Vermont Investment Corp v. Minister of National Revenue, [1981] CTC 3023

Guy Tremblay:—This case was heard in Montreal, Quebec, on May 14, 1981.

1. The Point at Issue

The issue is whether the profit of $14,750 in 1976 and $5,050 in 1977 made by the appellant on the obligatory sales to original owners of properties purchased at auction sales by a Sheriff for municipal taxes of the City of Montreal are income or capital gain. The original owners redeemed the said properties within one year from the date of the sale by the bailiff pursuant to the law.

Of the 24 properties purchased in the years involved, 19 were resold to the former owners.

2. The Burden of Proof

2.01 The burden is on the appellant to show that the respondent’s assessments are incorrect. This burden of proof results particularly from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

2.02 In the same judgment the court decided that the assumed facts on which the respondent based the assessments or reassessments are also deemed to be correct. In the present case the assumed facts are described in the reply to notice of appeal, paragraph 6, subparagraphs (a) to (j):

6. In reassessing the Appellant for its 1976 and 1977 taxation years, the Minister of National Revenue relied, inter alia, on the following facts:

(a) During the taxation years at issue, the Appellant company was involved in the real estate business;

(b) From 1974 to 1977, the Appellant bidded upon and purchased 24 real estate properties at auction sales held by a sheriff pursuant to the law;

(c) Pursuant to the law governing such auction sales, the former proprietor may, within one year from the sale, buy back his former property from the purchaser by reimbursing the purchaser his purchase price plus an additional 10% thereof;

(d) Of the 24 properties bought by the Appellant in this manner, 19 were resold to the former proprietor within a year;

(e) The profit realized by the Appellant on such resales of properties to former proprietors, amounted to $14,750.00 in its 1976 taxation year and $5,050.00 in its 1977 taxation year;

(f) In the computation of its income for its 1976 and 1977 taxation years, the Appellant declared only half of this profit as taxable capital gains;

(g) The properties sold back by the Appellant during its 1976 and 1977 taxation years, were purchased by the Appellant less than a year before at depressed prices;

(h) The expectation of profit on resale induced the Appellant to bid upon and purchase the properties that were resold during its 1976 and 1977 taxation years;

(i) During the taxation years at issue, the Appellant was also involved in other real estate transactions;

(j) During its 1976 and 1977 taxation years, the Appellant was involved in the carrying on of a business with respect to the properties purchased and resold to the former proprietors during the taxation years at issue.

3. The Facts

3.01 The appellant’s company was incorporated in 1954. According to Milton Greenberg, the main witness and the president of the appellant, . . we invest in real estate and administer our real estate” (SN p 5). A business card of the appellant, used since its inception, was filed as Exhibit A-1. It clearly states “Property Investment and Land Development”.

3.02 The appellant owned at the beginning of 1980 twenty properties. The maximum it ever owned was 25 (SN p 6).

3.03 The main source of income of the appellant is rental income. Financial statements for the years 1976 to 1979 were filed as Exhibit A-2 showing the following income:

3.04 A two-page document entitled: “Vermont Investment, Corp, Record of the Properties from 1956 to 1980” was filed as Exhibit A-3. The list (prepared by the manager and the witness) contains most of the properties acquired by the appellant since its inception and gives the ways in which they have been acquired and sold (if such were the cases). From 1956 to 1979, 63 properties were purchased of which 29 were from the Sheriff at auction sales (23 or 24 for municipal taxes and 5 or 6 for execution of judgment) and 34 from other people. From a document Exhibit R-1, sent to the respondent with the notice of objection, 27 properties were acquired from auction sales. From the 29 properties acquired at auction sales 24 were purchased during the years 1974 to 1976. From those 24, 19 were redeemed by the former owners. The other ten, including one bought in 1978 and one in 1979, were retained and provided rental income. The witness explained that if he almost stopped purchasing properties at auction sales in 1976, the reason was because the redemptions were too high and there was “too much work for nothing” (SN p 25).

3.05 Of the 34 properties purchased from people other than the Sheriff, 15 were sold (expropriation by or sold to the City of Montreal, sold to consolidate the investments, etc.). Most of those properties were owned by the appellant between 16 to 22 years before being sold.

Of the 15 properties sold, 7 were land with buildings, and before being sold they provided rental income.

3.06 Seventeen pieces of land were purchased and ten were retained to erect buildings in order to obtain rental income. Mr Greenberg testified that the appellant had planned to erect a 17-storey building with 250 apartments on Dorchester Street between Wolfe and Montcalm Streets. From 1972 and on, several letters were sent to the City of Montreal asking for authorization to erect the building. However, the zoning was changed from highrise to low-density “.. . and now we’re stuck, so now we wait”. The said letters were filed as Exhibit A-4.

The appellant also filed as Exhibit A-5, about 15 invoices from the newspapers: The Gazette, La Presse, Montréal Matin and The Montreal Star concerning the publicity for apartments to rent, parking lots, gas, etc.

3.07 Mrs Cecile Baker, an employee of the appellant, who has been keeping the accounting books of the company for 5 years, said that the rental income of the appellant comes from the commercial field (around 175 apartments) and from the industrial field (stores, garages, enterprises, etc.).

She also testified that the appellant never advertised in order to sell properties.

Mrs Baker also said that she helped prepare Exhibit A-3. She admitted that for the figures before 1970, there is a possibility that there are some errors. The accounting was less complete. In addition, because of a fire in 1979 or 1980, some sheets of the accounting books had been destroyed.

3.08 Mr René Charland, who is in charge of the accounts receivable for the City of Montreal, testified for the respondent. He said that his main function is to collect the municipal taxes and this includes the preparation, every autumn, of a list of the properties which have to be sold at auction sales by the Sheriff at the beginning of December.

He testified that the amounts of accounts receivable of the City of Montreal are around 10% of the municipal evaluation of the property at the auction sale. The City is always the first to tender. The price is the account receivable due on the property plus $200 for the justice fees. The price paid by the purchaser, however, in general is about 25% of the municipal evaluation of the property.

3.09 Mr Ben Rosenbloom, CA, accountant for the appellant since 1956, testified about the meaning of the item “Advances to affiliated companies” in the appellant’s financial statements for 1976. He said that the Greenberg family formed four companies: Anja, Mistel, Adanac and Somac in Florida in 1969 because they had decided to diversify their holdings, and to make some investments in condominium projects in Fort Pierce. They never sold the land. The appellant does not own shares in those four companies. It just made loans to them.

At the end of 1975 the loans were $375,000 and at the end of 1976, $404,000.

3.10 Mr Rosenbloom also explained that often the purchase price of property at an auction sale for taxes in December of a year could be paid the following January or February as the end of the financial year is December 31 of each year, this is why one can read in the financial statements under the Liabilities section the following item “Balance Unpaid on Land and Buildings Purchased at Sheriff Sales”.

3.11 Mr Rosenbloom said that sometimes the properties are redeemed a few days or a short time after the date of the auction sale. The property purchased in an auction sale for taxes is not included in the “Fixed Assets” until one year has passed. The law indeed allows the former owner to redeem the property within that year. Before the end of the year, they are considered as “Current Assets”.

3.12 Mr Paul St-Martin, assistant sheriff for the judicial district of Montreal, testified for the respondent. He had in hand a list of purchases made by the appellant or by Mr Greenberg since 1967. The list, which was not filed as an exhibit, was prepared by the secretary of the sheriff’s office.

The list contradicted not only the appellant’s list (Exhibit A-3), but also the respondent’s allegations in the reply to notice of appeal. Indeed, according to this witness, there were 39 properties purchased by the appellant and Mr Greenberg. An objection to the testimony of Mr St-Martin was made by the appellant’s counsel. The objection was then taken under reserve. The Board now maintains the objection. Perhaps the said list of Mr St-Martin was nearer the truth than the appellant’s list (Exhibit A-3). However the appellant, after the filing of the reply to notice of appeal, did not have the opportunity to prepare himself.

4. Law — Cases at law — Analysis

4.01 Law

The main provisions of the Income Tax Act are sections 3, 9(1) and the defintion of “business” in subsection 248(1). They shall be quoted if necessary during the analysis.

4.02 Cases at law

The counsel for both parties referred the Board to the following cases at law:

1. Californian Copper Syndicate v Harris, 5 TC 159;

2. Birmount Holdings Limited v HMQ, [1978] CTC 358; 78 DTC 6254;

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

4. Ronald K Fraser (No 2) v MNR, [1964] CTC 372; 64 DTC 5224;

5. Hans Reicher v HMQ, [1975] CTC 659; 76 DTC 6001;

6. Pine Ridge Property Ltd v MNR, [1973] CTC 201;

7. Raymond Miron v MNR, 36 Tax ABC 108; 64 DTC 541;

8. Léo Perreault v MNR, 24 Tax ABC 204; 60 DTC 284.

4.03 Analysis

4.03.1 It is clear from the evidence that, apart from what is the object of the litigation, the appellant never bought and sold properties. All the purchased properties were, in theory and in fact, for investment.

Concerning the 29 properties purchased at auction sales, 19 were redeemed. Among the 10 properties which were retained 5 or 6 were not purchased at auction sales for municipal taxes, but at auction sales for execution of judgment or contracts. In fact, all the properties bought by the appellant at auction sales for execution of judgment were retained by the appellant as well as those purchased at auction sales for municipal taxes, which were not redeemed by the former owner.

The loans to the USA affiliated companies and the preponderance of the evidence confirmed the testimony of Mr Greenberg that the appellant was incorporated to invest in and administer real estate (paras 3.01 to 3.10).

Moreover, the Board is even convinced that the main intention of the appellant in purchasing the properties sold by the Sheriff for municipal taxes was for investment even if it is not the only one. In buying a property indeed for 25% of the municipal evaluation (maybe 15% of the fair market value), the best way for an investment company was to keep it, and in fact the appellant retained those which were not redeemed.

4.03.2 The Board, however, cannot ignore the fact that 23 or 24 (29 less 5 or 6 for execution of judgment), indeed the greatest part, were redeemed.

Mr Greenberg, who is an intelligent and an experienced business man, could not ignore this fact either in purchasing the said properties. The worst that could happen was the redemption by the former owners, and this “worst” meant at least 10% of profit on the price paid and possibly, also the rental income from these properties during the period of ownership if the redemption occurred only a short time after the auction sales.

Despite the first intent to invest, the Board thinks that the redemption with the 10% profit and the possible rental income were, taken as a whole, another important factor. Indeed in purchasing the said properties, it was impossible not to make a profit (small as it can be if compared with the gross income of the appellant). That fact could not be ignored by the appellant nor could the other fact that more than 80% of the properties would be redeemed.

Before the evidence of those two facts, the Board must conclude the profit is in a business income.

It is the Board’s opinion that the principles issued by the Court in Bir- mount Holdings Limited v HMQ, supra at 365 [6258]:

The authorities make it clear that the Court was required to consider the relevant facts as of the time of purchase together with subsequent events together with the statement by Mr Mentzelopoulos as to the intention of the appellant at the time of acquisition. If, after considering all these matters, the Court concludes that the possibility of turning the property to account for profit in any way which might present itself as convenient or expedient, including re-sale, was a major motivating factor, or that an investment intention was not the only motivating factor at time of acquisition, then the Court must find any profit ensuing from a resulting sale to be taxable as an adventure in the nature of trade.

in Pine Ridge Property Ltd v MNR, supra at 201:

Where the relevant facts as of the time of the purchase are considered together with the subsequent events and the affirmations of the appellant’s shareholders, it is not realistic to conclude that the only possibility that motivated the acquisition was the ultimate creation and retention of a very substantial housing development. Having regard to the problems and delays to be expected by the appellant before it could hope to commence the concrete steps of realization of such a project, such as the creation of detailed plans, the arrangement of permanent financing and the negotiation of contracts, and having regard to the appellant’s lack of financial resources of consequence, one cannot escape the conclusion that, in 1964, the acquisition was a speculation in which, in addition to the hope of an ultimate permanent source of income, the possibility of turning the property to account for profit in any way which might present itself as convenient or expedient, including resale of some earlier stage, was a major motivating factor.

and in Paul Racine, Amédée Demers and François Nolin v MNR, supra at 159 [5103]:

To give to a transaction which involves the acquisition of capital the double character of also being at the same time an adventure in the nature of trade, the purchaser must have in his mind, at the moment of the purchase, the possibility of reselling as an operating motivation for the acquisition; that is to say that he must have had in mind that upon a certain type of circumstances arising he had hopes of being able to resell it at a profit instead of using the thing purchased for purposes of capital. Generally speaking, a decision that such a motivation exists will have to be based on inferences flowing from circumstances surrounding the transaction rather than on direct evidence of what the purchaser had in mind.

Considering all the circumstances, the Board concludes that the reassessment issued by the respondent must be maintained.

5. Conclusion

The appeals are dismissed in accordance with the above reasons for judgment.

Appeals dismissed.