Jimmy Haim Levy and Albert Levy v. Minister of National Revenue, [1993] 1 CTC 2400

Lamarre Proulx, T.C.C.J.:— These appeals were heard on common evidence. The appeals concern the 1985, 1986 and 1987 taxation years. The point at issue is whether the purchase and sale of two buildings is an adventure in the nature of trade or a capital transaction.

The facts on which the respondent, the Minister of National Revenue (the "Minister"), relied in assessing the appellants are set out in paragraph 5 of the reply to the notice of appeal for each of the two appellants. As the wording is identical except for the appellants' names, I reproduce here paragraph 5 of the reply relating to Mr. Albert Levy's appeal.

5. In making the reassessment as he did, the respondent, the Minister of National Revenue, assumed inter alia the following facts:

(a) on April 4, 1986 the appellant and his brother Jimmy Haim Levy purchased a commercial building in co-ownership, located at 214, Notre-Dame, Repen- tigny;

(b) the appellant and his brother sold the Notre-Dame Street building on November 7, 1986 and made a profit of $27,546, and the appellant's share of this, namely $13,773, was reported by him as a capital gain;

(c) on May 13, 1986 the appellant and his brother Jimmy Haim Levy purchased a commercial building in co-ownership, located at 4428, 4430 and 4432, St- Laurent, Montréal;

(d) on June 27, 1986 the appellant and his brother sold the St-Laurent Street building and made a profit of $85,000, and the appellant's share of this, namely $42,500, was reported by him as a capital gain;

(e) the total capital gain reported by the appellant for the two buildings was $56,273;

(f) the Notre-Dame Street building was held by the appellant and his brother for only seven months;

(g) the St-Laurent Street building was held by the appellant and his brother for only 45 days;

(h) each building was the subject of a solicited sale;

(i) accordingly, for the Notre-Dame Street building, the appellant and his brother announced their intention to sell the building by a" For Sale or To Let" notice placed on the premises;

(j) on the St-Laurent Street building, the appellant and Mr. Jimmy Haim Levy contacted the real estate agent who acted for the purchase of the building to tell him that it was for sale;

(k) in the case of both buildings, a real estate agent acted as intermediary in the sale of each one;

(l) the appellant and Mr. Jimmy Haim Levy are shareholders and officers of companies whose principal activity is the purchase, exploitation, administration and disposal of real property;

(m) accordingly, the appellant holds:

50 per cent of the shares in 153394 Canada Inc. ("Les Gestions A.J. Levy")

50 per cent of the shares in 112552 Canada Inc.

50 per cent of the shares in 117513 Canada Inc.

15 per cent of the shares in 149556 Canada Inc.

(n) all these companies listed in subparagraph (m) work in the real estate field;

(o) further, the appellant is the sole shareholder in a company, “104002 Canada Inc.”, which works in the real estate field and which in fact sold a building during the 1986 taxation year, reporting the sale as business income;

(p) the company 117513 Canada Inc., in which the appellant holds 50 per cent of the shares, has sold inter alia two buildings, one in 1986 and one in 1987, for which it reported business income;

(q) during the 1985, 1986 and 1987 taxation years, the appellant received employment and other income from the company Immeuble Levy Spec. Inc., in which he holds 33 A per cent of the shares, his brother Jimmy Haim Levy also holding a third as well as his father Mardoche Levy;

(r) the company Immeuble Levy Spec. Inc. works in the field of administering and exploiting buildings;

(s) the appellant and Mr. Jimmy Haim Levy purchased the Notre-Dame and St- Laurent Streets buildings to resell them at a profit and with the intent of carrying on a business.

[Translation.]

Mr. Albert Levy testified for the appellants. The appellants are shareholders of corporations which hold rental properties. They also had a retail business selling jeans at the time. This business existed from 1981 to 1988.

According to the witness, the appellants are two individuals who purchased the rental properties in question as a long-term investment.

The appellants are people who are well acquainted with the Plateau real estate market. One day, looking to buy some property in the Plateau, the owner in question told them that he had a brother-in-law who wanted to sell a property on Notre-Dame Street in Repentigny. The Notre-Dame Street building had two storeys. There was a shop on the ground floor and an office on the second floor. The appellants purchased because they felt they could either lease it to restaurant chains or lease or sell the land to real estate developers, because there were condominium developments in the neighbourhood. At the time of purchase the building had no tenants, and it remained empty. The appellants did some work amounting to $15,000 on the plumbing, wiring and asphalting. The witness said that the purchase price was not high given the size of the lot. In fact the lot was what was really valuable.

For the resale or rental of the building at Notre-Dame Street in Repentigny, the services of a real estate agent were used at the very time of purchase. The agent who sold them the building in the first place was the one who looked after the resale for the appellants. The evidence confirmed that there was indeed a "For Sale" or "To Let" sign on the premises from the very start. The agent was paid a commission of $7,000.

On subparagraphs (h) and (j) of the reply, Mr. Albert Levy testified that he did not solicit the sale of the St-Laurent Street building and that it was an unsolicited offer.

The purchase occurred as follows: when Mr. Levy saw the building in question advertised for sale, he contacted the real estate agent. The latter had already been contacted by a group of businessmen interested in the building and she mentioned the interest of these possible buyers to Mr. Levy. It is they who subsequently bought the building from the appellants through the same agent. They transformed it into an industrial site and office building.

The agent was not called to testify. Mr. Joanette, one of the purchasers, described the circumstances of his discussions with the real estate agent and explained the expertise of his group in transformations of the kind described. It may be assumed that his discussions of the possibility of a purchase offer and what he would do with the building were sufficiently explicit, because he thought of bringing an action against the agent. He did not do so.

This building was purchased by the appellants who financed it at over 100 per cent. The only document consulted in deciding to buy was the usual real estate agency listing. There was no study of the building's long-term profitability.

Exhibit 1-6 contains a note dated October 27, 1989, written by Mr. Albert Levy, which explains what happened to whomever it may concern:

Montréal, October 27, 1989.

To whom it may concern

Re: 4428 St-Laurent Blvd.

Dear Madam:

I wish to explain briefly the transactions involving the purchase and sale of the aforementioned property.

We made a purchase offer through the newspaper "La Presse" and the "Montreal Trust" agent Miss Sylvia Cosh on February 5,1986. She would accept the other purchase offers in case of my dissatisfaction on inspecting the property.

Messrs. Boisclair, Gilbert and Joannette had already made an offer to Miss Sylvia Cosh on this property; since my offer was accepted, Miss Sylvia Cosh suggested their offer to me and I accepted.

There was thus no solicitation by myself and/or by Mr. Jimmy Levy on this property.

Mr. Albert Levy

[Translation.]

This letter confirms that the appellant was aware at the time of the purchase of the building of the proposed purchase by the persons to whom he sold it.

Counsel for the respondent referred to the following cases:

M.N.R. v. Taylor, [1956] C.T.C. 189, 56 D.T.C. 1125;

Happy Valley Farms Ltd. v. The Queen, [1986] 2 C.T.C. 259, 86 D.T.C. 6421;

Jean-Pierre Campeau v. M.N.R., [1992] 2 C.T.C. 2671;

Ceglia v. M.N.R., [1978] C.T.C. 2054, 78 D.T.C. 1038;

Ramachandran v. M.N.R., [1986] 1 C.T.C. 2099, 86 D.T.C. 1069; Chan v. M.N.R., [1987] 1 C.T.C. 2246, 87 D.T.C. 176;

Pollock v. M.N.R., [1988] 2 C.T.C. 2045, 88 D.T.C. 1409;

Léonard Parent v. M.N.R., T.C.C., April 19, 1990 (unreported).

The appellants are shareholders of corporations which are involved in the real estate field by purchasing buildings, leasing them and sometimes, but rarely, reselling them. Mr. Levy said that if he had intended to speculate when he bought the buildings in question, he would have bought them through his own real estate company. In this way, he would have offset the business profit on the sale of the buildings by the operating losses on his real estate management business.

It should be borne in mind that a real estate management company can make profits on capital account as well as on income account on the sale of buildings. It depends on the circumstances surrounding the purchase transactions. So far as capital gains are concerned, the advantage of purchasing buildings through individuals rather than a company is that the individuals are entitled, under section 110.6 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"), to a maximum deduction for capital gains in calculating taxable income. This deduction is known to the public as the capital gains exemption.

In his notice of appeal, the appellant mentioned the following:

I object to the classification of the surplus from the sale of the two buildings, one in Repentigny and one in St-Laurent, over the cost price of these buildings, which you have classified as business income when it is actually a capital gain. The two buildings were bought personally by my brother Jimmy and myself, leased and then sold, producing a capital gain for us as individuals which was divided into two equal shares in accordance with our participation, and this capital gain under the tax provisions applicable to capital gains exemptions produced a benefit in the personal taxes of each of us. The fact that in 1986 we began receiving management income from the business “Levy Spec.", a building management business, does not make us experts in purchasing and selling buildings, and so does not mean that our usual business is the purchasing and selling of buildings. In the years prior to 1986, our income came primarily from a business selling jeans, "Jeans Mont-Royal”. We have worked in various business fields and like many taxpayers, we try to earn our living by looking for work in the field that seems most advantageous at the time. Our knowledge of real estate therefore does not result from expertise in the area. The Department itself created the capital gains exemption and it is legitimate for all taxpayers to try and take advantage of it once in their lives. It is of course intolerable that having acted within the law, like many other taxpayers, we are then penalized by the withdrawal of a right and on a slender assumption, which squarely implies the Department's refusal to allow us the freedom to buy property personally on the pretext that it should be bought by our real estate management business, because we are going to make a capital gain, which may be covered by an exemption. . . .

[Translation.]

The appellants wished to make use of the capital gains deduction mentioned in section 110.6 of the Act. Taxable capital gains are included in income under section 3 of the Act. However, section 110.6 of the Act provides that they may be deducted in calculating taxable income up to a certain amount. It should be borne in mind that this deduction exists for capital gains and that if a profit is not of this nature, the individual cannot make use of the deduction.

There seemed to be some confusion in the taxpayer's mind regarding the nature of a capital gain and of an income gain. For example, he appeared to think that any disposition of a building in his real estate management company would be treated as business income. Here again, it depends on the nature of the profit. If the building was purchased as a long-term investment, without any proof of secondary intention to buy for resale, it would be a capital gain. If the building was purchased primarily to resell it at a good price, it would be an income gain. In order to determine the intent, the circumstances and the terms of the purchase must be looked at.

In the case under review, there is really no indication that the buildings were purchased as long-term investments, that is in order to obtain income from them over a long period of time. In the case of the building at Notre-Dame Street in Repentigny, it was immediately put up for sale again. It was therefore bought for resale. In the case of the one on St-Laurent Street, it was resold after 45 days. First, the appellants knew that there was a potential purchaser, and second, there was no study of the rental potential. Further, the building was mortgaged at over 100 per cent. These circumstances indicate an intention to speculate and not a long-term investment.

I wish to quote the writers Lord, Saeville and Bruneau in their description of the distinction between a capital gain and an income gain, a distinction which has been the source of a number of disputes.

It is therefore still necessary to determine whether a transaction is a capital one or a business transaction. We have already seen that subsection 248(1) broadened the meaning of the word "business" by including in it any “adventure or concern in the nature of trade". Accordingly, for the profit from a particular transaction to be business income it is not necessary that such profit result from the exercise of a profession, calling, trade or manufacture.

Indeed, according to Thorson, j., a "concern in the nature of trade” can be an isolated and unusual transaction; it does not require an organization to be created to carry it out; it must be determined by the nature of the transaction; finally, it is not necessarily a transaction concluded by the taxpayer with the intent of making a profit, though this is an important sign.

A fourth test is the period of possession. Lengthy possession may be a sign of the capital nature of the property, and the subsequent disposition will probably be treated as giving rise to a capital gain. On the other hand, holding property for a short time may give the impression that it was bought for resale and that the profit made is income.

The reasons for and nature of the sale are also important factors. A sale made as part of an advertising campaign and not as the result of an event which was unforeseen at the time of purchase such as an expropriation, an urgent need for money or the impossibility of proceeding with the original intent will more likely be classified as business income.

Finally, the most important factor remains the taxpayer's intent. The factors listed above are generally regarded as creating a presumption as to the taxpayer's intent. Was the intent speculative or was it to hold the property in order to obtain income from it? The problem that arises is to determine ex post facto whether the original intent to invest was accompanied by a secondary intent to speculate. If this secondary intent exists and the principal intent was not achieved, the courts will consider that the additional value is of a business nature and taxable as income. [1]

[Translation.]

For the above reasons the appeals are dismissed.

Appeals dismissed.