Harvey Kagna v. Minister of National Revenue, [1974] CTC 275, 74 DTC 6221

Decary, J (orally):—This is an appeal from a judgment of the Tax Appeal Board dated September 1, 1970 confirming, for all practical purposes, an income tax assessment for the taxation year 1963. The Minister has included, in computing the income of the appellant, a gain of $254,399.52 assumed to be made by him alone on the sale of shares and notes of a company owning an industrial building.

The tax assessed is in the amount of $134,215.41 as per the notice of assessment dated September 21, 1966 and the profit is described as arising on “sale of all the shares of Verdun Industrial Building Corp”.

The appeal before the Board was heard by one member but the judgment was concurred in by the other four members. The appeal to this Court is a trial de novo and is an appeal from the assessment: vide H Goldman v MNR, [1951] Ex CR 274; [1951] CTC 241; 51 DTC 519 (Thorson, President as he then was.) The onus to prove that the assessment is incorrect is on the appellant: vide Dezura v MNR, [1948] Ex CR 10 at 15; [1947] CTC 375 at 380; 3 DTC 1101. The Supreme Court of Canada has determined the nature of that onus in R W S Johnston v MNR, [1948] SCR 486; [1948] CTC 195; 3 DTC 1182, to wit per Justice Rand at page 489 [202]:

... the onus was his [the taxpayer’s] to demolish the basic fact on which the taxation rested.

We read in the reply to the notice of appeal:

In assessing the appellant for the year 1963, the Minister made the following assumptions of facts:

(a) In May 1963, the Appellant acquired the right to purchase within a period of six months all shares and notes of Verdun Industrial Building Corporation by offering to purchase same for a total purchase price of $2,800,000 which offer was accepted by all shareholders.

(b) Before the expiration of the six month period, the Appellant sold the right to acquire the shares and notes of Verdun Industrial Building Corporation and made a profit of $254,399.52 as a result of sale.

(c) The acquisition of the right to purchase the shares and notes was made with the purpose of turning same to account for profit by sale or otherwise.

(d) The profit was added to the declared income of the Appellant as being a profit derived from a venture in the nature of trade within the meaning of Sections 3, 4 and 139(1)e of the Income Tax Act.

(e) The taxpayer, at the time and before the acquisition of the right to purchase shares was engaged in the real estate business in his own behalf or through corporations In which he had a substantial interest.

These are the assumptions of facts the appellant has to refute. It is to be noted that the Minister assumed that it was the sale of a right to purchase, not a sale of shares and notes, though the form T7WC refers to sale of shares.

One should delve in the background of the appellant. He immigrated to Canada from Europe at the age of 17, in the year 1923, with his family who settled in Edmonton. His father opened a bakery under the name of Edmonton Bakery and the appellant worked over 20 years in the family business up to the time the bakery was sold to a nation-wide bakery company.

The Court takes note of the fact that the appellant belonged to a closely knit family as it can properly be induced from the fact of his working with the family for over 20 years.

In 1943 the appellant left Edmonton and came to Ste-Thérèse, near Montreal, and started operating a bakery and pastry shop under the name of Chateau Biscuit Co. He operated that shop until a fire destroyed it six years afterwards.

With the proceeds of insurance, the appellant and his wife Ida, who had means of her own, as per the evidence adduced, purchased an industrial building on Moreau St in Montreal. Later on his two daughters had an interest in that building which was a good source of income for the appellant and his family. That was a family holding that lasted till it was decided to purchase the shares of Verdun Industrial Building Corporation some 13 years later. We find the same family pattern as in Edmonton: the holding together of the members of the family.

The appellant around 1962 joined a group owning an apartment building named Mayfield Apartments and his interest therein was 10%. Again that interest was shared with his wife. The appellant, two years ago, sold his interest, after ten years, on account of financial problems resulting from unsuccessful law suits.

The appellant’s family and the two family corporations own the shares of a company named Centre d’Achats Trois-Rivières Ltée since 1961. Again the same family spread interest.

While managing the building on Moreau St, holding on his interest in the Mayfield Apartments and also holding on the shares of the company owning the shopping centre in Three Rivers, which holdings plus the bakery and pastry shop in Ste-Thérèse were all productive sources of income, productive investments, the appellant joined two groups of persons, which purpose and business was buying land to build and then sell homes. The groups included, inter alios, an engineer and one or two builders by training. The role of the appellant was mainly to deal with the municipal authorities for the services and so on. The endeavours were both very successful.

The appellant never purchased land alone but always as member of a group.

I believe that the activity of a person who is member of a group is not of the same nature as the activity of a person acting alone and that it should be taken into account in judging the course of conduct. I do not believe that there should be guilt by association if there happens to be a builder and an engineer in the group.

In 1963 the appellant studied the possibility of purchasing the building and land or the shares of Verdun Industrial Building Corporation.

That corporation had a very unique characteristic: each shareholder was a tenant in the building owned by the company. The appellant had heard of difficulties arising amongst the shareholder-tenants, some wanting more space, some refusing to consider any possible expansion.

The appellant had then some 20 years of experience in managing his industrial building on Moreau St and therefore was able to assess the potential of the Verdun property located in that city near Pointe St- Charles. He saw the eventuality of expanding the building and of renting parking spaces to the industries nearby for there were about 800,000 square feet of free land that could be so used.

The appellant spoke of his findings to persons who knew real estate holding and was encouraged to proceed with his plan.

His mind being made up, the appellant on April 9, 1963 made a deposit of $50,000 with Verdun Industrial Building Corporation and on May 22, 1963 made an offer to purchase from the shareholder-tenants of the company all their shares and notes for a price of $2,800,000, on the condition, inter alia, that new leases be entered into by the tenants at a rental increased to 1.10 per square foot from .65 per square foot. The option provided for a closing on November 1, 1963. The offer was accepted within a short period of time.

What prompted the appellant to make the offer was the potential he visualized in the building and land as being a very good source of income. He considered that a $75,000 net annual profit could be earned from holding the shares. That intention is in evidence and is uncontradicted.

The chartered accountant of the appellant and of the companies in which the appellant owns shares testified that the appellant was worth then about $500,000 and could have a credit of $1,000,000.

The appellant secured the services of quite a few experts in order to obtain a financing. These experts were Mr Spooner who worked exclusively in trying to get hold of an emphyteutic lease and who corroborated the evidence of the appellant on that aspect of the facts, and Mr Prehogan, a real estate broker, who worked exclusively on trying to secure a long-term mortgage financing and also corroborated the evidence of the appellant in that aspect of the facts. These two witnesses, though not successful in their attempts, stated that it was reasonable to presume that they could secure a financing. Mr Spooner had valued the building and land at $3,650,000 in July 1963 when requested to make a written report. That evidence was uncontradicted.

Another corroboration came from Mr Bureau who helped the appellant in trying to secure mortgage financing. He knew the property very well and had assessed its potentialities. No counter-evidence against that testimony.

Mr Pitt, formerly president of Ernest Pitt Company, real estate broker firm, and a real estate appraiser, testified as to what he had been told by the appellant and corroborated the evidence of the appellant as to the potentiality of the property. Again no counter-evidence.

In the meantime, the appellant, with the help of an agent of the tenant-shareholders, the late Mr Miller, was trying to get a temporary loan from a nationally known lending institution. The appellant affirms to have secured a commitment from that company for a loan of two millions. That commitment was said to be in writing but the letter was lost and a person who had knowledge of it is now deceased: Mr Miller.

That commitment was made before the offer to purchase.

The appellant resorted to other experts in financing because the commitment was only for a temporary loan.

The testimony of Mr Brandis who appeared before the Tax Appeal Board, was filed in Court as an exhibit. Mr Brandis is a salesman for Morgan Trust Company. He was approached by the appellant to help him secure a mortgage in late August or early September of 1963. Not being able to get a financing he tried to secure someone who would take over from Mr Kagna because he knew of his unfortunate position. Mr Brandis had clients anxious to buy shares object of the offer to purchase. When told about that, the appellant refused not only to sell his right but even to think in terms of a partnership with them. Mr Brandis tried for weeks to have the appellant change his mind but to no avail. Mr Brandis stated that his clients that got the property obtained the mortgage refused to Mr Kagna.

The Court did not have the advantage of hearing that witness but the transcript of evidence does not permit to state that his evidence was not true. His evidence establishes that in late August and early fall the appellant had not only refused to sell but even to have any partner, that the same intention to hold the shares, ie the right to purchase the shares, existed.

In order to raise some money for the payment of part of the purchase price the appellant sold the building on Moreau St.

At about ten days from the date of closing, the appellant was advised in writing by the lending company that it would not implement its loan to him. This bad news prompted the appellant to fly to Vancouver and look for advice with his brother. He consulted a lawyer and was advised that he would lose his deposit unless an extension be granted. It was unrealistic to foresee an extension because the tenants would only be too happy to keep the deposit of $50,000. Back in Montreal, the appellant was approached again by Mr Brandis and an offer was made to him of $3,100,000 for the purchase of the shares. That offer originated from a Toronto group which was a client of Mr Brandis. The appellant knew nobody in that group.

By that time, people had known of the value of the building and land and so did the tenant-shareholders who would have asked for a higher price if the appellant had lost his right to purchase. It was a better deal to buy from the appellant than from them, because the appellant was in an unfortunate situation and had to sell the shares, otherwise he was losing his deposit of $50,000 and the expenses incurred. So the offer was accepted by the appellant and on closing date the shares became vested in the new group.

The appellant in that transaction had partners: his wife, his two daughters and two family corporations. Uncontradicted evidence was adduced to the effect that they contributed to pay the deposit and that they shared in the gain.

In all the transactions of the appellant his family is present. Such a presence has to be reckoned with unless it is proven that it is a sham. Nothing in the present matter permits the Court to believe in the existence of a sham and therefore it is found that the appellant had the partners he claimed he had. That was not taken into account by the Minister who included the whole profit in the income of the appellant.

It may be stated that people of a different ethnic group do not have necessarily the same customs and usages as people of other ethnic groups and that in weighing the evidence in the present instance these different usages and customs have to be taken into account. In Curran v MNR, [1959] SCR 850 at 854; [1959] CTC 416 at 421; 59 DTC 1247 at 1249, Kerwin, CJ, as he then was, referred to “the ordinary concepts and usages of mankind” for determining the meaning of income. These remarks are applicable in the present instance.* [1]

The appellant being 70 and not in too good health, as it appeared during his testimony, does not have the memory he used to have but in my opinion his behaviour and his frankness in Court preclude me from not giving full weight to his testimony.

The essential parts of that testimony are that:

(a) he wanted to secure a family source of income in acquiring the shares of Verdun Industrial Building Corporation;

(b) he operated a bakery in Ste-Thérèse till the fire and that was a source of income;

(c) he held an industrial building on Moreau St for 13 years and disposed of it only for the reason of being able to partially finance the purchase of the shares of Verdun industrial Building Corporation, that was another source of income;

(d) he was a part-owner in the Mayfield Apartments for many years and sold his interest therein on account of financial problems, that was another source of income.

That was his course of conduct pertaining to sources of income.

I have to weigh also his course of conduct pertaining to stock in trade: his two ventures in joining a group to buy land to build and sell houses. In these ventures the role of the appellant was passive compared to the role of the builder or the engineer present in both groups.

Having analysed the prior course of conduct of the appellant in connection with his sources of income and his stock-in-trade, ! think it necessary to analyse now his course of conduct relating to the transaction that gave rise to the profit that has been included by the Minister in computing his income:

(a) The appellant, having years of experience in managing his industrial building in Moreau St, studies carefully the potential of the property owned by the Verdun Industrial Building Corporation after having heard of frictions between the shareholder-tenants.

(b) The appellant, as adduced in evidence, comes to the conclusion that the rental for the said building would bring a net annual minimum profit of $75,000.

(c) The appellant gets in touch with the late Mr Miller, one of the shareholder-tenants and discusses the possibility of securing a temporary loan.

(d) Mr Miller accepts to help the appellant and many meetings were held with a lending firm which promised to grant a short term loan of $2,000,000.

(e) In April, 1963 the appellant deposits an amount of $50,000 with Verdun Industrial Building Corporation to secure an option to purchase the shares of the company.

(f) On May 22, 1963 the appellant makes an offer to purchase the shares and notes of Verdun Industrial Building Corporation at a price of $2,800,000.

(g) The appellant in the offer to purchase provided for an increase in rental from .65 to 1.10 per square foot.

(h) The appellant retains the services of one expert to try to get an emphyteutic lease and of three more experts to secure a long term mortgage loan.

(i) The experts are unable to secure a mortgage or an emphyteutic lease though they all admit that it was reasonable to presume they could get financing, as the property had been valued at $3,650,000.

(j) An acquaintance of the appellant, a few months before closing, knowing of his difficulties offers to secure a client to buy his right to purchase or to become partner: the appellant refused both offers.

(k) Two weeks from closing time, the appellant is advised by letter that he could not get from the earlier mentioned lending firm a short- term loan which would have permitted the appellant to secure long-term financing at better conditions.

(I) There being no short nor long-term financing, the appellant sees himself obliged to accept the offer of $3,100,000 one week before closing time, from a client of Mr Brandis whose client he met for the first time at the closing on November 1, 1963.

In my opinion such a course of conduct shows that the appellant did everything he could in order to be able to exercise his right to purchase the shares and notes and it is only in account of the fact that the lending firm did not keep its word that the appellant sold shares rather than lose the deposit of $50,000.

In including the profit of $254,399.52 in the computation of the income of the appellant the Minister assumed that the intention in securing the right to purchase was to dispose of it for profit, that the sale was in the nature of trade and the appellant before and after the acquisition of the right was in the real estate business.

The query is whether the evidence adduced is sufficient to refute these assumptions of fact: the purpose or intention and the course of conduct so that the profit resulting from the sale is or is not from an adventure in the nature of trade as the word “business” is defined at paragraph 139(1)(e) of the Income Tax Act and is or is not income by virtue of sections 3 and 4 of the said Act.

Upon the evidence adduced, I find that the appellant had no purpose or intention, at time of acquisition of the right to purchase, to turn to account the right he had acquired and that he turned it to account only in view of circumstances beyond his control and that his course of conduct shows that he had kept sources of income for years and in only two instances he had been member of a group disposing of stock-in-trade and that his course of conduct pertaining to stock-in- trade and consequently he was not engaged in the real estate business but in the real estate holding business [s/c].

The Court was referred to many cases by the appellant and by the respondent.

It being a question of weighing the evidence to ascertain if a profit results from a venture in the nature of trade, the Court does not believe it necessary to consider all the cases quoted and shall restrict itself to refer to certain authorities.

Since the matter of Sutton Lumber & Trading Co Ltd v MNR, [1953] 2 SCR 77; [1953] CTC 237; 53 DTC 1158, it is well known that the main criterion to be used in order to decide if there is an adventure in the nature of trade is the course of conduct. The appellant did not conduct himself as a trader in rights nor in shares nor in land nor in buildings. He conducted himself like a person who wants terribly to bring into fruition the goal envisaged: the acquisition of the shares of Verdun Industrial Building Corporation.

As to the matter of intention, I consider that the evidence is definite and that the intention of the appellant was to retain, if acquired, the shares of Verdun Industrial Building Corporation as a family source of income and that it was on account of facts beyond the control of the appellant that he sold the shares. The sale to the Toronto group was never envisaged except at the last minute. In Warnford Court (Canada) Limited v MNR, [1964] Ex CR 944; [1964] CTC 175; 64 DTC 5103, offers of high amounts being made, the appellant therein could not resist selling and the learned Chief Justice of this court allowed the appeal. The learned Chief Justice referred to Regal Heights Limited v MNR, [1960] SCR 902; [1960] CTC 384; 60 DTC 1270, as to an alternative intention but he found that there was no question of resale at the time of acquisition.

The same applies as to intention in the present instance. In lieu of irresistible offers we have in the present instance financial difficulties forcing the appellant to sell. I see no difference in essence between the two situations.

The learned counsel for the respondent laboured masterly the fact that the appellant had not sold a right to purchase shares but shares acquired to be at a moment later turned over to the Toronto group.

In my opinion such an approach is legalistic and the substance of the matter is the transfer of the shares not of the right. The appellant paid transfer tax on the sale of the shares and the date that could be reckoned with is the time he could acquire the shares, that is in May 1963 not in November of that year when the closing took place. The pleadings from the Minister referred to the sale of right not of shares. Be it as it may, my conclusion would be the same one whether the object of the sale is a right or shares because the former is linked to the latter and any other view, in my opinion, would be unrealistic because not taking into account the business customs and usages surrounding such transactions.* [2]

The case of Hill-Clark-Francis Ltd v MNR, [1963] CTC 337; 63 DTC 1211 (Can SC), was commented ably by the learned counsel for the respondent, but as stated at page 339 [1212], “It is apparent from that outline that this was not a simple purchase and sale of shares’’. That in itself is sufficient to distinguish that case from the present one.

Considering all the efforts deployed by the appellant to succeed in buying the shares—his studying the productivity of the building and the possibility of expansion, his relying on the services of experts, and their approaches to many lending institutions, his selling his source of income, the Moreau St industrial building, his own negotiations with a nation-wide lending firm that did not keep its word, his recourse for help to well-known notaries, his dismay at realizing that he could not bring to fruition the exercise of his right to purchase the shares, the non-relationship between the Toronto group, the purchaser, and the appellant—I find that the profit from the sale of the shares of Verdun Industrial Building Corporation is a capital gain arising out of an investment frustrated for reasons beyond the control of the appellant and that such gain is not to be included in computing the appellant’s income for the year 1963.

The appeal is allowed with costs.