Arnold Kostiner, Marsted Holdings Ltd, Hyman Fisher v. Minister of National Revenue, [1978] CTC 3063, [1978] DTC 1746

Delmer E Taylor:—These are appeals, heard on common evidence, against income tax assessments in which the Minister of National Revenue taxed the gain on the sale in 1974 of a parcel of real estate as income, rather than capital. The respondent relied, inter alia, upon section 3, subsection 9(1), paragraph 18(1)(b) and subsection 248(1) of the Income Tax Act, SC 1970-71-72, c 63, as amended.

Facts

On March 30, 1973, the appellants, operating as Se-Fish Associates (hereinafter referred to as “Se-Fish”), acquired at a cost of $539,985 the subject property located at 6550 Côte de Liesse Road, Montreal, Quebec. It was sold on June 13, 1974 for $805,000. At an earlier stage in this appeal process, the allocation between operating expense and capital expense of an amount of $52,200, spent in 1973 on the building situated on the subject property, had also been part of the dispute. It was reported to the Board at the commencement of the hearing that this had been settled between the parties but that the major issue noted above remained in contention. The Board heard the. evidence related to the capital/income gain question, but left , to the parties themselves the matter of making any necessary adjustments to the amounts originally involved in the assessments which. flowed from the accord on the $52,200 issue. The sole point at issue therefore will be the determination of the nature of the gain realized on the sale of the subject property (hereinafter referred to as the “property”), not the specifics of the amount involved or its apportionment among the three parties to these appeals. The appeals against the 1973 assessments will be treated by the Board as having been withdrawn.

Contentions

The appellants asserted as follows in their common “Statement of

Facts”:

—the taxpayers’ intent was to acquire property on a long-term investment basis;

—expenditures were made to accommodate the requirements of tenants, which resulted in the signing of long-term leases;

—the tenants enjoyed an adequate credit rating, thereby potentially assuring the taxpayers of affixed rental income on a long-term basis;

—Chas Cusson Ltée (hereinafter known as “Cusson”) subleased the entire building in June 1964 with an expiration date of April 30th, 1974;

—“Cusson” indicated an intent to extend the lease for a further ten-year

period with renewable options and desired repairs to be made. by the taxpayers;

—the taxpayers also secured a second tenant, Eagle Door Inc (hereinafter known as “Eagle”) when “Cusson” did not extend its lease on the entire premises. The term of this lease was five years net net with renewable options of five years;

—the following major expenditures and modifications were made pursuant to an agreement with “Cusson”—

a) air conditioning	$10,000;
b) partitioning	$26,000;

—to accommodate the needs of “Eagle”, taxpayers’ also made the following expenditures:

—the total amount expended on repairs and alterations to suit the two tenants was $52,200; these repairs and alterations did not add to the value of the entire building or affect its character, appearance or structure. They were made to accommodate and to be of use to the immediate tenant and the new tenant and primarily for the purpose of improving the building’s income earning features and to keep the property in an ordinary efficient operating condition;

a) electrical circuitry re: air-conditioning	$7,000;
b) cooler unit	$1,200;
c) wash-room facilities	$8,000;

—subsequently, the tenant “Eagle” encountered financial difficulties resulting in eventual bankruptcy;

—a new industrial park was proposed in the vicinity at that time which in the minds of the taxpayers would create problems in leasing the vacant space;

—the taxpayers received an unsolicited offer to purchase on advantageous terms and such a sale would enable the taxpayers to purchase other property more in line with their investment aims and policies.

The respondent contended that:

—during the relevant taxation years, the appellants were involved in the business of leasing industrial property;

—the respective partnership’s interests in Se-Fish were:

Arnold Kostine^..	9 0
Marsted Holdings Ltd	45%
Hyman Fisher	90%

—the partnership listed the above-mentioned property with two real estate brokers namely Bonaventure Land Corp and Armand Desrosiers Inc and received from these two brokers, two offers to purchase, one on March 29, 1974 and another one on April 18, 1974;

—in 1974 and the subsequent taxation years, the partnership sold some other real estate properties;

—the appellants had, at the time of acquisition of the property, at least a secondary intention of reselling it at a profit.

Evidence

Mr David Segal owns the appellant Marsted on an equal /3 basis together with his wife and.son. Se-Fish during the year in question owned other properties—one in New York State and another in Montreal—and negotiated for this property in 1972 before buying it in 1973. The new arrangements with Cusson had been for that lessee to occupy less space and this permitted the appellants to lease the balance of the space to Eagle. The “return on investment’’ as calculated by Segal—from the Cusson lease alone would have been about 10%, but the additional revenue from the Eagle lease increased this to about 20%. Efforts had been made to determine the credit rating for Eagle before that lease had been negotiated. The appellants had petitioned Eagle into bankruptcy after difficulties had been experienced in that company meeting its obligations under the lease. The market for leasing in the area had changed due to the construction of adjacent industrial space; the appellants had other uses for their funds; and the general economic and political outlook in the Province of Quebec had been a concern.

The general objective of Se-Fish in making an investment in real estate was to get the money back in about 8 to 10 years from a good net net lease. Some difficulties and complications were described to the Board related to the eventual sale of the of the property. Segal also had other real estate investments.

Mr Hyman Fisher corroborated the evidence of Segal, indicating that after he had retired from his own business about 1966 he had looked around for appropriate investments for his funds, and found such arrangements in his association with Segal and Se-Fish. He had other real estate investments, and attempted to place his funds in long-term, substantial, no difficulty, no administration leases, such as that he believed they had found with the subject property.

Argument

Counsel for the appellants substantially rested his case on Californian Copper Syndicate v Harris (1904), 5 TC 159. In addition refer- was made to Villa Capri Apartments Limited v MNR, [1970] CTC 464: 70 DTC 6307; Elgin Cooper Realties Ltd v MNR, [1969] CTC 426; 69 DTC 5276; and Samuel Y S Lee v MNR, [1978] CTC 2192; 78 DTC 1152. He covered each point which he felt should be considered in reviewing such a Case:

1. commercial rental property;

2. originally one tenant;

3. certain facilities particularly suitable to that tenant;

4. railroad siding nearby;

5. long-term lease;

6. options to renew:

7. property in a good location;

8. return from investment good;

9. Cusson renewed lease for less space;

10. market for tenants was good when purchase made;

11. Cusson’s AA credit rating;

12. improvements made for Eagle;

13. good credit rating for Eagle;

14. subsequent financial difficulties of Eagle;

15. new adjacent industrial park provided competition for tenants;

16. the economic conditions and language legislation in the Province of Quebec also had to be considered as impediments;

17. appellants did not put up a ‘For Sale” sign;

18. appellants did not advertise the property for sale.

"In summary it is necessary to decide from the facts what the. original intention of the taxpayers was in this particular case .bui from the facts elicited today it is our submission that their original and in fact sole intention right from the outset was to invest to obtain revenuebearing property, not to engage or turn over properties quickly, or that particular property, and not engage in a scheme of profit: making.” (Quotation from counsel.)

Counsel for the respondent put forward for the Board’s consideration that the salient facts brought out at the hearing were:

( 1) two principals were real estate businessmen and had been so engaged for a number of years;

(2) this sale was just an alternate way of realizing a profit;

(3) the appellants got rid of Eagle through bankruptcy;

(4) they listed the property with real estate dealers:

(5) there was no need to place “For Sale” signs or advertise it;

(6) both principals had almost daily business discussions with various real estate agents;

(7) the reasons for sale provided by the appellants are not substantiated;

(8) purchase and sale of property was as much a part of their total business as Was property rental.

Reference was made to Bestpipe Limited and Press-Seal Corporation of Canada Limited v MNR, [1970] CTC 310; 79 DTC 6226, as a judicial decision bearing on this matter, in Support of the position of . the Minister.

Findings

The Board has not gone into detail in repeating the evidence provided, but has listed the major points arising from the facts and evidence, as perceived by counsel. I am aware that issues of this kind may vary as to the facts and even to the interpretation that may be placed on those facts, and indeed legislative support can be found which gives comfort to both viewpoints. The mere fact that the appellants had involvement directly with the real estate field in their regular income production (as contrasted with something tangentially related, such as construction for example, or virtually unrelated such as fishing) does not of itself eliminate the possibility of a capital gain when property is bought and sold, but it does require the utmost effort in identifying and establishing the distinction which the Board is requested to make. In simple terms, it would seem to me that it would be essential in a case of this kind that the appellants not only highlight that which might logically and reasonably be regarded as their foremost intention, but also dispel any thought that the pursuit of the primary objective almost automatically encompassed a ready alternative or option from which gain could be realized.

Two quotations from earlier judgments of this Board might amplify the references already provided by counsel, within which both the principles and the specific facts of this case should be reviewed: Arthur E Kruger, Elmer D Bassani, Pantel Holdings Ltd v MNR, [1977] CTC 2311; 77 DTC 208, at 2320-2321 and 215 respectively:

The Board notes the effort and dedication of counsel in bringing forward for consideration numerous cases both of the Federal Court of Appeal and of this Board touching on the matter at issue. However, the Board recognizes the validity of the point also made by counsel that a determination in income tax law between capital or income account, due to its very nature, can usually only be made as a result of a serious consideration and assess- ment of the specific related facts in each case, and that earlier decisions serve mainly to enlighten the particular matter at issue, and provide general parameters and guidelines, rather than to give inflexible direction based on some similarity on facts and evidence. The Board has carefully reviewed the cases cited by counsel with that thought in mind.

In my opinion, to. determine a question of the kind posed at this hearing, particularly dealing with the purchase and sale of land and considered against the background just described, requires the following:

(a) An examination of the appellants’ personal and business circumstances at the time of acquisition, as such circumstances conflicted with, or complemented the probable fulfillment of their stated intention.

(b) A review of the efforts made and the progress demonstrated toward such stated intention as an objective.

(c) A critical consideration of the reasons advanced for the eventual abandonment or the frustration of the stated intention.

To the degree this procedure describes a rather objective test of the evidence, it may be so termed but I am unaware of any other approach save accepting, without such scrutiny, the assertions of the appellants, leaving the case open to a completely subjective assessment, and risking thereby not giving due attention to the facts and evidence the appellants have brought forward. The stated intention of an appellant in such matters may be regarded as that which he holds to have been his primary, often sole, objective at the critical point in time, eg the purchase of an asset. I do not hold that such a purchaser need have at that time only one possible objective—the primary one—and indeed it would be an unusual business matter which did not contain or allow for some flexibility of eventual outcome. It should be, however, the responsibility of an appellant in such a Situation to adduce evidence based on the above criteria which reflects favourably upon his contention as the predominant one, rather than as subsidiary or, in fact, inconsequential. Bearing in mind the retrospectivity of this ‘review’ process, it is inadequate for the appellant merely to establish that the stated intention is of such a character that it merely could have or should have occupied the central role in the initial decisions taken. It must be shown to have conspicuously done so.

James J Horvath v MNR, [1977] CTC 2429; 77 DTC 302, at 2431 and 304 respectively:

Having given my reasons for not accepteing the position of the appellant in this, matter, a further comment should be made on a major point of the argument given by counsel for the respondent, and I quote:

“The most significant factor is intention. It is not necessary that the sole intention of the appellant in purchasing the property was resale at a profit. In fact, his primary intention could have been to build a business premises or to build a rental property, but it is sufficient that if at the time of purchasing the property the appellant considered the possibility of resale at a profit and that consideration was one of the operating motivating considerations that led to the purchase of the property, then that is a sufficient intent, a secondary intent if you will, as substantial case law has defined it, that is, a sufficient intent to characterize the transaction as an adventure in the nature of trade.”

Suffice it to say that had the reassessment of the Minister rested on that proposition—‘the appellant considered the possibility of resale at a profit’— in my opinion, it would have been made on extremely tenuous grounds. I find no support in the case law cited by counsel to warrant the imposition of income tax merely on the consideration of a possibility, but the cross- examination by counsel showed that the appellant’s actions indicated a much stronger position than merely such passing reflection.

The impact of the position of counsel for the appellants is simply that the record of the appellants, particularly within the Se-Fish Associates format, was one of searching for, acquiring and operating stable rental properties as long-term investments, and it was with only that purpose in mind the subject property was purchased (there was no secondary intention). Conversely the thrust of the Minister’s position is that the appellants. were in the real estate field, for the purpose of producing income either from rental opportunities or from the sale of the assets acquired, with or without rental activity, and that the subject property must be looked at as one point in that general continuum (there was always a secondary intention).

The doctrine of “secondary intention” is not easily applied in dealing with income tax matters, and little enlightenment or advancement has been provided on the signal decision in Bestpipe (supra) by Cat- tanach, J. However, I would not hesitate in dealing with the instant case to adopt verbatim the assertion of the learned justice at pages 323 and 6234 respectively, of that judgment:

It is inconceivable to me that businessmen of the experience possessed by the officers and directors of the appellants would not have contemplated the sale of the land if their more ambitious plans for the use of that land could not be realized in whole or in part, nor do I think that they were oblivious of the fact that the land was situate in a developing area with the likelihood of an increase in price.

It is clear to me that the learned judge determined that such contemplation of disposition as a purpose had not been merely the “consideration of a possibility” but was of a sufficient magnitude to measure against the avowed other purpose—construction. In his view, after such serious thought, it had not been excluded at all from the totality of the program envisioned.

As indicated in Bassani (supra), the consideration of alternatives should be regarded as a responsible business approach in making any investment decision and in itself it need not be a factor in attracting income tax liability for the investor. In a real estate acquisition (and probably in most transactions), there is always the possibility of a sale at some time in the future. Axiomatically, the mere sale itself should not be determinative in concluding that the intention or purpose on acquisition was the realization of that eventuality. A conclusion must be reached by the Board as to where, along the scale from the “consideration of a possibility” to a “viable or probable alternative”, the prospect of such a sale was placed at the date of acquisition by the taxpayer. In certain cases, the evidence shows considerable sophistication, substantial current knowledge and business experience, a series of transactions and/or a direct and intimate relationship on a wide scale to the specific field of endeavour involved. For taxpayers with such a background to establish that their potential for profitmaking should be reduced to one overriding purpose (let alone to the exclusion of all other purposes as noted in Bestpipe (supra), while not an impossible task, appears to me to be monumental indeed. In such a matter, the. “critical consideration of the reasons advanced for the eventual abandonment or the frustration of the stated objective" (Bassani (supra)) in my view must take on the attitude of weighing up the degree of commitment to the stated intention, or conversely the the ease with which it was abandoned. In stating that opinion, I find nothing inconsistent with the expression by learned judges in the quotations from previous decisions provided by counsel for the appellants in support of their appeals.

Applying -that formula to the instant case, the reasons advanced for abandoning the stated objective and actively seeking a disposition do not stand up to critical examination, nor do they support any contention of frustration:

(a) the bankruptcy of Eagle—precipitated by the appellants themselves;

(b) difficulty in leasing vacant space because of shape of building—hardly a physical development which occurred after purchase, or was irreparable;

(c) tighter money—a generalization with no necessary relevance:

(d) political and economic situation in Quebec—hardly a serious factor when the profit of almost $200,000 was realized in only 15 months is considered;

(e) completion of new industrial park—quite contrary to what one would expect under point (d)—apparently everyone did not view the situation as bleak;

(f) other uses for funds—presumably a greater than 10% or even 20% return on investment was sought, again inconsistent with point (d), particularly if other investments were to be made in Quebec.

It might be asserted that in the total framework of Se-Fish operations, the preferred use of the property (all other things being equal) cauld have been as an investment asset to provide rental: income. The rationale advanced and the process used in re-ordering the priorities and abandoning that preference do not support a conclusion that the adoption of an alternative method of realizing the gain disrupted the total framework of Se-Fish operations, or disconcerted the appellants in any substantial way. Quite conversely, the evidence would support an opinion that the motivation for such abandonment was the facility with which the value in the asset itself could be realized as opposed to its utilization in olng-term income production. There is nothing in the evidence to suggest that the knowledge of such an alternative came after acquisition—in fact, had some of the elements

(a) to (f) above been real factors in the decision to sell; the property value between purchase and sale might well have been depressed rather than enhanced.

In a matter of this nature where the circumstances surrounding the issue are such as to provide prima facie support for the assumptions upon which the Minister has based the assessment, a quotation from Mr Justice Pigeon in MNR v James N Sissons, [1969] CTC 184; 69 DTC 5152, at 187 and 5154 respectively, specifically identifies the focus of the responsibility—it is for the taxpayer:

. . . to escape taxation on his gain from the operation he has to show that it is to be characterized as an investment. Otherwise, the conclusion is inescapable that it is an adventure in the nature of trade.

At the risk of extrapolating from the words of the learned justice, for the instant case I might add that the operation not only “is to be characterized as an investment”, but as an investment in which the fact that a reasonable or viable alternate purpose was available could not have been an evident consideration in the minds of the taxpayers at the time of acquisition: The evidence in this matter does not support a conclusion that such innocence existed, or that there was any such single purpose determination in the conduct of the operation and in its eventual termination. That evidence points dramatically and suc- cintly in the other direction.

Decision

The appeals are dismissed.

Appeals dismissed.