Carsons Camps LTD v. Minister of National Revenue, [1982] CTC 2372, 82 DTC 1384

John B Goetz:—This is an appeal by Carson Camps Ltd with respect to its 1975 taxation year. Carson Camps Ltd is a wholly-owned company of one Irwin Carson, a practising lawyer at the time of incorporation. Mr Carson indicates in his evidence that he incorporated the company solely for the purpose of enabling him to purchase Cumberland House Lodge from Les Voyageurs Outfitters Limited which, according to his understanding, was incorporated for the same reason by two Regina lawyers, one Rendik and one Wilson.

In its Notice of Appeal the appellant mentioned that the major portion of Mr Carson’s income as a barrister and solicitor was on a “fee for service” basis on an appointment to conduct criminal prosecutions for the Department of the Attorney General of the Province of Saskatchewan, in the northern area of Saskatchewan, what we call the remote areas, north of Prince Albert. Mr Carson has his own plane which enabled him to go to most of these places where he had sittings.

Mr Carson filed two financial statements relating to his law partnership — he has always been in partnership — and indicated that the criminal law practice provided a substantial source of income to the partnership.

Because Mr Carson’s appointment by the Attorney General was about to be terminated, for whatever reasons, that impelled him into buying Cumberland House Lodge.

The lodge had been built for approximately 10 years and Mr Carson had stayed there many times. He was familiar with the personnel. He was familiar with the operation, as he was with other like lodges that may have existed — not necessarily the same, but lodging places at Buffalo Narrows, etc.

The appellant purchased the lodge from Les Voyageurs, as shown in Exhibit A-1 (Interim Purchase Agreement) on April 10, 1973; and then on May 14, 1973 a more complete agreement for sale for the purchase of the operation known as “Cumberland House Lodge” as a going concern, was entered into.

On March 14, 1974, Carson Camps Ltd entered into an interim agreement with Robert Arthur Jardine to sell Cumberland House Lodge. The final agreement was drawn by Mr Carson’s firm on the 5th day of April, 1974.

So, in essence, Mr Carson conducted himself much the same as had Ren- dik and Wilson, who lived a long way away, leaving the operation of the lodge to the management of the personnel that had been hired.

Breaking down the component elements of the appellant’s purchase from Les Voyageurs, we have the following figures:

Then, a year later, in April 1974 the appellant sold Cumberland House Lodge for $185,000, allocated as follows: real estate: still $5,000; the building he has stated, and there are reasons for that, at $120,000; equipment has virtually doubled, $30,000; goodwill he has brought down.

In assessing the appellant for the taxation year 1975, the Crown alleges that the property was purchased for around $120,000 and it was sold for $185,000, realizing a profit on the sale as opposed to a capital gain of $61,375.92, and Revenue Canada placed that as income on his tax return for the said year.

There are very basic principles involved here. I must look at the evidence as a whole, which I have attempted to, and ascertain from that what was Mr Carson, or rather, the appellant, trying to do.

The factors mentioned by Mr Heinrich in his argument summation are all backed up by the notes of evidence that I have taken and marked. Mr Car- son spent a minimal amount of time out there. He used his plane to fly out liquor and whatever supplies were required and that would be a weekend for him out of the city.

In January 1974, a mere 23 weeks after taking possession of the hotel, Mr Carson wrote a friend endeavouring to get him to invest in the property for various reasons (Exhibit A-3). The phraseology used in that letter is, to my view, damaging to the expressed intention of the appellant that the purchase of this lodge was a capital investment; that he would be making money out of it. I am trying to tie this to the fact that the appellant really put no money of its own into it at all. The appellant borrowed a substantial amount of money to enable it to pay the purchase price, plus some extra for operating expenses, which Mr Carson knew was necessary.

The financial statement of the lodge itself indicates that in the first year there was a net income of $1,096. Attached to that is a copy for the year ending April 30, 1975, where the net income was up to $58,000.

Now, going back to Exhibit A-3, Mr Carson is writing his friend, Tony Polischuk, setting out what his estimated profit picture was from the lodge. On page 2 he says:

A $25,000 investment for / interest will give / of the net profit, plus / of the equity gained by reduction of the indebtedness of the Company plus / of any increase in value of the Hotel as a result of any increased turnover or inflation.

Following that he mentions a number of items that he thinks will cause the business to rapidly expand and change the profit picture.

If the above-mentioned comments are true, and by reading the financial statements of the lodge for 1975, if it were to be taken as an investment, Mr Carson surely had confidence in that business, unless he was trying to mislead a friend. In his letter to Tony Polischuk, Mr Carson says further:

I will be purchasing a 180 in the spring and would invite you to consider /2 share

Can sure use your help for the next year coming up. This is the year to put that turnover up and maybe next year peddle it for $240 — $250,000 giving all three partners a net gain of $30,000 — $40,000 divided three ways in addition to the profit in the meantime and in addition to the amount of reduced indebtedness. Think it over carefully.

Mr Carson says that Tony Polischuk responded to this invitation in the negative. In the Notice of Appeal and in the evidence Mr Carson says that, to his knowledge, the Lloyds had been managing the place, as a husband and wife team, for three years. He knew that if anything happened, obtaining new management for a like accommodation, or for that particular accommodation, would be difficult because they were dealing with natives and one had to have a special facility to get along with them and not to offend them, especially when they were drinking. That is where Mr Lloyd performed his function — in the licensed premises.

As mentioned in Exhibit A-3 and in his evidence, Mr Carson stated that that was his honest estimate of the lodge’s profits. Mr Heinrich, in cross- examining Mr Carson, said the lodge was really paying off the heavy debt “that you took upon yourself to purchase the building”, to which Mr Carson answered: “yes, and also making a profit besides”.

Quite obviously, Mr Carson, being a lawyer, would be aware of the interest burden involved. He suggests he was not too familiar with financial statements, and when he went to borrow the money to make the purchase he did, in fact, speak to the manager of the lending institution, who wanted to know what the profit picture was. Mr Carson must have had some knowledge in order to figure out what the profit picture was, what the operation was, and what was going to happen to his debt by following it up with a personal guarantee, regardless of whether he was going to continue being special Crown prosecutor for northern Saskatchewan.

I have it quite clearly here, in the letter to Tony Polischuk, that there was no question of management being proposed to Tony. Mr Carson says he may have mentioned the probability on the phone, but he can't recall for sure; that in his mind, “when I bought it I had the thought of turnover”.

When being pressed on the ability to repay the $130,000 borrowed, he gave a mere shrug in the witness box, which was noted both by counsel for the Crown and myself. When pressed to be more specific, he said, “I always wanted a partnership. If I could get Tony, that he might manage, that he could have a third”.

Now, be that as it may, let us go to the ultimate purchaser from the appellant, whereby he either made a capital gain or a profit. Jardine was a Straightforward witness who was led to Irwin Carson, by Irwin Carson’s brother, Grant Carson, who also was a respected lawyer in the view of Jardine, and who was Jardine’s personal lawyer. Jardine had been discussing with Grant Carson, his lawyer, that he had $20,000 to $40,000 loose money that he would like to invest in a hotel, or like investment in the north. He even made overtures to buy a certain hotel.

When Jardine met Irwin Carson at a cafe in Prince Albert, he said he was interested in a partnership. Apparently, they followed up the short discussion they had there about the acquisition of the lodge in the afternoon, where Irwin Carson showed Jardine some financial statements. Now, it is interesting to note that after Jardine went back to his farmland, which was between 50 and 80 miles from Prince Albert, he had only discussed partnership with Irwin Carson. But, Grant Carson told Jardine, “if you are going to be a partner, you are going to end up having to run the place. You might as well buy it”. So, Grant Carson’s advice was to buy the place, incorporate a company just as Irwin Carson did.

Jardine, when being pressed on cross-examination, admitted that when he was in the law office he only stated that he was interested in a “partnership”. It would appear that at that point the appellant was not interested.

As a result, Jardine was convinced by his lawyer, whom I think I can only infer and conclude was a pipeline to Irwin Carson, his brother, to get this farmer, Jardine — to acquire the proerty for the figure that he ultimately purchased it for, $185,000.

Putting all those facts together, I find that the appellant, or Irwin Carson, was personally knowledgeable of the operation of this particular Cumberland Lodge, as well as other living accommodations in centres or places in the far north that he visited on a regular basis.

I am forced to the conclusion that there was not even the original intention of a long-term investment, nor even a secondary intention if it didn’t work out, but that there was a primary intention at the time of the purchase from Les Voyageurs with minimum financing to operate the place until the appellant was able to find someone that would, in fact, buy it and thereby turn it over to a profit, which in fact did happen.

Now, I have gone through, on a very superficial basis, but essentially the key facts, which way does that lend the Board weight to give to the transaction as a transaction in trade on account of income, or whether, in fact, it was a gratuitous capital gain precipitated by the departure of Mr Lloyd’s wife, and that would be the only reason. I feel that that problem would have been anticipated and of which the appellant would have been aware of when he first bought the lodge.

The space of time between the acquisition of the property and its disposal at a substantial gain, works strongly against the appellant’s assertion that the property was purchased as an enduring investment asset. What, in fact, puts the cap on it is the language Mr Carson used with his friend, Tony Polischuk, only 23 weeks after the purchase (July 23, 1973 to December 29, 1973) in order to get his friend in to build it up a bit because things were looking good; the profit picture was going to be better and that it would be conducive to a turnover and increased value of the building, thereby it would be of greater value for the turnover. Mr Carson says:

This is the year to put that turnover up and maybe next year peddle it for 240 — $250,000.

That, unfortunately, for the appellant, is the most damaging evidence against it, which impels me to the only reasonable conclusion I can reach, having regard to the short space of time involved, the property was never acquired with the view of having a permanent investment, but merely to make a quick turnover, which is virtually what its vendors had done once they had turned it into a lodge.

Admittedly, Irwin Carson made efforts, he says, to get help, and when Jardine came along talking partnership it was his brother, Grant Carson, who talked Jardine into buying it and moving out and managing it himself, which ensured a quick sale and a quick profit.

Consequently, for those reasons, looking at all the circumstances and without referring specifically to any of these cases cited, which, in essence, say much of what I have just said, or even less than what I have just said, I find that there was no original intention to acquire the property as a capital investment. Consequently, there could not be a secondary intention to dispose of it if it did not produce a profit, but that the sole intention from day one was to acquire, improve and sell the property at a propitious time, which it did, one year after acquisition.

The time element, in all the jurisprudence, is of great importance. The appellant was not forced to sell. The property was in an earning position; that it was a quick acquisition of an amount of money; and that if it could have it construed as a Capital gain would be a substantial amount of money in Mr Carson’s pocket.

For those reasons I sustain the assessment of the Minister and dismiss the appeal.

Appeal dismissed.