Valley Vu Realty (Ottawa) Limited v. Minister of National Revenue, [1983] CTC 2238

John B Goetz:—This is an appeal with respect to the appellant’s 1978 taxation year. The issue is whether the sale, in 1978, of a building, hereinafter referred to as “Tower A”, owned by the appellant, was on capital account or on income account. The appellant declared the profit on the sale of Tower A as a capital gain. The respondent, on the other hand, assessed the gain as being income.

Facts

The appellant was incorporated in 1964. It was set up by John Steen- bakkers basically for his family. John Steenbakkers held 500 Preferred Class “A” shares. His four children were issued 100 Common shares each at the time of incorporation and still own them. Some of them are now in management. Steenbakkers is a Dutch immigrant who started humbly as a carpenter and gradually extended his operations into building houses, duplexes, doubles and eventually larger buildings. He was also involved in the retail and wholesale lumber business. He incorporated a number of companies, of which the relevant ones are as follows:

J Steenbakkers Lumber Limited — (retail sales) Capital Roof Truss (1969) Limited

— (trusses) Valley Vu Realty (Ottawa) Limited — (construction) Steenbakkers Realties Limited — (land development) Iber Construction Limited — (construction) Ottawa Forest Products Ltd — (wholesale lumber)

Steenbakkers had in mind that the appellant family company would acquire land and eventually construct a building of highest quality as a lasting investment. The appellant acquired five acres of land on Riverside Drive, in the City of Ottawa, Ontario, over a period of years as follows:

1964 — 1747 Riverside Drive for a cost of $21,019;

1971 — 1743 Riverside Drive for a cost of $40,000;

1972 — 1755-85 Riverside Drive for a cost of $546,687.

Steenbakkers encountered several offers for the land as he acquired it but he refused them all. His plan was to construct twin highrises consisting of 240 unit apartment towers that would be durable, prestigious and capable of earning lasting profits. There would be Tower A and Tower B. The appeal relates only to Tower A which was to be constructed first. He carefully calculated his projection of revenues for Tower A which would net $81,600 per year. It was identical in design as Tower B. He planned to build Tower A first and when fully rented, erect Tower B. After obtaining Central Mortgage and Housing Corporation approval, construction of Tower A started in the spring of 1973 and the appellant borrowed money from John Steenbakkers, Steenbakkers Lumber and from the bank. On August 15, 1973, the appellant and Steenbakkers Realties Limited (a land development company) obtained a mortgage, bearing interest at 9%, from the Royal Trust Company in the amount of $3,693,296.25 with the condition that the Royal Trust Company would have the right to finance Tower B and that Steenbakkers give his personal guarantee. The calculated cost of Tower A and Tower B was $3,800,000 and construction was completed in 15 months. There was, however, a 12% cost overrun and the end cost was $4,200,000, necessitating the acquisition of a second mortgage on August 27, 1973, from Globe Holdings (Ottawa) Limited and Elman Holdings Limited in the amount of $250,000, bearing interest of 13 /2%. Tower A was 95% occupied on completion of construction which took 15 months. It was rented for five years before it was sold.

At the time of excavation for Tower A, the excavation for Tower B was also done as both Towers were to have the use of an enclosed swimming pool situated between the Towers. Construction of Tower B commenced in the spring of 1974 at a projected cost of $4,200,000. Projected net revenues were calculated at $171,256.

Extreme cost overruns of almost 50% were encountered with Tower B, resulting in a final cost of approximately $7,000,000. This was the result of a rapidly growing construction market whereby costs of materials such as reinforcing steel, wall board, etc almost tripled in price. The appellant obtained a further mortgage on May 8, 1975, from Heller-Natofin (Ottawa) Limited, Globe Holdings (Ottawa) Limited and Elman Holdings Limited, in the amount of $500,000 bearing interest at 14 /2%, with John Steenbakkers as guarantor, but security was based on Tower A. Further, in fear of rent controls, Steenbakkers felt that the projected revenues from Tower B would be insufficient to finance it. He decided to convert Tower B into a condominium building, resulting in new and extra design costs. The consulting engineer witness confirmed all of Steenbakkers’ evidence with respect to the twin Towers.

Chauncey Kirby, a mecahnical engineer involved in the construction of both Towers, gave evidence that the buildings were of the highest quality and therefore subject to low maintenance costs. The Towers were the highest reinforced concrete buildings in Ottawa. He said it was an exciting expe- rience to be involved in the construction of a building 10 stories higher than any others in Ottawa. It was his feeling, from talking to Steenbakkers and to the architects, that the appellant intended to maintain and keep the buildings to be known as “Riverside Place” and that the buildings would maintain their quality “relative to the market”. Mr Kirby corroborated the reasons for the high cost overruns.

The appellant had been approached by a number of people to buy Tower A but had refused. It was not until the appellant had encountered such heavy overruns in the construction of Tower B that it became more receptive when an unsolicited offer from NDM Holdings Limited was received. Because of an extremely poor cash position and fearing bankruptcy, the appellant sold Tower A to NDM Holdings Limited in December 1977 for $5,950,000. As part of the consideration for the purchase, the appellant took back from NDM Holdings a mortgage for $1,300,000. The appellant received $1,000,000 in cash and this enabled it to pay out the Heller-Natofin mortgage and thus save the whole project. NDM assumed the remaining mortgages on Tower A. The appellant used the $1,300,000 mortgage as collateral security for cash advances from the Bank.

William Wilson, a chartered accountant who did the accounting for Steenbakkers and for his companies since 1958 stated that the appellant company was set up for Steenbakkers’ children and that “they were only common shareholders from the start”. Mr Wilson prepared all the tax returns up to 1978.

The appellant, together with Iber Construction, bought lots in subdivisions and constructed, sold and rented doubles and duplexes. All profits therefrom were declared as income. 1735 Riverside Drive, adjacent to Tower A, was purchased in the name of Steenbakkers Realties Limited in 1970. The appellant was the beneficial owner of 1735 Riverside Drive, built an apartment building on it and sold the property in 1972 at a profit of $3,000,000. This was also declared on income account.

The appellant built a condominium at 141 Somerset Street West, in the City of Ottawa, about the middle of 1975. This was placed in the books of the appellant as inventory at $3,000,000. Construction of Tower B on Riverside Drive, at this time, was almost completed.

Jean St-Jacques was project manager for the appellant from 1972 to 1977. The appellant was the builder of 1735 Riverside Drive, as well as of Towers A and B. He stated that the building at 1735 Riverside Drive was considerably inferior to the quality of the twin towers. He confirmed the heavy costs overruns and his evidence on the whole corroborated the evidence of all the other witnesses for the appellant. He felt that the Towers would be a monument to Mr Steenbakkers and, on cross-examination, reiterated that the Towers were “the ultimate in quality and height”.

Findings

The appellant was obviously in the construction business from the outset. All of its sales were recorded on income account and so declared in its tax returns. The accountant, knowing that Towers A and B were built as a lasting investment from rental income, decided that the profit on the sale of Tower A should be entered into the appellant’s books as a capital gain. Until Tower B was turned into a condominium, he treated both Towers the same but, at that point, felt that Tower B should be treated as inventory. Mr Wilson took Tower B out of fixed assets in the books and set up a new account for it as inventory.

In all of its dealings, the appellant recorded profits from its trading operations as income and so declared in its tax returns. The only transaction entered as on capital account was the sale of Tower A.

Tower A was never listed for sale by the appellant and the facts, as adduced by all the witnesses, are corroborative of one another. I was very impressed by the forthrightness of all of the appellant’s witnesses. The unsolicited offer for Tower A was accepted at a time when the appellant faced possible foreclosure or bankruptcy. Though pressed in cross-examination, all the witnesses deemed the Towers to be a long-term investment because of their high quality and consequent low maintenance costs.

Each case must be decided on its own facts and though counsel for the respondent cited Wonsch Construction Limited v MNR, [1968] Tax ABC 1009; 68 DTC 727, a decision of R S W Fordham, Esq, QC, as a case that might be considered as being on all fours with the appeal before me, I choose not to follow it because I am satisfied with the evidence before me that the appellant’s intention ab initio was to establish a lasting investment which was frustrated by the most peculiar and rapid increase in building activity and construction costs. There was no evidence to suggest a secondary intention to sell Tower A at a profit.

Most assuredly the appellant was a trader in real estate, but does that necessarily mean that it can never sell on capital account? Under all the circumstances of this case, believing all the witnesses as I do, I have concluded that the single transaction of the sale of Tower A was on capital account. See Les Immeubles Roussin Ltée v MNR, [1982] CTC 2668; 82 DTC 1683, a decision of my learned colleague R St-Onge, Esq, QC.

It was agreed by the parties that the fair market value of the land acquired prior to January 1, 1972 was, at V-Day, $185,606.

I therefore allow the appeal and refer the matter back to the respondent for reconsideration and reassessment on the basis that the gain on the sale of Tower A was on capital account.

Appeal allowed.