Tremblay T.C.J.:
1 This appeal was heard under the informal procedure at Montréal, Quebec on November 17, 1995.
1. Point at Issue
2 According to the notice of appeal and the reply to the notice of appeal, the point at issue is whether the parcel of lot P-339 situated in the City of Laval which the appellant disposed of during its 1989 taxation year was inventory property.
3 According to the appellant, it was not inventory property and accordingly the land was validly sold to a company in accordance with the provisions of section 85 of the Income Tax Act (the “Act”). It was eligible property that could therefore be the subject of a rollover. The appellant indicated a disposition price of $163,390 and an adjusted cost base of the same amount.
4 According to the respondent, the property was indeed inventory property and the sale of the land produced additional income of $150,125.
5 The appellant answered that the land in question was not purchased for resale. It was not part of the inventory.
2. Burden of Proof
6 2.01 The burden is on the appellant to show that the respondent's assessment was incorrect. This burden of proof arises from a number of judicial decisions including the judgment of the Supreme Court of Canada in Johnston v. Minister of National Revenue, [1948] S.C.R. 486, 3 D.T.C. 1182, [1948] C.T.C. 195 (S.C.C.).
7 2.02 The facts assumed by the respondent in the instant case are set out in subparagraphs (a) to (f) of paragraph 9 of the reply to the notice of appeal and read as follows:
[TRANSLATION]- 9. In making the reassessment dated March 23, 1995 for the taxation year ending on May 31, 1989, the Minister made the following assumptions of fact, inter alia:
(a) on February 11, 1988, the appellant purchased a vacant lot of 66,858 square feet with an old house situated at 5560 boul. des Laurentides in Laval from Gaston Boivin for total consideration of $163,390.00; [admitted]
(b) on October 14, 1988, the appellant transferred the said land by means of a rollover to 142529 Canada Inc. for the agreed upon sum of $163,390.00; [admitted]
(c) on October 14, 1988, 142529 Canada Inc. sold the said land, plus 30 feet of frontage, to Le Groupe Pétrolier Olco for total consideration of $338,065.00; [admitted]
(d) Membrex Ltée and 142529 Canada Inc. are wholly owned by Réginald Ratle; [admitted]
(e) Membrex Ltée is a company that operates a business manufacturing membranes for use in industrial construction; [admitted]
(f) 142529 Canada Inc. operates a senior citizens home; [admitted]
3. Facts in Evidence
8 Once the above admissions were made, additional evidence was provided through the testimony of four persons and the filing of 27 exhibits.
3.01 A. Testimony of Réginald Ratle
9 The first witness, Réginald Ratle, the sole shareholder of Membrex Limitée, the appellant, and of 142529 Canada Inc., has been an engineer since 1970.
10 3.02 During the relevant period, the appellant operated a business that manufactured and waterproofed linings for dams, reservoirs and so on and did product waterproofing consultation. Its fiscal year ends on May 31 of each year.
11 Three photographs were filed jointly as Exhibit A-1, one showing an installation for a reservoir 680′ × 220′ and 11′ deep, another of an underwater installation of a temporary PVC membrane for the construction of a dyke and the third showing a watertight cesspool for storing liquid manure using a Hypalon-type membrane supplied by the appellant.
12 3.03 142529 Canada Inc. was incorporated on May 27, 1995 in order to build and operate a senior citizens home.
13 3.04 The appellant and 142529 Canada Inc. operated two separate and distinct businesses during the relevant period.
14 3.05 On or about April 1, 1986, 142529 Canada Inc. purchased a parcel of land in Laval with the intention of building a senior citizens home there.
15 The parcel of land immediately adjacent was vacant. 142529 Canada Inc. designed and built the senior citizens home at an additional cost considerably greater than anticipated, as a result of which, if warranted by the business's operating circumstances, the adjacent parcel of land could also be purchased and the senior citizens home expanded onto that land. The architectural plans, the drawings for electricity and outlets, locations and so on were drawn up in such a way that the senior citizens home would be able to expand onto the adjacent property. The cost of the permit alone would have been $7,000, if the dual drainage system, the electrical hook-ups and so on were not put in immediately. The senior citizens home was built between August 1986 and May 1987 with the first resident moving in on June 1, 1987.
16 The site plan (Exhibit A-2) and the map of the city (Exhibit A-3) show the lot along Boulevard des Laurentides.
17 A photograph of the home that was built was filed as Exhibit A-4. The home was called “Villa Les Tilleuls”. In July 1987, only seven or eight seniors lived at the Villa out of 72 available beds (Exhibit I-2). The Villa was supposed to take in only independent individuals. The 10′ × 10′ rooms did not allow for wheelchairs to be used around the bed as required by the standards that apply to individuals who suffer from a loss of autonomy.
18 3.06 During the fall of 1987, the adjacent parcel of land was put on the market for sale by the owner, Gaston Boivin. The directors of 142529 Canada Inc. submitted an offer to purchase that parcel of land, on which they planned to expand the senior citizens home.
19 The contract (Exhibit A-5) prepared by Mr. Ratle is dated December 4, 1987. It stipulates that $161,500 would be paid for the land (lot P-339), which had an area of 67,000 square feet: $75,000 upon signing of the notarized agreement and the balance spread over a three-year period. A deposit of $3,000 was paid on December 4, 1987. Clause 6 of the contract (A-5) reads as follows:
[TRANSLATION]
6. The owner-vender shall have full enjoyment of the house currently situated on the land. No rent shall be claimed from him; he shall be responsible for the expenses, taxes and maintenance of the house. He shall thus be able to enjoy the residence freely for a period of six to 10 months, to be renegotiated if necessary.
20 3.07 According to the witness Ratle, the reason why the directors of 142529 Canada Inc. made the offer to purchase (Exhibit A-5) is that the hospital La Cité de la Santé de Laval seemed determined to transfer individuals suffering from a loss of autonomy to another building in order to use their rooms for patients who had to undergo surgery. According to the witness, he was informed of these facts in the summer of 1987 by members of a committee struck to review the situation. There was nothing in writing; the information was by word of mouth. Some people from this group apparently came to visit Villa Les Tilleuls. As the Villa was not in a position to take in individuals suffering from a loss of autonomy, interest was expressed in building another villa more suited to these individuals. The witness said he himself went to show La Cité de la Santé de Laval some plans.
21 3.08 The witness was confident. The Caisse Populaire de Vimont was prepared to advance 80 per cent of the funds. It asked the appraisal firm Yvon Caron et Associés to estimate the market value of the lot in issue, lot P-339 in the parish of Ste-Rose Auteuil, Laval. By letter dated January 6, 1988 (Exhibit A-6), the firm informed the Caisse that, as of December 14, 1987, the market value of the entire property was approximately $200,000. It also provided the following additional comments:
[TRANSLATION]
We are aware that the price paid (at such time as the land in question may be purchased) could be higher than the value estimated in this report. However, it should be borne in mind that the ultimate acquisition cost of this land would represent an “assembly value” and that the applicant could be justified in paying slightly more since this factor would be essential to the expansion of the existing business, “La Villa Les Tilleuls”.
22 Under Exhibit A-8, the architect André Nadolski confirmed this comment as well as the appellant's testimony on the dual drainage system, etc. (3.05). The letter of November 15, 1994 was objected to by the respondent. However, the Court admitted it because of the facts set out supra. This letter reads as follows:
[TRANSLATION]
Subject:
Project: Villa Les Tilleuls
5570 boul. Laurentides
Laval, Quebec
For: 142529 Canada Inc.
Dear Sir,
In my capacity as author (designer-architect), I hereby confirm that the above project was designed as a project to be carried out in two phases. One phase has already been completed, in 1987. The second phase was planned for construction over the next five years in accordance with the agreement with the building permits branch of the City of Laval, Quebec.
23 3.09 According to Mr. Ratle, he received a call in January 1988 from the director of La Cité de la Santé de Laval, whom he thought was Mr. Legault, informing him that the project would not be viable for elderly individuals suffering from a loss of autonomy and, as a result, there would be no chance of getting additional patients. The Pavillon Chomedey on Boulevard des Laurentides Ouest had been leased. Consequently, the expansion onto the neighbouring lot had become unprofitable.
24 3.10 Mr. Ratle was disappointed and consulted a real estate agent, a Mr. Marcoux, a relative of whose was a resident at the Villa Les Tilleuls, and showed him the agreement (A-5). Mr. Marcoux told him that since the agreement with Mr. Boivin did not contain any clause conditional on obtaining the contract with La Cité de la Santé, he could not have the agreement cancelled (Exhibit A-5). Moreover, Mr. Boivin, who worked at the Villa Les Tilleuls, informed Mr. Ratle that he himself had made an offer to purchase a house. Mr. Ratle then realized that he could not demand dissolution of the agreement.
25 3.11 On February 11, 1988, pursuant to the agreement (A-5), the notarized agreement was signed (Exhibit A-7) at the notarial firm Vaillancourt, Vaillancourt and Bigras. It was signed not with 142529 Canada Inc., but with Membrex Limitée, the appellant. The general manager of the Caisse Populaire de Vimont, Réjean Lamarche, had notified Mr. Ratle that, as 142529 Canada Inc. had limited financial resources (the company had a deficit of $248,000 at the time), the loan application would not be approved by senior management. He suggested instead that the acquisition be made by the appellant, which had been in existence for a number of years and had a healthy balance sheet (Exhibit A-10) (the appellant had retained earnings of $422,649 in May 1987 and $604,198 in May 1988).
26 3.12 A letter of December 18, 1992 from the general manager of the Caisse Populaire de Vimont, Réjean Lamarche, substantially confirmed these facts. The respondent objected to it, but the Court admitted the exhibit in light of the testimony of the respondent's witness, Ms. Deslandes (3.27.4), and since the contract (A-5) had already provided for this possibility. The first paragraph of the contract (A-5) reads in part as follows:
[TRANSLATION]
I, the undersigned, Réginald Ratle, engineer, residing at 5590 Boulevard des Laurentides, hereby offer on behalf of my company, of which I am the president and by which I am officially mandated, to the owner-vender Gaston Boivin, at the price and on the conditions hereinafter set out,...
27 By writing simply “...offer on behalf of my company...” without specifically stating “142529 Canada Inc.”, Mr. Ratle was already aware of the information from the Caisse Populaire de Vimont (Exhibit A-9):
[TRANSLATION]
In November 1987, you informed us of your intention to purchase the land adjacent to your senior citizens home situated at 5590 Boulevard Des Laurentides for the purpose of eventual expansion.
Pursuant to your request, I retained Yvon Caron, a Chartered Appraiser from the Caisse, to do an appraisal of the land. On the basis of that appraisal, we agreed to go ahead with the loan.
Being aware of the financial situation of your businesses, and knowing that the land was indeed for the activities of Villa Les Tilleuls, I required that the loan be granted on the express condition that it be granted to Membrex Limitée and not 142529 Canada Inc., Villa Les Tilleuls.
At the time of the sale of the land, you informed us that your intention was first to sell Membrex Limitée's land to 142529 Canada Inc. The Caisse was not opposed to this prior sale, knowing that an offer to purchase was being negotiated.
28 3.13 After the notarized agreement was signed on February 24, 1988, the appellant gave the real estate agent, Mr. Marcoux, who had just returned from vacation, the mandate to find a buyer for the land (Exhibit I-3). The asking price was $369,500. This mandate contains the following comments under the heading “Remarks”:
[TRANSLATION]
For an unlimited time, this land is for the construction of a shopping centre, a professional or medical centre or any other business that cannot interfere with Villa Les Tilleuls, situated at 5590 boul. Laurentides, City of Laval.
29 3.14 In October 1988, a serious buyer, Le Groupe Pétrolier Olco Inc. (hereinafter called “Olco”), was found. It wanted to establish headquarters in Laval. Olco had also purchased a large part of the land, the part facing onto Boulevard des Laurentides (more than 60 feet of frontage and 125 feet deep), from Mr. Boivin a number of years earlier. Mr. Boivin's land also had 60 feet of frontage on the same Boulevard. According to the City's zoning by-laws, a 90-foot exit was required.
30 Previously, however, to comply with the City's by-laws, Olco had made an offer to 142529 Canada Inc. to buy a triangle the 30-foot base of which gave onto Boulevard des Laurentides near the 60-foot exit from the land in issue. This parcel of land was appraised at $50,000 by Bureau d'évaluation Carmon Inc. (Exhibit I-4).
31 3.15 According to the witness, however, as the land in issue had been intended for 142529 Canada Inc. since the construction of Villa Les Tilleuls, the appellant transferred the land (Exhibit I-8) to 142529 Canada Inc. on October 14, 1988, for the price paid to Mr. Boivin, $161,500. The transfer was made in accordance with section 85 of the Act.
32 3.16 Then, on the same day, October 14, 1988, 142529 Canada Inc. sold the land in question (Exhibit I-7) to Olco for $338,065 (Exhibit I-9), including $23,787.05 (Exhibit I-5) for the real estate agent. This amount was paid by 142529 Canada Inc. (Exhibit I-6). The $338,065 included the $50,000 for the triangular portion (3.14). Olco was unable to go ahead with its head office project and it put the land back up for sale in 1988. It is still for sale.
33 3.17 The respondent reassessed the appellant on the basis that the adjacent land in question was “inventory” in the hands of 142529 Canada Inc. and was therefore not eligible for an election under section 85 of the Act, and the respondent taxed the appellant on the entire gain from the sale and the gain was treated as business income.
34 3.18 A notice of objection to the taxation as business income was filed with the respondent. By notice of reassessment, the respondent admitted that the $50,000 for the portion of land that was still owned by 142529 Canada Inc. would be taxable in 142529 Canada Inc.'s hands and moreover that that gain would be taxable as a capital gain. However, by maintaining its position that the transfer of the land by the appellant to 142529 Canada Inc. represented business income to the appellant, the respondent created a situation in which this transaction was not eligible for a rollover under section 85 of the Act.
35 3.19 In cross-examination, the respondent filed a letter dated July 20, 1987 (Exhibit I-1) from the Federal Business Development Bank (F.B.D.B.) to “Mr. Réginald Ratle, Eng. — 142529 CANADA INC. — VILLA LES TILLEULS”. This letter was integral to a consulting services agreement the purpose of which was [TRANSLATION] “To help the client establish a marketing strategy”. The value of the contract was $500.
36 The witness explained that, in light of the small number of patients (seven in June 1987), 142529 Canada Inc. had thought it wise to retain the F.B.D.B.'s services to do advertising, among other things.
37 During the discussion of this agreement, the F.B.D.B. official asked him, [TRANSLATION] “Why not go see the M.P.?” That was why he met with the M.P., Mr. Bélanger, shortly thereafter. It was also shortly after this meeting that he received a telephone call from someone at La Cité de la Santé de Laval. A group apparently visited the Villa Les Tilleuls after that (3.07).
38 3.20 Photocopies of the following cheques were filed:
- 14/10/88 142529 Canada Inc. to the appellant $161,500 (I-10)
- 19/10/88 the notary, Michel Jodoin, to 142529 Canada Inc. $148,657.10 (I-11)
- back of I-11 showing that the $148,657.10 was cashed by 142529 Canada Inc. (I-12).
39 3.21 The appellant's notice of reassessment dated June 21, 1993 and the form T7W-C showing additional business income of $150,125 were filed as Exhibit I-13.
40 3.22 In response to the notice of objection, a notice of reassessment was issued (Exhibit I-14) as well as the form T7W-C showing cancelled business income of $50,000, the value of the triangle owned by 142529 Canada Inc.
3.23 Real Property and Financial Aspects
41 3.23.1 Mr. Ratle testified that neither his companies nor he personally, nor the members of his family, have at any time engaged in the real estate business.
42 3.23.2 The witness contended that the appellant had never received a cent from the transaction. It had been suggested to him before that he amalgamate the two companies so that the losses of one could be absorbed by the profits of the other. He refused because the two businesses were completely different from each other.
43 3.23.3 The witness also contended that, before Olco, he had received another offer, from Zaraubi Entreprise, for $286,000. It had been rejected because it was not a serious offer. Payment was to have been spread over 10 years.
44 3.23.4 He filed the appellant's financial statements to May 31, 1988 as Exhibit A-10. The $163,390 cost of the land was entered not as an expense in the statement of profit and loss, but as an asset under the item “capital assets” in the balance sheet.
3.24 B. Testimony of André Stampfler
45 This witness has known Mr. Ratle since 1982. He was the accountant for his two corporations and for Mr. Ratle personally. He contended that neither Mr. Ratle nor his companies had ever engaged in real estate transactions, apart from the transaction in issue.
46 He filed the form T2057 dated October 23, 1989 concerning the appellant, with respect to the rollover under section 85 of the Act, as Exhibit A-11.
3.25 C. Testimony of Philippe Malo, witness for the respondent
47 3.25.1 Philippe Malo has been the director of technical services at La Cité de la Santé de Laval since 1976. He manages a number of the hospital's departments including the one that handles leasing buildings outside the hospital.
48 3.25.2 He said that his team visited Villa Les Tilleuls in 1992. The hospital wished to move 50 patients from the Pavillon Chomedey on Boulevard des Laurentides Ouest to another building. The conclusion from the visit was that Villa Les Tilleuls did not meet the needs in the circumstances.
49 3.25.3 He did not remember trying to arrange any transaction with Villa Les Tilleuls in 1987.
50 3.26 The witness filed the lease signed on July 14, 1987 between Les Entreprises Emelda Coutu Limitée, lessor, and La Cité de la Santé de Laval, lessee, as Exhibit I-15. The lease concerned the rental of the Pavillon Chomedey. It was signed by Jacques Ménard, director general.
51 He said that Mr. Legault was the assistant director general. Even though he was director general responsible for leases, it was possible that Mr. Legault, who was his superior, had entered into negotiations concerning transactions and that other premises had been visited on his instructions without Mr. Malo himself being informed.
3.27 D. Testimony of Suzie Deslandes, second witness for the respondent
52 3.27.1 Ms. Deslandes audited Mr. Ratle's two companies. She met with Mr. Ratle and Mr. Boivin and also with Mr. Lamarche of the Caisse Populaire.
53 3.27.2 She said that Mr. Boivin told her that Mr. Ratle had not asked him to cancel the agreement of purchase and sale.
54 3.27.3 Moreover, according to Mr. Boivin, he had told Mr. Ratle not to worry because a representative of a business, La Maison funéraire Urgel Bourgie Ltée, had approached him to purchase the land. Mr. Boivin had informed that representative that the land had been sold.
55 3.27.4 Ms. Deslandes said she also met with Mr. Lamarche of the Caisse Populaire together with Mr. Ratle. Mr. Lamarche explained that he had required that the acquisition be made by Membrex Limitée because of 142529 Canada Inc.'s weak financial situation. According to Mr. Lamarche, [TRANSLATION] “the purpose of the acquisition of the land in issue was apparently to protect the capital invested in Villa Les Tilleuls.”
56 3.28 Mr. Ratle testified again.
57 3.28.1 He admitted that he had forgotten to testify as to the information received from Mr. Boivin regarding a funeral home's probable interest in purchasing the land. The fact is that the witness absolutely did not want a funeral home next to Villa Les Tilleuls, which was occupied by elderly persons. Moreover, when the mandate was given to the real estate agent, Mr. Marcoux, on February 24, 1988, one purpose of the reserve entered under the heading “Remarks”, quoted supra, was precisely to prevent a purchase for the purpose of establishing a funeral home (3.13).
58 3.28.2 Mr. Ratle said that he did not remember meeting with Mr. Malo either in 1987 or in 1992.
59 3.29 Suzie Deslandes informed the Court that Mr. Legault told her in a letter dated March 18, 1993 that he had been appointed assistant director general of La Cité de la Santé de Laval in August 1988. This letter was not file as an exhibit.
60 3.30 Mr. Ratle answered that Mr. Legault had been hired as a consultant or a contract employee, possibly in the fall of 1987 and January 1988, and that he was appointed assistant director general after that, but this was mere conjecture.
4. Act - Case Law - Analysis
4.01 Act
61 The provisions of the Act involved in the instant case are mainly subsection 10(1), paragraphs 54(b) and (d) and the definition of the words “inventory” and “business” in section 248. They read as follows:
10. Valuation of inventory property.
(1) For the purpose of computing income from a business, the property described in an inventory shall be valued at its cost to the taxpayer or its fair market value, whichever is lower, or in such other manner as may be permitted by regulation.
54(b) “Capital property”.| “capital property” of a taxpayer means(i) any depreciable property of the taxpayer, and
(ii) any property (other than depreciable property), any gain or loss from the disposition of which would, if the property were disposed of, be a capital gain or a capital loss, as the case may be, of the taxpayer;
54(d) “Eligible capital property”.|| “eligible capital property” of a taxpayer means any property, a part of the consideration for the disposition of which would, if he disposed of the property, be an eligible capital amount in respect of a business;
248.
“Inventory”. — “inventory” means a description of property the cost or value of which is relevant in computing a taxpayer's income from a business for a taxation year;”
“Business” — “business” includes a profession, calling, trade, manufacture or undertaking of any kind whatever and, except for the purposes of paragraph 18(2)(c), section 54.2 and paragraph 110.6(14)(f), an adventure or concern in the nature of trade but does not include an office or employment;
4.02 Case Law
62 The following cases were cited or considered:
1. Ted Davy Finance Co. v. Minister of National Revenue (1964), 64 D.T.C. 5124 (Can. Ex. Ct.);
2. J. G. Young & Son Ltd. v. Minister of National Revenue (1972), 72 D.T.C. 1319 (T.R.B.);
3. Les Immeubles Laurier Inc . v. Minister of National Revenue (1972), 72 D.T.C. 1388 (T.R.B.);
4. Sands Motor Hotel Ltd. v. Minister of National Revenue (1985), 85 D.T.C. 677 (T.C.C.);
5. Morin c. Ministre du Revenu national (1994), 94 D.T.C. 1747 (T.C.C.);
6. Chorney v. R. (1995), 95 D.T.C. 124 (T.C.C.);
7. Levesque v. Comeau, [1970] S.C.R. 1010 (S.C.C.);
8. Friesen v. R., [1995] 3 S.C.R. 103 (S.C.C.);
9. Minister of National Revenue v. Taylor (1956), 56 D.T.C. 1125 (Can. Ex. Ct.);
10. Stubart Investments Ltd. v. R., [1984] 1 S.C.R. 536 (S.C.C.);
11. Hill-Clark-Francis Ltd. v. Minister of National Revenue (1960), 60 D.T.C. 1245 (Can. Ex. Ct.);(1963), 63 D.T.C. 1211 (S.C.C.);
12. Rutledge v. Commissioners of Inland Revenue (1929), 14 T.C. 490 (Scotland Ct. Sess.);
13. Inland Revenue Commissioners v. Fraser (1942), 24 T.C. 498 (Scotland Ct. Sess.).
4.03 Analysis
63 4.03.1 As the appellant elected the informal procedure, the Court's jurisdiction is therefore limited to $12,000 in taxes.
64 4.03.2 The central issue is whether the income resulting from the sale was a capital gain or business income.
65 If the latter is the case, the property was real property that was part of inventory and thus property not eligible for the application of subsection 85(1) of the Act.
66 If the former is the case, the property was capital property and eligible for the application of subsection 85(1) of the Act.
67 4.03.3 As the Supreme Court of Canada did in Friesen v. R. (4.02(8)), per Major J., at pages 115 and 116, we refer to Interpretation Bulletin IT-218R:
IT-218R, which replaced IT-218 in 1986, lists a number of factors which have been used by the courts to determine whether a transaction involving real estate is an adventure in the nature of trade creating business income or a capital transaction involving the sale of an investment. Particular attention is paid to:(i) The taxpayer's intention with respect to the real estate at the time of purchase and the feasibility of that intention and the extent to which it was carried out. An intention to sell the property for a profit will make it more likely to be characterized as an adventure in the nature of trade.
(ii) The nature of the business, profession, calling or trade of the taxpayer and associates. The more closely a taxpayer's business or occupation is related to real estate transactions, the more likely it is that the income will be considered business income rather than capital gain.
(iii) The nature of the property and the use made of it by the taxpayer.
(iv) The extent to which borrowed money was used to finance the transaction and the length of time that the real estate was held by the taxpayer. Transactions involving borrowed money and rapid resale are more likely to be adventures in the nature of trade.
68 Let us review each of these criteria with regard to the facts in evidence in the instant case.
4.03.4 Intention at time of purchase
69
The taxpayer's intention with respect to the real estate at the time of purchase and the feasibility of that intention and the extent to which it was carried out. An intention to sell the property for a profit will make it more likely to be characterized as an adventure in the nature of trade.
70 4.03.4(1) Starting in 1986, when Villa Les Tilleuls was built, the plan was to purchase the adjacent land, the land in issue, in order to expand the Villa Les Tilleuls or to build another home. The architectural plans, the drawings for the electricity and the dual drainage system and so on had been prepared for this purpose (3.05).
71 In speaking of the land in issue, the appraiser Yvon Caron said that the acquisition cost of this land represented an assembly value, and the architect André Nadolski, the author of the plans, confirmed that the project had been designed as a project to be carried out in two phases, the first starting in 1986 and the second five years later, with the agreement of the buildings branch of the City (3.08).
72 4.03.4(2) The immediate circumstances surrounding the purchase of the land in issue show Mr. Ratle's lack of experience in land acquisition. He drafted the agreement himself (Exhibit A-5), forgetting to include a clause making the agreement conditional on obtaining the contract with La Cité de la Santé de Laval (3.10).
73 Furthermore, the fact that La Cité de la Santé de Laval did not document the possible transaction with 142529 Canada Inc. should not be too surprising. It is well known that every transaction with a public body is almost always conducted orally until the final decision which is formalized by the notarized agreement. These institutions, which rely on public funding, do not want to leave any trace that can bind them or compromise them in any manner whatever except by the final written deed signed by senior management.
74 4.03.4(3) Because of the original intention, that the land in issue would one day be purchased by 142529 Canada Inc., was it not to be expected that the ownership of that land would return to it one day? In fact, it was only financial considerations that led Mr. Ratle to make the decision to have the land purchased by the appellant. Moreover, he could simply have let the purchase be made by the numbered company and had the loan guaranteed by Membrex Limitée. Here again, Mr. Ratle could have sought the opinion of someone knowledgeable. Lastly, by transferring the land to the numbered company, was the appellant not simply fulfilling the original intention?
75 The testimony of Ms. Deslandes, the respondent's witness, quoting Mr. Lamarche, the manager of the Caisse Populaire, is significant: [TRANSLATION] “The purpose of the acquisition of the land in issue was apparently to protect the capital invested in Villa Les Tilleuls.”
4.03.5 Nature of the business
76
The nature of the business, profession, calling or trade of the taxpayer and associates. The more closely a taxpayer's business or occupation is related to real estate transactions, the more likely it is that the income will be considered business income rather than capital gain.
77 4.03.5(1) Neither the nature of the numbered company nor the nature of the appellant, nor the profession of the sole shareholder, nor the past activities of the shareholder and members of his family, are related to real estate transactions, except for the transaction in issue (3.23.1, 3.24).
78 4.03.5(2) However, it is possible that the circumstances of a single real estate transaction could lead to the correct conclusion that the proceeds were business income.
4.03.6 Nature of the property and use made of it by the taxpayer
79 4.03.6(1) There is one kind of property whose nature is such that it leads almost inevitably, based on a single transaction, to the conclusion that the proceeds are business income, and that is when the property is a trade good.
80 4.03.6(2)a) Rutledge v. Commissioners of Inland Revenue (4.02(12)) is well known. In that case, the appellant, a shareholder in a film production company, had purchased a large quantity of rolls of toilet paper.
81 4.03.6(2)b) In another case, Fraser v. C.I.R. (4.02(13)), the appellant, a woodcutter, purchased several lots of alcoholic beverages.
82 In both cases, this was the first and only transaction for each of the taxpayers. As the property involved was trade goods, and given the quantity purchased, the appeals were dismissed.
83 4.03.6(2)c) The same was true in Taylor (4.02(9)), to which the respondent in the instant case referred. The appellant was the general manager of the Canadian subsidiary of an American company. The purpose of the subsidiary's business was to manufacture various products made of lead and other metals. In 1949, in light of the shortage of lead in Canada, the appellant asked the U.S. parent company for permission to import foreign lead. Permission was denied because of certain risks. The appellant took personal risks and purchased 1,500 tons of lead in Europe. He made an arrangement to sell it to the company at the Canadian market price on the date the merchandise arrived. He realized a substantial profit in the transaction. In his tax return, he reported the profit as a capital gain. A lengthy analysis was conducted, summarizing the English case law, and concluding that the transaction was an adventure in the nature of trade. Lead is in fact a trade good. An individual cannot buy 1,500 tons of lead for his personal use. He bought it with the intention of reselling it.
84 4.03.6(3) The instant case concerns the purchase of a lot, the purchase in this case being in the nature of an investment.
85 The criterion of the intention at the time of purchase is still the key criterion, the others serving only to try to confirm the original intention.
86 In the instant case, what was Mr. Ratle's intention at the time of purchase? First, which purchase should be considered: the one on December 4, 1987 entitled “offer to purchase”, or the one on February 11, 1988, which was the notarized agreement?
87 In Hill-Clark-Francis Ltd. (4.02(11)), the Exchequer Court held, affirmed by the Supreme Court of Canada, that it was not the intention on the date of the offer to purchase that had to be considered, but rather the intention on the date of the final contract. It is true that, in that case, in June 1952, the appellant had obtained, for $100.00, the option to purchase shares in Poitras et Frères Inc. for $50,000 in order to make it a subsidiary. That option expired on November 30, 1952. However, the appellant did not exercise its option to create a subsidiary. In September, a Mr. H. Strong, who knew of the appellant's option, offered it $160,000 for the shares of Poitras et Frères Inc. The appellant accepted this attractive offer. It exercised the $50,000 option and resold the shares for $160,000. The appeal by Hill Clark Francis Limited, which argued that it had realized a capital gain, was dismissed, even though shares in companies are in theory considered to be in the nature of an investment.
88 4.03.6(4) In the instant case, the “offer to purchase” ceased to be an “offer to purchase” at the moment the owner Mr. Boivin agreed to sell the land in issue. This agreement was formalized by Mr. Boivin's signature on the same day the offer to purchase itself was signed, December 4, 1987 (Exhibit A-5). The two parties were bound as of that moment. Even the death of one of the parties could not have changed anything.
89 The fact that, as a result of the call from an official at La Cité de la Santé de Laval in January 1988 demolishing all hope that construction could go ahead, Mr. Ratle consulted Guy Marcoux (3.10) to see whether he could have the agreement (A-5) cancelled merely confirms his intention not to buy if it was legally possible. Mr. Marcoux's negative answer and the fact that Mr. Boivin had already taken an option on a house left him with no intention to try to have the agreement (A-5) cancelled (3.10). All that remained for him to do was to sign the notarized agreement (Exhibit A-7), which was done on February 11, 1988. It was upon Mr. Marcoux's return from the south that the mandate to sell the land (Exhibit I-3) was signed, on February 24 of that year (3.13).
90 4.03.6(5) The decision to try to sell appeared in any case to be the only solution. All hope of reinvesting in another home for senior citizens, whether suffering from loss of autonomy or otherwise, became vain, based on the poor financial situation of the Villa Les Tilleuls (3.11) and the fact that one of the main possibilities for carrying out a new project was if La Cité de la Santé de Laval were to assist in it. That possibility had just disappeared.
91 Furthermore, the by-law restriction requiring a 90-foot opening onto Boulevard des Laurentides was a considerable obstacle. The only solution was the purchase by Olco, which occurred on October 14, 1988.
92 4.03.6(6) As Olco itself did not carry out its plans for a head office in Laval (3.14) on the land, it put the land back up for sale in 1988. The land was still for sale at the time this appeal was heard on November 17, 1995 (3.16).
93 4.03.6(7) Is it possible that there was a secondary intention at the time the agreement (Exhibit A-7) was signed, as the respondent argued?
94 In Racine, Demers and Nolin, supra, Noël J. wrote the following at page 5103:
[ Secondary intention doctrine]
In examining this question whether the appellants had, at the time of the purchase, what has sometimes been called a “secondary intention” of reselling the commercial enterprise if circumstances made that desirable, it is important to consider what this idea involves. It is not, in fact, sufficient to find merely that if a purchaser had stopped to think at the moment of the purchase, he would be obliged to admit that if at the conclusion of the purchase an attractive offer were made to him he would resell it, for every person buying a house for his family, a painting for his house, machinery for his business or a building for his factory would be obliged to admit, if this person were honest and if the transaction were not based exclusively on a sentimental attachment, that if he were offered a sufficiently high price a moment after the purchase, he would resell. Thus, it appears that the fact alone that a person buying a property with the aim of using it as capital could be induced to resell it if a sufficiently high price were offered to him, is not sufficient to change an acquisition of capital into an adventure in the nature of trade. In fact, this is not what must be understood by a “secondary intention” if one wants to utilize this term.
To give to a transaction which involves the acquisition of capital the double character of also being at the same time an adventure in the nature of trade,the purchaser must have in his mind, at the moment of the purchase, the possibility of reselling as an operating motivation for the acquisition; that is to say that he must have had in mind that upon a certain type of circumstances arising he had hopes of being able to resell it at a profit instead of using the thing purchased for purposes of capital. Generally speaking, a decision that such a motivation exists will have to be based on inferences flowing from circumstances surrounding the transaction rather than on direct evidence of what the purchaser had in mind.
95 In my view, there is no evidence in the instant case of any intention to resell upon the signing of the agreement (Exhibit A-5) on December 4, 1987. Furthermore, as pointed out earlier, the signing by the two parties on the same day completed the agreement and Mr. Ratle's concern about inquiring into the possibility of trying to have the agreement cancelled clearly confirms that his primary intention was to purchase in order to invest in another home, not to resell (4.03.6(4)).
96 4.03.7 The fact that the evidence suggests that Mr. Legault was not appointed assistant director general of La Cité de la Santé de Laval until August 1988 (3.29) and thus that it was not from him that Mr. Ratle received information in January 1988 (3.09) [TRANSLATION] “that the project contemplated could not be carried out” does not change the Court's opinion of Mr. Ratle's credibility. It may have been another person who gave him the information.
97 4.03.8 The fact that he put the land that had been purchased for $161,500 (exhibits A-5 and A-7) up for sale for $369,500 (Exhibit I-3) in no way establishes that the appellant's primary intention was to purchase in order to resell, as the respondent argued. From the moment a vendor decides to divest himself of property, it is entirely reasonable that he or she try to obtain the best possible price for it. After arm's length discussions between the parties, the price was set at $338,065. That was the fair price. It included $50,000 for the triangular piece of land belonging to the numbered company, which enabled it to comply with the City's by-law (3.16).
98 4.03.9 Given that the appellant did not summon Mr. Boivin as a witness, the respondent, referring to Lévesque v. Comeau et al. (4.02(7)), submitted that it must be presumed that that witness's evidence would not be favourable to the appellant. The respondent, on whose behalf Ms. Deslandes questioned him in the course of the investigation (3.27(2), 3.27(3)), pointed out these unfavourable aspects and Mr. Ratle explained himself (3.28.1). The respondent did not consider it appropriate to summon him. The appellant did not know where he lived.
4.03.10 Decision in Jake Friesen
99 This case, which was decided by the Supreme Court of Canada on September 21, 1995, was the subject of discussions between the parties in this case, each party citing it in support of its own position. The Supreme Court summarized the facts as follows:
In 1982, the appellant and several others bought a parcel of land for the purpose of reselling it at a profit. In the years immediately following its acquisition, the property substantially decreased in value and was eventually foreclosed in 1986. The appellant, relying on ss. 248(1), 10(1), 9 and Regulation 1801 of the Income Tax Act, sought to deduct the decline in the fair market value of the land as a business loss in his 1983 and 1984 tax returns. The appellant argued that he was entitled to make such deductions because s. 10(1) permits the use of such a valuation scheme should the initiative to purchase the land be deemed a “business” and should the land be defined as “inventory”. The Minister of National Revenue disallowed these business losses on the basis that the property was not “inventory in a business” within the meaning of ss. 10(1) and 248(1). The taxpayer appealed and both the Federal Court, Trial Division and the Federal Court of Appeal upheld the Minister's disallowance of these losses.
Held (Gonthier and Iacobucci JJ. dissenting): The appeal should be allowed.
Per L'Heureux-Dubé, Sopinka and Major JJ.: In interpreting sections of the Income Tax Act, the correct approach is to apply the plain meaning rule. When a provision is couched in specific language that admits of no doubt or ambiguity in its application to the facts, it must be applied. Here, on a plain reading of the relevant sections of the Act, the appellant was entitled to make use of the inventory valuation method in s. 10(1) in order to recognize a business loss on the property in the 1983 and 1984 taxation years.
Section 10(1) requires a taxpayer who computes income from a “business” to value the “inventory” at the lower of cost or market value or as permitted by regulation. The definition of “business” in s. 248(1) of the Income Tax Act specifically includes an adventure in the nature of trade. The appellant's venture is thus a “business” pursuant to that definition since it meets the judicially established test for an adventure in the nature of trade — namely, that the taxpayer has a trading or business intention with respect to the property. Indeed, the factual record reveals a legitimate “scheme for profit-making” with respect to the property.
100 Even though the instant case does not concern subsection 10(1), but rather subsection 85(1) of the Income Tax Act, the respondent nevertheless contended that the meaning given to the definitions of “inventory” and “business” in Friesen are applicable to the entire Act and thus to subsection 85(1) as well.
101 However, having regard to the intention to resell, according to the respondent, the property in issue was inventory property, not eligible capital property. It is expressly excluded.
102 In fact, the entire case turns on the question of intention at the time the land was purchased. In my view, the method used by the Supreme Court of Canada cannot be applied. That Court held that the property was inventory property; there was no discussion on the subject. The issue was whether subsection 10(1) could be applied and whether the appellant was entitled to elect the fair market value method of valuation.
103 The issue in the instant case is whether or not the property was inventory property. It all turns on the appellant's intention at the time of purchase, that is, December 4, 1987. Furthermore, in its financial statements the appellant had not shown the land as part of inventory (3.23.4), but on the asset side of the balance sheet under the heading “capital assets”.
104 4.03.11 It is the Court's view, based on the evidence adduced, that the intention at the time of purchase was not to resell and that there was no evidence of a secondary intention to do so.
5. Conclusion
105 The appeal is allowed with costs to the amount of $12,000 in taxes considering the appellant's choice of informal procedure.
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