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Citation: 2003TCC678
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Date: 20031020
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Docket: 2002-4017(IT)I
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BETWEEN:
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PAUL STAFFORD MOSHER,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Paris, J.
[1] This is an appeal from a
reassessment of the Appellant's 1997 taxation year by which
the Minister of National Revenue (the "Minister")
treated the Appellant's gain on the sale of real property in
Brooks, Alberta, legally described as plan 6827FP Block 2 Lot 1
(the "Property"), as being on income account. The Minister also
determined that the Appellant's spouse was not a partner with
the Appellant in the purchase and sale of the Property, and
therefore included the portion of the gain reported by her in the
Appellant's income.
[2] The two issues in this appeal are
whether:
(1) whether the purchase and sale of
the Property was an adventure in the nature of trade; and
(2) whether the Appellant's spouse
was a partner with him in the purchase and sale of the
Property.
[3] The Appellant and his spouse were
the only witnesses at the hearing.
[4] The Appellant testified that the
Property was purchased for the purpose of starting a Tim Hortons
fast food franchise. He said that he and his spouse became
interested in operating a Tim Hortons franchise in 1993 as a
result of a friendship they had with a couple who owned a
franchise in Red Deer, Alberta. The Appellant was expecting to
retire within a few years and wanted to start a business. At that
time the Appellant was a member of the RCMP in Forestberg,
Alberta where he lived with his family. The Appellant also had a
friend from work who had a franchise in Vernon, British
Columbia.
[5] As a result of his interest in a
Tim Hortons franchise, the Appellant said that he met with Ron
Joyce, the owner of the chain, and Mr. Lundgren from the TDL
Group Limited ("TDL"), which operated Tim Hortons and was sent
franchising information (Exhibits A-1 and A-2). He said that
he had become friends with the people who operated TDL in
Calgary, but that business "kicked in" when he returned
the franchise questionnaire (Exhibit A-3) to TDL.
[6] Around this time, the Appellant
and his spouse decided that they would target the Brooks, Alberta
area as location for a possible franchise. In 1995 the Appellant
and his spouse sold their home in Forestberg and purchased a home
in Brooks. The Appellant's spouse and children moved to
Brooks while the Appellant remained in Forestberg and commuted to
Brooks until 1996 when he was transferred there.
[7] The Appellant stated that in late
1994 and 1995 he and the Property Manager for TDL, John Barber,
looked at several possible sites for a Tim Hortons franchise in
Brooks but none were suitable to TDL. A map of one of those sites
was entered as Exhibit A-7. In 1996 he said that he did not have
much contact with TDL because all of the possible locations for
the franchise in Brooks had been explored.
[8] In January 1997 the Appellant was
approached by a secretary at his work who told him that her
grandparents' property was for sale. The Appellant said that the
two and half acre parcel was a perfect site for a Tim Hortons
franchise. The asking price for the Property was $250,000,
although he was told by the vendor that the appraised value was
$220,000.
[9] It appears from the evidence that
the Appellant moved quickly to purchase the Property. He was told
by the vendor that if the Appellant did not want it he (the
vendor) "could sell it in a minute" at that price. The Appellant
said that he needed help with the purchase and so approached a
real estate developer in town, Herb Wettiskind, who agreed to
purchase one half of the Property. The meeting with Wettiskind
took place on the same day the Property came available. The
Appellant said that he knew he could not afford the Property and
went out on a limb to purchase it. He agreed on cross-examination
that he had to tie up the Property quickly or someone else would
have purchased it. The Appellant originally offered $229,000 for
the Property but this amount was increased to $250,000, and the
vendor accepted the offer all on the same day, January 27,
1997.
[10] The Appellant said that he rushed to
Calgary after purchasing the Property to meet with TDL and was
told that TDL did not allow franchisees to own the land upon
which Tim Horton franchises were located. TDL was not
interested in buying the Property from the Appellant either.
Later on he received a letter from TDL saying that it had
determined that there was not a sufficient population in Brooks
to support a Tim Hortons franchise.
[11] About two weeks after the Property was
purchased the Appellant sustained a back injury at work that
eventually led to his discharge from the RCMP.
[12] As a result of all these circumstances
the Appellant and Wettiskind decided to sell the Property and a
buyer was found by Wettiskind. The Property was sold August 7,
1997 for $350,000.
Analysis
[13] The issue of whether the
Appellant's gain on the disposition of the Property was on
income or capital account will depend upon his intention when the
Property was purchased. If the possibility of resale at a profit
was a motivating factor to him in the purchase the gain will be
income from business.
[14] Generally speaking the taxpayer's
intention may be ascertained from his whole course of conduct and
the relevant circumstances and inferences flowing therefrom.
[15] On the whole of the evidence before me
I am satisfied that the possibility of resale at a profit was an
operating motive of the Appellant in the purchase of the
Property. Despite his assertions that the Property was purchased
solely for use in the Tim Hortons franchise, a review of the
surrounding circumstances leads me to conclude otherwise.
[16] The Appellant's stated intention is
inconsistent with the fact, known to him at the time, that TDL
handled the purchase and development of all Tim Hortons franchise
land. The Appellant's explanation in this regard was that he
thought TDL might make an exception in his case regarding
ownership of the franchise land, or that he could sell the
Property to TDL. If the Appellant's sole intention with respect
to the Property was for use in a Tim Hortons franchise, it is
highly unlikely that the Appellant would not have contacted TDL
prior to committing himself to the purchase, firstly to determine
if the Property met with TDL's approval, and then to see if TDL
would make an exception to its policy regarding the ownership of
franchise land or if it wanted to buy the Property itself. Given
that TDL had rejected all other properties that had been
available in Brooks, and given that the Appellant had little
contact with TDL during the preceding year, it made no sense for
him to make the purchase without discussing it with TDL. The
Appellant's conduct is more consistent with his having an
alternate motivation in acquiring the Property, namely resale at
a profit.
[17] It also appears that the Appellant
would not have had the financial resources to purchase both the
Property and a Tim Hortons franchise. By 1997 the cost of a
franchise was approximately $350,000. The Appellant also said he
expected to have an additional expenses to meet, bringing the
cost of the franchise close to $400,000. With the cost of the
half share in the Property added in, the Appellant was looking at
a capital commitment of around $525,000. In 1997 he agreed that
his and his spouse's combined net worth was about $279,000,
including their residence, and that he was counting on a loan
from his wife's brother in the amount of $100,000. The
Appellant asserted that the shortfall would be financed by TDL,
but Exhibit A-2 shows that the financing would have had to come
from chartered banks if it could have been obtained. In any
event, there was no evidence that the Appellant had done anything
to arrange this financing or even to determine if it were
available.
[18] In considering all these factors, I do
not accept the Appellant's evidence that he did not turn his
mind to the possibility of resale of the Property, at a profit at
the time he purchased it. I find that the possibility of making a
profit on such a resale was one of the Appellant's
motivations in acquiring the Property and therefore that the
purchase and sale amounted to an adventure in the nature of
trade.
[19] I turn now to the question of whether a
partnership existed between the Appellant and his spouse at the
time of the purchase of the Property, and, if so, whether the
purchase and the sale of the Property formed part of the
activities of the partnership.
[20] Under the Alberta Partnership
Act R.S.A. 2000 c. P-3, a partnership is defined as "the
relationship that subsists between persons carrying on business
in common with a view to profit". The Appellant and his spouse
testified that they intended to operate a Tim Hortons franchise
in common as a family business and that each of them would make a
significant financial commitment to it. Although there was no
written agreement between them I am satisfied that they had an
oral agreement to this effect. However, for the reasons that
follow, I am not satisfied that the Appellant and his spouse had
commenced carrying on the business at the time of the purchase
and sale of the Property.
[21] In the case Samson et Frères
Ltée v. The Queen, 97 DTC 642, Judge Dussault (as
he then was) of this Court dealt with the question of whether a
taxpayer had begun carrying on a business: At page 645 he
stated:
For a business to exist and to have commenced, one must have
gone beyond the stage of merely intending to commence it. A plan
to do so, even a clearly-stated one, is in my view merely the
expression of that intention and must be taken further. The
essential elements relating to the very structure of the
business, that is the necessary financing, assets and labour,
must have been sought out and brought together before it can be
stated that the business exists and that it has commenced. I will
add that the decision to commence the business, as it may be
detected from 'significant' or 'essential' steps taken by the
taxpayer with a view to operating the business, is an important
indicator that the business has commenced. ... It is indeed
fairly difficult to conceive that a business has commenced before
a firm decision has been made to that effect and before the
essential elements relating to the very structure of such a
business have been brought together.
[22] The evidence in this case shows that
the Appellant and his spouse had taken steps to start a Tim
Hortons franchise but that those steps were preliminary and
investigative in nature and were not binding either on them or on
TDL. While the Appellant claimed that he had been given the Tim
Hortons franchise in Brooks by TDL, no contract had been signed
nor had any money been paid to secure it.
[23] When a Tim Hortons franchise eventually
opened in Brooks, the Appellant and his spouse were not
involved.
[24] Furthermore, there was no evidence that
the Appellant and his spouse had arranged all of the financing
necessary to purchase the franchise and start operations or that
they had entered into any arrangements or contracts with third
parties other than for the purchase of the Property. It cannot be
said here that the essential elements of the structure of the
business had been brought together or that a business had been
commenced.
[25] It follows that the Appellant and his
spouse were not acting in partnership for the purchase and sale
of the Property.
[26] This does not, however, end the matter.
The Appellant's spouse contributed financially to the purchase of
the Property by co-signing an additional mortgage on the family
home. There was no evidence before me that she intended to make a
gift of this money to the Appellant or that it was a loan to him.
I accept that by co-signing the mortgage she intended to
participate in the purchase. Both the Appellant and his spouse
stated that they shared equally in all their property and that
they considered themselves equal partners in all of their
dealings and I am satisfied that they had a common intention that
they would own the Property equally.
[27] Therefore, although the Appellant's
spouse never appeared on title, a presumption would arise under
the doctrine of resulting trust that she had a beneficial
one-half interest in the Property. I would refer to the comments
of Sarchuk, J. of this Court in Karavos v. The Queen, 96
D.T.C. 1001 at page 1004:
In Rathwell v. Rathwell, the Supreme Court of Canada
confirmed that a resulting trust may arise in circumstances where
the parties have a "common intention" that the
beneficial interest should not belong solely to the person
holding legal title but is to be shared between such persons.
Such common intention can be ascertained by examining whether
evidence exists of an express declaration of common intention
that the non-titled party was to have a beneficial interest in
the property. The Supreme Court also noted that it is appropriate
for a court to consider whether a "common intention"
existed by examining the facts and circumstances surrounding the
acquisition of the property. If the person without title has
contributed to acquisition or improvement of the property the
doctrine of resulting trust may be engaged.
Summary
[28] For all the above reasons the appeal
will be allowed in part with costs and the matter will be
referred back to the Minister of National Revenue for
reconsideration and reassessment on the basis that one half of
the profit from the purchase and sale of the Property should be
included in the Appellant's income for his 1997 taxation year as
income from business.
Signed at Ottawa, Canada, this 20th day of October 2003.
Paris, J.
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