Bel-Conn Limited v. Minister of National Revenue, [1973] CTC 2009, 73 DTC 17

Roland St-Onge:—This appeal is from an assessment dated September 22, 1970, wherein federal tax in the amount of $38,880.60 and provincial tax in the amount of $10,782.83 was levied in respect of income for the 1969 taxation year.

The appellant’s relevant allegations of fact are as follows:

1. Since its incorporation in 1951, the appellant has carried on the business of buying, building and holding for investment purposes commercial and apartment buildings. In 1951 the appellant purchased, and still owns for revenue purposes, a large commercial building in downtown Calgary. In 1954 the appellant purchased land in the City of Calgary and in 1962 built thereon a large apartment building which it still holds for revenue purposes. In 1962 the appellant purchased a second apartment building which it also still holds for revenue purposes.

2. At all relevant times the appellant has been actively managed and directed by Mr Abraham J Conn (hereinafter called “Conn”) of the City of Calgary who owns one-third of the shares in the appellant company. The remaining shares are owned by Conn’s mother- in-law and sister-in-law who each own one-third of the shares.

3. Conn and his wife also jointly own 50% of the shares in Minton Apartments Ltd (hereinafter called “Minton”), the other 50% being owned by his sister-in-law. Conn actively manages Minton which, since its incorporation in or about 1956, has carried on the business of building and holding for investment purposes apartment buildings in the City of Calgary. The company bought a number of properties, demolished the buildings thereon, and built a total of nine apartment buildings on the site, none of which it has sold. In addition, in 1959 Minton purchased another parcel of land in Calgary which it still owns and upon which it plans to develop a combination apartmenthotel complex. Minton has not engaged in sales of, or otherwise dealt or traded in, any land whatsoever.

4. All of the foregoing activities of Minton and the appellant were carried out under the active direction of Conn who is an expert in the business of financing and developing revenue-producing properties.

5. In or about 1958 Conn became interested in the revenue-producing possibilities of motor hotels in the City of Calgary. In August 1958 Conn was responsible for Minton purchasing land and a building (hereinafter called “the Great West property”) located at 212-9th Avenue SW, in downtown Calgary (to the rear of the commercial building owned by the appellant) for $175,000 for the purpose of renting the said property initially and then building thereon a motor hotel to hold for revenue purposes. In or about March 1960 Minton transferred the Great West property to the appellant for the purpose of building thereon a motor hotel.

6. In or about October 1959 the appellant purchased a one-half interest in certain lands, owned by one Samuel Katchen, located at the corner of 4th Avenue and 5th Street SW, Calgary (hereinafter called “the 4th Avenue site”) for the purpose of erecting thereon a motor hotel. Over the following years Katchen and the appellant jointly purchased several adjacent properties still with the intention of erecting on the whole property a motor hotel. Conn was approached by Katchen because of Conn’s experience in financing, developing and completing revenue-producing properties and Conn undertook the active development of the motor hotel.

7. Conn proceeded to have plans drawn up for a motor hotel on each of the Great West and 4th Avenue sites expending on such plans the following amounts:

(i) 4th Avenue site — $1,081.57

(ii) Great West property — $1,065.00

8. Conn proceeded actively to attempt to raise mortgage financing for the motor hotels and, inter alia, made a trip to Toronto for that purpose.

9. Difficulties were encountered in finding financing on reasonable terms. Negotiations were then entered into with another apartment developer who had a guaranteed mortgage source with a view to developing a 125-suite apartment on the 4th Avenue site. Subsequently the parties were unable to reach agreement with respect to this project and the third party developer offered to purchase the land from the appellant and Katchen. The sale was concluded in February 1962 and the profit made by the appellant on the sale of its shares thereof was held to be taxable by the Exchequer Court in Bel-Conn v MNR, [1969] CTC 1; 69 DTC 5026, notwithstanding the fact that the appellant purchased its interest in the 4th Avenue site only for the purpose of developing the same with no intention whatsoever of selling its interest therein. The appellant still contends that it was wrongly subjected to tax in respect of its gain on the said sale.

10. The appellant continued to hold the Great West Saddlery property with the intention of erecting thereon a motor hotel. As a result of difficulty in arranging financing on reasonable terms for this type of project, the appellant decided to turn to apartment buildings and in 1962 constructed one large apartment, the Americana, on the land which it had purchased in 1954 and then purchased another apartment building, the Westerner. The appellant, with the continued intention of erecting on the Great West site a motor hotel at the appropriate time, attempted over the years to purchase additional land for that purpose and turned down a number of offers to purchase the site. Finally, in or about April 1968, the appellant accepted an unsolicited offer of $275,000 for the property from the City of Calgary.

Most of the above allegations were substantiated by Conn who gave additional details as to the transaction under review, as well as details of the appellant’s course of conduct and his own.

Conn testified that he had six business properties in Medicine Hat —two of which he disposed of—one in 1964 and the other in 1971, after a holding period of 30 and 21 years respectively.

The companies Conn managed, namely “Minton” and “Bel-Conn”, have been in the business of financing and developing revenue-producing properties for investment purposes only, and have never sold them. They are:

(1) Bel-Conn Building — 14 storeys

(2) Americana — 50-suite apartment

(3) Westerner — 30-suite apartment

In 1959, because of Conn’s experience in financing and building apartments, he was approached by Mr Katchen, apparently ignoring the fact that the latter was a real estate dealer. They were to become partners and erect a building on certain lots then owned by Mr Katchen at the corner of 4th Avenue and 5th Street—a municipality known as 604 4th Avenue SW. Bel-Conn purchased from Mr Katchen a one- half interest in the said property for $30,000. In the same year Bel-Conn and Katchen jointly bought near-by lots known as “618 4th Avenue” from Mr Webber for $50,000—of which Bel-Conn paid $25,000 and subsequently they acquired another property known as “608 4th Avenue” for $50,000 of which Bel-Conn paid $25,000. Subsequently, for its one-half interest, Bel-Conn paid a total of $80,000.

Conn also narrated all the steps he took such as hiring a firm of architects to prepare plans and going to Toronto to seek mortgage money in order to erect the proposed motor hotel, and then giving all the details of negotiations preliminary to the sale of the 4th Avenue property to Chartered Investments Limited in January 1962.

All this evidence is more completely set out in Bel-Conn Ltd v MNR (supra), in which case the Exchequer Court decided that the appellant’s preferred intention was to construct and operate a motel if the money necessary to finance the project could be borrowed, but that there was also a secondary intention to sell the property at a profit if the motel project proved impossible to carry out.

The property under discussion, Great West Saddlery, was acquired in 1959 for $175,000—apparently $80,000 more than its market value. It yielded an ‘annual rental income of $66,000. Prior to the acquisition, Great West had rented the building for three years (in 1957) and thereafter it was used by Conn as a shop and storage for the purpose of managing the apartment suites.

Conn never accepted a long-term lease for the said building because of the appellant’s plans to erect a motor hotel on the site.

After being approached several times by the City of Calgary, the appellant in 1968 decided to sell the Great West Saddlery property for $275,000 and paid to a real estate agent a commission of $10,000.

According to Conn, the sale took place because the city could expropriate, in which case there was a danger of getting less than the price offered and also because the price offered was an attractive windfall.

Upon cross-examination, Conn admitted that the building, as it was managed, was not an income-producing property and that it was acquired in a downtown area of Calgary where active business existed. He also stated that the property was never advertised for sale, that there was enough land to build a motor hotel thereon although the appellant tried to get additional land, and that he did not erect a motor hotel on the site but was waiting for the occasion to do so.

According to the evidence adduced, it also appears that the appellant started the building of the Americana and Westerner Suite Apartments only after the sale, at substantial profit, of the 4th Avenue property. Obviously Conn, during the erection of the said buildings, did not have enough time to pursue the motor hotel project, and when the opportunity of selling the Great West Saddlery property to the city came along he was very happy to realize such a substantial profit.

As a matter of fact, the Board does not see any difference between the appeal under review and the one decided by the Exchequer Court in Bel-Conn v MNR (supra). The evidence reveals that after the selling of the 4th Avenue property, the appellant started the building or buying and managing of apartment buildings and did almost nothing to achieve its motor hotel project.

The Great West property was kept longer than the 4th Avenue property but it was finally sold through the assistance of a real estate agent to whom the appellant paid a commission of $10,000. This transaction being the second within six years effectuated by the appellant and having almost all the earmarks of the first transaction, it is difficult to rule that the property under review was not acquired with the purpose of selling it at a profit if money necessary for the building of a motor hotel could not be obtained.

This is affirmed in Bel-Conn v MNR (supra), when Mr Justice Kerr declared at pages 11 and 5032 respectively:

Having regard to the nature and course of the venture; the knowledge, experience and business activities of Katchen and Conn; the location of the property in a downtown area of Calgary in which there was fairly heavy land speculation; the magnitude of the probable cost of the proposed motor hotel; the known impossibility of building it without large borrowings; the lack of prior investigation in respect of the possibility of obtaining the money to build; . . . .

From the foregoing it is concluded that the sale of the property was an adventure in the nature of trade and the profit therefrom is income from a business within the meaning of sections 3 and 4, and paragraph 139(1)(e) of the Income Tax Act.

Consequently the appeal is dismissed.

Appeal dismissed.