LSW Inc v. Minister of National Revenue, [1982] CTC 2313, 82 DTC 1300

Roland St-Onge [Translation]:—The appeal of LSW Inc was heard at Quebec City on May 5, 1981. It involves two real estate transactions concerning the 1973 and 1974 taxation years.

The arguments of the parties are clearly stated in paragraphs 1 to 19 of the notice of appeal:

[Translation]

1. The appellant is a corporation legally constituted under the laws of the Province of Quebec having its principal place of business at 2685 rue Aurigny, Ste-Foy, Province of Quebec;

2. During the years currently under appeal, the appellant was engaged in the leasing of buildings or portions or buildings and to this end owned various buildings in the Quebec City area;

3. By notarial deed dated December 24, 1971 and drawn up before Andre Cossette, the appellant acquired an office building situated at 3220 des Quatre- Bourgeois, in Ste-Foy, Province of Quebec;

4. As one of the conditions of the sale, the purchaser, that is, the appellant, undertook to respect the lease entered into by the vendor, Wilfrid Légaré Inc, and International Business Machines Company Limited;

5. In the course of the 1972 taxation year, the appellant entered into negotioations with a view to renewing the lease with International Business Machines Company Limited;

6. In order to meet the new requirements of the tenant, the appellant acquired a lot that was to be used as a parking area;

7. Moreover, the appellant drew up building alteration plans, obtained a building permit, secured an amendment to the City of Ste-Foy zoning by-law and so on, all for the purpose of complying with the request of International Business Machines Company Limited;

8. After laborious and costly negotiations, the tenant, International Business Machines Company Limited, advised the appellant that it did not intend to renew the lease when it expired at the end of April 1974 and that it would vacate the leased premises as early as the end of 1973;

9. The appellant undertook an immediate and intensive effort to find a tenant for its building at 3220 des Quatre-Bourgeois in Ste-Foy;

10. The appellant then found a group of professionals interested in leasing the IBM building; at the last minute, however, this group decided not to lease the building;

11. One member of the group then made an offer to purchase the building situated at 3220 des Quatre-Bourgeois and the appellant, in desperation and having no other prospective tenant, sold the said building;

12. In its income tax assessments dated August 17, 1977, the Minister of National Revenue disallowed the capital gain realized from the sale of this building and taxed the gain as a business profit;

13. As part of its building leasing business, the appellant acquired in 1973 an office building situated at 955 de Bourgogne, in Ste-Foy;

14. This office building was leased in its entirety to a company called Holiday Magic;

15. In 1974, following searches and both civil and criminal proceedings against the tenant, Holiday Magic, the latter vacated the premises unexpectedly;

16. The appellant made every effort to find one or more tenants for the building situated at 955 de Bourgogne in Ste-Foy;

17. After a number of vain attemps and realizing that the “scandal” surrounding the Holiday Magic Company had become a matter of public knowledge and was making it difficult if not impossible to lease this building, at least for a while, the appellant received a serious and unsolicited offer of purchase and decided, albeit reluctantly, to divest itself of the building situated at 955 de Bourgogne, in Ste- Foy;

18. In its income tax assessment of August 17, 1977, the Minister of National Revenue disallowed the capital gain realized from the disposition of the building at 955 de Bourgogne in Ste-Foy and taxed the gain as a business profit;

19. The appellant served notice of objection within the prescribed time and following confirmation of the assessments by the respondent, appealed therefrom to this court;

In his reply to the notice of appeal, paragraph 10, subparagraphs (b) to (k) inclusive and (n) to (q) inclusive read as follows:

[Translation]

(b) By virtue of these letters patent, the appellant has the following powers inter alia:

To acquire in any way whatsoever, establish, lease, operate, administer, develop, sell, exchange or otherwise dispose of and mortgage all manner of real property; to acquire, build, operate, administer, sell and otherwise dispose of all manner of buildings and constructions; to buy and sell building materials;

(...)

To act as agents, brokers, for the investment, payment or transfer of funds, for the purchase, sale, development or administration of all manner of movable and immovable property, businesses and companies, for the administration, management or organization of unions, associations, partnerships, companies or corporations; to start up, manage, or help in the starting up of or the administration of firms, partnerships and corporations;

(c) During the taxation years in question, the following persons were shareholders of the applellant:

Lucien Simard:	99 common shares
Sam Wong:	99 common shares
Rose-Annette Payeur:	1 common share
Fleurette Gaudreault-Wong:	1 common share

(d) From 1971 to 1975, Mr Sam Wong and his wife, Mrs Fleurette Gaudreault- Wong, made not less than 7 short-term real estate sales;

(e) The appellant’s two principal shareholders, Messrs Lucien Simard and Sam Wong, each hold 25 per cent of the capital stock in WSMG Inc, a company whose principal activity is speculative land sales;

(f) The appellant’s two principal shareholders, Messrs Lucien Simard and Sam Wong, are also involved in short-term buying and selling of land in conjunction with Yves Germain Inc, a real estate brokerage firm.

(g) Since its incorporation, the appellant has made a number of major land and property purchases:

Year	Description	Cost
1972	Lot and building, 3220 Chemin des
	Quatre-Bourgeois, Ste-Foy	$ 123,000
	Lot, Boulevard Masson (les Saules sector)	$ 38,855.71
1973	Lot, Les Saules, Québec	$	4,048.49
	Lot and building, 955 de Bourgogne, Ste-Foy	$ 250,800
	Lot, 3220 Chemin des Quatre-Bourgeois, Ste-Foy	$	5,972

1974	Lot
	Ste-Foy, Quebec	$ 17,559
	Lot
	Les Saules, Quebec	$	1,137
1975	Lot
	Ste-Foy, Quebec	$	2,858
	Lot
	Les Saules, Quebec	$	2,867
1976	Lot
	Ste-Foy, Quebec	$	1,747
	Lot
	Les Saules, Quebec	$	3,609

(h) The building situated at 3220 Chemin des Quatre-Bourgeois was sold 24 months following its purchase, while the building situated at 955 de Bourgogne was sold 5 months after its purchase;

(i) The buildings whose disposition has given rise to the instant case were situated

in an area of Quebec City that is the subject of intense land speculation;

(j) The reason put forward by the appellant in justification of its sale of the building situated at 3220 Chemin des Quatre-Bourgeois (the failure of IBM Ltd to renew its lease) is of little validity and does not amount to frustration of the appellant’s original intention.

(k) IBM Ltd had never undertaken to either Wilfred Légaré or the appellant to extend or renew its lease at 3220 Chemin des Quatre-Bourgeois upon its expiry.

(n) The reason put forward by the appellant to justify the sale of the building situated at 955 de Bourgogne in Ste-Foy (that is, a scandal surrounding Holiday Magic that had “become a matter of public knowledge” and the departure of this company from the leased premises) is of little validity and does not amount to frustration of the appellant’s original intention.

(o) After the departure of Holiday Magic from the leased premises, the appellant was able to find other tenants without much difficulty.

(p) The appellant’s principal intention when it purchased the aforementioned buildings was to resell them at a profit.

(q) At the very least, when the appellant company purchased the properties in question, it had the secondary and determining intention of reselling them at a profit in the event of leasing problems.

Mr Simard testified as follows: the appellant company was incorporated for the purpose of making long-term investments. On December 24, 1971, it purchased a building on Chemin des Quatre-Bourgeois; IBM Ltd was the only tenant in the building and held a lease that was due to expire on December 21, 1973. The only guarantee that this lease would be renewed, upon the fulfilment of certain conditions, for two further five-year periods was the word of the local manager in Quebec City. The appellant was to construct new basement offices and obtain a larger parking lot. An adjacent lot was acquired for this purpose at a cost of $5,895. In spite of these improvements, IBM informed the appellant of its departure and the latter posted a notice to the effect that its offices were for rent. Mr Simard was then approached by Dr Roy, who wished to purchase a building in order to set up a medical clinic. After three meetings in as many weeks, Mr Simard decided to sell him the building on December 21, 1973.

On October 5, 1973, the appellant company purchased the building situated at 955 rue de Bourgogne in Ste-Foy; this was a three-storey office building with a parking lot adjacent to that belonging to the building acquired on December 24, 1971. The said building was 98% occupied and the same superintendent was to handle the maintenance duties for both buildings. Five months later, however, on March 22, 1974, the appellant sold the building because the principal tenant, Holiday Magic, had been visited on two occasions by city police in connection with its pyramid sales opera tions. Neither building was ever offered for sale, but most of the meetings with the purchasers were arranged with the help of Mr Wong, the other majority shareholder, and occurred at his restaurant.

In cross-examination, Mr Simard admitted the following: In 1969, he and his brother purchased a property for $150,000, not a lot as he had stated at the outset, but a property that he sold in 1973 for $295,000. In 1972 the appellant company purchased a lot on boulevard Masson for $38,855 and another one in 1974 at Versant-Nord, Ste-Foy, Quebec City for $17,559. In the first case, the lot was purchased in order to build a warehouse for leasing purposes but, owing to zoning difficulties, this intention was never realized and, two and a half years later, the lot was sold for a profit. In the second case, the Versant-Nord lot was to be the site of a building that would house the Bank of Montreal and other tenants but once again, a zoning problem forced the abandonment of the project and on September 12, 1977, the lot was sold for a profit to Mr Wong’s sons, who obtained the desired zoning change in order to build a restaurant across from a shopping centre. It should be noted that in both cases, the purchasers secured the zoning change that the appellant company had been anxious to obtain.

Mr Marcel Têtu, an accountant, explained the financial statements. As of December 31, 1971, the appellant company had an issued and paid-up capital stock of $2,000, a loan of $103,000, that is 80% of the value of the building, and an advance from the shareholders in the amount of $22,500. On December 31, 1973, the loan from the shareholders was increased to $77,500 in the form of “Notes payable to shareholders”. Income after capital cost allowance was nil for the 1972, 1973 and 1974 taxation years. Mr Têtu admitted that the two companies (SWMG Inc and Yves Germain Inc) in which the majority shareholders of the appellant company held shares were selling lots and reporting business incomes.

Mr Wong purchased four buildings and sold three of them together without a profit. His wife entered into two profitable real estate transactions.

Counsel for the appellant advanced the following arguments:

1. The appellant company was incorporated for investment purposes even though the company’s objects were different, and he referred the Board to two decisions of the Supreme Court, Sutton Lumber and Trading Co Ltd v MNR, [1953] CTC 237; 53 DTC 1158, and Regal Heights Ltd v MNR, [1960] CTC 384; 60 DTC 1270, in support of his contention that the Board must decide on the basis of the shareholders’ intention and not on the basis of the company’s objects:

2. The shareholders’ intention at the time of the purchase of the two buildings under appeal was to set up a pension fund for themselves even though they were unlucky in their four transactions;

3. On the other hand, the purchasers were all lucky because what they purchased was for their own use;

4. The function of the appellant company was not the same as that of the other two companies in which the majority shareholders of the appellant company held interests and the case law has held that a speculator may realize a capital gain.

Counsel for the respondent submitted that at the time of the purchase, it was the intention of the appellant to dispose of the buildings at a profit as soon as the opportunity presented itself and that this is clearly shown by the following five criteria:

1. The method of financing and the objects of the company;

2. The experience of the majority shareholders;

3. The short period of possession;

4. The speculation-prone area in which the purchased buildings were located;

5. The intention of the shareholders.

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

Californian Copper Syndicate (Limited and Reduced) v Harris (Surveyor of Taxes) (1904), 5 TC 159;

John A Gamble v MNR, [1975] CTC 2085; 75 DTC 77;

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

J Euclide Perron Ltée v MNR, [1962] CTC 457; 62 DTC 1288;

Manru Realty Limited v MNR, [1972] CTC 501; 72 DTC 6415;

GW Golden Construction Limited v MNR, [1967] CTC 111 ; 67 DTC 5080.

The evidence has shown that the appellant company’s powers included the power to buy, sell and dispose of properties and also to act as a real estate agent. That is exactly what the appellant company has done in this case. The first building was sold after five months and the second after two years. The appellant had no need to go to a real estate agent or to advertise that his buildings were for sale, since all contacts were easily set up with the help, and at the restaurant, of the majority shareholder Mr Wong.

A speculator is inclined to use borrowed money to achieve his end. In the case at bar, the appellant, in addition to using borrowed money, purchased buildings that yielded him no income. The contention that the interest received by the appellant’s shareholders was equivalent to dividends does not hold water, since it makes much more sense from an investment standpoint to lend out one’s money at interest than to manage buildings that do not produce any income. In the case at bar, the method of financing, the experience of the majority shareholders involved in the buying and selling of lots through two other companies, the short period during which the appellant owned the buildings and lots, the lack of perseverance in the pursuit of its aims, the speculation-prone area in which the buildings and lots were acquired — all these factors would suggest that the appellant has failed to rebut the presumption of speculative motives that weighed against it.

In the circumstances, it is abundantly clear that at the time it purchased the buildings, the appellant had at the very least the secondary intention of reselling them at a profit.

For all these reasons, the appeal is dismissed.

Appeal dismissed.