T K Sales LTD v. Minister of National Revenue, [1973] CTC 340, [1973] DTC 5284

Walsh, J:—This is an appeal from a decision of the Tax Review Board dated March 20, 1972 which dismissed the appellant’s appeal! from a reassessment of its income tax for its 1968 taxation year, terminating March 31, 1968, whereby the Minister assessed the net gain on the sale by it on or about December 1, 1967 for $169,000 of the Brentwood Auto Court purchased by it on or about January 31, 1967 for $73,743.75, as profit from its business whereas appellant claims it should have been treated as a capital gain.

Appellant’s principal shareholder and president, Thomas W Kaye, contends that he caused appellant, through which he carried on his various business activities, to purchase the property in question in order to retire from his used car business which was his principal activity, and as an investment to be operated by him and his wife to provide income for his retirement. He contends that when he bought it he had no intentions of selling same even if this could be done at a substantial profit, as events proved, but that the various problems and frustrations which he encountered while operating it, and in particular the serious illness of his wife in April 1967 which made it impossible for her to continue to participate fully in its operation, forced him to sell, and the gain realized thereby was fortuitous, and should not be taxed as income earned by appellant in the course of its business operations.

Respondent for his part contends that he computed the net gain, which the parties agree was $31,058.36, on the basis that this transaction was no different from various real estate transactions carried on by appellant in addition to its used car business, that appellant acquired the Brentwood Auto Court for the purpose of reselling same at a profit, and commenced advertising it for sale early in 1967, and he invokes sections 3 and 4 and paragraph 139(1)(e) of the Income Tax Act.

At the opening of the hearing it was admitted on behalf of appellant that it, and its principal shareholder, Mr Kaye, had had sufficient transactions in real estate to be classified as dealers in same, and that the motel in question was listed for sale on July 20, 1967 with a firm of real estate agents and that it advertised it for sale by advertisements in the Edmonton Journal on July 29, 1967 and in the Daily Colonist, Victoria, on July 30, 1967.

The motel in question, situated not far from Victoria, British Columbia where appellant carries on business, was paid for by appellant by the assumption by it of a balance of sale, and a mortgage on the property due by vendor, and by the assignment by it to vendor of equities in and mortgages on various properties, a mortgage on another property owned by it, the sale to vendor of a car, various tax and other adjustments and a small cash payment.

The agreements relating to the sale of the property were even more involved, as appellant was obliged to take in part payment a property on Langley Street known as the British Public Schools Club, which itself had a mortgage on it. Later it sold this property at a loss, and, as of June 1, 1968, sold at a discount the mortgage it held on this property and its equity in the agreement of sale of the Brentwood Motel. It is not necessary to go into all the details of these various transactions since the parties are agreed that they are all part of the same deal and that the net gain realized by appellant was $31,058.36.

Appellant was incorporated in 1961 so was not especially formed for the acquisition of the motel. Mr Kaye testified that although he had worked for 17 years as a salesman for Adams (the chewing gum company) he had always on the side bought and sold cars. By 1961 he was doing this on an extensive scale and felt he should become properly licensed as a used car dealer, so formed the company. He did not have a distributorship from any car manufacturer and often the people who came to him to buy used cars had little ready cash available, so he accepted all sorts of trades, taking properties, mortgages and other assets in payment for cars sold. In this way, for example, he acquired some lots of land from a developer in Alberni for a group of cars. He acquired and sold various properties for his married daughter, in these instances using his own name rather than the appellant company. He bought and sold several residences for himself. He had always wanted to own a motel and in 1953 bought one consisting of some very old cabins on a good piece of land. They were only really usable in summer and he operated it for two years but because of zoning by-laws could not get a permit to build a modern motel on it as the municipality was waiting for sewers to reach the property. Finally on his fourth application he obtained a permit to build 12 or 15 units. Meanwhile, the old cabins had been condemned and torn down. He felt that this number of units was insufficient to provide the sort of retirement income he wanted so sold the property.

In 1967 a woman who was buying a car from him said she had a motel for sale. He saw it, liked the location in Brentwood and traded his equity in an apartment house and some mortgages for it. He sold his used car stock wholesale intending to get right out of that business and retire to the motel. He and his wife started work remodelling it, painting the units, fixing the heating system, and digging up the septic system which was in poor shape and overflowing. An Indian reservation was about one mile away and four of the older units were rented to Indians, including one common-law family. One night one of the young girls ran to him for help saying the man had the woman by the throat and was choking her. He had to go to her rescue and call the police and there was a great disturbance. Another time he hired an Indian, son of a noted wrestler, and himself a wrestler, to do some work and was assured by him that he knew how to put a new roof on one of the cabins. He bought the materials, but on returning after a day in Victoria found they had been improperly applied, about two- thirds being used on one side and an open gap left on the other, and when he admonished this employee he took offence, and a few days later returned drunk and threatened him. Tools, television sets and equipment were stolen from him. He had to repeatedly call the police, and the Indian chief accused him of discrimination.

His wife became seriously ill in April, and a medical certificate produced indicates she underwent an hysterectomy and removal of ovarian tumours and diseased fallopian tubes on April 25 which required three months convalescence. She had looked after the office and cleaning and kept the books, attended to the telephone and so forth while he did the outside work, plumbing, carpentering, painting, fruit tree pruning, grass cutting and so forth. A young Indian girl helped and while his wife was ill he had a man and his wife, who accepted a cottage free in return for some help. The motel was not a big enough operation to justify hiring regular paid help, and without his wife’s active participation it was no longer feasible to operate it, so he put it on the market for sale. He accepted the first offer and in order to make the sale had to enter into a complicated series of transactions, taking the Langley Street property which he did not want in part payment, then selling it, and finally discounting the mortgages resulting from the motel and Langley Street property sales. He insisted that his original intention had been to keep the property for some years as it was in a good area. After the sale of the motel he had to return to the used car business although he had already disposed of his stock in bulk sales.

Appellant’s financial statements show that sales of used cars for the year ended March 31, 1966 amounted to $146,401.34, for 1967, $413,491.18, for 1968, $217,542.50, for 1969, $285,577.05 and for 1972, $249,585. Apparently, the sales were abnormally high for the year ended March 31, 1967 because it was at the beginning of 1967 that his stock of cars was sold by bulk sales to provide for the motel purchase on January 31. When the motel was sold on December 1 and he reverted to the used car business, four months remained before the end of the fiscal year on March 31, 1968, so the sales of cars for that year were still quite substantial. Although it seems somewhat surprising that this should be so during such a brief period of starting up again, it was pointed out that most sales involve a trade-in, which leads in turn to another sale and trade-in, with the stock turning over about every two months, so that a used car dealer might sell 300 cars a year but never average more than 50 on his lot at any given time.

Subsequently in 1970 and 1971 appellant acquired a one-third interest in another motel, but not an operating interest. It never got any income from it and recently sold out to one of the other parties.

Mr Kaye’s evidence as to the state of health of his wife being the main reason for selling the motel was corroborated by her and by Douglas Dowsley, a real estate agent called as a witness by respondent, who stated this was the reason given him when Mr Kaye informally listed the property for sale. His agency advertised it in Vancouver, Edmonton and Victoria, but did not make the sale which Mr Kaye did himself. It was not an exclusive listing so no commission was received by his agency. All Mr Kaye’s previous listings with him had also been done informally. The advertisements indicate 15% income. The statement for 8 months of operation of the motel ending November 30, 1967 shows rents received of $19,644 less expenses (without any claim for capital cost allowance) of $14,037.99 or net income of $5,606.01.

It is respondent’s contention that Mr Kaye’s long history as a trader both personally and through appellant company, not only in cars but also in real estate, both prior and subsequent to the motel purchase. and sale indicates that this was no different from his other real estate dealings, the profits of which were taxed as trading transactions, and that this conclusion is strengthened by the short time during which he held the property and the fact that he advertised it for sale, and did not merely sell it as the result of an unsolicited offer too good to refuse, as was the case in such judgments as Bead Realties Ltd v MNR, [1971] CTC 774; 71 DTC 5453, Warnford Court (Canada) Ltd v MNR, [1964] CTC 175; 64 DTC 5103, and Jean-Marc Cham poux v MNR, [1970] CTC 603; 71 DTC 5001.

Against this appellant contends that even a trader can make a capital gain on sale of a property, when the property in question was acquired by him for the purpose of producing income and not with a view of resale at a profit, or even with the secondary intention at the time of acquisition of doing so, should the original intention of operating the property to produce income be frustrated and a sufficiently good offer be received, as in the case of Regal Heights Ltd v MNR, [1960] CTC 384; 60 DTC 1270. In support of this contention Mr Kaye insists that this property was purchased by him with the intention of operating the motel himself with the aid of his wife. In purchasing it he planned to get out of the used car business and in fact disposed of his inventory of cars by bulk sales. He and his wife went to live in the living quarters of the motel and he devoted considerable time and expense to upgrading it by painting and cleaning, replacing some roofs, improving the heating and septic systems, and so forth. He found the problems he encountered difficult to cope with but testified that nevertheless he would have kept the motel had it not been for his wife’s serious illness. With 20 units it was not large enough to be operated by salaried staff, and while he was able to obtain some help during her illness, the continued operation of it in future would be too arduous for her. He then put it up for sale. This evidence was in no way contradicted and I have no reason to disbelieve it.

Under these circumstances the short period that elapsed between the purchase and sale becomes irrelevant. As Noël, J (now Associate Chief Justice) said in Racine, Demers and Nolin v MNR, [1965] CTC 150; 65 DTC 5098 at 5105:

Nevertheless I can find nothing in the evidence to justify my rejecting the sworn testimony of the appellants in regard to the explanations which they gave to justify the resale of the business so soon after acquiring it, and here also their testimony in this regard was not questioned in cross- examination.

If this explanation is accepted, and I accept it entirely, the rapid resale after the purchase does not give rise to any inference that this resale with profit was one of the reasons motivating the appellants when they acquired the business.

The facts in this case closely resemble those in the case of Elgin Cooper Realties Ltd v MNR, [1969] CTC 426; 69 DTC 5276, in which the principal shareholder, who had a long history of both trading and investing in real estate, had the company sell an apartment building it had built as an investment soon after it was completed because, rightly or wrongly, he was concerned about defects in the construction which might cause problems. Jackett, P, as he then was, in allowing the appeal stated at page 429 [5278]:

Whether or not Mr. Shenkman was justified in his apprehensions about the building, I accept his evidence that they caused him to alter his original intention to keep the property and manage it as an income producing property.

The appeal will be allowed and appellant’s assessment for its 1968 taxation year will be referred back to the respondent for reassessment on the basis that the profit of $31,058.36 realized by the sale of Brentwood Auto Court and British Public Schools Club was not a profit from a business, the whole with costs.