Leopold Toulouse v. Minister of National Revenue, [1982] CTC 2703, 82 DTC 1710

The Chairman [TRANSLATION]:—The appeal of Mr Léopold Toulouse is from a reassessment dated August 7, 1980 which has the effect of adding to the appellant’s income, as business income for 1976, a profit in the amount of $71,786 from the sale of a piece of land situated on Boulevard Dagenais, City of Laval, Quebec. In his notice of appeal, the appellant contended that the land in question was a capital property and that the profit realized on the sale was a Capital gain.

As this case turns principally on facts, the facts as outlined in the notice of appeal and the presumptions on which the respondent relied in preparing his assessment are reproduced here in extenso, as they appeared in the amended reply to the notice of appeal:

(Translation) (Notice of Appeal)

THE FACTS

1. The appellant is the principal shareholder of Toulouse Construction Inc (hereinafter called the “Company”).

2. The Company’s warehouse-workshop occupied one half of a building situated at 2921 Boulevard Dagenais, Laval, built by the Company in 1967.

3. The other half of the building was leased to Acier Profile SBB Inc (hereinafter called the “Tenant”).

4. At the beginning of 1976, the Tenant advised the appellant that it needed more space for its operations and offered to purchase the building it was leasing.

5. The appellant began to look for a piece of land on which to build a new warehouse-workshop and thereby free the building on Boulevard Dagenais for the use of his Tenant.

6. In March 1976, the appellant acquired a piece of land in the immediate vicinity in order to build thereon a new workshop for his company and to build on the same site other warehouse-workshops for leasing purposes.

7. The appellant at this time already owned several rental properties, all of which were held under long-term leases.

8. The land acquired in March 1976 was zoned for commercial use and was bounded on two sides by land zoned for industrial use. The appellant anticipated no difficulty in obtaining, if necessary, a minor change in the zoning plan.

9. Once his offer of purchase was accepted, the appellant approached a member of the Executive Committee of the City of Laval to determine whether the construction of his workshop would require changes in the zoning plan. The appellant was advised that this would be the case, and to expect that such changes would not be made without first being subject to a number of studies. The appellant was disappointed with this response from the municipal official, since his Company had to find a space quickly so as to enable his Tenant to occupy the building on Boulevard Dagenais.

10. The appellant was then told for the first time that a group of promoters wished to build a shopping centre on the adjacent property and that these promoters might well offer him twice the price he had paid.

11. The appellant was approached by the shopping centre promoters and, realizing that he could lose a tenant and that the price offered was irresistible, agreed to sell the land for a price that represented more than twice the amount he had agreed to pay to purchase it. The sale price was to be paid to him in two annual instalments.

12. The appellant then began to search for another property on which to build the warehouse-workshop for his company. After much fruitless negotiation over the acquisition of a piece of land in Laval, the appellant went to inspect lots located in the industrial park of St-Eustache, a municipality located on the north shore of the St Lawrence River.

13. As the appellant wished to keep his place of business in the City of Laval, he approached his tenant with an offer to lease it the new building to be constructed by his company in the above-mentioned industrial park.

14. Since this arrangement was satisfactory to the tenant, the appellant acquired a piece of land in the St-Eustache industrial park and commenced construction of the building for his tenant in December 1976.

15. In a notice of reassessment dated September 8, 1978, the respondent included the proceeds of the land sale in the computation of the appellant’s business income. In the same assessment, the respondent added a sum of $30,133 as additional remuneration.

16. A notice of objection was duly prepared on November 6, 1978.

17. On May 20, 1980, the respondent sent the appellant a notice bearing the number TLA 7 in which he appeared to indicate that the additional remuneration of $30,133 would be deducted from the appellant’s income for 1976 and that the proceeds from the land sale would constitute a business profit.

18. The appellant was advised orally by his attorney that he would receive a new notice of assessment dated August 7, 1980 accompanied by the notice bearing the number TLA 7 and confirming the information contained in notice TLA 7 of May 20, 1980.

(Amended reply to the notice of appeal)

(A) STATEMENT OF FACTS:

9. In assessing the appellant for the 1976 taxation year, the Respondent relied on, inter alia, the following presumptions of fact:

(a) The Appellant is the president and principal shareholder of “Toulouse Construction Inc”;

(b) Through his company, “Toulouse Construction Inc”, the Appellant was involved on a frequent and regular basis in the construction and leasing of building, and possessed considerable experience in this area;

(c) With a view to acquiring a property situated on Boulevard Dagenais in the City of Laval, the Appellant submitted two offers of purchase to Mrs Yvette Vanier, one on March 4 and the other on March 10, 1976; each offer was valid until the following day;

(d) On March 11, 1976, Mrs Vanier agreed to sell the said land to the Appellant for $62,054;

(e) During the same period, an oral agreement was reached between Mr Claude Thomas, president of “Les Immeubles Carrefour Ltée” and the Appellant under which the latter would transfer this land to that company for $136,000;

(f) This oral agreement was confirmed by an offer of sale drafted by the Appellant and dated March 16, 1976:

(g) At that particular period, “Les Immeubles Carrefour Ltée” was anxious to acquire this land in order to build a shopping centre on it;

(h) It was never the Appellant’s intention to keep the said land in order to build on it;

(i) The Appellant was aware that the zoning regulation was unfavourable to his alleged relocation project, since this land was designated for commercial and not industrial use;

(j) Although the alleged relocation project involved enormous costs, the Appellant

did not carry out any preliminary study prior to the acquisition of the land;

(k) One of the principal motives prompting the Appellant to acquire this land was purely speculative in nature, namely, the opportunity to resell the land at a profit;

(l) This offer emerged on the very day that the Appellant’s offer to purchase was accepted; the Appellant then made an offer to sell the land to “Les Immeubles Carrefour Ltée” for a price amounting to more than double the amount he himself had just agreed to pay for the purchase of the same land;

(m) The profitable resale of this land constituted the realization of the Appellant’s

purely speculative intention and was not the result of sheer coincidence;

(n) Subsequent to the sale of this land, the Appellant acquired a piece of land

that enabled him to carry out the relocation project without any difficulty;

(o) When computing his income for 1976, the Appellant reported a capital gain on the profit earned from this real estate transaction;

(p) In his notice of assessment dated August 7, 1980, the Respondent taxed the profit earned as though it were business income, thereby increasing the Appellant’s taxable income for the 1976 taxation year;

The facts as outlined in the appellant’s submission to the Minister of National Revenue and so pleaded before the Board and contained in part in the notice of appeal were corroborated by the following witnesses:

(1) Mr Raymond Fortin who was a municipal councillor in 1976 and a member of the Executive Council of the City of Laval;

(2) Mr Claude Thomas, a real estate agent during the taxation year in question and president of Les Immeubles Carrefour Ltée, who participated in the transaction at issue in this appeal;

(3) Mr Victor Bellavance, a businessman and owner of Acier Profile SBB Inc, the tenant during the period in question, which occupied one-half of the appellant’s warehouse-workshop situated at 2921 Boulevard Dagenais.

In the course of his cross-examination, counsel for the respondent failed to discredit or weaken the testimony of these three witnesses or of the appellant.

The arguments upon which the respondent based his assessment may be summarized as follows:

(a) It was never the appellant’s intention to keep the land acquired from Mrs Yvette Vanier on March 11, 1976 in order to construct thereon a building;

(b) The acquisition of the said land was speculative and one of the chief motives prompting the appellant to buy the land was the prospect of reselling it at a profit.

The issue therefore turns exclusively on the appellant’s intention at the very moment he acquired the land that is the subject of this appeal. It goes without saying that the appellant’s statement as to his intention to acquire the land for the purpose of building a warehouse-workshop must be borne out by the facts and the circumstances prevailing at the moment of the pur- chase. Moreover, for the appellant to win his case, there can be no question of his entertaining at the time of the purchase any notion of acquiring the land in order to resell it should he fail to achieve his initial aim. It is in this perspective that the facts and circumstances prevailing from March 4 to March 11, 1976, that is, the period during which the appellant purchased the land from Mrs Vanier, must be considered.

The respondent has, moreover, admitted that the appellant was not in the business of buying and reselling land, but that his company was concerned exclusively with the construction and long-term leasing of warehouseworkshops.

I have no reason not to accept the testimony, during examination-in-chief or cross-examination, of Mr Bellavance, who stated that his company was in the process of expanding and that his operations required double the amount of space he was then occupying. In fact, some months after the transaction at issue in this appeal, Mr Bellavance leased from the appellant a warehouse and workshop in St-Eustache.

Mr Vanier’s land was in the immediate vicinity of the appellant’s business and adjoined land zoned for industrial use on two sides. The appellant foresaw no difficulty in obtaining a change in the zoning plan. Moreover, Mr Fortin testified that the change could have been made within a normal period of time.

From these facts, it is reasonable to conclude that the appellant had valid grounds for acquiring a piece of land located near his place of business and for which the zoning status could probably have been altered to allow the construction of one or more warehouse-workshops for his use, enabling him to sell his building on Boulevard Dagenais to his tenant Mr Bellavance

The appellant submitted two offers to Mrs Vanier, one on March 4 and the other on March 10, 1976. Mrs Vanier agreed on March 11, 1976 to sell the land to the appellant.

The evidence indicates that it was only after the offer of purchase was accepted by Mrs Vanier, on March 11, 1976, that the appellant contacted Mr Fortin regarding the zoning of the land. Only then did the appellant learn from Mr Fortin that, notwithstanding that it would have been possible to alter the zoning status of the newly acquired land, he could obtain double the purchase price for the said land since a group of businessmen were in the process of buying up properties in the vicinity of his land. Mr Fortin was himself in the process of selling them one of his own properties. According to the latter’s testimony, Mr Thomas, who represented the group of businessmen, met with the appellant, after March 11, and made an offer to purchase, without, however, informing him that the intended project was a shopping centre and was to be built by Les Immeubles Carrefour Ltée.

The respondent’s main contention to the effect that an oral agreement was reached between the appellant and Mr Thomas between March 4 and March 11, is groundless. There is nothing in the evidence that would permit such a conclusion. On the contrary, it seems clear from the testimony of Mr Fortin and Mr Thomas that the discussions and negotiations concerning the shopping centre project were held confidentially and had not yet been made public at the time in question. The argument that the appellant had extensive experience in the real estate field and that he had knowledge of the shopping centre project — and was even in possession of a verbal offer to purchase from Les Immeubles Carrefour Ltée — is pure conjecture and is not, in my opinion, supported in any way by the evidence.

In her notes and the authorities she cited, counsel for the respondent has emphasized that the courts, in examining the facts and circumstances surrounding a transaction, consider certain indications that sometimes aid in determining the nature of the transaction.

In this instance, counsel for the respondent has noted the following:

(1) the preliminary steps and the financing of the transaction;

(2) the period of ownership of the property;

(3) an unsolicited offer.

It appears obvious to me that not one of these indications is a determining factor in itself and that the question whether the affair at hand was a commercial transaction would best be answered through a consideration of all the data viewed as a whole.

In my opinion, the three indications cited by the respondent do not apply to the facts of the matter before us and do not support his contentions in any way, any more than the case law cited by counsel for the respondent. Even though the rulings in the cases cited are based on the application of one or other of these three indications, the facts are essentially different from those of the present appeal.

With regard to the steps taken prior to the purchase of the land, it is true that the appellant did not make application for a zoning change until after the land was purchased. However, since two properties adjacent to that of the appellant were zoned for industrial use, there was no reason to anticipate any difficulty in obtaining similar zoning status for the appellant’s property. In fact, Mr Fortin indicated that, in principle, the zoning change presented no problem and could, subsequent to a review of the application, be granted after a waiting period of a few months. The fact that the appellant purchased the land before obtaining a zoning change does not, in the circumstances, constitute sufficient evidence to warrant a conclusion on my part that the appellant did not, on purchasing the property, intend to build a warehouse-workshop on it, but had acquired it for the purpose of reselling it.

The evidence would indicate that the appellant, who was at this time the owner of a number of other warehouse-workshops, faced no obstacles with regard to the financing of another warehouse-workshop on Mrs Vanier’s property for his own use, which was his immediate purpose at the time of the purchase. Nor is the fact that the appellant did not turn to the banks or loan companies in order to finance his project sufficient to warrant a conclusion that the appellant intended to resell the land and not to build a warehouse on it.

The appellant resold the property five days after buying it. Such a brief period of ownership could well be, in certain circumstances, a determining factor, but in the case at bar the testimony of Mr Fortin and Mr Thomas indicated that, unknown to the appellant, Les Immeubles Carrefour Ltée needed to acquire Mrs Vanier’s property in order to go through with their shopping centre project. Thus, without having in any way solicited an offer, and once he was made aware of the scope of the project, the appellant accepted the first offer made by Les Immeubles Carrefour Ltée.

Remarks made by counsel for the respondent concerning the third indication (“an unsolicited offer”) suggested that this indication is probably less of a determining factor than the acceptance of such an offer by a taxpayer. There can be no doubt that the courts give very serious consideration to the reasons that lead to the acceptance of even an unsolicited offer.

None the less, in this case, the appellant, very soon after acquiring the Vanier property, was informed by Mr Fortin that he could resell the land for twice the purchase price. In the course of the week that followed, the appellant was offered such an amount by Mr Thomas. In the circumstances, I am at a loss to understand how and why the appellant could logically have refused such an offer. That the appellant accepted it does not, in my opinion, indicate that, when he acquired the land, he intended to resell it at a profit.

The judgment in this matter is founded chiefly on the testimony of Messrs Fortin, Thomas and Bellavance, as well as that of the appellant. Whether or not we are dealing with a coincidence, the evidence adduced has not been contradicted. The appellant and Mr Bellavance have established the existence of a valid reason for the acquisition by the appellant of a piece of land in order to construct a warehouse-workshop for his own use. The testimony of Mr Fortin and Mr Thomas corroborated the appellant’s testimony and established that the appellant had no knowledge of the Immeubles Carrefour Ltée project on or before March 11, 1976. No other valid evidence or indication has been advanced that would permit the conclusion that the appellant, at the time of his purchase of the Vanier property, intended to resell it to Les Immeubles Carrefour Ltée or any other purchaser.

For these reasons, the appeal is allowed and the matter referred back to the Minister for reassessment on the basis that the property sold in 1976 by the appellant was a capital property and the profit realized was a capital gain.

Appeal allowed.