Tremblay,
TCJ
[TRANSLATION]:—These
cases
were
heard
on
common
evidence
on
September
29,
1983
at
Québec,
Quebec.
1.
Issue
According
to
the
appeal
submissions,
the
question
is
whether
the
appellants,
forming
a
partnership
known
as
“Société
Immobec
Enr”
that
was
registered
in
October
1976,
are
correct
in
reporting
the
profit
realized
on
the
sale
of
some
properties
in
1977
and
1978
as
a
capital
gain
in
calculating
income
for
the
1978
and
1979
taxation
years.
The
appellants
had
held
an
option
to
purchase
this
land
since
December
1976
with
a
view
to
constructing
a
multiple-unit
rental
complex
for
residential
purposes.
They
stated
that
they
were
forced
to
cancel
their
project
and
sell
because
of
financing
difficulties.
The
respondent,
however,
regards
the
profit
as
income
from
a
business
because,
among
other
things,
the
appellants
are
experienced
businessmen
and
knew
when
they
took
the
option
to
purchase
in
December
1976
that
the
fair
market
value
of
the
land
was
double
the
purchase
price.
Furthermore,
they
were
not
required
to
make
any
payments
before
the
project
was
built,
they
were
entitled
to
resell
the
land,
and
they
resold
it
at
a
profit
the
same
day
they
bought
it.
2.
Burden
of
Proof
2.01
The
appellants
have
the
burden
of
showing
that
the
respondent’s
assessments
are
incorrect.
This
burden
of
proof
results
not
from
a
particular
section
of
the
Income
Tax
Act,
but
from
several
judicial
decisions,
including
a
judgment
of
the
Supreme
Court
of
Canada
in
Johnston
v
MNR,
[1948]
CTC
195;
3
DTC
1182.
2.02
The
facts
presumed
by
the
respondent
are
set
out
in
subparagraphs
(a)
through
(aa)
of
paragraph
8
of
the
respondent’s
reply
to
the
notice
of
appeal.
This
paragraph
reads
as
follows
(Roger
Pelletier):
8.
In
reassessing
the
appellant
for
the
1978
and
1979
taxation
years,
the
Minister
of
National
Revenue
relied,
inter
alia,
on
the
following
facts:
(a)
in
late
1975
or
early
1976,
Mr
Roger
Pelletier
decided
to
acquire
some
property
owned
by
the
Les
Soeurs
de
St-Francois
d’Assise,
a
religious
community;
(b)
at
that
time
Mr
Yves
Chantal,
a
financier,
was
acting
as
adviser
to
the
community
and,
on
hearing
that
Mr
Pelletier
was
interested
in
purchasing
the
property,
decided
to
go
in
with
him;
(c)
the
community
was
seeking
to
divest
itself
of
the
property,
but
only
under
certain
conditions,
the
chief
of
which
was
that
the
property
in
question
would
be
used
for
rental
housing;
(d)
in
1976,
Messrs
Pelletier
and
Chantal
commissioned
a
feasibility
study
from
Mr
Jean
Martin,
who
became
the
third
partner;
(e)
Mr
Edward
Richard,
who
was
an
old
friend
of
Mr
Roger
Pelletier,
also
joined
the
group;
(f)
the
four
were
henceforth
partners
under
an
oral
agreement;
(g)
they
had
already
acquired
a
considerable
business
background:
—
Edouard
Richard
was
a
certified
accountant
with
Thorne
Riddell;
—
Roger
Pelletier
worked
at
La
Laurentienne
in
Mortgages
and
later
became
vice-president
in
charge
of
finance
at
the
Unique;
—
Yves
Chantal
is
a
financial
adviser
and
broker
with
René
T
Leclerc
Inc;
—
Jean
Martin
is
employed
as
a
contractor
by
the
Groupe
Martin;
(h)
on
or
about
August
10,
1977,
the
four
partners
made
their
partnership
agreement
official
by
registering
it
under
the
name
“Société
Immobec
Enr”,
and
listed
the
following
objects:
1.
To
purchase
a
property
on
Boulevard
Henri-Bourassa
at
Charlesbourg
and
construct
buildings
on
it;
2.
To
purchase,
develop
and
manage
real
estate;
3.
To
purchase,
develop,
sell
and
promote
properties;
(i)
the
feasibility
study
referred
to
in
subparagraph
(d)
was
based
on
a
five-building
complex
totalling
115
units.
It
indicated
that
the
fair
market
value
of
the
Order’s
property
was
approximately
$2.50
per
sq
ft;
(j)
the
feasibility
study
assumed
a
relatively
small
investment
inasmuch
as
the
project
would
be
primarily
funded
by
the
Central
Mortgage
and
Housing
Corporation
[now
the
Canada
Mortgage
and
Housing
Corporation];
(k)
on
December
17,
1976,
the
group
made
an
offer
to
purchase
a
piece
of
land
having
an
area
of
510,000
sq
ft
for
$1.10
per
sq
ft:
this
offer
was
accepted
by
the
community
on
or
about
December
23,
1976;
the
offer
entailed
no
outlay
or
risk
on
the
purchasers’
part
since
it
was
conditional
on
obtaining
permission
from
the
City
of
Charlesbourg,
acceptance
by
the
ARP
(Assisted
Rental
Program)
of
the
Central
Mortgage
and
Housing
Corporation
(CMHC)
and
the
financing
needed
to
carry
out
the
project;
(l)
on
the
same
day,
December
17,
1976,
the
group
made
another
offer
to
purchase
a
piece
of
land
240,000
sq
ft
in
area
for
$1.25
per
sq
ft:
this
offer
was
accepted
by
the
community
before
December
23,
1976;
the
offer
was
made
on
the
same
terms
referred
to
in
subparagraph
(k),
with
an
additional
clause
rendering
the
purchase
offer
void
if
the
work
contemplated
in
respect
to
the
purchase
offer
mentioned,
in
the
preceding
subparagraph,
was
not
undertaken;
(m)
at
the
time,
the
taxpayers
had
no
assurance
from
the
Central
Mortgage
and
Housing
Corporation
that
this
housing
project
would
qualify
for
the
Assisted
Rental
Program;
(n)
at
the
time
the
taxpayers
obtained
the
purchase
option,
they
were
aware
of
the
substantial
profits
that
could
be
realized;
(o)
the
options
to
purchase
did
not
require
the
taxpayers
to
be
in
fact
the
owners
of
the
housing
project;
moreover,
there
was
nothing
in
the
purchase
offer
to
prevent
the
sale
of
the
aforementioned
options
to
purchase;
(p)
once
they
signed
the
option
to
purchase,
several
avenues
of
action
were
open
to
the
taxpayers
because
of
the
flexibility
of
the
said
offers
to
purchase,
namely:
(i)
to
exercise
the
options
to
purchase
and
build
the
housing
project
only;
(ii)
or,
if
they
could
not
carry
out
the
housing
project
by
themselves,
they
could
exercise
the
options
to
purchase
and
resell
the
properties
at
a
profit,
or
simply
sell
the
options
to
purchase;
(iii)
if
(i)
and
(ii)
were
not
feasible,
they
could
let
the
whole
matter
drop
without
losing
a
thing
since
they
had
not
invested
anything;
(q)
when
they
learned
that
the
CMHC
subsidies
would
not
be
as
much
as
they
had
hoped,
the
taxpayers
contacted
several
other
people
and
formed
a
limited
partnership
under
the
name
of
“Immobourg
Inc,
Société
en
commandite”;
(r)
at
the
time
Immobourg
Inc,
Société
en
commandite,
was
registered,
the
taxpayers
held
thirteen
of
the
forty
shares,
as
follows:
|
—
Edouard
Richard
|
3
out
of
40
|
|
—
Roger
Pelletier
|
3
out
of
40
|
|
—
Yves
Chantal
|
4
out
of
40
|
|
—
Jean
Martin
|
3
out
of
40
|
(s)
on
September
26,
1977,
the
taxpayers
(Immobec
Enr)
purchased
a
206,689
sq
ft
property
for
$227,357.90
at
$1.10
per
sq
ft;
(t)
on
the
same
day,
September
26,
1977,
the
taxpayers
resold
the
property
they
had
acquired
to
Immobourg
Inc,
Société
en
commandite
for
$434,046.00,
or
$2.10
per
sq
ft,
thereby
realizing
a
profit
of
$206,689.00;
(u)
following
this
purchase,
Immobourg
Inc,
Société
en
commandite,
undertook
the
construction
of
multiple-unit
residential
buildings,
awarding
the
contract
to
Paul
Martin
Inc;
(v)
on
April
28,
1978,
the
taxpayers
(Immobec
Enr)
purchased
more
land,
totalling
283,621
sq
ft
in
area,
for
$311,983.10
at
$1.10
per
sq
ft;
they
sold
part
of
the
land,
namely
185,386
sq
ft,
to
Immobourg
Inc,
Société
en
commandite
(now
“Immobourg
Inc
et
Associés
Enr’’,
a
general
partnership),
for
$397,710.60
at
$2.14
per
sq
ft,
thereby
realizing
a
profit
of
$189,681.51;
(w)
the
remainder
of
the
property
that
was
acquired
on
April
28,
1979,
or
98,235
sq
ft,
still
belongs
to
Immobec
Enr;
(x)
part
of
the
profits
realized
by
Immobec
Enr
was
lent
to
Immobourg;
(y)
at
the
end
of
1979,
the
taxpayers’
shares
in
Immobourg
were
as
follows:
|
Edouard
Richard
|
6.5
out
of
120
|
|
Roger
Pelletier
|
7
|
out
of
120
|
|
Yves
Chantal
|
10
|
out
of
120
|
|
Jean
Martin
|
5
|
out
of
120
|
(z)
the
profit
realized
by
the
taxpayers
is
not
proportionate
to
the
time
and
effort
they
devoted
to
realizing
this
housing
complex,
in
view
of
the
time
elapsed
between
the
signing
of
the
option
to
purchase
and
the
purchase
and
resale
of
the
land
the
same
day;
(aa)
the
taxpayers’
profits
from
the
two
real
estate
transactions
referred
to
above
arose
from
an
adventure
in
the
nature
of
trade.
3.
Facts
3.01
The
facts
alleged
by
the
appellants
in
their
notices
of
appeal
were
substantially
borne
out
by
the
testimony
of
Mr
Pelletier
and
Mr
Chantal.
Mr
Pelletier’s
notice
of
appeal
states
them
as
follows
(the
notices
of
appeal
of
the
other
appellants
are
the
same,
mutatis
mutandis):
1.
In
October
1976,
the
appellant,
with
Jean
Martin,
Edouard
Richard
and
Yves
Chantal,
formed
a
partnership
under
the
name
of
“Immobec
Enr’’
(hereinafter
referred
to
from
time
to
time
as
IMMOBEC);
2.
The
purpose
of
the
above-mentioned
partnership
was
to
develop
rental
property;
3.
As
soon
as
IMMOBEC
was
formed
the
appellant,
with
his
partners,
namely
Jean
Martin,
Edouard
Richard
and
Yves
Chantal,
undertook
to
purchase
a
property
in
the
municipality
of
Charlesbourg
in
order
to
build
a
multiple-unit
rental
complex
for
residential
purposes;
4.
Beginning
in
December
1976,
the
appellant,
one
of
the
partners,
undertook
negotiations
with
Les
Soeurs
de
St-François
d’Assise
on
behalf
of
IMMOBEC
to
purchase
a
property
having
an
area
of
510,000
sq
ft
and
situate
in
front
of
the
Sainte-Marie
des
Anges
convent
on
Boulevard
Henri
Bourassa;
5.
On
or
about
December
17,
1976,
the
appellant,
acting
as
agent
for
IMMOBEC,
offered
to
purchase
from
the
corporation,
Les
soeurs
St-François
d’Assise,
a
property
having
an
area
of
510,000
sq
ft
on
Boulevard
Henri-Bourassa
for
$1.10
per
sq
ft,
or
a
total
of
$561,000.00;
6.
On
the
same
day,
the
appellant,
still
acting
as
agent
for
IMMOBEC,
offered
to
purchase
from
the
corporation
Les
Soeurs
St-François
d’Assise
another
property
having
an
area
of
approximately
240,000
sq
ft,
also
on
Boulevard
Henri-Bourassa
in
Charlesbourg
for
$1.25
per
sq
ft,
or
a
total
of
$300,000.00;
7.
The
above-mentioned
offers
of
purchase
were
accepted
by
the
corporation
Les
Soeurs
St-François
d’Assise;
8.
Subsequently,
the
appellant
and
his
partners
took
steps
to
carry
out
the
housing
project;
9.
The
appellant
and
his
partners
prepared
feasibility
studies
for
the
project;
10.
They
entrusted
the
management
of
this
project
to
a
firm
specializing
in
the
planning
and
management
of
construction
projects
and
applied
for
funds
from
the
Assisted
Rental
Program
of
Central
Mortgage
and
Housing
Corporation;
11.
After
the
preliminary
studies
had
been
completed
and
the
potential
profit
of
the
project
ascertained,
the
appellant
and
his
partners
were
informed
that
they
would
not
receive
as
much
financial
assistance
as
they
had
anticipated
from
the
Assisted
Rental
Program
of
Central
Mortgage
and
Housing
Corporation;
12.
In
view
of
the
foregoing,
the
appellant
and
his
partners
realized
that,
for
the
project
to
get
off
the
ground,
they
would
have
to
invest
substantial
sums
of
money.
13.
The
appellant
and
his
partners
undertook
to
find
investors
who
could
help
them
carry
out
the
project;
14.
After
locating
some
fifteen
investors,
the
appellant
and
his
partners
formed
a
limited
partnership
on
July
11,
1977
under
the
name
IMMOBOURG
INC,
SOCIÉTÉ
EN
COMMANDITE;
15.
On
September
26,
1977,
following
negotiations
between
IMMOBEC
and
IMMO-
BOURG
INC,
Société
en
commandite,
IMMOBEC
sold
part
of
the
property
which
it
had
purchased
from
the
corporation
Les
Soeurs
de
St-François
d’Assise
to
IMMO-
BOURG
INC;
16.
On
April
28,
1978,
following
another
series
of
negotiations,
IMMOBEC
sold
another
piece
of
the
property
purchased
from
the
corporation
Les
Soeurs
de
St-François
d’Assise
to
IMMOBOURG
INC,
Société
en
commandite;
17.
IMMOBOURG
INC,
Société
en
commandite,
then
began
to
build
multi-unit
residential
housing;
18.
In
calculating
his
taxable
income
for
the
1978
and
1979
taxation
years,
the
appellant
included
his
share
of
the
capital
gain
from
the
disposition
of
the
two
pieces
of
land
mentioned
above;
19.
In
its
tax
assessments
for
the
1978
and
1979
taxation
years,
dated
March
17,
1981,
the
respondent
took
the
view
that
the
profit
realized
upon
the
disposition
of
the
properties
was
income
from
a
business.
3.02
The
chief
witness
was
Mr
Roger
Pelletier,
chartered
accountant,
director
and
treasurer
of
La
Laurentienne
in
1973,
vice-president
in
charge
of
finance
of
Unique
Co,
vice-president
and
treasurer
of
Prêt
et
Revenu.
Mr
Pelletier
initiated
the
project
and
is
acquainted
with
all
phases
of
its
development.
3.03
In
his
testimony,
Mr
Pelletier
stated
that:
(a)
He
was
acquainted
with
the
Sisters
because
he
had
two
children
studying
music
with
them
and
in
May
1976
he
offered
to
purchase
50,000
sq
ft
of
land
from
them
to
build
sixteen
housing
units.
Because
of
his
position,
he
was
aware
of
the
CMHC
Assisted
Rental
Program
(Exhibit
A-l)
and
he
wanted
to
take
advantage
of
it.
The
Sisters
refused
his
offer,
however,
saying
that
he
had
to
buy
all
800,000
sq
ft
of
the
property
in
question
or
nothing.
He
realized
then
that
he
could
not
do
it
alone;
(b)
In
a
few
weeks
he
located
three
partners,
first
Jean
Martin,
and
then
Edouard
Richard
and
Yves
Chantal.
Mr
Chantal
advised
the
Sisters
on
their
real
estate
investments.
Following
Mr
Pelletier’s
request
to
enter
into
a
formal
partnership,
Mr
Chantal,
who
foresaw
a
possible
conflict
of
interest
with
his
clients,
the
Sisters,
informed
them
of
Mr
Pelletier’s
proposal.
They
raised
no
object
to
his
becoming
a
partner.
The
partnership
agreement
was
only
oral
at
the
outset;
(c)
None
of
the
partners
was
involved
in
promoting
real
estate.
Each
of
them
had
business
experience.
Their
qualifications,
as
described
in
subparagraph
(g)
of
paragraph
8
of
the
reply
to
the
notice
of
appeal,
referred
to
above
in
Paragraph
2.02,
are
common
ground;
(d)
Following
the
oral
agreement
of
September
1976,
Jean
Martin
made
a
fesibility
study,
and
project
A-2
was
presented
to
the
Sisters
in
October
1976.
The
study
was
based
on
a
projected
five-building
complex
consisting
of
115
units;
Project
A-3
was
submitted
to
the
Industrial
Insurance
Company:
this
was
the
same
project
as
A-2,
but
with
the
accounting
data
changed
in
order
to
obtain
a
loan
specifically
from
the
Industrial
Insurance
Company;
(e)
The
partners
had
to
try
and
co-ordinate
the
requests
for
information
coming
from
all
sides
(lenders,
City
of
Charlesbourg,
and
so
on).
This
explains
why
plans
A-4
and
A-5
were
drawn
up.
Plan
A-4
was
prepared
at
the
instigation
of
Jean
Martin
and
involved
the
entire
Les
Jardins
Bourassa
project.
Plan
A-5
is
actually
a
revised
version
of
Plan
A-4
which
was
amended
to
conform
to
the
economic
data.
3.04
On
October
1,
1976,
the
oral
agreement
was
embodied
in
a
written
contract
(Exhibit
A-6)
and
the
partnership
was
registered
under
the
name
of
Immobec
Enr.
Its
stated
objects
included:
(a)
purchasing
a
property
on
Boulevard
Henri
Bourassa
in
Charlesbourg
and
constructing
rental
housing
on
it;
(b)
purchasing,
developing
and
managing
real
property;
(c)
purchasing,
developing,
selling
and
promoting
land.
3.05
The
appellant
Roger
Pelletier
then
tendered
two
offers
to
the
Sisters
on
December
17
(Exhibit
A-7):
—
Offer
A,
for
the
purchase
of
a
510,000
sq
ft
piece
of
land
at
$1.10
per
sq
ft,
the
whole
to
be
purchased
before
June
1,
1977,
with
five
buildings
containing
115
units
to
be
placed
on
this
property
in
the
shape
of
the
letter
L.
—
Offer
B,
for
a
240,000
sq
ft
piece
of
land
at
$1.25
per
sq
ft,
the
whole
to
be
purchase
before
June
1,
1979.
Both
offers
have
since
been
accepted
by
the
Sisters.
Both
offers
contain
the
following
clause:
2.
(e)
The
purchaser
will
not
be
required
to
execute
this
offer
if
he
cannot
obtain:
—
permission
from
the
City
of
Charlesbourg;
—
acceptance
from
the
Assisted
Rental
Program
of
Central
Mortgage
and
Housing
Corporation;
—
the
financing
needed
to
carry
out
the
project.
3.06
The
Sisters,
who
wished
to
preserve
the
view
to
the
west
from
their
convent,
required
that
the
height
of
the
buildings
referred
to
in
Offer
A
of
Exhibit
A-7
not
exceed
183.5
feet.
The
entire
plan
was
amended
accordingly
(Exhibit
A-8).
3.07
The
property
was
zoned
agricultural
as
long
as
it
belonged
to
the
Sisters.
Following
an
application
to
the
city
of
Charlesbourg,
the
zoning
was
changed
to
multi-residential
at
a
meeting
of
the
municipal
council
on
May
16,
1977
(Exhibit
A-9),
but
this
change
was
not
to
take
effect
until
the
Sisters
relinquished
possession.
3.08
Various
feasibility
studies
had
to
be
undertaken
and
the
requirements
of
the
various
parties
concerned
complied
with.
The
most
substantial
change
resulted
from
the
CMHC
urban
planning
officer’s
requirement
that
the
five
rectangular
blocks
mentioned
in
Offer
A
be
placed
in
a
north-south
direction
rather
than
in
the
shape
of
an
L.
This
was
supposed
to
be
the
final
plan
(Exhibit
A-10).
It
is
dated
March
20,
1977.
3.09
Sometime
between
fall
1976
and
early
1977,
CMHC
had
agreed
to
pay
an
incentive
grant
of
$100
per
month
per
unit
as
a
way
of
promoting
projects
of
this
kind.
At
the
end
of
March
1977
or
the
beginning
of
April,
the
CMHC
said
that
it
would
pay
a
maximum
of
$75
per
month.
The
change
from
$100
to
$75
per
month
meant
an
overall
decline
in
income
amounting
to
$15,000
per
year
and
thus
made
necessary
an
additional
investment
of
$1,500,000
for
the
five
blocks.
As
a
result
of
this
financial
setback,
the
promoters
could
only
build
two
blocks
of
ninety-nine
units
each,
placed
in
a
north-south
direction.This
change
was
reflected
in
a
new
plan
(Exhibit
A-11)
at
the
end
of
April
1977.
3.10
In
these
circumstances,
the
appellants
decided
they
could
no
longer
continue
on
their
own.
They
needed
other
investors.
In
view
of
the
scope
of
the
project
and
the
financial
liability
to
which
they
would
be
exposed,
prospective
investors
felt
that
Immobec
Enr
was
an
unsuitable
vehicle
for
investment.
3.11
On
May
20,
1977,
letters
patent
(Exhibit
A-12)
were
issued
by
federal
authorities
incorporating
an
unlimited
liability
company
under
the
name
of
Immo-
bourg
Inc.
This
company,
Immobourg
Inc
was
to
be
the
general
manager
of
a
limited
partnership
known
as
Immobourg
Inc,
Société
en
commandite.
This
limited
partnership
was
registered
in
the
Superior
Court,
district
of
Québec
(Exhibit
A-13)
on
July
19,
1977.
In
such
a
partnership,
the
liability
of
the
partners
is
limited
to
the
amount
of
their
investment.
There
were
twenty
partners,
including
the
four
appellants
and
Immobourg
Inc.
3.12
A
letter
dated
July
7,
1977
(Exhibit
A-14)
was
sent
by
Immobourg
Inc,
Société
en
commandite,
to
the
Provincial
Bank
of
Canada
applying
for
an
interim
construction
loan.
CMHC
was
to
provide
a
permanent
35-year
loan
at
10%
per
cent
for
90
per
cent
of
the
cost
of
the
project.
The
amount
of
the
interim
loan
was
based
on
a
letter
to
the
limited
partnership
from
the
contractor,
Paul
Martin
Inc,
dated
July
18,
1977,
advising
that
the
overall
cost
of
the
contract
would
be
$4,550,000
(Exhibit
A-16).
3.13
Since
the
deadline
for
project
A
had
expired,
an
agreement
was
reached
with
the
Sisters
on
August
12,
1977
to
postpone
part
of
project
A
(Exhibit
A-20)
for
one
year.
3.14
Finally,
after
all
the
details
of
the
project
had
been
settled,
a
contract
(Exhibit
A-17)
was
entered
into
on
September
26,
1977
between
Imbec
Enr
(actually
Immobec
Enr)
and
the
Sisters,
making
official
the
December
1976
offer
to
purchase
(Exhibit
A-7)
510,000
sq
ft
of
property
at
$1.10
per
sq
ft.
That
very
day,
Immobec
Enr
resold
the
same
510,000
sq
ft
piece
of
land
to
Immobourg
Inc,
Société
en
commandite,
for
$2.10
per
sq
ft
(Exhibit
A-18).
3.15
The
Court
notes
that
a
blank
copy
of
the
construction
contract
between
Immobourg
Inc,
Société
en
commandite,
and
Paul
Martin
Inc
has
been
entered
as
Exhibit
A-15.
This
contract
was
supposedly
entered
into
shortly
after
the
limited
partnership
had
purchased
the
property
in
September
1977.
3.16
Gerbec
Inc,
project
co-ordinator,
submitted
the
final
plan
on
August
30,
1977.
It
has
been
entered
as
Exhibit
A-19.
3.17
On
April
28,
1978
Imbec
Enr
(actually
Immobec
Enr)
purchased
from
the
Sisters
the
other
part
of
the
property
in
question,
namely
the
240,000
sq
ft
referred
to
in
Offer
B
(Exhibit
A-7)
for
$1.25
(Exhibit
A-21).
The
same
day,
Immobourg
Inc,
Société
en
commandite,
purchased
185,000
sq
ft
at
$2.25
per
sq
ft
(Exhibit
A-22).
3.18
Mr
Pelletier
explained
why
he
bought
and
sold
the
two
properties
on
the
same
day
(paras
3.14
and
3.15).
First,
he
did
not
wish
to
buy
until
he
was
certain
he
could
build.
Moreover,
once
the
land
was
purchased,
the
municipal
taxes
would
increase
tenfold
because
the
land
would
then
be
zoned
residential.
Thus,
by
putting
off
the
purchase,
he
avoided
this
additional
cost.
Finally,
by
delaying
the
purchase,
he
avoided
having
to
pay
interest.
3.19
On
cross-examination,
Mr
Roger
Pelletier
explained
that:
(a)
he
sold
the
properties
for
$2.10
per
sq
ft
and
$2.25
per
sq
ft
as
part
of
a
package;
the
CMHC
set
the
lending
value
of
the
project
at
$2.50
per
sq
ft:
that
is,
it
took
into
account
the
value
the
properties
would
have
once
the
construction
was
completed,
because
the
loan
would
be
guaranteed
by
the
mortgages
registered
against
the
entire
housing
project;
(b)
the
second
property
was
purchased
from
the
Sisters
at
a
higher
price
because
the
purchase
and
development
of
the
first
property
enhanced
the
value
of
the
second
property.
In
his
opinion,
the
property
had
little
value
apart
from
the
project.
It
was
of
value
only
in
terms
of
what
could
be
done
with
it,
what
could
be
put
on
it.
In
1980,
Yves
Germain
Inc,
a
professional
developer,
purchased
a
property
adjacent
to
the
Sisters.
It
belonged
to
the
Pères
St
Vincent
de
Paul
and
was
similar
in
size
to
the
property
in
question.
He
paid
$.95
per
sq
ft.
The
project
that
Yves
Germain
Inc
planned
was
never
carried
out.
He
would
have
liked
to
sell
the
land
at
the
same
price,
but
was
unable
to.
3.20
According
to
Mr
Pelletier,
the
primary
objective
was
to
build
but
without
the
investors
having
to
invest
anything.
Everything
was
to
be
financed
by
the
CMHC
through
the
surplus
value
given
to
the
property.
Over
time,
the
property
would
appreciate
in
value
and
justify
the
guarantee.
The
decrease
in
the
proposed
incentive
grants
from
$100
to
$75
per
unit
per
month
and
the
resulting
need
for
an
initial
$1,500,000
investment
completely
changed
the
picture.
3.21
Mr
Yves
Chantal,
a
real
estate
broker
with
Geoffrion
&
Leclerc,
was
the
second
witness.
He
substantially
confirmed
the
testimony
of
Mr
Pelletier.
The
original
purpose
of
Immobec
Enr
was
to
make
an
investment
for
the
future.
As
adviser
to
the
Sisters,
he
had
personal
knowledge
of
various
offers
to
purchase
the
properties,
including
an
offer
from
a
Montreal
Promoter
who
wanted
to
purchase
the
land
for
resale.
On
cross-examination,
he
maintained
that
his
reason
for
not
buying
sooner
was
his
ignorance
of
the
real
estate
business.
Mr
Pelletier
was
an
old
friend,
but
they
had
never
done
business
together
before
he
telephoned
and
became
interested
in
the
project
in
the
fall
of
1976.
He
said
that
he
relied
on
Pelletier
for
the
arithmetic.
He
testified
that,
on
December
31,
1978,
the
limited
partnership
was
converted
to
a
general
partnership.
There
are
now
65
partners
whose
liability
is
limited
to
their
investment.
4.
Act
—
Case
Law
—
Analysis
4.01
Act
The
most
important
sections
of
the
Income
Tax
Act
which
are
relevant
to
this
case
are
sections
3,
9
and
the
definition
of
the
term
“business”
in
section
248.
This
definition
reads
as
follows:
248.
(1)
In
this
Act,
“business”
includes
a
profession,
calling,
trade,
manufacture
or
undertaking
of
any
kind
whatever
and,
except
for
the
purposes
of
paragraph
18(2)(c),
an
adventure
or
concern
in
the
nature
of
trade
but
does
not
include
an
office
or
employment;
4.02
Case
Law
The
case
law
in
this
area
is
so
abundant
and
well-known
that
the
parties
often
do
not
take
the
trouble
to
examine
it.
A
B
Robertson
v
MNR,
[1963]
CTC
550;
63
DTC
1367,
which
contains
a
discussion
of
“adventure
in
the
nature
of
trade”,
was
cited
by
the
respondent.
4.03
Analysis
4.03.1
The
Test
In
determining
whether
a
capital
gain
or
profit
from
business
is
involved
in
cases
of
this
nature,
the
taxpayer’s
intention
at
the
time
the
property
was
purchased
is
paramount.
Other
tests
such
as
the
length
of
time
the
property
has
been
held,
the
relation
to
the
taxpayer’s
ordinary
business
or
profession,
the
frequency
of
similar
transactions
and
so
forth
are
useful
only
in
so
far
as
they
make
it
easier
to
discern
the
taxpayer’s
intention
at
the
time
of
purchase.
4.03.2
Counsel
for
the
appellants
argued
that
if
they
had
wanted
to
speculate,
they
could
have
invested
in
building
stocks.
One
of
their
number
was
a
specialist
in
this
area,
namely
Mr
Chantal.
None
of
them
was
familiar
with
the
purchase
and
resale
of
property
in
general
or
land
in
particular.
4.03.3
Moreover,
according
to
counsel
for
the
appellants,
in
the
normal
course
of
things
the
Immobec
Enr
partnership
would
have
afforded
an
adequate
structure
for
undertaking
and
completing
the
two
projects,
A
and
B
(Exhibit
A-7),
that
had
been
proposed
by
the
four
appellants
and
accepted
by
the
Sisters
in
December
1976
(para
3.05).
It
was
CMHC’s
decision
to
slash
the
proposed
subsidies
from
$100
per
month
to
$75
which
upset
everything
and
forced
the
appellants
either
to
change
their
method
of
financing
or
abandon
the
whole
thing.
However,
too
much
work
had
already
been
done.
Thus,
new
investors
had
to
be
found,
but
the
latter
were
reluctant
to
work
within
the
Immobec
Enr
framework
because
of
the
financial
liability
they
might
incur.
Accordingly,
the
appellants
and
the
new
investors
set
up
Immobourg
Inc,
an
unlimited
liability
company,
and
Immobourg
Inc,
Société
en
commandite,
under
which
the
partners*
liability
is
limited
to
the
amount
of
their
investment
(paras
3.09,
3.10).
Immobec
Enr
had
to
sell
the
properties
purchased
from
the
Sisters
to
the
limited
partnership.
The
resulting
profit
was
taxed
by
the
respondent
as
income
from
a
business
(paras
3.14,
3.17).
4.03.4
The
sale
took
place
on
the
same
day
as
the
purchase,
or
rather
the
purchase
was
delayed
until
the
day
the
property
was
to
be
sold,
so
that
in
the
interim
the
appellants
did
not
have
to
pay
municipal
taxes
which
would
have
been
very
high.
The
appellants
did
not
have
to
dig
into
their
own
pockets
to
pay
for
the
property,
because
the
interim
loan
for
the
project
allowed
Immobec
Enr
to
pay
for
the
property
immediately
and
Immobec
Enr
(the
appellants)
could
pay
the
Sisters.
The
profit
made
by
the
appellants
was
immediately
reinvested
in
Immobourg
Inc,
Société
en
commandite.
The
third
and
final
advantage
was
that
the
appellants
did
not
have
to
pay
interest
on
the
balance
that
would
have
been
Owing
to
the
Sisters
or
a
lender
had
the
property
been
purchased
prior
to
the
day
of
sale
(para
3.18).
4.03.5
Counsel
for
the
respondent
acknowledged
that
the
appellants
had
been
in
good
faith
when
they
originally
planned
to
invest
in
the
project.
Nonetheless,
that
fact
did
not
prevent
them
from
later
acting
as
promoters
or
speculators.
In
any
case,
the
objects
of
Immobec
Enr
(Exhibit
A-6),
which
was
registered
in
October
1976,
include
“the
purchase,
sale
and
development
of
property’’
(para
3.04).
Moreover,
in
Counsel’s
opinion
they
were
not
seeking
a
capital
gain
because,
following
the
CMHC’s
decision
to
lower
the
incentive
grant
from
$100
to
$75,
the
appellants
looked
for
partners
to
whom
they
could
resell
their
properties.
4.03.6
Citing
Robertson,
(supra),
counsel
for
the
respondent
argued
that
the
transactions
in
this
case
amounted
to
an
adventure
in
the
nature
of
trade.
In
that
case
the
appellant,
a
lawyer,
became
one
of
a
group
of
five
at
the
beginning
of
1949
to
incorporate
and
develop
an
oil
and
gas
company.
Following
the
incorporation
of
the
company,
the
associates
subscribed
for
a
large
number
of
shares
at
half
a
cent
each.
The
appellant
purchased
124,493
shares
in
two
transactions
in
1949.
The
shareholders
became
company
directors.
The
latter
acquired
a
large
number
of
properties.
Development
began,
financed
by
American
interests.
The
appellant,
in
March
1951,
purchased
20,833
more
shares
at
$.60
per
share.
Later,
in
1951
and
1952,
he
made
two
sales,
including
an
initial
lot
of
50,000
shares
at
a
half
cent
and
another
50,000
lot
at
prices
varying
between
$1
and
$4
per
share.
The
profits
were
taxed
by
the
Minister
of
National
Revenue
as
income.
The
Exchequer
Court
upheld
the
assessment
on
the
grounds
that
the
evidence
showed
that
the
appellant,
by
buying
and
selling
the
company’s
shares
in
a
series
of
transactions,
had
organized
a
profit-making
scheme
that
was
essentially
a
speculative
commercial
venture.
As
a
member
of
the
original
group,
he
had
helped
develop,
promote
and
organize
the
disposition
of
the
greater
part
of
his
shares.
His
activity
in
promoting
and
selling
the
shares
was
very
similar
to
the
way
that
someone
who
was
involved
in
the
business
of
promotion
would
have
gone
about
it.
His
shares
had
been
placed
with
the
Royal
Trust
Company
and
in
order
to
maintain
control
of
the
market,
he
decided
to
sell
them
only
through
and
with
the
consent
of
the
brokerage
firm
of
James,
Capithorne,
Birch
Ltd.
4.03.7
Like
counsel
for
the
respondent
(4.03.5),
the
Court,
believes
that
in
early
fall
1976
the
appellants
were
in
good
faith
in
planning
to
use
Immobec
Enr
to
invest
in
real
estate.
The
question,
however,
is
whether
their
intention
changed
by
force
of
circumstances,
because
it
was
not
possible
to
do
otherwise.
4.03.8
Counsel
for
the
respondent
pointed
out
that
the
partnership’s
object
clauses
(para
3.04)
are
by
and
large
excerpted
from
works
dealing
with
the
formation
of
companies
and
partnerships.
Such
clauses
do
not
always
represent
the
real
and
immediate
intentions
of
the
company,
since
the
incorporating
officers
operate
on
the
principle
that
more
is
better
than
less.
The
first
object
(3.04(a)),
however,
which
specifies
the
purchase
of
a
property
on
Boulevard
Henri-
Bourassa
in
Charlesbourg
and
the
construction
of
residential
apartments,
seems
far
more
indicative
of
the
appellants’
real
intentions.
4.03.9
The
evidence
showed
that
what
prevented
the
appellants
from
continuing
to
use
Immobec
Enr
was
CMHC’s
decision
to
decrease
the
incentive
grant
from
$100
to
$75,
which
led
to
a
need
for
an
additional
investment
of
$1,500,000
(3.09
and
4.03.3).
Counsel
for
the
respondent
maintains
that
the
appellants
then
hurriedly
sought
other
companies
to
sell
the
property
to.
The
evidence,
however,
showed
that
their
intention
was
to
find
new
partners
or
else
abandon
the
project.
Because
of
the
financial
liability
problem,
the
sixteen
new
partners
did
not
want
to
operate
through
Immobec
Enr.
By
May
1977
the
appellants,
who
had
already
devoted
a
great
deal
of
time
to
the
project
since
September
1976,
decided
to
incorporate
Immobourg
Inc
and
to
form
a
limited
partnership,
which
was
the
only
way
to
limit
the
liability
of
each
partner
(3.11).
Their
intention
was
to
finance
the
project
without
spending
a
cent;
CMHC’s
guarantee
would
be
based
on
the
rise
in
the
value
of
the
property
(3.20),
on
the
principle
that
“what
gives
the
property
value
is
what
can
be
put
on
it’’.
The
$2.10
and
$2.25
sale
prices
for
the
property
have
thus
been
adequately
explained.
The
fact
that
the
preliminary
work
had
been
completed
on
the
whole
development
increased
the
value
of
the
property.
CMHC
valued
the
property
at
$2.50
per
sq
ft,
once
the
buildings
were
constructed
(3.19).
Of
course,
the
appellants
could
have
transferred
their
offer
to
the
limited
partnership
which
would
then
have
bought
the
land
at
$1.10
and
$1.25
per
sq
ft
instead
of
$2.10
and
$2.25.
However,
they
were
not
obliged
to
give
away
all
the
capital
accumulated
during
the
ten
months
they
had
devoted
to
the
project.
The
fact
that
the
properties
were
resold
the
same
day
they
were
purchased
was
adequately
explained
(paras
3.10
and
4.03.4).
It
was
the
only
intelligent
thing
to
do
in
the
circumstances.
4.03.10
The
Court
concludes
that,
if
the
appellants
wanted
to
pursue
their
plan
of
investment,
they
could
not
have
acted
otherwise
in
the
circumstances.
The
Robertson
case,
(supra),
is
of
little
relevance
to
this
case.
A
scheme
like
the
one
elaborated
in
Robertson
bears
no
similarity
to
this
case.
4.03.11
The
Court
finds
that
the
weight
of
the
evidence
favours
the
appellant’s
contention.
5.
Conclusion
The
appeals
are
allowed
and
the
matter
is
referred
back
to
the
respondent
for
reassessment
in
accordance
with
the
reasons
for
judgment
set
out
above.
Appeals
allowed.
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