Andrew Babiy v. Minister of National Revenue, [1969] CTC 693, 70 DTC 6013

CATTANACH, J.:—This is an appeal from a judgment of the Tax Appeal Board* [1] whereby an appeal from an assessment to income tax for the appellant’s 1960 taxation year was dismissed.

There is no dispute as to the amounts included in the assessment, but the sole question for determination is the familiar one as to whether a profit realized upon the sale of a particular property is profit from a business within the meaning of Sections 3 and 4 of the Income Tax Act and the extended meaning of ‘“business’’ as defined in Section 139(1) (e) to include an adventure or concern in the nature of trade as contended by the Minister or as contended by the appellant, the sale of the property was the sale of a capital asset acquired for the purpose of producing income and accordingly the gain was a mere enhancement of value rather than a gain made in carrying out a scheme of profit making.

In assessing the appellant as he did the Minister did so on the following assumptions :

(a) that in or about the month of September, 1959, the Appellant purchased units of a motel in Edmonton and caused them to be moved to White Court, Alberta;

(b) that the relocation of the units was substantially completed by December, 1959;

(c) that the Appellant acquired the motel units for the purpose of resale or otherwise turning them to account at a profit;

(d) that in January of 1960 the Appellant listed the motel in White Court, Alberta, for sale and sold it in April of 1960, realizing a profit of $18,000.00;

(e) that the profit of $18,000.00 realized by the Appellant on the disposition of the motel in White Court, Alberta, constitutes a profit from a business or an adventure or concern in the nature of trade;

On the other hand, the appellant sets out his case in the Notice of Appeal as follows :

1. The Appellant is and in the 1960 taxation year was an individual resident in the Province of Alberta.

2. In 1959 the Appellant acquired eight (8) motel units in the City of Edmonton in the Province of Alberta and moved them to the Town of White Court in the Province of Alberta where he proceeded to lease the units deriving therefrom a rental income.

3. In the 1960 taxation year the Appellant anticipated that he would be called upon to pay a previously unexpected sum of money to satisfy a proposed assessment of the Department of National Revenue and accordingly disposed of the said motel units realizing a profit in the amount of $18,000.

6. The sale by the Appellant of the motel units in question represented a disposal of an investment, the proceeds of which are a capital receipt to the Appellant and accordingly are not subject to taxation pursuant to any provision of the Income Tax Act.

The motel units were acquired by the appellant in Edmonton in September 1959, because the appellant considered them to be a good deal. They could not have been built on a site, which the appellant had not acquired at the date of purchase, at a cost comparable to the purchase price plus the cost of moving and other costs incidental to relocation of the units.

The relocation of the motel units to White Court was completed about December 1959.

A month later, in January 1960, the units were listed for sale by the appellant with a real estate agent in Edmonton and they were, in fact, sold in April 1960 at a profit of $18,000.

Accordingly the appellant made a quick decision to sell the motel units shortly after their relocatoin.

That decision to sell, made shortly after the relocation of the motel units, followed by a sale and resulting profit, if unexplained, would give rise to the inference that the transaction was ‘‘an adventure or concern in the nature of trade’’ within the meaning of those words as used in the definition of the word "‘business’’ in the Income Tax Act.

During the course of the trial I intimated to counsel for the appellant that on a consideration of the facts as briefly outlined above, it should be concluded that the inference to be drawn is one of trading and that the matter must be considered to ascertain if there is some satisfactory explanation which would negative the prima facie inference of trading.

I added that if from the facts that are proved, it appears to the satisfaction of the Court that, at the time of the acquisition of the property in question, the purpose of the operation was exclusively to provide the taxpayer with an investment or capital asset and that there was not in contemplation at that time the possibility of sale, then the inference of trading would be rebutted.

Counsel for the appellant agreed that the foregoing was an accurate résumé of the issue here involved. He also agreed that it is well established by numerous clear and incontrovertible authorities that the onus of disproving the Minister’s assumption, in assessing the appellant, as he did, falls on the appellant.

The case was presented and argued on this basis.

The explanation for the sale of the property in question proferred by the appellant was, an outlined in paragraph 3 of the Statement of Facts in the Notice of Appeal, that he anticipated that he would be called upon to pay a previously unexpected sum of money to satisfy a proposed assessment to income tax and accordingly disposed of the motel units in order to be able to meet that obligation.

My task is, therefore, to consider the appellant’s explanation as to the circumstances which prompted his decision to sell the motel units and to determine whether, on the balance of probabilities, that explanation is a more acceptable explanation of what happened than the assumption of the Minister.

The appellant was a man with multitudinous business interests. He was prepared to turn his hand to any enterprise to make an honest dollar. He seems to have been blessed with a Midas touch. However, unlike Midas, everything he touched did not turn to gold, although his record of successes far outweighed his failures.

The attitude of the appellant was that his efforts should be devoted to making money on his own account and that the officials of the Department of National Revenue should investigate to learn how much income he earned and assess him accordingly without his initial co-operation and assistance. The appellant said he was not a book-keeper. He left those mundane details to others. He did employ a chartered accountant to prepare his income tax returns. The accountant was not called as a witness and I can only assume that the accountant prepared the returns from information supplied to him by the appellant which was not complete. The certificate of the auditor appended to the financial statements was to the effect that the statements were prepared from books and records that were available and from information supplied by the appellant but without audit. The appellant was assessed on a net worth basis in each year of his business career from 1955 to 1965, a procedure resorted to by the Department of National Revenue when the records of a taxpayer are inadequate. The appellant did not include in his returns income from three service stations he operated. The statements supplied by the appellant through his accountant did not include statements of profit and loss, but only balance sheets. The records were insufficient to conduct an audit and accordingly the balance sheets were used to make a net worth assessment. For example in the taxation years 1956, 1957, 1958 and 1959, the appellant reported net income in the respective amounts of $3,765.98, $3,170.00, $1,850.00 and $2,960.54, a total of $11,746.52 which total amount was revised by the Minister to a net income for that period to the sum of $74,814.01, a difference of $63,067.47.

The appellant began his business career as a farmer on one- quarter section given him by his father. He acquired another half section. He still owns this farm which he rents on a crop-share basis.

However the appellant had more ambitious projects in mind.

In 1954 he leased land on which he built a service station and restaurant at Centreville, Alberta at an estimated cost of $20,000. He later bought the land. This station was erected to serve the workers in a nearby oil field. The appellant testified that he refused an offer of $70,000 for this business from unidentified oil workers because he wished to operate the business himself. This he did for three years. The oil patch dried up and business fell off. The appellant was able to dispose of this property to the neighbouring store-keeper for $17,000 in 1957. In short he disposed of the business at a slight loss after having reaped the profits therefrom during its halcyon period.

He next built a service station in partnership with a man named Keeley at Lodgepole, 16 miles west of the original station, in 1959. He traded his interest in this station in 1964 to the Public Trustee for the interest of Keeley’s estate in another property known as the Gateway station in White Court, Alberta.

The Gateway station was built by the appellant and Keeley in 1955 and was operated through a limited company, although the appellant referred to this business as a partnership and treated it as such. This business consisted of a service station, restaurant and motel which was operated until 1964 when the buildings were lost by fire except the motel which was operated for another four years when it was sold.

In conjunction with the Gateway business the appellant also operated Babiy Motors Limited, an automobile dealership begun in 1963 and which three years later, in 1966, had sales slightly in excess of $900,000.

The appellant also incorporated a finance company to deal in conditional sales agreements which were considered too risky for acceptance by established companies in this field.

Mr. Keeley died sometime shortly before 1964. The appellant then acquired the sole ownership of the shares in Gateway by paying $60,000 in cash plus the appellant’s one-half interest in the Lodgepole service station, an estimated value of $17,500, to the Public Trustee.

Durine Keeley’s lifetime he and the appellant signed an agreement whereby they agreed to sell Gateway for $200,000 with an $8,000 down payment and in exchange for property in the city of Edmonton. Apparently the purchasers could not furnish good title to the Edmonton properties and paid a forfeit.

The land upon which the Gateway enterprise was situated consisted of approximately 13 acres and was divided into three parcels. One small parcel was sold by the appellant to a trucking company. The site on which the service station had stood was sold to Imperial Oil for $58,000. Another parcel was subdivided into building lots, a number of which were sold. This subdivision was undertaken by a real estate agent without sufficient funds and accordingly the appellant went into the business to salvage his interests.

In addition, the appellant also leased a service station in the town of Valleyview which he sold in the mid-sixties by which sale the appellant testified he recovered his original outlay.

He also built a service station, motel and restaurant complex at Isogan Lake in 1957 which was sold shortly after the Jack Pine Motel, which is the property the sale of which gives rise to the present appeal. Again the appellant testified that he realized no profit on this sale but merely recovered his initial outlay.

The appellant and his partner Keeley, together with a third person, had in contemplation the operation of another service station at the eastern end of the town of White Court, being the opposite end of the town to the location of the Gateway station. The oil company, which was the lessor, insisted that the lease be taken in the name of the third person in his individual capacity. That person made it clear that the service station should be operated in accordance with his wishes and decisions and since he held the lease Keeley and the appellant withdrew.

At this time the appellant learned that the motel units in Edmonton were available for purchase through a person named Gordon Smith whom the appellant described as a ‘‘trader’’. The appellant first had in mind the relocation of the motel units on the Gateway site, but abandoned that idea because the units were too wide to pass over a bridge en route to that site. His next thought was to locate them at the site of the service station at the east end of White Court, which would facilitate an exchange of custom even though the appellant’s prospective participation in the eastern service station had ended.

However, the appellant considered that the purchase of the motel units was too good a deal to pass up. He could purchase them, move them to White Court and install them there at a price much less than the cost of their erection on a site. He therefore bought the units. He then had to find land on which he could relocate the units. This land he found next to the service station at the east of the town and bought it after he had bought the units. He then moved the units to the site he had bought and expended further money and personal effort on plumbing and like facilities to locate the units there.

To recapitulate, the appellant learned of the availability of the motel units for purchase around August 1959. He bought them in September 1959. He then bought the land on which to locate them. The relocation was substantially completed in December 1959. The motel untis were listed for sale in January 1960 and were sold in April 1960.

In the meantime the personal affairs of the appellant came under investigation by the officials of the Department of National Revenue, no doubt prompted by the fact that he had been previously assessed on a net worth basis and the Department was aware or suspected that the income from at least three service stations, known by them to be operated by the appellant, had not been disclosed by him.

On December 1, 1959 three officers of the Department including Mr. Polomark, who was charged with the responsibility of investigating the appellant’s affairs, visited the appellant. At that time Mr. Polomark asked the appellant to produce his books and records for his examination, particularly those businesses from which no income had been reported. Mr. Polomark contemplated doing a complete audit if the records were adequate but, as it subsequently transpired, the records eventually made available to him were most inadequate and a net worth assessment resulted.

The appellant did not produce the books and records pursuant: to Mr. Polomark’s request but countered with the suggestion that they should be produced through his chartered accountant as an intermediary. This was done.

There is a conflict of evidence as to what was said at that meeting between Mr. Polomark and the appellant, or perhaps: at some subsequent meeting between them. The appellant’s version, to the best of his recollection, is that Mr. Polomark advised him that he would be liable for a substantial increase in his assessment and that he should sell some of his properties: to meet that assessment. On the other hand, Mr. Polomark denied ever having made such suggestion to the appellant.

I accept Mr. Polomark’s version of what occurred.

The appellant had been assessed on a net worth basis before and since he knew full well that he had not disclosed his full income, it is logical to assume that he knew he would be found liable to an increased assessment and he could conjecture the amount from his knowledge of what income he had not disclosed.. At one time he did state that he had sufficient resources in liquid form to meet any increased assessment.

The appellant did produce what records he had to his chartered accountant with whom he had numerous conferences. I would assume that from the information available to him the accountant would have estimated the amount of tax to which the appellant might be liable but there is no evidence as to the precise date upon which he did so.

In any event in January 1960 the appellant listed the Gateway service station and motel, the motel units here in question and a service station at Fox Creek for sale with a real estate salesman for an Edmonton firm. He intimated to the salesman that he would sell any of the properties of which he was possessed depending on which would sell first because he was building a line of service stations throughout Alberta and was pressed for money particularly since he owed a "‘big chunk of money for income tax’’. The salesman received no offers for any of the properties except the motel units. He explained that the service stations were difficult to sell. because there were mortgages on them held by the supplying oil companies. These companies had the right to approve any prospective purchaser and an option clause in these mortgage agreements gave the company the right of first refusal. The difficulty in selling was further in- «creased by the appellant’s insistence upon a substantial down payment in cash.

As previously intimated, the motel units were sold in April 1960 for $30,000 with a down payment of $7,000 which, less the real estate agent’s commission of $1,500, netted the appellant $5,500 in cash. He took a first mortgage of $23,500 from the purchaser and when the purchaser resold the motel units to a second purchaser the appellant took a mortgage in the amount of $27,600. The increase in the amount of the mortgage was explained by the fact that the appellant paid off a second mortgage, the amount of whieh was added to the first mortgage held by him.

Shortly after the sale of the motel units the appellant sold the Isogan Lake service station to an employee. He testified that he sold the station for $45,000 and that he broke even on the deal. He received a cash payment of $16,500. This, together with the ‘cash payment on the sale of the motel units, put the appellant in possession of $22,000 in eash.

The appellant’s brother-in-law, John Bieleny, was negotiating for the purchase of a hotel. He needed $20,000 to complete the purchase. He had a letter of agreement dated December 9, 1960 from North American Road, Ltd., a mortgage company, that it would advance that amount on the security of a first mortgage. There was a delay in the advance of the mortgage money and as Bienely was required to pay $20,000 forthwith, he therefore approached the appellant in January 1960 explaining his predicament and obtained from him a loan of $20,000. It was understood between the appellant and his brother-in-law that this loan would be for a very short time and would be repaid from the mortgage money when advanced. The mortgage company turned down the mortgage and accordingly Bieleny was unable to repay the $20,000 loan he had received from the appellant. Bieleny therefore gave to the appellant a first mortgage on the identical terms that he was to have had from the mortgage company, that is, a first mortgage in the face amount of $27,000 being the loan of $20,000 plus a premium of $7,000 at 7 % interest repayable in monthly instalments. Accordingly when the appellant eventually received his assessment calling for a payment of tax in the neighbourhood of $27,000 he was unable to pay and arranged to pay his liability by instalments.

It was the appellant’s ambition to own a line of service stations and he had made progress to the achievement of his goal. He experienced difficulty with the operation of his individual stations. He suspected he lost a great deal from pilfering but could not exercise adequate supervision. He hoped to reach 5,000,000 gallons in sales. If he did so he would get a rebate of five cents per gallon from the supplier. The margin was seven cents per gallon. It was his plan that he would take the five cent rebate and let the operator keep the balance by which means he would ensure honesty in his employees. However he did not reach this objective, the closest he came being 2,900,000 gallons.

The foregoing was not the appellant’s only line of endeavour. He was a licensed prospector and had mining claims. He promoted a mining property in 1966 and sold Shares. He ran a body shop in connection with the automobile dealership and he dealt in timber berths. He was also interested in a trucking business.

In my view it was impossible for the appellant to have known in December 1959 or January 1960 the precise amount of his tax liability. At one time he stated that he had adequate resources readily available to pay any increase but it is conceivable that when he made that statement he estimated that his tax should be much less than he subsequently found that it might be. In all likelihood when he consulted with his chartered accountant he was given an estimate of what the increase might be when he or the records made available to the accountant indicated the amount of income he had not disclosed in his tax returns.

I formed the distinct impression that the appellant had become disillusioned with the service station business, which was his principal line of endeavour. He despaired of reaching an output of 5,000,000 gallons, which was his objective, it was difficult to supervise and control his employees and he was not adverse to selling any of his businesses if it were expedient to do so.

The most salient point in the argument of counsel for the appellant was that the appellant, in January 1960, listed a number of the service stations for sale and indicated to the real estate salesman a willingness to sell any of the properties he owned if an adequate offer was received.

After reflection I have concluded that such fact is not significant. The appellant must have known that the service stations were not readily saleable because of the mortgages held on them by the oil companies. Those stations which he sold himself were sold to employees. Therefore the market was extremely limited. The Gateway service station was not the exclusive property of the appellant. He needed the concurrence of Keeley to its offer for sale. The most saleable property he possessed was the motel units to which the appellant held clear title, and that fact must have been known to him.

The appellant offered several explanations for his sale of the motel units. One was that he was obliged to obtain working capital. Another was that the sales were being made to pay outstanding bills. In the notice of objection to the assessment, where incidentally the only item objected to was the profit on the sale of the motel units, the implication was that he was told by his accountant to sell property to meet a large tax liability. At the trial the appellant suggested that Mr. Polomark might have told him to sell property to pay his tax liability. The real estate agent testified that the appellant was selling the properties because he was pressed for money. My recollection of this witness’s testimony was that the appellant told him he was building a line of service stations throughout Alberta and that he was faced with a "‘big chunk’’ for tax liability. This is susceptible of a twofold purpose, to obtain money for further expansion or to obtain money to meet an anticipated tax liability.

The appellant had a line of credit with his bank. He did not seek a loan in December 1959 or January 1960 for the purpose of paying his tax liability. On the contrary he listed certain of his properties for sale and authorized the real estate salesman to sell all or any of his remaining properties. The appellant is entitled to conduct his affairs as he sees fit and he apparently chose to sell his properties rather than seek a bank loan. Therefore, while this evidence is not conclusive one way or another, it does indicate that the appellant was prepared to sell the motel units to realize funds rather than to seek other means of raising money and retain the motel units for revenue produeing purposes.

When the appellant was possessed of some $22,000 resulting: from the sale of the motel units and the Service station at Isogan Lake, he lent $20,000 to his brother-in-law to save him from his. predicament. While it is true that the appellant expected that such loan would be of very short duration, but which turned out. otherwise, it follows that the appellant did not expect his increased tax assessment to be imminent. Bearing such in mind it. seems to follow logically that there was not the need of a. precipitate sale of the motel units to meet a future and undetermined tax liability and that other considerations were present: in the appellant’s mind.

Considering all the appellant’s acts and operations objectively, 1 am not satisfied on the balance of probability that the appellant. purchased and relocated the motel units for the purpose of deriving rental income therefrom to the exclusion of any purpose of their disposition at a profit.

In other words, I am not satisfied that the appellant has discharged the onus of showing that the sole motivation for the acquisition of the motel units was to hold them to earn an income from them and that supervening events constrained him to dispose of them to obtain funds to meet an anticipated tax liability.

Accordingly it cannot be said that the assumption of the Minister in assessing the appellant as he did was wrong on the facts.

The appeal is, therefore, dismissed with costs.