Elgara Enterprises LTD v. Her Majesty the Queen, [1974] CTC 642, [1974] DTC 6500

Mahoney, J:—The matter in issue is the liability of the plaintiff to include in its income the $50,200 profit made by it on the disposition, in 1968, of an apartment building in Vancouver, BC which it had caused to be built and had operated for about one year.

Adelbert Weitemeyer had been a professional engineer in Europe. He came to Canada in October 1952 and, unable to practise his profession, was employed as a master mechanic in the maintenance of heavy equipment in the construction and logging industries. Much of his work was necessarily away from home and, aside from any required by law, no retirement benefits attached to it. Louise V Maguire, a bookkeeper with two children, 12 and 15, was, early in 1963, in the course of a divorce and intended, when able, to marry Weitemeyer. They were married in December 1963.

In looking to their future, Weitemeyer and Mrs Maguire, who will henceforth be called Mrs Weitemeyer, decided to build an apartment as an investment to generate income permitting Mrs Weitemeyer to quit her job and permitting Weitemeyer to provide retirement income for himself. Weitemeyer purchased the necessary land from a real estate agent with whom he had previously done business. The real estate agent introduced him to a contractor, Wilhelm H Walter, who was engaged to build the apartment to be called the Lorelei. Walter succeeded in selling himself to the Weitemeyers with the resulting incorporation of the plaintiff and his initial participation in it. Title to the land for the Lorelei was taken by the plaintiff. Walter also convinced Mrs Weitemeyer that it would be of benefit to all concerned, inasmuch as the plaintiff’s credit rating would be enhanced, if she were to transfer title to the house she received in the settlement with her former husband to the plaintiff.

The plaintiff was incorporated under the laws of British Columbia July 11, 1963 with very wide objects. It was immediately organized and 1,000 Class “B” common shares were issued: 500 to Wilhelm H Walter: 300 to Louise V Maguire; 199 to Adelbert Weitemeyer and one remained in the name of the incorporating solicitor, Gordon Hazelwood. No other shares were issued. It appears, both by direct evidence and innuendo, that Walter was long on grandiose plans and short on performance and proved very soon to be an unsatisfactory business associate. He gave the instructions for the plaintiff’s incorporation and, in the result, the Weitemeyers came to own beneficially all of the shares in a company to whose incorporation they had paid no attention and to whose objects they had given no thought.

Waiter did not pay for the shares which had been allotted to him. The Weitemeyers soon began receiving complaints from tradesmen and suppliers that they were not being paid. The relationship with Walter was terminated summarily and, it seems, rather informally. The Weitemeyers paid the solicitor’s account and came to own the company. The 1964 annual report indicates that Walter’s 500 shares were transferred to Mrs Weitemeyer effective the same date they had been allotted to him and that he was not re-elected a director at the annual meeting in 1964. The solicitor replaced him as a director. The shareholdings of 800 by Mrs. Weitemeyer; 199 by Mr Weitemeyer and one by the solicitor did not change thereafter during the period material to this action.

The plaintiff transferred the house previously mentioned to the Weitemeyers in July 1964. The plaintiff neither paid nor received payment for the house. The Weitemeyers lived in it following their marriage.

The Lorelei contained 8 suites on three floors. It was completed and rented in 1963. It cost more than expected, due mainly to Walter’s involvement, but both Weitemeyers had full-time jobs and they succeeded in paying all the bills during the ensuing year. Their own equity had come from the sale of a residence owned by Mr Weitemeyer, the cashing of his life insurance policies and the personal savings and Current earnings of both.

A caretaker was engaged; however, the Weitemeyers did the major cleaning and the redecorating between tenants. They were usually there in the evening, and then only to work. They never lived there. They took no salaries but did receive some car allowance for necessary travel between their home and the Lorelei. It is Mr Weitemeyer’s impression that the deduction of the car allowance from his personal taxable income was disallowed. The Lorelei was kept full but it became obvious that it was simply too small for their purposes. Their accountant advised them that they would need at least 30 suites to satisfy their income requirement.

In June 1965 the plaintiff made a deposit of $28,500 on the land for another apartment to be known as the Lugano. This money was derived from a $14,000 loan from Mr Weitemeyer’s mother in Germany and advances from the Weitemeyers derived from savings, their current earnings and the sale of the house that Mrs Weitemeyer had brought from her previous marriage. They moved into an apartment some distance from the Lorelei and the new location.

The Lorelei was located at 8780 Fremlin Street in the Marpole district of Vancouver which is described as a good working-class neighbourhood. To the south of it there was another 3-storey apartment building and then Fremlin joined Southwest Marine Drive, a very busy arterial road, being one of the two main routes between Vancouver and New Westminster. Another parcel of land lay to the north of Lorelei and then Fremlin intersected Laurel Avenue. There is a lane behind the three properties on Fremlin running all the way from Laurel to Marine Drive although it does not give access to Marine Drive. Immediately across the lane, to the east, is 8755 Laurel Avenue, the location for the Lugano. This property ran through the entire block from Laurel to Marine Drive. To the east of the new location was another lane and then a triangular parcel of park land owned by the municipality.

The area may be visualized as a right-angle triangle with Fremlin Street to the west, as its base; Laurel Avenue, to the north, as its side, and Marine Drive, to the south, as its hypotenuse. It is divided, horizontally, into thirds by the public lanes. The park occupies all of the upper third, or apex; the Lugano site all of the middle third and three properties, of which the Lorelei was the central, occupied the lower third. The land across Marine Drive and on to the North Arm of the Fraser River is used for industrial purposes. The premises of a heavy construction equipment dealership are directly across Marine Drive. To the east about two blocks are the ramps giving access for traffic eastbound on Marine Drive to the Oak Street Bridge, which leads, inter alia, to the Vancouver International Airport and to the United States border. Nearby is a plant processing forest products. Marine Drive is a very busy street with a great deal of heavy truck traffic including numerous tankers hauling fuel to the Airport during the early morning hours.

Plans were drawn for the Lugano and then a contractor and mortgage arranged. Construction proceeded and the Weitemeyers moved in around March 1, 1967.

Meanwhile the Lorelei was sold June 6, 1966 for a net gain of $4,707.80. This amount was added by reassessment to the plaintiff’s 1966 income and, while it did not result in the payment of any tax, it certainly reduced the loss carry-forward. That reassessment, along with the 1968 reassessment that is the subject of this appeal, was appealed to the Tax Review Board and both appeals were dismissed. The plaintiff did not appeal the Tax Review Board’s decision on the 1966 reassessment. Mrs Weitemeyer’s explanation is to the effect that, since the sale of the Lorelei had been dictated by business considerations while that of the Lugano had been dictated by personal considerations, the Weitemeyers felt the two transactions ought not be treated the same for tax purposes. Thus, while they could accept the Board’s decision with respect to the Lorelei, they did not accept the decision with respect to the Lugano.

There is no doubt that the Lugano was a superior building in relation to its location and time of construction. It was faced in brick rather than stucco; it had an underground parking garage at a time when there was no by-law requiring such; although only three floors high, it had an elevator, the first in the area; it had hardwood parquet floors in the suites and wool carpets in the corridors where linoleum or tiles and cheaper carpets were the rule. There is evidence that superior insulation and better grade lumber than normal were used. Appliances were top or near top of the line. Each suite was about 100 square feet larger than competing neighbours and the landscaping was both attractive and hardy. The extra quality in construction, facilities and amenities went well beyond what was necessary to satisfy current tenant and market requirements. The contractor, who worked on a “cost plus” basis, says that whenever materials and equipment were discussed, Weitemeyer invariably opted for better quality as he felt it would serve him better in the long run. The realtor who handled its sale estimates that the Lugano was $1,500 to $2,000 per suite greater in value than other apartment blocks in the area.

The Weitemeyers planned to live in the Lugano. Their own suite was de luxe. It featured rosewood panelling, a chandelier and a fireplace. An extra room for an office-study was included. A workroom was built in the basement to accommodate Mr Weitemeyer’s tools and equipment.

It had been the Weitemeyers’ intention to quit their jobs and devote full time to running the Lugano; however, costs again exceeded estimates and the contractor had to carry a balance which obliged Mr Weitemeyer to continue working. Mrs Weitemeyer advised her employer of her intentions in the spring of 1967 and was asked to stay on until his fiscal year end in August. She left her job in September.

Mrs Weitemeyer kept the books, rented the suites, collected the rents and did all the gardening. The caretaker, who spoke no English, was not able to do much in the way of tenant relations. Mr Weitemeyer helped the caretaker during the shakedown period and did all the repairs; there was no other maintenance man. Neither drew a salary.

The Weitemeyers’ suite was one of six facing on Marine Drive. Only after they moved in did they discover that they had made a serious mistake in their choice of a home. The odour emanating from the forest products plant and the traffic noise emanating from Marine Drive made life most unpleasant. This condition particularly affected Mrs Weitemeyer after she quit her job and was there throughout the day as well as the night.

The caretaker also lived in a suite facing Marine Drive, leaving four suites available for rent. During the period the plaintiff operated the Lugano, March 1967 to June 1968, there were 26 changes in tenancies in the entire 33 suites whereof 10 involved the four Marine Drive suites. Pleading the traffic noise, the smell and the unkempt condition of the adjoining park, the plaintiff succeeded in obtaining a 15% reduction in the Lugano’s municipal tax assessment.

Raymond Michael Olma had been an employee of the real estate firm that handled the sale of the Lorelei and is the realtor who handled the sale of the Lugano. He also had at that time, and still has, his own construction company engaged in building dwellings, apartments and commercial buildings. In so far as his evidence relates to the Weitemeyers’ intention when they built the Lugano it may be summed up by his statement “if they were building for resale, they were doing things all wrong”. He felt that the extra quality would pay off in -a lower vacancy factor but not in more rent and that purchasers discount value that does not reflect itself in revenue.

Hazelwood acted for Olma as well as for the Weitemeyers and, on his suggestion, Weitemeyer contacted Olma toward the end of 1967 to obtain his professional advice with respect to the situation they had created. Olma came to the conclusion that the Lugano was appreciably too expensive for the area and that, having regard to the Weitemeyers’ retirement and investment intentions, it was not as pleasant nor as secure as it should be. He embarked on a program of attempting to convince them that they should locate away from the industrial, high- traffic area where living would be more pleasant and, in the process, consider a larger building with more suites where the risk of lost revenue from vacancies would be proportionally reduced. The advice happily coincided:with the possibilities implicit in a site Olma was assembling in Burnaby at the time.

The Weitemeyers eventually decided that while they did not want to sell they could not continue to live in the Lugano indefinitely and that they might as well face up to it. Accordingly, they agreed to sell the Lugano provided Olma would come up with a site on which they could carry out their long-term intentions. This agreement was not in writing but, then, neither were the contracts for construction of either the Lorelei or the Lugano.

The Lugano was sold in June 1968, after two or three offers and counter offers, to a real estate operator who saw an ad by Olma’s firm which did not specifically refer to the Lugano but simply to the fact that the firm had apartments for sale. The purchaser recalls the first asking price as being $350,000 or $355,000. The price was $348,000. The Weitemeyers got their gain and the purchaser got what he wanted, and still has, at a price in the range he was then paying. He says he paid about $200 per suite less than he would have been prepared to pay for other apartments of equal quality and size. He has had no vacancy problem, no unusual turnover and no regrets.

As a result of one holdout among the owners of the land Olma was assembling and subsequent delays in obtaining mortgage financing and in construction due to labour disputes the plaintiff was considerably delayed in getting its new apartment on the market but it eventually did at a considerably increased cost. The plaintiff still owns and operates the 59-suite building in Burnaby. Weitemeyer was laid off by his then employer in November or December 1970 and has had no job since then except work connected with the apartment. He and his wife are now each paid $300 per month salary by the plaintiff.

While the statement that the plaintiff still owns the Burnaby apartment is literally true, the evidence is that during the period July 1, 1970 to December 31, 1971 the land and building were owned by a limited partnership of which the plaintiff was one of seven equal partners. Mr and Mrs Weitemeyer were each a partner as were Hazelwood and three of his associates in the practice of law. The legal title to the property was never transferred by the plaintiff to the partnership and it appears that the partnership was terminated December 31, 1971 with the plaintiff resuming beneficial as well as legal ownership.

The tax implications of these transactions for the plaintiff and its partners are not presently in issue and I do not have to consider them except as evidence material to the acquisition and disposition of the Lugano by the plaintiff. l have come to the conclusion that they have no relevance to the issue before me except to confirm my overall impression that in pursuing their long-range goals, the Weitemeyers have been remarkably disposed to ad hoc actions. The association with Walter; the neglect of written contracts in transactions with, for them, very substantial financial considerations; the failure to do or have done the elementary economic projections and site inspections that would have, in all probability, avoided the fundamental errors of building too small an apartment in the first instance and an unsuitably located building in the second, all establish a course of conduct devoid of businesslike elements not to mention calculation and cunning.

There are two other matters in evidence before me that are of concern. Richard S Tipple, an officer of the Department of National Revenue, met with a man he took to be Raymond Michael Olma on December 9, 1969. Olma does not recall the meeting and it appears that Tipple and Olma did not recognize each other when they met outside the courtroom during this trial. Olma had a brother associated with him in the business. The statement of concern arose out of the circumstances that led Olma Brothers Realty Ltd to sue the plaintiff and the Weitemeyers personally by writ issued in the Supreme Court of British Columbia July 21, 1969 for a balance of $2,000 on account of its commission on the purchase of the new Burnaby apartment site and $5,095 fees and disbursements for arranging financing and other services in connection with the 59-suite apartment built on it. Tipple returned to his office from the interview and, within a matter of hours, after discussing the interview with his superior, he wrote a memorandum, the relevant portion of which is:

It was Ray Olma’s understanding that because the way things were going, the Weitemeyers intended to sell the Cassie St project just as soon as it was completed. In order to help the Weitemeyers financially, and perhaps ensure their chance to earn a further commission re the sale of the Cassie St property, Olma Bros deferred payment of their split commission of $2,030.00 and so advised the Weitemeyers. At some point Olma Bros discovered that the Weitemeyers were not going to sell, not right away at any event, and they therefore took action to collect the full amount of $7,000.00.

The action was defended but settled by payment of the claim in full. The Weitemeyers say this was done to get rid of the suit in order to permit completion of the financing. This was particularly critical as a garnishing order before judgment had issued in the action.

The Weitemeyers deny that it was ever their intent to turn the new project to account and Olma says that, if he made the statement, his impression was possibly derived from his knowledge of the difficulty they were having in getting the project financed and built. That is certainly consistent with the memorandum. Assuming that the Weitemeyers had formed that intention at all, which they deny, and that they formed it for the reason indicated in the memorandum, which would be consistent with the evidence of the difficulties encountered in building and financing the Burnaby project, the fact remains that those difficulties arose well after the sale of the Lugano.

Finally, the purchaser of the Lugano is under the impression that Olma told him the Weitemeyers wanted to sell the Lugano because they were overextended financially. That is, of course, hearsay and unconfirmed by any direct evidence. While it appears that the financial difficulties encountered in bringing the Burnaby project to market were quite serious, the evidence does not support that conclusion with respect to the Lugano. With the accommodation of their contractor and the income from their jobs, the Weitemeyers were able to resolve any financial problems relative to the Lugano with comparative ease.

In addition to the testimony of the Weitemeyers themselves, and Olma, the announcement of their retirement and investment intentions at the time they built the Lugano are confirmed by Jerry Kenneth McPhail, Mrs Weitemeyer’s former employer, by Jack Timm, the contractor who built the Lugano, and by Christa Timm, his wife, and by Ferdinand Paul Rupert, a landscape gardener. The Timms and Rupert are personal friends of the Weitemeyers. All, including the Weitemeyers, were credible witnesses. I am satisfied that the Lugano was acquired as an investment to provide income and a place to live, that the Weitemeyers intended to operate it and that the decision to sell was reluctantly reached as a result of their tardy discovery that it was not a satisfactory location for their home. The timing of the sale was determined by the opportunity to replace the Lugano with a similar investment more suitably located. Taken as a whole the evidence does not support a conclusion that the Lugano’s acquisition was a venture in which not only revenue but an advantageous disposition was contemplated. It was not an adventure in the nature of trade and the gain realized on its sale was not profit from a business.

The appeal is accordingly allowed. The plaintiff is. entitled to its costs to be taxed.