Quasar Investments Limited v. Minister of National Revenue, [1972] CTC 2666

The Chairman (orally):—This is an appeal by Quasar Investments Limited, a company incorporated under the laws of the Province of Alberta, with respect to the notice of reassessment of the Minister for the 1970 taxation year. The reassessment results from the sale of a building known originally as the Milne Building and later known as the BC Bank Building and located in the City of Victoria. In this transaction a substantial profit was made by the appellant, which the appellant declared as a capital gain, with the usual result that the respondent, in looking at the facts surrounding it, classified it as income.

We have listened to a great deal of evidence, all called on behalf of the appellant, and I concur with counsel for the respondent that it is almost impossible for the Minister to call evidence to rebut what was in the minds—or was alleged to have been in the minds—of the appellant’s officers at the material time in any of these so-called trading cases. The facts have been gone into in some detail, and I do not propose to cite them at any great length, but rather to summarize, as best I can, what took place.

Apparently three named individuals were directly involved, with a fourth, one Alex Hamilton, also involved, although perhaps not so directly as Mr Burchett, Doctor Ross and Mr Winspear. Mr Burchett is a businessman in the City of Victoria and had been associated with Doctor Ross in the construction and renting of a medical building in Sidney, BC through a “vehicle” company known as Beacon Investments Limited. This company is still owned on a 50/50 basis by these two gentlemen, each of whom put up $40,000 in cash for his interest. It is now rented as a medical clinic and houses various other offices associated with the physical needs of residents of that location. Mr Burchett exhibited in the witness stand a sincerity which, in this day and age, might—to use a colloquial expression—sound rather “corny” to some of our younger generation. He had a belief that his city, Victoria, was ready for advancement into the new era of office accommodation, and one of the oldest buildings in the city lent itself to his vision of what could be a good start in this direction.

The building was at that time known as the Milne Building and had been built around the turn of the century. At the material time it was owned by a Mrs Dunsmuir with whom Mr Burchett was personally acquainted, and he felt that any direct contact or approach on his part might result in pushing the price up. He therefore worked through an agent of the Yorkshire Trust, a Mr Chauvin.

Apparently Mr Burchett had had this concept in mind from about 1966 or 1967, and he eventually learned that the Bank of British Columbia might have some interest in the building. He felt, therefore, that it was time to make his move, and he arranged for a meeting between Chauvin, Mrs Dunsmuir and himself. He said that the lady expressed surprise on finding that Burchett was the prospective purchaser.

In any event, having discussed the matter with Doctor Ross, Mr Burchett took an option on the premises for six months at $500 per month, and, according to his evidence, intended to use the six months to find temporary or permanent financing, or at least to ascertain if it was available for his needs. Doctor Ross suggested that Mr Winspear might be interested, through one of his companies, in joining the project, and since Doctor Ross had had a longer acquaintance with Mr Winspear, he was chosen to approach him with the concept. Mr Burchett’s original idea was that he would retain 50% of the project and that each of the other two participants would have 25%. However, Mr Winspear indicated that his company would not be interested in having such a minority interest. In any event, it was decided that Burchett and Winham Investments Limited (the vehicle which Mr Winspear was to use) would each hold 37 /2% of the project, and Doctor Ross 25%.

I should say at this time that the option had been taken in the name of Beacon Investments because it was available, and there is nothing in the evidence to indicate that it was ever intended that that company should hold the option as anything other than a trustee until a new company could be incorporated to handle the matter if the project was to be proceeded with. Mr Winspear was obviously involved because of his financial background. He had been the founding partner in the well-known chartered accounting firm of Winspear, Hamilton and Company (now Winspear, Higgins and Company) and, at the present time, is a vice-president and director of the Toronto-Dominion Bank. At the material time he had excellent relations with the banking fraternity as a result of his dealings with them through his various companies. At the time, Winham Investments had, I believe, some $6,000,000 in investments, and the shares of that company were held by Winspear Holdings, a holding company of Mr Hamilton and some partners of the original firm. Winspear Holdings was originally conceived as a holding company for investments of the partners in the accounting firm but, as the firm grew, not all the partners were included in the holding company.

Burchett set about the task of having professionals attend on the site, investigate the reconstruction of the building, and determine an estimate of the cost of the renovations that he visualized, and they came up with a figure of $225,000. The purchase price was to be a like amount.

In the meantime, Mr. Winspear suggested that interim financing would probably be available at prime bank rates. This proved to be correct, and arrangements were made with the Toronto-Dominion Bank for interim financing of $450,000, which, because of certain factors with which I will deal in a moment, was later raised to some $625.000. This increase resulted from an undervaluation of the work that had to be done, the estimate having been about $60,000 too low, and also because, when they discovered that one of the tenants was to be the Bank of British Columbia, it was decided to extend the building into a 12 by 14 foot area, adjacent to the City parking premises, that was not built on. Also, when the upper two floors were rented by the British Columbia Government, they (the provincial government) preferred to pay an increased rent which would amortize the capital cost of supplying the necessary office divisions and partitions for these two top floors rather than to make a capital outlay themselves for the purpose.

It should be pointed out that, when this three-storey building was completed, it was occupied by what are sometimes referred to as “triple-A” tenants, namely, Midland-Osler and the Bank of British Columbia, with the British Columbia Government in the top two floors.

Mr Burchett, who described himself as a sort of amateur architect without professional training, obviously took a very deep interest in the reconstruction of this building, and was on the site almost daily. The associates had an arrangement with the contractor whereby two- thirds of any savings would be passed on to the owners with the other one-third going to the contractor. Burchett ploughed those savings back into the building ‘‘to improve it” or make it more suitable, in his words, “on the long-term haul”.

Quasar was incorporated on August 30, 1968. The option was transferred to it and the transaction was finally completed with title in the appellant company. Burchett received no remuneration for accomplishing this, nor did Beacon Investments for holding the option, but Burchett was to be paid a management fee, on the basis of 4% of the gross income, for managing the building, a responsibility which he undertook as soon as the renovations were completed. By Septem- ber of 1969 the building was completed, the tenants were in and the building was officially opened.

Mr Winspear was busily engaged in trying to arrange long-term financing, that is to say, trying to get a mortgage on the property. It is a well-known fact, and Exhibit A-5 shows the chartered banks’ prime lending rate over a period of years immediately preceding and immediately following 1969, that at this time money became short and interest rates began to rise throughout the country. As a result, negotiations were carried on by Mr Winspear without much success. Appellant’s Exhibit A-1 shows the various people with whom he communicated, the extent to which they were willing to participate, the high interest rates sought and, where money in the amount required was available, the exhibit reveals that an equity position was also requested.

During this time, Mr Burchett indicated, he was being pestered by Chauvin with regard to whether or not he would sell the building and, according to him, he continued to say no, although apparently on one occasion he said “Well, perhaps”, or words to that effect. In any event, an unsolicited offer was received from a company, known throughout this appeal as MEPC, and this offer was in the amount of $900,000. A meeting of the three principals was held immediately, and Mr Burchett was adamant that he did not wish to sell, and made it clear that he would like to buy out the other two. However, Doctor Ross said that he would not sell to Burchett unless he had the approval of Winspear because—I think I can infer—he felt some responsibility to Winspear for having obtained his participation in the project.

At that time, Burchett was about to leave on a skiing vacation, and it was suggested to him that he go on this vacation and, while he was away, give the matter some more consideration. However, before he left, another offer was received, this time in the amount of $925,000. Mr Winspear pointed out to him the situation, so that, as Burchett said, he was fully aware that he would be risking all his assets and those of his wife—or, at the very best, stretching himself quite thin—if he were to take on this project alone at this time.

I think it should be pointed out that, prior to the receipt of this offer by the appellant, MEPC had requested certain information that had not been forwarded by Burchett. Winspear, on a visit to the east, presumably on business, met an officer of MEPC—I am not sure if it was the president or not—and this gentleman indicated that they had not received the information they had requested and, on his return to Edmonton, Winspear forwarded the information sought. The net result was that Burchett, putting aside the emotional feeling that he had for his concept or dream, finally decided, after listening to the advice of Winspear, that it was more prudent for him to sell.

Winspear was also concerned for his friend Doctor Ross, who is now retired, and whose retirement—at least in Winspear’s mind— was precipitated by his anticipation of a regular revenue return from the project once all the tenants were established on the premises. He had sold his medical practice and received payments of $5,000 a year over a period of five years, and certainly this was not going to be sufficient to maintain him in the manner to which he was accustomed. Furthermore, he had pledged all his assets, including his home, to put up his guarantee for his interest in Quasar.

In any event, the property was sold, and the question now arises as to whether or not, at the time of entering into the project, the parties intended to hold the property as a long-term investment or whether they also had determined to turn the matter of the complex to a profit at the first opportunity, should one arise. This is a circuitous way of saying: was there a secondary intention upon which the Department of National Revenue can hang its hat in order to tax the substantial profit that has been made?

I have said before in many cases—and I believe—that in order for the Board or a court to hold that a secondary intention existed, it must have been present in the mind of the taxpayer at the time the project was entered into and it must have been a very real and conscious intent, and not one that was subsequently conjured up when a profit had already been made. This makes it a very difficult decision for any Board or court to make, because one must try and assess what was in the minds of the principals in this case—or in any case—when they, as shareholders of Quasar, contemplated the future of this development.

In order to do so, I think the Board must look through the corporate veil and examine the individuals involved and their background in order to try to see—and to assess as best it can on the particular facts of this case—just what was intended at the outset by the three principals. Without meaning any disrespect, I put Doctor Ross aside, because, in his testimony, he was quite frank in saying that he left the matters of the business end of the project to his two associates and continued on with the practice of his profession until his retirement.

Winspear is a man of great experience, obviously a man highly respected in financial circles and, on the evidence of himself and his partner Mr Hamilton, their corporate ventures are highly successful. Both, by their training, would be highly knowledgeable in the laws pertaining to income tax, and one might say would be well aware that, if this property was sold at a time so close to its completion, they would at some time be faced with the question of whether or not they were engaged in an adventure in the nature of trade. What, then, is there to assist the Board in assessing their evidence? They all have a decided interest in the outcome, they all tend to benefit if the appeal is successful, and so one must keep this in mind when reviewing their evidence.

Winham Investments becomes complicated to dissect because, as I have said, it was comprised of shareholders who were holding com- panies and shareholders who were individuals, all of whom had been engaged in investment projects and managerial projects over a. long period of time. They were not interested in investing in companies to any degree unless they had “the managerial say” in the business. They have, as I have stated, obviously been successful, as is evidenced by the extent of their assets. In one instance, they operated a lumber business for some 26 years before disposing of it and, as Mr Winspear pointed out, they made money while operating it.

Winspear’s evidence is that his son knew Burchett very well and that he himself knew him to a lesser degree; that they were both of the opinion that, if they were to move into the Victoria area on a long-term basis, he was a man with whom they felt they should be associated. I am impressed with a few by-the-way comments of Mr Winspear, which tend to corroborate, if one can corroborate one’s own evidence, what Winham expected to get out of this association. As I recall his evidence, he said, at one time: “We looked upon this as the beginning. We felt that this project would only be the first of other projects in which we would be profitably involved.”

He tried to obtain a mortgage in excess of the amount that was actually needed, and when asked the obvious question, he answered that it is a common practice to have the property valued, and, according to his testimony, this property was valued at between $900,000 and $1,000,000 and, if they could obtain $800,000 in mortgage money, they would have $150,000, or thereabouts, to start on another project, perhaps not in the immediate area, but certainly in the city of Victoria. There is no evidence whatsoever to indicate that Winham was in any way interested in short-term investments with third parties, but was concerned almost entirely with revenue-producing projects which would produce immediately, and was also interested in having considerable say in the management and operation of the projects and in having this control over a long period.

In Burchett they felt that they had the management aspect covered. They had the triple-A tenants that one would hope for, and they had them on a long-term basis. Burchett, in my view, and I observed him very closely in the witness box, gave his evidence in a most sincere and honest fashion, and I accept his evidence completely. I believe he had the desire to upgrade the particular building in question for the very reasons that he gave, and I believe he felt frustrated—and perhaps despaired—when, after all his work, he found that the man with the financial experience recommended, with logic and precision, that the project should be sold. I am certain there was no intention in Burchett’s mind to sell this property when he entered into the project but rather that it was his hope that this was to be the beginning of a long-term association and, perhaps, only the first of many renovations to and upgrading of the office and commercial facilities of his beloved city.

For the respondent, counsel raised several very pertinent questions, both in agrument and in cross-examination, that cannot—and, in my view, do not—go unanswered in this case. First of all, why was Winspear Foundation—I suppose it was really meant to be Winham, although it says Winspear Holdings in the agreement with MEPC— prepared to lend a substantial sum of money to a third party and not to Quasar? This question was put to Mr Winspear, and he gave an answer that, to me, coming from a man of his obvious character, is completely worthy of acceptance, namely, that he was not prepared to lend money from one of his companies to friends that he might eventually have to take legal action against as a result of the instability of the prospects for the future of this operation. MEPC was, to him, a third party stranger concerning whom he would have harboured no regrets whatsoever had he been forced to take action to recover on his mortgage; and when I say “his”, I associate him with his respective corporate entities. He said, in all honesty, that he would be happy, since MEPC had put up a quarter of a million dollars of its own money, to get the property back on this basis.

In answer to a question which always bothers me in this type of case and which was put to him by the Board, “Why does the purchaser always seem to regard it as such a good deal and yet the appellant says it is such a bad deal that it must sell and get out, invariably at a profit?” he stated that, from his experience viewpoint, he could not understand why MEPC would take this project on. He said—and this was conjecture, and was admitted by him to be conjecture—they were attempting to diversify across Canada on a longterm basis, being a subsidiary of an English concern. He went on to say that to him it was not a provident deal so far as the purchaser was concerned.

The other point that counsel for the respondent so pointedly makes and which cannot go unanswered is: why would a taxpayer sell at a time when fulfilment of his dream is within reach, and not proceed further? I think this is a very important question in every case. I am not one that believes that the time factor between entering and leaving these projects is the main consideration in determining whether the gain realized is a capital gain or not. I think it is only one of many factors that one must consider, such as the objects of the corporate body, if the seller is not an individual. What one must really look at, in my view, is the situation at the time the decision was made. Mr Winspear says that, in his view, the operation was “marginal” at 9%. Interest rates quoted to him, and documented in Exhibit A-1, exceeded that plus equity interest sought by prospective lenders. He says that it was a time in Canada when banks and lending institutions were having difficulties in servicing their own customers and were not interested in “one-shot vendors” and money was short—period!

The question that comes to my mind in all these cases is whether or not there is a principle of law involved that says that, when a project which starts out to be an honest investment project suddenly is frustrated, or goes sour for one or more reasons, the principals must remain on that dedicated course regardless of the financial loss —or even, perhaps, bankruptcy—that might face them if they persist, merely in order to prove that they did not have a secondary intention to sell at a profit but always intended to carry out their Original investment theme. It is very easy to say, in a case such as this, that the finances of Mr Winspear and, perhaps, of Mr Burchett, and even of Doctor Ross, were in a sufficiently healthy condition to permit them to hold on without serious loss to their respective companies or serious danger to their personal assets. But if it is indeed a principle of law, then it must apply generally, that is, in my view it matters not whether the person who entered on that project can afford to wait it out or whether he is operating on a very marginal basis. It is also my view that there is no such principle of law that says that a taxpayer cannot extricate himself when a fortuitous opportunity arises without being held to have made an income receipt rather than a capital gain. In my view, the secondary intention principle was never meant to be carried to that extent.

In this case, ample evidence has been adduced that is worthy of belief as to why the property was sold. There is nothing in the background of the individuals at the material time that would attach to them the badge of traders in real estate or that might lead me to conclude that they had an obvious secondary intention to turn this project to account and that this was a venture in the nature of trade from which they intended to make a profit at the first opportunity. In my view, on all the evidence, the project was frustrated by the high interest rates and short money conditions that existed at the time of the offer from the third-party purchaser, the experience and advice of Mr Winspear was wisely accepted, and the property was sold before any loss could be incurred by the individuals concerned.

For these reasons, and for the reasons and the details contained in the various exhibits filed, I find that the appellant Quasar Investments Limited entered into this project with a view to a long-term investment in income-producing property that would be successful in offering a return over a long period of time without any secondary intention of selling it or turning it to a profit at the first opportunity.

For these reasons, the appeal is allowed and the matter is referred back to the Minister for reassessment accordingly.

Appeal allowed.