Lamarre T.C.J.:
1 This is an appeal from an assessment for the appellant's 1986 taxation year. The issue concerns the profit he realized on the sale of a lot situated in Boucherville in 1986. The appellant reported this profit as a capital gain. The Minister of National Revenue (the “Minister”) ruled that the profit was business income.
Facts
2 André Couture, an engineer and shareholder in Construction J.M. Vallée Inc. (“Vallée Inc.”), and the appellant testified at the hearing.
3 Vallée Inc. has been in existence since 1977. At the time of its incorporation, the appellant and his brother, Mario Landry, held 80 per cent of the shares, and the remaining 20 per cent belonged to Jean-Marc Vallée. At the time Vallée Inc. was created, Jean-Marc Vallée had been operating a residential construction business in Québec for some time, and the Landry brothers operated other businesses in the field of building materials distribution. These businesses were divided into seven branches under the corporate entity Matériaux Rénomat (“Rénomat”), of which the appellant was president and his brother vice-president. Rénomat's turnover at that time was $20 million. Wishing to make Rénomat appeal to a particular clientele, the Landry brothers decided to go into business with Jean-Marc Vallée, Mario Landry's brother-in-law, and thus joined forces in Vallée Inc. At the same time, the appellant was also vice-president of another business by the name of Thilco International (“Thilco”), operating in toy manufacturing.
4 As part of the operation of its residential construction business, Vallée Inc. had an inventory of a number of vacant lots, which it resold once the houses were built on the lots. Jean-Marc Vallée, the president of Vallée Inc., was the person most involved with this business since this was his field of expertise. The Landry brothers had their say when Vallée Inc. purchased lots. Their involvement was more financial in nature.
5 In 1981, another brother-in-law of Mario Landry, André Couture, who was completing his training in engineering, purchased 30 per cent of the shares of Vallée Inc. from the Landry Brothers. The brothers then held only 25 per cent of the shares each. Mr. Couture testified that he wanted to take the business's operation in another direction. He wanted to get out of residential construction in order to engage in commercial and industrial construction instead. At that point, Vallée Inc. had a turnover of about $500,000. It had in its inventory at that time two completed houses and a number of vacant lots. Mr. Couture said that, from that point on, he had tried to dispose of both the houses and the lots for Vallée Inc. because they were not suited to what he now wanted to do with the company. It was thus he who had taken over the management of the business.
6 During this period, residential construction was entering a recession (interest rates were also very high) and lots were selling with great difficulty or not at all.
7 In 1983, Rénomat experienced such major financial difficulties (it went from seven branches to two at the end of 1983) that the bank wanted to take over the business's operations. Thilco had to advance money to it in order to keep it afloat. No longer having any interest in Vallée Inc., the Landry brothers wanted to recover the money they had invested, which was on the order of $100,000, to invest it in Rénomat. Mr. Couture, who was interested in purchasing their shares at that time, did not have the money necessary. It was then that the shareholders reached an agreement.
8 By a contract of sale dated August 31, 1983, the Landry brothers sold their shares in Vallée Inc. to the two other shareholders, André Couture and Jean-Marc Vallée, for the sum of $72,132.07 payable on September 1, 1986. On that same day, Vallée Inc. sold the lots in its inventory (including the Boucherville lot that is the subject of the instant case) to the Landry brothers for the sum of $125,972.13 indicated in the contract. By an adjustment agreement dated November 2, 1983, the selling price was corrected to show a figure of $131,811.65. The appellant explained in his testimony that the selling price of the lots had been determined on the basis of two factors. The first was the value of a $59,679.58 note that Vallée Inc. owed to the Landry brothers, which amount appeared on the company's financial statements to August 31, 1982. The second factor to be considered in setting the selling price was the value assigned to the shares at the time of the sale to André Couture and Jean-Marc Vallée, that is $72,132.07. The total price of the lots was thus calculated as the sum of these two amounts, that is $131,811.65. Of this figure, $59,680, the value of the note, was considered to have been paid in cash, $18,443 was payable to the Caisse Populaire St-Constant in repayment of the mortgages and the balance of the selling price was payable before September 1, 1986, with interest.
9 The lots were then divided between the Landry brothers. The appellant sold a few of them between 1983 and 1986, in some instances at a nominal profit, in others at a loss. According to the appellant, his intention in purchasing those lots had been to recover his investment in Vallée Inc. As the recession was at its worst point, he had expected no profit. Moreover, the sale of the other lots that are not the subject of the instant case produced little or no profit.
10 The appellant received no serious offers for the Boucherville lot until 1986. The few offers he did receive were well below his cost. The appellant testified that he wanted to recover his investment, not to get rid of his land. In 1986, as a result of a zoning by-law, the appellant received an offer of $72,000, which he immediately accepted. The lot was thus sold on September 10, 1986, for $72,000, so that the appellant realized a profit of $31,856.
11 The appellant stated specifically on cross-examination that, in 1983, the market value of the lots acquired from Vallée Inc. was definitely less than their cost to the company. If the opposite had been true, he and his brother would not have done what they did. The company would simply have sold the lots and would subsequently have recovered their investment through dividends or share redemptions. Furthermore, it may be noted, as indicated above, that the price of the lots was fixed simply on the basis of the book value of the shares and the amount of the debt.
Analysis
12 Counsel for the appellant argued that the profit realized on disposition of the lot in Boucherville had rightly been reported as a capital gain in the appellant's return of income since the appellant's intention at the time he purchased that lot was not to resell it at a profit, but to resell it in order to recover his investment in Vallée Inc.
13 Counsel for the respondent contended that the appellant could not claim, by testifying, that the transactions had been anything other than those that had actually been carried out by notarized agreement. It was clear in his view that the sale of Vallée Inc.'s shares and the sale of the lots were two completely separate transactions. The appellant could not claim after the fact, by testifying, that the lots had been acquired in exchange for shares. Counsel contended that it was clear from the evidence that those lots had been purchased in order to be resold at a profit or at least that one of the appellant's considerations at the time the lots were acquired was the possibility of reselling them at a profit.
14 As mentioned above, the point at issue is whether the profit realized on disposition of the lot in Boucherville must be characterized as a capital gain or as business income.
15 The Income Tax Act (the “Act”) defines “business” in section 248 as follows:
“business” includes a profession, calling, trade, manufacture or undertaking of any kind whatever and, except for the purposes of paragraph 18(2)(c), an adventure or concern in the nature of trade but does not include an office or employment;
16 In order to characterize the transaction as an adventure in the nature of trade, it is important to verify what the taxpayer's intention was at the time of the acquisition of the property that gave rise to the profit and to analyze the facts and circumstances surrounding the transaction in order to determine the true intention.Furthermore, it is not sufficient to verify the primary intention; it must also be determined whether there was a secondary intention at the time of acquisition. Thus, if the purchaser had in mind, at the moment of the the purchase, the possibility of reselling it at a profit as an operating motivation for the acquisition, the transaction will then be considered to be an adventure in the nature of trade.
17 Furthermore, the fact that the land was inventory in the hands of the vendor (Vallée Inc. in the instant case) does not thereby make it inventory in the hands of the purchaser (the appellant). Judge Bowman of this Court wrote as follows in Rudacel Investment Co. v. Minister of National Revenue (1992), 92 D.T.C. 1118 (T.C.C.), at p. 1121:
Kinwest, a separate juridical entity, acquired land and engaged for five years in the business of developing and selling it. The shareholders' ownership of shares in Kinwest was a capital investment in a business enterprise carried on by a separate legal entity. Kinwest's business and its profits from that business were its own and not those of its shareholders. That principle has been entrenched in our law for at least a century....
18 Furthermore, it is not necessary to characterize the transaction as an exchange or otherwise, as counsel for the respondent attempted to argue, in order to decide whether the profit realized was business income or a capital gain. It is sufficient to consider the whole of the circumstances surrounding the various transactions in order to conclude whether or not the profit realized was the result of an adventure in the nature of trade. This is essentially a question of fact.
19 A priori, it might be thought that a transaction involving a vacant lot should be considered to be an adventure in the nature of trade, if the intention at the time of purchase was to resell it as it was without even hoping to make a profit.Thurlow J. of the Exchequer Court wrote as follows in Minister of National Revenue v. Taylor, supra, at pages 1137 and 1138:
And a transaction may be an adventure in the nature of trade although the person entering upon it did so without any intention to sell its subject matter at a profit. The intention to sell the purchased property at a profit is not of itself a test of whether the profit is subject to tax for the intention to make a profit may be just as much the purpose of an investment transaction as of a trading one. Such intention may well be an important factor in determining that a transaction was an adventure in the nature of trade but its presence is not an essential prerequisite to such a determination and its absence does not negative the idea of an adventure in the nature of trade. The considerations prompting the transaction may be of such a business nature as to invest it with the character of an adventure in the nature of trade even without any intention of making a profit on the sale of the purchased commodity.
20 However, this will not necessarily be the case if the evidence shows that the purchaser's intention at the time of acquisition was not to resell the land at a profit and that there were other motivations for engaging in such a transaction. Thus, if the appellant's motivations in purchasing the land were to use it as capital, that acquisition would then be considered to be capital in nature even if the land were subsequently resold at a profit. On this point, I cite the remarks by Noël J. in Racine, supra, at page 5103:
...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.
21 The question that then arises is whether the transaction that generated the profit was carried out simply in order to liquidate an investment or as part of a business operation started up with the intention of realizing a profit. The Lord Justice Clerk (Macdonald) of the Court of Exchequer (Scotland) developed the following test for dealing with this question in California Copper Syndicate Ltd. v. Harris (Surveyor of Taxes), (1904) 5 T.C. 159, at p. 165:
What is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts: the question to be determined being - Is the sum of gain that has been made a mere enhancement of value by realizing a security or is it a gain made in an operation of business in carrying out a scheme for profit-making?
22 The evidence in the instant case is that the appellant and his brother were at a serious financial impasse.They needed money and no longer held any interest in Vallée Inc. André Couture, its new president, wanted it to change direction and thus divest itself of its lots at a time when residential construction was in a recession. Rather than lose their investment, the Landry brothers decided to transfer their shares and buy back the lots, with which they hoped to recover their investment. The purchase price of the lots was calculated on the basis of the selling price of the shares and the amount of the debt. It was also certainly easier for them to resell the lots than to sell their shares. Does the fact that the appellant intended to resell the lots at the moment he acquired them for the purposes indicated above ipso facto characterize the transaction as being in the nature of trade? My opinion is that it does not. As Martland J. stated in the majority judgment of the Supreme Court of Canada in Irrigation Industries Ltd. v. Minister of National Revenue (1962), 62 D.T.C. 1131 (S.C.C.), respecting securities transactions, at page 1133:
...In my opinion, a person who puts money into a business enterprise by the purchase of the shares of a company on an isolated occasion, and not as a part of his regular business, cannot be said to have engaged in an adventure in the nature of trade merely because the purchase was speculative in that, at that time, he did not intend to hold the shares indefinitely, but intended, if possible, to sell them at a profit as soon as he reasonably could. I think that there must be clearer indications of “trade” than this before it can be said that there has been an adventure in the nature of trade.
23 In Shuckett v. Minister of National Revenue (1965), 65 D.T.C. 5122 (Can. Ex. Ct.), the President of the Exchequer Court at that time ruled as follows with respect to a situation in which a creditor had accepted a property in payment of his claim, at pages 5124-5125:
There is, in my mind, no doubt that, if a person who has loaned money to a borrower who is unable to raise the money to repay it, accepts from the borrower some asset that cannot readily be turned into money at the moment in settlement of the obligation to repay the loan, the acquisition of such asset does not in itself constitute the launching of a venture in the nature of trade. Normally, in any such case, at the time of the settlement transaction, the lender does not know whether he will ultimately be able to obtain, upon disposition of the asset accepted in lieu of cash, an amount equal to the amount of the loan, an amount less than the amount of the loan or an amount greater than the amount of the loan. Nevertheless, if the sole motivating reason for the transaction as far as the lender is concerned is the lender's desire to obtain repayment of the loan, the acquisition of the asset is, as far as the lender is concerned, merely receipt in kind of repayment of the loan.
On the other hand, the fact that the property acquired was paid for by discharge of a debt owing to the vendor by the purchaser is not incompatible with the acquisition being the inception of a venture in the nature of trade. Neither is the fact that the vendor of the property is unable to pay money owed by him to the purchaser of the property incompatible with acquisition being the inception of a venture in the nature of trade.
If, here, one of the motivating reasons for the acquisition by the appellant of the lots in question in 1951 was his expectation and hope that he would be able to resell them at a profit, even if there was another motivating reason consisting of the appellant's desire to collect loans from borrowers who were in financial trouble, the acquisition was the inception of a venture in the nature of trade.
As indicated earlier the onus in this case was on the appellant to show that he did not acquire the lots in question with a view to profit by turning them to account or trading in them....
24 It is my view in the instant case that the appellant has shown on a balance of probabilities that the preponderant operating motivation for his acquisition of the lot in issue was not the intention of reselling it at a profit. Although the appellant admitted that he had the intention of reselling the lot at the time he acquired it, he was in a way forced to purchase the lots in view of the impossibility of divesting himself of his investment in Vallée Inc. It cannot be claimed here that the appellant acted as a trader in similar matters as was the case in Taylor, supra. He was not a real estate speculator and the operating motivations for his engaging in such a transaction do not indicate that he intended to engage in land-trading. In the words of the Supreme Court of Canada in Irrigation Industries, supra, there would have had to be clearer indications in the evidence that the appellant was carrying on a land sales “business” before the transaction could be characterized as an adventure in the nature of trade.
25 The situation in Darius v. R. (1974), 74 D.T.C. 6260 (Fed. T.D.), to which counsel for the Minister referred, is different. In that case, the appellant had received a lot from the company in which she was a shareholder in payment of a debt that the company owed her. The profit on the sale of that land was held by the Federal Court, Trial Division, to be business income. The appellant in that case had expertise in the real estate field. At the time she acquired the land, the company's sales were excellent (which was not the case for Vallée Inc.), and it was in evidence that the appellant had no immediate reason to want to be repaid, which suggested that she wished to make a profit on the sale of the land without tax consequences. In the instant case, the appellant urgently needed to recover his investment since his other businesses were experiencing serious financial difficulties at the same time. Moreover, he sold the other small lots at a price approaching cost. In my view, all this shows that the appellant's intention was also to resell the Boucherville lot at a price as close as possible to his cost, thus confirming the argument that the appellant wished to recover his investment.
26 The circumstances as a whole lead me to believe that the transaction respecting the Boucherville lot was merely an alternative way for the appellant to recover his investment in Vallée Inc., despite the fact that the existence of two separate transactions cannot be ignored.
27 For these reasons, the appeal is allowed and the assessment is referred back to the Minister for reassessment on the basis that the $31,856 profit realized in the 1986 taxation year on the sale of the lot in Boucherville constituted a capital gain for the appellant, with costs to the appellant.
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