John S. M. Chan, Jamie Ung, Ellen Ung v. Minister of National Revenue, [1987] 1 CTC 2246

Sarchuk, T.C.J.:—The appellants John S.M. Chan (Chan), Jamie Ung (Ung) and Ellen Ung appeal from reassessments of income tax in respect of their 1980 taxation year. The three appeals were heard at the same time on common evidence. The issue is whether gains realized by them upon the disposition of certain properties were capital gains as reported or were income from a business as that term is defined in the Income Tax Act.

The properties in question are located in the City of Calgary, in that portion of Victoria Park known as the MacLeod Trail Couplet. The first property, located at 203 - 14th Avenue S.E. was acquired by the appellants on June 7, 1978 for the sum of $168,000. Chan contributed $33,000 and the Ungs $16,500 each towards the purchase price. The balance was financed by way of a demand loan arranged by Chan with the Royal Bank. The Ungs were not signatories to any loan documents nor did they appear to have any role in arranging this financing. Chan did say that he had a gentleman's agreement with the Ungs with respect to his liability to the Royal Bank.

The appellants pleaded and in their evidence stated that there was a fully leased nine-suite apartment building located on this property. In fact the dwelling was an old house which had been divided into eight rental units.

In July 1978 the appellants purchased a second property located at 204 - 15th Avenue S.E. for $80,000. Possession of this property was taken by the appellants on January 1, 1979. The appellants paid $30,000 in cash with the balance once again being financed by way of a demand loan arranged by Chan at the Royal Bank. An old house which was rented out to tenants stood on this site at the time of purchase. The appellant Ung testified that in the summer of 1979 a fire destroyed this house. Chan stated that in June 1979 the tenants destroyed the house by breaking windows and damaging walls and carpets. Other evidence notably that of the Fire Marshal of the City of Calgary established that the fire took place on December 1, 1979. The Court also heard from the supervisor of the Property Standards Section of the City of Calgary, who stated that his department received complaints respecting this property on September 26, 1979. As a result a Board-Up Notice was forwarded to Chan by the City of Calgary Housing Authority on September 28, and the building was boarded up on October 23.

On September 6, 1979 the appellants entered into an agreement to purchase and sell both properties at a price of $450,000. Pursuant to that agreement the properties were transferred to the purchaser on January 8, 1980.

Before examining the various factors which, according to the appellants, led to both the acquisition and subsequent sale of the properties it would be appropriate to consider the background and business activities of each appellant and to review their respective involvement in these transactions.

Mr. Chan is a businessman. In or about 1969 he became involved in the grocery business in Calgary and since that time he and his extended family have owned and operated several stores. At the present time the Chan family operates the Red Rooster Grocery. In 1971 he took employment with a real estate broker. This was his primary occupation until 1983 and, according to his income tax returns, was his chief source of income in the years 1977 to 1981 inclusive. In 1982 he founded A.C.I.C. International Enterprises, now a successful import/export trading company. At all relevant times Chan was the principal decision maker and manager of all the family business ventures.

The Chan family, under the stewardship of the appellant, has accumulated substantial assets to the extent that the appellant was able to represent to a lending institution a net worth in excess of $700,000. Much of this net worth was in real estate. A summary filed by counsel for the appellant discloses that since 1971 the appellant acquired some 15 properties all of which are still owned in whole or in part by Chan excepting 1317 - 1319 37th Street S.E. and 916 - 918 40th Street S.E. (Ex. A-3). The latter two were lost due to foreclosure. The material submitted also established that during the years 1977 to 1981 all of the rental properties were operated at a net loss. The two subject properties are not included in this summary.

There is no question that Chan is an industrious and intelligent businessman, prepared to work hard and to take reasonable risks. To meet the challenge presented by convenience store operators in the early 1970s he was instrumental in founding a grocers' association to make representations to the appropriate officials at City Hall. He has been active in the real estate business for a number of years and is knowledgeable end experienced in that field.

Mr. Ung is also a businessman. He and his family have been involved in the grocery business for a number of years and have owned and operated their own stores since at least 1974. As contrasted to Chan, Ung does not have a history of dealing in land. He owns his own residence. Of the two grocery stores currently operated by the Ung family one is located on property owned by them while the other is located in leased premises. Subsequent to the disposition of his interest in the subject properties Ung together with his wife and his brother-in-law purchased two ten-suite apartment buildings.

Ung was introduced to the subject properties by Chan. Although he examined them himself it is evident that he relied on Chan for most if not all of his information and advice. Initially Ung alleged that he had discussions with an architect regarding the preparation of drawings. He further alleged that he was involved in meetings with the planning department of the City of Calgary and that an officer in the planning department had indicated substantial delays would be encountered in receiving city permission for the construction of the shopping centre on the two properties. When cross- examined Ung conceded that he had no personal knowledge of the matters stated in the pleadings and could not vouchsafe their accuracy. Ung personally had no communication with the architect nor with the planning department of the City of Calgary.

Mrs. Ellen Ung is a co-owner of the grocery business which she operated with her husband and their immediate family. She also owns a 25 per cent interest in the property on which their Dollar Store #2 is located and in several apartment buildings. Notwithstanding this involvement her evidence leads me to conclude that with respect to the transactions in issue she acted entirely on the advice and perhaps even instructions of her husband. She did not see the property prior to its acquisition nor does she recall discussing its purchase with her husband or Chan. She advanced part of the down payment from her own bank account but could not remember the amount. She was not consulted with respect to the sale and recollected only that her husband had made some mention of that fact. On balance her evidence is of little assistance to the Court.

Counsel for the appellants acknowledged that Chan was the party who initiated the purchases and was primarily responsible for their acquisition. Nonetheless counsel submitted that Ung did not rely entirely on Chan and formed his own opinion with respect to the suitability of the properties as a proposed site for a grocery store. Counsel conceded that Mrs. Ung relied entirely on Mr. Ung in her decision to acquire an interest in these properties.

I am satisfied that Ung exercised at best a token measure of independent judgment with respect to these transactions. There is no question that Chan was the dominant factor influencing the decision of both Ungs to participate in the purchase and sale of the subject property. The fact that Chan was an experienced and successful businessman, was a person who knew the grocery business and who was carrying on business as a real estate salesman was well known to the Ungs. It is significant that all of the loan arrangements made at the Royal Bank were completed by Chan with little or no input from the other appellants.

I conclude, after hearing the testimony of all three appellants, that Chan was the principal actor in the acquisition of these properties and in their subsequent sale. In my view one must look to him to determine what intentions should properly be attributed to the appellants at the time the properties were acquired. Whether the appellants succeed in this appeal therefore depends in great measure upon the acceptability of Chan's assertions.

The appellants’ position is that the sole reason and the only matter considered by them in deciding to purchase the properties was their suitability for the construction of a grocery store. which would be owned by them and operated by their respective families. It was contended that resale of the properties at a profit was neither the primary reason for the purchase nor was it even considered secondarily by them at the time of acquisition. A number of factors were submitted as supporting the appellants’ position. Both Chan and Ung stated that they were having difficulty with their respective landlords and that they were facing the threat of termination of their lease. In the case of Ung his family operated its second convenience grocery store on 4th Street S.W. in leased premises and it was alleged that in 1978 the landlord advised the Ungs that he would not renew the lease. In so far as Chan is concerned it was pleaded that in 1978 he became aware that his lease of the premises in which he carried on his grocery business would not be renewed upon its expiry in 1980. Facing similar problems the appellants said that they had discussions respecting the joining of their families in the grocery store business and that each desired to own their own store in order to avoid landlord problems in the future. Both Chan and Ung testified that they discussed the advantages that could be gained by joint ownership of such a grocery store operated by their respective families.

Chan said that as a result of these discussions he let it be known in the Block Bros. Real Estate office in which he worked that he was looking for a site for a grocery store. A fellow agent directed his attention to the 14th Avenue property and Chan and Ung viewed the site. Both testified that they formed their own opinion with respect to this property and independently concluded that it was a good site for a grocery store. Chan testified that he enquired about the zoning of the property and its suitability for commercial development and was told by a City of Calgary employee that there should be no problem.

With reference to the second property located on 15th Avenue S.W. counsel for the appellants contended that its purchase was contemplated by both Chan and Ung at the time of the purchase of the first property since both recognized that one property was too small for their purposes. Their evidence on this point was somewhat imprecise and not entirely consistent. It is a fact however that Chan attempted to acquire a lot on 14th Avenue immediately behind the first property. That attempt, such as it was, was unsuccessful and Chan and Ung then purchased the 15th Avenue property which was immediately south of the first acquisition.

It was alleged by both Chan and Ung that it was not until after the acquisition of the second property that a potential problem with zoning developed. Chan stated that it was only then that he discovered that a number of zoning variations would be required. He said that while an application for such variations could be made the advice that he received from some person at the City of Calgary municipal offices led him to conclude that approval could be substantially delayed. Both Chan and Ung maintained that their needs to secure alternative grocery store premises were becoming imperative, and, rather than making an application for a variance, they separately began to look to other sites upon which they could continue their respective grocery businesses. They also decided to retain the subject properties for the purpose of continuing to derive rental income therefrom.

It was submitted that the frustration of their development plans, occasioned by the delays with respect to any possible approval of their proposals by the City of Calgary, coupled with the loss of revenue following the property damage and/or fire, led to the acceptance of an unsolicited offer to purchase which was received on or about September 6, 1979. They contend that the disposition of these properties was the result of a change in circumstances which could not have been anticipated at the time of purchase and which made the sale thereof in their best interests.

The question for consideration is whether, on the facts disclosed by the evidence, the appellants have established that the properties were acquired by them as an investment for the purpose of erecting thereon a grocery store and that it was only because this purpose was frustrated that the lands were sold and they realized a fortuitous profit by way of capital gain.

The determination of what were the real intentions of the appellants at the time they acquired these properties and whether they had at that time a secondary intention in the event that their primary objectives could not be achieved is a difficult one. As various courts have observed, a professed intention cannot be considered as determinative of what it is the concrete facts amount to. It is only part of the evidence and must be considered along with the objective facts. In this context I am mindful of comments made by Walsh, J. in Pierce Investment Corp. v. M.N.R., [1974] C.T.C. 825 at 831; 74 D.T.C. 6608 at 6612:

I am also of the view, as has been expressed in other cases, that while the evidence of the witnesses is helpful in endeavouring to determine their intentions, their actual conduct and the steps they took to carry out these intentions gives a much better indication of what they actually were. Without intending to cast any aspersions on the credibility of the witnesses in the present case it is nevertheless evident that in any case where a distinction must be made between a transaction which constitutes an adventure in the nature of trade and one which leads to a capital gain, one must expect the witnesses to insist that their intentions were solely to make an investment and that the idea of reselling the property at a profit had never occurred to them even as a secondary intention at the time of making the original investment, but was merely forced on them subsequently by some event beyond their control. If they were not in a position to testify to this effect they would have little or no ground for appealing against the assessment.

I propose to briefly review the appellants’ assertions to determine whether they are reasonable, credible and consistent with other proven facts.

The lease Chan's family held for its Mission Grocery was due to expire. Chan was less than precise as to the date on which this would occur but it was either at the beginning of 1980 or a few months before August 1980. Ung's lease was to expire in February 1979. He testified that he needed a location for a second store as soon as possible. The thrust of their submissions was that in early 1978 both families were facing the possibility of relocating their businesses in the immediate future and this resulted in the decision to purchase the first property.

It is a fact that before the appellants made their offer to purchase the first of the two subject properties they knew that they would have to apply for rezoning from the existing R-5 designation to a commercial designation in order to build. They also knew that there was no guarantee that such rezoning would be granted. They were aware of the proposals for Victoria Park, including the McLeod Trail Couplet sector where the properties were located, and knew that under the proposed regulations the area would be designated RM-7. They knew, prior to the purchase of the first property, that such a designation would in all probability only permit a grocery store to be part of a high density development. At the time of their purchases they were also aware that these properties would not accommodate such a development. While it is not entirely incorrect for counsel for the appellant to suggest that there was no apparent reason for Chan not to expect to be able to obtain commercial zoning for the first property at some point of time, it is illogical to suggest Chan could readily have concluded that there would be no problem with the development of a grocery store on the property.

In their July 1978 offer for the second property they agreed to January 1, 1979 as a closing date although Ung's lease on the Freda Grocery was terminating in February 1979. Counsel for the appellants argued that the January 1, 1979 closing date gave the appellants some time to pursue their develop- ment plans. Considering their alleged deadlines for the acquisition of replacement property it is difficult to reconcile their lack of a sense of urgency with their stated intentions.

Counsel for the appellants argued that “‘it is not unreasonable to concur in their decision with respect to the viability of this location for use as a grocery store . . . if a store with suitable parking could be developed on this location it would be ideally situated to capture the evening commuters on their way home . . .”. Counsel argued that prior to the removal of a condition they had placed on their offer, Chan enquired about the zoning of the first property and its suitability for commercial development. That is true in that Chan did speak to some employee at "City Hall” and it is fair to say that he probably made some general enquiries and received some general responses. There is no evidence however that he discussed with that employee any proposal to build a grocery store on that site.

There is no doubt that the first property was not suitable for the purpose that they alleged they had in mind and that this unsuitability was not rectified by the addition of the second piece of land.

The Court has before it the evidence of John Torode (Torode), a realtor, who at the request of counsel for the respondent prepared a development feasibility study with respect to these properties. Torode is the president of Torode Ltd., a company active in commercial real estate. The focus of its business is to assist investors in acquiring commercial properties. As part of the service to their clients Torode Ltd. considers the appropriateness of properties for various commercial uses and provides them with its opinion as to the viability of their proposals. I heard Torode as a witness qualified to give evidence as to the feasibility of the development of the subject properties either separately or in combination into a grocery/convenience store or a small shopping centre.

Mr. Torode testified that it would be physically impossible to build a small shopping centre on the site. In order to attempt such a development side yard relaxations would have to be obtained from the city. Furthermore the buildings in the development would have to be set back farther than usual because of restrictions arising from the fact that the properties had frontages on 15th Avenue, 14th Avenue and 1st Street S.E. It was Torode's conclusion that even if permission to build had been granted these constraints would have resulted in an awkwardly designed project with limited parking and small stores that would have been difficult to market to prospective tenants. Given these problems it was his opinion that even if the project received the necessary rezoning and relaxations it would have been economically imprudent.

The Court also heard the evidence of Judy Crumb, A.A.C.I., a real estate appraiser with the Department of National Revenue with respect to the highest and best use of the subject property. She stated that redevelopment in this area should be of a mixed-use nature facilitating high density residential development and commercial ventures of a specialized nature. She stated that the type of commercial development that would be most consistent with the properties’ highest and best use and its zoning would be a development such as the high rise apartment building with ground level convenience stores including a grocery store shown in the photograph filed as exhibit A-9.

I cannot accept the submission made by counsel for the appellant that Mrs. Crumb's evidence confirmed that the proposed RM-7 designation would allow for the construction of the grocery store contemplated by the appellants. It was clear from her evidence that the construction of a grocery store standing alone or a grocery store in a small shopping centre would not conform to the high density use desired by the planning authorities. It was her view that to receive approval for any development on this site it would of necessity have to be a commercial development of a high density nature. The appellants’ proposals do not fall into this category.

With respect to the manner in which the appellants financed their acquisitions it is significant that a substantial portion of the moneys required in each of the two purchases was borrowed by way of a demand loan at the Royal Bank. Counsel for the appellant suggested that given the circumstances of the first purchase and the short time available to Chan to make a decision this was the only possible way to raise the money. He contended that it was not reasonable to suggest that a mortgage or any other type of long-term financing could have been arranged prior to the purchase. Even if that were true with respect to the first purchase it most certainly was not the case with respect to the second purchase. If indeed the appellants had some fixed plans for the property one would expect at the very least that some tentative arrangements would have been made for longer-term financing.

The first loan of $105,000 had a revision date of December 1, 1978. While the branch manager, Mr. Jonassen testified that the bank was not necessarily looking to repayment of the loan by that date he expected that some arrangements with respect to payment of the principal amount would be insisted upon.

Counsel for the appellants placed significance on the fact that in the loan application (Ex. A-4) Mr. Jonassen recorded the existence of a “letter signed by John Chan undertaking to mortgage the above property to pay out both loans". This, it was submitted, was corroboration of the appellants’ longterm plans for the properties. I do not agree. A copy of the letter from Chan to the Royal Bank dated June 9, 1978 referred to by Mr. Jonassen was tendered as an exhibit (R-30). It states, with reference to 203 - 14th Avenue S.E.:

In the event that the above property is not sold by December 1, 1978, I undertake to mortgage the property and apply the proceeds on my outstanding loans at the Bank’s request.

This letter confirms that the loans were intended to be short-term and that the appellants had not sought out long-term financing. It also suggests that they had no immediate intention of doing so but would mortgage the property if the Bank insisted.

Chan applied for the second loan in the sum of $55,000 on September 21, 1978. The manager of lending services in approving this additional amount instructed Mr. Jonassen to have an understanding with Chan that the Bank would not carry the loans beyond September 15, 1979.

On July 20, 1979 Chan again wrote to the Royal Bank undertaking to obtain a mortgage loan on 204 - 15th Avenue S.E. and to apply the proceeds against outstanding loans if requested to do so by the Royal Bank. The unsolicited offer for the property was received by the appellants on August 29, 1979. On September 6, 1979 Chan signed the agreement to purchase and sell countering on the price and leaving the counter offer open for acceptance by the purchasers until September 14, 1979. It is a fact that September 15, 1979 was the due date for the demand loans at the Royal Bank and it is also a fact that an extension of time was given to Chan on that date in order to enable him to complete the disposition of the properties and to receive the proceeds in order to pay off the loans. There was not one word of evidence suggesting that at any point of time any attempt was made by the appellants to secure longer-term financing. It has already been noted that during the summer of 1979 although problems existed, tenants were still occupying the house on 15th Avenue and that it was not ordered to be boarded-up until September 28, 1979. The eventual loss of tenants and the later loss of the premises due to fire in December 1979 could not have been a factor in the appellants’ alleged “frustration” which led to the acceptance of the offer in early September.

While dealing with the manner in which the acquisitions of the subject properties were financed it is instructive to note that the only real estate purchases of Chan not financed by way of a mortgage were the purchases of the two subject properties and a purchase in 1979 of 331A - 22nd Avenue which was also partly financed by way of a demand loan at the Royal Bank. With respect to the latter transaction on June 5, 1979 Chan along with his wife Lily and Peter Chan appear to have borrowed $60,000 by way of an interest only demand loan to purchase this property to complete a land assembly. Bank documents indicate that Chan was to try to have the property rezoned with the objective of selling it as a unit. Chan denied having gone to the Royal Bank for this loan and denied telling the lending officer that his intention was to have the property rezoned for resale. In this respect Chan testified as follows:

Q. Now, on January 1st, 1979 you take possession of the house that is 204 - 14th Avenue, S.E., do you not?

A. Yes.

Q. And sometime after that you go back to the Royal Bank and Mr. Jonassen, don’t you in the month of June you go back and you borrow another $60,000.00?

A. No, I don’t think so.

Q. You have no recollection of having gone to the Royal Bank in June to borrow $60,000.00?

A. No.

Q. Well, I put it to you that you went back to the Royal Bank and got a demand loan for $60,000.00, in June of 1979.

A. Not as I remember.

Q. And I put it to you that the purpose of that loan was so that you could buy a piece of property known as 331A - 22nd Avenue, to complete a land assembly, to resell as a unit.

A. I don’t agree with that.

Q. Did you buy that property?

A. We did bought the property.

Q. What was the source of funds for the purchase of that property?

A. I believe the fund is from our family.

Q. Are you sure of that?

A. I’m quite sure about that.

Q. You deny having gone to the Royal Bank to get that money?

A. Maybe a small amount, maybe, you know, because our term deposit maybe, you know, up to date. Maybe a small amount, but not $60,000.00.

Q. And you deny telling Mr. Jonassen that the purpose of the loan was to purchase that land to complete a land assembly to resell as a unit?

A. I never say I’m going to resell the unit. I said I’m going to develop it because you need more frontage to develop that.

A document captioned Royal Bank, Amendment to Authorized Credit and dated June 5, 1979 (Ex. R-31) contains the following remarks:

Concerning our telephone approval of May 16, 1979 (J.C.J. - H.E.A.), Mr. Chan is purchasing the property located at 331A - 22nd Avenue S.W. at a cost of $65,000. He presently owns 333 and 335 - 22nd Avenue S.W. so this will give him three residential lots in a row. Future plans call for him to try and have the property zoned multiple family at which time he will sell off the three parcels as a unit. He feels that this will be accomplished within the next two years.

Counsel for the appellants noted that the properties were not sold by Chan, urged the Court to disregard this notation and to accept Chan's evidence. That is not possible. In his testimony the author of those comments, Mr. Jonassen, confirmed they would have been based on what Chan said to him. Furthermore I found Chan's testimony with regard to this transaction to be less than forthright and his responses not convincing.

One other major contention must be considered. Chan's previous involvement in land transactions, as his counsel noted, consisted of investment in rental properties. I cannot however accept counsel's submission that it would necessarily be out of character for Chan to become engaged in a specualtive real estate transaction. It is true that speculation is not consistent with his previous activities. However there is also the evidence of the proposed acquisition of 331A - 22nd Avenue which, on the face of it, was for the purpose of completing a land assembly for resale. In addition he is a skilled entrepreneur and an experienced realtor. These facts entitle the Court to draw an inference that his intentions in 1978 and 1979 were to turn a profit in real estate other than by the acquisition of rental properties.

The length of time that the property was owned by the appellants is also a factor. In this context I considered their stated intention for the land, their conduct in implementing their plans and the validity of their claims of frustration. I concluded that the only reasonable inference to be drawn from the short period the property was owned was that the appellants intended to turn it to account at the earliest opportunity. The fact that the appellants did not advertise the property for sale and that an apparently unsolicited offer was received by them is not in the circumstances of this case worthy of much weight.

As businessmen who needed replacement premises as soon as possible their actions were unusual to say the least. No attempt was made to have the properties rezoned. No long-term financing was ever discussed; no feasibility studies were considered; the only plan, if it could be referred to as such, was sketched on a piece of foolscap by an architect over lunch. With respect to the joining of the families in a common grocery store venture I note only that there is not a tittle of evidence as to the nature of the proposed arrangements. It is truly inconceivable that astute businessmen would proceed to purchase property for such a venture without taking some steps to establish the basis of the partnership.

On the facts before me the probability that the appellants purchased the properties for the purpose of constructing a grocery store/shopping centre to the exclusion of any purpose of its disposition at a profit does not appear to be a realistic view of their course of conduct.

The appeals are dismissed.

Appeals dismissed.