S & S Properties LTD v. Minister of National Revenue, [1977] CTC 2267

Roland St-Onge (orally: March 25, 1977):—The appeal of S & S Properties Ltd came before me on March 22, 1977 at the City of Victoria, British Columbia, and the question at issue is whether a gain earned in the appellant’s 1973 taxation year is taxable or not.

Mr Sherwood, the main shareholder of the appellant company, testified as follows. In 1959, he acquired personally a property of some 4 /2 acres known as Mill Bay property, with the intention of further development in order to provide for his old age.

In 1966, he sold the said property at a loss and reported it to the Minister and was allowed a business loss.

In 1967, he and his wife purchased the Brentwood property in order to have a rental project which would provide the necessary income for retirement.

Mrs Sherwood had lost her teaching position and Mr Sherwood’s intention was to erect units for rental income. At that time, he could not rent more than four units, because of a septic tank problem. From 1967 to 1969 inclusive, he built more units with the expectation that the sewer system would be installed within two years, but the said system was available only in 1972.

Because of this delay, Mr Sherwood could not terminate his project which, apparently, put him in financial straits. His original plan was to rent eight units, but he succeeded in erecting only four.

Meanwhile, the building costs increased tremendously and they decided to list the property with a realtor who was supposed to have a buyer at $125,000. This offer was never accepted by the purported buyer, and in 1970, the property was sold to the appellant company for $80,000.

At that time, Mr Sherwood and one Mr Smith were the main shareholders of the appellant company. The latter ran into financial difficulties, and sold his shares to Mr Sherwood, which allowed Mrs Sherwood to recuperate her money.

At this juncture, it should be mentioned that Mr Sherwood became a realtor in 1969, that is a year before the appellant company sold the Brentwood property to D F Hanley Investments Ltd at a profit of some $30,000.

Apparently, the shopping centre was sold because Mr Sherwood needed money for his wife. After the sale, the appellant company became dormant.

Mr Smith testified that he has known Mr Sherwood for 52 years, that he was asked by the latter to buy the property by incorporating a company in which he would own half the shares. His intention was to buy these shares, in order to get income for his retirement, but five months later, he sold them to Mr Sherwood, because he had some marital difficulties.

Mr Smith went into bankruptcy and was forced to sell his interest to Mr Sherwood.

Counsel for appellant argued that the subject matter of this transaction was investment, and that the shopping centre was acquired to earn retirement income. He also stated that the taxpayer did not behave as a trader, that there was clear evidence of his intention, which evidence was corroborated by Mr Smith, who had the same hope of building the units to obtain retirement income.

He also stated that the two main aspects of the case which could be dangerous for the appellant were first, the fact that he was in real estate business, and second, the fact that he claimed a business loss in his first transaction.

As to the first aspect, he argued that the Federal Court had lately ignored this fact when it was possible to believe the taxpayer, and that the business loss was accepted by the Minister because there was not enough money involved.

He also said that paragraphs 9 and 10 of the Notice of Appeal, which mentioned that in 1971 a listing was given for one year and that after the sewers were installed in 1972 stated that the property was again listed for sale. He argued that this Notice of Objection was not prepared by the appellant but his accountant; that no listings were filed before the Board, and that Mr Sherwood had denied the existence of such listings.

He concluded his argument by saying that the Board must look at the appellant’s course of conduct, the long period of holding the property, and the fact that the property was sold because of financial difficulties.

Counsel for respondent argued that one must look at what the appellant really did, and must not rely only on what Messrs Sherwood and Smith said about their intentions. She stated that when the appellant company purchased the property, Mr Smith was aware of the sewer problems and the limited number of units.

As to Mr Sherwood, she stated that he personally purchased the Mill Bay property to get income for his retirement, and that years later, his company acquired the shopping centre for the very same reason; that he did not have the financial means to build such a project and that he was not very persistent in carrying out his original intention.

She also argued that Mr Sherwood was a real estate agent from 1969 to 1972, and that his experience and knowledge should be taken into consideration to know if there was a possibility of a change of intention when the appellant company was incorporated.

According to the evidence adduced, it seems to me that the appellant company was incorporated for the purpose of acquiring the Brentwood shopping centre property, in order to turn it to account as soon as it became profitable to do so.

At that time, Messrs Sherwood and Smith knew about the numerous difficulties they had to overcome in order to accomplish such a project, and there is not enough evidence before the Board to show that the two main shareholders had the financial means to achieve the said project.

Furthermore, when Mr Sherwood acquired the Mill Bay property, his Original intention was to develop it and get retirement income. Years later, while he was acting as a real estate agent, he repeated the same thing through the incorporation of the appellant company.

There is enough evidence to conclude that the appellant company was not incorporated for the purpose of holding the Brentwood shopping centre as a long-term investment.

The appellant, who had the onus to prove that the respondent was wrong in reassessing it, failed to do so.

For these reasons, the appeal is dismissed.

Appeal dismissed.