Climac Hotels Ltd, B & C Hotels LTD v. Minister of National Revenue, [1985] 2 CTC 2312, 85 DTC 609

Brulé, TCJ [ORALLY]:—These two cases heard together, involved the purchases and sales of different hotel properties. As a result of these transactions the Minister reassessed Climac Hotels in its 1977 income tax year for the profit on the sale of a hotel as income rather than as a capital gain claimed, and in the case of B & C Hotels there were reassessments of its 1979 and 1980 income tax years on the same basis.

Without reviewing the facts, suffice it to say that the principals in each of the appellant companies, who were virtually the same two individuals, bought and sold hotels at different times over a period of years, sometimes owning just one, sometimes more. In three instances of sales the Minister reassessed on the basis that profits should have been treated as income and not capital gains. In order to arrive at a conclusion, it is necessary to review the taxpayers’ conduct in relation to the sales.

The problem was perhaps best put in perspective by President Thorson in John Cragg v MNR, [1951] CTC 322 at 327; 52 DTC 1004 at 1007 when he said:

There is, I think, no doubt that each of the profits made by the Appellant could, by itself, have been properly considered a capital gain and the Court must be careful before it decides that a series of profits, each one of which would by itself have been a capital gain, has become profit or gain from a business. Such a decision cannot depend solely on the number of transactions in the series, or the period of time in which they occurred, or the amount of profit made, or the kind of property involved. Nor can it rest on statements of intention on the part of the taxpayer. The question in each case is what is the proper deduction to be drawn from the taxpayer’s whole course of conduct viewed in the light of all the circumstances. The conclusion in each case must be one of fact.

While there were several transactions involved, and this can indicate a pattern on behalf of the taxpayers, it is important to look at other considerations.

Counsel for the principals offered the proposition found in Hans Reicher v The Queen, [1975] CTC 659; 76 DTC 6001, that to reach a conclusion one must decide that on the balance of probability the possibility of resale at a profit was one of the motivating considerations that entered into the decision to acquire the property in question. Here, it was submitted that both witnesses, who were the principals involved, denied this motive in evidence and also on cross-examination.

By looking at the surrounding circumstances it was pointed out that the appellants were good managers, they depended on the profits earned for a living, and they had reasons which should be accepted as to why they sold the three hotels in question rather than keeping them as investments.

They placed a fair amount of their capital in each hotel, they had “hands on” management, both of which, it was suggested, were not traits of a trader.

Reasons in evidence were presented why each of the three hotels at sale should be considered on capital account and the fact that a short period of ownership of each should not influence the Court in its decision. In support of this argument counsel referred to the case of Racine, Demers and Nolin v MNR, [1965] CTC 150; 65 DTC 5098. This case was also used to illustrate the principle set out at 162 (DTC 5105) as follows:

The inference of an intention to make a profit by a rapid resale can also flow from the fact that the purchaser did, in fact, resell almost immediately at a profit, but only if there exists no satisfactory explanation for the rapid resale.

Here it was submitted that there was unrefuted evidence as to satisfying explanations and therefore the appeals should be allowed.

Counsel for the Minister stressed the reasoning of Thorson, P in the Craig case (supra), and, if one reads that judgment, the similarities between that case and the present one are very striking. There, a number of rental properties were sold and, in each case, a plausible reason was given why a capital gain should be allowed, hence the passage quoted above. The appellant was the only witness, he never advertised, he received gratuitous offers from real estate agents and turned his so-called investments into profitable sales, all the time looking for a "modern revenue producer”.

In Cragg (supra), the President of the Exchequer Court said at 1005:

The question on which side of the line an item of profit or gain falls is thus one of fact to be answered in the light of all the surrounding circumstances. Consequently, little, if any, help is to be derived from the actual decisions in other cases based, as they must be, upon the facts of the case in which they were given.

The Minister’s representative suggested that while evidence showed an investment intention, the Court must consider whether or not this was the only motivating factor at the time of the acquisition and, if not, and any profit ensues from a sale it should be taxed as an adventure in the nature of trade. This proposition was set forth in the case of Birmount Holdings Ltd v The Queen, [1978] CTC 358; 78 DTC 6254, heard in the Federal Court of Appeal, and also in the Racine case (supra) at 159 (DTC 5103). This is referred to as the Doctrine of Secondary Intention.

It is not sufficient to accept what the principals said, but what they did. One must consider the number of transactions, the short periods of holdings, the experience and knowledge of the principals at the time of acquisition, and their behaviour after acquisition.

In this case the principals did cause improvements to be made to the hotels, albeit often at the insistence of the Alberta Liquor Board. They did say the operations were profitable, and I ask, if so, why did they sell and move to another location? Also a profitable operation in the hotel business is one of the major considerations in buying and selling. The knowledge of the principals was the driving force that made the hotels saleable.

Because counsel questioned the credibility of the witnesses, I believe I should make some comment. Health and family considerations were put forth as reasons for certain sales, yet subsequent actions belied this. One piece of evidence was that the appellants never advertised, yet one independent witness acknowledged he was hired as a result of an advertisement. Another point raised was that the Royal Hotel was in good shape on take-over while, again, an independent witness said the premises were “run-down”.

Most of all, I find it inconceivable to accept the testimony that one evening a real estate salesman arrived with a client at the Driard Hotel and after a few drinks, offers to buy the hotel. The principals say jokingly their price is $2,000,000. The next morning the visitor offers $1,900,000 and this is refused. A short time later the real estate agent phones to say he has an offer of $1,975,000, which is accepted.

I cannot comprehend how anyone would invest that kind of money without at least an inspection of the premises and a very close look at the financial statements. Hotels are often sold on a “gallonage” basis and this requires careful inspection or a great mistake can be made. I believe a profit motive existed.

Counsel for the Minister offered other reasons and other cases to strengthen his argument that the principals must have had some profit motive in mind at the time of acquisition and their evidence that their exclusive intention was always for investment purposes is not justified on the facts.

I will refer to only one other case presented, that of Hugo Deuschle v MNR, [1975] CTC 2389; 76 DTC 1001, and to paraphrase from the judgment of Chairman K A Flanigan as follows:

On all the evidence I cannot accept the intention of investment as alleged by the Appellants herein, as there is just too much coincidence and too many transfers of hotels of a similar type to allow me to come to the conclusion that the Appellants were serious investors on a long-term basis in the hotels they owned.

In conclusion, therefore, I dismiss the appeal.

Appeal dismissed.