Avon Realties and Investments Corp v. Minister of National Revenue, [1972] CTC 2114, 72 DTC 1093

Maurice Boisvert:—This appeal was heard at Montreal, Province of Quebec, on November 23, 1970, before the Tax Appeal Board as it was then constituted, and concerns an income tax assessment dated August 19, 1968 in respect of the taxation year 1965.

The appellant, a corporation whose fiscal year ended on April 30th of each year, saw its taxable income for 1965 increased by the respondent from $1,490.36 to $34,823.16. After allowing an amount of $1,966.13 as a loss that was claimed in 1966, the 1965 revised taxable income amounted to $32,857.03. The amount of $33,332.80 is a profit arising from an expropriated property located on Décarie Boulevard, in the City of Montreal.

The appellant objected to the assessment contending that the above- mentioned property had been purchased for investment purposes only, and that the expropriation was unsolicited.

The sole question for determination is whether, in the circumstances to be shown hereafter, the gain made by the appellant on the expropriation was a Capital gain.

The facts are few and very simple. On August 13, 1963 (appellant’s 1963-1964 fiscal period), the appellant, Louis Fine and David Isenberg purchased a property bearing civic numbers 5415, 5417 and 5419 on Décarie Boulevard. On January 8, 1965, the following agreement was signed:

AGREEMENT

BETWEEN: AVON REALTIES INVESTMENTS CORP., LOUIS FINE AND DAVID LEWIS ISENBERG, OF MONTREAL, hereinafter called the vendor, ON THE ONE PART,

AND: THE HONOURABLE MINISTER OF ROADS, hereinafter called the Minister, OF THE OTHER PART.

WHEREAS the Vendor alleges that on January 28, 1964, June 28, 1964, and October 28, 1964, he was the registered owner of all that certain parcel or tract of land being composed of lot 50-361, 362, 363, 364 & 365 of the Official Cadastre of the Parish of Montréal and whereas on the said days of January 29, 1964, June 29, 1964, and October 29, 1964, the said parcel or tract of land was taken by the Government of the Province of Quebec, represented by the Minister of Roads, according to the dispositions of article 1066V of the Code of Civil Procedure as per a notice of expropriation filed on January 29, 1964, June 29, 1964, and October 29, 1964, with the Registrar of Deed for the County of Montréal under numbers 1,724,679, 1,759,352 and 1,786,309.

Now this Agreement witnesseth that the Vendor hereby offers and agrees to accept as compensation for the said expropriation (or for the purchase of the entire immovable property) the sum of TWO HUNDRED AND TWENTY- FIVE THOUSAND DOLLARS ($225,000.00) and to release the Minister from all claims including damages, interest arising out of the said expropriation and to execute a document accordingly in favour of the Minister. This includes all indemnities and interest to mortgage creditors.

The foregoing Agreement is made on the special condition that we and the mortgage creditors shall be paid the sum of Two Hundred Twenty-Five Thousand Dollars ($225,000.00) on or before the 7th day of March 1965. Should payment be made after the said date, any additional interest or indemnity due to the mortgage creditors shall be paid by the Minister of Roads and the monies due to us Shall bear interest at the rate of five percent per annum from the 7th day of March 1965 to the date of payment.

We shall pay municipal and school taxes for the period ending July 31st, 1964, and any municipal and school taxes applicable for the period after July 31st, 1964, if payable to us, or demanded from us, shall be paid to us or to the proper authorities by the Minister of Roads to our complete exoneration and as additional compensation.

IN WITNESS WHEREOF the Vendors have signed this 8th day of January 1965.

From the above document it is to be noted that the property was taken by the Government of the Province of Quebec on January 29, 1964, June 29, 1964 and October 29, 1964. From the date of the original purchase to the date of taking possession by the Minister of Roads, five months had elapsed.

It has been admitted that the appellant was dealing in real estate and that Louis Fine and David Lewis Isenberg were also engaged in real estate. It is in evidence that the appellant had to borrow the sum of $52,000 being the cash given on account of the sale price which was set at $150,000.

The main witness, Louis Fine, stated in his evidence that he was not aware when the property was purchased that said property was to be expropriated. To justify his statement he proved that on September 10, 1963, he had certain alterations made, under contract, amounting to $13,000. The alterations were completed in December of 1963 and on December 2, 1963, the contractor acknowledged receipt of the full amount owed to him by the appellant. Some of the invoices were in accordance with the agreement with the contractor and others were for furniture and for work done after January 29, 1964. However, the general plan covering expropriations on Décarie Boulevard was dated December 28, 1963.

On January 29, 1964, the first notice of expropriation was given by the Minister of Roads. This notice reads as follows:

The Government of the Province of Quebec requires your property or a portion thereof bearing number(s) P-50-365, 364, 363, 362, 361 of the official cadastre of Parish of Montreal among other properties for the construction, rebuilding and for enlargement of New Trans-Canada Highway (Decarie Boulevard). To this effect the Honourable Minister of Roads has, on January 29, 1964, acting in accordance with article 1066V, as amended by the Civil Code of Procedure of the Province of Quebec, filed at the Registry Office of Montreal under number 1724679 a general plan of the required land. Your property is a portion of this land.

We must advise you that in accordance with the expropriation law ‘The deposit hereinabove contemplated shall convey to the Government of the Province the ownership of the immoveable or the real right expropriated free from any encumbrances other than the obligation to pay the indemnity awarded, upon which alone the real rights affecting the immoveable shall be conserved and may be exercised. From the date of such deposit, the Minister shall be seized of the possession of the immoveable or of the real right and may take all required steps to cause all resistance to his possession to cease’.

If according to the plan, your property is completely expropriated and if you possess good, free and clear title, without mortgages or other encumbrances, to the opinion of the Minister, at least 75% of the municipal valuation of the City of Montreal for the current year for the lands and buildings will be paid to you at the earliest convenience.

However, if only a portion of your land and building is expropriated, the department will pay you, on account, a substantial portion of the indemnity to which you are entitled in their opinion.

All payments so made by the department will be on account and deducted from the final total indemnity to which you may be entitled resulting directly from this expropriation. You will be indemnified as quickly as possible and everything will be done to minimize inconveniences.

The representatives of the Department will do everything possible to evaluate, within the shortest possible delay, the total, fair and equitable indemnity resulting from this expropriation. You will be offered payment in accordance with their analysis and conclusion.

Please be advised that as a result of this expropriation, the leases between you and tenants are cancelled. Henceforth, from the above-mentioned date of the filing of the plan, you are not entitled to collect rents from the tenants of your property.

All receipts after the date of the filing of the plan due to rentals or other charges from the tenants should be paid to Trust Général du Canada, 84 Notre-Dame Street West, Montreal. They are administering the expropriated properties in accordance with the Department’s instructions.

In deciding the appeal, it must be taken into consideration that the persons involved in the transactions were in the real estate business at large. Of course they could make an investment, but the proof of intention is not as easy to make as in the case of an isolated transaction.

The appellant company was incorporated in 1959. After four years the shareholders were still indebted to the appellant for their subscription. For the first fiscal period, as at April 30th, 1960, a profit of $13,341.16 was reported.

The financial statements for the year 1960 indicate that out of a social capital of $40,000, composed of 10,000 common shares at $1 par value and 3,000 preferred shares at $10 par value, only 4,000 common shares were issued.

For the year 1961 the balance sheet does not show the $4,000 as an asset but as a liability. In the profit and loss statement, there is amongst the expenses, an amount of $4,000 as executive salaries. The executives were Mr Fine and Mr Isenberg. That $4,000 was offsetting the amount of the subscription for the shares. The profit served to pay for the subscription.

For the year 1963 a profit of $4,918.24 was reported and an amount of $2,139.46 as cash in the bank, which proves that the deposit on the purchase price had to be borrowed.

The financial statements for the year 1964 show rental income for $9,516.50 with expenditures amounting to $17,145.60 which included $400 for executive salary and $4,105.66 for repairs and maintenance. This latter item is not accurate because during the fiscal year 1963- 1964, the appellant paid an amount of $15,400 for alterations. These figures are brought forward to defeat the submission that the property was purchased for investment purposes. It rather tends to demonstrate that it had been purchased in view of the expropriation or for resale. It is also to be borne in mind that the appellant and its directors had a specialized knowledge as real estate traders. They should have known or must have known about the expropriation. Good real estate agents are well aware of all the new developments, the probability or the possibility of expropriation by municipalities and governments. They anticipate the needs for land and buildings by governmental and municipal institutions.

In Leeming v Jones (HM Inspector of Taxes), 15 TC 333, Lord Dunedin says at page 360:

The fact that a man does not mean to hold an investment may be an item of evidence tending to show whether he is carrying on a trade or concern in the nature of trade in respect of his investments but per se it leads to no conclusion whatever.

Here we have speculators in land and buildings. It was their business and their way of living out of the profits made in trading. The appellant’s objects of incorporation included purchases and sales of all kinds of properties. The appellant was concerned with other people dealing in real estate and, in this appeal, the others were its own shareholders and directors. The property had been purchased with borrowed money and the income from the property was not capable of meeting the expenditures. The fact that the property was improved is immaterial. The alterations were bringing a higher value to the property. The appellant was clever enough to expect the expropriating party to pay for the improvements.

This being said, I have arrived at the conclusion that the profit derived from the expropriation is taxable. Therefore, the appeal is dismissed.

Appeal dismissed.