Theo Genest v. Minister of National Revenue, [1978] CTC 2209, 78 DTC 1168

Guy Tremblay [TRANSLATION]:—The case at bar was heard at Quebec City, Quebec on May 9, 1977.

1. Summary

The question is whether a profit of $28,603.67 made in 1974 on the sale of a house with five apartments was a capital gain or income.

2. Burden of Proof

The burden is on the appellant to show that the respondent’s assessment is incorrect. This burden of proof results not from any particular provision of the Income Tax Act but from several court decisions, including that of the Supreme Court of Canada rendered in R W S Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

3. Facts

3.1. In 1974 the appellant, a man of 55, dealt in real estate through the firm of Theo Genest Inc.

3.2. In 1974 the appellant was the president and principal shareholder of (a) Theo Genest Inc, (b) La Société d’expansion immobilière Inc, and (c) Edifices Champlain Inc.

The appellant was also an equal share partner in (a) Genest et Sailloux and (b) Genest, Dubois et Guy.

3.3. According to the appellant, the role of a real estate agent, whether an individual or a company, is to serve as an intermediary between the person wishing to sell real estate and the person wishing to buy property. The real estate agent is legally bound to advise the parties in question when he has an interest other than that of a real estate agent in a transaction.

3.4. According to the appellant’s testimony and that of his accountant, Theo Genest Inc never engaged in land speculation, that is, it never purchased land to be resold at a profit.

3.5. According to the appellant, two small lots purchased by the company several years ago—one in Sillery and the other at Lac Beauport—having a present value of $5,000 each, had not been purchased for purposes of speculation. In fact, the one at Lac Beau- port, on which there is a small cottage, had been purchased for the purpose of hiring another employee. This employee was a salesman and used the cottage as his residence during part of the year.

3.6. Theo Genest Inc also became the owner of another piece of real estate—the property whose sale at a profit is the issue in this case. It is a lot and house at 940 St-Michel Street in Quebec City.

3.7. The wife of the owner of the property offered to sell the house to the appellant. The latter visited the single-family home, and noted that it was well divided and would be easy to turn into five apartments at a reasonable cost. Further, since the house was near “complexe G”, a government building, he believed that the apartments would be easy to rent. He thought he could ask $115 a month. Allowing $5,000 to $6,000 for repairs, he did not hesitate to offer $21,000 for the house. At the hearing, the appellant stated that he considered the house would yield approximately $7,000 gross income a year, or about 25% on the investment, and therefore concluded that it would be a good personal investment. According to the appellant’s testimony, in fact, he had meant to purchase the house for himself.

3.8. The name appearing on the November 10, 1972 contract, however, was not that of the appellant himself, but Theo Genest Inc (see Exhibit A-1). The appellant explained that the contract was drawn up and signed as such by mistake.

When the appellant asked his notary to draw up the contract, the latter thought it concerned the company. Since the appellant trusted his notary, he did not even read the contract before signing it.

When, shortly afterwards, the mistake was noticed by the accountant, André Dion, a new contract (Exhibit A-2) was signed on December 6, 1972 by which the company sold the property to the appellant.

3.9. The price of the property was the same in both contracts, that is, $21,000, $1,000 of which was to be paid in cash and $20,000 payable before January 15, 1973, the whole without interest.

3.10. The appellant filed bundles of invoices totalling over $12,500 as Exhibits A-3 to A-11. According to the appellant, not all of these expenditures were made for the house in question. The salaries of some of the employees must be applied to other buildings. The appellant stated that approximately $6,000 was spent for repairs to the house. Purchase invoices over $2,200 were unmistakably identified. These materials were to be used for the house at 940 St-Michel Street, the house at issue in the case at bar. Mr Jean-Pierre Frénette, a plumbing contractor, testified that he did $3,500 to $3,700 worth of work at 940 St-Michel Street. Drainage problems were the cause of the high cost.

3.11. The appellant later tried to purchase a small lot next to the house to be used as parking for his tenants. The Department of Transport, which owned the land, would not sell.

3.12. The appellant in turn refused to purchase the house next to his, on the same street. The house contained five, six or seven apartments. He did not even inspect the inside of the building. He did not want to purchase it. According to the appellant, he would have had to spend a substantial sum of money and he already had enough commitments.

3.13. In the summer of 1974 Quebec City decided to expropriate the lots on St-Michel Street in order to widen the street. The appellant maintained that he had not heard of this expropriation before then.

3.14. On September 13, 1974 a promise of sale of the property at 934-940 St-Michel Street to Quebec City for $51,000 was signed by the appellant. On October 9, 1974 Quebec City decided to purchase the said property by Resolution No 412. “It was with regret,” the appellant stated, that he sold for that price, but in his experience it was better to settle for this price than to appear before the expropriation tribunal.

3.15. The evidence showed that in 1973 and 1975 the appellant had agreed to be taxed on the sale of two houses, the first on 2nd Avenue (he had owned it for 8 years) and the second on Laporte Street (he had purchased it as a residence but his wife refused to live in it).

3.16. Mr André Dion, CA, the appellant’s accountant since 1959, testified and confirmed the main facts alleged by the appellant. He maintained, inter alia, that the property at issue had been purchased because it appeared to be a really good investment, and that the appellant had wanted to include it in his will, rather than leave shares in a company.

3.17. The appellant’s income tax return for 1974 shows that Genest et Sailloux and Genest, Dubois et Guy were investment businesses. They owned and managed income-producing property.

3.18. In filing his 1974 income tax return, the appellant declared a Capital gain on the sale of the house on St-Michel Street.

3.19. In making his assessment of December 5, 1975 the respondent included the profit from the sale of the house on St-Michel Street in the appellant’s income.

3.20. Following receipt of a notice of objection dated December 15, 1975 the respondent notified the appellant on May 31, 1976 that he was confirming the assessment of December 5, 1975.

3.21. On August 25, 1976 an appeal was filed with the Board.

4. Act, Precedents and Comments

4.1. Act

Section 3 and subsections 9(1) (providing that business income is taxable) and 248(1) (“business” includes an undertaking in the nature of trade) of the new Act are the main sections: involved in the case at bar.

4.2. Precedents

The following judgments, including several cited by the parties, were examined by the Board:

(1) Elgin Cooper Realties Ltd v MNR, [1969] CTC 426; 69 DTC 5276;

(2) Roy M Power v Her Majesty the Queen, [1975] CTC 580; 75 DTC 5388;

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

(4) Her Majesty the Queen v Stanfold Investment Corporation, [1974] CTC 19; 74 DTC 6035;

(5) Vaughan Construction Co Ltd v MNR, [1970] CTC 350; 70 DTC 6268;

(6) Bead Realties Ltd v MNR, [1971] CTC 774; 71 DTC 5453;

(7) Regal Heights Ltd v MNR, [1960] CTC 384; 60 DTC 1270;

(8) Bestpipe Ltd and Press-Seal Corporation of Canada Ltd v MNR, [1970] CTC 310; 70 DTC 6226;

(9) Irrigation Industries Ltd v MNR, [1962] CTC 215; 62 DTC 1131;

(10) Avon Realties and Investments Corporation v MNR, [1972] CTC 2114; 72 DTC 1093;

(11) Atlantic Sugar Refineries Ltd v MNR, [1949] CTC 196; 4 DTC 602;

(12) Erm in io Morassutti v MNR, 13 Tax ABC 40; 55 DTC 293;

(13) No 290 v MNR, 14 Tax ABC 7; 55 DTC 569;

(14) Rowland Francis May v MNR, 41 Tax ABC 319; 66 DTC 501;

(15) First Torland Investments Ltd, Second Torland Investments Ltd and Third Torland Investments Ltd v MNR, [1969] CTC 134; 69 DTC 5109.

4.3. According to counsel for the respondent, the appellant behaved like a businessman. Within a period of two years, he purchased the house in question, repaired it and resold it to Quebec City. The evidence showed that the appellant had been in real estate for over 20 years. Since he was well known and knew a lot of people, he must have known that Quebec City planned on expropriating the houses on St-Michel Street at some point in time. Counsel for the respondent cited Mr Boisvert, a Member of the Board, in Avon Realties and Investments Corporation v MNR, and applied this remark to the appellant: “They should have known or must have known about the expropriation.” In this sentence, “they” refers to the directors of the appellant company.

The appellant also sold two other houses—one in 1973 and one in 1975—the profits from which he declared as income in his income tax returns. In view of the number of companies and partnerships to which the appellant belonged, the respondent believed that he could be considered a speculator. In any case, it is not necessary to be a speculator to behave like a businessman in such a situation.

4.4. According to counsel for the appellant, the fact that his client had been in real estate for a long time did not necessarily mean that he was a speculator or that the sale of a piece of real estate was a business transaction. He cited the decision of Jackett, J in Elgin Cooper Realties Ltd v MNR. The principal shareholder was a known real estate speculator. His intentions were deemed to have been those of the company. The latter completed the building of an apartment house in 1960. This building was intended to be an investment. It was sold in 1961 because of problems resulting from construction defects. The sale was not considered a business transaction nor an undertaking in the nature of trade.

With respect to the argument that the appellant must have known in advance about the expropriation by Quebec City, counsel more or less repeated what the appellant stated at the hearing: had he known, he would have purchased the house next to his on St-Michel Street, which he refused to purchase. Further, he would not have tried to purchase part of a lot for parking. Finally, the expropriation took place over a year and a half after he purchased the building.

4.5. The Board was impressed with the appellant’s honest and simple testimony. It does not doubt his good faith and credibility. With respect to the sales made by the appellant in 1973 and 1975, as described in paragraph 3.15, the Board is not required to decide whether the profits could have been held to have been capital gains. Further, for the purposes of the case at bar, the Board does not consider these sales as representative and as forming a basis for holding that the sale at issue was a business transaction or even an undertaking in the nature of trade.

It must be remembered that, according to the evidence, neither the purchase nor the sale were made at the appellant’s initiative. On the one hand, it was Mrs Bernard, the wife of the owner, who offered to sell the house to the appellant. On the other hand, it was Quebec City who offered to purchase it by mutual agreement (although in fact the appellant signed an offer for sale prepared by Quebec City) instead of by expropriation. The fact that they proceeded by mutual agreement rather than awaiting the expropriation and the decision of the expropriation tribunal cannot be taken as evidence of the appellant’s intention to purchase in order to resell.

The Board does not consider that the decision of Mr Boisvert in Avon Realties and Investments Corporation v MNR, cited by counsel for the respondent, applies in the case at bar. The company concerned and its directors were speculators in real estate. They purchased a building on Décarie Boulevard in Montreal on August 13, 1963 and received an expropriation notice from the Government of Quebec less than five months later, on January 29, 1964. In view of the short interval, and especially in view of the fact that the appellant and its directors were considered to be speculators, Mr Boisvert held that this was a business transaction.

In the case at bar, the Board holds that the profit was a capital gain.

5. Conclusion

The appeal is allowed and the matter is referred back to the respondent for reassessment in accordance with the reasons for judgment.

Appeal allowed.