Joe’s & Company Ltd. v. Minister of National Revenue, [1986] 1 CTC 2123, 86 DTC 1073

Sarchuk, T.C.J.:—Joe's & Company Ltd. (Joe's) appeals from assessments to tax with respect to its 1974 and 1975 taxation years. The appeals were heard together although the issues raised in each case are separate and distinct.

The appellant is a corporation incorporated in 1948 under the laws of the Province of Manitoba. It is a family concern and carries on its business operations at 1500 Wall Street in Winnipeg. Originally involved in the general contracting business, in or about 1960 it found itself in some financial difficulty and became more or less dormant. Its sole remaining source of income was rent from property it owned on Wall Street. The lessee is an associated company, Wall Construction Company Limited (Wall Construction) which, under the business name of Trevi-Tile manufactured and installed tile.

The 1974 Taxation Year

On December 31, 1971, the appellant owned approximately 10 acres of land located on Logan Avenue (the Logan property) in Winnipeg which it had acquired on October 29, 1970 for an aggregate price of $32,500. On May 15, 1974 the appellant sold the Logan property for $75,000. In its 1974 income tax return the appellant declared that it had outlays and expenses of $176.58 in disposing of the said property and further showed the net gain from the disposition of the land as nil.

On March 19, 1979 the respondent reassessed the appellant calculating the appellant’s gain from the disposition to be $42,166.42, and the appellant's taxable capital gain to be $21,083.21. In so doing the respondent made inter alia the following assumptions of fact:

(a) that the Logan Avenue lands were acquired by the appellant in 1970 for $32,657

(b) that the Valuation Day value of the Logan Avenue land was less than $32,657.

At issue is whether or not the respondent was correct in reassessing the appellant on this basis.

The Logan property had been purchased by Wall Construction in 1968. Its location was considered to be excellent and Wall Construction hoped to eventually build a new plant thereupon. In 1970 the shareholders of the appellant decided to revive the company and to acquire property for the purpose of earning rental income. To assist the appellant with its plan Wall Construction decided to “put all the property into Joe’s” with the expectation that it would build the new plant and eventually rent it back to Trevi- Tile. As a result on October 30, 1970 the land was transferred by Wall Construction to the appellant for the sum of $32,500 (Ex. A-3). The consideration was set by the appellant and Wall Construction and was based on a valuation of the property provided by Glen Greenway Co. The author of this valuation was not called to testify.

Mr. Romeo Jacobucci, the president of the appellant (and of Wall Construction) expressed the view that the Logan Property was worth $75,000 in 1970. According to him it had a number of features which made it attractive to Trevi-Tile the intended lessee, (and to other industrial users) such as frontage on a main transportation route and proximity to existing services. For Trevi-Tile it had the added advantage of access to an excellent source of water, a matter of some importance in the tile manufacturing process. Notwithstanding these positive features the Logan property remained unused because the appellant was not able to arrange the necessary financing to build a new tile plant.

In 1971 the appellant purchased another property which it leased to Mac- Cosham Warehousing Ltd. Shortly thereafter MacCosham inquired whether or not the appellant had any other buildings or land available since MacCosham wished to expand. As a result of these discussions the Logan property was sold to MacCosham on November 15, 1973. The consideration paid was $75,000.

The appellant bears the onus of establishing that the respondent's assessment, based as it was on the assumption of fact that the Valuation Day value of the Logan property was less than $32,657, was wrong.

The evidence of Mr. Jacobucci that the property was undervalued at the time of acquisition (and at V-Day) is not supported by any other evidence. Mr. Jacobucci’s background and experience is not such that would enable this Court to give much weight to his opinion as to value. No particular reliance can be placed on the correspondence between the appellant and the zoning authorities. Indeed their responses (Ex. R-1 and A-4) indicate that an application for rezoning would be premature and that industrial development was not considered to be as likely in the near future as sug- gested by Mr. Jacobucci. The sale to McCosham, taking place as it did over two years after Valuation Day is not, and cannot be, in the absence of special circumstances, evidence of market value as at December 31, 1971.

Counsel for the appellant further argued that the assumptions of fact made by the respondent were in any event wrong. It was submitted that the appellant had met the onus by establishing facts that “created a state of doubt” about the propriety of the respondent's assessment and that accordingly the tax liability of the appellant must be negative. In support counsel cited Anderson Logging Company v. The King, [1925] S.C.R. 45; [1917-27] C.T.C. 198 and Kit-Win Holdings (1973) Limited v. The Queen, [1981] C.T.C. 43; 81 D.T.C. 5030.

The Court notes that subsequent to the Anderson case the Supreme Court of Canada specifically considered the tests to be applied and held that the onus was on the appellant to “demolish the basic fact on which the taxation rested.” Roderick W. S. Johnston v. M.N.R., [1948] S.C.R. 486; [1948] C.T.C. 195.

Whichever words one may choose to describe the nature of the onus, given the weakness of the evidence of value the appellant has not created a state of doubt nor has it demolished the basic facts upon which the respondent's assessment was founded. The assessment was correct and must remain undisturbed. The appeal with respect to the 1974 taxation year is accordingly dismissed.

The 1975 Taxation Year

On July 1,1973 the appellant acquired certain lands and buildings located at 601 Bowman Avenue, in the City of Winnipeg, in Manitoba (the Bowman property). The purchase price was $250,000 payable as to the sum of $50,000 in cash on closing and as to the balance of $200,000 by a mortgage back to the vendor. During the years 1973, 1974 and 1975 the appellant carried out renovations to the buildings located on the Bowman property at an aggregate cost of $35,075.15.

On June 13, 1975 the appellant appointed Oldfield, Kirby & Gardner Real Estate Ltd. its exclusive agent to sell the Bowman property at a price of $1, 250,000. The listing agreement was expressed to expire at one minute before midnight on June 16, 1976. The appellant accepted an offer to purchase at a price of $925,000 on October 28, 1975.

In computing its income for the 1975 taxation year the appellant treated the gain on the disposition of the Bowman property as a capital gain. On March 19, 1979 the respondent reassessed the appellant on the basis that the gain upon the disposition of the Bowman property was income of the appellant. The respondent also adjusted the amount of the reserve claimed by the appellant in its 1975 taxation year return on account of proceeds of disposition not receivable by it until a future date. With respect to the latter issue at the commencement of the hearing counsel advised the Court that the appellant now agrees with the respondent's calculations. Accordingly the remaining issue is the validity of the respondent's position that the gain on disposition was income to the appellant.

As stated beforehand, by 1970 the appellant was no longer active as a general contractor. Its shareholders, seeking to involve it in a more stable business decided that the appellant should acquire properties for rental purposes. The acquisition of the Logan property from Wall Construction in 1970 (the subject of the 1974 taxation year appeal) appears to have been the first step. In 1971 the appellant purchased an older building located at 1377

- 1385 Winnipeg Avenue which was refurbished by Wall Construction. On April 19, 1972 it was listed for sale. Subsequently on August 21, 1972 it was leased to McCosham. In 1975 this property was expropriated by the City of Winnipeg.

On March 13, 1973 the appellant entered into an agreement to purchase the Bowman property, and took possession on July 1, 1973. Prior to its acquisition by the appellant, the building located on the site had been utilized as a farm equipment assembly plant. The improvements necessary to divide and refurbish it into rental units were made by the appellant and by the latter part of 1975 the building was fully rented. No difficulties were encountered in finding tenants. On June 13, 1975 the appellant listed the Bowman property for sale. According to Mr. Jacobucci the price was set by the appellant in consultation with its real estate agent and was deliberately set too high. Notwithstanding that fact, on August 29, 1975 an offer was received and was seriously considered by the directors of the appellant. There was a consensus that the property should be sold but at a price closer to the listing price. As a result further negotiations took place, the offer was increased to $925,000 and was accepted.

In 1974 two parcels of land located on Union Avenue in Winnipeg were acquired by the appellant. Two buildings were located on this site. One was converted into commercial space (by Wall Construction) and was leased to a number of tenants. On April 8, 1975 both the renovated and the older buildings were listed for sale. The buildings were sold on September 2, 1976 then recovered by way of mortgage sale proceedings and are owned and managed by the appellant to this date.

In 1974 Joe’s purchased 230 acres of vacant land on Inkster Boulevard in the City of Winnipeg with the expressed intention of holding it for further development. At the time of purchase it was zoned for agricultural use and since acquisition has been leased to a tenant farmer. No steps have been taken to develop it. The property was listed for sale May 26,1975 as a result of which an offer was received but was rejected as being too low.

In 1976 a rental property located on St. Joseph Street, in Winnipeg was acquired. This property continues to be owned and managed by the appellant.

More recently the appellant purchased a property on Higgins Avenue in the City of Winnipeg with the intention of preparing it for tenant occupancy.

Before turning to the evidence adduced with respect to the appellant’s intention at the time it acquired the Bowman property it is appropriate to consider both the fact and the manner in which the appellant listed for sale all of the properties it acquired. More specifically:

(i) 1377 - 1385 Winnipeg Avenue — this property was acquired in 1971 and was first listed for sale on April 19, 1972. It was listed again on July 17, 1975 and subsequently relisted as a multiple listing on October 8, 1975 (Ex. A-9 and A-10).

(ii) 430 - 470 Union Street, a commercial property accommodating 10 industrial tenants acquired in 1974 was the subject of an exclusive listing for sale for a period of one year commencing April 8, 1975 (Ex. A-14). It was subsequently placed on a multiple listing on March 30, 1976 (Ex. R-2). On July 14, 1976 an amendment was made to the listing increasing the price (Ex. A-11). Both buildings were sold as noted hereinbefore.

(iii) The property on Inkster Boulevard consisting of approximately 230 acres was acquired in 1974 and was listed for sale on May 26, 1975 (Ex. A-12).

(iv) The St. Joseph property was never listed. The practice previously followed was changed as a result of comments made to Mr. Jacobucci by an employee of Revenue Canada.

(v) The subject property, acquired in 1973 was the subject of an exclusive listing on June 13, 1975 (Ex. A-17) for a period of one year. The listing produced an offer which was ultimately accepted.

Two of the listing agreements contain a clause which in the Court's view bears on the validity of appellant’s expressed intention. In the listing agreement (Ex. A-17) granting Oldfield, Kirby and Gardner Real Estate Ltd. exclusive authority to sell the Bowman property the clause setting the price and terms reads as follows:

1 million, 250 thousand or an offer acceptable to us. ($1,250,000). [Emphasis added.]

Furthermore, although other clauses in the agreement (a form document) were deleted or amended the Court notes that the following clause was retained and formed part of the agreement:

I further agree to accept any bona fide Offer to Purchase at the price and terms herein set out and to complete the sale with the offeror or to forthwith pay to you the commission to which you would have been entitled on such sale had it occurred.

The identical clause is found in the listing agreement with respect to 430 - 470 Union Street dated April 8, 1975 (Ex. A-14). It is a fact that when offers were received with respect to these properties they were accepted.

Mr. Jacobucci's recollection was that the appellant did not reject the offer for the Bowman property because it was too good and came at a time when the appellant was seriously indebted to the bank and to other creditors. On cross-examination it was disclosed that in 1975 Joe’s had incurred rather substantial expenses in relation to a film it had produced totalling almost $200,000. Mr. Jacobucci conceded that part of the reason for the acceptance of the offer was that ‘‘we had bills, we were indebted . . . we wanted to pay it off." There was no dispute that this sale enabled the appellant to recover more than the original amount of cash invested in the acquisition and improved its working capital position.

At all times Mr. Jacobucci maintained that the appellant acquired the Bowman property strictly with the intention of renovating it as a rental property and holding it as a long-term investment. He flatly rejected a suggestion that at the time of purchase Joe's intended to resell the property if the right price could be obtained.

Counsel for the appellant argued that the relevant intention is that present at the time of purchase and that the facts adduced supported the appellant's position that the Bowman property was acquired as an investment. The property was readied for tenants and in due course fully leased. The rental income provided a satisfactory return on investment and there was no evidence of any problem with tenants. The offer resulted from a listing intended only to ascertain market value for lending purposes. When the listing produced an unanticipated offer so close to the highly inflated price set by the appellant, it had no alternative but to accept. In keeping with its original investment intention the appellant took back a substantial mort- gage, which mortgage was not discounted but was retained as an investment until paid.

The appellant’s trading history, counsel argued, was further proof of its investment intentions. It acquired income-producing properties, and improved them to maximize the rental value with the view of maintaining them for the long term. The listing of the property was done for the reasons expressed by Mr. Jacobucci and ought not to be viewed as evidence of an intention to resell.

Counsel for the appellant sought to distinguish the cases cited on behalf of the respondent and in particular Regal Heights Limited v. M.N.R., [1960] C.T.C. 384; 60 D.T.C. 1270 (S.C.C.) on the basis that in the case at bar the expressed investment intention was untainted by any evidence that Joe's had, at the time of acquisition, an alternative or secondary intention of disposing of the property at a profit.

Counsel advanced a second argument to the effect that the respondent had failed to properly plead "secondary intention.” In particular the appellant challenged subparagraph 8(j) of the respondent's reply to the notice of appeal, which reads:

(j) An operating motivation of the Appellant at the time it acquired the Bowman property was to turn the property to account and resell it at a profit.

It was argued that the reply, read as a whole establishes that the respondent has pleaded primary intention and failed to expressly allege secondary intention as required. The result was that the onus to prove secondary intention shifted to the respondent and has not been met.

This submission can be disposed of by reference to the decision of Cullen, J. in Woodbine Developments Ltd. v. The Queen, [1984] C.T.C. 616; 84 D.T.C. 6556. The taxpayer in that case challenged the sufficiency of the pleadings, the relevant portions of which were worded almost identically to the pleadings in the case at bar. Cullen, J. in disposing of the taxpayer's argument stated:

I am satisfied and Counsel for the Defendant has argued correctly that the wording of this pleading, namely paragraph 7(d), conforms completely with the doctrine of “‘secondary intention” as set forth by Mr. Justice Noël in the Racine case in that Mr. Justice Noël states that to give the character of "secondary intention,” and I quote: "The purchaser must have in his mind at the moment of purchase the possibility of reselling as an operating motivation for the acquisition.” The Crown has fully satisfied the requirements of pleading a "secondary intention” by using those words (the emphasis is mine).

I turn now to the first argument advanced by counsel for Joe's. The appellant’s expressed intention is not surprising or unexpected, and, standing by itself should not be accorded a great deal of weight. Such statements must be considered in the context of matters such as the appellant’s previous (and subsequent) involvement in real estate, its business history, and its financial strength or debt load at the relevant time. Consideration must also be given to the rather unusual listing practices followed by the appellant. All are factors which must be weighed in determining the appellant's intentions at the time of acquisition.

Mr. Jacobucci explained the appellant’s listing practice as nothing more than a technique utilized by it to establish property values to facilitate the borrowing of funds from its bank. To achieve maximum borrowing capacity the listing price was set in each case at an inflated figure. It is clear from Mr. Jacobucci’s evidence that these listings were presented to the lending insti- tutions by the appellant as bona fide and with the intention that the banks rely on the figures contained therein. I find Mr. Jacobucci’s denial that the deliberately inflated figures would misrepresent the situation to the bank totally unacceptable.

I am satisfied that although the appellant may have used the listings to bolster its borrowing position, on all of the evidence a conclusion that the listing agreements were entered into by the appellant for the purpose of selling the properties is more appropriate. No other inference can be drawn from a listing agreement which sets the price at $1,250,000 “or an offer acceptable to us” as was the case with the subject property.

This is not a case of a careful and prudent investor realizing that land may appreciate in value and that, given an appropriate offer, it might in some circumstances be available for sale. The appellant in this case invited offers by listing the property. In two specific instances (one involving the property in issue) the listing agreement made the appellant liable to pay the commission in the event a reasonable bona fide offer was presented whether or not it was accepted. I find it difficult to believe that the appellant, managed as it was by astute businessmen, would enter into such an agreement if it had no intention to sell the property and was merely testing the market. Notwithstanding the rationale advanced by Mr. Jacobucci with respect to the listing of these properties the fact remains that the appellant was prepared to consider any offer made and if high enough was prepared to accept it.

In this same vein the trading history of the appellant is relevant and significant. The Logan property was sold within three years of acquisition. The Winnipeg Avenue property was listed for sale twice during the first four years of ownership. The Union Street property was refurbished, listed, sc d and recovered within three years. The Bowman property, the subject of this appeal, was listed for sale prior to the completion of renovations and was promptly sold thereafter.

Counsel for the appellant argued that all of the actions by the appellant were consistent with an investment intention. I do not agree. While it is possible to accept that the appellant at the time of acquisition of the Bowman property intended to develop it for rental purposes on the evidence before me I cannot find that this was the dominant motivating intention. The appellant’s actions were far more consistent with a trading purpose than with an overall investment purpose. In the Court's view there was, at the very least, a concurrent motivation present at all times to turn the property to account. This motivation can readily be inferred from inter alia, the appellant’s trading history, its listing practices, the rapid resale upon completion of the refurbishing and the absence of any evidence that its alleged investment plan was being frustrated by some unexpected factor.

Accordingly, on the evidence before me I have concluded that the respondent's treatment of the gain as income was correct. The appeal with respect to the 1975 taxation year is dismissed.

Appeals dismissed.