143088 Canada Inc. v. Her Majesty the Queen, [1996] 3 CTC 2580, 97 DTC 38

McArthur J.T.C.C.: — This appeal was heard in Ottawa, Ontario on February 5, 1996 with respect to the Appellant’s 1987 and 1988 taxation years.

The issue is whether the proceeds from four real estate transactions were on account of revenue or capital.

In 1986, the Appellant purchased two income producing residential apartment buildings in the Province of Quebec. One property in Gatineau (the Mont Joye) was purchased by the Appellant on December 1, 1986 for $3,548,000.00 and sold to a non-arm’s length purchaser for a profit of $925,942.00 on December 17, 1987 and it was sold again shortly thereafter to a second non-arm’s length purchaser without profit or loss. In 1990, the apartment units were converted to condominiums and sold to third parties.

The second property was in Hull (the Jolicoeur). It was also purchased by the Appellant on December 1, 1986, for $5,100,000.00 and sold to a non-arm’s length purchaser for a profit of $762,470.00 on December 17, 1987. It was then sold at arm’s length on May 26, 1988 without profit or loss.

In 1987 the Appellant entered into two options to purchase incomeproducing properties. The first option (the Gatineau option) was entered into by the Appellant on April 1, 1987 and sold at arm’s length on July 22, 1987, for a net gain of $862,000.00. The second (the Hull option) was obtained on March 25, 1987 and sold to a non-arm’s length purchaser for a net gain of $1,000,000.00.

Mr. Camille Villeneuve, president of the Appellant and Mr. B. Raymond, chartered accountant of the Appellant were examined and cross examined at length. The sole beneficial shareholder and the directing mind of the Appellant corporation was Mr. Villeneuve.

In 1985 the Appellant acquired a fast food chain chicken restaurant business that included several company-operated restaurants and several franchised restaurants. The restaurant business suffered substantial losses each year until it was sold in 1990. The Appellant’s financial statements show losses of $193,870.00 and $1,241,473.00 for the years 1985 and 1986, respectively. The Appellant was substantially indebted to its bankers. Mr. Villeneuve stated that the Appellant purchased two real estate properties with the intent to maintain the projects as long term investments. The rental income would subsidize the restaurant business providing needed cash flow and financial stability required by the bank.

Mr. Villeneuve added that the Appellant was not motivated in making the purchases by an intention to sell the two properties as part of its business operations or to use the properties in an adventure or operation in the nature of trade. He established that on acquisition of the properties in December 1986, the Appellant started to upgrade the buildings, making renovations thereto. He projected that both projects, over the long-run, would be a profitable rental business. He stated that in 1987, consideration was being given to selling the Appellant’s restaurant business. For various business reasons, it was anticipated that the shares of the Appellant might be sold rather than the restaurant assets. The sale would be simplified if the Appellant did not retain the real estate at issue. He emphasized that it was the Appellant’s original intent to hold Mont Joye and Jolicoeur as a long term income producing business.

The Appellant accepted an offer for the Gatineau Option within three months of entering into the option which he described as “too good to refuse”. Mr. Villeneuve stated that the three other non-arm’s length transfers were effected to facilitate the sale of the shares of the Appellant.

Through cross-examination, it was established that Mr. Villeneuve had vast experience in dealing in income-producing real estate in the Gatineau- Hull region since at least 1979. Camille Villeneuve has an impressive history of buying and selling income-producing real estate and related enterprises in the Gatineau-Hull regions, either through personal or corporate holdings and either alone or in association with other businessmen. He had purchased and sold, either alone or together with partners, shareholders and corporations, approximately ten properties over the years prior to the relevant years. Some properties were retained as investments, but most of the real estate was sold at a profit after periods of less than three years.

Position of the Appellant

The intention of the Appellant in acquiring the 148 unit Mont Joye and 196-unit Jolicoeur apartment complexes, was to provide income and financial stability to offset the losses of the struggling restaurant business. It was a strategic business decision to permit the survival of the restaurants by offsetting losses. Substantial funds were expended to upgrade the properties. Mr. Villeneuve personally guaranteed the financing.

As with the outright purchase of two properties, the intent of the two options was to provide revenue to the Appellant. Agreements of Purchase and Sale contained rental income guarantees. This demonstrates the Appellant’s intent to invest in income-producing real estate with a positive cash flow to be used to support the restaurant business during the financially difficult start up period. The non- arm’s length sales of the two properties and the option were made to “sister” corporations at fair market value to facilitate the sale of the shares of the Appellant. The sale prices were not in dispute.

Position of Respondent

The Respondent’s counsel submitted that given the conduct of Mr. Villeneuve over the years, his stated intention is entirely self- serving and not worthy of credit. His construction company was involved in ten construction projects from 1973 to 1986. These included residential apartment buildings and medical clinics. Nine of the 10 were sold. Given his history in the trade, the number of properties he has acquired, built, and sold, he is so plainly a dealer in real estate that he is almost incapable of selling on a capital gains basis.

Analysis

Four properties in question were conveyed in the following time periods:

1. The Gatineau property was sold one year after its purchase.

2. The Gatineau option was sold three months after its purchase.

3. The Hull property was sold one year after its purchase.

4. The Hull option was sold three months after its purchase.

On these facts alone, one could reasonably conclude the rapid sales were part of a predetermined profit making scheme. Has this inference been rebutted? The Appellant’s Counsel argued that the motivating factor or intention upon purchase was to produce income and the Appellant was not motivated, upon purchase, to resell at a profit.

Counsel for both parties directed the Court to jurisprudence that clearly supported their respective positions. There is an abundance of such cases and I will not attempt to review them.

The finding is essentially one of fact based on all of the circumstances and not limited to the Appellant’s stated intention.

I am guided by the criteria set out by Mr. Justice Rouleau in Happy Valley Farms Ltd. v. Minister of National Revenue (sub nom Happy Valley Farms Ltd. v. R.), [1986] 2 C.T.C. 259, 86 D.T.C. 6421 (F.C.T.D.). These were adopted by the Federal Court of Appeal in First Investors Corp. v. R. (sub nom. First Investors Corporation Ltd. v. The Queen), [1987] 1 C.T.C. 285, 87 D.T.C. 5176 (F.C.A.), Leave to appeal to S.C.C. refused (1987), 79 N.R. 395 (n) (S.C.C.).

I shall list these criteria together with my application of them to the present facts:

1. The nature of the property sold. Although virtually any form of property may be acquired to be dealt in, those forms of property, such as manufactured articles, which are generally the subject of trading only are rarely the subject of investment. Property which does not yield to its owner an income or personal enjoyment simply by virtue of its ownership is more likely to have been acquired for the purpose of sale than property that does.

The two properties purchased outright were capable of earning income. The two options, as long as they were not exercised, were not capable of earning income.

Mr. Villeneuve stated the properties were purchased and the options entered into, for the purpose of producing badly needed income for the Appellant.

2. The length of period of ownership. Generally, property meant to be dealt in is realized within a short time after acquisition. Nevertheless, there are many exceptions to this general rule.

The holding period was short. This raises the inference that the Appellant’s intention, from the outset, was to sell at a profit. The Appellant has not successfully rebutted that presumption. There were no unusual or compelling events to bring the Appellant within the exceptions referred to by Justice Rouleau. The two options were acquired and disposed of within a period of less than four months in 1987. The Hull property was transferred at non-arm’s length within one year and then sold at arm’s length approximately 6 months later. The Gatineau property was transferred at non-arm’s length approximately one year after its purchase. It was sold as condominium units in 1990.

3. The frequency or number of other similar transactions by the taxpayer. If the same sort of property has been sold in succession over a period of years or there are several sales at about the same date, a presumption arises that there has been dealing in respect of the property.

There is considerable evidence that Mr. Villeneuve, the directing mind of the Appellant, frequently bought and sold similar properties. The Appellant is placed in the same position as its owner.

4. Work expended on or in connection with the property realized. If effort is put into bringing the property into a more marketable condition during the ownership of the taxpayer or if special efforts are made to find or attract purchasers (such as the opening of an office or advertising) there is some evidence of dealing in the property.

Money was expended to upgrade the two properties purchased. No money was spent on the two properties under option. I do not find this factor conclusive one way or the other.

5. The circumstances that were responsible for the sale of the property. There may exist some explanation, such as a sudden emergency or an opportunity calling for ready money, that will preclude a finding that the plan of dealing in the property was what caused the original purchase.

The position of the Appellant is that a decision was made to sell the restaurant division and the real estate was transferred out of the company to facilitate the sale. Despite this, the options and properties were sold to arm’s length purchasers after a relatively short period of ownership. The Gatineau property was retained for over three years but it had been converted to a condominium project and the individual units sold. I conclude from this there was an intention to convert the property upon its purchase.

6. Motive. The motive of the taxpayer is never irrelevant in any of these cases. The intention at the time of acquiring an asset as inferred from surrounding circumstances and direct evidence is one of the most important elements in determining whether a gain is of a capital or income nature.

Mr. Villeneuve and the Appellant’s accountant testified that the intention at the time of acquiring the assets was to provide rental income to offset the losses incurred from the restaurant business. Counsel added that the evidence of the repairs and maintenance to two properties support that intention. These expenditures also support an intention to condominiumize the Gatineau property and to prepare the Hull property for resale. The two options were disposed of within months of their acquisition. I do not accept the stated intention that they were acquired to provide income for the troubled restaurant business. The diverse combination of the chicken restaurant and franchise business with the income producing properties does not appear to be a compatible mix.

The fact that Mr. Villeneuve personally guaranteed the financing does not assist the Appellant’s position. The properties were almost entirely financed by loans and mortgages. The Appellant did not have financial strength and liquidity to satisfy a lender. It is probable that the financing could not have been arranged without the personal guarantee of Mr. Villeneuve.

Without regard to the intention of the Appellant, it is unlikely that a purchaser of income producing properties would enter into an agreement without rental income assurances.

Given the short period of ownership, Mr. Villeneuve’s business history, and all the factors surrounding the transactions, I find that the Appellant has not met the onus of establishing that on a balance of probabilities the gains were on capital account.

The appeal is therefore dismissed with costs.

Appeal dismissed.