Burns & Dutton Construction (1962) LTD v. Minister of National Revenue, [1972] CTC 2533, 72 DTC 1453

The Assistant Chairman:—This is an appeal of Burns & Dutton Construction (1962) Ltd from an income tax assessment with respect to the appellant’s 1969 taxation year.

1. Burns & Dutton Construction (1962) Ltd (hereinafter to be referred to as “Burns & Dutton”) were subcontractors for an apartment building project in Calgary and held an $89,000 contract for the installation of the footings of the building. The appellant had received $22,000 and had owing to it some $21,000 for the work executed on the footings when the partly completed building became the subject of a judicial sale.

2. The appellant tendered successfully on the judicial sale and on June 11, 1963 acquired title to the said property for $201,000 which amount came out of the general fund of Burns & Dutton (Exhibit A-1). The value of the land and the work performed on the building at that time was admitted by both the appellant and the respondent to be in the vicinity of $600,000.

3. Having had an economic feasibility survey made, it was decided that the building be redesigned in order to contain 160 suites with an average of 900 square feet per suite rather than 114 suites of approximately 1,300 square feet per suite as originally planned. In order to construct the redesigned building more land was needed. Owing to zoning by-laws and other technical difficulties the additional land was not acquired until March 1966 for $10,200 (Exhibit A-2). Work on finishing the building commenced in May 1966 and the building was completed in April 1967.

4. The property bought by the appellant in the judicial sale was subject to a $1,300,000 mortgage at 7% held by the Manufacturers Life Insurance Company. In March 1966 the appellant sold the land on which the said structure stood for $300,000 to Manufacturers Life Insurance Company and leased it back for a 99-year term. At the same time the appellant renegotiated a new mortgage with Manufacturers Life Insurance Company increasing the existing mortgage to $1,580,000 at 7%.

5. In the redesigning of the apartment building the appellant had included several construction features such as a complete brick exterior, suspended ceilings, a stand-by boiler, soundproofing and better, but more expensive, elevators, which had not been contemplated in the original design of the building. The building was completed and was rented from May 1967 until it was sold to Manufacturers Life Insurance Company approximately 16 months later.

6. In this sale the appellant realized a profit of $107,056.64 which was considered as income from a venture in the nature of trade and reassessed as such by the Minister of National Revenue in the appellant’s pertinent taxation year. The appellant appealed the reassessment on the grounds that the apartment building was constructed for producing rental income and therefore a capital investment and that the profit realized on the sale of the building was a capital accretion.

The decision as to whether a profit in a particular appeal is a capital gain or income from a business or from a venture in the nature of trade can only be arrived at in certain circumstances from a full analysis of all the facts surrounding the pertinent transactions which will either confirm or infirm the appellant’s honestly declared intention. I consider the case at bar to be one of these.

The declared intention of the appellant in this case was to the effect that the purchase of the partly erected apartment building and its subsequent completion by the appellant was an investment in order to obtain a rental revenue which would offset the fluctuating construction income.

It is on record that Burns & Dutton is a very large construction company with a reported gross profit in 1969 of approximately $3 million. It must be noted that the appellant had neither originated nor planned for the construction of the rental-producing apartment building in order to stabilize its alleged fluctuating construction income. Burns & Dutton was originally involved in the project as a subcontractor only. It was when the appellant stood to lose, in effect, some $14,000 on work already done on its subcontract that consideration was given to the acquisition of the partly constructed building.

An insight of the appellant’s intention and motivation can be gleaned from the evidence given by the appellant:

Q. Why did you bid on this particular property? A. Well, we had been a sub-contractor and had installed the footings for the building. We had figured a close contract price of $89,000.00. We had received about $22,000.00, and we are still owed about $21,000.00, as I recall. We had primarily hoped to protect the amount of money to some extent because we had heard indirectly that there was only one tenderer interested in the property and he was going to tender in the neighbourhood of $125,000.00, so that at that rate it meant that the lienholders would receive perhaps only about 34% of the monies owing to them, and I guess, secondly, we realized that the property had a value somewhat larger than that and eventually could be built into a prestige building and become a very good investment for us.

Q. In what way? A. Well, by way of producing revenues, and we were interested in obtaining some revenue-producing properties primarily to Stabilize fluctuating construction prices.

In the appellant’s own words, the primary intention in tendering on the property was to protect the money already owing to it. Acquiring for $201,000 a partly constructed building valued at $600,000 which could eventually become a revenue-producing property came as an afterthought and, at best, a secondary intention.

In argument, counsel for the appellant cited, among other cases, Gagnon v MNR, [1970] Tax ABC 432; 70 DTC 1280. However, I do not see its applicability to the case at bar. Counsel contends that there was no speculation on the part of the appellant and that the predominant factor in bidding on the asset was to increase the receivables of the lienholders. I agree with the latter part of counsel’s contention but I disagree with the statement that no speculation was involved. We have here evidence of a large construction company engaged in the business of general construction which acquired for $201,000 a $600,000 asset in the nature of a partly-constructed building. No doubt the acquisition of this asset was an excellent investment but I consider that there was speculation on the part of the appellant. From evidence given by the appellant and from counsel’s argument concerning appellant’s intention, investing in a revenue-producing apartment building does not appear to be as firm as that of protecting the moneys which were owing to it.

I think it is unrealistic to contend that since the appellant did not immediately resell the land, the foundation and the structural steel framework which comprised the asset acquired for $201,000 one should necessarily conclude that the appellant’s intention was therefore to invest in a revenue-producing apartment building. The building, as it was at the time, could have value to someone engaged in construction as the maximum profit could only be realized when the building was completed. Since the appellant was in an excellent position to finish the building, one might well ask why it should sell so valuable an asset to a competitor. This, of course, does not in any way answer the question as to what the appellant intended to do with the completed apartment building.

Counsel contends that the redesign of the building to include more suites, the purchase of additional land, the improvement in the structural features of the building, the extra boiler, etc are all indicative of the appellant’s intention to invest in a prestige revenue-producing building. That may be so, but by the same token the saleability of the building is, accordingly, increased and so it could be argued either way.

A further argument given by the appellant in support of its submission that it acquired the property as an investment and not for resale is the fact that the appellant sold the land to Manufacturers Life Insurance Company and leased it back on a 99-year lease which, according to counsel, would discourage people from buying property which they could not entirely own. It seems to me that when dealing with buildings in the million-dollar bracket this form of long-term lease is not uncommon. In this instance, if it were the intention of the appellant to retain the building as an investment, then the financial advantages sought and acquired by it in such an arrangement would also beneficially accrue to any subsequent buyer. I do not consider this argument as sufficient to establish the appellant’s intention of investing in a revenueproducing property. I am, however, impressed by the fact that the appellant sold the land to Manufacturers Life Insurance Company for $300,000 and was granted a 99-year leaseback. At the same time, Manufacturers Life Insurance Company, which already held a. $1,300,000 mortgage, negotiated with the appellant a new mortgage — this time for $1,580,000. The appellant’s successful bid on the property being $201,000, the additional land having cost $10,200, the capital outlay by the appellant at that time was $211,200. The appellant, with the sale of the land to Manufacturers Life Insurance Company for $300,000, had a surplus of $88,800. The actual cost of the completed building valued at close to $2 million not having been clearly established, one might ask what exactly was the appellant’s equity in what was to have been a revenue-producing investment. Finally, 16 months later, the building was sold to Manufacturers Life Insurance Company. No advertisements and no real estate agents were, of course, required.

One of the reasons given for the sale of the property was that Mr Auck, vice-president of Burns & Dutton and the only witness for the appellant at the hearing of the appeal, was inconvenienced by so many telephone calls from tenants that it was interfering with his construction business in spite of the fact that there was a manager whose duty it was to look after tenants in the appellant’s apartment building.

The Board can safely take judicial notice of the fact that one of the occupational hazards of being a landlord, whether it be of a 6-suite or 600-suite building, is the constant stream of requests and complaints of tenants communicated day or night and ranging from the complaint of a leaky faucet to a request for the installation of a sauna or a swimming pool on the roof. Evidence shows that Mr Auck, a general contractor, possessed several smaller apartment buildings and no doubt was well aware of how demanding tenants can be before he made the bid on the partly-constructed building. Another reason given for the sale of property was that the revenue derived therefrom was in the order of 10% on the capital invested. This is the average revenue for most apartment buildings and the appellant must have known, before engaging in the project, that the revenue it would likely derive from the project would be in the vicinity of 10%.

In this case there are no unusual circumstances which might justify the eventual sale of a project entered into as a revenue-producing building. The apartment building was successfully completed and the return on the investment was normal and in the order of what could be expected for that type of enterprise.

Mr Auck, in giving evidence, had this to say regarding the return on the investment in the apartment building:

Q. What about the return on the investment? A. Well, it appeared that the return on the investment was not any better than the return we could get on other properties. For instance, at that time we owned a warehouse in Edmonton in which we had approximately $100,000.00 invested, a return of $15,000.00 a year, which meant a return of about fifteen and—

Q. Fifteen what? A. Fifteen per cent; and I only heard from those tenants perhaps twice a year.

Q. What was the rate of return approximately on the apartment building? A. Our calculations on the apartment appeared that it might be about ten per cent, nine and a half to ten per cent.

Surely the appellant knew before engaging in this project that there were more profitable enterprises than apartment buildings. The reasons given do not really justify the sale of what, in fact, turned out to be a successful revenue-producing investment, nor does this actual sale of the building in any way strengthen counsel’s contention that the appellant tendered on, and acquired, a partially constructed building for the purpose of investing in a revenue-producing apartment building in order to stabilize fluctuating construction income.

A memorandum was written by Mr Roy King, an auditor of the De^ partment of National Revenue, in the course of his official audit of the company, concerning a meeting held in September 1967 with Mr H R Auck of Burns & Dutton and Mr F Anderson of Price Waterhouse & Ca which reads in part as follows (Exhibit R-2):

Consideration was given to establishing an estimated cost of the land and taxing the profit as a separate transaction. However, it was decided to defer this action until such time as the apartment is sold. Mr H Auck, Secretary- Treasurer of the Company and Mr F Anderson of Price Waterhouse felt that this was the proper treatment of ‘the transaction and both agreed that the ultimate profit on sale would be taxable. They also agreed that if capital cost allowance is claimed, it would be claimed on the total cost of the apartment less the amount received on sale of land.

Although this memorandum is conclusive proof of nothing and any alleged agreements contained therein are binding on no one, it is nevertheless, in my opinion, an acceptable commencement of proof in writing that such a meeting was held and that the sale of the building was mentioned. The burden of disproving any mention of sale at that meeting shifts to the appellant which, in its evidence, stated:

Q. Did you agree with Mr King in such a meeting that the profit on any future sale of this property would be taxed? A. I don’t remember specifically agreeing with Mr King, but I may have discussed it with him, and logically I probably felt at the time that this would not render an assessment on the sale of the land between some of this profit which I would have had to appeal and, secondly, the fact that I had not contemplated selling the building at that time I could not visualize ever having to pay any tax at some time in the future.

Although the appellant did not contemplate selling the building in September or October of 1967, it was effectively sold some ten months later.

The preponderance of evidence in this case is to the effect that the appellant, a general contractor, in an attempt to recoup moneys owing to him for work on a partially constructed building which would otherwise have been lost, speculated on the acquisition of the property in an advantageous business transaction. Having acquired the property, the completion of an apartment building then became mandatory. The appellant’s motivation and intention of acquiring for itself a revenue-producing apartment building was neither firm nor serious and at best a secondary intention forced on the appellant by the site and the partly constructed building it acquired. The eventual sale of the property, though perhaps not contemplated in October 1967, was in the mind of the appellant an ever present possibility.

In my opinion, the profit realized by the appellant from the above- mentioned property constitutes income from a venture in the nature of trade pursuant to paragraph 139(1 )(e) of the Income Tax Act and is taxable.

The appeal is therefore dismissed.

Appeal dismissed.