Roland St-Onge (orally: May 30, 1975):
1 This appeal came before me on May 29, 1975 in the City of Toronto, Ontario.
2 By a reassessment the Minister of National Revenue has included in the computation of the income of Ball Brothers Limited for its 1971 taxation year the sum of $369,628 described as “Profit on disposal of the Guelph Adult Education Centre”. The appellant submits that the said amount is a gain on capital account and does not form part of its income.
3 In his reply to notice of appeal the respondent admits the following facts:
The appellant is a general contractor engaged principally in the construction of factories and other large buildings;
In the year 1963 the appellant constructed a building in Kitchener to meet the requirements of Bell Canada to whom it was leased. This building is still owned by the appellant. Bell Canada has an option to renew but no option to purchase;
In or about the year 1964 the Ontario Department of Education, working with the Federal Department of Manpower, commenced the operation of Adult Training Centres to be administered by local high school boards;
The appellant, in 1966, submitted a proposal for such a centre in the City of Waterloo. The appellant required that the building's design be such as to make it readily convertible to a building suitable for light manufacturing purposes and that it be located in a suitable zone or else that the selected site be zoned or rezoned to meet such requirements;
The appellant's proposal was accepted and the Waterloo Adult Training Centre is still in operation and is still owned by the appellant; The appellant was the successful tender for Centres at Ottawa, Brantford, Guelph and Hamilton. With the exception of the Guelph Centre, all are still owned by the appellant. In all cases the appellant required that the building be suitable for conversion to light industrial use and that the site be zoned for such use;
In the communication from the Department of Education or local administering body, the leases required were to contain options to purchase at an agreed price or prices adjustable at the expiration of the term or, in some cases, a renewal term. All of the Adult Training Centres constructed by the appellant are now operated by Colleges of Applied Science and Technology.
4 At the hearing seven witnesses were heard: four shareholders of the appellant company, an employee, the appellant company's chartered accountant and a lawyer.
5 Mr John A Ball, president of the appellant company since 1965 and an employee since 1950, testified that the appellant company has been in existence since 1930 and has never engaged in the purchase and sale of developed or undeveloped land; nor has it ever constructed buildings for resale.
6 Since that time the appellant company has engaged in the construction of large buildings such as churches, factories, schools and other types of commercial buildings and its business has been confined to building under contract, to the specifications of the customer, which either it or the customer has developed, and it has never been any part of its business to build on land which it owns for the purposes of resale.
7 Over the years, commencing in 1963, the appellant has acquired a substantial portfolio of rental properties as an investment and in 1971 it had nine buildings at a value of $1,655,402, as evidenced by Exhibit A-2.
8 In 1963 the appellant company purchased the land, built thereon, and leased to Bell Telephone Company of Canada without any option. In 1967 the same thing happened and this time Bell did not obtain an option to buy at the end of ten years.
9 As previously mentioned, in 1964 the Ontario Department of Education commenced the operation of Adult Training Centres and the appellant company was successful in obtaining the contract to build and rent four of these centres, at the following locations: Ottawa, Brantford, Guelph and Hamilton. All of these contracts had an option to sell except Hamilton. Mr John Ball testified that it was one of the conditions in order to obtain the contract; that all the documents were prepared by the School Board and contained this option and that they were successful in avoiding this clause in the case of Hamilton by offering a reduction in rent.
10 Besides the above-mentioned buildings the appellant company acquired the Lang Building at Kitchener and the Marsland Building. The appellant did not build the Lang Building but built the Marsland property. In the latter case the original owner could not meet its commitment and the appellant took back the property and moved into it.
11 The witness specified that the appellant never did anything to try to sell the Guelph Centre property; they were approached by the School Board and because the appellant company had a shortage of working capital, Mr Ball discussed this with his father and brother and they decided to sell. The appellant had no intention or design that the option be exercised but had intended to hold the property as the others for rental purposes. An offer to purchase the Hamilton Centre was received and rejected without even any discussion of the price.
12 Then he filed Exhibit A-5 to show that in 1970 the construction business had a loss of $522,000 and the rental property a profit of $77,000.
13 Mr Harold Ball, who with his brother founded the appellant company, corroborated his son's testimony. He testified that the appellant company had never built for speculation and when, on November 27, 1970, he received a letter from Conestoga College offering to purchase the Guelph operation, he considered it as providential because his company was experiencing a serious shortage of working capital. He explained that even if the bank was very helpful to them, the volume of construction at that time was only $9,000,000 when it should have been $20,000,000 and the appellant had the same overhead to pay. The construction industry was highly competitive and the rental revenue was much greater than the business income.
14 On cross-examination Mr Harold Ball stated that even if he did not have the financial statement when he decided to sell the Guelph operation, he knew about the financial situation of the company by the cash flow and the money they were to receive for the unfinished jobs. He knew that the money to come in could not cover the expenses and they were in trouble with the bonding company.
15 All the other witnesses corroborated, in one way or another, the testimony of Messrs John and Harold Ball. Mr Easton, QC testified that the Hamilton College was very anxious to buy and in fact had the money to do so but Mr Harold Ball was not interested in selling.
16 Counsel for the appellant referred the Board to the case of Harvey v. Caulcott (1952), 33 TC 159at page 165, and I read:
Such a case as the present is always coloured by the fact that the man is a builder. That no doubt puts a peculiar onus on him, to show that the profit from the sale of some property is profit from an investment, or profit from something which is not trading stock. That onus is not incapable of discharge, and here I think the Appellant did discharge it.
17 He submitted that the onus has been discharged because during 45 years the appellant company has never traded in the sphere of real estate; when the appellant bought property the purpose was to increase its investment portfolio which shows rental revenue of $208,000 in 1974.
18 He stated that the evidence is uncontradicted as to the fact that the appellant's intention was to keep the building even though in three cases there was an option of ten years to sell; that the Guelph operation was sold at the request of the School Board and because the company had a shortage of working capital at that moment; that everything done by the appellant was consistent with its intention and that the theory of secondary intention cannot be considered in the case at bar.
19 He also submitted the appellant's sole business has always been that of a custom building contractor and that the offer to purchase by the Guelph Centre was fortuitous and unsolicited; that the transaction bears none of the indicia of trade and that, accordingly, the gain realized should be deleted from the appellant's income.
20 Counsel for the respondent submitted that the gain should be taxed because when the appellant entered into an agreement with the different School Boards for the erection and renting of the building it agreed to sell by granting them an option of ten years. According to counsel for the respondent part of the appellant's intention was to sell at the time of the erection even if it was going to hold the property for a certain time.
21 In the case at bar the Board is very much impressed by the appellant's course of conduct; for 45 years the appellant has never engaged in the purchase and sale of land and buildings nor has it ever constructed buildings for resale. The appellant's sole business has always been that of a custom building contractor. The uncontradicted evidence reveals that the offer to purchase the Guelph Centre was fortuitous and unsolicited and the sale resulted because of the difficult working capital conditions in which the appellant found itself at the time. It is obvious that the appellant had to agree to include the option in the agreement if it wanted to obtain the contracts and it seems certain that this option was put into the agreement by the School Board which prepared the document.
22 For these reasons it cannot be said that when the appellant erected the different buildings its intention from the beginning was to sell; it it were so, why did the appellant require that the building design be such as to make it readily convertible to a building suitable for light manufacturing purposes and that it be located in a suitable zone?
23 According to the evidence adduced the transaction under review does not bear the indicia of trade. I have no reason to disbelieve the witnesses who swore that at all times the appellant's intention was to keep the building which it had built. The appellant's course of conduct corroborates this testimony. Furthermore, the respondent failed to contradict the appellant's evidence.
24 For all the above reasons the appeal is allowed.
Email this Content