Darade Investments LTD v. Minister of National Revenue, [1985] 2 CTC 2168, 85 DTC 525

Christie, ACJTC:—This appeal relates to the appellant's 1980 taxation year. The issue is whether the profit realized by it on the purchase and subsequent sale of an interest in certain real estate in Kamloops, British Columbia, in that year was a capital gain or business income.

The president and sole shareholder of the appellant is Dr Darrell A Sher- rin. It was incorporated in 1974 or 1975 under the laws of British Columbia as the vehicle to deal with investments for the benefit of Sherrin. In 1980 a group calling itself “Group 31 JV” (“the group") consisting of the appellant, Adma Leasing Ltd, Fred Westen Construction Ltd and Allen and Myrtle Snowsell acquired real estate at 1605 Summit Drive, Kamloops, comprising 31 condominiums (“the property"). Their respective interest in percentages in the property was 25, 12 /2, 50 and 12 /2. The entire complex at 1605 Summit Drive consisted of approximately 96 units.

The witnesses who testified at the hearing are Sherrin's accountant, Mr Stewart Jennens, CA, Mr Jack Westen and Sherrin. It is clear from the evidence of each of them that domination of and control over the entire venture was with Fred Westen Construction Ltd. In turn the management and control of this company was vested in Jack Westen. Although his wife owned half of the shares of the company and he owned the other half, his was the directing mind and will of Fred Westen Construction Ltd. Sherrin expressly agreed that his role was that of “really a passive investor". He knew ab initio where the effective control over the group was regarding the property. This included control over its disposition. Sherrin was asked this question and gave this reply:

Q. And you understood from the beginning in this venture that you would have no control over what happened to the investment?

A. That’s right. It would have been very impractical, I mean to have any control.

Jack Westen said: “The whole deal was basically mine". He added: “I made the decisions and did what I felt I had to do".

Jack Westen is currently a realtor. He testified that in 1975 he was president and “Operating Manager” of Fred Westen Construction Ltd. In 1980 the company was active in the business its name implies. It had work to do in Kamloops in 1979 which led to the purchase of the property in this way. Jack Westen's brother, Hugh, worked for Fred Westen Construction Ltd. as a superintendent and he was assigned to supervise the work in Kamloops. When he sought a place to rent there, it was discovered by him and Jack Westen that there was a severe shortage of that kind of accommodation and what was available was undesirable. In the fall of 1979 a house was purchased for Hugh Westen.

Concurrently with these conditions Central Mortgage and Housing Corporation, the then owner of the condominium complex at 1605 Summit Drive, was foreclosing against persons who had occupied units in the complex under the Assisted Home Ownership Program. The units in respect of which there was foreclosure proceedings were left vacant. Initially early in 1980 Jack Westen and Hugh Westen together with their wives purchased 10 units (“the 10 units") at 1605 Summit Drive. At this time they had no experience whatever in the renting of real estate devoted to housing or in the management of that type of property. Jack Westen wished to purchase an additional 31 units which he regarded as a good buy especially if acquired as a package, but he could not manage it all. This led in April 1980 to other investors being found who would join in. He estimated the purchase price of the property as being the cost of construction and the land was regarded as “thrown in” or “free". The group made an offer to purchase the property on May 5, 1980, which was conditional upon securing suitable financing. The acquisition was completed effective August 1, 1980.

Originally the management of the 10 units was the responsibility of Strata Corporation which looked after the entire complex. The manager of Strata Corporation absconded with funds which included rents received in respect of the 10 units. This led Jack Westen to persuade Hugh Westen and the latter's wife to take over as managers of the 10 units and later the 31 units comprising the property.

When asked if he had told officials at Revenue Canada that when making the purchases referred to his intention was to renovate the units and keep them for four or five years, after which he would consider selling them, Jack Westen replied “Probably". He said that in acquiring the units “basically I was looking for a means to fight inflation". A method of combatting inflation was “what the whole thing boiled down to at the time".

Although the effective date of the purchase of the property was August 1, 1980, the group occupied the units in July 1980 and undertook badly needed renovations. The precise date when the offer by the group to purchase the property became a legally binding agreement with CMHC was not established in evidence, but what is before the Court indicates this occurred in late June or early July 1980.

It is the evidence of Jack Westen that in the winter of 1979-80 the real estate market in Kamloops as a sellers market was in a severely depressed condition, but by May-June 1980 this had turned around and by the fall of that year it was a “boom market". The first offering for sale of a unit comprising part of the property was on September 30, 1980. The remainder of the property was listed in October and November 1980. By December 31, 1980, 26 units were sold and four more were sold in 1982. At the time of the hearing, one of the units remained with the group and was being rented. Precisely when the 10 units were disposed of was not established.

According to Westen's testimony the thing which precipitated the sale of the property was his dealings with tenants which he found intolerable. He described this in blunt and uncompromising language.

The profit made on the sale of units of the property, which was very substantial in relation to investment, was initially reported by Fred Westen Construction Ltd as capital gain. The respondent reassessed on the basis that the profit was business income. An objection to the reassessment under section 165 of the Act was not forthcoming because, said Jack Westen, his accountant advised him that challenging the reassessment would be costly “and there is very little chance of winning". Snowsell who is a chartered accountant and a former partner of the firm to which the witness Jennens belongs, was similarly reassessed. He also refrained from invoking section 165. No evidence was forthcoming in this regard with respect to the other members of the group.

Sherrin was steadfast throughout his testimony in the position that the sole motivating intention behind the appellant investing in the property was to acquire a long-term income-producing investment. He pointed to a lengthy history of long-term investments in stocks, bonds and rental income-producing real estate. His evidence in this regard was to some extent at least corroborated by Jennens.

In Leonard Reeves Inc v MNR, [1985] 2 CTC 2054; 85 DTC 419, a number of propositions are enumerated which are applicable to ascertaining relevant intentions in relation to “trading cases” of the kind under consideration. They need not be repeated here, but applying what is pertinent therein to the facts of this appeal, this may be said. Ordinarily the intention to be attributed to the appellant at the time of the acquisition by it of a 25 per cent interest in the property would be that which Sherrin, as president and sole shareholder, had for it, but this does not obtain for these reasons. Sherrin placed the appellant in the position where it was a passive investor in relation to Fred Westen Construction Ltd, which was clearly dominant and authoritative in the group. The intention of the construction company at the time of acquisition is therefore what decides whether the profit from the sale of units of the property was a capital gain or an adventure in the nature of trade and therefore business income of the appellant. Also the intention to be attributed to Fred Westen Construction Ltd is that which Jack Westen had for it at the relevant time which is the time when a legally binding agreement to purchase the property came into existence: Warn- ford Court (Canada) Limited v MNR, [1964] CTC 175; 64 DTC 5103 per Jack- ett, P (as he then was) at 176 (DTC 5104).

On the whole of the evidence, my reconstruction of what transpired is this. When Jack Westen took part in the purchase of the 10 units early in March 1980, his intention may have been to keep them for a few years as an income-producing asset, but his disillusionment with the role of landlord set in early and went deep. I am satisfied that at the time the group became legally committed to purchasing the property, the foremost intention as an operating motivation for the purchase in Jack Westen's mind was selling it for profit at the earliest opportune time which, as the evidence shows, soon arrived. This intention on the part of Jack Westen is attributable to the appellant in determining its tax liability. It follows that its profit on the purchase and subsequent sale of its interest in the property is business income and taxable as such.

The appeal is dismissed.

Appeal dismissed.