Adrien Dastous v. Minister of National Revenue, [1983] CTC 2463, 83 DTC 394

Guy Tremblay [TRANSLATION]:This case was heard on January 14, 1983 in the city of Montreal, Quebec.

1. Point at issue

The question is whether the appellant, a building contractor, was correct in treating as a capital gain a profit of $176,138.72 made on the sale of a piece of land which was part of a larger piece purchased in 1974 with the alleged intention to build apartment houses for the purpose of earning rental income. In the submission of the respondent, the appellant’s purpose was to resell the apartment buildings and the profit is business income.

2. Burden of proof

2.01 The appellant has the burden oif showing that the respondent’s assessments are incorrect. This burden of proof results not from any particular section of the Income Tax Act, SC 1970-71-72, c 63, as amended, but from several judicial decisions, including a judgment of the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195, 3 DTC 1182.

2.02 The facts presumed by the respondent are described in subparagraphs

(a) to (g) of paragraph 5 of the respondent’s reply to the notice of appeal. This paragraph reads as follows:

5. In assessing the appellant for the taxation years 1976 to 1978 the Minister of National Revenue relied, inter alia, on the following presumptions of fact:

(a) in 1974 to 1976, the appellant operated a construction business under the firm name Dastous Construction Enrg.;

(b) at this time, the appellant was also involved in residential and commercial construction as the majority shareholder in Les Entreprises St-Hubert Inc. and the sole shareholder in Les Aménagements Laprairie Inc.;

(c) the appellant’s construction business consisted essentially of buying vacant lots to construct buildings and resell at a profit;

(d) the large piece of vacant land located in Ste-Julie was bought by the appellant in 1974 with the intention of building on it apartment buildings which the appellant could subsequently resell at a profit;

(e) it was only when unforeseen problems arose with the Ste-Julie municipal authorities that the appellant decided to resell this land without completing its construction projects;

(f) the appellant purchased the land and disposed of it in the course of carrying on its construction business;

(g) the balance of the selling price for the land which remained due to the appellant at the end of the taxation years 1976, 1977 and 1978 amounted to $185,176.80, $160,921.68 and $142,515.40 respectively.

3. Facts

3.01 In his examination-in-chief the appellant testified as follows.

(a) He began working in construction as a labourer at about age nineteen. He is now fifty years old.

(b) In 1962, when he had gained experience and become a foreman for contractors, he went into business under the name Dastous Construction Enrg.

(c) He had several workmen in his employ. Most of his work consisted of carpentry subcontracts for various contractors (constructing the foundations of buildings, finishing interiors and so on).

(d) As his own foreman, Mr J M Bolduc, wished to build an eight-apartment building, it was decided that he would build another alongside, and that they would build them together. He even formed a company known as Les Entreprises St-Hubert Inc, the principal purpose of which was to build apartment buildings which were to be kept.

(e) Another company was formed in 1974, Les Aménagements Laprairie Inc, for the purpose of building apartment buildings, but this time for resale. The appellant was the sole shareholder. The first building was put up in 1975.

(f) Prior to 1974, he had approximately five eight-apartment buildings, J M Bolduc had two, and Les Entreprises St-Hubert Inc had one.

3.02 With regard to the purchase of the Ste-Julie land, which is the subject of this case the appellant testified as follows.

(a) In 1974, while he was in the process of building the eight-apartment structure on rue Daniel in Longueuil, an employee of Anjou Gardens Ltd offered to buy this building, but the offer was refused.

(b) However, Anjou Gardens Ltd offered to sell the appellant land of 869,000 sq ft located in Ste-Julie, and to take apartment buildings in payment.

(c) The idea appealed to him, as he had been thinking of building apartments on the said piece of land. He formed a partnership with Mr J M Bolduc and Les Entreprises St-Hubert Inc.

(d) The income from the apartment building represented a sort of old- age pension for him.

(e) The land was paid for with seven eight-apartment buildings: four from the appellant, two from Mr Bolduc and one from Les Entreprises St- Hubert Inc. As the value of the buildings was greater than the value of the land, Anjou Gardens Ltd paid the partners $57,000. The contract was concluded on April 26, 1974 (Exhibits A-1 and A-2). In fact, about $0.05 to $0.06 a square foot was paid for the said land, including the portion reserved for streets.

(f) The Ste-Julie land was not subdivided, but Anjou Gardens Ltd had a project under way to build single-family houses on 90 per cent of the land and apartment buildings on 10 per cent. A survey was being prepared. Municipal zoning by-laws existed to this effect. However, the appellant thought that the zoning could always be changed. He stated that in fact he did not try to have it changed.

(g) After the purchase the appellant learned that there would also be problems with the water supply, as only 10 per cent of the land could actually be supplied with water.

3.03 With regard to the sale of a part of the Ste-Julie land in 1976, the appellant testified as follows.

(a) In June 1976, the partnership had sold to Les Constructions Savaria et Frères Ltée (“Savaria”) two small pieces of land with an area of 14,000 sq ft (Exhibit A-3, pages 2 and 6) to accommodate them.

(b) In the fall of that year, Savaria offered to buy all the area zoned for single-family housing.

(c) No real estate broker was involved in the sale, and there was no advertising prior to the sale.

(d) The contract was concluded on December 24, 1976 (Exhibit A-3). The selling price was $360,000. The area sold was 608,000 square feet, not counting streets, which were transferred. The price per square foot, not counting streets, was $0.60. The profit was $176,138.72.

3.04 The gross and net income of the appellant from the eight-apartment buildings in 1974, 1975 and 1976 are broken down as follows in Exhibits A-4, A-5 and A-6:

The principal item of expenditure was interest. The appellant had to bear the cost of financing during the construction. Income only began coming in when the rental period was over. It was to be expected, therefore, that net income would be almost non-existent in the first few years.

3.05 In cross-examination, the appellant testified as follows.

(a) His purpose in buying the Ste-Julie land through an exchange was to build apartment buildings. It was a large piece of land and was paid for. A mortgage loan was then almost sufficient to pay for building the apartment.

(b) He intended to begin construction in three years. He did not intend to keep it indefinitely. If he had not built, he would have exchanged the land for another piece, and he could always have sold it if it proved to be a bad investment.

(c) The water supply problem which existed on the Ste-Julie land was resolved in 1981.

(d) The surveying plan being prepared in 1974 for the part of the land intended for construction was not stopped by the appellant; it was finished in 1975 (Exhibit A-3, page 5) and appellant paid its cost.

(e) The commercial part of the land, namely that on which the apartment buildings were to be constructed, was not subdivided. It was sold by the appellant in 1982.

3.06 The appellant admitted the following facts regarding the eightapartment buildings he bought or built: between 1971 and 1975 thirteen buildings were built or bought; of these twelve, he admitted that eleven were resold (seven) or exchanged (four); no evidence was provided regarding the other two, as to whether they were sold or kept.

Two bought in 1971 and 1972 were sold in 1979; one built in 1972 was resold in 1974. Four built in 1973 were exchanged in 1974. One built in 1973 was resold in 1974. Of the three built in 1974, two were sold in 1974 and the other around 1980. All these buildings were located in Longueuil.

3.07 The appellant submitted that the water supply problem was one of the major reasons why he decided to sell. He learned of the existence of this problem when he went to the city, after buying the land in 1974, to get information.

4. Act — case law — analysis

4.01 Act

The principal provisions of the Income Tax Act at issue are 9(1), 12(1 )(e), 20(1)(n) and 248(1), the definition of “business”. These provisions will be cited if necessary during the analysis.

4.02 Case law

The case law cited to the Board by counsel for the parties is as follows:

1. MNR v Muzly Lawee & Naima E Lawee, [1972] CTC 359; 72 DTC 6342;

2. Glacier Realties Limited v The Queen, [1980] CTC 308; 80 DTC 6243;

3. MNR v Valclair Investment Company Limited, [1964] CTC 22; 64 DTC 5014;

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

5. John C Cragg v MNR, [1951] CTC 322; 51 DTC 34;

6. Antonio Archambault v MNR, [1962] CTC 176; 62 DTC 1086.

4.03 Analysis

403.1 The main criterion established by the courts to determine whether the profit from a transaction is a capital gain or business income is the intent of the taxpayer when he purchased the property which later became the subject of the sale. In Lawee, (supra), Cattanach, J mentioned this at 6353 of the DTC, and referred to Warnford Court (Canada) Limited v MNR, [1964] Ex CR 944; 64 DTC 5103, and to Villeneuve v MNR, [1965] Ex CR 110; [1964] CTC 287; 64 DTC 5174.

The other criteria (number and frequency of transactions, nature of transaction, advertising and so on), which are never conclusive, only serve to determine the taxpayer’s real intent at the time the property which was the subject of the transaction was purchased.

4.03.2 In the case at bar, the appellant maintained that at the time he bought the Ste-Julie land, he intended to build apartment buildings to obtain rental income, and thus his purpose was investment (para 3.05(a)). This income was to serve as a pension fund (para 3.02(d)).

He said that it was only because of a special circumstance, the fact that he was unable to obtain a water supply, that he decided to get rid of the land. It is well established that the intent stated by a witness in court is not conclusive. It has to be confirmed by circumstances or by direct evidence. In the case at bar, the appellant had even formed two companies, one for keeping apartment buildings and the other for selling them (para 3.02(e) and (f)).

To some extent, the appellant’s property income in 1974, 1975 and 1976 (para 3.04) provides a valid financial basis for his claim that he was creating a pension fund for his old age.

4.03.3 However, other circumstances to some degree contradict the appellant’s statement as to his original intent of investment.

For example, it is hard to accept the suggestion that the appellant, a man of twenty-three years’ experience in construction in 1974, did not think of investigating the water supply with the municipality before purchasing the Ste-Julie land (para 3.07). Not only did he not ask the municipality to Change the zoning, but it was he who allowed the plans to subdivide the land for single-family housing to be completed, and it was he who paid for the said plans (para 3.02(f)).

4.03.4 It is also somewhat surprising to see how little the appellant was interested in his pension fund, since of the thirteen apartment buildings bought or built seven were resold, apart from the four exchanged to purchase the Ste-Julie land. Of the seven sold, four were sold in 1974, the year of the exchange, and two were completed in that same year. The other two had been built in 1972 and 1973 (para 3.06).

4.03.5 Finally, the commercial part of the Ste-Julie land, on which the apartment buildings could have been built, was also resold, in 1982 (para 3.05(e)): yet the water supply problem had been solved in 1981 (para 3.05(c)).

4.03.6 The appellant had the burden of proof, and the weight of the evidence does not persuade the Board that the appellant even originally intended to build apartment buildings for investment.

All the appellant’s actions suggest an intention to resell.

If he actually intended to invest, the evidence laid before the Board does not provide the basis for such a conclusion. The reassessments made by the respondent must be upheld.

4.03.7 In accordance with a request by the appellant, income for 1976, 1977 and 1978 will be computed in accordance with paragraph 20(1 )(n) of the Act.

5. Conclusion

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

Appeal dismissed.