Lamarre T.C.J.:
1 These are appeals from assessments for the appellants' 1987, 1988 and 1989 taxation years, which were heard on common evidence. At issue is the profit that they realized on the 1987 sale of two pieces of land, one situated on Boulevard Curé Labelle in Laval on which a shopping centre was built, and the other situated in Rosemère and consisting of 13 vacant lots. The appellants reported these profits as taxable capital gains, which they spread over the years in issue and against which they deducted capital losses over those same years. The Minister of National Revenue (“Minister”) considered these profits to be business income.
Facts
2 Only the appellant Hanri Kourdi testified for the appellants. He stated that he had arrived in Canada in 1982 with his wife, the appellant, and his three children, who were adolescents at the time. At the time he left Syria, his country of origin, he had an aluminum sales business. His wife was an architect there. He arrived in the country with approximately $400,000. Since he did not have work in Canada, he began by speculating in foreign currency. This did not prove profitable: he said he lost about $100,000 doing this. Seeking more stable investments, he decided, on the advice of friends, to invest his money in real estate.
3 On September 9, 1985, he purchased a vacant piece of land on Boulevard Curé Labelle for $360,000. According to his testimony, his intention at the time he purchased the land was to build a shopping centre on it and to earn rental income. However, he did not do a viability study before undertaking this adventure; on the other hand, he knew from talking about it with friends that it was a location that could prove profitable.
4 He therefore instructed an architect to draw up the plans for the shopping centre and to look after obtaining the building permits, and retained a contractor for the construction. His wife was not involved in the project as an architect since she could not use her diploma in Canada.
5 On the advice of his lawyer, Selim Moghrabi, whom he had known for 35 years since he had done business with him in the past in Syria and Lebanon, he transferred the land on May 16, 1986, to a company incorporated for the express purpose of building the shopping centre. This company was named Hanri et Claude Import & Export Inc. This afforded the advantage of protecting the appellant from lawsuits relating to privileges registered by the various suppliers. It seems the appellant personally guaranteed a loan of about $1.5 million granted to Hanri et Claude Import & Export Inc. by the Republic National Bank of New York to build the shopping centre.
6 Construction started in the spring of 1986 and was completed in the fall of that year. According to a summary of costs filed as Exhibit I-1 (tab 12), the construction cost about $2 million, including the price of the land, and the last work was apparently done in December 1986.
7 The shopping centre contained 14 rental units. At the end of December 1986, six units were rented, the first leases having been signed on November 3, 1986. Mr. Kourdi was dissatisfied with the shopping centre's occupancy rate and considered the expenses to be too high (he says he incurred losses of $14,713 for the period from November 1, 1986, to January 29, 1987), and so he consulted his lawyer, Mr. Moghrabi. Mr. Moghrabi apparently then proposed that he buy back the shopping centre, provided the appellant Hanri Kourdi allowed him to carry a balance on the selling price. Thus, on January 12, 1987, the appellants bought back the land and the shopping centre from Hanri et Claude Import & Export Inc. for $1,710,000, $1,350,000 of which was payable to the Republic National Bank of New York, and personally resold it to the company Centre d'Achats l'Intersection Inc., which was controlled by Mr. Moghrabi, for $2,250,000 on January 29, 1987. Out of this, the appellants received $550,000 at the time of sale, $1,350,000 was payable to the Republic National Bank of New York and the $350,000 balance of the selling price was to be payable on August 7, 1988. Mr. Kourdi stated that he ultimately received only $200,000 of the balance of the selling price. The profit realized on the sale was reported as a capital gain in the appellants' returns of income, which the Minister disputed.
8 During the same period, more precisely on October 17, 1986, the appellants purchased a vacant piece of land, which was already subdivided into 13 lots, for $139,120. On February 9, 1987, they purchased a fourteenth lot adjacent thereto for $18,000. According to Mr. Kourdi's testimony, an officer of Montreal Trust, whom he had met when he purchased the land on Boulevard Curé Labelle, was the one who told him that this was a good deal. Although the streets were not yet built in the area, it was a residentially zoned site that was developing fairly quickly. At the time they made their investment, the water and sewer pipes were already installed.
9 Since the appellants had no specific plans for this land, they decided to resell it. Accordingly, they retained a real estate agent, and on August 28, 1987, they sold the 14 lots to a contractor for $364,503, $100,000 of which was payable at the time of the sale, leaving a balance of the selling price of $264,503 payable on September 1, 1988. The appellants considered the profit realized on the fourteenth lot to be business income since they had held it for a period of only six months. The profit realized on the other 13 lots was treated as a capital gain in their returns of income, and this was also disputed by the Minister.
10 During the same period, Mr. Kourdi controlled another company, 133121 Canada Inc., which conducted a number of real estate transactions. According to the financial statements prepared to June 30, 1990, this company had a $1,032,187 land inventory. At present, this inventory is apparently $300,000 since it now holds only two vacant pieces of land. The appellants apparently also realized other profits personally on a few other real estate properties.
Analysis
11 Counsel for the appellants argued that the profits realized on disposition of the lots situated on Boulevard Curé Labelle and in Rosemère were rightly reported as capital gains in the appellant's returns of income.
12 If the evidence establishes that, at the time the lots were acquired, the appellants' sole intention was to hold them as an investment, that is, as income-producing property, the profits subsequently realized on the resale of the lands will then be considered to be capital gains.The question of secondary intention in business matters must also be taken into account. If the purchaser had in his mind, at the moment of the purchase, the possibility of reselling as an operating motivation for the acquisition, the transaction involving the acquisition of a capital asset would have the double character of also being at the same time an adventure in the nature of trade.
13 With respect to the land on Boulevard Curé Labelle, counsel for the appellants contended that Mr. Kourdi had no experience in the real estate market at the time he purchased the land. This was the first real estate investment he had made and his intention was to erect a shopping centre on the land in order to earn rental income. In light of the considerable losses that he had incurred each month, since the shopping centre was not leased as quickly as anticipated, he accepted his lawyer's unsolicited offer and then sold. The explanation she gave for their doing this was that the appellants were strapped for cash. In her view, the possibility of reselling at a profit was not a decisive factor at the time the land was purchased and she therefore argued that the appellants had not had the secondary intention required to characterize the transaction as a business transaction.
14 As to the land situated in Rosemère, she argued that the land had already been subdivided at the time it was purchased, and in her view this showed that the appellants did not intend to speculate: witness the fact that the appellants did not do a market study and had no specific plan. She claimed that the fact they had not wanted to develop the land confirmed the argument that this was a capital investment.
15 With respect, I am not of the same view as counsel for the appellants. First, while it is true that the purchase of the land on Boulevard Curé Labelle was Mr. Kourdi's first real estate investment, it should not be forgotten that he had been speculating in foreign currency. Mr. Kourdi was definitely a seasoned businessman who made the necessary inquiries before investing his money. For this first transaction, he had not done a viability study on the shopping centre construction project. At the time of purchase, however, he knew upon consultation that he was buying in a good area. The work was completed in December 1986 and six of the 14 units were already leased. This meant that 43 per cent of the space was leased. Mr. Kourdi claimed that he felt strapped for cash and that he could no longer withstand the pressure brought to bear by the financial institutions. However, I note that on October 17, 1986, before the work was completed, he and his wife purchased 13 lots in Rosemère for $139,120. Furthermore, a few days earlier, on October 9, 1986, they had purchased a vacant house in Laval for $87,500, which was resold on April 13, 1987, for $115,000. It seems to me that if the appellants were indeed experiencing financial difficulties, they would not have bought these other lots during this period.
16 Furthermore, at the time the shopping centre was sold to Mr. Moghrabi on January 29, 1987, the land and the shopping centre had already been transferred once from Hanri et Claude Import & Export Inc. to the appellants. Why, if this land was indeed initially purchased for the sole purpose of earning rental income from the shopping centre through this company, were the land and shopping centre transferred back to the appellants when they knew they had a buyer?
17 In my view, all this planning shows that this was a purely speculative project. It seems to me that Thurlow J.'s remarks in Bayridge Estates Ltd. v. Minister of National Revenue (1959), 59 D.T.C. 1098 (Can. Ex. Ct.), at p. 1102, are on point here:
In purchasing the property, the directors relied on their own knowledge of real estate and acted without any independent appraisal of the property, and in the transaction they committed the bulk of their company's financial resources for an unproductive, but saleable, property. I am far from satisfied that men of their ability and experience would have done this for the purpose of building a motel and service station without having arranged for the funds to finance this construction and without, at the same time, having in mind the most obvious alternative course open to them for turning the property to account for profit. Despite their optimism the possibility, if not the probability, of their not being able to obtain the necessary loan must, in my opinion, have been present in their minds, and the experience of the appellant's first project alone would have suggested both the necessity for an alternative course and the availability of the alternative course which was in fact followed less than a year after the property was purchased. To my mind, it is not without significance that that course was the only alternative course considered and that it was decided upon as the only thing left to do. In my opinion, the sale of the property for profit was one of the several alternative purposes for which the property was acquired, and it was in the carrying out of that alternative purpose, when it became clear that the preferred purpose was unattainable, that the profit in question was made. It was, accordingly, a profit made in an operation of business in carrying out a scheme for profit-making and was properly assessed.
18 Likewise, in Regal Heights Ltd. v. Minister of National Revenue (1960), 60 D.T.C. 1270 (S.C.C.), in which land had been purchased by a company for the purpose of building a shopping centre thereon and earning rental income from it, then resold at a profit after this plan was frustrated by the surrounding competition, it was held, and affirmed by the Supreme Court of Canada, at p. 1272:
There is no doubt that the primary aim of the partners in the acquisition of these properties, and the learned trial judge so found, was the establishment of a shopping centre but he also found that their intention was to sell at a profit if they were unable to carry out their primary aim....
Their venture was entirely speculative. If it failed, the property was a valuable property, as is proved from the proceeds of the sales that they made.
19 I have come to the same conclusion in the instant case with respect to the land situated on Boulevard Curé Labelle. It seems clear to me from the evidence that the appellants had in mind at the time they purchased the land -- and this, in my view, was a factor that motivated them to engage in such a transaction -- the possibility of reselling at a profit should they be unable to obtain the rental income they anticipated. The profit thus realized on the sale of this land and the shopping centre was therefore taxable as business income.
20 As to the lots purchased in Rosemère, it seems clear on the evidence that the appellants' primary intention was to resell them at profit as soon as the opportunity arose. They were subdivided vacant lots situated on a residentially zoned site that was developing very quickly. The appellants did not invest a cent beyond the purchase price of the lots and simply awaited the opportunity to resell at a profit. As a result, the lots were resold very quickly to a contractor who, in less than a year, completed a residential development.
21 As counsel for the appellants admitted at the start of her argument that Mr. and Mrs. Kourdi had to be considered to have had the same intention, Mrs. Kourdi not having testified at the hearing, I have come to the conclusion that the appellants have not established on a balance of probabilities that the two transactions in issue resulted in the realization of a capital gain. In my view, these transactions were speculative in nature and accordingly they were taxable as business income.
22 For these reasons, the appeals are dismissed and the assessments confirmed. Furthermore, counsel for the respondent informed the Court that Mr. Kourdi's appeal for the 1987 taxation year should be dismissed on the ground that it is void since when it was filed no notice of objection had been filed with the Minister in response to the notice of determination of loss issued on August 21, 1992. Mr. Kourdi's appeal for 1987 is therefore dismissed on the ground that it is void under section 169 of the Income Tax Act.
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