Theodore P Vardalos v. Minister of National Revenue, [1983] CTC 2416, 83 DTC 354

Guy Tremblay:—This case was heard on December 6, 1982, at the City of Winnipeg, Manitoba.

1. The Point at Issue

The point at issue is whether the profit of $48,200 made by the appellant on the sale of 30,000 shares of “Lake of the Woods Development Corporation Limited”, during the 1975 taxation year, is a capital gain or business income.

2. The Burden of Proof

2.01 The burden is on the appellant to show that the respondent’s assessment is incorrect. This burden results especially from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

2.02 In the same judgment the court decided that the assumptions of fact on which the respondent based the assessment are also deemed to be correct. In the present case, in paragraphs 10(a) to (I) of the reply to the notice of appeal, the respondent described the facts on which he based his assessment:

10. In reassessing the Appellant, the Respondent assumed, inter alia:

(a) that immediately upon the purchase of “Ken Whities Resort” it was closed indefinitely as a tourist establishment;

(b) that the cottages were sold by auction;

(c) that neither the Appellant nor the corporation ever intended to operate the

said lands as a resort and in fact they never operated the lands as a resort;

(d) that the corporation at all relevant times held the lands for development;

(e) that the corporation intended to develop the land by building an 8 storey

condominium containing 48 units and to be sold at $25,000.00 each;

(f) that in conjunction with this development, it was necessary to provide a marina for the eventual owners;

(g) that in 1973 the corporation changed its plans and decided to build 5 two- storey condominiums containing a total of 20 units, each unit to be sold for $62,000.00;

(h) that accordingly the marina was no longer required and sold by an agreement dated December 18th, 1973;

(i) that, until June 10th, 1975, the Appellant was the sole shareholder of the corporation;

(j) that, on June 10, 1975, the Appellant purchased 39,998 shares of the corporation for $82,400.00, or $2.06 per share;

(k) that on June 10, 1975 the Appellant sold 30,000 shares for $110,000.00 or $3.67 per share for a gain of $48,200.00;

(l) that one of the major motivating factors for the acquisition of the lands by

the Appellant was the possibility of resale at a profit at some future time.

3. The Facts

3.01 The appellant was born in 1912. He is a retired person. Prior to 1970, he was a teacher at the National School of Photography. In 1968, he sold the photography business he had had since 1952.

3.02 On May 6, 1970, the appellant purchased certain lands, buildings and 17 cottages located at Kenora, Ontario, from Kenwhities Limited, an Ontario company with head office in the town of Kenora. It operated a tourist and outfitters business (Exhibit A-1). The purchase price was $80,000, being paid on October 1, 1970, the date of possession. The purchase price was broken down as follows:

3.03 Clause 3 of Exhibit A-1 provided that the purchaser lend $20,000 to the vendor at 9 /2% interest, secured by a third mortgage, the said amount to be credited at the date of possession.

Clause 13 provided that in the event the purchaser, on or before October 1, 1975, sold the cottages, one of them, the Lunenburg cottage, would be sold to the vendor for $1.

3.04 The appellant took possession of the property October 1, 1970. On October 9, 1970, the appellant caused “Lake of the Woods Development Corporation Limited to be incorporated under the laws of Ontario, which corporation is hereinafter called ‘Lake of the Woods’”. The appellant transferred the assets to the corporation.

According to the witness, his intention at the time of the acquisition and at the time of the transfer to Lake of the Woods was for the purpose of being held as an investment. He never intended to dispose thereof, but rather to hold it as an investment and to operate it as a summer resort.

3.05 In July 1971, Lake of the Woods purchased from Marr’s Marine Limited for the price of $25,000, a marina (300 to 400 feet long) located at Clearwater Bay, one mile from the property.

3.06 During the summer of 1971, the appellant hired six or seven employees, including a manager and his wife, to help him during the first summer season as owner of the business.

Many improvements were then made to the docks, to the fuel tank and to the septic tank. At the beginning of the fall of 1971, the cottages were sold by auction; they were very old according to the appellant.

3.07 The financial statement of earnings and deficit of Lake of the Woods for the year ended October 31, 1971, shows a loss of $2,756.49:

In the balance sheet dated October 31, 1971, the total of the assets is $120,084.74 — one can read as main items of assets:

3.08 From the income tax returns, the profits and losses during the 1971 to 1975 taxation year were as follows:

3.09 From 1971 to 1975, the total of assets and the shareholder’s equity are:

The item “payable to shareholder” varies from $91,082.44 in 1971 to $97,841.46 in 1975 “non-interest bearing, no fixed terms of repayment”.

3.10 On December 27, 1973, Lake of the Woods sold for $35,000 the marina (Exhibit A-4).

3.11 The appellant said that in 1971 he received an offer of $145,000 to sell the property. He refused because he wanted to develop it.

3.12 In 1972 and 1973, two architects presented plans to Lake of the Woods for the development of the property. The first architect had a ski resort concept (fees — $750) which the appellant did not like. The second architect presented an eight-storey building plan (fees $2,000). The plan pleased the appellant but was still changed. In fact, at the end of 1973, Lake of the Woods decided to build five two-storey condominiums containing a total of 20 units, each unit to be sold for $62,000.

3.13 In January, 1974, Lake of the Woods and the appellant received an option (Exhibit A-5) to buy 50% of the shares for $75,000. It was from Donley Estates Ltd whose main shareholder was Donald W Craik, a 40-year-old engineer. The latter was competent. The appellant trusted him. On January 29, 1974, one common share was transferred to Donald W Craik “to be held by him as bare trustee for Theodore Peter Vardalos” (Exhibit A-6).

3.14 In June, 1975, the following transactions occurred:

(a) On June 10, 1975, the appellant purchased 39,998 shares of the corporation for $82,400 or $2.06 per share.

(b) The same day, the appellant sold to Donald W Craik 20,000 shares for $60,000 to be paid on July 31, 1975. The 20,000 shares were transferred that very day (Exhibit A-8, Minutes of meeting of Board of Directors and Memorandum of Agreement).

(c) The same June 10th, the appellant and Mr Donald W Craik sold to George Hansen, 5,000 shares; to Charles F Lunn, 5,000 shares; and to Thomas H Smith, 10,000 shares. The said shares were sold for $5 each (Exhibit A-9, Memorandum of Agreement). The appellant and Mr Craik in fact sold 10,000 shares each.

(d) The transfer of the shares to Messrs Hansen, Lunn and Smith was done on July 16, 1975; Mr Smith was elected treasurer; Mr Craik, vice- president and secretary; and the appellant, president (Exhibit A-10, Minutes of a meeting of the Directors, and Exhibit A-11, Shareholders’ Ledger).

4. Law — Cases at Law — Analysis

4.01 Law

Sections 3, 9, 38(1 )(a), 39, 40 and 248(1) definition of “business”, are the provisions involved in this case. They shall be quoted if they are useful for the analysis.

4.02 Cases at Law

Counsel for the parties referred the Board to the following cases:

1. Regal Heights Limited v MNR, [1960] CTC 384; 60 DTC 1270;

2. John Cragg v MNR, [1951] CTC 322; 52 DTC 1004;

3. Irrigation Industries Limited v MNR, [1962] CTC 215; 62 DTC 1131;

4. Harry Moluch v MNR, [1966] CTC 712; 66 DTC 5463;

5. Ronald K Fraser v MNR, [1964] CTC 372; 64 DTC 5224;

6. Normae Investments Limited v MNR, [1969] CTC 468; 69 DTC 5326;

7. Kensington Land Developments Ltd v The Queen, [1979] CTC 367; 79 DTC 5283;

8. James Antonakos v MNR, [1982] CTC 2754; 82 DTC 1792;

9. Hiwako Investments Limited v The Queen, [1978] CTC 378; 78 DTC 6281;

10. Demeter Equity Limited v The Queen, [1979] CTC 311; 79 DTC 5230;

11. Richard P Fraleigh v MNR, [1981] CTC 3038; 81 DTC 944;

12. R RL Weldon and K W Robb v The Queen, [1980] CTC 301 ; 80 DTC 6224;

13. South Shore Estates (Saltfleet) Limited v The Queen, [1981] CTC 252; 81 DTC 5181;

14. Kit-Win Holdings (1973) Limited v The Queen, [1981] CTC 43; 81 DTC 5030;

15. Paul Racine, Amédée Demers and François Nolin v MNR, [1965] CTC 150; 65 DTC 5098;

16. Roy M Power v The Queen, [1975] CTC 580; 75 DTC 5388.

4.03 Analysis

4.03.1 In examining the taxpayer’s course of conduct, the courts, among the different factors considered in the cases at law referred to above and in all others in which income versus capital gain is involved, always direct their research to the taxpayer’s intention. In substance, it is the only factor. All other factors indeed (relation of transaction to taxpayer’s business, number and frequency of similar transactions, the length of the period of ownership, the nature of transactions and assets involved, the corporation’s object, etc) are studied inasmuch as they are significant to the taxpayer’s main intention and secondary intention.

4.03.2 Usually a gain is held to be of an income nature where a taxpayer’s main intention was to hold an asset for sale at a profit. The onus, on the appellant’s shoulders, to establish the existence of facts showing his investment intention, and, hence, an error in the imposition of tax, is not easy to reverse.

Addy, J in Roy M Power, (supra), at 584 and 5391 respectively comments on the evidence relating to intent:

The only direct evidence of what a person has in mind at any given time must necessarily come from a statement by that person either at the trial or orally or in writing to another person and any such expression of intention is most relevant and important, especially when given under oath at the trial by the person whose intention is at issue and after the statement of such intention has been thoroughly tested by cross-examination in light of his actions both before and after the event in question. Conversely, it would be most difficult for me to find in favour of a taxpayer, whatever the surrounding circumstances might be, who, without any justifiable excuse, failed to testify personally at the trial as to what his intention actually was. It is such important and vital evidence that its absence would, in my view, almost invariably destroy the taxpayer’s case unless there was some good explanation offered as to its absence. Furthermore, it is evidence which has the added characteristic of being solely within the knowledge and control of the taxpayer himself. If a judge were to charge a jury to the effect that the law requires that circumstantial evidence of intention be given preference over direct evidence then I have no doubt that any such direction would constitute a mistrial. A judge should therefore refrain from charging himself in that manner.

All issues must be determined by a careful consideration of all of the relevant evidence both direct and circumstantial. In any particular case, a specific piece of evidence might, by reason of surrounding circumstances of that case, necessarily possess great probative value while, in another case, evidence to the same effect might carry little or no weight. The Court must also bear in mind that facts often speak louder than words and that free acts are very good indication of what a person really intends and overt acts and their results constitute an excellent means of deciding what the intention actually was. In the same manner, other circumstances, which are not the result of any particular action of the person at the time and place in question, might also be of considerable help in deciding the issue of intention. I have in mind, for instance, the circumstances of a taxpayer, whose intention is being scrutinized, being by profession a land developer (see Be/-Conn Limited v MNR, [1973] CTC 2009; 73 DTC 17). This is undoubtedly a very important circumstance. Yet, one cannot say that, as a matter of law, every land developer is precluded from establishing that in a particular case there was no primary or secondary intention to speculate, anymore than in a case such as the one at Bar where a mature man has never previously resold a piece of real estate at a profit, is one precluded from finding that, on his very first venture in this sphere, he did in fact have the intention of reselling at a profit when he originally purchased the lands. The issue of intention must therefore be resolved by a careful weighing of all of the admissible evidence which is in any way relevant to that issue and the person or body charged with finding the facts must refrain from considering each piece of evidence independently but must examine it in the light of all the other evidence both direct and circumstantial. Unless there is a specific statutory provision to the contrary, this general rule of evidence must be applied in all cases including taxation cases. It follows that little help can be obtained from former decisions regarding what weight should be attributed to any particular circumstance in so far as it may prove or disprove any intention to engage in an adventure in the nature of trade, except in so far as any such decision might make one aware of a particular area or circumstance which should be considered or taken into account.

4.03.3 The secondary intention means that, even where it could be established that a taxpayer’s main intention was investment, a gain on the sale of the asset would be held taxable if the evidence showed that at the time of acquisition the taxpayer had in mind the possibility of selling the asset if his investment project for some reason did not materialize.

Mr Justice Noël in Racine, Demers & Nolin, (supra), gave a summary of the secondary intention test and I quote at 5103:

. . . Thus, it appears that the fact alone that a person buying a property with the aim of using it as capital could be induced to resell it if a sufficiently high price were offered to him, is not sufficient to change an acquisition of capital into an adventure in the nature of trade. In fact, this is not what must be understood by a “secondary intention” if one wants to utilize this term.

To give to a transaction which involves the acquisition of capital the double character of also being at the same time an adventure in the nature of trade, the purchaser must have in his mind, at the moment of the purchase, the possibility of reselling as an operating motivation for the acquisition; that is to say that he must have had in mind that upon a certain type of circumstances arising he had hopes of being able to resell it at a profit instead of using the thing purchased for purposes of capital. Generally speaking, a decision that such a motivation exists will have to be based on inferences flowing from circumstances surrounding the transaction rather than on direct evidence of what the purchaser had in mind.

4.03.4 The point is whether the appellant, in buying the business in May 1970, had the original and/or secondary intention to sell it. According to the Board, the short period of the possession of the shares of Lake of the Woods after their acquisition in January 1975, is not really significant to the intention to sell. From the moment indeed it was decided in late 1973 to have partners in the five two-storey condominium buildings, it was only a mechanism to buy shares and resell them. Until January 1974, only three shares had been issued.

4.03.5 The testimony of the appellant is clear that his intention was not to sell but to operate a summer resort.

This gratuitous affirmation however, must be confirmed by something else. It is the rule of the best evidence. The strongest fact to confirm his investment intention is that he refused an offer of $145,000 in 1971. Unfortunately for the appellant, this is another gratuitous affirmation. This fact was not corroborated by a written document or by another witness. Despite the fact that the Board has no doubt about the appellant’s credibility, a fact of this nature must be confirmed to be accepted as evidence. This fact indeed is fundamental in the instant case especially because there are other facts which, without being conclusive by themselves, seem however, altogether to confirm the respondent’s thesis, which is deemed to be correct until the appellant provides evidence to the contrary.

4.03.6 Some facts seem to confirm the respondent’s thesis:

(a) Exhibit A-1, which is the deed of purchase, had already provided that possibly the cottages would be sold. In the Fall of 1971, they were in fact sold;

(b) Despite the appellant’s contention that it was the architect’s intention to develop land by building eight-storey condominiums, the appellant agreed and paid the architect $2,000 (para 3.12);

(c) The first object of Lake of the Woods was “to promote residential industrial and all kinds of developments and to that end to acquire property of all kinds and to develop the same”.

Is it possible for the appellant to incorporate Lake of the Woods without the intention of selling shares? The preponderance of the evidence and the burden of proof confirm the existence of this intention. The burden of proof in a case of this nature is heavy for the taxpayer.

5. Conclusion

The appeal is dismissed in accordance with the above reasons for judgment.

Appeal dismissed.