O & M Investments LTD v. Minister of National Revenue, [1985] 2 CTC 2207, 85 DTC 535

Christie, ACJTC:—The issue is whether the profit realized by the appellant on the purchase and subsequent sale of real estate located at the intersection of 109th Street and 85th Avenue in Edmonton ("the property") is ordinary income or capital gain.

On March 1, 1974, the appellant bought an undivided 50 per cent interest in the property which was a two-story apartment building consisting of nine suites. Mr Paul Ergezinger bought the other 50 per cent.

The president of, and the person who controlled and directed the appellant in all of its corporate acts during the period relevant to this appeal, is Mr Otto Weltzien. The appellant was incorporated under the laws of Alberta in February 1966. Weltzien is the owner of 50 per cent of the shares in the appellant, the remaining 50 per cent being owned by Weltzien's wife who is not involved in the management of the appellant. Not only did Weltzien control the appellant, but it is obvious that, in the association between it and Ergezinger in relation to the property, Ergezinger was also under the control and direction of Weltzien. In the last analysis it was Weltzien, a realtor since 1962 and a prosperous entrepreneur, who made all the significant business decisions regarding the property which are germane to this appeal, ranging from the decision to purchase, arranging for the financing, making the decision to convert the apartments into condominiums and to sell them. The role assigned to and accepted by Ergezinger was that of a supplier of labour and services principally related to repairs and renovations of the apartments which, when purchased, were in a condition of severe deterioration. It was the contribution that Ergezinger was expected by Weltzien to make which led the latter to invite Ergezinger to join in the acquisition. Ergezinger had no prior experience in dealing with the purchase, management or sale of rental properties. This fact was readily admitted by both. The nature of their relationship was underscored by their demeanor during the course of the hearing. Both testified on behalf of the appellant and, in addition, Weltzien conducted the appeal on behalf of the appellant.

The purchase of the property was entirely financed by credit and, in particular, Weltzien's credit. Ergezinger did not have the funds or credit to acquire a 50 per cent interest in the property. The repayment of the money advanced to him by the Bank of Nova Scotia for this purpose was guarantied by Weltzien. The purchase price was $120,000. This amount was borrowed from the bank. In addition, cost of repairs in the amount of $10,000 to $15,000 was borrowed from time to time from the bank as required. Weltzien said interest would have been three or four per cent above the bank's prime lending rate which would result in a rate of about 13.50 per cent. At the time of acquisition, the apartments were renting for $125 a month which, when multiplied by 9, gives a product which is insufficient to pay the interest on the loan. The steps necessary to convert the apartments into condominiums were taken. A condominium plan was prepared and the required certificates obtained from an Alberta land surveyor, a registered architect etc. Exhibit R-2 shows that the plan was registered on September 25, 1974, whereupon the certificate of title pertaining to the property in favour of Ergezinger and the appellant was cancelled and a separate certificate of title for each unit in the plan was issued. Four were in favour of the appellant and four in favour of Ergezinger. One certificate of title showed joint ownership by them. The property was refinanced by Crédit Foncier which advanced $16,500 per condominium. This was secured by a mortgage on each unit. The proceeds were used to retire the debt owing to the Bank of Nova Scotia and to pay the expenses, including legal fees, incurred in converting the apartments into condominiums. The first confomi- nium was sold on December 1, 1974, and the last of the remaining eight condominiums was disposed of on May 1, 1975.

Weltzien personally and corporations over which he directly or indirectly exercised absolute control have a history as traders in real estate both prior and subsequent to the date of the acquisition of the property. The appellant has purchased and sold rental houses, apartment buildings or an interest therein, farmland and warehouses in Alberta, British Columbia and Denver, Colorado. In addition it purchased Higgins Island off the coast of British Columbia for $160,000 with the intention of resale, but efforts in this regard have been unsuccessful to date. A wholly-owned subsidiary of the appellant, 238834 Alberta Limited, has, in the post-1974 period, purchased four islands off the coast of British Columbia for resale. It has also bought a shopping centre and apartment complex at Gibsons, British Columbia. The evidence is not clear regarding whether the property at Gibsons has been resold. There is evidence of other real estate transactions by corporations controlled by Weltzien, but it is unnecessary to recite particulars of this or rely on it for the purpose of determining this appeal.

Section 28 of the Interpretation Act, RSC 1970, c 23, provides that in every act of the Parliament of Canada or any regulations made thereunder '“person’ or any word or expression descriptive of a person, includes a corporation”. Where under enactments the liability of a “person” depends upon the intention behind a particular course of conduct by that person and the person is a corporation, the intention to be attributed to it must be that of a natural person or persons because, of course, forming an intention is a thought process of which a corporation is incapable. As Viscount Haldane, LC, observed in Lennard's Carrying Co Ltd v Asiatic Petroleum Co Ltd, [1915] AC 705 at 713: “My Lords, a corporation is an abstraction. It has no mind of its own any more than it has a body of its own”. It is the intention of the natural person or persons who are properly regarded as responsible for the corporate act or acts giving rise to the issue of liability which is ascribable to the corporation. In this case that person is Weltzien.

To paraphrase Laskin, J (as he then was) in delivering the reasons for judgment of the Supreme Court of Canada in Vaughan Construction Co Ltd v MNR, [1970] CTC 350; 70 DTC 6268, the starting point on the issue in this appeal is that the appellant was a trader in real estate at the time the property was acquired. This conclusion arises out of the history of its corporate acts in this regard and those of Weltzien which, because of his relationship to the appellant, are assignable to it. While this is not conclusive, it does point away from the appellant’s contention that the profits in question in this appeal were capital gains: Leonard Reeves Incorporated v MNR, [1985] 2 CTC 2054 at 2058; 85 DTC 419 at 422. Nor is the fact that Weltzien was emphatic in his assertions that the intention of both the appellant and Ergezinger at the time of acquisition was to make a long-term investment in a revenue-producing asset conclusive for the resolution of this appeal of what that intention was: Leonard Reeves Incorporated v MNR at the same page.

The essentials of Weltzien’s testimony in favour of the appellant’s position are that after the property was purchased he had a falling-out with Ergezinger for two reasons: first, Ergezinger did not put enough effort into his work on the property, and second he failed to pay his share of the interest on the bank loans. Weltzien decided that the appellant should in its best interests sever its relationship with Ergezinger. He found what he regarded as the solution through legal advice that condominiums be created out of the apartments. Then, except for one unit, there would be separate ownership. Nevertheless problems still remained in the eyes of Weltzien. There was only one building which had areas common to the apartments and which would be common to the condominiums and Weltzien was concerned about Ergezinger discharging his responsibilities in this regard, hence the decision to sell. I do not accept this version of what occurred, it may well be that Weltzien and Ergezinger clashed and were antagonistic toward each other. I have already described my perception of the relationship between them. Weltzien said that partnerships had never been a success with him and added, “I may be very demanding; I want things done right now, and then they are done, because that is the way I do them and I expect everybody else to do them too". Ergezinger denied that he failed to fulfil his obligations to the bank and stated that he contributed as much labour as he could to the project. The repairs were extensive. Weltzien described them as repairs to the roof of the building, new doors on each garage, redecoration of each suite, painting the outside trim on the building, new carpeting and new vinyl in the kitchens and bathrooms. Sinks and toilets were repaired and there was “a general clean up outside, the yards, etc." In addition, used fridges and stoves were purchased to replace those in the apartments which were in a decrepit condition.

Weltzien agreed that, at the time of acquisition, rental revenue from the apartments was inadequate to recover related business expenses, but he said that the intention was to increase rents to $300 per unit per month after renovations. This goal was in fact achieved and rent of that order was being paid for restored units prior to their sale as condominiums. In this regard Ergezinger's testimony respecting intention at the time of the acquisition of the property was to the same effect as that given by Weltzien, but no persuasive reason was forthcoming from Ergezinger for his failure to retain at least the four renovated and refinanced condominiums registered in his name. This is significant, especially when he must have known that Weltzien was selling out and their alleged unhappy relationship would terminate. I believe the foregoing simply underscores what was previously said about Ergezinger's role in this matter and that the only significant relevant decision made by Ergezinger was to place himself in Welzien's hands with regard to the property. Ergezinger undoubtedly had the intention and expectation of making money from the property, but the manner in which this was to be achieved was left to Weltzien to determine.

In reassessing, the respondent assumed that the motivating intention of the appellant at the time of the acquisition of the property was to sell it at a profit as soon as what it regarded as desirable conditions existed to realize that purpose. The appellant has failed to cast any substantial doubt on the validity of this assumption. This precludes it from succeeding on this appeal. All that happened is consistent with such an intention. I refer in particular to the two methods of financing adopted, the repairs and renovations, the conversion of the apartments into condominiums and the time-frame from the acquisition to the final disposition of the property. The respondent also assumed the existence of a secondary intention. The history and nature of the doctrine of secondary intention is described in some detail in Joel Jordan v MNR, [1985] 2 CTC 2131; 85 DTC 482. In light of the appellant’s failure to discharge the onus on him in regard to the first assumption of the respondent, it is unnecessary for me to deal with secondary intention.

The appeal is dismissed.

Appeal dismissed.