Her Majesty the Queen v. Eino Sipila, [1977] CTC 280, 77 DTC 5179

Mahoney, J:—This is another appeal against a decision of the Tax Review Board that the $42,565.24 gain realized on the disposition of an interest in real estate was capital and not income. The amount is not in dispute.

The defendant, a carpenter, immigrated to Canada from Finland in 1958 and settled in Vancouver where he has since, at all material times, been steadily employed as a carpenter while working for wages and a "framing contractor” while doing piece work. He was a carpenter, not a contractor. In 1959, his wife, a Swiss, joined him.

His first venture was to build, with a friend, a 1080 square foot bungalow on the friend’s lot. When it was completed he bought a half interest, presumably in part with the value of his labour. Cater, he and his wife bought the other half interest. They still live in the bungalow.

While working as a carpenter building apartments he noticed two vacant lots in East Vancouver. He bought them in 1965, one from a private owner, the other from the City of Vancouver. He had a 16 suite, 3 storey, walk-up apartment building designed and looked for financing. Through a Finnish friend he was introduced to another Finn, Kaarlo Juoperi, an elderly man of some wealth who agreed to advance up to $80,000 at 8% pending permanent financing. He took a conveyance of a half interest in the property as security.

Construction proceeded with the defendant devoting a good deal of his own time and talent to it. The $80,000 was not enough. The defendant and his wife had a $4,000 balance on the mortgage on the house that had cost $14,000 in 1959. They borrowed another $13,000 on its security in 1968. Meanwhile, construction was completed in mid-August, 1967. A caretaker was installed in one suite and the others were easily rented.

After the building was completed and rented, the defendant started to look for permanent financing. Interest rates had risen and were continuing to rise. Juoperi assured him that he was in no hurry for his $80,000 and that interest rates would fall if he waited. He did and they did not. Early in 1968, Juoperi, who was close to 80, started to press for his money. He told the defendant that he was going back to Finland before he died. He gave the defendant a one-month deadline.

The defendant approached London Life, which was where the apartment builder for whom he had worked, also a Finn, had got his mortgages. He was advised that the location was not a prime area and that London Life had better places to lend. The same result flowed from contacts with numerous mortgage brokers and lenders. His wife explored her Swiss contacts to no avail. Finally, he was referred to Block Bros, a large Vancouver real estate sales firm, who, in the person of one Kendall, undertook to try to find a mortgage on condition that he list the property with them for sale. He did, on a multiple listing basis, for $170,000 and the same day, April 22, 1968, filed an application for a mortgage in which he valued the property at $150,000. A $93,500 mortgage was granted at 9%, whereof the mortgagee kept $3,500 as a bonus. The defendant paid off Juoperi.

The defendant had by now made up his mind to sell. He was turned off the property by the mortgage companies’ assessments of its location. The return was not as good as originally planned because of the interest rate. The caretaker was not doing a good job and trouble had developed with some tenants. He was working days at his carpentry and found he was working nights too at the apartment. He was not comfortable in debt and Kendall was putting pressure on him. In summary, he was tired of the whole thing. He renewed the listing as it expired and, in November 1968, accepted the offer that resulted in the gain in issue. As part of the purchase price, he accepted a house valued at $20,000, which he later sold at a $2,500 loss in 1969.

In August 1968, the defendant bought a lot near his home in North Vancouver. He built a duplex on it which he finished in August 1969 and sold June 15, 1970.

When he sold the house taken in trade, he again dealt with Kendall who, it appears, was a very persuasive salesman, given the various antipathies the defendant had developed during his previous incarnation as a landlord. Kendall was agent in the 1969 sale to the defendant of two lots in West Vancouver on which he intended to build an apartment as an investment. The price was $29,445 per lot. The defendant borrowed $50,000 from the bank. He never did build on them. He entered into some arrangement whereby they were to be developed and he was to end up with one-third of the final product. He tried to get out of it but, after legal proceedings, was forced to sell the lots for $88,000 in early 1976. They were then appraised at $280,000.

The only question is whether his acquisition of the apartment building was, as he says, made solely with the intent that it be an incomeproducing investment or whether the possibility that it might be sold at a profit was at least one operating motivation.

The defendant was an entirely credible witness. In saying that I have in mind that almost all of his direct evidence was led. The reason for that was apparent. He may be a good carpenter but he would probably have difficulty as a foreman. He has some problems with English but, in addition to the difficulty he has in expressing himself, his recollection of when and comprehension of why things occurred is most incomplete. He relied almost entirely on his fellow Finnish immigrants for his ideas, contacts and guidance and was very susceptible to Kendall’s salesmanship. He took no independent professional advice during any of the transactions except, too late, in respect of the West Vancouver site.

While his direct evidence was largely led, it did stand the test of a competent and complete cross-examination. Measuring his evidence against the inferences to be drawn from the circumstantial evidence, the only important inconsistency is his stated discomfort at being in debt. While the transactions involving the bungalow and the house taken in trade are immaterial, it is difficult to reconcile a genuine discomfort in debt with his conduct in the duplex lot and the West Vancouver apartment site transactions. That said, discomfort in debt was not represented as the only or first reason behind the decision to sell nor even a main reason for it.

Taken by itself, the sale in question was the sale of a revenueproducing asset for cogent reasons not related to the realization of a profit. There is no evidence that would support a finding that, notwithstanding his credible direct evidence, a so-called “secondary intention” to resell at a profit is to be imputed to him as a motivating reason for the original acquisition.

The action will be dismissed with costs.