Donald Mitchell Contracting LTD v. Minister of National Revenue, [1978] CTC 2642, [1978] DTC 1477

The Chairman:—This is the appeal of Donald Mitchell Contracting Limited from an income tax assessment in respect of the 1973 and 1974 taxation years by which the Minister added to the appellant’s income for those years the amounts of $21,271 and $20,215 respectively as income from a business. The appellant objected to and appealed the assessment on the grounds that the profit realized from the sale of certain properties was in the nature of a capital gain.

The Facts:

The facts, which are not in dispute, can be summarized as follows:

a) Mr Donald Mitchell was, for some 18 years, a contractor engaged in the building and sale of residential housing.

b) In May of 1969, Mr Donald Mitchell acquired six lots on Queen Street in the Town of Kincardine (agreement of purchase and sale attached to pleadings). In December, 1969, Donald Mitchell Contracting Limited was incorporated and the said property was conveyed to the corporation at the purchase price.

c) The construction of six apartment buildings of four units each was commenced in 1970. The last apartment was completed in April, 1971.

d) In November, 1970, the appellant entered into a leasing agreement with the Hydro-Electric Power Commission of Ontario for the leasing on a monthly basis of all the apartments in four of the appellant’s buildings to employees of Hydro-Electric Power Commission of Ontario with a guaranteed full occupancy payment (agreement attached to pleadings).

e) Although the remaining two buildings were not subject to the Hydro- Electric Power Commission of Ontario agreement, the apartments were, in fact, also all rented to Hydro-Electric Power Commission employees.

f) On August 15, 1973, the four buildings subject to the lease agreement with Hydro-Electric Power Commission were sold to 264213 Holdings Limited for $187,000.

g) On January 3, 1974, the remaining two buildings were sold for $100,000.

Submissions:

The appellant company, through Mr Mitchell its President, submitted that the land was purchased and the apartment buildings constructed as a long-term rental income investment and as a hedge against a foreseeable decline in the demand for single unit family dwellings. The appellant contends that at the time of purchase there was no primary nor secondary intention of selling the properties. Mr Mitchell testified that although the apartments had an occupancy rate of approximately 95% and that Hydro-Electric Power Commission paid for unoccupied apartments in the four buildings subject to the lease agreement, the turnover in tenants was very rapid. It is alleged that tenants remained in the apartments for a period of only two to three months; that they deteriorated the apartments to the point where Mr Mitchell, who looked after the apartments himself, was continuously repairing or painting the apartments for the next tenants. Mr Mitchell stated that the reason the properties were sold was principally because of the attitude and the comportment of the short-term tenants which became a “continuous aggravation’’ resulting in high maintenance costs which rendered the rental income from the properties unsatisfactory as a long-term investment. He further alleged that the property was sold in a moment of frustration without having been listed for sale.

It was established that the appellant and/or Mr Mitchell had, prior to the construction of the six apartments, built residential housing for resale only. Counsel for the respondent, as a result of his questioning, contends that contrary to what one would normally expect, the appellant admitted having no more equity in the six apartment buildings alleged to have been built for investment purposes than he generally held in the residential housing built for resale. He also pointed out that the last apartment building was terminated in April of 1971 and that the four buildings under the lease agreement were sold on August 15, 1973. The two remaining buildings were sold on January 3, 1974. Counsel contends that the possession of the properties by the appellant for the short-term of approximately 2 /2 years is not indicative of the appellant’s intention of investing in rental properties on a long-term basis. The evidence is that Hydro-Electric Power Commission of Ontario fulfilled all its obligations under the lease agreement for the four apartment buildings and paid rent, as agreed, during the period of vacancies. The appellant admitted that the six buildings had an occupancy rate of 95%. Counsel for the respondent suggests that the appellant cannot now contend that the buildings were sold because they did not generate sufficient income and that the aggravation with the tenants, of which the appellant complains, could have easily been solved by having a manager look after the tenants, leaving Mr Mitchell free to carry on his residential housing construction business.

Counsel concludes that on these facts alone and because of the appellant’s background, one would have to conclude that the appel- lant’s intention in building the apartment buildings was not to invest in rental properties but that the apartments were built for resale. Counsel for the respondent further contends that the sale of the properties cannot be attributable to the abortion or frustration of the appellant’s plan or any other compelling reason.

Some controversy arose as to whether or not the properties had ever been listed for sale. Mr Lloyd Hutton, a real-estate agent with Wilfred Mcintee and Co Limited, who was called as a witness and he and Mr Mitchell both testified that on May 26, 1971, the subject properties were in fact listed, (Exhibit A-1). However, both witnesses stated that the listing was agreed to by Mr Mitchell in order to help Mr Hutton win a prize in a salesmen’s contest in which prizes were given to a salesman for reaching a certain amount of sales commissions, (Ex A-2). Both were emphatic however in repeating that the properties were not for sale but were listed for purposes of the contest only.

Exhibit A-2 must, no doubt, have been filed as an example of the existence of such contests. It cannot, of course, be the contest to which the witnesses referred to in relation to the listing of the properties on May 26, 1971, since the contest in Exhibit A-2 commenced of January 1, 1972.

Although Mr Hutton alleged that the contests were held quite frequently he did not say that they were held annually and there is no evidence, other than the testimony of Mr Mitchell and Mr Hutton, that the listing of the properties was only for the purpose of a salesmen’s contest, alleged to have taken place in 1971.

In support of this position, counsel for the appellant filed with the Board a letter from Mr Hutton to Mr Mitchell dated November 29, 1976, (Ex A-3), which reads as follows:

November 29, 1976.

Mr Donald Mitchell,

Box 36,

Listowel, Ont.

Dear Don:

The listing held by the Income Tax Department on file Re: the Mclntee listing on your apartment buildings was for my own personal use, for. a contest, and at that time you were not interested in selling them as you had built them for an income investment in case the house building business in Kincardine should taper off. You advised me that as long as you could get the credit to continue building, and there was a favourable market, you would not be interested in selling.

Yours with thanks,

(signed) Lloyd W Hutton.

Lloyd W Hutton.

LWH:FR

Counsel for the respondent filed with the Board as Exhibit R-1 an office memorandum dated February 25, 1976, admitted by Mr Hutton as having been written and signed by him and which reads:

Data re Sale

1. Listing with D Mitchell had expired—but on a gentleman’s agreement I kept on trying to sell the apartments.

2. I have no written record but I believe that agreed selling price was $52,000 per unit, originally including utilities.

3. I think I was approached by Mr Mitchell early in the spring 1971 re selling the buildings.

4. Mr Mitchell has always been a real gentleman in any dealings I’ve had, always honest and co-operative.

February 25th, 1976

(signed) Lloyd W Hutton

The price of $52,000 per unit in the February 25, 1976, memorandum is exactly the price asked for in the listing of May 26, 1971.

Since both Mr Hutton’s and Mr Mitchell’s statements, which contradict the written documents produced as Exhibits A-1 and R-1, were made under oath, the resulting probative value of both the oral and written evidence in that respect is; in my view, nil. I must therefore base my decision on other pertinent facts of this appeal.

Finding of Facts:

The declared intention of the taxpayer to invest in the subject rental properties must be supported by facts and the burden of establishing those facts to the satisfaction of the Board lies with the appellant.

The evidence is that the appellant is a contractor who has built residential properties for resale for eighteen years; the appellant’s equity in the land and the apartment buildings is low for investment purposes; the rental project with an occupancy rate of 95% at rates agreed to by the appellant evidently met the appellant’s financial objectives of his investment; the appellant did not produce any figures which could corroborate his allegations that cost of maintenance of the buildings was unusually high and thereby permit the Board to decide whether or not the appellant was justified in selling the buildings because it had turned out to be a bad investment; there is no evidence that the appellant’s investment in the building was in any way unsuccessful, thwarted or that he was compelled to sell the buildings; the continuous aggravation of having tenants move in and out every two or three months may have been very real to the appellant and may, as alleged, have disrupted his construction business, but it would not have been unusual for the owner of 24 apartments to hire some one to manage the appellant’s investment, which, of course, he did not do and finally he sold the properties after holding them some 30 odd months.

Other than the appellant’s declared intention of purchasing the land and building the apartments as a rental income investment, what evidence did the appellant adduce to support that contention? In the absence of any facts which might corroborate the appellant’s declared intent, I find that the appellant did not establish to the satisfaction of the Board that his sole intention at the time of purchasing the land and building the apartments was to invest in rental income properties. I conclude, therefore, that the Minister of National Revenue did not err in adding to the appellant’s income. the amounts of $20,271 and $20,215 for the 1973 and 1974 taxation years respectively as income from a business.

The appeal must therefore be dismissed.

Appeal dismissed.