Date: 19980401
Docket: 95-1086-IT-G
BETWEEN:
154135 CANADA INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
LAMARRE J.T.C.C.
[1] The appellant is appealing from an assessment made by the
Minister of National Revenue ("the Minister") for the
1990 taxation year on June 8, 1993, pursuant to the
Income Tax Act ("the Act"), and another
assessment made pursuant to the Act on May 10, 1993,
regarding Part III tax.
[2] In calculating its income for 1990 the appellant reported
a profit of $3,173,929 on the disposition of an office building
located at 144 Boulevard de l'Hôpital in the Town
of Gatineau as a capital gain, and included the taxable portion
amounting to $2,313,780 in its income. Following this disposition
the appellant made an election in accordance with to
s. 83(2) of the Act regarding a capital dividend of
$612,930, which was paid tax-free to its shareholders.
[3] In assessing the appellant the Minister considered that
the gain made was not a capital gain but business income. He
accordingly cancelled the capital gain and added $3,173,929 to
the appellant's income. He further assessed tax pursuant to
Part III of the Act in the amount of $459,698 on the
declared dividend of $612,930.
[4] The respondent admitted that the appellant was
incorporated on February 18, 1987 to develop and carry out
an investment project which involved purchasing land in the Town
of Gatineau, building a six-storey office building on it and
renting it to various tenants, including the Town of Gatineau.
However, she maintained that from the time the purchase was made
and the building constructed the appellant had a secondary
intention to resell at a profit, and this was denied by the
appellant (see paragraph 3 of the Notice of Appeal;
paragraphs 2 and 9(d) of the Reply to the Notice of Appeal;
and paragraph 2 of the Answer).
[5] The appellant's shareholders were:
NAME PERCENTAGE OF APPELLANT'S CAPITAL STOCK
Claude Bérard 30% through the company "Les
Carrières de la Gatineau Inc."
Daniel Moreau 12.5% through "151706 Canada Inc."
Jacques Cormier 12.5% through "151706 Canada
Inc."
Jacques G. Sauvé 12.5% through "151706 Canada
Inc."
Gérald Groulx 12.5% through "Les Investissements
Gefra"
Gilles Lauzon 10% through "144002 Canada Inc."
Yves Letellier 5% through "155629 Canada Inc."
Maynard Robinson 5%
[6] At the start of the hearing the parties submitted a
partial agreement on the facts, by which they admitted the
following facts:
[TRANSLATION]
1. During the years at issue Claude Bérard was
partly engaged personally or through companies in purchasing
vacant pieces of land, subdividing them and selling the lots to
building contractors for the construction of single-family
homes.
2. From May 5, 1988 to date the following individuals
owned and continue to own, directly or indirectly, an 11,000
square foot commercial rental building located at 139 de
l'Hôpital in Gatineau:
Claude Bérard
Jacques Sauvé
Gilles Lauzon
Daniel Moreau
Jacques Cormier
3. From January 20, 1988 to date the following
individuals owned and continue to own, directly or indirectly, a
14,000 square foot commercial rental building located at
360 Boulevard Maloney in Gatineau:
Claude Bérard
Jacques Sauvé
Daniel Moreau
Jacques Cormier
Evidence
[7] I heard the following testimony:
Jacques Sauvé, a structural engineer, vice-president
of the appellant; Gilles Lauzon, a real estate broker;
Daniel Moreau, formerly director of services with the Town
of Gatineau for 10 years and now a restaurant operator and
owner of the Brasserie Le Houblon, located at 455 Boulevard
de l'Hôpital in a building owned by him; and
Claude Bérard, a businessman operating in various
businesses including a real estate development firm.
[8] In early 1987 the Town of Gatineau announced its intention
of creating a new town centre in the quadrangle formed by de
l'Hôpital, Maloney, Montée Paiement and
St-René boulevards. At the same time it announced
its intention of leasing office space in the future town centre
in order to centralize some of its municipal services (the town
hall, clerical services, senior management and human
resources).
[9] It accordingly issued a call for tenders for the rental of
premises in a building to be built inside the town centre
quadrangle. The building had to meet certain requirements, namely
having a minimum floor space of 30,000 square feet on three
floors or a maximum of 60,000 square feet on six floors. The
Town offered to lease an approximate floor space of
1,400 square meters (about 15,000 square feet) for a
period of seven or ten years.
[10] According to the Town of Gatineau's planning
guidelines for the construction of its new town centre, the
building in question was to be built in a commercial zone not far
from the Maison de la Culture and the Hôtel de Ville, which
was to be built in 1997 in an institutional zone.
[11] According to Mr. Sauvé, there was a chance
for the group of investors to which he belonged to make a
long-term investment, since with the Town as a tenant they
expected they would be able to attract other businesses to the
building.
[12] The group of investors referred to by
Mr. Sauvé consisted of Daniel Moreau,
Gérald Groulx, an insurance broker,
Yves Letellier, a lawyer, Maynard Robinson, a trucking
contractor, Claude Bérard, Gilles Lauzon,
Jacques Cormier, a builder who is now deceased, and himself.
All were in their forties at the time.
[13] The National Bank was prepared to finance the project and
the Communauté régionale de l'Outaouais
had indicated that it might be setting up a satellite office in
Gatineau. Various partners associated with the project also
wanted to become tenants. The aforesaid investors accordingly
expected to be able to make the project financially viable fairly
quickly.
[14] They therefore decided to submit a bid to the Town of
Gatineau through an already existing company, 146607 Canada Inc.
("146607"), in which they were all shareholders, in
view of the short deadline for bidding and the fact that the
company had a little liquidity which would enable it to obtain
financing more easily.
[15] An offer to lease was accordingly submitted to the Town
of Gatineau on January 7, 1987; in it they proposed to put
up a 60,000 square foot building and lease floor space of
1,400 square meters (15,000 square feet) to the Town at
a rental of $159.84 net per square meter (all expenses included
except for janitorial costs) for a period of 10 years. In
the general presentation of the offer to lease, the group of
businessmen, Bérard, Moreau, Cormier, Groulx and
Sauvé, represented itself as a serious group which had
taken an active part in developing the area surrounding the town
centre and had proven experience in the planning, design,
construction and rental of commercial buildings. The offer to
lease also indicated that the group had been responsible for
completing projects with a total overall value of more than a
billion dollars (see Exhibit A-1, tab 4).
[16] This bid was apparently accepted on February 11, 1987,
and the appellant company created a week later, on
February 18, 1987. 146607 subsequently assigned its rights
to the appellant by notarial deed dated September 11,
1987.
[17] The amount initially invested by the shareholders was
$150,000, $1,000 of which was in the form of capital stock and
$149,000 in the form of advances.
[18] An option to purchase was signed on April 9, 1987,
by which Gérald Groulx agreed to sell his land to the
appellant company, represented by Claude Bérard, for
the sum of $300,000. This land was located at the corner of de
l'Hôpital and de la Gappe boulevards, in the
heart of the new town centre. The option was valid for a period
of six months. The option was exercised and the land
purchased on July 30, 1987.
[19] On April 13, 1987, the Communauté
régionale de l'Outaouais agreed to lease floor space
from 146607 of 3,600 square feet in the building to be
built, on a net, net, net lease (all expenses excluded) for a
term of seven years, with an option to renew for
three years, beginning on January 1, 1988, and at an
annual rent of $13.60 per square foot (see
Exhibit A-1, tab 8). According to
Mr. Sauvé, this lease brought in $5 more per square
foot than the one signed with the Town, in view of the fact that
the rent was net, net, net.
[20] On April 24, 1987, the Town of Gatineau signed a
memorandum of understanding with 146607 by which the Town
undertook to remove the restriction which prohibited any building
on the land in question. At the same time the Town gave official
sanction to the rental of premises in the building to be built
and 146607 gave a bond of $30,000 if the construction was not
done within the deadlines and on the terms stipulated by the
Town. The lease with the Town was not to be signed until the work
was completed. The restriction that had existed since
December 19, 1985 was finally officially removed on
April 27, 1987.
[21] Construction began after the issuance of a permit to
146607 on May 12, 1987. Construction, which was to have
taken place in two stages, was ultimately completed in one stage
as a sufficient number of tenants had been found, and the work
ended in December 1987. Jacques Sauvé did the
framing plans for the building and construction was done under
the supervision of the company Termina Construction, owned
by Jacques Cormier. The partners themselves were responsible
for hiring the various subcontractors.
[22] The appellant entered into a ten-year lease with
the Town of Gatineau for part of the second and third floors of
the building, in accordance with the terms of the offer to lease.
The appellant also entered into a number of other leases with
various tenants, such as the Communauté régionale
de l'Outaouais, the law firm Bélec, Letellier,
two accounting firms, Assurance-Vie Desjardins and the companies
Landry, Gauthier & Associés Inc. and Immeubles
G.R. Lauzon Inc.
[23] The Town took possession of the premises in January 1988
and the official opening of the new building, known as
"Édifice Pierre Papin", took place in
spring 1988.
[24] The appellant company had obtained a bridging loan of
$5,500,000 from the National Bank on May 25, 1987, and each
of the eight partners personally guaranteed it. This loan was
repayable on July 31, 1988 at the latest, and the
shareholders were to invest $450,000. Ultimately, they only had
to lay out $150,000. Indeed, judging from the appellant's
financial statements even this investment was repaid to the
shareholders in the first year (see balance sheet at
September 30, 1988, Exhibit A-3,
tab 48).
[25] In the bridging loan, the National Bank undertook to
advance 75 percent of the economic value based on rental
income. It was to disburse the funds 35 days after
completion of the work or by July 1, 1988 at the latest, on
submission of leases showing annual net, net, net rental income
of $834,000.
[26] A projection of anticipated rental income was prepared by
Mr. Sauvé on October 5, 1988
(Exhibit A-2, tab 31). According to
Mr. Sauvé, there was still plenty of space not leased
at that time. According to this projection, the ground floor was
to be leased at $22.50 per square foot (all the projections were
based on net, net, net rent) and the other floors at $18.50 per
square foot. The Town of Gatineau had signed a lease in which the
rent amounted to $10 per square foot and the Commission
régionale de l'Outaouais at $13.60 per square foot.
For the period from 1988 to 1993, total annual rental income of
$1,008,453 was anticipated. In fact, less than two-thirds of the
floor space was leased in October 1988 and it brought in $450,988
for the year. The profit and loss statement for the rental of the
building for 1987 to 1990 (the year of disposition) was filed as
Exhibit A-3, tab 48. It reads as follows:
[TRANSLATION]
PROFIT AND LOSS STATEMENTS
Year 1987 1988 1989 1990
Income 0 $450,988 $829,544 $1,048,653
Interest $17,069 $451,550 $755,563 $ 838,769
Expenses $51,273 $581,689 $456,302 $ 551,419
Depreciation - $ 92,318 $119,502
-
Loss $68,342 $605,186 $501,823 $ 341,535
[27] At this point the appellant's shareholders were in
negotiations with the Bank of Nova Scotia to negotiate a lease
with it, and at the same time new financing. That was why the
appellant kept its bridging loan with the National Bank rather
than securing it by a mortgage on the building.
[28] In October 1988 the building was nearly 70 percent
leased and the Bank of Nova Scotia expressed an interest in
leasing the ground floor of the building, the result of which
would have been that the floor space was nearly 75 percent
rented.
[29] On October 27, 1988 the Bank of Nova Scotia finally
made an offer to lease floor space of 4,000 square feet on
the ground floor for $23.50 per square foot for the first
five years and for $26.50 per square foot for the next
five years. This offer was accepted on November 4,
1988.
[30] On July 11, 1989 the appellant obtained financing
from the Bank of Nova Scotia in the form of a bridging loan to
finish the improvements to the premises. As a result of this new
agreement the appellant repaid the National Bank. The new
$7,000,000 loan was repayable before December 31, 1990 and
was guaranteed by the shareholders personally.
[31] Mr. Sauvé explained that it was more
advantageous for the appellant to keep short-term financing
because it got a better rate of interest and the interest was
fully deductible. This was therefore temporarily advisable.
According to Mr. Sauvé, it was less costly to keep
financing in the form of a bridging loan as long as the building
was not completely leased.
[32] The appellant's shareholders used the same method of
financing for buildings located at 139 boulevard de
l'Hôpital and 360 boulevard Maloney in Gatineau,
buildings which they still own. They first obtained financing in
the form of a bridging loan by giving personal guarantees for a
period of about five or six years and then guaranteeing the
loan by a mortgage.
[33] Before obtaining this new financing the appellant's
shareholders experienced certain problems leasing the still
vacant third of the building. That was when the Town of Gatineau
indicated that it wished to lease additional space. Following the
municipal election of 1988 the Town of Gatineau, under the
administration of its new mayor, developed a project to relocate
and centralize its services at the same location in the
appellant's building. The size of this project meant that the
building and the parking area had to be expanded.
[34] Initially the appellant was not interested since the rent
initially agreed to with the Town was not high enough. The
parties ultimately reached an agreement in which the Town agreed
to pay $15.90 per square foot, net, net, net. According to
Mr. Sauvé, this price was capable in terms of the
financial viability of the building, although everyone hoped the
interest rates would fall.
[35] The Town subsequently required that the building be
expanded by about 4,000 square feet as a condition for
renting any additional space. This meant a new investment for the
appellant, which in order to satisfy the Town had to purchase the
adjacent land.
[36] Finally, the Town imposed as its last condition for
renting the new space that the appellant give it an option to
purchase which it could exercise within a year. The proposed
purchase price was $9,000,000 plus the cost of expanding to an
additional floor space of 8,000 square feet (no longer
4,000 square feet), estimated by the appellant's
shareholders at about $800,000.
[37] The Town's demands caused a lot of concern among the
group of shareholders. This is indicated in the minutes entered
as evidence. The Town's new proposal was not acceptable.
However, there were those who pointed out that the Town had the
power to expropriate them if its proposal was rejected. Others
suggested that they might gamble that the Town would not exercise
its option. Ultimately, the shareholders felt that they really
had no choice and at a meeting held on May 15, 1989 they
accepted all the conditions imposed by the Town.
[38] The appellant accordingly purchased the adjacent land
from the Town of Gatineau on May 18, 1989 (in order to carry
out the expansion requested by the Town) for the sum of $144,736,
undertaking not to resell it for a higher price if the Town
exercised the option.
[39] On June 20, 1989, the Town signed a lease in which
it undertook to lease floor space area of over 20,000 square
feet at the price already negotiated of $15.90 per square foot
for eight years with an option to purchase, in accordance
with the terms previously agreed. The option was to be exercised
before September 1, 1990. Under this lease the Town was to
take possession of the premises in fall 1989.
[40] As agreed, the building was expanded by 8,000 square
feet over a four-month period. Arrangements were made to
move some tenants, including Assurances Desjardins, the architect
Landry and Gilles Lauzon.
[41] On April 18, 1990, Mr. Bérard informed
the appellant's shareholders that the Town had decided to
exercise the option. This news was very badly received by some of
them, who according to the minutes of the meeting suggested that
they would be the losers as the building would have [TRANSLATION]
"a much higher value in four or five years"
(minutes of a shareholder meeting held on
April 18, 1990, Exhibit A-3,
tab 53).
[42] Although the expansion work had been valued at some
$800,000, including the cost of purchasing the land, the Town
bought the building on September 1, 1990 for the sum of
$9,500,000 (namely $9,000,000 as agreed in the lease plus
$500,000 for the expansion costs). The appellant made a gain of
$3,173,929 in this transaction.
[43] On July 30, 1990, Gilles Lauzon's office
billed the appellant for $285,000 in connection with the sale of
the building located at 144 Boulevard de
l'Hôpital. According to Messrs. Sauvé and
Lauzon this amount, which corresponded to 3 percent of the
selling price, was paid to Mr. Lauzon to compensate him for
the various moves he had had to make as a result of the
transactions with the Town. The lump sum was determined in
accordance with the actual cost of relocating, arranging offices
and so on and, they said, was in no way related to a mandate
which was allegedly given to Mr. Lauzon for the sale.
Mr. Lauzon explained that he had moved his office from a
very lucrative location in the Promenades de l'Outaouais to
set up in the new building. What had initially been a good
investment for him subsequently proved to be a losing
proposition. After persuading his salespeople to go with him, he
apparently lost several of them after the new move made necessary
by the Town of Gatineau. He said this was why he negotiated
the payment of this amount with the appellant's other
shareholders. However, it should be noted that the amount was
billed a year after the final move and that it was regarded as a
disbursement resulting from the sale in the appellant's
financial statements for the fiscal year ending
September 30, 1990. Those financial statements were approved
by a resolution of the shareholders on November 30,
1990.
[44] According to Mr. Sauvé, no advertising was
ever done to sell the building. However, an initial offer to
purchase was made by Yves Daigle on
October 19, 1987, for $8,675,000, and was given to the
accountant for study and subsequently refused. A second offer for
$10.5 million was made by Mr. Daigle, under which, if
it was accepted, the appellant would agree to take a second
mortgage and accept a rental guarantee. This second offer was
refused for the reasons stated in the minutes of the meeting held
on January 19, 1988, which read as follows:
[TRANSLATION]
The building is only 50 percent rented at present and
they feel that its value will exceed $11 million: it will be
fully leased at $18.50/sq. ft. net, net, net and $23.50/sq. ft.
to the Bank of Nova Scotia.
It would be better to wait for a more solvent purchaser in
future and not have to carry a second mortgage or a rental
guarantee.
If interest rates continue at their present level or fall, the
building will have a much higher value in five or
six years.
(See Exhibit A-3, tab 53)
[45] Previously, 146607 had purchased a piece of land from a
company in which Mr. Bérard had interests. A
commercial office building was built on this land (located at
430 boulevard de l'Hôpital) through the company
Termina Construction, owned by Mr. Cormier. The land was
bought on April 18, 1986 (according to
Exhibit I-2) and the building was sold on May 1,
1987 (according to Exhibit I-3). 146607 apparently
made a profit of $942,816, which was treated as a capital gain
(see 146607's tax return for the 1987 taxation year,
Exhibit I-1, tab 8). Mr. Sauvé said
that in that case, as in the case of the building at issue, no
sale was solicited. Limited partnerships were very popular at
that time with investors who were looking for tax relief. These
partnerships displayed considerable interest in this type of
building. According to Mr. Sauvé, it was a
partnership of this kind which was the purchaser. The deed of
sale (Exhibit I-3) shows a Mr.
Gaétan Lemieux as the purchaser.
[46] As well, in the same period, another building (located at
492 boulevard de l'Hôpital) was built and sold
within two years by the same group of shareholders under the
auspices of another company. Once again, according to
Mr. Sauvé, no sale was solicited, and another limited
partnership purchased the building. He took back a share in the
building himself to accommodate his offices. Mr. Lauzon, who
at that time represented the largest brokerage firm in the area,
said that it was quite rare to receive unsolicited offers, except
for limited partnerships who paid higher prices for buildings
than their actual value, given the tax advantages available.
According to him, the building at issue was in great demand since
it was the largest construction project in Gatineau. Moreover,
the building was very well located, in strategic terms, and was
occupied by quality tenants.
[47] The same group of shareholders also owned several vacant
lots which they intended to develop either as residential lots or
as commercial buildings through other companies.
[48] Of course, everyone said they had become involved in all
these projects with the intention of [TRANSLATION] "building
some equity" and keeping these buildings for the long term.
In terms of the buildings that were sold, with the exception of
the building at issue, they had received attractive offers which
could not be refused and which gave them the chance to do
something else.
[49] Mr. Bérard added that personally he was not
pleased to see the Town of Gatineau exercise the option.
Immediately afterwards, he said, he built another building
(located at 160 boulevard de l'Hôpital) adjacent
to the building at issue, with other investors who were not with
him in the Hôtel de Ville project. He said he still had an
interest in that building. He said he financed the building, like
the others, by obtaining a bridging loan, which he had just
transformed into a loan secured by a mortgage, after owning it
for six years.
Arguments of the parties
[50] Counsel for the appellant contended that in 1987 the
appellant had purchased a capital asset in order to earn income
from property, and that when it disposed of this building in 1990
it made a capital gain. Alternatively, he argued that in making
the assessment on May 10, 1993, the Minister had not acted
with dispatch in examining the election made by the appellant
under s. 83(2) of the Act on February 22, 1991, and
rather had acted improperly, wrongfully and belatedly, thereby
causing hardship to the appellant, and for these reasons asked
that the assessment be vacated.
[51] Counsel for the respondent maintained that the gain made
on the building at issue should be regarded as business income,
not as a capital gain. Having regard to the location of the
building, the experience of the people in charge of the
appellant, the minimal investment, the method of financing, the
short time the building was owned, the money spent at the time of
disposition and all the other factors taken together, he
submitted that the appellant had, at the time the building was
purchased, [TRANSLATION] "the intention to resell at a
profit or at the very least a secondary intention to resell at a
profit". He also argued that the assessment of May 10,
1993, made in accordance with Part III of the Act, is valid
and was examined by the Minister with due dispatch.
Analysis
[52] In order to show that the disposition of the building at
issue here resulted in a capital gain and not business income,
the appellant must prove that the building was not purchased in
the course of carrying on a business of selling and reselling
buildings (Californian Copper Syndicate v. Harris
(1904), 5 T.C. 159; Irrigation Industries Limited v.
M.N.R., [1962] C.T.C. 215 (S.C.C.)). Additionally, even if it
is accepted that the appellant was not engaged in such a
business, the appellant must also show that the purchase of the
building in question was not an adventure in the nature of trade
and made in order to dispose of the building in question at a
profit (see M.N.R. v. Taylor, 56 DTC 1125, at
1131 (Ex. C.R.). To do this it must show on a balance of
probabilities that its primary or its real intention was to
purchase the building to operate it as a rental income property
and not to resell it at a profit (see Les Immeubles M.H.T.
Ltée v. M.N.R., 93 DTC 70, [1992]
2 C.T.C. 2326 (T.C.C.)). In the instant case, it appears
that the respondent accepts that the appellant's primary
intention was to put up a building in order to earn rental income
from it.
[53] However, the analysis must be taken further, since the
Court must consider whether, at the time of the purchase, the
appellant had a secondary intention to resell the building if the
circumstances were right. In other words, if the secondary
intention to resell at a profit, in the event that circumstances
were such that it was more advantageous to resell the building at
a profit than to use it for capital purposes, is an operating
motivation which prompted the appellant to purchase the building,
the transaction may be characterized as an adventure in the
nature of trade (see Regal Heights Limited v. M.N.R.,
[1960] C.T.C. 384 (S.C.C.); Racine, Demers and Nolin v.
M.N.R., 65 DTC 5098, [1965] C.T.C. 150, at 159 (Ex.
C.R.)). This decision must be based on inferences resulting from
the circumstances surrounding the transaction rather than direct
evidence of what the purchaser had in mind (see Racine,
Demers, supra, at 159).
[54] There is some authority for the proposition that the
appellant does not have to prove that the intention to resell at
a profit was not an operating motivation which prompted it to
purchase the building if this was not a fact which was taken into
account by the Minister in making his assessment (see Hiwacko
Investments Ltd. v. The Queen, 78 DTC 6281, [1978]
C.T.C. 378 (F.C.A.); Kit-Win Holdings (1973)
Ltd. v. The Queen, [1981] C.T.C. 43 (F.C.T.D.); Les
Immeubles M.H.T. Ltée, supra).
[55] Counsel for the appellant relied on this very point in
arguing that he did not have to show absence of secondary
intention. In paragraph 9(s) of the Reply to the Notice of
Appeal the respondent said that in making his assessment the
Minister relied inter alia on the following presumption of
fact:
[TRANSLATION]
(s) having regard to the location of the building, the
experience of the people in charge of the appellant, the
investment, the method and amount of financing as compared with
the cost of the property, the short time it was owned, the money
spent at the time of disposition and all the other factors taken
together, at the time of the purchase/construction of the
building the appellant had at the very least a secondary
intention of reselling at a profit . . .
[56] According to counsel for the respondent, it is clear from
reading this paragraph that the concept of secondary intention
was the basis of the assessment.
[57] In my opinion, the question of a secondary intention to
resell at a profit as an operating motivation which led to the
purchase of the building may be inferred from the very language
used in the presumptions of fact which were the basis for the
assessment and which are set out in the Reply to the Notice of
Appeal. The onus is thus on the appellant to show that there was
no such intention.
[58] In the instant case the appellant was created in order to
comply with the undertaking given by its shareholders in the bid
accepted by the Town of Gatineau to construct a building to house
part of the municipal services while waiting for the Hôtel
de Ville to be built.
[59] The appellant's shareholders were all businessmen who
had a quite comprehensive knowledge of real estate. Each
contributed his professional knowledge to this building project,
which was initiated by the Town itself. They all knew that the
Town of Gatineau wanted to develop a new town centre at the exact
location where one of the shareholders already owned land that
would be used as a site for the future building.
[60] They all knew that the land located in this quadrangle or
its vicinity was in demand. The evidence was that at the time
there was also renewed interest in limited partnerships, which
were looking for this type of land at prices higher than its
actual value, in view of the tax benefits available to investors
in such partnerships.
[61] Although the witnesses stated that this building was
constructed under their management to create a capital asset, in
my opinion this is not indicated by the evidence surrounding the
circumstances of the transaction. Each shareholder only invested
a very small amount of money in the project as compared with the
actual cost of financing. The partnership's profit and loss
statement from the time the building was purchased in 1987 to the
time it was disposed of in 1990 shows quite large losses in each
of those years, even though 70 percent of the building was
leased. Instead of decreasing over the years, the
"interest" item increased significantly. The evidence
further showed that although the building was still running at a
loss the shareholders recouped the initial investment of $150,000
before disposing of it. They did not repay any of the loan
principal. All these points hardly support the argument of the
appellant's shareholders that they got involved in this
project in order to create a capital asset.
[62] Additionally, at the time of the bid to the Town, the
appellant's shareholders knew that the Town was prepared to
commit itself as a tenant for a maximum period of 10 years
since at that time it had already planned to build the
Hôtel de Ville. They also knew the maximum price the Town
was prepared to pay to rent 15,000 square feet of floor
space. That price, $10 per square foot net, net, net was clearly
insufficient to make the building financially viable. The
witnesses said that they initially accepted this amount in order
to get the contract with the Town. Also, with the Town as a
tenant, they were counting on attracting other quality tenants.
At the same time, if we look at the minutes of January 19,
1988, it would appear that the consensus was that they should
wait for the building to be completely rented so they could try
and obtain a higher price for it.
[63] This appears to confirm the shareholders' intention
not only to obtain the contract with the Town for construction of
the building but to resell it as soon as it was fully rented,
making a profit on the venture.
[64] Further, the question of the commission paid to
Mr. Lauzon at the time the building was sold in my view
confirms that the shareholders intended from the start of this
entire venture to resell at a profit as soon as circumstances
permitted. Despite all the testimony which sought to show that
this commission was paid not in connection with the sale, but to
compensate for the repeated moves that Mr. Lauzon had to
make, the dates do not correspond since the last move took place
a year before the sale. Moreover, other tenants had been through
the same process when the Town exercised the option. There was no
evidence that they were compensated for this. Finally, the
appellant's shareholders approved the tax return showing the
$285,000 as an expense associated with the sale. In my view, that
money might well have been the subject of a prior agreement
between the shareholders that, in the event of a sale, a
commission would be paid to Mr. Lauzon for the part he
played as real estate broker.
[65] Finally, the evidence was that four other buildings were
constructed following the same process and by the same group of
shareholders, through different partnerships, at almost the same
time. These buildings were constructed in the quadrangle where
the new town centre was, or in that vicinity. Two of them were
sold at a profit after being owned for a short time.
Additionally, some of the appellant's shareholders also own
vacant land for residential or commercial building and the
evidence suggests that they intend to resell it eventually to
contractors.
[66] I am therefore of the view that there is sufficiently
clear and convincing evidence to conclude that the transaction in
question was the result of an operation prompted from the outset
by the appellant's intention to resell the building at a
profit as soon as circumstances permitted. The appellant
certainly did not establish the contrary on a balance of
probabilities.
[67] However, I realize that the Town may not have been the
ideal purchaser and that the profit made may have been less than
was anticipated by the appellant's shareholders. This is
shown by the minutes of shareholder meetings at the time the
first two offers were refused and at the time the Town decided to
exercise its option. In my opinion, this only confirms the
risk-taking nature of the business in which the appellant was
engaged.
[68] I therefore conclude that the gain made on disposal of
the Pierre Papin building resulted in business income, not a
capital gain.
[69] Counsel for the appellant also submitted an alternative
argument that the assessment made pursuant to s. 185 of
Part III of the Act should be vacated since the Minister did
not act with due dispatch in examining the election made by the
appellant under s. 83(2) of the Act.
[70] In Ginsberg v. Canada, [1996] 3 F.C.
334, 96 DTC 6372 (C.A.), the Federal Court of Appeal held
that this could not be a valid reason for vacating an assessment.
Although the appeal in that case concerned the making of an
assessment under s. 152(1) of the Act, the rule also applies
to any assessment made under Part III of the Act, by
operation of s. 185(3) of the Act.
[71] The appeal is accordingly dismissed with costs to the
respondent.
Signed at Ottawa, Canada, April 1, 1998.
Lucie Lamarre
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
Translation certified true on this 14th day of December
1998.
Kathryn Barnard, Revisor
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