Les Immeubles Roussin Ltée v. Minister of National Revenue, [1982] CTC 2668

Roland St-Onge [Translation]:—The appeal of Les Immeubles Roussin Ltée came before me on May 11,1982 in Quebec City, Province of Quebec.

The case involved real estate transactions that occurred during the 1976 and 1977 taxation years.

In 1976 the appellant disposed of an apartment building, the Chanoine- Scott property, and realized a profit of $5,615. The following year, it disposed of the Lavoisier warehouse and realized a profit of $423,864.66.

The appellant contended that the profit earned from the disposition of these properties constituted a capital gain and not an operating profit.

The respondent claimed the opposite and assessed the appellant on the basis of the presumed facts, which are contained in paragraph 21 of the reply to the notice of appeal and which read as follows:

[Translation]

21. In its assessment of the appellant for the 1976 and 1977 taxation years, the Minister of National Revenue relied on the following presumptions of fact, inter alia :

(a) The appellant was incorporated on October 16, 1964 and since that time has always carried on business in the construction field and as a real estate agent;

(b) On February 19, 1973 the appellant purchased a parcel of land from the Frères des Ecoles Chrétiennes and constructed thereon in the same year a warehouse located on rue Lavoisier (hereinafter referred to as “the Lavoisier property”);

(c) From June 1, 1973 to May 1, 1976 the appellant leased a portion of the Lavoisier property to Alex Coulombe Quebec Ltée;

(d) On May 31, 1977 the appellant offered to sell the Lavoisier property for the price of $960,000 and on June 9, 1977, Alex Coulombe Ltée agreed to purchase the said property for the sum of $950,000;

(e) The appellant thus realized a profit of $423,864.66 in 1977 from the sale of the Lavoisier property;

(f) On February 26, 1976, the appellant also sold a property known as the Chanoine Scott building for the price of $42,000 to Jean-Louis Ouellet;

(g) Some months earlier on September 29, 1975, the appellant authorized the Royal Trust to sell the Chanoine Scott property;

(h) The appellant thus earned a profit of $5,615 in 1976 from the sale of the Chanoine Scott property;

(i) At the time of the acquisition of the above-mentioned properties, the appellant’s letters patent provided for the following objects, inter alia:

(a) To purchase, lease or otherwise acquire, own, manage, improve or contribute to the improvement of all manner of real estate, and sell, mortgage or otherwise dispose of such properties; to purchase and sell mortgages;

(b) To purchase building sites, prepare them for construction, subdivide them into lots and improve and develop them in all ways; to purchase, lease, construct or otherwise acquire, own and on the properties owned or managed by the company such assets and rights as would facilitate the provision of water, gas, electricity, energy, lighting, heating and sewage and drainage systems; to carry on any business that would further the attainment of these ends;

(c) To carry on general contracting operations in construction, demolition and building repairs of all kinds;

(j) During and previous to the years at issue, the appellant owned several apartment buildings, warehouses and shopping centres;

(k) Since it was incorporated, the appellant has engaged in large-scale buying and selling of real estate;

(l) During previous years, the appellant earned substantial profits from the sale of real estate;

(m) In its tax returns for the previous years, the appellant reported these profits from the sale of real estate as business income; accordingly, for the 1972,1973 and 1974 taxation years, the appellant reported the following amounts as income from the sale of properties:

1972	—	$861,313
1973	—	$342,000
1974	—	$ 2,800

(n) Moreover, the appellant also effected other real estate transactions before 1972, the proceeds of which it also reported as business income in its income tax returns for the relevant taxation years;

(o) The appellant had acquired a good knowledge of the area of real estate transactions;

(p) Prior to 1976 and 1977, as the result of numerous real estate transactions,

the appellant had accumulated extensive experience in the real estate field;

(q) The appellant undertook the purchase of the said properties as well as the construction of the Lavoisier warehouse within the overall framework of a business whose function was to generate profits, and the profitable resale of these buildings — where the opportunity presented itself — was another way of achieving those ends;

(r) Upon purchasing the said properties, the appellant had the secondary if not

primary intention of realizing a profit on the sale of the said properties;

(s) The appellant’s purchase and disposition of the Chanoine Scott and Lavoisier properties constitute an integral part of the operation of the appellant’s business;

(t) For the appellant, the profitable resale of the above-mentioned properties was a method of attaining its objectives within the framework of a company whose goal was the maximization of profits;

The appellant’s arguments are clearly stated in paragraphs 1 to 25 of the notice of appeal, which read as follows:

Notice of Appeal

1. The appellant hereby gives notice of appeal from the reassessments dated March 19, 1979 and bearing the numbers 286838 and 286839; the said reassessments were issued by the respondent for the 1976 and 1977 taxation years and were confirmed by the respondent by means of a notice of confirmation from the Minister dated January 25, 1980. In these reassessments, the respondent included in the computation of the appellant’s income $5,615 and $423,864.66 for 1976 and 1977 respectively, as profits arising from the disposition of the property situated at 833, rue Chanoine-Scott and the Lavoisier warehouse.

Statement of Facts

LAVOISIER WAREHOUSE

2. The appellant acquired lot 423-4 from Henri Giguère on February 26, 1973 and lot 427-2 from the Frères des Ecoles Chrétiennes de Québec on February 19, 1973 with a view to building thereon a warehouse for leasing and investment purposes (the said lots being referred to hereinafter as “the land”).

3. This land is adjacent to the Alex Coulombe Ltée bottling plant, the latter being a distributor of Pepsi and 7-Up products in particular.

4. The construction of the warehouse on the above land was completed near the end of May 1973.

5. Alex Coulombe Ltée leased 20.12 per cent of the surface area of the warehouse under a three-year lease that expired on May 31, 1976.

6. The warehouse was leased from the outset and in 1976 the yield exceeded 57.61 per cent.

7. In building the Lavoisier warehouse, it was the appellant’s intention to build several other warehouses on adjoining lands and, in fact, it now owns about fifteen warehouses; all are held for investment and leasing purposes and, in fulfillment of the appellant’s aims, all are leased.

8. Gross rental income in 1977 amounted to $1,598,736, against $6,094,543 spent in acquiring the properties.

9. The appellant received several purchase offers from agents or other persons but consistently declined to sell.

10. The appellant did not in any way solicit, announce or advertise the sale of the warehouse, which was not, moreover, for sale.

11. In March 1975, the principal shareholders of the appellant incorporated under the name of Roussin et Frères Inc to handle the construction of the appellant’s warehouses.

12. To confirm its line of business, the appellant obtained supplementary letters patent dated December 2, 1975 under which the sole object of the company was to acquire properties for investment purposes and to lease and manage such properties (photocopy of supplementary letters patent attached as Exhibit A-1).

13. On October 19, 1976, Alex Coulombe Ltée offered to purchase the warehouse from the appellant for $900,000. As the warehouse had cost $526,135 according to the respondent’s figures, the resulting capital gain would have been $373,865, but the apellant did not even discuss the price and gave Alex Coulombe Ltée a categorical “no”. A photocopy of the purchase option is attached hereto as Exhibit A-2.

14. Subsequently, the appellant made no effort to communicate anything to or solicit anything from Alex Coulombe Ltée, but the latter was persistent in its efforts.

15. In order to discourage Alex Coulombe Ltée, the appellant set an asking price of $1,000,000 In the hope that by asking such a price, it would dissuade Alex Coulombe Ltée from buying since the price was double the construction cost of the warehouse.

16. In spite of all that, Alex Coulombe Ltée came back in about April of 1977 and offered the sum of $950,000 for the warehouse.

17. So attractive was the offer that the appellant could not refuse as it was in a position to invest the proceeds of the sale. The appellant did just that, investing the said proceeds in a new warehouse situated at 3260 John Molson which is leased and which it holds for investment purposes. Thus the proceeds of the sale were reinvested in a similar property.

18. This is the only warehouse sold by the appellant since the company was founded; moreover, it included in the computation of its income for 1977 a taxable capital gain of $211,932.33 resulting from the disposition of this warehouse. SIX-UNIT APARTMENT BUILDING, RUE CHANOINE-SCOTT

19. In 1964 the appellant acquired a piece of land on rue Chanoine-Scott with the intention of fixing up on it an old six-unit apartment building situated nearby, which was moved to the said land in 1964.

20. Since that time, the appellant has rented the six apartments and has derived rental income therefrom.

21. The appellant never put the apartment building up for sale or engaged in any soliciting or advertising to that end.

22. In 1976 it received an unsolicited offer of purchase from Jean-Louis Ouellet, who was represented by an agent unknown to the appellant.

23. In view of the offer made; and whereas this small apartment building was isolated from the appellant’s other apartment buildings; and whereas it was not profitable to keep one superintendent for only six apartments and thus impossible to have a superintendent on the premises, and whereas major repairs to the building were a constant necessity and the appellant was earning a smaller return on this apartment building than on its warehouses, the appellant finally agreed to sell, thereby realizing a modest capital gain of $5,615.

24. On the basis of the fair market value on valuation day of the land and the building, the appellant included in the computation of its income for the 1976 taxation year a taxable capital gain of $982.50 resulting from the disposition of this apartment building.

Supporting arguments

25. The appellant contended that the profit earned from the disposition of the warehouse and the apartment building constitutes a capital gain and not an operating profit.

The following witnesses testified at the hearing:

1. Roger Bernard, industrial director in charge of expansion for Alex Coulombe Ltée;

2. Bruno Roussin, rental agent for the appellant company;

3. Maurice Roussin, president of the appellant company.

The testimony of the above witnesses confirmed all the allegations contained in the notice of appeal, with the exception of the amount of $1,000,000 in paragraph 15, which should read $960,000.

Mr Bernard was most categorical. He did everything, including vacating the leased premises, so that his employer could purchase the Lavoisier warehouse at the best possible price, but the Roussin brothers consistently refused. Finally, since they had never wished to mention a price, he asked them to submit an offer of sale in writing. Then, on May 31, 1977, Bruno Roussin drew up an offer of $960,000 using a model from the local real estate board. On the basis that there was no real estate agent to negotiate this transaction, Mr Bernard submitted a final price of $950,000, an amount he had always recommended to his employer, Mr Alex Coulombe, as a purchase price.

Mr Bruno Roussin corroborated Mr Bernard’s testimony; the appellant never sought to sell its Lavoisier warehouse. On the contrary, following the departure of Alex Coulombe Ltée, he first of all leased to Can-Van for four months with an option; then on April 13, 1977, he leased fifty per cent of the space that had already been occupied by Alex Coulombe Ltée to Gilles Murray Ltée for five years with an option for a further five years. The appellant even spent as much as $20,000 to subdivide the space.

He further testified that the appellant owned some 15 industrial buildings and 774 apartments, all for rental purposes, that it had never offered these properties for sale but only to rent and that, as a result, it had never had recourse to a real estate agent.

Mr Maurice Roussin corroborated Roger Bernard’s testimony. He stated that the appellant had been incorporated in order to purchase land and construct buildings on such land for rental purposes and that on occasion, the appellant had sold property and each time had reported the profits as operating income. The appellant had never operated as a real estate agent and always maintained these buildings situate in the city of Ste-Foy for purposes of rental income.

He filed under Exhibit A-10 an advertisement in which the company billed itself as specializing in leases, mostly three- to five-year leases with ten-year options. Also filed were statements of income and expenses:

Exhibit A-11:

Buildings owned by appellant — 1977 — Income — $272,000.

Exhibit A-12:

Warehouses — 1979- gross income — $7,185,000 —

— net income — $2,785,000.

He explained that the income from the warehouses was much greater than that from the apartments and that they represented 60% of the invested capital; he further explained that in 1975, a very active year, supplementary letters patent had been obtained in order to confirm what had become a reality, namely, their vocation as leasing specialists, and that a new company, Roussin & Frères Ltée, was being set up for the sole purpose of going into the construction business. During 1975 and subsequent years, les Immeubles Roussin Ltée did not undertake the construction of any buildings.

He closed his testimony by saying that in view of his infirmity, he had always wanted to become a building owner and draw rental income, that his company has never been in financial difficulty, that it had never advertised its buildings for sale or had recourse to agents and that it had never considered selling its Lavoisier warehouse.

The appellant has owned the apartment building for 12 years; it never looked for a buyer and sold the building for the simple reason that it was no longer profitable. Consequently, this transaction does not constitute an operating profit.

As for the Lavoisier warehouse, the land was acquired and the warehouse built and leased in 1973. In 1975, the appellant acquired a new vocation by obtaining supplementary letters patent under which the sole purpose of the company was the acquisition of properties for investment purposes. On October 19, 1976, ten months later, the appellant received a purchase offer of $900,000 that it declined; then six months later, Alex Coulombe Ltée came back with a new offer of 1950,000. This offer was so attractive that it could not be refused. In fact, the offer amounted to almost double the acquisition price.

Even if the appellant, as the respondent has contended, reported business income arising out of the sale of properties during the years previous to 1975, that does not mean that it never had the intention of keeping certain properties for investment purposes, since it does in fact own about 15 warehouses, all of which are held for investment purposes; in 1977, these properties yielded a gross rental income of $1,598,736, as compared with an initial purchase price of over $6,000,000.

The appellant had never previously sold any warehouses, but an offer that amounts to double the initial purchase price and comes after only four years of ownership is an offer that cannot be refused.

I was impressed by the testimony of the Roussin brothers, and I have no reason not to believe them. When they believed that their company was earning operating profits, they reported them as such. Today, they believe that the two transactions under appeal give rise to capital gains and the Board must believe them. In any event, the established facts clearly show that they were correct.

Consequently, the appeal is allowed.

Appeal allowed.