Kyllo v. Minister of National Revenue, [1975] C.T.C. 2243, 75 D.T.C. 194

The Chairman (orally: November 26, 1974):

1 This is an appeal by Grant P Kyllo against the reassessments of the Minister of National Revenue for the 1968 and 1969 taxation years. This case is the type of case that falls into the trader cases and involves the purchase and sale by the taxpayer-appellant of several apartment buildings.

2 I should say that the appellant has, since early in 1958, been employed by Block Bros Industries Ltd or its subsidiary real estate company, or a company which had a different name at the time he joined it, but for all intents and purposes I think it is safe to say that he is a member of the Block group, and that Block Bros Industries has been engaged in the real estate business since he joined them. It is of course, one of the largest, if not the largest, real estate companies in British Columbia and Alberta, and I think at the present time the appellant is one of the executive members of the company dealing in real estate in Alberta and British Columbia.

3 He has taken the stand and given evidence on his own behalf and has stated that in 1964 he, along with a fellow employee and fellow office manager named Sawatzky, purchased what have been referred to as the Montcalm Street Apartments in or near the Greater Vancouver area.

4 In November of 1969 the appellant purchased Sawatzky's half-interest, and Sawatzky moved over to another larger unit.

5 In April of 1966 the appellant purchased a half interest in the Jordanaire Apartment building in the Vancouver area for $115,604. He purchased this from Mr Arthur Block who, as the name would indicate, was one of the senior members of the Block group. The holder of the other half- interest in the Jordanaire Apartments was Mr Henry Block, and Mr Kyllo then became associated in Jordanaire with Mr Henry Block.

6 The evidence indicates that, from the outset—and this evidence is uncontradicted—the appellant was interested in finding an investment proposition whereby he would be able to supplement his earnings and provide funds for a period in his life when he would be perhaps less productive than he expected to be in his middle years.

7 He says that in May of 1966, although Montcalm was “buying itself out”—and, from his evidence, I take that to mean that the rents and taxes and mortgage payments were equalizing each other—he felt that it would be many years before he could look for a return from this property, and he sold it at a loss of $8,000, which he did not claim as a deduction from other earnings.

8 I might say at this point that he has stated that one of the reasons he chose for entering the apartment field was that in those days—and I suppose “in those days” will for a long time be taken to mean “pre-1972 days”—persons were entitled to write off against other income the depreciation on buildings held in their own names. He says that this was one way in which, without putting up any money, he was able to accumulate funds by a tax saving of the type just described.

9 In 1967 the appellant, again along with Mr Henry Block, bought a building on Imperial Street in Burnaby, British Columbia and, after purchasing it without thorough investigation, discovered that the cost of renovating it and putting it into shape would far exceed any return he and Mr Block could expect by way of rental revenue. They immediately turned the property over, at a profit to each of them of $1,600, which, at least in so far as this appellant is concerned, was included in his declared income.

10 I really don't attach much importance to the purchase and sale of the Imperial Street property. I think the appellant and his associate made a snap judgment that turned out to be wrong, and when it was discovered to be wrong, they were in a position to turn it over quickly at a small profit; to “walk away” from that transaction, so to speak.

11 In 1968 the appellant bought a 10/48th interest in a piece of land in Burnaby, BC and, together with the parties holding the remaining interest, let a contract for the construction of the Kay-Jean Apartments on that land. I think at this time I should point out that again the other interested party was Mr Henry Block, and the 10/48ths represented the involvement of the appellant in 10 of a total of 48 units, as I recall, in that project.

12 By the time the Kay-Jean Apartment building was completed in September of 1968, the cost far exceeded what was anticipated.

13 In December 1968 the appellant sold his interest in Jordanaire Apartments in order to meet his obligation in the sum, I believe, of $133,000 that he required. He realized a gain of $47,000 on the sale of the Jordanaire Apartments, and that, of course, is one of the matters that brought this case to the appeal stage.

14 In December of 1969 he purchased a 20% interest in the El Rancho, the Boston Bar, and the Barkerville Apartment buildings in Coquitlam, BC for $352,000. At about the same time the interest of the appellant in the Kay- Jean Apartment building was sold to finance his participation in what I will refer to as “the El Rancho transaction”.

15 It may be that I have been wrong when I said that he needed $133,000 in the Kay-Jean Apartments project; perhaps it was for the El Rancho. In any event, what has taken place throughout this series of transactions is that in a short period of years the appellant has built up, or has attempted to build up, his investment from an interest in a small 20-unit apartment to interests in larger buildings that might be expected in the long run to produce greater income.

16 The total cost, as I recall, of the El Rancho transaction was $4,700,000, and the appellant's share was 20%, and in reading my notes I now see that it was for this transaction that he needed the $133,000 cash. As I recall, there was a CMHC first mortgage on the property. He had the proceeds of the sale of the Kay-Jean Apartments and he was able to arrange a second and a third mortgage, totalling $60,000, on the El Rancho property, so that he still needed $133,000. Therefore, in order to raise this money, he was prepared to sell his shares in Block Bros. However, at that time, apparently, there was an underwriting going on, and he was unable to sell his shares and, when the underwriting was completed, the market in Block Bros' shares fell and he did not realize enough to cover his commitment. As I recall it, as well as undertaking bank financing, and buying and selling what I would call, as an outsider, speculative shares, he gave up 5% of his 20% interest in order to keep his equity in El Rancho.

17 He says that up until this time he had never been required to use any of his own funds to subsidize the operation of the apartments. However he also says the market was bad for renting in 1970 and through to the early part of 1973, but that it was at its worst in 1970 and 1971.

18 He still has a 15% interest in the El Rancho property and, although he feels the replacement cost of it—that is, the replacement cost of his 15%—to be in the neighbourhood of $80,000 to $100,000, he says there is really no hope at the moment of realizing that sum and the resale value on the open market is not very great. In fact, it would seem that, for the moment at least, he has himself in a position where he will have to hang on to this building.

19 The evidence further indicates that, although he has spent much of his productive working life with Block Bros, he has dealt mainly with residential real estate, but nevertheless I am satisfied that he had a good general knowledge of the real estate business, and that he was never at any time engaged in raw land speculation, although he freely admits that this was the most opportune market for anyone to make a substantial sum of money in a short period of time. However, a person in the position in which he found himself, that is, without sufficient funds to purchase raw land, he was only able to embark on his investment projects by way of mortgaging, as best he could, the apartment buildings that he purchased. He also adds that it was contrary to the policy of Block Bros to allow employees to speculate.

20 Many previous decisions have been cited by the appellant and by the respondent, but I think both parties agree that in this type of situation we are really dealing with factual situations and that, although general principles may be helpful to us, in looking at the various cases one does not gain very much assistance from them when one has to consider the factual situations of the case at bar.

21 I don't think that there really is any question of a secondary intention on the part of this appellant when he entered into this series of transactions. I don't think at any time I could impute from the actions of the appellant at the time of purchase a thought that the property would be turned to a profit at an early opportunity.

22 As I understand Regal Heights Ltd v Minister of National Revenue, [1960] C.T.C. 384, 60 D.T.C. 1270, and Racine, Demers and Nolin v Minister of National Revenue, [1965] C.T.C. 150, 65 D.T.C. 5098, that secondary intention must be present at the time of the purchase. Also I feel that the primary intention is clear, throughout this case, that the appellant wished to embark on an investment type of project which he intended from the outset to pyramid, as his finances increased, from a small 20-unit apartment building to something that would produce greater income for him. I think that the appellant's stated intention of retaining the property for its rental income was within the realm of possibility, despite the small amount of equity capital that he started out with. Also as was said in the case of Twenty Spadina Road Limited v Minister of National Revenue, [1962] C.T.C. 478, 62 D.T.C. 1297, by Mr Justice Cattanach, it is not to be inferred that the appellant was engaged in an adventure or concern in the nature of a trade merely because he did follow a course of action of “pyramiding”, as I call it, or of buying and selling other properties.

23 Counsel for the appellant, of course, relies mainly on Bryk v. MNR, 4 Tax A.B.C. 329, 51 D.T.C. 278, which is an old 1951 decision of the predecessor of this Board delivered by Mr R S W Fordham, QC, in which, on similar, but only slightly similar, facts, he said that this method of increasing value in properties by buying and selling to reach a certain point was not one that should attract tax.

24 The case of Thomas Campbell v Minister of National Revenue, [1953] S.C.R. 3, [1952] C.T.C. 334, 52 D.T.C. 1187, has been cited by the respondent, and the appellant in that case was a policeman who built several apartment houses and later resold them at a profit. The Minister, in assessing the plaintiff, added to Campbell's reported income the profits made on the resales. The appellant therein contended that the profits in question were not income but were capital gains, because the buildings were built to provide a home for his family and to establish an investment. The Minister's assessment was upheld on appeal to the Income Tax Appeal Board and to the Exchequer Court, and when it subsequently found its way to the Supreme Court of Canada, the appeal was again dismissed.

25 In that case the ratio is very short. Mr Justice Locke, as he then was, seems to have spent more time dealing with the history of the case as it proceeded through the Income Tax Appeal Board and the courts than he did on the ratio, and I am not taking the trouble to cite Californian Copper Syndicate v. Harris (1904), 5 TC 159, or any of the other cases that are well known to all parties and to anyone hearing this in any other forum.

26 On page 338 [1188] of the Campbell case, Mr Justice Locke says:

The learned members of the Income Tax Appeal Board, having heard the evidence of the appellant, did not accept his statement that he had caused to be built these various properties for the purposes of investment and concluded that in truth he was carrying on the business of constructing them for the purpose of resale at a profit. The learned Deputy Judge of the Exchequer Court having again heard the appellant's evidence in the matter has come to the same conclusion. Mr Gregory's able argument for the appellant has failed to satisfy me that there is any ground upon which we are justified in interfering with these findings.

I would dismiss this appeal ...

27 In this case I have observed Mr Kyllo in the witness-box, I have considered his interest in the result, I have reviewed the transactions that he entered into, and I have no hesitation in coming to the conclusion that he is a credible witness who should be believed and that his expressed intention in buying these properties as he did was to provide security for himself in his later years.

28 I think I am supported by, or at least I can find solace or corroboration in coming to this decision in, the simple fact that I find it difficult to believe that a man who was engaged in a series of trades, within the meaning of paragraph 139(1)(e) as it existed at the material time, would go to such lengths, incur such liabilities, and plough any money that he did make back into other projects of identical nature but of a larger dimension, if his intention was to make and keep a profit.

29 I think the evidence clearly supports his avowed business intention of entering into investment transactions, and I need not cite cases, I am sure, to show that even a trader—which I do not think this man to be—but even a trader can make a capital gain under the provisions of the Act as it was prior to 1972.

30 For all these reasons I would allow the appeal and vacate the assessment.