Kempo,
T.C.J.
(orally):
—The
appeals
of
Candor
Investments
Ltd.
("Candor")
and
Hanover
Management
Ltd.
("Hanover")
were
heard,
by
consent,
on
common
evidence,
as
the
issue
to
be
determined
was
common
to
both
appellants
for
each
of
their
respective
1980
and
1981
taxation
years.
The
issue
was
whether
the
gain
realized
on
the
purchase
and
subsequent
sale
of
Lots
9
through
20
inclusive
in
Block
71,
Plan
“A”,
Calgary
(the
"Bekins"
property)
was
taxable
as
capital
(the
appellants'
position)
or
as
business
income
as
part
of
an
adventure
in
the
nature
of
trade
or
profit-making
concern
(the
respondent's
position).
The
Bekins
property
was
purchased
on
January
30,
1979.
One
half
was
sold
in
February
of
1980.
The
other
half
was
at
the
same
time
optioned
by
the
same
buyer
and
sold
in
or
about
April
of
1981.
It
was
conceded
at
the
outset
of
the
hearing
that
the
appellant
Hanover,
through
the
auspices
of
one
Mr.
Beddoe,
was
the
active
participant
in
all
matters
relevant
to
the
issue
and
that
Candor
was
a
passive
participant.
A
Mr.
Rodger
Tournigny
gave
such
evidence
on
behalf
of
Candor.
The
overall
thrust
of
the
case
to
be
determined
is
reflected
in
the
pleadings
as
filed
in
the
Hanover
appeal,
being
Court
File
Number
86-1146
(IT).
Paragraphs
1
through
12
inclusive
of
the
notice
of
appeal
read:
1.
Hanover
Management
Ltd.
(''Hanover")
is
a
corporation
who,
in
the
years
in
question,
was
principally
in
the
business
of
real
estate
development
and
management.
2.
On
March
30,
1979,
Hanover,
as
a
member
of
the
Colony
Hanover
Joint
Venture
(the
“Joint
Venture")
purchased
a
70%
interest
in
Lots
9
through
20
inclusive
in
Block
71,
Plan
“A”
Calgary
(the
Bekins
Property").
Hanover's
share
of
the
Bekins
Property
was
one
half
of
the
Joint
Venture's
interest.
3.
The
Bekins
Property
consisted
of
a
building
and
land.
4.
Prior
to
the
purchase
of
the
Bekins
Property,
the
Joint
Venture
had
purchased,
and
continues
to
hold,
commercial
properties
in
the
City
of
Calgary
from
which
it
derives
rental
income.
5.
Immediately
following
the
acquisition
of
the
Bekins
Property,
the
Joint
Venture
commissioned
an
architect
to
carry
out
design
drawings
for
renovations
of
the
building
thereupon
and
retained
a
contractor
to
prepare
an
estimate
and
to
carry
on
renovations
necessary
to
effect
the
Joint
Venture's
intention
to
make
the
Bekins
Property
suitable
for
long
term
rental
by
potential
tenants.
This
was
consistent
with
the
course
of
action
adopted
by
the
Joint
Venture
in
respect
of
two
properties
previously
purchased
and
two
properties
subsequently
acquired
in
the
City
of
Calgary.
Furthermore,
real
estate
consultants
were
retained
to
advise
on
the
likely
rental
income
from
the
property
and
to
seek
out
prospective
tenants.
6.
As
part
of
the
development
process,
the
Joint
Venture
secured
a
tentative
agreement
to
lease
two
floors
of
the
building
for
the
operation
of
a
restaurant
and
nightclub.
It
was
a
term
of
this
tentative
agreement
that
the
adjoining
lands
be
retained
and
used
for
parking,
and
the
effect
of
this
agreement
was
to
preclude
any
subdivision
of
the
Bekins
Property.
7.
One
of
the
assumptions
made
in
purchasing
the
Bekins
Property
was
that
a
proposed
Calgary
Civic
Centre
would
be
built
near
the
Begins
Property.
At
the
date
of
acquisition
of
the
Bekins
Property
by
the
Joint
Venture,
construction
of
the
Civic
Centre
had
been
approved
by
Calgary
City
Council
and
the
land
necessary
for
construction
(being
approximately
four
city
blocks,
between
7th
and
9th
Avenues
in
south
east
Calgary)
had
either
been
acquired
or
was
in
the
course
of
being
acquired
through
expropriation.
The
members
of
the
Joint
Venture
considered
the
construction
of
the
Civic
Centre
to
be
absolutely
necessary
to
create
new
demand
for
commercial
space
in
that
area
and
therefore
achieve
the
levels
of
rental
income
that
were
required
to
finance
the
purchase.
8.
Following
the
purchase,
a
citizen's
committee
was
organized
to
protest
the
construction
of
the
Civic
Centre
on
the
grounds
that
it
would
result
in
higher
property
taxes.
Public
discontent
caused
the
City
of
Calgary
to
decide
against
proceeding
with
construction.
Consultants
hired
for
the
Joint
Venture
indicated
that
in
the
absence
of
the
Civic
Centre,
that
the
demand
for
commercial
space
in
the
area
would
be
essentially
removed.
Concurrently
with
the
decrease
in
rental
prospects,
interest
costs
were
increasing.
The
combination
of
decreased
potential
rents
and
increasing
costs
of
servicing
the
debt
incurred
on
acquisition
made
financing
the
project
by
the
Joint
Venture
totally
impractical.
9.
Prior
to
it
becoming
clear
to
the
general
public
that
the
Civic
Centre
would
not
proceed,
the
Joint
Venture
decided
to
list
the
property
for
sale.
Although
the
Joint
Venture
sought
to
interest
potential
purchasers
in
the
rental,
rather
than
purchase
of
the
building,
this
was
unsuccessful.
An
offer
was
received
by
the
Joint
Venture
for
the
purchase
of
the
Bekins
Property.
10.
It
was
a
condition
of
the
offer
that
a
subdivision
of
the
Bekins
Property
be
effected.
The
purpose
of
this
condition
was
that
the
property
could
then
be
purchased
by
the
purchaser
in
stages,
such
a
purchase
being
more
consistent
with
the
purchaser's
financial
resources.
11.
The
purchase
of
the
Bekins
Property
was
effected
through
a
subdivision
of
the
property,
the
purchase
of
the
building
with
an
option
for
the
purchaser
to
purchase
the
remainder
of
the
site,
and
the
subsequent
exercise
of
that
option.
12.
Hanover
received
a
confirmation
of
the
Notice
of
Determination
of
Loss
on
April
22,
1986,
indicating
that
the
Minister
of
National
Revenue
proposed
to
treat
the
gain
on
the
sale,
being
approximately
$803,855.00
to
be
on
account
of
income
rather
than
a
“capital
gain”
as
reported
by
Hanover.
Paragraphs
1
through
3
inclusive
of
the
Minister’s
reply
to
notice
of
appeal
read:
1.
He
admits
Paragraphs
1,
2,
3,
11
and
12.
2.
He
has
no
knowledge
of
Paragraphs
4,
5,
6,
7,
8,
9
and
10
and
does
not
admit
them.
3.
On
reassessing,
the
Respondent
assumed
that:
(a)
Hanover
Management
Ltd.
(Hanover)
was
incorporated
by
Clive
Beddoe
in
1978;
(b)
Mr.
Beddoe
was
a
professional
surveyor
and
vice-president
of
the
Cascade
Group
(a
group
of
development
companies)
and
as
such
involved
with
commercial
real
estate
development
in
Calgary;
(c)
on
March
15,
1978,
Hanover
entered
into
a
joint
venture
with
Colony
Developments
Ltd.
(Calgary)
for
the
purposes
of
acquiring
property,
whether
subdivided
or
not,
suitable
for
resale
or
development
to
acquire,
develop,
rent,
or
sell
such
other
buildings
as
the
venturers
may
agree;
(d)
on
January
29,
1979,
the
joint
venture
offered
to
purchase
the
property
located
at
239-10
Avenue
S.E.,
Calgary,
known
as
"Bekins
Moving
and
Storage";
(e)
the
joint
venturers'
interest
in
the
property
was
to
be
35%
each
with
the
remaining
30%
going
to
Candor
Investments
Ltd.
;
(f)
the
offer
to
purchase
was
accepted
by
Mr.
Stanley
Bekins
on
January
30,
1979,
at
2:15
p.m.
in
Los
Angeles,
California;
(g)
on
January
30,
1979,
the
Mr.
Beddoe
prepared
a
working
paper
showing
the
potential
profit
on
the
sale
of
50%
of
the
property;
(h)
the
total
purchase
price
of
$1,550,000
was
payable
as
follows:
(i)
$30,000
cash;
(ii)
$1,250,000
by
way
of
a
first
mortgage
at
10
/2%,
taken
back
by
the
vendor
for
a
term
of
nine
months
or
until
the
date
at
which
vacant
possession
of
the
property
was
handed
over
to
the
purchaser;
(i)
the
property
was
leased
back
to
the
vendor
at
an
annual
rate
of
$100,000
until
September
30,
1979,
at
which
point
the
vendor
had
the
option
to
renew
on
a
month-to-month
basis
until
March
31,
1980,
subject
to
60
days
notice
of
termination;
(j)
on
November
15,
1979,
the
vendor
gave
notice
that
it
would
terminate
its
tenancy
on
March
31,
1980;
(k)
on
October
30,
1979,
Hanover
wrote
a
letter
to
a
real
estate
agent
authorizing
the
listing
of
the
property
for
sale;
(l)
an
offer
to
purchase
the
property
was
accepted
on
February
25,
1980;
(m)
the
property
was
subdivided
into
lots
9-14
and
lots
15-20;
the
building
which
was
on
lots
15-20
sold
for
$1,308,800
with
a
closing
date
of
May
1,
1980;
(n)
the
offer
to
purchase
also
provided
for
an
option
to
purchase
lots
9-14
for
$1,050,000
which
was
exercised
on
March
30,
1981;
(o)
in
acquiring
the
property
which
is
the
subject
matter
of
this
appeal,
one
of
the
major
motivating
factors
of
the
appellant
was
the
possibility
of
turning
the
property
to
account
by
means
of
resale
as
part
of
an
adventure
in
the
nature
of
trade
or
profit-making
concern
or
undertaking
and,
alternatively,
if
not
acquired
and
sold
with
the
primary
intention
to
sell
for
a
profit
at
the
appropriate
time,
then
at
least
with
a
dual
or
alternative
intention,
ab
initio,
to
do
so.
The
viva
voca
evidence
called
by
the
appellants
was
from
the
realtor
who
was
involved
in
the
crucial
aspects
of
the
case,
Mr.
Arthur
Donald
Flett,
and
from
Mr.
Clive
Beddoe,
the
experienced
driving
force
in
respect
of
the
Bekins
property
acquisition,
use
and
subsequent
resale.
A
book
of
documents
was
marked
as
Exhibit
A-1.
It
was
composed
of
18
documents
under
numbered
tabs.
The
index,
which
appears
just
before
Tab
#1,
is
indicative
of
its
contents.
The
index
reads
as
follows:
1.
Joint
Venture
Agreement
dated
April
1,1978
between
Colony
Developments
Ltd.
and
Hanover
Management
Ltd.
2.
List
of
Colony
Hanover
Joint
Venture
Purchases.
3.
Chronology
of
Events
with
respect
to
Civic
Centre
Development.
4.
Excerpts
from
brochure
entitled
“Calgary
Civic
Centre".
5.
Offer
to
Purchase
of
Bekins
Property,
as
tendered
by
Hanover
Management
Ltd.
dated
January
29,
1979.
6.
Picture
of
property
and
survey
certificate.
7.
Lease
Agreement
to
Bekins
dated
March
30,
1979.
8.
Hanover
estimates
of
revenue
and
costs.
9.
Leasing
Materials/Architectural
Design
Sketches.
10.
Newspaper
clippings
with
respect
to
City
Centre
Project
(1978).
11.
Newspaper
clippings
with
respect
to
City
Centre
Project
(1979).
12.
City
of
Calgary
by-law,
as
first
read
on
July
30,
1979
and
as
abandoned
September
17,
1979.
13.
Offer
to
Purchase
from
Demcor
Services
Ltd.
dated
February
19,
1980.
14.
Demcor
Services
Ltd.
Option
Agreement
dated
May
1,
1980.
15.
Transfer
of
Land
from
Joint
Venture
to
Demcor
dated
April
28,
1981.
16.
Copy
of
letter
dated
March
13,
1980
from
Central
and
Eastern
Trust
Company
to
Colony
Development.
17.
Central
and
Eastern
Trust
Company
Mortgage,
April
1,
1980.
18.
Canadian
Interest
Rates
and
Mortgage
Lending
Rates,
January
1977
through
December
1980.
Tab
#8
of
Exhibit
A-1
was
an
estimate
of
total
income
potential
and
site
redevelopment
which
was
made
some
time
after
the
handwritten
one
dated
January
30,
1979
(Exhibit
R-2)
which
had
been
made
by
Mr.
Beddoe
for
the
consideration
of
his
co-venturers
so
as
to
be
able
to
respond
to
an
opportunity
to
immediately
resell
the
property
at
almost
double
the
price
paid.
This
opportunity
was
wholly
fortuitous.
It
came
from
the
neighbouring
business
who,
apparently,
was
not
aware
that
the
Bekins
property
was
up
for
sale.
The
Bekins
property
co-venturers
refused
the
neighbour's
offer
and
had
simply
decided
that
the
long-term
investment
plan
should
proceed
as
planned
as
that
was
their
desire,
motivation
and
goal.
The
value
of
the
property
was
known
to
be
increasing
which,
from
a
renovation
and
rental
perspective,
made
good
financing
all
the
more
favourable
to
its
economics.
Counsel
are
to
be
commended
on
the
thoroughness
of
presentation
of
their
respective
positions,
both
by
way
of
presentation
of
evidence
and
also
as
to
their
thorough
and
vigorous
cross-examination.
The
authorities
presented
were
also
reflective
of
their
best
positions.
The
massive
amount
of
case
law
on
the
subject
is
authority
for
the
requirement
that
the
whole
and
pertinent
course
of
conduct
of
the
appellants
is
to
be
viewed
objectively
and
as
a
back-drop
to
the
stated
subjective
intentions.
Present
statements
as
to
the
intention
which
motivated
the
acquisition
must
be
considered
along
with
the
objective
facts.
It
is
my
view
that
the
subjective
and
objective
should
be
capable
of
integration
and
should
be
reconcilable
for
the
most
part.
Therefore
each
case
is
to
be
decided
essentially
on
its
own
facts,
and
each
fact
in
the
case
should
be
weighed
individually
as
well
as
collectively.
With
the
above
considerations
in
mind
I
am
satisfied
that
the
appellants
have
successfully
rebutted
the
respondent's
assumption
reflected
in
subparagraph
3(o)
of
his
reply,
supra,
on
the
balance
of
probabilities.
My
reasons
for
coming
to
this
conclusion,
chiefly,
are
as
follows.
Mr.
Beddoe's
background
and
experience
was
in
the
realm
of
the
acquisition
of
realty
investments
for
rental
income
purposes.
His
professional
training
had
qualified
him
to
do
this.
The
overall
plan
and
vision
since
the
formation
of
the
appellant,
Hanover,
was
to
acquire
older
commercial
buildings,
renovate
them
and
then
rent
them
out.
Mr.
Beddoe
said
he
bought
well
and
that
he,
via
Hanover,
was
probably
slightly
ahead
of
the
pack
in
this
investment
plan.
One
of
the
three
major
objectives
of
Candor
was
also
that
of
investment
in
long-term
rental
projects.
With
respect
to
Hanover
two
such
projects,
the
Keg
and
Lougheed
buildings,
had
been
acquired,
renovated
and
rented
out
according
to
plan.
The
Bekins
property
project
has
been
shown
to
have
been
acquired
within
the
same
kind
of
overall
objective
and
plan
and
for
identical
purposes
as
the
Keg
and
Lougheed
projects.
Mr.
Beddoe's
experience
and
established
contacts
enabled
him
to
effectively
manage
and
control
renovation
costs
as
to
their
amounts,
their
extent
and
their
timing.
Large
contracting
companies
were
avoided.
Mr.
Beddoe
had
found
and
successfully
used
a
smaller,
reliable
renovator
with
whom
he
could
actively
participate
in
each
stage
of
the
work
project
and
thus
keep
the
costs
low,
manageable
and
within
budget.
There
was
no
need
or
pressure
extant
to
immediately
renovate
the
Bekins
project
because
of
Bekins’
occupation
rights
for
at
least
the
first
nine
months.
Also,
Mr.
Beddoe
had
anticipated
that
this
time
frame,
given
the
anticipated
successful
outcome
of
the
nearby
Civic
Centre
project,
would
see
a
clean-up
and
improvement
in
the
general
area
making
the
realtor's
job
of
finding
the
appropriate
tenants,
who
would
be
prepared
to
pay
realistic
rental
rates,
much
easier.
Bekins’
occupation
served
to
minimize
the
holding
costs
during
which
time
professional
advice
was
sought
and
retained
to
assist
in
the
renovation
plans.
The
Bekins
renovation
project
was
designed
to
meet
the
market
for
desirable
and
affordable
rental
space
which
would
arise
for
the
use
of
architects,
engineers
and
other
professionals
seeking
close
proximity
to
City
departments
which
would
have
been
relocated
in
the
Civic
Centre
project.
At
the
time
the
Bekins
property
was
acquired
it
was
reasonable
for
Mr.
Beddoe
to
have
assumed,
with
a
great
deal
of
certainty,
that
the
new
Civic
Centre
would
have
gone
ahead
and
that
once
the
legalities
of
the
plan
were
in
place,
which
appeared
to
be
imminent,
a
rapid
and
even
more
generalized
clean-up
of
the
whole
warehouse
area
would
have
followed.
The
Bekins
development
plan
was
aborted
due
to
the
unanticipated
collapse
of
the
Civic
Centre
project.
A
business
decision
to
sell
was
made
at
the
time
which
was
not
unlike
that
of
a
long-term
investor
seeking
to
minimize
losses,
or
to
maximize
profit,
of
a
capital
nature.
The
sale
was
made
in
two
stages
solely
to
accommodate
the
financial
capabilities
of
the
purchaser.
Accordingly,
although
the
holding
period
was
relatively
short,
the
reasons
for
the
sale
were
credible,
justifiable
and
were
on
account
of
an
unanticipated
and
material
change
of
circumstances.
Apart
from
the
obvious
and
objective
fact
that
land
values
were
escalating
rapidly,
there
was
really
no
subjective
or
objective
evidence
here
which
is
supportive
of
any
sustainable
inference
that
the
appellants
had
had
a
plan
at
the
very
outset
to
sell
or
flip
the
Bekins
property
because
of
market
volatility
or
in
the
event
the
Civic
Centre
project
had
failed.
To
the
contrary,
and
if
this
indeed
had
been
the
true
state
of
affairs,
it
is
more
likely
that
the
fortuitous
offer
to
buy
at
twice
the
price
that
came
in
on
the
same
day
of
the
purchase
might
have
been
either
negotiated
or
accepted.
Instead,
following
Mr.
Beddoe's
presentation
of
the
estimates
and
facts
to
all
of
the
joint-venturers
(which
he
would
have
been
obliged
to
do)
an
unequivocal
decision
was
made
to
stick
to
and
follow
through
with
the
original
and
desirable
plan
for
long-term
investment
and
holding.
The
credibility
of
Mr.
Beddoe's
evidence
has
not
been
eroded.
Four
other
projects
of
a
similar
nature
were
acquired,
renovated
and
rented
out
subsequent
to
the
Bekins
project,
all
in
accordance
with
the
stated
objectives
and
overall
plan
of
the
appellants.
The
document
filed
under
Tab
#2
of
Exhibit
A-1
is
a
list
of
their
joint
venture
purchases.
It
shows
the
following:
Colony
Hanover
Joint
Venture
Purchases.
a.
May
1978
“Keg
Building”
605-11th
Avenue
S.W.,
Calgary
—
Renovate
and
rent.
b.
September
1978
"Lougheed
Building”
604-1st
Street
S.W.,
Calgary
—
Renovate
and
rent/assembly.
c.
Fall
1978
to
mid
1979
"Petro
Canada
Land"
101-6th
Avenue
S.W.,
Calgary
—
Land
accumulation/assembly
—
Redevelopment
project.
d.
April
1979
“Bekins
Building”
221-239-10th
Avenue
S.E.,
Calgary
—
Renovate
and
rent.
e.
December
1979-May
1982
i.
"Herald
Building”
206-7th
Avenue
S.W.,
Calgary
Land
Assembly/renovation
and
rent
ii.
“Fitzpatrick
Building”
208-7th
Avenue
S.W.,
Calgary
Land
assembly/renovation
and
rent
iii.
“Irish
Linen
Building”
210-7th
Avenue
S.W.,
Calgary
Land
assembly/renovation
and
rent
iv.
"Empress
Hotel”
6th
Avenue
S.W.,
Calgary
Land
assembly/renovation
and
rent
It
seems
to
me
that
at
the
end
of
the
day
the
proof
of
intent
is
found
in
the
pudding,
and
that
in
all
of
its
material
aspects
the
appellants
have
made
their
case.
I
do
not
want
to
leave
this
case,
however,
without
having
made
a
comment
in
the
nature
of
a
caution
with
respect
to
my
having
made
a
preliminary
ruling
on
the
nature
and
extent
of
Mrs.
Crumb's
expertise.
She
was
called
by
the
respondent
to
give
an
expert
opinion
of
the
highest
and
best
use
of
the
Bekins
property
and
as
to
how
that
use
would
impact
upon
it’s
long-term
holding
investment
potential.
Her
subsequent
testimony
has
clearly
shown
a
significant
deficiency
of
experience
and
skills
on
her
part
in
the
realm
of
construction
and
renovation
economics
for
her
opinions,
otherwise
based
on
hearsay,
to
be
acceptable
as
that
of
an
expert.
Accordingly,
while
her
report
documented
an
excellently-researched
commentary
of
relevance
to
generalized
matters
concerning
highest
and
best
use
to
which
her
real
expertise
pertains,
it
is
of
no
use
and
weight
respecting
building
and
renova-
tive
economics.
Further,
the
report
lacks
particularization
of
and
specificity
to
the
Bekins
situation,
which
to
my
mind,
would
be
essential.
For
example,
she
had
not
spoken
to
Mr.
Beddoe,
for
if
she
had,
she
would
have
been
made
aware
of
his
intentions
of
having
the
tenant-related
improvements
done
by
the
tenants,
that
plans
were
afoot
to
rent
the
main
floor
and
basement
to
a
restaurant/night
club
operator,
that
parking
charges
were
to
be
extra
and
that
stairs
and
elevators
may
have
been
put
on
the
exterior
of
the
building
thus
increasing
the
rentable
space.
On
cross-
examination
she
acknowledged
these
items
would
have
impacted
on
her
value
of
the
building's
investment
potential.
She
also
acknowledged
that
renovation
prices
were
not
sought
from
smaller
renovators
or
contractors,
and
that
no
consideration
was
given
to
Mr.
Beddoe's
cost
saving
methods
or
approaches.
My
conclusion
then
is
that,
for
all
of
the
reasons
aforesaid,
the
appeals
of
each
appellant
are
to
be
allowed,
with
one
set
of
costs,
and
the
matters
referred
back
to
the
Minister
of
National
Revenue
for
reconsideration
and
reassessment
on
the
basis
that
the
gains
realized
by
each
of
the
appellants
arising
out
of
the
sale
of
the
Bekins
property
in
1980
and
in
1981
were
on
account
of
capital
and
not
on
account
of
income.
Appeals
allowed.
Email this Content