Kathryn C. Pollock and Wilma Steed v. Minister of National Revenue, [1988] 2 CTC 2045, 88 DTC 1409

Rip, T.C.J.:—The appellant Kathryn C. Pollock originally appealed income assessments issued against her for 1979, 1980, 1981 and 1982 and the appellant Wilma Steed appealed an income tax assessment for 1979. At the outset of the trial before the Tax Court of Canada Mrs. Pollock abandoned her appeals with respect to the assessments for 1980, 1981, and 1982. The issue in respect of both appeals against 1979 assessments, which by consent, were heard on common evidence, is whether the appellants acquired undivided interests in property in Denver, Colorado, on capital or revenue account.

Mrs. Pollock and Mrs. Steed are sisters-in-law.

The first witness was Mr. Dennis L. Pollock, a solicitor and the husband of Mrs. Pollock. Mr. and Mrs. Pollock reside in Lethbridge, Alberta. Mr. Pollock testified that sometime in 1978 his wife’s brother, Dr. Barry Steed, who resides in Calgary, contacted him with respect to the acquistion of real estate properties in Denver, Colorado. Mr. Pollock and his wife had indicated to Dr. Steed that they were interested in investing in real estate. Dr. Steed had been previously to Denver and Utah looking at potential acquisitions of real estate. Dr. Steed got in touch with Mr. and Mrs. Pollock at the same time he communicated with his other brothers and sisters and their spouses to determine whether they also were interested in acquiring property in the United States. Mr. Pollock indicated Dr. Steed was anxious for his family to acquire real estate for future income.

Mr. Pollock testified Dr. Steed had been down to Denver on a number of times looking at properties and asked Mr. Pollock to join him in Denver. With the help of a realtor Dr. Steed, Mr. Pollock and a Mr. Tingle, a solicitor in Calgary and close friend of Dr. Steed, looked at various properties in the Denver area. They discussed the various properties and their risks. One property, Kings Village, consisting of 24 suites in. two buildings, had a marginal cash flow but it was anticipated profit could be obtained with good management. Another property, Layton Gardens, had a cash flow sufficient to cover payments required for the mortgage and taxes. The Steed family wanted better cash flow than Kings Village offered, even if Kings Village was a newer property.

Layton Gardens consisted of 60 units in five or six buildings encircling a recreation pool area. The buildings were approximately ten years old, and appeared to be in good condition. At the time the property was viewed it had a vacancy rate of approximately four or five per cent.

Dr. Steed investigated the expenses of the vendor and had made various calculations which showed that the building would be profitable. The only observable problem was a leak in the swimming pool and calculations for its repair were taken into account in detemining whether the property should be acquired.

Mr. Pollock, Dr. Steed, and Mr. Tingle had looked at eight to ten buildings while in Denver. They decided that the Layton Gardens was the best of all the properties available primarily because its cash flow would enable the owners to meet their current obligations without any financial burden on them.

The calculations as to cash flow, the viability of the project and the expectation of profit were made by Dr. Steed.

On June 1, 1978, the appellants and Jo-Bar Incorporated ("Jo-Bar"), a United States corporation corporated by Dr. Steed and his wife, Maren Enterprises Ltd. ("Maren"), a corporation owned by Mr. Tingle, Colleen Steed, Douglas Steed, Karen Steed and Donna Steed purchased the Layton Gardens apartments for $780,000 U.S. The purchasers assumed a prior mortgage of approximately $510,000. Kathryn Pollock owned and acquired a 4/24th undivided interest in the property and Wilma Steed a 5/24th undivided interest in the property. Mrs. Pollock paid $40,000 and Mrs. Steed $50,000 cash on closing.

Mr. Pollock indicated that the members of the Steed family "discussed" the project and Mr. Tingle prepared a joint venture agreement for them to execute. The document was prepared "to help us remember how we put things together". The joint venture agreement provided for the property to be managed by a committee composed of Mr. Tingle, Maryelle Steed and Dennis Pollock. The agreement stated the purpose and scope of the joint venture were to purchase, to manage and to sell the project. The property was registered in the name of Jo-Bar who held title as trustee for the owners in their proportionate shares. The owners appointed Barry Steed, Dennis Pollock and Richard Tingle as their exclusive managers to supervise and manage the project, including the right to sell, mortgage, lease, or otherwise dispose of or encumber the project.

Mr. Pollock testified that he was not too involved in the management of the property since most of that work fell to Dr. Steed and Mr. Tingle. The managers hired Mrs. Pollock’s cousin, a Mr. Miln, who lived in Denver, Colorado, who at the time was articling for an accountant, to manage the property. Mr. Miln was about 25 years old and had some real estate experience "because his father owned some rental projects".

The Kings Village was poorly managed but Mr. Pollock felt that with a decent management and cleaning up the property could be profitable notwithstanding that it was not in as favourable an area as Layton Gardens. Mr. Pollock believed that with an increase in rents Kings Village property would have a better cash flow and thought the property should be acquired by his family, if not the Steeds. He approached members of his family. Mr. Pollock testifed he used as "hype" to his family that the property could be sold once it was cleaned and well managed. He himself anticipated that the property could be sold at a profit but could also be retained, depending on the financial strength of the property. In a letter, dated May 23, 1978, to his brother Mr. Pollock indicated that: "Our intentions are to arrange for the sale of this property immediately. I am confident that there will be substantial capital gain, the income of which will be the property of each investor to disburse of as the investor sees fit." Mr. Pollock convinced his family to purchase the Kings Village property. Mrs. Pollock, the appellant, acquired an undivided interest with several other members of her husband's family on June 19, 1978; the property was disposed of on March 27, 1979. The purchase price was $325,000 U.S. and the sale price was $395,000 U.S. The respondent has assessed the members of the Pollock family, including Mrs. Pollock, on the profits of the sale as income from a business or venture in the nature of trade. All the taxpayers have abandoned their appeals from these assessments.

Mr. Pollock testified that the goals in Layton Gardens and Kings Village were a little different in that the members of the Pollock family agreed that if there were any problems with the property it would be sold. The Pollock family had not invested in real estate up to that time and Mr. Pollock's own experience in real estate was from what he had learned from Dr. Steed. He told his family that if they had to, they could always sell the property.

Layton Gardens was held for 13 months prior to its sale in 1979. The managers of the property instructed Mr. Miln to keep the property in good condition so as to maintain a decent rent level. When the first offer to purchase was made Mr. Pollock was excited because there was a considerable increase from the purchase price.* [1] Mr. Pollock testified, however, that Dr. Steed advised the owners to reject the proposal because it was not their intent to sell. However a month later a second offer came at a "considerable" increase and this, according to Mr. Pollock, “really shook us up" and we accepted it. The second offer was for $1.2 million U.S. The property had not been listed for sale. Mr. Pollock stated he was excited and wanted his wife to accept the second offer immediately; however the others did not want to go that way at first. Eventually they realized that they would have a much better return on the sale proceeds than on the property itself.

The only major expense during the ownership of the property was $5,000 spent repairing the swimming pool. The cost of the pool came from the cash flow.

In cross-examination Mr. Pollock acknowledged that Dr. Steed initiated the investment in Denver approximatly six months prior to the actual acquisition. Mr. Pollock stated that he had never invested in real estate but Dr. Steed had. Dr. Steed had investigated real estate values in Calgary and found the prices were inflated as compared to Denver. For example, in Denver suites were selling for $15,000 each and in Calgary similar suites were being sold for $23,000 per unit. Mr. Pollock also indicated that most of the properties in Denver had a positive cash flow.

Dr. Barry Steed also testified on behalf of the appellants. He said Jo-Bar was incorporated by him and his wife to purchase real estate in the United States.

He had had an interest with two other people in Calgary in an apartment building which was purchased in 1973 and sold soon after the purchase of Layton Gardens because the other owners wanted to sell. Dr. Steed also confirmed that he and Mr. Tingle had purchased a 32-unit apartment located in south west Calgary in late 1978 or early 1979 which they sold in either 1980 or 1981 because Calgary economy was not looking good. Their profit on the sale was $250,000.

While visiting Utah and Denver Dr. Steed said he saw numerous apartment buildings and after reviewing the potential in both Utah and Denver he was of the opinion that Denver had a better economic climate. He corroborated Mr. Pollock’s evidence of their visit to Denver with Mr. Tingle, but in his view Mr. Pollock "came along for the ride”. He was impressed with the Layton Gardens property since it had a good cash flow and a very good potential. He confirmed that he discussed the investment with family members. Dr. Steed testified he wanted to have his family invest together and iscussed the acquisition of the Layton Gardens with his family. The family consisted of eight siblings "who are very close and did things together". As a group Dr. Steed indicated the family gets together about four or five times a year.

After the acquisition of the Layton Gardens property Dr. Steed visited Denver on several occasions and discussed management with Mr. Miln. Mr. Miln's responsibilities included the collection and deposit of the rents and "on-site" supervision and management of the property; he also recommended what repairs and maintenance should be carried out.

Both Dr. Steed and Mr. Miln were of the opinion that the rents at the time of acquisition were undervalued and about six months after the purchase of Layton Gardens rents were increased about 15 per cent, or about $35 to $45 per unit per month.

During his visits to Denver Dr. Steed said he realized that the properties were increasing in value but did not realize the extent of the increase. Mr. Miln had telephoned him about the first offer to purchase the property but upon hearing the purchase price, Dr. Steed indicated he was not interested in selling. Dr. Steed said the owners considered the second offer a good offer and accepted it. He insisted that no steps were taken to promote the sale of the property.

The intent at acquisition of the Layton Gardens property, according to Dr. Steed, was to acquire good revenue producing property. This was his "dream and goal". He stated he was “low key on the sale and did not really want to sell”. He said the reactions of the other investors were mixed. Dr. Steed stated that in his view "real estate is long term; if you own (it) long enough you get rid of the mortgage and all rents are yours".

The Layton Gardens property was sold, Dr. Steed testified, because of its unusual appreciation; he thought he may not have the opportunity to sell that property at that price again. He stated that on acquisition he did not think the property would appreciate so much in 13 months. The appreciation was quite a surprise to him. He said that he did not know how one could reject such an increase; his investigations did not show any such potential in Denver for such an appreciation in value. He indicated that he understood there had been no great appreciation of real estate properties in Denver during the 1960's and early 1970's.

The vacancy rate in the Denver area at time of acquisition of Layton Gardens, according to Dr. Steed, was approximately six to twelve per cent. That Layton Gardens had few vacancies, in Dr. Steed's view, was probably because the rents were low. He indicated that the owners may have had more vacancies after the increase in rent but not much. Rents at Layton Gardens were lower than other rents in the area but he and the others did not appreciate to what extent until after the property was acquired.

He confirmed that he was the active member of the ownership group. Most of the times he went to Denver he went alone. Mr. Tingle may have gone once or twice.

Prior to the acquisition of the Layton Gardens Dr. Steed sought tax advice from Coopers and Lybrand, a chartered accountancy firm in Calgary. In a letter dated May 15, 1978, a Mr. C.E. English of Coopers and Lybrand, wrote to Dr. Steed in reply to an opinion requested by him. According to the understanding of Coopers and Lybrand, Mrs. Steed was a majority shareholder of Jo-Bar which at the time owned undeveloped real estate in Utah and that Jo-Bar was to purchase ten acres of land in Utah as well as apartment buildings in Denver. Coopers and Lybrand understood that the intention was to have five or six other family members purchase undivided interest in the Utah land and apartment buildings in Denver and that it was likely that the properties would be sold within 12 months of acquistion. The transactions of the acquisition for both the Kings Village and the Layton Gardens properties were structured on the basis of the advice contained in the Coopers and Lybrand letter; for example, the properties were purchased by wives who had little or no income, and that the wives were funded by their spouses on security of non-interest bearing demand notes.

In cross-examination Dr. Steed stated he had not been satisfied with the Coopers and Lybrand letter, in particular as to their understanding of the facts. However he did not ask Coopers and Lybrand for an explanation nor did he advise them that their understanding of the facts was wrong. He indicated he was very upset at the statement of account from Coopers and Lybrand and he did not want to further increase the bill.

Wilma Steed could not recall how much money she put down in cash on closing of Layton Gardens. She stated she did not borrow any money, the money was her husband's. She said that she and her husband, a dentist in Lethbridge, had discussed the investment and because her husband had no pension plan they wanted to invest for their retirement; they also wanted a "cushion" for Dr. Steed in the event "something" would adversely affect his practice.

Mrs. Steed confirmed that her brother-in-law, Dr. Barry Steed, initiated the discussions involving her interest in the project. She also emphasized that the Steed family is "very family-oriented and wanted something for posterity."

Mrs. Steed stated that the investment was investigated by Dr. Steed and Mr. Tingle who was involved because of his friendship with Dr. Steed. She was not called upon to make any decisions as to the management of the property. She stated when the offer to purchase was made known to her she probably went along with what her husband said. She says the proceeds of the sale of the property were "probably" used to pay off the balance of purchase price of land her husband farmed.

Mrs. Steed stated that prior to the acquistion of the Layton Gardens apartment she and her husband had not acquired any real estate except for the farm. In cross-examination she stated that she "presumed Dr. Barry Steed wanted to collect rents to earn extra money". She stated that she and her husband had conversations with Dr. Steed on how the rents from Layton Gardens would help their income. She stated that according to her understanding Barry Steed had no intention of selling any properties, the properties were to be purchased as investments to increase income without really sweating for it. "The Layton Gardens apartment rents added to income we already had." She stated that "you can't be a dentist all your life” and that you need some other source of income, "something to live on once you retire".

She confided that she trusted Barry Steed very much but she said that if she would see a mistake that he may have made she would not go along with it. She stated the offer to purchase was "a tremendous offer" and therefore she accepted it. Her decision to sell was made by her husband; "he thought it was a tremendous offer". She said very few people would have passed it up.

Mrs. Kathryn Pollock said she acquired the Layton Gardens property because she and her husband "wanted a future for the children and for retirement". Land was very important to her. She said she was ingrained with the concept of needing to own land. She stated she had lots of discussions in respect of the future and wanted to own Layton Gardens. She testified there had been no discussions amongst the owners as to the proposed length of ownership of the property.

Mrs. Pollock also acquired an interest in land in Utah with Dr. Steed and on a sale of the Utah land some profit had been made. She could not remember when the land in Utah was purchased or how the profits were applied.

Mrs. Pollock was also involved in the Kings Village property. She stated that after her husband's mother died her husband, Dennis Pollock, wished to do with the Pollock family what the Steed family was doing, mainly to acquire investment property. She became involved with the Kings Village property through her husband.

She also testified that the Pollock family was not as close as the Steed family and that the Pollocks do not look at the future as the Steed family did. Some of the Pollock family members are unmarried and have no family. She stated circumstances existed in the Pollock family which were completely different from the Steed family.

In cross-examination she stated that there was a difference between the Kings Village acquistion and the Layton Gardens acquistion. She felt the investment in the Kings Village was not so personal because it was with her husband's family and she invested in that property because it was convenient for tax purposes that she rather than her husband make the investment. The purchase of Layton Gardens with her own family was a more personal acquistion.

Mrs. Pollock had no other investments in real estate.

In his submission that the profits from the sale of Layton Gardens were on account of capital counsel for the appellants stressed that the nature of the property was as an investment and that a family group purchased the property in a common effort as an investment. He argued that Layton Gardens always had a positive cash flow and the increase in rents was only to meet demand and not for resale purposes.

The offer to purchase, argues counsel, was a "once in a lifetime” opportunity and was unsolicited. Neither of the appellants was in the business of trading in real estate; they relied on their husbands, brother and brother-in- law on the purchase and sale of the property.

Counsel asked the Court to accept the evidence of Dr. Steed and the appellants and to reject the understanding of Dr. Steed's erstwhile accountants, Coopers and Lybrand, as set out in the letter: there was, he insisted, no intention to sell Layton Gardens within 12 months of acquistion.

In respect of other sales of properties by Dr. Steed, counsel said these properties were owned in co-ownership with persons who were not family. Layton Gardens was acquired as a family asset.

The respondent's counsel submitted that the intent of the appellants, in particular, Mrs. Pollock is none too clear. Mr. Pollock testified that at the outset both Layton Gardens and Kings Village were acquired as investments. But in a letter to his brother, he volunteers that Kings Village could be sold at any time, if necessary.

Mr. Pollock also testified he travelled to Denver with Dr. Steed and Mr. Tingle to assist in the examination of properties they were considering to purchase. Dr. Steed said Mr. Pollock "went along for the ride".

To counsel, the structuring of the ownership and financing of Layton Gardens bore an "uncanny resemblance" to what was recommended in the letter by Coopers and Lybrand, and counsel suggested that if Dr. Steed found factual errors in that letter, he would have sought clarification, "especially because of the bill he got".

The respondent's counsel expressed the intentions of the purchasers on the acquistions of Layton Gardens and Kings Village were one and the same: to sell if a good offer came along.

It is irrelevant to the appeal, he submitted, whether the property was owned with family or with strangers. The driving force in the transaction for the acquisition of Layton Gardens was Dr. Steed. Dr. Steed had a history of selling property whether he held property or owned the property together with family or with strangers.

I was not impressed with the evidence of the appellants or their witnesses. I found Dr. Steed to be the driving force in the acquisition of Layton Gardens and its eventual sale. I found Dr. Steed to be an intelligent, astute, no-nonsense type of individual and this has caused me to seriously doubt his evidence, for example, that because he feared an additional account from Coopers and Lybrand he allowed purported factual errors, on which a course of action was based, to survive. I would not think that being so concerned with an accountant's bill, Dr. Steed would pay such an account, even grudgingly, for an opinion based on wrong assumptions of fact. Dr. Steed is not an unsophisticated professional. Dr. Steed's real estate expertise was the catalysis in this transaction. The respect his family had for his real estate knowledge allowed the family members, including Mr. Pollock, to purchase, or influence their spouses to purchase, the Layton Gardens property. My appreciation of the evidence is that the appellants were content to go along with any course of action promoted by Dr. Steed, so long as money could be made.

I also agree with counsel for the Minister that much, if not all, of the advice given to Dr. Steed by Coopers and Lybrand was followed in structuring the Layton Gardens transaction: the wives purchased the undivided interests in the property and the capital to acquire the interests was borrowed from the husbands. Thus one may reasonably conclude that much of Coopers and Lybrand's understanding of the facts was not in error.

Dr. Steed's evidence, and that of the appellants, concerning the close family ties of the Steed family is a double-edge sword. It is quite clear that because of the close ties the appellants and other family members became aware of Layton Gardens and were able to purchase the property. But because of the close ties the family had utmost confidence in Dr. Steed and was Willing to follow his lead in this venture.

The insistence by Dr. Steed that the property was sold because the rate of return to the owners of the property would be greater on the proceeds of sale than continuing to own Layton Gardens lacks proof. No evidence was submitted to show that the proceeds of disposition were invested by either appellant for such a return. The evidence suggested that land was purchased in Utah, but land was also purchased in Lethbridge by Dr. Steed, the appellant's husband. There was no evidence that after the sale the Steed family reinvested the proceeds of sale: the facts do not support the appellants' testimony as to intention.

The appellants entered into this venture with confidence that with Dr. Barry Steed's track record it was reasonably certain at the end of the day they would make a profit. The profit potential was either from rentals or from sale of the property; from the outset they were willing to sell the property, which Dr. Steed had done profitably with other properties in Calgary.

The appeals are dismissed.

Appeals dismissed.