Alpine Management Corporation Limited v. Minister of National Revenue, [1980] CTC 2338, [1980] DTC 1300

The Chairman:—This is the appeal of Alpine Management Corporation Limited from assessments in respect to the 1972, 1973 and 1974 taxation years. For the 1972 and 1973 taxation years, the appellant claimed capital cost allowance of $10,625 and $10,093.70 respectively on a building owned by the appellant and known as the Bow Valley Building situated on 6th Avenue, Calgary, Alberta. For the 1974 taxation year the appellant claimed a terminal loss as a result of the demolition of the said building in the amount of $191,781.30. On reassessing the appellant, the Minister disallowed the capital costs allowances, as well as, the terminal loss.

The assessment is based on paragraph 20(1)(a) and Regulations 1100(2) and 1102(c) of the Income Tax Act, SC 1970-71-72, c 63, as amended and the issue is whether or not the Bow Valley Building was acquired for the purpose of earning rental income, or whether it was acquired for demolition so as to construct a high rise building on the site.

The parties to the appeal agreed on the allocation of value for land and building with appropriate adjustments as being:

Summary of Facts

Mr Austin Ford, the appellant’s Chairman of the Board and its principal witness, discussed in some detail the events leading to the subject transactions.

In early 1940, Mr Ford purchased Alberta Billiard Supplies which manufactured pool tables etc, in a factory at 528-9th Avenue in Calgary, Alberta.

In 1948, at the time of the Leduc Oil discovery, the real estate business in West Calgary experienced a marked activity increase. Mr Ford moved the billiard operating to East Calgary, tore down the factory on 528-9th Avenue and built, with a partner, a two-storey building on the site known as the Derek Building. In 1956, Mr Ford invested in a chain of lodges in Banff and elsewhere in Alberta, which he still held at the time of the hearing and had served as guarantee for loans subsequently made.

In his evidence, the witness stated that it had been his life-long dream to build a high rise building named after him and this evidence was confirmed by several witnesses who had known Mr Ford for many years.

A real estate company had assembled eight lots in the downtown section of Calgary on the corner of 6th Avenue and 6th Street, which interested Mr Ford. He in fact purchased six of the eight lots, with the intention of purchasing the remaining two lots at a later date. In 1954, after demolishing the existing buildings on lots 1,2,3 and 4 of Block 32 (Exhibit A-1), he build a two-storey building known as the Alpine Building, using lots five and six as a parking lot. Mr Ford stressed the importance of the windows in the Alpine Building, overlooking the parking lot.

The Derek Building was sold at that time and three floors were added to the Alpine Building. Difficulties arose with his partner in the Alpine Building, Mr Peter McCrae, and Mr Ford eventually purchased Mr McCrae’s shares in Alpine Management Corporation Limited and remained the sole owner of all the shares in Alpine.

In 1954 and 1955, lots seven and eight of Block 32 which Mr Ford had intended buying, was sold to an English firm, MEPC Canadian Properties Limited, and a two-storey offices building was constructed on the site which was adjacent to Mr Ford’s parking lot. In 1964, an offer was made by MEPC Canadian Properties Limited, to purchase the Alpine Building parking lot, which was refused because of the importance given to the existence of windows on that side of the Alpine Building.

In 1971, MEPC Canadian Properties Limited was negotiating to sell the Bow Valley Building for $300,000. Because of the very active real estate market in Calgary and the rumour that the Government of Alberta was interested in purchasing all of Block 32, Mr Ford made inquiries as to the economic viability of the Bow Valley Building, (Exhibit A-2).

In November of 1971, Mr Ford consulted Mr George C Davey, then Superintendent of the Treasury Branches of Alberta who allegedly on the basis of its cash flow considered the Bow Valley Building a viable project and was prepared to grant a 10-year mortgage at 9.25% interest rate.

By letter dated December 20,1971, Mr Ford made an offer to purchase the Bow Valley Building for $270,000, (Exhibit A-4). The offer was refused by letter dated December 20, 1971, (Exhibit A-5). A second offer of $300,000 was made by Mr Ford in an agreement dated January 14, 1972, which contained a conditional clause that the vendor would make all leases or agreement for lease available to the purchaser’s inspection before purchasing. The purchase of the Bow Valley Building was executed on March 23, 1972, (Exhibit A-7; Exhibit A-8; Exhibit A-9).

In July 1972, problems in respect of leases in the Bow Valley Building began (Exhibits A-10 to A-14). Early in 1973, the four top floors of the Bow Valley Building were vacant and Mr Ford was forced to take a hard look at the building then 15 years old, and concluded that it required considerable renovation if it was to be rented, the cost of the improvements were estimated at $1,000,000.

In April 1973, Mr Ford consulted Mr Milne, an architect, with a view of tearing down the Bow Valley Building and using the parking lots five and six, as well as lots seven and eight on which Bow Valley was constructed to build what was to become the Ford Tower. A development permit from the City of Calgary was sought. Prints of sketches of the proposed 20 storey Ford Tower were submitted, as well as, a schedule describing the project, lots five and six were consolidated with lots seven and eight and the building permit granted, (Exhibits A-15 to A-21).

On July 2, 1973, a brochure of the proposed Ford Building was sent to Panartic Oils Ltd (Exhibit A-22), with a view of renting office space to that company. Panartic advised that, contrary to what had previously been considered, the company would not lease space in the Ford Tower, (Exhibit A-23).

In November 5, 1973, Mr Ford on behalf of Alpine Management Corporation Limited, advised tenants of the Bow Valley Building that owing to the Federal Government Policy on Energy, he was forced to delay his plans and the premises would not be required by December 31, 1973, but would be extended to January and perhaps on a month to month basis thereafter, (Exhibit A-24). In the summer of 1973, Mr Ford, although no detailed plans and specifications had been made and the plans were to be developed as the building went up, had again consulted Mr George Davey, the Superintendent of the Treasury Branches of Alberta and applied for an interim financing loan of $5,000,000, which was granted and the Ford Tower was built.

Mr P J McCaffery, counsel for the appellant, subpoenead Mr George Cyril Davey, referred to above, who testified that he had known Mr Ford for some 16 years and that in November 1971, he had been instrumental in arranging a $300,000 loan to Alpine for its purchase of the Bow Valley Building. Mr Davey testified that on the basis of the Bow Valley Building cash flow, he felt that its acquisition by Alpine was a sound and viable proposition which would pay itself out and was prepared to recommend the loan at 9.25%, but required the personal guarantee of Mr Ford. He stated that the $5,000,000 loan subsequently made by the Treasury Branch to Alpine, had taken place after he had retired from his position in Treasury Branch, but felt certain that the loan would not have been granted if Mr Ford’s financial position at that time did not warrant it. Mr Davey testified that although he was aware of Mr Ford’s life long dream of owning a tower named after him, there was no discussion with Mr Ford of building a high rise at the time the $300,000 loan for the acquisition of the Bow Valley property was made. Mr Davey States that Alpine’s financial position at that time would not have warranted a $5,000,000 loan for the construction of a new building.

In cross-examining Mr Davey, counsel for the respondent Mr W A Ruskin produced as Exhibit R-2 the application form used for processing the $300,000 loan to Alpine in December of 1971, which was signed by Mr Ross E White, then manager of the local Treasury Branch, in Calgary. Counsel for the appellant objected to the production of the Exhibit, since Mr Davey had not written it and could not testify as to the truth of the memorandum. The Board noted counsel’s objection, but allowed the document to be produced on the understanding that Mr White who had drafted the memorandum, would be called as a witness.

In re-examination, Mr Davey could not recall whether the memorandum attached to Exhibit R-1 was read to the loan committee of Treasury Branch, but presumed it must have been since that was the normal Branch procedure. He also stated that at the time, Mr White was being considered for appointment as Superintendent of Alberta Treasury Branches, because he was a good loan officer and an excellent man.

With reference to Mr White’s comments in his memorandum attached to the application for the $300,000 loan in December of 1971, Mr Davey claimed he did not recall anything being said about demolishing the Bow Valley Building and constructing a tower, but agreed that Mr White in presenting his application to the loan committee, was presenting the best possible picture of Alpine’s potential or in other words “puffing” as termed by counsel for the appellant.

Mr P J McCaffery also called as witness Mr Frank T Brete, Vice-President of Morguard Properties who was property manager of the Bow Valley Building; Mr R RG S Currie a life-long friend of Mr Ford who in 1971 was Vice- President of Panartic Oils Ltd, to whom space had been offered in the proposed tower (Exhibits A-22 and A-23), and Mr Harry Ford, Mr Austin Ford’s son, all of whom confirmed the evidence given by Mr Austin Ford. All the appellant’s witnesses were considered by the Board as reliable witnesses.

Mr W A Ruskin’s only witness for the respondent was Mr Ross E White, one of the assistant superintendent of the Southern Alberta Treasury Branches, who in 1971 was manager of Calgary’s Main Treasury Branch and who had processed the appellant’s application for a $300,000 loan.

In his comments attached to the application R-2, Mr White states:

The price available on the Bow Building is cerainly within reason and in fact represents a good investment for our customer. We are applying for a ten year loan; but there is an excellent possibility this loan will be paid out in full within the next five years by the construction of a high rise office building on the existing location of the parking lot and the new addition. The Alpine Building would remain in it’s present form with minor renovations to the exterior to fit in with the high rise being contemplated. If this project goes through the mortgage funds obtained would pay out our advance, consequently, I am satisfied the term of the loan will not be as lengthy as requested. The construction of the tower depends on one oil company lease and it appears very promising that Mr Ford will receive this lease and be allowed to proceed with his overall project.

Reference by Mr White to the fact that the Alpine Building would remain in its present condition with minor renovations to the exterior to fit in with the proposed tower, was confirmed by Mr Harry Ford as what in fact took place.

Mr White, also a credible witness, stated that having interviewed thousands of borrowers, he could not remember his interview with Mr Austin Ford nor could he recall his discussions, but assumed that the Ford Tower must have been discussed in 1971 in relation to the $300,000 loan for the purchase of the Bow Valley Building. Mr White claimed that at the time of his interview with Mr Ford, he was aware that Mr Davey had been consulted, but was unaware of the nature of their discussions. Mr White also stated that he presumed that the memorandum had been made from notes taken during the interview, because it was not his practice to use third party information as a source for comments in his memoranda.

Mr White admitted that the 10-year time mortgage loan granted to the appellant was not the Treasury Branches’ usual policy, normal loans were of about 5 years duration. He was satisfied that the Bow Valley Building cash flow warrantied such a loan and considered it a good investment and indeed recommended it. He added that Mr Ford’s personal guarantee had been required.

In cross-examination, Mr McCaffery brought out, that at the time the $300,000 loan was made that Mr White then being considered for promotion to the position of superintendent was under some stress; that Mr White could not recall who it was he had interviewed in relation to the loan in 1971; that the error in the footage on 6th Avenue referred to in the memorandum at 150 feet, when in fact it was 200 feet, could not have been made by Mr Ford; that Mr White had made no verification as to the oil company referred to in his memorandum; that he had not discussed the necessity or the consequences of demolishing the Bow Valley Building or nor had he seen any plan for the proposed high rise. Mr White reaffirmed that the Bow Valley Building was thought to be a good investment capable of paying itself out and confirmed Mr Davey’s statement that the appellant would not have qualified for a $5,000,000 loan in 1971.

He testified that the opinion he gave in his memorandum was based on information received; that it was possible that Mr Ford in an exuberant mood had spoken of his dream of owning a high rise . . . but added “I say that it is possible yes, not that it happened.” Mr White also stated that the ten-year loan would not have been granted had it not been required for immediate use.

Finding of Facts

The question to be determined by the Board is whether the appellant’s intention at the time of the acquisition of the Bow Valley Building was to invest in an income producing property, or to demolish it for the purpose of constructing the Ford Tower on the site. There have been innumerous decisions dealing with a taxpayer’s intention and it is generally agreed that the taxpayer’s declared intention must be seen to be supported by the facts and the circumstances surrounding the transactions. In this appeal I found Mr Ford, the Chairman of the Board of the appellant, to be a credible witness as indeed were all the witnesses who testified at the hearing. The decision in this appeal therefore can only be based on my appreciation of the facts and all the circumstances surrounding the purchase of the Bow Valley Building as presented to the Board.

It is Mr Ford’s declared intention, that the Bow Valley Building was purchased as an investment for the purpose of gaining or producing income. He also testified that it was his life long dream to have a high rise building named after him. The facts, in my opinion, support both these statements.

The construction and operation of the Alpine Building confirms, not only that Mr Ford was in the business, but was knowledgeable in the field of income producing office buildings. He was according to his testimony well aware of the market for office space in Calgary and followed it very carefully. The Alpine Building was fully rented at the time it acquired the Bow Valley Building and there was an overflow of tenants who leased office space in the Bow Valley Building.

The evidence is that on hearing that the Bow Valley Building was for sale, he immediately made inquiries as to the existing leases and cash flow of the property and included on his offer to purchase a conditional clause, the purchase being subject to Mr Ford’s examination of the leases and the cash flow of the property.

Mr George Davey in his testimony stated that the Bow Valley Building, on the basis of its cash flow was a good investment which would pay itself out. He also stated, that although he was aware of Mr Ford’s dream of owning a high rise, he did not recall discussing the demolition of the Bow Valley Building or the construction of a high rise in connection with the loan made for the acquisition of the Bow Valley Building. He affirmed that the $300,000 loan was made on the basis of the Building’s cash flow and its viability as an investment. Mr White’s evidence was much to the same effect that Bow Valley Building was a good investment which would carry itself and had no hesitation in granting an unusually long 10-year lease. He stated that a 10-year loan would not have been granted, had it not been necessary. Both Mr Davey and Mr White were categorical in stating that a $5,000,000 loan would not have been granted to the appellant for the constuction of a high rise in 1971, because its financial position even with Mr Ford’s personal guarantee would not warrant such a loan.

No plans had been made for a high rise in 1971 and no effort had been made by Mr Ford to find tenants for such a building.

The Bow Valley Building was in fact rented and the gross revenue from the building was $41,665, $50,546 and $7,500 for the years 1972, 1973 and 1974 respectively.

Counsel for the respondent claimed that if the cost of management had been included in the operating expenses as they should have been, the operations would have shown a loss. I am not convinced that that fact justifies concluding that the property was acquired for the sole purpose of demolition, particulary when there is uncontradicted evidence that there was a Slump in the renting of office space in 1972 and 1973, which caused Mr Ford to take a hard look at the Bow Valley Building. To attract tenants, the Bow Valley Building would have to be redecorated at a cost of $1,000,000. It is not unreasonable to accept Mr Ford’s statement that at that point in time he decided to construct the Ford Tower. Other than Mr Ford’s statement given under oath, the evidence which leads me to conclude that the appellant’s sole purpose in acquiring the Bow Valley Building in 1971 was not to demolish it and construct a high rise, is that he rented and derived rental income from the Bow Valley Building for some two years; he had made no plans for the construction of a high rise; he applied for a construction permit some 18 months after acquiring the Bow Valley Building; he had no prospective tenants for the proposed high rise. More importantly, he was in 1971 unable to finance such a project.

It is not possible of course to overlook Mr Ford’s stated desire to own a high rise office building named after him. Mr Ford’s own statements, Mr Davey and Mr Currie’s testimonies, make this abundantly clear. The evidence is that Mr Ford, in 1954, would have acquired the eight lots on 6th Avenue instead of six, had he been able to afford it. He was somewhat disappointed that MEPC Canadian Properties Limited, should have purchased lots seven and eight and constructed the Bow Valley Building. He lost no time in making an offer when he learned that MEPC Canadian Properties Limited were seeking to sell their building.

It is, under the circumstances, not difficult to believe that in Mr Ford’s mind there was at the time of acquisition the recurrence of his desire to build a high rise at some time in the future.

In my opinion, this is a classic example of a dual intention or motive in acquiring property. In this instance, on the basis of the evidence, Mr Ford’s primary motive was to acquire the property for the purpose of earning income for as long as it would take to put into effect his secondary intention that of building and operating a high rise office building, if and when circumstances permitted him to do so.

That in my opinion is what is reflected in Mr White’s memorandum, (Exhibit R-2). The possibility at some time in the future to build a high rise. The period 2 years, 5 years or 10 years of time it takes to realize the secondary intention has, in my view, no bearing on the fact that at the time of acquisition of the Bow Valley Building it was only a secondary intention, the primary intention being to acquire the property for the purpose of earning income.

On the basis of the evidence, I cannot conclude that the appellant’s sole purpose in acquiring the Bow Valley Building, was to demolish it as submitted by the respondent.

The appeal is therefore allowed and the matter referred back to the Minister for reassessment on the basis that the property was acquired for the purpose of earning income and that the capital cost allowances for 1972 and 1973, and the terminal loss claimed for 1974, are deductible pursuant to paragraph 20(1)(a) and Part XI of the Income Tax Regulations.

Appeal allowed.