La Cie D’immeubles Courville Liée v. Minister of National Revenue, [1973] CTC 2024, 73 DTC 35

The Assistant Chairman:—The appeal by La Cie d’Immeubles Courville Ltée from an assessment for the taxation years 1968 and 1969 was heard at Quebec City on December 8, 1972.

The argument in this case turns on three main points: (1) the date on which appellant acquired and exercised an option to purchase certain shares, to determine whether the transaction occurred within the taxation year 1969, as respondent maintains, or in 1968, as alleged by appellant; (2) the value of the said shares at the time of the transaction;

(3) the nature of the profits realized by appellant from the sale of two properties in 1968.

With regard to the date on which appellant exercised the option to purchase the said shares, the facts are as follows: On September 22, 1967 Fibracan Incorporée awarded its directors and the members of its managing committee an option to purchase 9,000 ordinary shares, to be exercised within a period of five years from September 22, 1967, and at the rate of 60 ordinary shares for each attendance at the regular meetings of the board of directors or managing committee.

In addition, an option on 4,000 ordinary shares in Fibracan was offered to each member of the managing committee, valid for a period of five years.

Mr Jean-Paul Marcoux, the principal shareholder in appellant, was also a member of the managing committee of Fibracan, and according to the offer made he was entitled to purchase 5,260 ordinary shares in Fibracan.

According to Mr Marcoux’s testimony, he transferred the option on his 5,260 shares to appellant, who exercised the option, paid the sum of $750 on account, and received the shares on July 26, 1968. Appellant’s financial year ends on July 30.

All that exists to prove or disprove this on the record is a minute of the meeting of Fibracan on May 26, 1967, when the aforementioned option was offered, and a minute of Fibracan dated July 26, 1968, in which: that company authorized the acceptance of subscriptions from among others the appellant, La Cie d’lmmeubles Courville Ltée, for the purchase of 5,260 ordinary shares.

This clearly is not the best evidence that appellant exercised his option on July 26, 1968, but it is the only evidence before the Board, which must decide this point before proceeding to valuation of the shares. The sworn testimony of Mr Marcoux, who in fact is the owner of appellant, cannot be ignored, and it corroborates what, in my view, is partial written evidence that the purchase option was authorized by Fibracan, transferred to appellant and exercised by it in July 1968. As this transaction took place in financial year 1968, it cannot be assessed for the taxation year 1969. Having concluded that respondent erred in including this transaction in taxation year 1969, I cannot consider the second point in the case, namely the value of the shares purchased by appellant.

The third point in the case deals with the sale of two properties, the profits from which were considered and assessed by respondent as deriving from a venture or business of a commercial nature. According to the evidence the principal business of La Cie d’lmmeubles Courville Ltée is the sale of lots and the operation of rental buildings, and in general, according to the balance sheets, does not cover the sale of buildings. In 1968, however, appellant sold two buildings, and subsequently a lot, the whole being part of Lot 587-246-1 in St-Roch north, measuring 28,000 square feet, and divided to accommodate two buildings with five to six apartments, leaving one lot vacant.

The evidence indicates that the choice of the lot purchased by appellant was conditioned by the need to move the two buildings onto the site.

Once the buildings had been relocated and rented, the soil conditions and the proximity of the river resulted in damage to the basements of the buildings. During heavy rain, or at certain times when the tide was especially high, water leaked into the basements of both buildings. The evidence establishes that prior to 1968 appellant received claims amounting to $265, for damage caused by water, from a tenant in one of the buildings. After 1968 Mr Claude Gauthier, who purchased the other building, testified that he incurred $75 worth of damage.

The two buildings were sold, one to Mr Claude Gauthier and the other to a Mr Croteau, without any solicitation on the part of appellant. In his testimony Mr Gauthier stated that he bought the building because the grocery business he operated in it was thriving in spite of the water problem. The adjoining vacant lot was sold for the erection of a service station, which was not affected by flooding since it is built entirely above ground. Appellant paid tax on the profit from the sale of the lot.

There is nothing on the record to indicate that the land in Lot 587-246-1, and the buildings erected thereon, were purchased other than for rental of buildings as a sideline to appellant’s principal business. There is no evidence that the land and buildings were bought for resale. There is a document on file to the effect that a commission of $1,000 was paid by appellant in connection with the sale of the property to Mr Gauthier. However, it is established, and is not disputed, that Mr Gauthier, who was under the impression that appellant was not willing to sell him the property, apparently used the services of a real estate broker. In fact, appellant paid $1,000 commission, but the purchaser, Mr Gauthier, apparently paid $1,500 commission, which in my opinion is rather unusual.

I am satisfied on the evidence that appellant carried out no solicitation for the sale of the properties at issue; that it did not engage a broker’s services, and that appellant’s intention was not to purchase the land and buildings for resale, but to invest in other rental properties. The sale of these properties can only be considered in the light of soil defects and the unexpected flooding in the basements of the buildings.

Further, the proceeds of the sale of these properties was applied to purchase of other lots, as a means of investing in the construction of an apartment building of 110 units, worth 2 million dollars, which has subsequently been built.

If appellant’s principal intent in buying these properties was not to resell them, what must be said of its secondary intent? For a secondary intent to be alleged, such a secondary intent would have had to be present, inter alia, when the land and buildings were purchased. There is nothing to suggest that such a secondary intent existed when these properties were purchased. It was only following the damage caused by water in the basements prior to 1968 that appellant sold the properties. I consider the reason for the sale, which was not planned when the properties were purchased by appellant, to be credible and valid. In my opinion when the land was bought and the buildings moved no secondary intent existed regarding the disposal of these properties. In short, these transactions were not within appellant’s ordinary course of business, nor are they in my view transactions of a commercial nature. There was no secondary intent to resell the properties when the buildings were moved, and the sale of the land was brought about by a soil defect. As they were subject to flooding, these properties were unsuitable for use in a business of operating apartment houses. In my opinion the profits realized by appellant on the sale of its properties are of a capital nature and not taxable.

For these reasons, the appeal is allowed.

Appeal allowed.