Kanvest Ag v. Minister of National Revenue, [1980] CTC 2576, [1980] DTC 1489

The Chairman:—The appeals of Kanvest AG are from assessments in respect of the 1972 and 1973 taxation years. By assessment dated April 12, 1977, the Minister added to the appellant’s income for 1972 an amount of some $245,000 as income realized from sale of a certain property. The appellant having objected to the said assessment, the Minister reassessed the appellant on April 15, 1978 and, as I understand it, adjusted the quantum to $244,206.

For the 1973 taxation year, the Minister assessed the appellant on November 4, 1975 and added to the appellant’s income an amount of $1,429,901.27 realized as profit from the sale of properties in 1973. The appellant filed a notice of appeal on August 9, 1977. On receipt of the Minister’s reassessment for the 1972 taxation year, the appellant filed another notice of appeal dated May 11, 1978, in which he refers to both the Minister’s assessments of $244,206 for the 1972 taxation year and the amount of $1,454,650.30 assessed for the 1973 taxation year.

At the hearing counsel for the appellant, Mr John A Gamble, clarified his position by stating that the amount of $244,206 in issue was for the 1972 taxation year and should be deleted from the notice of appeal in respect of the 1973 taxation year. He also advised that an agreement had been reached with the respondent as to the adjusted cost base of the subject properties to be used in computing the profit realized from the disposition of the properties.

The Board therefore is seized with an appeal from a reassessment dated April 15, 1978 for 1972 (Board file #78-313) and an appeal from an assessment dated November 4, 1975 in respect of the 1973 taxation year, (Board file #77-813). By consent of the parties, the appeals were heard on common evidence.

The two issues in these appeal are:

1. Whether or not the subject transactions were in the nature of trade.

2. If the transactions were in the nature of trade was the appellant carrying on business in Canada?

Summary of Facts

The appellant, a company incorporated under the laws of the Duchy of Liechtenstein, was at all relevant times a non-resident of Canada. On August 31, 1971, the appellant in a single transaction acquired real estate holdings in Toronto from Peters Wiles and Co Ltd, an Ontario Corporation, for a total consideration of $1,438,000. (Exhibits A-7, R-3)

Included in the real estate holdings acquired by the appellant was a 20% interest in a commercial and development property known as “The Rawlinson Properties.” The legal title to the Rawlinson properties, made up of several buildings, was held on behalf of the beneficial owners, including the appellant, by St Joseph St Investments Ltd. The secretary and the director of St Joseph St Investments Ltd was Mr Joseph Chiappetta, a lawyer, who had acted in the acquisition of the Rawlinson properties and who had been subpoenaed by the appellant to testify at the hearing.

Mr Chiappetta testified that there had been no change of intention in the minds of the other beneficial owners of the Rawlinson properties to develop and operate the properties as a result of the transfer of the interest of Peters Wiles to the appellant. The Rawlinson properties however, were subject to a $500,000 first mortgage which was to become due on July 4, 1972 and refinancing was necessary. The Toronto-Dominion Bank to whom an application for a $500 loan was made, required the personal guarantees of the beneficial owners of the Rawlinson properties including that of Dr Willy Dober, the managing director of the appellant. (Exhibit A-1). Dr Dober refused to give his personal guarantee. The other beneficial owners in the circumstances and to extricate themselves from a difficult financial position, were considering an offer made by Mr Stephen Harry Aarons to purchase the Rawlinson properties at $42.75 per square foot for a total of $2,382,286.50, (Exhibit A-2). Through his agent in Canada, Dr Dober made it known that he was not interested in selling the properties. It was Mr Chiap- petta’s evidence that the other beneficial owners made inquiries as to the legal possibility of selling the properties without Dr Dober’s consent. On July 3,1972, Dr Dober on behalf of the appellant, forwarded a telegram to Mr Chiapetta’s attention to the effect that he authorized the Trustee, St Joseph St Investments Ltd, to sell the property at $60 per square foot, requiring all cash on the closing date August 31, 1972. (Exhibits A-3 and A-5)

On July 10,1972, Dr Dober authorized St Joseph’s Investments Ltd to borrow an amount of $630,000 and to execute a mortgage in favour of Toronto- Dominion Bank in the amount of $550,000, (Exhibit A-4). Dr Dober made no mention of the personal guarantee required of him by the lender.

St Joseph St Investments Ltd however proceeded with the sale. The agreement of purchase and sale between Mr Stephen Harry Aarons and St Joseph St Investments Ltd was signed on September 19, 1972 and closed on November 20, 1972 at a price of $45 per square foot. (Exhibit A-2)

The appellant is alleged to have sued St Joseph St Investments Ltd for selling the property and a writ to that effect was allegedly issued. The proceeds from the sale of the property were paid on November 23, 1972, but St Joseph St Investments Ltd allegedly refused to pay the appellant until the appellant had withdrawn his suit. The appellant was paid its share of the proceeds of sale in the amount of $244,206 in 1972, 6 weeks after the other beneficial owners had been paid.

Other than the Rawlinson properties referred to above, 20% of which was acquired in a package deal and sold in 1972, the appellant had acquired as sole owner other properties: Five rental commercial properties, two real property mortgages, two small lots, a farm and a cottage. It is my understanding that the farm was sold at a loss and the cottage was also disposed of, but their sale is not subject to the instant appeal. The remaining properties acquired by the appellant were sold to Astride Properties Limited on January 29, 1973 for $2,150,000. (Exhibit A-13)

It is alleged that all of the appellant’s remaining properties were sold because of the frustrating experience the appellant had with the Rawlinson properties and the conviction that the appellant could not continue to operate in Canada as it was accustomed to.

There does not appear to be any dispute as to the quantum of the profit realized by the appellant from the disposition of the properties, or that the appellant’ acquisition did contain rental properties from which rents were in fact derived. The fact that the appellant’s company was not resident in Canada was admitted by the appellant.

Submissions

Counsel for the appellant’s position is twofold:

1. The appellant acquired the subject properties and the real property mortgages in a single purchase transaction for the purpose of deriving rental and interest income therefrom. The appellant was forced to sell his interest in the Rawlinson properties by the other beneficial owners in 1972 and it sold all of its real properties in Canada in 1973 as a consequence of the unauthorized transfer of its interest in Rawlinson properties. The appellant contends that the purchase and sale transaction with respect to the properties constituted a disposition of taxable Canadian property of a capital nature and having complied with provisions of Section 116(1) of the Income Tax Act SC 1970-71-72, c 63 as amended and that any amount taxable pursuant to Section 2(3)(c) of the Act, should be made with regard to that fact.

2. The appellant was during the pertinent taxation period carrying on business in Canada and should not be assessed pursuant to Section 2(3)(b) of the Act or Section 115(1 )(a)(ii) of the Act and that the provisions of Part XIV of the Act are not applicable. It is further contended that the word “business” within the meaning ot Section 2(3)(b) of the Act does not include an adventure, a concern in the nature of trade.

Counsel for the respondent submitted:

1. That the appellant purchased the properties with the intention at the time of acquisition of trading and turning the properties to account for a profit.

2. Alternatively the respondent submits that if the appellant acquired the properties as an investment, he had at the time of acquisition a secondary intention of turning the properties to account.

3. As a second alternative the respondent contends that if the transaction did not constitute an adventure in the nature of trade then the appellant realized a capital gain on the profits realized in the transaction.

Finding of Facts

The appellant company was unquestionably a non-resident of Canada, which according to the testimony of Mr Arno Meyer, a resident of Switzerland and secretary and director of the appellant, was in corporated in 1971 for the purpose of acquiring and selling real estate in foreign countries, (Exhibit A-6, art 3 of the Company By-Laws). It is my understanding that the appellant owned no other properties in any foreign country during the pertinent taxation years.

Before deciding whether or not the appellant’s transactions constituted the carrying on of business in Canada, it is first necessary to consider whether the profits realized from the disposition of the subject properties are in the nature of income or capital.

The evidence is that the properties subject to the appeals and acquired in a package deal can, for the determination of the issue, be considered as income-producing properties which in fact produced income in each of the taxation years.

The declared intention of the appellant, which is reflected more particularly in letters from Dr Dober dated September 30,1971 and October 20, 1972 respectively (Exhibits A-10 and A-11), was to acquire the properties as an investment.

There is sufficient evidence on the record for the Board to accept that the appellant objected to the proposal of selling the properties at $42.75 per square foot. However, Dr Dober by letters dated June 22, 1972 and July 3, 1972 (Exhibits A-3 and A-5), did authorize the sale of the properties for $60 per square foot. The properties were in fact sold in November 1972 at $45 per square foot, for a total price of $2,382,286.50.

The remaining properties acquired along with the Rawlinson properties in the package deal, were also disposed of by the appellant by his own volition on January 29, 1973 for $2,150,000. (Exhibit A-13)

It has become trite that formal declaration of intentions must be viewed in the light of all the surrounding circumstances before a transaction can be considered as having been made solely for investment purposes.

It is the appellant’s position that he has successfully rebutted the respondent’s assumptions as set out in paragraph 4(a) of the reply and that the Board should conclude that the profits realized from the sale of the properties, were capital in nature.

On the basis of the evidence, the Board can conclude that the appellant may well have had the intention of investing at the time the properties were acquired. However, there are many factors surrounding the purchase which are a clear indication that a long term investment was not the only intention the appellant had at the time of purchase.

Many of the facts surrounding the purchase of the properties by the appellant would indicate a secondary and speculative intent. First, the properties were acquired for a price of $1,498,000 with a deposit of only $1,000, without Dr Dober or any officers of the appellant visiting the properties; without the appellant requiring any financial statements; without knowing or communicating with the co-owners of the Rawlinson properties, who had the control of the properties and without knowing their intentions as to what was to be done with the said properties in the future. No discussions were held and no plans made for necessary repairs on the properties and no study of costs were made by the appellant.

In my Opinion, no serious investor would have acquired what was to have been rental producing properties under those conditions. On the other hand a speculator whose sole interest in the properties was for purposes of resale at a profit, would not have acted otherwise.

If it was Dr Dober’s sole intention to invest in rental producing properties, it is difficult to understand why he categorically refused to sign the mortgage renewal guarantee required of the co-owners of the Rawlinson properties. Indeed it was Dr Dober’s refusal to sign the guarantee which prompted the co-owners to consider selling the Rawlinson properties which in fact resulted in their sale.

In his letter of June 22, 1972 (Exhibit A-5), Dr Dober states: “As we have communicated to you, we are not interested to sell now our part of this property.” (italics mine). From this an inference may well be taken that the sale of the properties was in fact considered at the time of acquisition if the price were high enough. Dr Dober’s price for the Rawlinson properties as stated in his letter of June 22,1972 was $60 a square foot. Although there may have been disagreement as to the price of the Rawlinson properties, they were in fact sold as indeed were all the appellant’s Canadian properties within a period of 15 months in keeping with the appellant company’s object of incorporation.

Exhibit A-6, art 3 reads—(Translation):

Object of the company is:

Purchase and sale and management of real estate abroad. Financial and legal transactions of any kind.

The onus of establishing that the properties purchased in Canada in 1971, were acquired solely for the purpose of investing in rental producing properties rests squarely on the appellant.

Dr Dober who clearly was the controller of the appellant and whose intention the Board is attempting to determine in the appeals was not present at the hearing of the appeals.

Mr Arno Meyer, a lawyer residing in Switzerland, the secretary and an executive officer of the appellant, was called as a witness. His evidence as to the meeting between Dr Dober and a Mr Klieb a Swiss national who at the time resided in Canada and who proposed to Dr Dober the purchase of the Subject properties from Mr Peters Wiles, was very far from clear. Mr Meyer added very little if anything to clarify the discussions that had taken place at the time of purchase between Dr Dober, Mr Klieb and Mr Peter Wiles. The lack of knowledge of Mr Meyer in respect of facts pertinent to the purchase of the properties or the intention of Dr Dober, his absence of memory relative to documents, letters and telegrams, renders his evidence of negligible probative value in determining what Dr Dober’s intention may have been in purchasing the properties.

On the basis of the evidence, the appellant has not established to the satisfaction of the Board that the appellant’s sole intention was to acquire the properties for purposes of investment, and he has not succeeded in rebutting the assumptions on which the respondent based his assessment, particularly on the assumption that the appellant had at the time of acquisition a secondary intention of disposing of the properties at a profit.

Turning now to the second point in issue: If the transactions were in the nature of trade, was the appellant carrying on a business in Canada within the meaning of subsection 248(1) of the Act? In support of his position that “business” as used in paragraph 2(3)(b) of the Act, does not include an adventure in the nature of trade, the appellant cited the decision of the Federal Court Case in Tara Exploration and Development Co, Ltd v MNR, [1970] CTC 557; 70 DTC 6370; which was confirmed by a decision of the Supreme Court of Canada, [1972] CTC 328; 72 DTC 6288.

At 567 & 6376 respectively, Mr Justice Jackett then President of the Exchequer Court of Canada stated:

With great doubt as to the correctness of my conclusion, I am of opinion that section 139(1)(e) does not operate to make a non-resident person subject to Canadian income tax in respect of a profit from an adventure that otherwise does not amount to, and is not part of, a “business”. With considerable hesitation, I have concluded that the better view is that the words “carried on” are not words that can aptly be used with the word “adventure”. To carry on something involves continuity of time or operations such as is involved in the ordinary sense of a “business”. An adventure is an isolated happening. One has an adventure as opposed to carrying on a business.

My conclusion is, therefore, that the appeal succeeds on the ground that the appellant does not fall within the charging section of the Income Tax Act.

In that case there existed a Canada-Ireland Income Tax Agreement Act and Mr Justice Jackett examined the applicable provisions of the said agreement and found that the profit made by the taxpayer was not attributable to a permanent establishment and concluded that the taxpayer, by virtue of the provisions of the tax agreement, did not fall within the terms of the Income Tax Act.

The Supreme Court of Canada confirmed the Exchequer Court’s decision without however subscribing to the interpretation of Mr Justice Jackett of paragraph 139(1 )(e) in relation to subsection 52(2) of the Income Tax Act. Mr Justice Abbott on behalf of the Court stated at 329 and 6289 respectively in MNR v Tara Exploration and Development Co, Ltd (supra):

As to the first of the questions, the learned trial judge appears to have proceeded on the assumption that the profit in question were taxable under s 2(2) as profits from an adventure in the nature of trade. I agree with that assumption and, in my view, such profits would have been taxable income in the hands of a resident of Canada. However, since I am of the opinion that respondent is entitled to exemption under the Canada-Ireland Income Tax Treaty, I prefer to dispose of the appeal on that basis.

No tax agreement between Canada and the Duchy of Liechtenstein was brought to the attention of the Board, but more importantly the instant case is distinguishable from the Tara (supra) case in that the appellant in the case at bar had its management in Canada. On August 10,1971 by contract, the appellant constituted Mr Wiles as its manager and agent (Exhibit A-8) and was given specific authority by letter dated June 22, 1972 (Exhibit A-5).

The appellant had by contract an establishment in Canada and was in fact carrying out the objects of its incorporation, viz. “The purchase, sale and management of real estate abroad” (Exhibit A-6), through its agent Mr Peters Wiles.

The appellant also cited Hiwako Investments Ltd v Her Majesty the Queen, [1978] CTC 378; 78 DTC 6281. In that appeal the Federal Court found that the evidence did not support the inference that the prospect of resale was a motivating reason for the purchase of certain apartments. In the instant appeals, I have found on the basis of the evidence that the prospect of resale was indeed a motivating factor which existed at the time the properties were acquired, notwithstanding the appellant’s declared intention of having acquired the properties for investment purposes.

For these reasons the appeals are dismissed.

Appeal dismissed.