Parkview Manor LTD v. Minister of National Revenue, [1974] CTC 402

Sheppard, DJ:—The issue is whether a gain realized by the plaintiff in the taxation year 1968 is capital as realized from an investment, which the plaintiff contends, or is taxable income as contended by the Minister of National Revenue, in respect of which the plaintiff therefore disputes the sum of $24,644.19 as the income tax payable.

The profit arose out of the following circumstances: By offer of February 11, 1965 Cowichan Holdings Ltd agreed to purchase from CHMC Lot 8 Block 5 Plan 12568 Centennial Subdivision in Duncan, BC and paid a deposit thereon of $60 (Exhibit A-2).

By assignment of May 18, 1965 Cowichan Holdings Ltd assigned to James M Patterson and Gordon A Hayes its interest in the agreement with CHMC. Patterson and Hayes then applied to CHMC for a loan of $180,000 (Exhibit R-1) which would be advanced as Parkview Manor was constructed upon the said lot.

Patterson was a building contractor, who had built at Duncan, BC, a Cairn, a dormitory for St Mark’s School, a garage and sales office for Hayes, Springridge Apartments, consisting of 33 suites built in 1963-64 for Cowichan Holdings Ltd under a loan obtained from CHMC and a second mortgage for the balance, in which company Patterson and his wife owned half the shares and the remaining half were owned by Cowichan Finance Ltd.

Patterson and his wife owned all the shares in Silver Campsites Ltd, which company owned the land on which was constructed rental space for 15 trailers. That company had proved profitable and provided Patterson with a living.

Patterson was as of the trial 55 years of age, and had a wife 18 years younger than him and two young daughters. The purpose of Patterson’s purchasing an interest in Lot 8 Block 5 Plan 12568 Centennial Subdivision was to build thereon an apartment block (to be called Parkview Manor) with a loan of $180,000 from CHMC, so as to provide an income for his wife and children, together with the Springridge Apartments, still held by Cowichan Holdings Ltd, in which company Patterson and his wife held half the shares and Cowichan Finance Ltd the other half. The plan was to keep the apartments, particularly Parkview Manor, for investment for the benefit of Patterson’s wife and children; it was not intended for sale.

Patterson said that he needed another $40,000 in addition to the loan from CHMC to build Parkview Apartments and to hold it as an investment for his wife and two daughters. To obtain funds he therefore admitted Hayes as a partner and joint purchaser of the lot, and sold him one-half of the shares in Silver Campsites Ltd. Patterson had estimated Parkview Manor to cost $204,620, and after a mortgage of $180,000 to CHMC would leave a balance of $24,620. Hence, under agreement of April 5, 1965, Hayes agreed to purchase one-half the shares in Silver Campsites Ltd from Patterson and his wife for the sum of $15,000, and Hayes over two years was to pay into that company “as a shareholder a sum equal to Patterson’s’’; that is, $20,362.92, which sum together with Patterson’s equal sum was to be used to cover the balance of the cost of building Parkview Manor (Exhibit A-5).

Accordingly, Patterson and Hayes proposed building as partners Parkview Manor on Lot 8 Block 5 Plan 12568 Centennial Subdivision, and on August 5, 1965 Paterson got a building permit (Exhibit A-6). Patterson and Hayes then proceeded with the building of Parkview Manor, and each drew $7,000 as remuneration for working thereon and building the apartment. Towards the end of 1965 the apartment house was completed, and early in 1966 was filled with tenants. Patterson and Hayes were personally liable for the balance of debts in the amount of $40,000, in addition to their liability under the loan from CHMC, and Hayes had put in only $2,000 towards the building. Hayes lost interest in the apartment, so that Patterson and Hayes disagreed and on July 15, 1966 they agreed to separate on the following terms:

(1) to incorporate Parkview Manor Ltd, the plaintiff company, the company to assume land, chattels, and debts of the partnership;

(2) Hayes to transfer his 100 shares in Silver Campsites Ltd, 50 to Patterson and 50 to Patterson’s wife, Patterson to repay to Hayes the $15,000 paid for the shares;

(3) Patterson and others were to convey to Hayes the Cowichan Bay property for $3,500 (Exhibit A-8).

There followed the formation of the plaintiff company, which was intended, according to Patterson:

(1) to permit Hayes to dispose of his interest in the partnership and to avoid a tax of 5% on the transfer of chattels from the partnership to the plaintiff company;

(2) Patterson would be relieved in one sense of the creditors for Parkview Manor, amounting to approximately $40,000, which would be assumed by the plaintiff company (Exhibit A-8).

Patterson’s evidence is corroborated by Davie, his solicitor at the time, that he (Davie) considered formation of a company as a means of Hayes getting out of the partnership. As a result, the formation of the plaintiff company was merely a means of carrying out the plan of dissolution of the partnership. Also, Patterson had, at that date, continued with his plan to continue to hold Parkview Apartments as an investment for his family. The position of Patterson is similar to that of the appellants in Racine, Demers and Nolin v MNR, [1965] CTC 150; 65 DTC 5098, where Noël, J stated at pages 154, 5100:

I am of the opinion that, for the purposes of taxation, this manner of proceeding cannot affect the character of the transaction. In effect, from the point of view of taxation, this transaction would be exactly the same if the appellants had simply purchased everything in their own names.

In the result, the conveyance of the lot to Parkview Manor Ltd means nothing.

Patterson still endeavoured to carry on with his original plan of holding the property as an investment. However, Patterson had to get an additional sum of $40,000 to placate the creditors of the partnership incurred in building Parkview Manor, which remained after payment of $180,000 advanced under the mortgage to CHMC, and also there was the obligation on Patterson under the release of Hayes. Patterson therefore tried every place that he knew to obtain a second mortgage to satisfy the creditors, but found it impossible to get this financing. Finally he went to John Wood Griffiths of J H Whittome & Co Ltd. On October 25, 1966, Griffiths, really for Whittome, agreed to lend to the plaintiff company the sum of $40,000 on a second mortgage to be subject to the first mortgage to CHMC for $180,000, and to be repaid with interest at 15%, with right to be paid off within two years, the mortgagor to deliver a quit claim deed to be used by the mortgagee if default on the second mortgage continued beyond 90 days (Exhibit A-10). The proceeds of the second mortgage were disbursed as appears in Exhibit A-9, and accordingly Patterson got rid of the creditors. As a result, Patterson and his wife owned all the shares in Silver Campsites Ltd, after having got rid of Hayes, and Silver Campsites Ltd in turn owned all the shares of the plaintiff company.

Patterson still needed $40,000 to pay off the second mortgage. Patterson interested Cowichan Finance Ltd and entered into the agreement of May 3, 1967 between Silver Campsites Ltd and Cowichan Finance Ltd (Exhibit A-11), whereby Silver Campsites Ltd, the holder of 100 shares in Parkview Manor Ltd, agreed to sell Cowichan Finance Ltd 50% of the shares in Parkview Manor Ltd for $20,518.49.

Patterson considered that with Cowichan Finance Ltd on the covenants as interested in Parkview Manor Ltd there would be no difficulty in borrowing on a second mortgage to replace the existing second mortgage.

Cowichan Finance Ltd attempted to get better terms on the second mortgage, but failed (Exhibits A-19, A-20). Then Cowichan Finance Ltd obtained an evaluation of Parkview Manor, and that evaluation, dated June 29, 1967, showed the value at $186,000 (Exhibit A-12) on which, of course, there were mortgages to CHMC of $180,000, and a second mortgage of $40,000. Cowichan Finance Ltd decided it had to get rid of a shareholder (not Patterson). Accordingly, Cowichan Finance Ltd put pressure on Patterson so that he had to purchase the release of the agreement by Cowichan Finance Ltd to purchase 50% of the shares in the plaintiff company, which had been sold to Cowichan Finance Ltd. Patterson and his wife became the directors of Parkview Manor Ltd (Exhibit A-21).

Patterson then endeavoured to get a second mortgage elsewhere. He still intended to keep Parkview Manor Ltd as an investment which would eventually benefit his wife and family. In that, Patterson is corroborated by A F McDonald, then his lawyer, and J M Wilson, the chartered accountant. It therefore appears, on the evidence, that Patterson intended not selling, but keeping, Parkview Manor as an investment for his wife and family.

After repeated refusals of a second mortgage, or of otherwise raising $40,000, and to get rid of the existing second mortgage, Patterson saw that he was required to sell Parkview Manor as the only way to raise the necessary $40,000. Therefore, on November 27, 1967 the plaintiff company gave a listing to Nanaimo Realty of Parkview Manor in the amount of $310,000 (Exhibit A-13), and on February 5, 1968 it agreed to sell Parkview Manor; that is, to exchange subject to the mortgage to CHMC for a house in Victoria, BC (Exhibit A-18). This house was eventually sold by the plaintiff company at a profit (Exhibit A-22).

lt would appear that on the evidence of Patterson, as corroborated by McDonald and Wilson, and for a lesser time by Davie and Haddock, that Patterson up to the date of the listing had intended to keep Parkview Manor as an investment to be held by the plaintiff company, in which the shares would be held by himself and his wife indirectly. To do so Patterson had to borrow on a second mortgage which he attempted to replace, and on failure to do so, he had, out of necessity, to sell Parkview Manor. In other words, Patterson had to realize on his investment in Parkview Manor as the only way to save Parkview Manor from the second mortgagee.

The house in Victoria was no doubt acquired by the plaintiff company to resell; in fact, it was listed shortly after being acquired (Exhibit R-9), but that sale of the house was undertaken as a means of realizing on the investment.

The defendant relies upon the secondary intention doctrine, namely that Patterson had the alternate intention to sell Parkview Manor.

in Racine, Demers and Nolin v MNR (supra), Noël, J stated at pages 159, 5103:

In examining this question whether the appellants had at the time of the purchase what has sometimes been called a “secondary intention” of reselling the commercial enterprise if circumstances made that desirable, it is important to consider what this idea involves. It is not, in fact, sufficient to find merely that if a purchaser had stopped to think at the moment of the purchase, he would be obliged to admit that if at the conclusion of the purchase an attractive offer were made to him he would resell it, for every person buying a house for his family, a painting for his house, machinery for his business or a building for his factory, would be obliged to admit, if this person were honest and if the transaction were not based exclusively on a sentimental attachment, that if he were offered a sufficiently high price a moment after a purchase, he would resell. Thus, it appears that the fact alone that a person buying a property with the aim of using it as capital could be induced to resell it if a sufficiently high price were offered to him, is not sufficient to change an acquisition of capital into an adventure in the nature of trade. In fact, this is not what must be understood by a “second intention” if one wants to utilize this term.

To give to a transaction which involves the acquisition of capital the double character of also being at the same time an adventure in the nature of trade, the purchaser must have in his mind, at the moment of the purchase, the possibility of reselling as an operating motivation for the acquisition; that is to say that he must have had in mind that upon a certain type of circumstances arising he had hopes of being able to resell it at a profit instead of using the thing purchased for purposes of capital. Generally speaking, a decision that such a motivation exists will have to be based on inferences flowing from circumstances surrounding the transaction rather than on direct evidence of what the purchaser had in mind.

Hence, to make the secondary intention effective, Patterson must need to have had in his mind at the moment of purchase the intention to sell the apartment at a profit. However, it was not when Patterson bought the property, but after he had attemped every means he knew of to raise sufficient moneys to pay off the second mortgage, that he then acquired the intention to sell; that is, about the time of the listing. Patterson first realized he must sell after he had exhausted all means of raising the $40,000 to discharge the second mortgage, and that reason for sale was raised by the fact that he could not obtain the necessary moneys otherwise. Haddock corroborated Patterson in that he (Haddock) had twice tried for a listing of Parkview Manor, but that was refused and Patterson first spoke of selling about the time of the listing.

The defendant contends that the conveyance of Parkview Manor to the plaintiff company disposed of Patterson and his intention and thereafter it was the intention of the plaintiff company which prevailed. That contention failed in that Patterson and his wife had control of the plaintiff company throughout. Temporarily, Hayes had one half the shares in Silver Campsites Ltd and later Cowichan Finance Ltd had for a short time purchased half the shares in the plaintiff company, but that was merely temporary, and at the most gave a control equal to that of Patterson and his wife, but did not divest Patterson of his original purpose. There is no evidence that either Hayes or Cowichan Finance Ltd had any intention contrary to Patterson’s original intention of reclaiming the manor as an investment for his family. The defendant refers to the fact that the memorandum of association of the plaintiff company contains an object to sell (Exhibit R-2) and argues that therefore the plaintiff company contemplated a sale.

In Sutton Lumber & Trading Co Ltd v MNR, [1953] 2 SCR 77; [1953] CTC 237; 53 DTC 1158, Locke, J stated for the Court at page 88 [244,1161]:

The question to be decided is not as to which business or trade the company might have carried on under its memorandum, but rather what was in truth the business it did engage in.

Patterson said he gave Davie the instructions to incorporate, but had nothing to do with drawing the papers. Davie corroborates Patterson in that Patterson gave the instructions to incorporate, but Davie’s firm was to draw the memorandum, that the inclusion of the object to sell was an error of his firm, as had he (Davie) drawn the memorandum he would not have included the power to sell. The given evidence of Patterson as corroborated is, to the effect that the intention of Patterson throughout was to regard Parkview Manor as an ultimate source of income for his family, therefore to regard it as an investment; also, that the sale of Parkview Manor was first conceived about the time of the listing, and it was then sold because Patterson found by his own efforts that there was no other way to raise sufficient money to pay off the second mortgage before it became due.

On behalf of the defendant, it is contended that the second mortgage had three years to run at the time of the sale of Parkview Manor. Assuming that to have been the case, when Patterson realized that a sale was necessary he proceeded at once with the sale as the due date of the second mortgage was known, but it was not known how long it would take to sell the property, or how long before the sale would produce sufficient funds to pay off the second mortgage.

The evidence is that the amount of the leases of Parkview Manor would pay the interest and make some reduction of the principal, but the leases would not pay the principal of the second mortgage when due; hence, the necessity of sale which prevented the Parkview Manor being retained as an investment.

In conclusion, the assessment for the taxation year 1968 is referred back to the Minister for reassessment in which the amount realized from the sale of Parkview Manor will be regarded as capital and not as taxable income.

The plaintiff will have its costs against the defendant.