Estate of the Late Rolland Couillard, Couillard Entreprises (Division Construction) Inc, Immeubles Versant Nord Inc, Immeubles Du Coteau Lévis Inc, Place Prévert Inc v. Minister of National Revenue, [1981] CTC 2716

Guy Tremblay [Translation]:—These cases were heard in Quebec City, Quebec on March 21, 1978, November 27, 28, 29 and 30 and December 1, 1978, and April 23, 24, 25, 26 and 27, 1979. The Board took this case under advisement on February 4, 1980, the date on which the last exhibit relating to the written pleadings was received.

1. Points at issue

1.1 In general

In all these cases the basic problem was whether the profits resulting from sales (of real estate or shares) are capital gains or business profits.

1.2 In particular

1.2.1 Coteau Lévis, Versant Nord, Place Prévert

(a) Tax-exempt?

First, the question is whether these three companies are “limiteddividend housing companies” and so tax-exempt in accordance with paragraph 149(1 )(n) of the Income Tax Act.

(b) If these companies are not tax-exempt, the question then is whether the disposal of appellant’s real estate in 1972 resulted in capital gains or in business profits?

(c) Does subsection 69(1) apply?

If this is business profit, the question then is whether subsection 69(1) (used to determine the presumed cost of the land, that is, the fair market value) applies. Appellants argued that, since the purchases of land were made before the new Income Tax Act, and thus the said section, came into effect, the latter cannot apply.

(d) If the said subsection 69(1) applies, then what was the fair market value of the land at the time of purchase?

1.2.2 Couillard Entreprises (Division Construction) Inc

It was admitted by the appellant that the profit realized is not a capital gain. Further, the parties agreed on the value of the land at December 13, 1971, the date of purchase, in the event that subsection 69(1) applies.

The problem that remains is as to whether subsection 69(1) of the Income Tax Act applies.

1.2.3 Estate Rolland Couillard

The question is, first, whether the profits resulting from each of the following sales, made in 1973 and 1974, constitute a capital gain or business income for the appellant:

in 1973

(1) the sale of the Desjardins property located at Lévis;

(2) the sale of the Manoir Lévis property located at Lévis;

in 1974

(3) the sale of the Le Bourgogne property located at Ste-Foy;

(4) the sale of the Le Murray property located at Quebec City;

(5) the sale of the shares of Couillard Entreprises Inc.

The question is also whether the respondent was correct in imposing a penalty of $5,188.32 for failing to report interest income of $56,565.11 in 1974. The respondent contended that this omission was made knowingly or in circumstances amounting to gross negligence, in accordance with the terms of subsection 163(2) of the new Income Tax Act.

2. Burden of proof and common evidence

2.01 The appellants have the burden of proof with regard to profits resulting from sales. The reassessments issued by the respondent, like the presumed facts on which he relied in issuing the reassessments, are presumed to be true unless the appellants in their evidence can contradict them on a balance of probabilities. These principles were stated by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

With regard to the penalty of $5,188.32, the respondent has the burden of proof under subsection 163(3) of the new Income Tax Act.

2.02 Common evidence

Whereas all the appellants are interrelated, and dominated by the personality of Mr Rolland Couillard; whereas in all these cases the basic problem is as to whether the profits resulting from sales (real estate or shares) are capital gains or business profits; and whereas the principal witnesses had to testify in nearly all the cases, it was agreed between the parties that the evidence in Immeubles Versant Nord Inc, Immeubles du Coteau Lévis Inc and Place Prévert Inc would be filed in the case of Estate Rolland Couillard. The Board used all the evidence.

2.03 Plan

3. Coteau-Levis, Versant Nord, Place Prévert

3.01 Côteau-Lévis

3.01.1 Facts presumed by the respondent

3.01.2 Facts adduced in evidence — Coteau Lévis

3.02 Versant Nord

3.02.1 Facts presumed by the respondent

3.02.2 Facts adduced in evidence — Versant Nord

3.03 Place Prévert Inc

3.03.1 Facts presumed by the respondent

3.03.2 Facts adduced in evidence — Place Prévert

3.04 Circumstances of the sale of the real estate and intentions of the appellants: Coteau Lévis, Versant Nord and Place Prévert

4. Couillard Entreprises (Division Construction) Inc

4.01 Facts presumed by the respondent

4.02 Agreement and admitted facts: Couillard Entreprises

5. Estate Rolland Couillard

5.01 Facts presumed by the respondent

5.02 Admissions, agreement and proven facts

6. Act and case law

6.01 Act

6.02 Case law

7. Analysis

7.01 Points for analysis in brief

7.02 Analysis of Immeubles Versant Nord, Coteau Lévis and Place

Prévert

7.02.1 Are these appellants limited-dividend housing companies and thus

tax-exempt?

7.02.2 Capital gain or business income

7.03 Couillard Entreprises (Division Construction) Inc

7.03.1 Does section 69(1) apply?

7.04 Estate Rolland Couillard

7.04.1 Decisions regarding certain objections

7.04.2 Capital gain or business income

7.04.3 Penalty

8. Conclusion

2.04 Description of facts

The facts presumed by the respondent are reiterated, as are the replies of the respondent to the notices of appeal of the appellants. The facts presented by the testimony and exhibits were in general fully described by the parties in their pleadings. The Board will borrow extensively from their pleadings in describing the facts, with verification in the eighty-six exhibits and 1,572 pages of transcript.

3. Coteau Lévis, Versant Nord, Place Prévert

3.01 Immeubles du Coteau Lévis Inc

3.01.1 Facts presumed by the respondent

The presumed facts on which the respondent relied in reassessing Immeubles du Coteau Lévis Inc on June 4, 1975 for 1972 are those described below in paragraphs (a) to (cc) of paragraph 3 of the reply to the notice of appeal:

3. In assessing the appellant for its 1972 taxation year, the respondent relied, inter alia, on the following presumptions of fact:

(a) the letters patent of the appellant were granted to it on May 20, 1969 for the following purposes:

Do business as a real estate and construction company under the name of “Immeubles du Coteau Levis Inc”;

(b) the appellant is managed and controlled by Messrs Rolland Couillard and Jean-Pierre and Claude Ruel (hereinafter referred to as the Couillard-Ruel group);

(c) the Couillard-Ruel group includes fifteen businesses the registration dates of which for tax purposes and the sales breakdown is described in list A attached

hereto, to have effect as if stated in this reply;

(d) all these companies, except for Société Beaufort Inc and Société Belmont Inc, are interrelated;

(e) on July 9, 1969 Messrs Couillard and J P and Claude Ruel bought lots 173-9 and 175-23-1 in the Village of Bienville, having an area of 125,490 square feet, for the sum of $75,000;

(f) on September 29, 1969 Messrs Couillard and Ruel resold the said lots to the appellant, to which they were related, for the sum of $140,000;

(g) on September 29, 1969 the fair market value of the said lots was $75,000;

(h) on December 31, 1970 Messrs Couillard and J P and Claude Ruel bought lots 195-1-1, 196-2-1-1, 198-3-1-1 and 199-3-11 in the Village of Bienville, having an area of 97,760 square feet, for the sum of $65,000;

(i) on April 19, 1971, Messrs Couillard and Ruel resold the said lots to the appellant, to which they were related, for the sum of $125,000;

(j) on April 19, 1974 the fair market value of the said lots was $65,000;

(k) the Couillard-Ruel group obtained low-cost mortgage financing to build six blocks of eighteen apartments on the first group of lots, listed in paragraph 3(e);

(l) the Couillard-Ruel group obtained low-cost mortgage financing to build five blocks of eighteen apartments on the second group of lots mentioned in paragraph 3(h);

(m) another company associated with the Couillard-Ruel group, namely Couillard Enterprises (Division Construction) Inc, built the eleven blocks of eighteen apartments financed by the CMHC;

(n) the appellant admitted the following operating losses for the said building, for each of its 1970, 1971 and 1972 taxation years: $12,112; $60,447; $50,224;

(o) the Couillard-Ruel group knew from the outset that the appellant could not generate operating income;

(p) the appellant was formed by the Couillard-Ruel group for the purpose of obtaining low-cost financing;

(q) on August 28, 1972 the appellant disposed of two groups of the aforementioned lots, with the eleven blocks which had in the meantime been built on them, for net proceeds of disposition of $2,253.384;

(r) the total cost of the property sold by the appellant was as follows:

Land:	$ 140,000
Buildings:	1,799,618
Furniture:	36,958
Total	$1,976,576

(s) the appellant made a business profit on this resale of $276,808;

(t) the appellant’s alter ego, namely the Couillard-Ruel group, saw the appellant

as only one link in a chain intended to realize a profit on resale;

(u) the Couillard-Ruel group has acquired vast experience and expertise in dealings in real estate as the result of a large number of commercial deals completed since 1966;

(v) as an example, the respondent attaches as an appendix list B, to have effect as if stated at length in this reply, giving a list of real estate sales made by the group and reported by it as having generated business profit;

(w) neither the purposes, the incorporating documents, nor anything else classifies the appellant as a limited-dividend housing company within the meaning of the National Housing Act;

(x) during its 1972 taxation year, the appellant erroneously claimed as a deductible expense an amount of $500 paid to Mr Jean-Pierre Ruel to support his electoral campaign for the mayoralty of the town of Lauzon;

(y) for its 1970 taxation year, the appellant erroneously claimed as deductible expenses Class 6 capital expenditures in the amount of $15,600, representing

interest charges;

(z) the appellant agreed to this correction, and claimed and obtained a capital cost allowance of $674 for its 1970 taxation year, as appears from the reassessment

dated July 5, 1972;

(aa) the appellant did not take this correction into account in its financial statements for its 1971 and 1972 taxation years;

(bb) the appellant claimed no capital cost allowance for its 1971 and 1972 taxation years;

(cc) the result is recapture income of $674 for the appellant’s 1972 taxation year, as established by the following table:

Class 6	1980	1971	1972
Capital Cost	$971,240	$1,799,618 $1,799,618
Cost of Additions	($955,640- $15,600)	$828,378
Depreciation allowed	$674
Depreciation accumulated		$674	$674
Undepreciated portion (UCC)	$970,566	$1,798,944 $1,798,944
Proceeds of disposition			$2,253.384
Recapture income		—	$674

3.01.2 Facts adduced in evidence: Coteau Lévis

3.01.2.1 On May 20, 1969 Immeubles du Coteau Lévis Inc was incorporated by letters patent (see Exhibit A-21); supplementary letters patent were issued for the said company on February 24, 1970 (see Exhibit A-22).

Rue Pelletier land

3.01.2.2 On July 9, 1969 Messrs Rolland Couillard, Jean-Pierre Ruel and Claude Ruel bought a piece of land having an area of 125,490 sq ft, located along rue Pelletier in Lauzon, for $75,000 or $0.60 a square foot.

On September 29, 1969, less than two months later, they sold this land to Immeubles du Coteau Lévis Inc for $140,000 or $1.11 a square foot. (The profit from this sale was reported by the sellers as business profit.)

In the assessment issued for the appellant’s 1972 taxation year, the respondent estimated that the fair market value of this land on September 29, 1969 was $75,000, or $0.60 a square foot.

The witness Henri Paquet, the appellant’s appraiser, maintained that the fair market value of this land on September 30, 1969 was $158,600, or $1.26 a square foot. Mr Paquet used the so-called residual method.

The witness Jacques Giguére, the respondent’s appraiser, contended that the fair market value of this land on September 29, 1969 was $75,300, or $0.60 a square foot. Mr Giguère used the so-called parity method.

Rue Thibault land

3.01.2.3 On December 31, 1970 Messrs Couillard and Jean-Pierre and Claude Ruel bought the rue Thibault land in Lauzon, with an area of 97,760 sq ft, for $65,000, or $0.66 a square foot.

On April 19, 1971, Less than four months later, they sold this land to Immeubles du Coteau Lévis Inc for $125,000, or $1.27 a square foot. The sellers declared the profit from this sale as business profit.

In the assessment issued for the appellant’s 1972 taxatioon year, the respondent estimated the fair market value of the land at $65,000, or $0.66 a square foot.

The witness Henri Paquet, the appellant’s appraiser, maintained that the fair market value of this land on April 19, 1971 was $123,500 or $1.26 a square foot. Mr Paquet used the residual method.

The witness Jacques Giguere, the respondent’s appraiser, maintained that the fair market value of this land on April 19, 1971 was $65,000, or $0.66 a square foot. Mr Giguere used the parity method.

3.01.2.4 On December 4, 1969 Immeubles du Coteau Levis Inc borrowed from the Corporation $1,134,400, with interest at 6 per annum repayable over a 50-year period (see Exhibit 1-13).

On May 31, 1971 Immeubles du Coteau Lévis Inc borrowed from the Corporation $962,445, with interest at 7 /2% per annum repayable over a 50-year period (see Exhibit 1-14). The CMHC valued the rue Thibault land at $74,440.

3.01.2.5 The said loans were used in financing the construction of low- income housing projects of 108 and 90 units respectively; in return for the advantageous terms of the loans, Immeubles du Coteau Lévis Inc had to Sign operating contracts with the Central Mortgage and Housing Corporation, under which each family dwelling unit would be leased in accordance with certain requirements regarding the maximum annual rental and maximum annual income of the tenants, and rentals could only be increased with approval from the Corporation (see Exhibits 1-13, clause 33, 1-14, clause 37 and 1-15, clause 1).

3.01.2.6 The 109 and 90 housing units were built by Couillard Entreprises (Division Construction) Inc (see t of J P Ruel, trans p 429).

Immeubles du Coteau Lévis Inc did not own or lease any construction equipment, had no employees working in this area, did not act as a general contractor and did no construction (/oc cit).

3.01.2.7 Immeubles du Coteau Lévis Inc incurred operating losses on the operation of the said dwelling units for the 1970, 1971, and 1972 taxation years of $12,112, $60,447 and $50,224 respectively, a total of $122,783 (see Exhibit A-9 and reply to the notice of appeal, clause (3)(n) ).

3.02 Immeubles Versant Nord Inc

3.02.1 Facts presumed by the respondent

The presumed facts on which the respondent relied in reassessing Immeubles Versant Nord Inc on June 4, 1975 for 1972 are described below:

5. In assessing the appellant for its 1972 taxation year, the respondent relied inter alia on the following presumptions of fact:

(a) the letters patent of the appellant were granted to it on November 5, 1970 for the following purposes:

“Do business as a builder and general building contractor, under the name of ‘Immeubles du Versant Nord Inc’.. .”

(b) the appellant is managed and controlled by Messrs Rolland Couillard and Jean-Pierre and Claude Ruel (hereinafter referred to as the Couillard-Ruel group);

(c) the Couillard-Ruel group includes fifteen businesses the registration dates of which for tax purposes and the sales breakdown is described in list A attached hereto, to have effect as if stated in this reply;

(d) all these companies, except for Société Beaufort Inc and Société Belmont Inc, are interrelated;

(e) on February 9, 1967 a company related to the appellant, Couillard Entreprises (Division Domiciliaire) Inc, purchased a group of lots having a total area of $1,410,957 sq ft for a total cost of $634,935.65;

(f) on September 29, 1969 the appellant purchased from a related person, namely Couillard Entreprises (Division Domiciliaire) Inc, an area of $607,418 sq ft from the said lots;

(g) on September 29, 1969 the fair market value of the lots purchased by the appellant was $635,195;

(h) the Couillard-Ruel group obtained low-cost mortgage financing from the CMHC, to build 396 low-income apartments;

(i) another related company of the Couillard-Ruel group, namely Couillard Entreprises (Division Construction) Inc, built the twenty-wo eighteen-apartment

blocks financed by the CMHC;

(j) the appellant reported the following operating losses for the said building, for each of its 1970, 1971 and 1972 taxation years: $77,133; $123,641; and $127,399;

(k) the CMHC of its own authority set the rentals payable in the financing contract itself;

(l) the Couillard-Ruel group knew from the outset that the appellant could not generate operating income;

(m) the appellant was formed by the Couillard-Ruel group for the purpose of obtaining low-cost financing;

(n) on August 28, 1972, thirty-five months after purchasing the vacant lot, the appellant disposed of it with the twenty-two eighteen-apartment blocks which

had been built on it in the meantime, for net proceeds of disposition of $4,892,530;

(o) the total cost of the property sold by the appellant was as follows:

Land:	$ 635,195
Buildings:	3,568,536
Furniture:	53,003
Total:	$4,256,734

(p) the appellant made a business profit on this resale of $635,796;

(q) the appellant’s alter ego, namely the Couillard-Ruel group, saw the appellant

as only one link in a chain intended to realize a profit on resale;

(r) the Couillard-Ruel group has acquired vast experience and expertise in dealings in real estate as a result of a large number of commercial deals completed

since 1966;

(s) neither the purposes, the incorporating documents nor anything else classifies the appellant as a limited-dividend housing company within the meaning of the National Housing Act',

3.02.2 Facts adduced in evidence: Versant Nord

3.02.2.1 On February 9, 1967 Couillard Entreprises (Division Domiciliaire) Inc purchased a group of lots having a total area of 1,410,957 square feet for the sum of $634,935.65, or $0.45 a square foot.

3.02.2.2 On September 29, 1969 the appellant Immeubles du Versant Nord Inc purchased from Couillard Entreprises (Division Domiciliaire) Inc an area of 607,418 square feet from the said group of lots. The price agreed on was $911,127, or $1.50 a square foot.

3.02.2.3 In the assessment issued for the appellant’s 1972 taxation year, the respondent estimated that the fair market value of the land on September 29, 1969 was $635,195, or $1.0457 a square foot.

3.02.2.4 The witness Claude Tremblay, the respondent’s appraiser, using the parity method, concluded that the subject land had a fair market value of $652,000, or $1.19 a sq ft on September 26, 1969. However, according to the expert witness this value applied only to the usable value of 547,582 square feet. an area of 59,836 sq ft was, according to him, unusable because it was a slope (Exhibit I-2).

The witness Henri Paquet, the appellant’s appraiser, also using the parity method, concluded that the said lot of 607,418 sq ft had a value of $911,127, or $1.50 a sq ft.

3.02.2.5 The opinions given by the two expert witnesses contradict each other on several points (Exhibit A-16 and testimony of Nov 27, 1978, pp 21-55, Henri Paquet Exhibit 1-2 and testimony of Claude Tremblay, Nov 27, 1978, pp 57-168).

3.02.2.6 On December 3, 1969 Immeubles Versant Nord Inc borrowed from the Corporation $4,600,000, with interest at 6 per annum repayable over a 50-year period (see Exhibit 1-10). The purchase price of the land mentioned in the loan application (Exhibit 1-22) is $563,000.

3.02.2.7 The said loan was used in financing the building of a low-income housing project of 396 units; in return for the favourable terms of the loan, Immeubles Versant Nord Inc had to sign an operating contract with the Corporation under which each family housing unit had to be leased in accordance with certain requirements, regarding the maximum annual rental and the maximum annual income of tenants, and rentals could only be increased with approval from the Corporation (see Exhibit 1-10, clause 33 and Exhibit 1-12, clause 2).

3.02.2.8 The 396 housing units were built by Couillard Entreprises (Division Construction) Inc (see t of J P Ruel, trans pp 367-368). Immeubles Versant Nord Inc neither owned nor leased any construction equipment, had no employees working in this area, did not act as a general contractor and did no construction (/oc cit).

3.02.2.9 Immeubles Versant Nord Inc incurred operating losses on the operation of the said housing units for the 1970, 1971 and 1972 taxation years of $77,133, $123,641 and $127,399 respectively, a total of $328,173 (see Exhibit A-9 and reply to the notice of appeal, clause 5(j) ).

3.03 Peace Prévert Inc

3.03.1 Facts presumed by the respondent

The presumed facts on which the respondent relied in reassessing Place Prévert Inc on June 4, 1975 for 1972 are those described below:

4. In assessing the appellant for its 1972 taxation year, the respondent relied, inter alia, on the following presumptions of fact:

(a) the letters patent of the appellant were granted to it on November 5, 1970 for the following purposes:

Do business as a builder and general builder adn general building contractor, under the name of “Place Prévert Inc”.. .

(b) the appellant is managed and controlled by Messrs Rolland Couillard and Jean-Pierre and Claude Ruel (hereinafter referred to as the Couillard-Ruel group);

(c) the Couillard-Ruel group includes fifteen businesses the registration dates of which for tax purposes and the sales breakdown is described in list A attached hereto, to have effect as if included in this reply;

(d) all these companies, except for Société Beaufort Inc and Société Belmont Inc, are interrelated;

(e) on November 30, 1970 a company related to the appellant, Les Immeubles Seigneurs Inc, purchased two parts of lot 3432 in the parish of St-Sauveur in the registration division of Quebec City, having an area of 306,235 and 216,650 square feet, for a total cost of $522,885;

(f) on December 17, 1970 the appellant purchased from a related person, Immeubles Seigneurs Inc, part of the said lot 2432 having an area of 306,235 sq ft, at a cost of $570,000;

(g) on December 17, 1970 the said part of lot 2432 had a fair market value of $363,157;

(h) in accordance with an application submitted on October 1, 1970 by the Couillard-Ruel group, the latter obtained low-cost financing from the CMHC on October 28, 1970 for the building of 192 low-income housing units;

(i) another related company of the Couillard-Ruel group, Couillard Entreprises (Division Construction) Inc, built the six thirty-two-apartment blocks financed by the CMHC;

(j) the appellant reported the following operating losses for the said building

for each of its 1970, 1971 and 1972 taxation years: $41; $14,272; $41,063; [sic]

(k) the CMHC of its own authority set the rentals payable in the financing contract itself;

(l) the Couillard-Ruel group knew from the outset that the appellant could not generate operating income;

(m) the appellant was formed by the Couillard-Ruel group for the purpose of obtaining low-cost financing;

(n) twenty months after purchasing the vacant land, the appellant disposed of it (except for one-third of the lots) with the six blocks which had been built on it in the meantime for net proceeds of disposition of $2,273,393;

(o) the total cost of the property sold by the appellant was:

Land:	$ 205,439
Buildings:	1,795,816
Furniture:	31,123
Total:	$2,032,378

(p) the appellant realized a business profit on this resale of $241,015;

(q) the appellant’s alter ego, namely the Couillard-Ruel group, saw the appellant

as only one link in a chain intended to realize a profit on resale;

(r) the Couillard-Ruel group has acquired vast experience and expertise in dealings in real estate as the result of a large number of commercial deals completed since 1966;

(t) neither the purposes, the incorporating documents nor anything else classifies the appellant as a limited-dividend housing company within the meaning of the National Housing Act:

3.03.2 Facts adduced in evidence: Place Prévert

3.03.2.1 On November 15, 1970 Place Prévert Inc was incorporated by letters Patent (see Exhibit A-23).

3.03.2.2 On November 30, 1970 Immeubles des Seigneurs Inc purchased a piece of land having an area of 522,885 square feet in Ville Vanier for $522,885, or $1 a square foot.

On December 17, 1970 Immeubles des Seigneurs Inc sold to Place Prévert a portion of this land with an area of 306,235 square feet for $570,000, or $1.86 a square foot.

3.03.2.3 In the assessment for the appellant’s 1972 taxation year, the respondent estimated that the fair market value of this land on December 17, 1970 was $363,157, or $1.18 a square foot.

3.03.2.4. The witness Henri Paquet, the appellant’s appraiser, argued that the fair market value of this land on December 17, 1970 was $582,000, or $1.90 a square foot (Exhibit A-8 and testimony of Henri Paquet, March 21, 1978, pp 28 to 99). Mr Paquet used the parity method.

3.03.2.5 The witness Jacques Giguere, the respondent’s appraiser, considered that the fair market value of this land on December 17, 1970 was $352,000, or $1.15 a square foot (Exhibit 1-1 and testimony of Jacques Giguere on March 21, 1978, pp 101 to 186). Mr Giguere also used the parity method.

3.04 Circumstances of the sale of the real estate and intentions of the appellants:

Coteau Lévis, Versant Nord and Place Prévert

Sales

3.04.1 On August 28, 1972 Immeubles Versant Nord Inc, Immeubles Coteau Lévis Inc and Place Prévert Inc disposed of the aforementioned housing units to Headway Corporation Limited (see Exhibits A-13, A-14 and A-15).

3.04.2 According to the appellants’ evidence, they were each incorporated specifically for the purpose of purchasing the said housing units, owning them and deriving investment income from them (see t of J P Ruel, trans pp 369, 370, 376 and 379).

The sole intent when the lands were purchased by the appellants and the housing units built was to retain these housing units as an investment (see t of J P Ruel, trans p 402 and testimony of Claude Ruel, trans p 808).

This declared intent is corroborated by the fact that these projects were undertaken at the instigation of the Corporation (see t of J P Ruel, trans p 382, and in cross-examination pp 687-688).

These projects were undertaken by the appellants because their shareholders firmly believed they would be profitable and when the decision was taken in this regard there was a reasonable expectation of a profitable return, in view of:

(a) the advantages of financing the projects as compared with terms in the open market (closed loan for 50 years compared with a loan open after five years, an interest rate 1.5 to 2% lower than that on the market: see t of J P Ruel, trans pp 351, 405, 406 and 415);

(b) the 5% return on capital invested by the appellants, a guaranteed return because the annual operating expenses of the projects on which the rental rates had been approved included an amount for “dividends” of 5% (see Exhibits A-25, Appendix B, A-26, appendix A and A-27, appendix B);

(c) the additional value conferred on the real property by inflation (t of J P Ruel, trans pp 420 to 423, and in cross-examination, pp 677, 679, 680 and 686);

(d) the income that would be derived by Société Beaufort Inc for administering the properties (t of J P Ruel, trans pp 424-425); the income from administering the said properties enabled Société Beaufort Inc to pay the premiums on insurance policies obtained on the lives of the three shareholders, so that in the event of the death of any one of them, Société Beaufort Inc would have sufficient liquidity from the proceeds of the insurance to purchase the shares of the deceased individual; Rolland Couillard was not a shareholder of Société Beaufort Inc (see the purchase-sale agreement of August 19, 1969, Exhibit A-24);

(e) the income obtained by Couillard Entreprises (Division Domiciliaire) Inc, Rolland Couillard, Jean-Pierre Ruel, Claude Ruel and Immeubles des Seigneurs Inc as a result of the sale of the land to the appellants; all these persons included this profit in computing their income;

(f) the income derived by Couillard Entreprises (Division Construction) Inc from construction of the buildings held by the appellants for investment purposes (t of J P Ruel, trans pp 429-430, and in cross-examination P 677).

3.04.3 The declared intent of the appellants is also corroborated by the fact that they received several purchase offers for the housing units in the said projects from professional people in Quebec City and gave categorical refusals (t of J P Ruel, trans pp 357-358).

This declared intent is in accordance with the statement that the companies, in which Rolland Couillard, Jean-Pierre Ruel and Claude Ruel had interests, held two types of real estate: that intended to form part of a capital investment category, held to generate investment income, and that intended for resale to earn business income used in financing the real estate which was part of the capital investment category (t of J P Ruel, trans pp 359-360; in cross-examination, pp 563, 595-596, 605 and 635-636; t of C Ruel, trans p 807).

The criteria distinguishing real estate in the first category from that in the second category was, inter alia, the type of financing, the location and the size of the projects (t of J P Ruel, in cross-examination, trans p 565).

3.04.4 The appellants’ shareholders had adopted the method of using a company for each group of real estate so as to minimize the financial risks and facilitate administration of the projects (t of J P Ruel, trans p 365, and in cross-examination, p 557).

3.04.5 The circumstances of the sale of the real estate also corroborate the declared intent of the appellants. The following is a summary.

(a) following operating losses in 1970 and 1971, Immeubles Versant Nord Inc sent its tenants whose lease expired on or after May 1, 1972 a notice of a rental increase. This notice was sent to them from January 1, 1972 onwards.

On the receipt by certain tenants of this notice, the tenants of Immeubles Versant Nord Inc founded an association of tenants under the leadership of Marcel Boily. They devised a stratagem to avoid receiving increase notices, and distributed documents indicating the procedure to be followed in objecting to rental increases. About 330 tenants signed a petition asking the Corporation to refuse to approve this rental increase. When Marcel Boily asked for and obtained an interlocutory injunction, prohibiting Immeubles Versant Nord Inc from renegotiating the terms of its lease before obtaining authorization from the Corporation, the tenants’ committee of Immeubles Versant Nord Inc demanded that a hearing be held on management of the housing complex.The interlocutory injunction was renewed and the tenants’ objection pursued to the fullest, accompanied by violent denunciations which were taken up by the local press. The Corporation authorized Immeubles Versant Nord Inc to increase the rental required of its tenants.

This decision provoked the wrath of the tenants and the campaign of denunciation and vilification against Immeubles Versant Nord Inc and the Corporation resumed. The tenants organized public demonstrations and occupied the premises of the Corporation. The information media gave extensive coverage to these events. In addition, the tenants posted notices in the windows of their apartments, leaving no doubt as to their anger at the rental increases. Finally, they even obtained the support of the Quebec Labour Council.

These events, which took place between January and April 1972, led several non-activist tenants not to renew their leases in a housing complex which was the subject of such conflict; several of the tenants who were unhappy with the rental increase also failed to renew their leases. Largely as a result of these facts, the vacancy rate in apartments rose to 21.46% in the summer of 1972 (85 apartments vacant out of 396).

These various facts were presented in evidence through testimony by Jean-Pierre Ruel (trans pp 448-480), Claude Ruel (trans pp 809-811) and William Boyd (trans pp 197-200), and through the filing of Exhibits A-34 (press clippings) and A-15 (contract of sale, clause 5, paragraph 4).

(b) Similarly, as the result of operating losses between 1970 and 1971, Immeubles du Coteau Lévis Inc also sent its tenants a rental increase notice, receipt of which led to the formation of the Immeubles du Coteau Lévis Inc tenants’ committee. Despite vigorous opposition by the tenants, the Corporation authorized a rental increase in April 1972.

These events led to the same consequences as in the case of Immeubles Versant Nord Inc, so that in the summer of 1972 the apartment vacancy rate rose to 11.5% (23 apartments out of 198). These facts were presented in evidence through the aforementioned testimony and Exhibits A-34 and A- 13.

(c) In the summer of 1972, the vacancy rate of apartments owned by Place Prévert Inc was 26.56% (51 apartments out of 192: see Exhibit A-14, clause 5, paragraph 4). This rate was high though it appeared less alarming than in the other two cases, in view of the shorter period since the end of the construction.

(d) The losses accumulated by the three appellants and their lack of liquidity forced them to cease their payments to the Corporation for sev- eral months (t of J P Ruel, trans p 480, t of C Ruel, trans p 824, t of William Boyd, trans pp 201-202).

(e) Their bank advised them to divest themselves of some of their assets so that they would continue to be able to meet their obligations (t of J P Ruel, trans pp 486-487 and 498-499).

(f) Despite this advice, the appellants and their shareholders did not directly or indirectly put the said properties up for sale, undertake any solicitation for the purpose of selling them, request the aid of a broker, or do any advertising with a view to an eventual sale (t of J P Ruel, trans pp 487-488; t of C Ruel, pp 808-809 and 812-813; t of William Boyd, trans pp 194-195).

(g) In the summer of 1972 William Boyd asked one Cassiani whether he knew anyone who owned “limited-dividend properties”: Cassiani told him of Rolland Couillard. At William Boyd’s request Cassiani, who was in Montreal, called Rolland Couillard to organize a meeting with William Boyd. As a result of this telephone call William Boyd went to Quebec City and visited the properties owned by the appellants and other properties with Claude Ruel; he then went on to Ontario. Shortly afterwards, still without having been solicited by any of the appellants’ shareholders, he contacted Rolland Couillard and made him an offer to purchase the three housing complexes. Rolland Couillard did not say that they were for sale and showed some hesitation about selling these properties, so that there were lengthy negotiations in July and August (t of William Boyd, trans p 196).

(h) The appellants’ shareholders realized clearly that a sale was necessary in order to avoid a disastrous bankruptcy (t of J P Ruel, trans pp 498 and 500, and in cross-examination, pp 761-762; t of C Ruel, trans p 821), and the purchaser was also aware of this (t of William Boyd, trans p 227), hence his persistent efforts to buy the three housing complexes (t of William Boyd, trans p 228).

(i) In short, though hesitant to sell one of the three housing complexes, and even more hesitant to sell that owned by Place Prévert Inc, the shareholders of the appellants had to resign themselves to selling in order to avoid bankruptcy; they would have liked to retain at least the housing complex owned by Place Prévert Inc, but the offer made by William Boyd was conditional on the sale of the three complexes at the same time. This sine qua non condition had to be regretfully accepted by the appellants (t J P Ruel, trans p 498 and t of C Ruel, trans p 819).

4. Couillard Enterprises (Division Construction) Inc

4.01 Facts presumed by the respondent

In reply to the appellant’s notice of appeal, the respondent stated in paragraph 7 the presumed facts on which he relied in issuing the notice of reassessment for 1974. Paragraph 7 reads as follows:

7. In assessing the appellant for its 1974 taxation year, the respondent relied, inter alia, on the following facts:

(a) on December 13, 1971 the shareholders of the appellant were:

Rolland Couillard	240 ordinary shares
Jean-Pierre Ruel	30 ordinary shares
Claude Ruel	30 ordinary shares

and the shareholders of Immeubles des Seigneurs Inc were:

Rolland Couillard	80 ordinary shares
Jean-Pierre Ruel .	10 ordinary shares
Claude Ruel	10 ordinary shares

(b) on December 13, 1971, when the appellant bought the land in question, it purchased a property from a person to which it was related, namely Immeubles des Seigneurs Inc;

(c) on December 13, 1971 the fair market value of the land in question was $298,977, or $1.38 a square foot;

(d) on July 4, 1974 the appellant sold 201,780 square feet of the land in question

to Entrepôt Colbert Inc for the sum of $450,000, that is $2.23 a square foot;

5.02 Agreement and admitted facts: Couillard Entreprises

4.02.1 Agreement

Counsel for the appellant and the respondent verbally entered into an agreement before the Board that:

1. the fair market value of lot 2432 of St-Sauveur parish on December 13, 1971 was $368,305, or $1.70 a square foot for an area of 216,650 square feet;

2. the only point still at issue is as to whether paragraph 69(1 )(a) of the Income Tax Act should apply to the case at bar;

3. if the Board concludes that paragraph 69(1 )(a) of the Income Tax Act should not apply in the case at bar, the appeal must be allowed and the assessment for the 1974 taxation year vacated;

4. if the Board concludes that paragraph 69(1 )(a) of the Income Tax Act should apply in the case at bar, the appeal should be allowed in part and the whole referred back to the Minister for re-examination and reassessment on the basis of the judgment rendered and the agreement concluded between the parties.

4.02.2 Admitted facts

With regard to the facts in evidence, it is only necessary to restate the facts admitted by the two parties and still relevant, namely:

1. on December 13, 1971 Immeubles des Seigneurs Inc sold to the appellant lot 2432 of St-Sauveur parish, having an area of 216,650 square feet, for the sum of $425,000;

2. Immeubles des Seigneurs Inc and the appellant are related persons for the purposes of the Income Tax Act:

3. on July 4, 1974 the appellant sold 201,780 square feet of the land in question to Entrepôt Colbert Inc for the sum of $450,000;

4. the fair market value of the land in question was $368,305, or $1.70 a square foot on December 13, 1971.

4.02.3 It is admitted by implication that the profit from the transaction must be regarded as business profit, and not a capital profit.

Thus the appellant, admitting that the only point at issue is whether paragraph 69(1 )(a) of the Income Tax Act applies, admitted that the profit resulting from the transaction is not a capital gain but a business profit. This section cannot apply in the case at bar because a business profit is involved.

5. Estate Rolland Couillard

5.1 Facts presumed by the respondent

In reply to the appellant’s notice of appeal, the respondent stated in paragraph 2 the presumed facts on which he relied in issuing the notices of reassessment for 1973 and 1974. Paragraph 2 reads as follows:

2. In assessing the appellant for its 1973 and 1974 taxation years, the respondent relied, inter alia, on the following presumptions of fact:

(a) the late Rolland Couillard was a shareholder of several companies specializing in the purchase, construction and sale of real estate, including the following companies:

Couillard Entreprises (Division Domiciliaire) Inc;

Couillard Entreprises (Division Construction) Inc;

Couillard Entreprises (Division Maritime) Inc;

Le Domaine du Versant Nord Inc;

Les Immeubles des Seigneurs Inc;

Place Prévert Inc;

Les Immeubles du Coteau Lévis Inc, and so on;

(b) in addition to the companies cited above, the late Rolland Couillard bought and sold real estate personally, and sometimes considered his profits as business

income, while at other times he regarded the profit as a capital gain;

(c) during the 1973 taxation year, the late Mr Couillard disposed of the following properties:

	Selling price	Cost Cost	Profit Profit
Manoir Lévis	$667,176	$593,757	$73,419
Desjardins	$633,287	$583,551	$49,766

and an amount of $123,185 was added by the respondent to the appellant’s

reported income as business profit for the 1973 taxation year;

(d) during the 1974 taxation year, the late Mr Couillard disposed of the following properties:

	Selling price	Cost Cost	Profit Profit
Bourgogne	$450,000	$350,317	$99,683
Murray	$ 72,000	$ 63,000	$ 9,000

and an amount of $108,683 was added by the respondent to the appellant’s reported income as business profit for the 1974 taxation year;

(e) during the 1972 taxation year, the following companies were merged:

Couillard Entreprises Inc;

Couillard Entreprises (Division Domiciliaire) Inc;

Les Immeubles Des Seigneurs Inc;

Le Domaine du Verant Nord Inc;

(f) as a result of this merger the new company became owner of all the real estate owned by the former companies;

(g) the issued and paid up shares of the new company were divided as follows:

Rolland Couillard	80%
Claude Ruel	10%
Jean-Pierre Ruel	10%

(h) the new company disposed of real estate which had been owned by Domaine du Versant Nord Inc, made a profit of $656,000 and treated this amount as a business profit;

(i) during the 1974 taxation year, the late Rolland Couillard disposed of all the shares which he held in the new company;

(j) the shares were sold for the sum of $3,000,000: the difference between the selling price and the cost of the shares ($32,080) was added to the appellant’s reported income as business profit resulting from the disposition of the shares;

(k) following the sale of the shares in 1974, the late Rolland Couillard disposed of two other pieces of property:

	Selling price	Cost	Profit
Maricourt	$185,250	$175,000	$ 10,250
Pasteur	$985,000	$744,066	$240,934

(l) the profit resulting from the sale of the Maricourt property was added to the appellant’s reported income for the 1975 taxation year;

(m) in computing his income for the 1974 taxation year, the appellant omitted to report the amount of $56,565.11 paid to him by Couillard Entreprises Inc as a refund of interest owed to the appellant.

5.02 Admissions, agreements and proven facts

5.02.1 The parties filed at the hearing a written agreement relating to the fair market value of the property at issue (real estate and shares) on December 31, 1971. This agreement reads as follows:

AGREEMENT

The parties through their undersigned counsel agree as follows:

(1) if the Tax Review Board comes to the conclusion that the profit resulting from the disposition of the shares held by the late Rolland Couillard in Couillard

Entreprises Inc (80% of the issued and paid-up capital) constitutes a capital gain as defined by the Income Tax Act (SC 1970-71-72, c 63, as amended), then judgment to be given allowing the appeal in part for the 1974 taxation year, setting the fair market value of the shares held by the late Rolland Couillard

on December 31, 1971 at $2,000,000 (80% x $2,500,000);

(2) if the Tax Review Board comes to the conclusion that the profit resulting from the disposition of the real estate listed below constitutes a capital gain as defined in the Income Tax Act (SC 1970-71-72, c 63, as amended), then judgment

to be given allowing the appeal in part for the 1973 and 1974 taxation years, setting the fair market value of the real estate on December 31, 1971 as follows:

Bourgogne	$352,000
Desjardins	$591,000
Lévis	$630,000
Murray	$ 59,110

and that the matter be referred back to the Minister of National Revenue for

reassessment and reconsideration.

5.02.2 Admissions: selling prices

Adittionally, in their written pleadings the parties admitted the following amounts regarding selling prices. They are broken down as follows:

5.02.3 Admissions: costs of property

The appellant in his notice of appeal, and the respondent in his form T7W and appendices attached to the reassessments, set the following amounts as the cost of the property which is the subject of the case at bar:

5.02.4 The amount to be included in computing the appellant’s income will thus be determined, using a simple computation with the data contained in paragraphs 5.02.1, 5.02.2 and 5.02.3, in accordance with whether the Board concludes that this was a capital gain or business profit.

5.02.5 With regard to the penalty of $5,188.32 imposed by the respondent and challenged by the appellant, the latter did not question the fact that the amount of $56,565.11 in interest was omitted in computing the income of Mr Rolland Couillard in 1974. It simply argued that this was an oversight, as will be indicated below.

5.02.6 Proven facts

The parties in general gave clear descriptions in their pleadings of the facts proven by testimony and by exhibits. The Board will borrow at length from these pleadings in explaining the facts.

5.02.7 Rolland Couillard started out in construction and real estate at the age of twenty-seven in about 1952-1953. Together with Fernand Couillard, his brother, he founded the firm Fernand & Rolland Couillard (hereinafter referred to as the “F & R company”). His early efforts involved the construction of single-family homes. Around 1959, Fernand Couillard left the company and Rolland Couillard then hired his nephew, Jean-Pierre Ruel.

5.02.8 In 1959 Rolland Couillard founded his first company, Couillard Entreprises Inc (Exhibit A-47). Rolland Couillard transferred the company’s assets to it and handed over 10% of the capital stock to Jean-Pierre Ruel, retaining 80%. Around 1962-1963, Claude Ruel, Jean-Pierre’s brother and Rolland Couillard’s nephew, joined Couillard Entreprises Inc and received 10% of the capital stock (issued and paid-up). According to Exhibit I-6, income in 1964 to 1972 was as follows:

1964 income:

(Construction, rental, sale of land)	$643,059.76
1965 income:
Sale of land	723,080.93
Rental income	290,820.50
Other income	164,404.45
1966 income:
Sale of land	186,307.80
Rental	359,848.10
Other	20,693.47
1967 income:
Sale of land	254,036.00
Rental	370,969.00
Other	138,444.00
1968 income:
Sale of apartment blocks	580,000.00
Rental	384,740.00
Sale of land	10,000.00
Interest earned	2,853.00
Miscellaneous	1,566.00
1969 income:
Rental	394,868.00
Sale of land	16,000.00
Miscellaneous	2,281.00
1970 income:	413,195.00
1971 rental income:	428,759.00
1972 rental income:	216,694.00

5.02.9 In 1963 construction began on the housing complex known as “Jardins des Seigneurs”, 240 apartments located behind the Auberge des Gouverneurs at Ste-Foy. According to the financial statements this building was completed during the 1965 taxation year, the date at which the building costs ceased being capitalized (Exhibit I-6). The financial statements indicated building costs of $2,140,226.

5.02.10 On July 20, 1964 Rolland Couillard incorporated Couillard Entreprises (Division Maritimes) Inc (hereinafter referred to from time to time as “Couillard Maritimes”). Following the sale of real estate, this company reported the following gross income in 1967, 1968 and 1969:

The profits from these sales were reported as business profits. The financial statements of this company were not submitted in evidence (trans p 861 — the respondent’s witness Blouin).

5.02.11 On September 28, 1964 Couillard Division Domiciliaire Inc (hereinafter referred to from time to time as “Domiciliaire”) was incorporated (Exhibit A-47). According to Exhibit I-7, this company declared the following income:

March 31, 1966:

Rental income	$ 36,166.50
Income — sale of land
(selling price - cost price)	22,320.00
March 31, 1967:
Rental	214,257.00
Sale of land	141,226.00
Sale of buildings	990,000.00
Other	37,138.04
March 31, 1967:
Rental	290,535.00
Sale of land	247,784.00
Sale of buildings	3,499,142.00
Other	44,750.00
December 31, 1968:
Rental	435,085.00
Sale of land	17,600.00
Sale of buildings	2,611,200.00
Other income	30,897.00
December 31, 1969:
Rental	462,610.00
Sale of building	7,249,987.00
December 31, 1970:
Income	5,747,664.00
December 31, 1971:
Income	1,956,832.00
June 30, 1972:
Rental income	237,453.00

5.02.12 Couillard (Division Construction) Inc (hereinafter referred to from time to time as “Construction”) was incorporated on November 26, 1965. Construction was incorporated to handle the construction of various buildings. It also sold land and buildings.

5.02.13 Immeubles des Seigneurs Inc was incorporated on November 10, 1965 (Exhibit A-47). This company also sold real estate.

5.02.14 The shareholders of these companies Couillard Entreprises Inc, Couillard Entreprises (Division Domiciliaire) Inc and Immeubles des Seigneurs Inc, until they were merged, were Rolland (80% of the shares), Jean- Pierre Ruel (10% of the shares) and Claude Ruel (10% of the shares) (see testimony of J P Ruel, trans pp 1316 and 1321).

5.02.15 The eventual aim of incorporating these three companies, according to Mr Jean-Pierre Ruel, was to make possible the establishment of a bank of real estate that would be held as an investment (see testimony of J P Ruel, trans p 1316).

To do this, each company in effect owed two types of real estate: that intended to form part of a capital investment category, held to generate investment income, and that intended for resale to earn business income used in financing the real estate which was part of the capital investment category (t of J P Ruel, trans pp 359—360 and 1317-1318, and in cross- examination, pp 563, 595-596, 605 and 635-636; t of C Ruel, trans p 807).

5.02.16 Additionally, Rolland Couillard while he was alive explained this method of financing his real estate investments to Paul Laberge (t of P Laberge, trans pp 938-939 and 988).

The criteria distinguishing real estate in the first category, namely that intended for investment, from the second category were among other things the method of financing, the location and the size of projects, as well as the type of construction (t of J P Ruel, in cross-examination trans p 565).

5.02.17 In 1965 Mr Rolland Couillard bought one share in the Malta partnership. This business consisted of ten partners, who had built buildings at 2 or 3 million (t Paul Laberge, trans p 956). The aim was to resell them after construction. After one year the project was sold through a real estate broker, Mr Turgeon, at a profit (t Paul Laberge, trans p 957-961).

5.02.18 The company Entrepôt Colbert Inc (hereinafter referred to from time to time as “Colbert”) was also created. This company owned two warehouses on rue Colbert, which were to be kept for investment purposes. However, they were sold in 1971 and the profit reported as a capital gain. The respondent taxed them as business income. There was no objection (Exhibit I-9). According to Mr Jean-Pierre Ruel, there was no objection because the amount involved was not substantial.

5.02.19 To sum up, in 1963, 1964 and 1965 Couillard Entreprises Inc built the housing complex known as “Jardins des Seigneurs”, consisting of 240 units, loacated behind the Auberge des Gouverneurs at Ste-Foy (see t of J P Ruel, trans pp 1321 and 1426).

Between 1965 and 1967 Couillard Entreprises (Division Domiciliaire) Inc built the housing complex known as “Place des Seigneurs”, consisting of 280 Units, located at Charlesbourg (see t of J P Ruel, trans pp 1321 and 1426).

Between 1967 and 1969 Immeubles des Seigneurs Inc built the housing complex known as “Immeubles des Seigneurs”, an apartment block consisting of 320 units, located beside the Jardins des Seigneurs and the Auberge des Gouverneurs in Ste-Foy (see T of J P Ruel, trans pp 1321 and 1426).

5.02.20 According to Mr Ruel, these three housing complexes represented capital investments intended to be held to generate investment income, in accordance with the criteria mentioned in para 5.02.16 hereof.

In fact, the financing for these three housing complexes was more favourable than for those intended for resale, especially in that:

(a) they were financed by insurance companies guaranteed by the Central Mortgage and Housing Corporation under the 1954 National Housing Act (SC 1954 c 23), and thus received a preferential interest rate (t of J P Ruel, trans pp 349-350 and 1323-1324);

(b) the loans were closed for a period of twenty-five years, whereas conventional loans were renegotiable every five years (t of J P Ruel, trans pp 351 and 1324);

(c) the loans were guaranteed up to 90% of the value of the project, whereas conventional loans ordinarily covered 70 to 75% of the value of the project (t of J P Ruel, trans p 350).

5.02.21 In addition, these three housing complexes were in locations that were “more strategic, better from a rental standpoint and better from the point of view of surrounding traffic” than the project intended for resale (t of J P Ruel, trans pp 1324-1325, t of P Laberge, trans pp 972-973, t of G Paradis, trans p 1274).

Finally, the construction quality of these three housing complexes was clearly superior to that of the projects intended for resale (t of J P Ruel, trans p 1325).

Couillard Entreprises Inc, Couillard Entreprises (Division Domiciliaire) Inc and Immeubles des Seigneurs Inc kept these three housing complexes, regarding them as investments and, over the years, taking the capital cost allowance for the buildings when appropriate.

Thus, on June 30, 1972 Couillard Entreprises Inc had already taken $504,688 in capital cost allowances for the buildings alone (see Exhibit I-6, financial report to June 30, 1972 of Couillard Entreprises Inc, explanatory notes with financial statements of June 30, 1972, note 1, fixed assets).

Similarly, on June 30, 1972 Couillard Entreprises (Division Domiciliaire) Inc had already taken $642,377 in capital cost allowances for the buildings alone (see Exhibit I-7, financial report to June 30, 1972 of Couillard Entreprises (Division Domiciliaire) Inc, explanatory notes with financial statements of June 30, 1972, note 1, fixed assets).

Immeubles des Seigneurs Inc had on June 30, 1972 already taken $490,321 as capital cost allowances on the buildings alone (see Exhibit A- 44, financial report to June 30, 1972 of Immeubles des Seignerus Inc, explanatory notes with financial statements of June 30, 1972, note 1, fixed assets).

5.02.22 To finance the construction of these three housing complexes, and also in order to cover the deficits of the first years of operation, the three companies purchased land and resold it at a profit, or purchased land, built buildings on it and resold them at a profit, deliberately reporting the profit from these operations as business income for tax purposes (as examples see, in Exhibit I-6, the financial report of Couillard Entreprises Inc to December 31, 1968, income and expenditure statement from January 1, 1968 to December 31, 1968, indicating income of $580,000 from the sale of apartment blocks financed by conventional means, and comments in this connection by J P Ruel, in cross-examination, trans pp 595-596-597, 599-600 and 605; see in Exhibit 1-7 the financial report of Couillard Entreprises (Division Domiciliaire) Inc at December 1, 1967, statement of income and expenditure from April 1, 1966 to March 31, 1967, income: sale of lands, $141,226; sale of buildings, $990,000; and comments in this connection by J P Ruel, trans pp 392-393, and in cross-examination, trans pp 628 and 635-636; and for Immeubles des Seigneurs Inc see comments in this connection by J P Ruel, in cross-examination, trans pp 649-650).

Several repeated offers from serious buyers capable of making such purchases, were made for one or other of the three housing complexes, and were immediately refused by the shareholders of the three companies, who wished to retain these projects as investments; of these offers, the following may be noted:

(a) Paul Morin offered on several occasions to buy the buildings on one or other of the three housing complexes but his offers were categorically refused, Rolland Couillard even adding “I’m keeping it for my old age” (t of Paul Morin, trans pp 746-747, 749-750 and 752, and in cross- examination, pp 756-757; t of J P Ruel, trans pp 1326-1327);

(b) Paul Laberge offered to buy the Immeubles des Seigneurs complex but his offer was rejected by Rolland Couillard (t of Paul Laberge, trans pp 939-940, and in cross-examination, p 967; t of J P Ruel, trans p 1327);

(c) Gaston Paradis made an offer to purchase the Jardins des Seigneurs complex, and this offer was also peremptorily refused (t of Gaston Paradis, trans pp 1274-1275, and in cross-examination, pp 1280 and 1282- 1283; t of J P Ruel, trans pp 1327-1328);

(d) when he visited Quebec City in 1972, William Boyd indicated that he was interested in purchasing one or other of the three housing complexes for Headway Corporation Ltd and his verbal offers were refused on the spot (t of William Boyd, trans p 1120-1121, and in cross- examination, trans pp 1147 and 1158; t of J P Ruel, trans pp 1328-1329);

(e) groups of professionals also made purchase offers which were refused (t of J P Ruel, trans pp 357-358);

(f) finally, Henri Paquet made an offer for Jardins des Seigneurs which was refused (t of Henri Paquet, trans pp 900-909).

5.02.23 The three housing complexes were administered by Société Beaufort Inc (t of J P Ruel, in cross-examination, p 656). The income for administering the said housing complexes enabled Société Beaufort Inc to pay the premiums on insurance policies obtained on the lives of the three shareholders, so that in the event of the death of any one of them Société Beaufort Inc would have sufficient liquidity from the proceeds of the insurnace to purchase the shares of the deceased individual. Additionally, the three shareholders had signed an agreement to this effect (see the purchase-sale agreement of August 19, 1969, Exhibit A-24).

Rolland Couillard was not a shareholder of Société Beaufort Inc (t of J P Ruel, trans p 397).

5.02.24

On May 13, 1969, Immeubles Versant Nord Inc was incorporated (Exhibit A-19), on May 20, 1969, Immeubles Côteau-Lévis Inc (Exhibit A-21), and finally on November 5, 1970, Place Prévet Inc (Exhibit A-24) . . .

Jardins de Merici Inc was incorporated in 1972 (or rather in1971 ; t of J P Ruel, trans p 614). Between 1972 and 1975 Rolland Couillard and his sons held 50% of the capital stock, Jean Pierre Ruel 25% and Claude Ruel 25%. This company built a housing complex known as “Les Jardins Merici”. In June 1975, Mr Rolland Couillard and his sons sold their shares to Mr Rolland Couillard’s nephews (see t of J P Ruel, trans p 1335).

as will be explained below.

5.02.25 In 1971 Rolland Couillard and the Ruel brothers were desirous of buying, through a company, a vacant piece of land owned by the Frères des Ecoles Chrétiennes. However, the property of the Frères des Ecoles Chrétiennes also included a juvenate and the land underlying this juvenate (hereinafter referred to as “the juvenate”). Rolland Couillard and the Ruel brothers would have preferred to purchase only the vacant land without the juvenate, but the Frères des Ecoles Chrétiennes would not have sold the vacant land without that of the juvenate. This is why, after negotiations lasting from six to eight months, a company incorporated on July 9, 1971, Domaine du Versant Inc, bought the juvenate, while another company Gouil- lard Entreprises (Division Construction) Inc, bought the vacant land. These two purchases were made on the same day, namely January 14, 1972, the deed of sale of the juvenate being signed first (see t of J P Ruel, trans pp 567-571, 622-625 and 1318-1320; t of Br Desjardins, trans pp 995-1002).

The purchase of the juvenate by Domaine du Versant Inc was made with the intent of reselling it as quickly as possible, or failing that, of converting it into buildings subsidized by the federal government (t of J P Ruel, trans p 1320).

5.02.26 In the spring of 1972, Domaine du Versant Inc had found a purchaser for its only asset, the juvenate, and expected to make a significant profit. After consulting with their tax adviser, the shareholders decided for tax planning purposes to merge Domaine du Versant Inc as well, so that they could apply the capital cost allowance taken on the three housing complexes against the taxable profit resulting from the sale of the juvenate (t of J P Ruel, trans pp 1341-1342).

5.02.27 In the spring of 1972, following repeated requests from their bank, and to faciliate their administration, Rolland Couillard and the Ruel brothers decided to merge the companies whose projects had begun to be profitable (t of J P Ruel, trans pp 608-609, 611 and 1339-1340, and in cross- examination, pp 1483-1484). On this basis, it was agreed to merge Couillard Entreprises Inc, Couillard Entreprises (Division Domiciliaire) Inc and Immeubles des Seigneurs Inc, the sole assets of which at this time were the three housing projects.

On June 29, 1972 Couillard Entreprises Inc, Couillard Entreprises (Division Domiciliaire) Inc, Immeubles des Seigneurs Inc and Domaine du Versant Inc were merged into a single company known as Couillard Entreprises Inc (see Exhibit A-47, and the division of shares between the shareholders remained the same, namely Rolland Couillard 80% and the Ruel brothers 20%. In fact, until 1974 Rolland Couillard held 80% of the issued shares in all the companies mentioned below, Jean-Pierre Ruel 10% and Claude Ruel 10%:

(a) Couillard Entreprises Inc;

(b) Domiciliaire;

(c) Immeubles des Seigneurs Inc;

(d) Domaine;

(e) Construction;

(f) Versant-Nord;

(g) Coteau-Levis;

(h) Prévert;

(i) Entrepôt Colbert Inc.

Mr Roland Couillard controlled Maritime. The reason given for this multiplicity of companies was twofold: first, to minimize the risks, and second, to simplify administration.

The purposes of Couillard Entreprises Inc were primarily:

(a) the construction, purchase, improvement, administration and rental of real and personal property for investment purposes, and

(b) the construction, repair, improvement, purchase, sale and development of real and personal property (see Exhibit A-47, para 5.0).

The purposes mentioned in paragraph (a) covered the holding for investment of the housing complexes Jardins des Seigneurs, Place des Seigneurs and Immeubles des Seigneurs, while the purposes mentioned in paragraph (b) applied to the sale of the juvenate (t of J P Ruel, trans pp 1344-1345).

5.02.28 Couillard Entreprises Inc in fact subsequently sold the juvenate and realized a profit of $432,267.00. This profit was deliberately reported as business profit (t of J P Ruel, trans pp 570-571, 623-624, 1342 and 1345).

5.02.29 Jardins de Merici Inc was incorporated in 1971. The shareholders in this company at that time were Rolland Couillard and his sons (50%) and Jean-Pierre and Claude Ruel (50%). Jardins de Merici Inc began the construction of a housing complex known as “Jardins de Merici” in the spring of 1972. The first units were ready for occupancy in May 1973. The initial cost of the project was $7,500,000. Work was completed late in 1975 and the actual cost of the project was $13,000,000 (t of J P Ruel, trans pp 1329- 1330).

5.02.30 Still in 1972, the Société en Commandite Couillard et Ruel No 2, owned by Rolland Couillard and his sons (50%) and Jean-Pierre and Claude Ruel (50%), began construction of a building which, according to the original design, was to be used as both a shopping centre and an office building. The first shops were ready for occupancy in May 1974. The initial cost of the project was $4,000,000, and the actual cost of the project was $5,300,000 (t of J P Ruel, trans pp 1331-1338). It should be noted that part of the vacant land purchased by Couillard Entreprises (Division Construction) Inc from the Frères des Ecoles Chrétiennes was sold to the Société en Commandite Couillard et Ruel No 2 for the purposes of building the Centre Innovation on it (t of J P Ruel, trans p 625).

5.02.31 All the companies in which Messrs Ruel and Couillard were shareholders had a single bank account (t of J P Ruel, trans pp 365, 486, 557 and 561) . All the administrative staff except for Rolland Couillard were part of the Société Beaufort Inc (t of J P Ruel, trans p 558). The head office of all these businesses was at 1198 rue Colbert in Ste-Foy (t of J P Ruel, trans p 562) . All these companies filed consolidated financial statements (t of J P Ruel, trans p 609). The shareholders had given their personal guarantees for each of the loans contracted by one or other of the companies (t of J P Ruel, trans p 610). In all these companies, Mr Jean-Pierre Ruel occupied the position of secretary-treasurer, Mr Claude Ruel the position of vice-president and Mr Rolland Couillard the position of president (t of J P Ruel, trans p 556). It is clear that Rolland Couillard was the brains and the prime mover in all these companies (t of J P Ruel, trans pp 494, 502, 556 and 562).

5.02.32 In January 1973 Rolland Couillard, utterly disgusted by the municipal and school tax increases in the Quebec City region, and anticipating harmful consequences for building owners and tenants as a result, publicly attacked this state of affairs, which he regarded as dangerous (t of J P Ruel, trans pp 506 and 508).

He caused to be published a manifesto with the heading: “We are forming a fifth government to stop the madness of the parasites who are plundering our property and driving up taxes” (see Exhibit A-34). On about January 13, 1973 he officially launched his movement, which he called the Association des Payeurs de Taxes du Québec [Quebec taxpayers’ association]. On February 2, 1973 the Association des Payeurs de Taxes du Québec was incorporated under Part III of the Companies Act (see Exhibit A-35). Between January 1973 and June 19, 1973 Rolland Couillard was involved in various activities designed to promote the cause supported by the Association des Payeurs de Taxes du Québec (see the list of these activities in Exhibit A-56). During this period, he was concerned only with promoting the Association (t of Rosaire Tremblay, trans p 198), and completely gave up all other activities, including those concerning building projects under construction at the Jardins de Merici and Centre Innovation (t of J P Ruel, trans pp 509, 1348 and 1428-1429). He stated publicly that he would build no more buildings (t of Remi Blais, trans p 1259; t of Rosaiare Tremblay, trans p 1107; t of J P Ruel, trans p 1350). Additionally, on March 13, 1973 he told a seminar at the Auberge des Gouverneurs:

Five days before the launching of this non-profit body, the Association des Payeurs de Taxes du Québec, that is, from January 1 of this year, I gave up this attractive career . . .

I repeat, and I wish to state once and for all, that I ceased to be a building contractor on January 1, 1973. At this time my assistants are concluding the projects in which I was involved prior to this year; but the building contractor career of your speaker is over, finished, a thing of the past. . . (See Exhibit A-57, pp 1-2).

He was pessimistic and predicted that building owners would be going into bankruptcy (t of Carol Coulombe, trans p 1010; t of Paul Laberge, trans p 945). The aims pursued by the Association were so important to him that he could not be persuaded not to pursue them within the Association, and reacted in a manner that was to say the least “categorical” (t of Paul Laberge, trans pp 944-945); t of Rémi Blais, trans pp 1262-1263). The Association hired four employees: Gaston Roussel, Pauline Lagacé, Lisette d’Amours and Rosaire Tremblay.

Rouland Couillard’s attitude was against his own financial interests at this time, provoked criticism from financial institutions and municipalities (t of J P Ruel, trans pp 1352-1353, and in cross-examination, trans p 1448), and contributed to creating a difficult working atmosphere in the office, as the Association had installed its offices there (t of J P Ruel, trans p 1354). These facts led to arguments between Rolland Couillard and the Ruel brothers.

In June 1973 it seemed apparent that the Association had not received the support Rolland Couillard had expected. The movement died away and Rolland Couillard reluctantly decided to terminate the activities of the Association on June 19, 1973. He undertook to personally absorb the difference between the Association’s income and its expenditure, an amount of $28,790.02 (see Exhibit A-58), statement of income and expenditure to June 30, 1973, trustee’s report).

5.02.33 Rolland Couillard was an “extremely disappointed” man (t of Rosaire Tremblay, trans P 113), “disheartened” (t of Remis Blais, trans p 1265), “very discouraged and aggressive” (t of Lisette d’Amours, trans p 1290—), “greatly upset” (t of J P Ruel, trans p 1369, and in cross-examination, trans p 1444). He even subsequently took up drinking (t of J P Ruel, in cross- examination, trans pp 1443-1444).

5.02.34 After the construction break in August 1973, Rolland Couillard and the Ruel brothers had a meeting which developed into a furious argument and during which, in the heat of the discussion each offered to sell the other his share. These purchase offers were refused all around (t of J P Ruel, trans pp 511 and 1354-1356).

The day after this discussion, Jean-Pierre Ruel met with the Mercantile Bank manager and told him that the Ruel brothers were breaking up with Rolland Couillard. The latter organized a meeting with Rolland Couillard and the Ruel brothers for the following day. At that meeting, he told Rolland Couillard he was calling in a demand loan of $1,800,000 if the Ruel brothers broke with him. Rolland Couillard assured him that the atmosphere would improve (t of J P Ruel, trans pp 1357-1358).

5.02.35 The atmosphere subsequently became highly charged. Rolland Couillard and the Ruel Brothers agreed in September 1973 to part company by any means possible (t of J P Ruel, trans pp 1358-1359). However, at the time neither Rolland Couillard nor the Ruel brothers had the liquidity needed to buy back the other’s shares (t of J P Ruel, trans pp 1359 and 1363, and in cross-examination, pp 1458-1459 and 1469-1470).

5.02.36 At the end of 1973 William Boyd investigated the possibility of purchasing other properties for Headway Corporation Ltd. Rolland Couillard appeared to him to be a despondent man who wished to liquidate everything and retire (t of William Boyd, trans pp 1122-1123, and in cross-examination, trans pp 1159-1161; t of J P Ruel, trans pp 1368-1369). William Boyd made an offer for the three housing complexes, negotiations lasted about ten days, and Rolland Couillard and the Ruel brothers finally agreed to sell him the shares of Couillard Entreprises Inc for $3,080,000 (t of William Boyd, trans pp 1123-1124, and in cross-examination, trans pp 1163, 1166 and 1168).

5.02.37 The sellers preferred to sell the shares of Couillard Entreprises Inc rather than the three housing complexes, so as to facilitate the ending of their relationship, as each would then receive his share of the proceeds of the sale directly (t of J P Ruel, trans pp 1372-1373 and in cross-examination, trans p 1489).

5.02.38 According to Mr J P Ruel, without the earlier quarrel and the resulting intention to go their separate ways, the sellers would not have sold and would have retained ownership of these three housing complexes (t of J P Ruel, trans pp 800-802 and 1492; t of C Ruel, trans pp 825-826). The sale indeed surprised people who knew of Rolland Couillard’s attachment to his three “pilot projects” (t of Paul Laberge, trans pp 937, 978 and 989).

5.02.39 Moreover, the sellers accepted a price some $500,000 below what they felt was the fair value of these three housing complexes (t of J P Ruel, trans pp 1374 and 1480). The resale by Headway Corporation Ltd to a subsidiary of Fidinam Inc indeed confirmed this valuation, since Headway Corporation made a profit of $750,000 from the deal (t of William Boyd, trans pp 1135-1139).

5.02.40 For the purposes of this resale, Rolland Couillard had to provide the affidavit filed as Exhibit A-55. The respondent objected to the filing of this affidavit as Exhibit A-55 on the ground that it was a domestic paper. The Board allowed the document to be filed and reserved judgment on the matter. This decision dismissing the objection is explained below (see para 7.04.1.B). A careful reading of this affidavit indicated that Rolland Couillard regarded the three housing complexes as investments.

5.02.41 Rolland Couillard personally obtained $2,400,000 for the sale of Couillard Entreprises Inc shares. He invested the proceeds of the sale as follows:

(t of Gilles Béland, trans p 1199; t of J P Ruel, trans p 1467).

5.02.42 The debt held by Rolland Couillard against X Béton Inc was subsequently assigned and the resulting loss was reported and treated as a capital loss. Similarly, following his death Rolland Couillard realized a capital loss on the debt owed by Entrepôts Colbert Inc (t of Gilles Béland, trans pp 1197-1198 and 1218-1219).

The shares held by Rolland Couillard in the capital stock of Couillard Entreprises Inc, Couillard Entreprises (Division Domiciliaire) Inc, Immeubles des Seigneurs Inc and the company resulting from their merger, Couillard Entreprises Inc, were shown on his personal financial statements as investments, so as to indicate clearly that these were investments for Rolland Couillard (see Exhibit I-26; t of Léopold Marotte, trans pp 1069-1071).

5.02.43 Except in the process of dissolving his ties with the Ruel brothers, Rolland Couillard did not make a profit on selling the shares of his private corporations (t of Léopold Marotte, trans p 1080).

5.02.44 After the sale of the shares of Couillard Entreprises Inc, Rolland Couillard and the Ruel brothers continued the separation process which they had begun: in February 1974 the Ruel brothers installed their office in the Centre Innovation (t of J P Ruel, trans pp 1361 and 1367); the Ruel brothers purchased the shares of Rolland Couillard and his sons in the Centre Innovation in December 1974 and their shares in Jardins de Merici Inc on June 4, 1975 (t of J P Ruel, trans pp 1337 and 1376). This purchase was made with the aid of a bank loan (t of J P Ruel, trans p 1453). The Ruel brothers returned to Rolland Couillard the shares they held in the other companies in the group for $1 (t of J P Ruel, trans pp 346-347); on June 5, 1975 Rolland Couillard and the Ruel brothers finally broke all ties and never saw each other again.

5.02.45 On April 30, 1959 Rolland Couillard purchased a property known as Le Murray (t of Gilles Beland, trans p 1203; Exhibit A-59).

Rolland Couillard retained ownership of his property, which he regarded as an investment, for fifteen years, and during these years, when appropriate, he took the capital cost allowances for the building.

On December 31, 1970 Rolland Couillard had taken $32,824 in capital cost allowances for Le Murray (Exhibit 1-26), note prepared by the appraiser A S Blouin on June 20, 1974).

5.02.46 In 1969 Rolland Couillard purchased two properties known as Le Bourgogne and Manoir Lévis (t of Gilles Béland, trans p 1206).

Rolland Couillard retained ownership of Le Bourgogne and Manoir Lévis for six and five years respectively, and during those years, when appropriate, he took the capital cost allowances for the buildings.

On December 31, 1970 Rolland Couillard had taken $82,578 and $149,526 as capital cost allowances for Le Bourgogne and Manoir Lévis respectively (Exhibit 1-26, note prepared by the appraiser A S Blouin on June 20, 1974).

5.02.47 In 1969 Rolland Couillard purchased a property referred to as Desjardins (that is, Place Versailles located on rue Desjardins in Lévis, next to the Manoir Levis — t of Gilles Beland, trans p 1206).

Rolland Couillard retained ownership of Desjardins for four years, and during these years, when appropriate, he took the capital cost allowance on the building.

On December 31, 1970 Rolland Couillard had taken $103,294 in capital cost allowances for Desjardins (Exhibit I-26, note prepared by the appraiser A S Blouin on June 20, 1974).

5.02.48 On September 18, 1973 Rolland Couillard disposed of the Desjardins and Manoir Lévis properties to Laurentide Motels Ltd (see Exhibit A- 48).

On March 27, 1974 Rolland Couillard disposed of the Le Murray property to Messrs Gaston, Marcel, Pierre and Bertrand Florent (see Exhibit A-60).

On June 13, 1974 Rolland Couillard disposed of the Le Bourgogne property to Headway Builders (Sault) Limited (see Exhibit A-49).

5.02.49 These sales occurred during a period when Rolland Couillard was pessimistic and expected that, because of increases in costs, and in particu- lar in municipal and school taxes, building owners were going to lose everything. They were therefore the acts of a property owner who preferred to realize on his investments rather than being subject to serious financial problems (t of Paul Laberge, trans pp 945-946; t of Léopold Marotte, trans pp 1081-1082).

Rolland Couillard clearly told William Boyd in 1974: “I am going to sell everything I own and go to my summer camp in the bush” ( t of William Boyd, trans p 1122).

This wish to withdraw from the real estate business also resulted from the crushing failure of the Association des Payeurs de Taxes de Québec (t of Paul Laberge in cross-examination, trans pp 978-979), a failure which had a considerable effect on Rolland Couillard (see paras 5.02.33 and 5.02.36 hereof). It should also be noted that the violent quarrel between Rolland Couillard and the Ruel brothers was at its height at this time.

5.02.50 The sale of the Le Bourgogne property resulted from an offer made through William Boyd to Rolland Couillard. Rolland Couillard undertook no canvassing to sell this property and did not seek the assistance of a broker (t of William Boyd, trans pp 1141-1142).

The Le Murray, Le Bourgogne, Desjardins and Manoir Lévis properties were entered in the financial statements of Rolland Couillard as fixed assets (see Exhibit 1-26).

5.02.51 On November 12, 1977 Mr Rolland Couillard died.

In his will, dated October 8, 1969, he bequeathed all his apartment properties to his children. Clauses 7.0 and 7.1 read as follows:

7.0 I bequeath to my children in equal shares in universal title all the apartment properties I shall own at the time of my death, subject to the mortgages, liens and other rights that may encumber the said properties.

7.1 No division of the apartment properties shall take place before the oldest of my children has attained the age of twenty-five.

Following the assessment on the properties Mr Couillard, having occasion to consult his will and having reread paragraph 7.0, wrote in the margin: “Proof that these were to bekept: RC”.

6. Act — case law

6.01 Act

The provisions of the Income Tax Act involved in the case at bar are sections 3, 9, 248 (“business”), subsection 69(1) and paragraph 149(1)(n). These sections will be cited where necessary in the course of the comments.

6.02 Case Law

1. Place des Soeurs Inc v MNR, [1978] CTC 3188; 78 DTC 1862;

2. Roy M Power v HMQ, [1975] CTC 580; 77 DTC 5388;

3. HMQ v Harold Borinsky, [1977] CTC 570; 77 DTC 5389;

4. R RWS S Johnston v MNR, [1948] CTC 195; 3 DTC 1182;

5. MNR v Pillsbury Holdings Limited, [1964] CTC 294; 64 DTC 5184;

6 . Nathaniel C Brewster v HMQ, [1976] CTC 107; 76 DTC 6046;

7. David Tobias v HMQ, [1978] CTC 113; 78 DTC 6028;

8. Hiwako Investments Limited v HMQ, [1978] CTC 378; 78 DTC 6281;

9. Joseph Friedman v MNR, [1977] CTC 2611; 78 DTC 1020;

10. S & S Properties Ltd v HMQ, [ 1978] CTC 412; 78 DTC 6294;

11. Clemow Realty Limited v HMQ, [1976] CTC 129;76 DTC 6094;

12. Foreign Power Securities Corporation Limited v MNR, [1966] CTC 23; 66 DTC 5012, [1967] CTC 116; 67 DTC 5084;

13. Bead Realties Limited v MNR, [1971] CTC 774; 71 DTC 5453;

14. HMQ v Stanfold Investment Corporation, [1974] CTC 19; 74 DTC 6035;

15. Harvey Kagna v MNR, [1974] CTC 275; 74 DTC 6221;

16. Branlyn Management Ltd v HMQ, [1974] CTC 579; 74 DTC 6471;

17. Parkview Manor Ltd v MNR, [1974] CTC 402; 74 DTC 6311;

18. Irrigation Industries Ltd v MNR, [1962] CTC 215; 62 DTC 1131;

19. MNR v Valclair Investment Company Limited, [1964] CTC 22; 64 DTC 5014;

20. Ronald Francis Theres Maclsaac v MNR, [1974] CTC 576; 74 DTC 6380,

21. Hans Reicher v HMQ, [1975] CTC 659; 76 DTC 6001;

22. Elgin Cooper Realties Ltd v MNR, [1969] CTC 598; 69 DTC 5276;

23. T K Sales Ltd v MNR, [1973] CTC 340; 73 DTC 5284;

24. Tara Exploration and Development Company Limited v MNR, [1970] CTC 557; 70 DTC 6370;

25. Allfine Bowlerama Limited v MNR, [1972] CTC 2603; 72 DTC 1502;

26. Royal Victoria Hospital et al v Mary Morrow, [1974] SCR 501;

27. Lloyd v Powell Duffryn Steam Coal Company Limited, [1914] AC 733;

28. Libero Pella v MNR, 35 Tax ABC 100; 64 DTC 240;

29. Les Meubles de Maskinongé Inc et al v MNR, 79 DTC 66;

30. Ronald K Fraser v MNR, [1964] CTC 372; 64 DTC 5224;

31. Gordon S Shipp et al v MNR, [1967] CTC 330; 67 DTC 5222;

32. MNR v Joichi G Kato et al, [1969] CTC 492; 69 DTC 5308;

33. Guy Dumas v MNR, [1978] CTC 2961; 78 DTC 1704;

34. Hazeldean Farm Company Limited v MNR, [1966] CTC 607; 66 DTC 5397;

35. Stefan Jachimowicz v MNR, [1976] CTC 2309; 76 DTC 1241 [1977] CTC 162; 77 DTC 5148;

36. Atwater Western Corporation v MNR, [1970] CTC 472; 70 DTC 6312;

37. Investors Leaseholds Limited v MNR, [1976] CTC 2211; 76 DTC 1163;

38. Victor Ross v MNR, [1973] CTC 22; 73 DTC 5060;

39. J I C Developments Limited v MNR, [1978] CTC 2992; 78 DTC 1708; 40. Yves Cloutier v HMQ, [1978] CTC 702; 78 DTC 6485;

41. Cyrus C Udell v MNR, [1969] CTC 704; 70 DTC 6019;

42. MNR v Donald M Weeks, [1972] CTC 60; 72 DTC 6001;

43. Kensington Land Developments Ltd v HMQ, [1976] CTC 783; 77 DTC 5011;

44. Nicholas De Toro v MNR, [1965] CTC 321; 65 DTC 5194;

45. Fredericton Housing Limited v HMQ, [1975] CTC 537; 75 DTC 5367;

46. Joël Inv Corp v Le Sous-Ministre du Revenu de la Province du Québec, [1977] RDFQ 23;

47. Gairdner Securities Ltd v MNR, [1952] CTC 371; 52 DTC 1171; [1954] CTC 24; 54 DTC 1015;

48. Bel-Conn Limited v MNR, [1969] CTC 1; 69 DTC 5026;

49. Be-Vi Investment Corporation v HMQ, [1975] CTC 636; 75 DTC 5444;

50. G W Golden Construction Limited v HMQ, [1967] CTC 111; 67 DTC 5080; [1967] TCS 302;

51. Hersch Fogel v MNR, [1959] CTC 227; 59 DTC 1182;

52. Punjab Co-Operative Bank v In Re Amritsar v Income Tax Commissioner Lahore, [1940] AC 1055;

53. J C Oliver v Farnsworth, 37 TC 51;

94. Granville Building Co Ltd v Oxby, 35 TC 245;

55. Hobson & Sons Ltd v Newall, 37 TC 609;

56. Anderson Logging Co Ltd v Le Roi, [1925] TCS 45;

57. Miron et Frères v MNR, [1955] TCS 679;

58. Johnston v MNR, [1948] SCR 486;

59. Admiral Investments Ltd v MNR, [1967] CTC 165; 67 DTC 5114;

60. First Torland Investments Ltd et al v MNR, [1969] CTC 134; 69 DTC 5109;

61. Sutton Lumber & Trading Company Limited v MNR, [1953] SCR 77; [1953] CTC 237; 53 DTC 1158;

62. Ben Rosenblatt v MNR, [1955] CTC 323; 55 DTC 1205;

63. Osler, Hammond & Nanton Limited v MNR, [1960] CTC 384; 60 DTC 1270;

64. Regal Heights Limited v MNR, [1960] CTC 384; 60 DTC 1270;

65. De Salaberry Realties Limited v HMQ, [1976] CTC 656; 76 DTC 6408;

66. Grand Marais Development Company v MNR, [1965] CTC 486; 65 DTC 5286;

67. HMQ v Alex H Dobroskay et al, [1974] CTC 260; 74 DTC 6158;

68. Avram Goldstein v MNR, [1973] CTC 51; 73 DTC 5088;

69. Pierce Investment Corp v MNR, [1974] CTC 825; 74 DTC 6608;

70. Pickford & Quickie, (1927), 78 TC 257;

71. Noak v MNR, [1953] 2 SCR 136; [1954] CTC 6; 53 DTC 1212; 72. Collins & The Firth-Brearley Stainless Steel Syndicate, case reversed by Court of Appeal), (1925), 9 TC 520;

73. California Copper Syndicate v Harris, (1904) 5 TC 159.

7. Analysis

7.01 Points for analysis in brief

Based on the appeal pleadings, their replies and the evidence presented, the Board makes the following analysis and draws conclusions on the following points:

A. Versant Nord, Coteau Lévis and Place Prévert properties (para 7.02)

1. Are the three companies Coteau Lévis, Versant Nord and Place Prévert limited-dividend housing companies and so tax-exempt (paragraph 7.02.1)?

2. If the answer to this question is in the negative, it becomes necessary to establish whether the profits resulting from the sales are capital gains or business profits (para 7.02.2.1).

3. If business income is involved, it becomes necessary to decide whether paragraph 69(1 )(a) applies, and if it does what the fair market value of the land was at the time of purchase.

B. Couillard Entreprises (Division Construction) Inc (para 7.03)

4. It will be necessary to decide whether paragraph 69(1 )(a) applies if this point has not been earlier decided.

C. Estate Holland Couillard (para 7.04)

5. Reply to three objections which were raised at the hearing (para 7.04.1).

6. It will be necessary to decide whether the profits resulting from the sales of four properties, Desjardins, Manoir Levis in 1973, Le Bourgogne and Le Murray, and shares in Couillard Entreprises in 1974, represent capital gains or business income (para 7.04.2).

7. Additionally, it will be necessary to establish whether the penalty of $5,188.32 should be upheld (para 7.04.3).

7.02 Analysis of Versant Nord, Coteau Levis and Place Prévert

7.02.1 Are these appellants limited-dividend housing companies and so tax- exempt?

The appellants Prévert, Coteau Lévis and Versant Nord contend, alternatively, that they were at all times limited-dividend companies, and that consequently their income was tax-exempt under the provisions of paragraph 149(1 )(n) of the Act, which states:

(1) No tax is payable under this Part upon the taxable income of a person when that person was

(n) a limited-dividend housing company (within the meaning of that expression as defined in the National Housing Act);

Section 2 of the National Housing Act, RSC 1970, c N-10, SC 1953-1954, c 1, defines a limited-dividend housing company as follows:

means a company incorporated to construct, hold and manage a low-rental housing project, the dividends payable by which are limited by the terms of its charter or instrument of incorporation to five per cent per annum or less; (Emphasis by the Board)

Counsel for the three appellant companies argued in essence that they are actually limited-dividend housing companies, since the Central Mortgage and Housing Corporation made loans to these companies under a loan contract (Exhibit 1-12). In the conditional clauses of the said contract, it is clearly indicated that the Governor in Council by order approved a loan which could only be issued to a limited-dividend housing company.

In order to decide whether the exemption applies, the Board must consider only the conditions specified by the Act. The first condition is satisfied, namely that this is a low-rental housing company. However, the letters patent do not contain the clause specified in the definition, namely that “the dividends payable . . . are limited by the terms of its charter or instrument of incorporation to five per cent per annum or less”.

These are the legal conditions which the Board must consider, not whether the CMHC loaned them money, even if the latter condition is not met. The principles on which the CMHC is administered are not necessarily the principles of strict interpretation applicable to a tribunal responsible for interpreting the Act.

There is an abundance of case law on this matter: the Board refers to W A Sheaffer Pen Company of Canada Limited v MNR, [1953] CTC 345; 53 DTC 1223. In that case Thorson, J of the Exchequer Court reviewed the earlier decisions. He cited, inter alia, W J Ritchie, J of the Supreme Court of Canada in Wylie v City of Montreal, [1885] 12 SCR 384, at 386, regarding exempting sections as in the case at bar:

I am quite willing to admit that the intention to exempt must be expressed in clear unambiguous language; that taxation is the rule and exemption the exemption, and therefore to be strictly construed.

In the case at bar, the definition of “limited-dividend housing company” contained in the exempting paragraph 149(1 )(n) is very clear. The evidence is equally clear that the appellants do not meet the requirements of the definition. Indeed, the evidence showed that not only do the appellants’ letters patent not contain the clause required by the definition, but in addition Versant Nord even caused its charter to be amended to remove this five per cent clause, which was included in the original letters patent. The Board can come to no other conclusion than that the three appellants Coteau Lévis, Versant Nord and Place Prévert are not strictly limited-dividend housing companies, and accordingly that their income is not exempt under the Income Tax Act.

The question then becomes whether the profits resulting from the transactions at issue are capital gains or business profits.

7.02.2 Capital gain or business profit

7.02.2.1 Points to be considered

The chief points to be considered in determining whether the profits resulting from a transaction constitute capital gains or business income have long been established by precedent: the nature of the property; the intent at the time of purchase; the number and frequency of similar transactions; the taxpayer’s activities; the circumstances of the sale; the presumption that a company is engaged in commerce.

7.02.3 The nature of the property and the presumption that a company is engaged in commerce

Certain property, such as comestibles (fruits, vegetables and so on), building materials (iron, cement and so on) or items for personal or industrial use (tools, cleaner and so on) are by nature commercial.

With regard to these items, there is a presumption of fact that they are purchased for resale unless, because of the quantity purchased and other circumstances, it appears that they were purchased for consumption and personal use and not for resale. The profit resulting from the resale of such items in general constitutes business income, particularly in view of the fact that under the Act, the word “business” includes an adventure or concern in the nature of trade: section 248.

Other property, such as real estate, collections and company shares are more in the nature of investments. There is a presumption of fact that they are purchased for the long term. The profit resulting from the resale of such property in general constitutes a capital gain, unless the circumstances indicate that they were purchased for the purpose of resale.

This property, if owned by a company, constitutes a presumption of purchase for commercial purposes, especially when the purposes stated in the letters patent of the company include transactions in the nature of purchase and sale of the items concerned: HMQ v MRT Investments Ltd, [1976] CTC 294; 76 DTC 6158; this presumption may however be rebutted (Sutton Lumber & Trading Company Limited v MNR, [1953] CTC 237; 53 DTC 1158).

In Collins & The Firth-Brearley Stainless Steel Syndicate, 9 TC, Rowlatt, J stated:

Now, the principle I think is very clear and has been established by many cases. The appreciation of an article, the subject of property, whether it is the property of an individual or whether it is the property of a company, is not taxed as such; but it is taxed if the realisation of that appreciation forms part of a trade, because then the trade is taxed, and this is an item in the trade. That is all there is in the principle.

In the case at bar, real property is certainly involved (and hence the presumption of investment), purchased by companies the principal purpose of which (see Exhibits A-21, A-22 and A-23) is the purchase and sale of real property (presumption of commercial operations). However, the nature of an asset is only one factor, as the real activities of the taxpayer and the quantity purchased are also significant factors.

7.02.4 Activities of the taxpayer and number and frequency of transactions

In the case at bar, the taxpayers are three companies. In realty, the evidence indicated (testimony of Mr Jean-Pierre Ruel, whose credibility was not impugned by the respondent and whose testimony was confirmed by the financial statements) that the appellants owned two classes of real estate: one was bought (or bought and built upon) for the purpose of resale, and formed part of inventory; profits from such resale were reported as business income; the other was purchased for investment purposes. The profits from the sale of the first class were used to finance the second (trans pp 359, 360, 563, 595-596, 605 and 635-636).

The activities of the shareholders of the appellants, Mr Rolland Couillard and the Ruel brothers, also cannot be ignored. The evidence as a whole shows the extent to which they have been involved for several years in various real estate transactions, personally as well as in the capacity of shareholders of various companies.

The number and frequency of real estate transactions in this regard are considerable, especially bearing in mind that most of the companies in reality bought real estate for resale purposes, and reported the profits on sales as business income. The same is true of the transactions carried out by individual shareholders (para 5.02.27, part 2). These similar activities and numerous transactions cast some doubt on the appellant’s argument. However, it should not be forgotten that the appellants are legal persons independent of the shareholders, nor that the intentions of the appellants are those of the shareholders and officers: C/R v Fisher’s Executors, [1926] AC 395:

.. . desires and intentions are things of which a company is incapable. These are the mental operations of its shareholders and officers.

The intent at the time of the purchase taken together with the circumstances of the sale are undoubtedly key factors in determining whether a capital gain or a business profit was concerned.

7.02.5 Intent of the appellants — Circumstances of the sales

The facts relating to the appellants’ intent and the circumstances of the sale are set forth at length in para 3.04. The facts described in that paragraph are in accordance with the testimony of Messrs William Boyd, Jean- Pierre Ruel and Paul Morin. The Board does not question their testimony:

— William Boyd

William Boyd was senior vice-president of Headway Corporation Limited, a public corporation, in 1972. The negotiations to purchase the real estate on behalf of the purchaser, Headway Corporation Limited, were conducted by William Boyd.

William Boyd is not directly or indirectly interested in the outcome of the case at bar.

— Jean-Pierre Ruel

The respondent himself stated that the credibility of this witness is not open to question (trans p 413).

— Paul Morin

Paul Morin is an insurance broker who also has no interest in the outcome of the case at bar.

As the principal shareholder is dead, the testimony of Messrs Boyd, Ruel and Morin is very important in determining the intent that prevailed in purchasing and building the properties sold. It is worth noting the comments made by Noël, J in Paul Racine, Amédée Demers and François Nolin v MNR, [1965] CTC 150; 65 DTC 5098:

To give to a transaction which involves the acquisition of capital the double character of also being at the same time an adventure in the nature of trade, the purchaser must have in his mind, at the moment of the purchase, the possibility of reselling as an operating motivation for the acquisition: that is to say that he must have had in mind that upon a certain set of circumstances arising he had hopes of being able to resell it at a profit instead of using the thing purchased for purposes of capital. Generally speaking, a decision that such a motivation exists will have to be based on inferences flowing from circumstances surrounding the transaction rather than on direct evidence of what the purchaser had in mind.

Addy, J, after citing the foregoing, in Roy M Power v HMQ, [1975] CTC 580; 75 DTC 5388, at 584 also comments on the evidence relating to intent:

The only direct evidence of what a person has in mind at any given time must necessarily come from a statement by that person either at the trial or orally or in writing to another person and any such expression of intention is most relevant and important, especially when given under oath at the trial by the person whose intention is at issue and after the statement of such intention has been thoroughly tested by cross-examination in the light of his actions both before and after the event in question. Conversely, it would be most difficult for me to find in favour of a taxpayer, whatever the surrounding circumstances might be, who, without any justifiable excuse, failed to testify personally at the trial as to what his intention actually was. It is such important and vital evidence that its absence would, in my view, almost invariably destroy the taxpayer’s case unless there was some good explanation offered as to its absence.Furthermore, it is evidence which has the added characteristic of being solely within the knowledge and control of the taxpayer himself. If a judge were to charge the jury to the effect that the law requires that circumstantial evidence of intention be given preference over direct evidence then I have no doubt that any such direction would constitute a mistrial. A judge should therefore refrain from charging himself in that manner.

All issues must be determined by a careful consideration of all the relevant evidence both direct and circumstantial. In any particular case, a specific piece of evidence might, by reason of the surrounding circumstances of that case, necessarily possess great probative value while, in another case, evidence to the same effect might carry little or no weight. The Court must also bear in mind that facts often speak louder than words and that free acts are very good indication of what a person really intends and overt acts and their results constitute an excellent means of deciding what the intention actually was. In the same manner, other circumstances, which are not the result of any particular action of the person at the time and place in question, might also be of considerable help in deciding the issue of intention. I have in mind for instance, the circumstance of a taxpayer, whose intention is being scrutinized, being by profession a land developer (see Bel-Conn Limited v MNR, 73 DTC 17). This is undoubtedly a very important circumstance. Yet one cannot say that, as a matter of law, every land developer is precluded from establishing that in a particular case there was no primary or secondary intention to speculate, any more than in a case such as the one at bar where a mature man has never previously resold a piece of real estate as a profit, is one precluded from finding that, on his very first venture in this sphere, he did in fact have the intention of reselling at a profit when he originally purchased the lands. The issue of intention must therefore be resolved by a careful weighing of all of the admissible evidence which is in any way relevant to that issue and the person or body charged with finding the facts must refrain from considering each piece of evidence independently but must examine it in the light of all the other evidence both direct and circumstantial. Unless there is a specific statutory provision to the contrary, this general rule of evidence must be applied in all cases including taxation cases. it follows that little help can be obtained from former decisions regarding what weight should be attributed to any particular circumstance in so far as it may prove or disprove an intention to engage in an adventure in the nature of trade, except in so far as any such decision might make one aware of a particular area or cirvumstance which should be considered or taken into account.

The foregoing remarks were followed by Collier, J of the Federal Court in HMQ v Harold Borinsky, [1977] CTC 570; 77 DTC 5389.

In the case at bar, there is no doubt that the weight of the evidence is that the original intent in purchasing the land and constructing the buildings on it through the CMHC was to make an investment (see para 3.04.02).

The twofold classification of the appellants’ activities clearly suggests a significant role for long-term investments (para 3.04.3) and rebuts any presumption (para 3.04.4) of commercial operation as the result of ownership by a company and the experience of the shareholders in the real estate sector. Additionally, the refusal to sell when business was prospering clearly confirms the intent to invest (para 3.04.3).

The circumstances in which the three housing complexes were sold (financial difficulties, suggestion by the bank that certain buildings should be sold, unsolicited offers to buy with a sine qua non condition that the three projects be sold together — para 3.04.5) do not in any way rebut the evidence as to the original intent to invest. On the contrary, these circumstances show that, through their shareholders and officers, the appellants were obliged to resign themselves to selling.

7.02.6 The original intent at the time of purchase is the key factor in determining whether the profit resulting from the transaction is a capital gain. The other factors are only useful in arriving at this original intent. In the case at bar, as the original intent for it to be an investment is clear, the Board concludes that the profits resulting from the sale of the housing complex of the three appellants, Versant Nord, Coteau Lévis and Place Prévert, are capital gains. No evidence was presented and no agreement made regarding the value of the lands concerned at December 31, 1971.

7.03 Couillard Entreprises (Division Construction) Inc — Does subsection 69(1) apply?

7.03.1 In assessing the appellant Couillard Entreprises, the respondent established the purchase price of the property, and consequently the profit on the transaction, by applying paragraph 69(1)(a). This section reads as follows:

(1) Except as expressly otherwise provided in this Act,

(a) where a taxpayer has acquired anything from a person with whom he was not dealing at arm’s length at an amount in excess of the fair market value thereof at the time he so acquired it, he shall be deemed to have acquired it at the fair market value;

Paragraph 69(1)(a) came into effect on January 1, 1972 and the purchase of the property in question was made on December 13, 1971, so that the appellant argued that the said section does not apply in the case at bar.

Subsection 32(1) of the Income Tax Application Rules (ITAR) reads as follows:

(1) Paragraph 69(1 )(a) of the amended Act does not apply to deem a taxpayer by whom anything has been acquired at any time before 1972 to have acquired it at its fair market value at that time, unless, if subsection 17(1) of the former Act had continued to apply, that fair market value would have been deemed to have been paid or to be payable therefor for the purpose of computing the taxpayer’s income from a business.

The French and English versions of subsection 17(1) of the old Act are as follows:

17. (1) Lorsqu’un contribuable exerçant des affaires au Canada a acheté quelque chose d’une personne avec laquelle il ne traitait pas à distance, a un prix excédant la juste valeur marchande, cette juste valeur marchande est censée, aux fins de calculer le revenu du contribuable provenant de l’entreprise, avoir été payée ou être payable à cet égard.

17. (1) Where a taxpayer carrying on a business in Canada has purchased anything from a person with whom he was not dealing at arm’s length at a price in excess of the fair market value, the fair market value thereof shall, for the purpose of computing the taxpayer’s income from the business, be deemed to have been paid or to be payable therefor.

7.03.2 Subsection 17(1) cannot apply to the case at bar, in the submission of the appellant, as the said subsection only applies where a taxpayer is “carrying on business”, and not where, as here, there is an “adventure in the nature of trade”. The phrase “carrying on business” or “exerçant des affaires” the appellant submitted cannot be applied to an adventure in the nature of trade.

The appellant derives this conclusion from the comments made by Jack- eft, C J in Tara Exploration and Development Company Limited v MNR, [1970] CTC 557; 70 DTC 6370, at 567, [6376]:

With considerable hesitation, I have concluded that the better view is that the words “carried” are not words that can aptly be used with the word “adventure”. To carry on something involves continuity of time or operations such as is involved in the ordinary sense of a “business”. An adventure is an isolated happening. One has an adventure as opposed to carrying on a business.

As the respondent noted in his own pleading, this passage must be taken together with the preceding sentence in this paragraph and all the facts which were the basis of the judgment. The paragraph begins as follows:

With great doubt as to the correctness of my conclusion, I am of opinion that paragraph 139(1)(e) does not operate to make a non-resident person subject to Canadian income tax in respect of a profit from an adventure that otherwise does not amount to and is not part of, a “business”.

and then follows the passage cited above, beginning with “With considerable hesitation . . .”

Paragraph 139(1 )(e) of the old Act, which is the definition of a business, reads as follows:

(a) “business” includes a profession, calling, trade, manufacture or undertaking of any kind whatsoever and includes an adventure or concern in the nature of trade but does not include an office or employment;

In this case, one of the problems which the Court had to resolve was whether an “adventure in the nature of trade” made a non-resident (not taxable under subsection 2(1) of the old Act) taxable under subsection 17(1) of the old Act by “carrying on a business” in Canada. Jackett, C J concluded that “having” an adventure in the nature of trade is different from “carrying on a business”, and thus that a non-resident whose activity in Canada constitutes “an adventure in the nature of trade” cannot be regarded as “carrying on a business in Canada” and so was not subject to subsection 2(2).

In the case before the Board, the evidence did not establish that the appellant’s only commercial activity consisted in an adventure in the nature of trade. The evidence showed that the appellant Couillard Entreprises (Division Construction) Inc, incorporated in Canada, purchased land and regularly carried on business, constructed buildings and sold land and buildings (para 5.02.12). The Board is of the opinion that in 1974 the appellant was “a taxpayer carrying on a business in Canada” within the meaning of subsection 17(1) of the old Act, and that accordingly paragraph 69(1 )(a) of the new Act must apply.

The appeal of the appellant is therefore allowed only in part, as to the quantum of the profits in accordance with the agreement (para 4.02.1).

7.04 Estate Pol land Couillard

7.04.1 Decisions on certain objections taken under advisement

7.04.1.A Exhibit A-51 — letter dated August 23, 1976 from Mr G St-Pierre of Revenue Canada to Mr Rolland Couillard

This letter to the taxpayer from the Department of National Revenue contains, inter alia, the following sentence:

We propose to use this value in determining the capital gain resulting from the sale of shares in 1974.

Naturally, the respondent objected to the filing of this letter.

The content of the letter, to begin with, constitutes in part an attempt at a settlement between the parties, an attempt which did not succeed as the case was submitted to the Board. The Board cannot admit the document.

The burden of proof resulting from the assessment thus remains unchanged.

7.04.1.B Exhibit A-55 — Letter of transfer of April 12, 1979 from Mr I G Wahn, QC to Mr Jean Marier; certificate of April 12, 1979 by Mr I G Wahn, QC in his capacity as a notary public in the province of Ontario, to the effect that the enclosed document is an authentic copy of the statutory declaration of May 16, 1974 by Rolland Couillard, the original of which is contained in his files; a sworn statement by Rolland Couillard, dated May 16, 1974, regarding the application of the Foreign Investment Review Act.

This exhibit should be admitted in evidence because the sworn statement of Rolland Couillard constitutes a document written for third parties and containing certain statements which may shed some light on the taxpayer’s intent for the Board. As Addy, J of the Federal Court observed in Roy M Power v HMQ (see supra), the only direct evidence of what a person had in his mind at a given time must necessarily come from a statement by that person, either at the trial, orally, or in writing to another person, and such a statement of intent is very relevant and significant. This rule indicates clearly that the oral or written statements of the taxpayer, admissible in evidence, are not limited to those made as part of the trial proceeding.

We contend that the effect of the rules of evidence in civil law allows this exhibit to be filed. in Royal Victoria Hospital et al v Mary Morrow, [1974] SCR 501, Pigeon, J, speaking for the Supreme Court, set forth the rule that in Quebec hearsay evidence is prohibited (see 508); he then went on to state a second rule:

It would appear, then, that in principle the exceptions allowed in English law must be recognized as applicable, in so far as there is no express provision in this regard or any incompatibility with an express rule, (p 509)

According to Phipson (On Evidence, 12th ed, London, Sweet and Maxwell, 1976, p 221) evidence of intent constitutes an exception to the ban on hearsay:

When the question of intention arises in relation to the act done, it may, as has been shown, be proved either by declarations made at the time of the act or when the latter is of a continuous nature — e.g. longer user of property, the protracted absence of a debtor, or settled residence in cases of domicile, by declaration made at any time during its currency.

In Lloyd v Powell Duffryn Steam Coal Company Limited, [1914] AC 733, Lord Moulton of the House of Lords stated:

Now, it is well established in English jurisprudence, in accordance with the dictates of common sense, that the words and acts of a person are admissible as evidence of his state of mind. Indeed, they are the only possible evidence on such an issue. It was urged at the Bar that although the acts of the deceased might be put in evidence, his words might not. I fail to understand the distinction. Speaking is as much an act as doing. It must be borne in mind that there is nothing in the admission of such evidence which clashes with the rooted objection in our jurisprudence to the admission of hearsay evidence. (pp 751-752)

Furthermore, the document in question is not a family register or paper in accordance with Art 1227 of the Civil Code, which could be the basis for rejecting this document, as in Les Meubles de Maskinongé Inc et al v MNR, [1979] CTC 2028; 79 DTC 66. It is an affidavit required by the Foreign Investment Review Agency for purposes of giving effect to the Foreign Investment Review Act. The document is admitted.

7.04.1.C Questions concerning the sale of Couillard Entreprises Inc shares by Headway Corporation Limited to a subsidiary of Fidinam Inc

These questions concern a well-known act of the witness being examined, William Boyd, namely the profit made by Headway Corporation Limited in reselling the shares. They confirm the testimony of Jean-Pierre Ruel that the selling price agreed between Rolland Couillard, Jean-Pierre and Claude Ruel of the first part and Headway Corporation Limited of the second part was “$500,000 below the price”, that is, below its actual value (trans p 1480) and that the sale at this price was the means of facilitating termination of the relationship between Rolland Couillard and the Ruel brothers (trans p 1479). The Board is of the opinion that the objections of the respondent should be dismissed.

7.04.2 Capital gain or business income

Here again, the Board must consider the following points:

(1) 1) the nature of the property;

(2) the intent at the time of the purchase;

(3) the number of years held;

(4) the number and frequency of similar transactions;

(5) the taxpayer’s activities; and

(6) the circumstances of the sale,

for the shares in Couillard Entreprises Inc as well as the Le Murray, Le Bourgogne, Desjardins and Manoir Levis properties.

7.04.2.1 The Couillard Entreprises Inc shares

7.04.2.1.1 Intent and time held

The shares in Couillard Entreprises Inc were purchased by Mr Couillard (80%) and the Ruel brothers (10% and 10%) when the various companies were merged in 1972.

The merger of the various companies, (1) Couillard Entreprises Inc, (2) Couillard Entreprises (Division Domiciliaire) Inc, and (3) Immeubles des Seigneurs Inc, was undertaken to meet the requirements of the bank and to simplify administration (see para 5.02.27, part 1). There was no evidence that the shareholders were in the business of buying and selling shares (para 5.02.43). The shares in themselves are more in the nature of an investment. In the case at bar, there is no reason why obtaining the shares of the new company should not be based on the same intent as the purchase of the shares of the merged companies. The evidence as a whole leaves no doubt that the purchase of the shares in these companies was made for investment purposes.

Furthermore, before the merger the shareholders had held the shares for thirteen years (Couillard Entreprises Inc); ten years (Couillard Entreprises (Division Domiciliaire) Inc); and seven years (Immeubles des Seigneurs). The shares of the new company were held for a year and a half. In the circumstances of the case at bar, these time periods work in appellant’s favour and confirm the original intent to invest.

The affidavit (Exhibit A-55) of Mr Couillard is clear. Paragraphs 1, 2 and 4 of that affidavit read as follows:

1. I am the President and own approximately 80% of the outstanding shares of Couillard Entreprises Inc. (hereinafter called “Couillard Entreprises”), a corporation incorporated under the laws of the Province of Quebec.

2. Couillard Entreprises owns three groups of apartment buildings known as Immeubles des Seigneurs and Jardins des Seigneurs in the City of Ste Foy and Place des Seigneurs in the City of Charlesbourg in the vicinity of the City of Quebec and comprising in total approximately 840 apartment units, and Couillard Entreprises has no other income producing assets.

4. I have been active in the acquisition of real estate for many years and, in general, my practice is to form a corporation to hold each separate real estate investment. Accordingly I control, as majority shareholder, a number of corporations in addition to Couillard Entreprises of which approximately nine corporations are corporations which I have formed to hold real estate investments including apartment buildings, shopping plazas and other business and commercial real estate properties. The total number of apartment units owned by such corporations controlled by me, including Couillard Entreprises, is approximately 1,340. (para 5.02.40)

7.04.2.1.2 Circumstances of the sale of the shares

If the unsolicited sale of the shares of Couillard Entreprises Inc and the absence of a broker as an intermediary in that sale support the appellant’s argument, the disagreement between the Rule brothers and Mr Couillard and the decision to sell as a means of facilitating termination of the relationship provide even stronger support for the said argument. The evidence to this effect is beyond question (paras 5.02.34 to 5.02.39).

7.04.2.1.3 Taxpayer’s activities

The respondent’s argument that the profit from the sale of the shares must be regarded as a business profit is based above all on the taxpayer’s activities.

Though Mr Couillard was not in the business of selling shares (para 5.02.43), he was however in the real estate business. In selling the shares, it is apparent that the assets of the four companies, including the real estate, were transferred to the buyer.

Based on the evidence presented, the opinion of the Board is that the sale of the shares was not a roundabout means of selling the real estate. The Board adopts the reasons given by the appellant in this regard:

The property which was the subject of the disposition (the shares on the one hand and apartment buildings on the other) is an investment by nature, since it generates income in the form of dividends and rental: this factor is therefore in the appellant’s favour.

On this point, see Bead Realties Ltd v MNR, 71 DTC 5453, at 5453, where Walsh, J indicates that the rules regarding securities can be applied to land and other property capable of producing income, and Irrigation Industries Ltd v MNR, 62 DTC 1131, at 1133-1134 (Martland, J); Maclsaac v MNR, 74 DTC 6380, at 6380, where Jackett, C J, speaking for the Federal Court of Appeal, said regarding an apartment building: “The transaction in question here, taken by itself, is, prima facie, the sale of a revenue-producing asset and, if that were the end of the matter, the resultant profit would not be a profit from a business”.

Nonetheless, the respondent argued that the fact that Rolland Couillard disposed of the shares in no way alters the outcome of the case, and that for all practical purposes this sale must be treated like the sale of real estate owned by Couillard Entreprises Inc. This argument appears to us to be incorrect, for the following reasons.

In Fraser v MNR, 64 DTC 5224, Judson, J of the Supreme Court of Canada stated the following rule:

Some point was made of the fact that the appellant did not in one case sell a store and in the other case vacant land but shares in two companies. I agree with Cameron, J that this was merely an alternative method that they chose to adopt in putting through their real estate transactions. The fact that they incorporated companies to hold the real estate makes no diffference (Associated London Properties Ltd v Henriksen (HM Inspector of taxes), (1942-1945) 26 TC 46).

(p 5226)

In this case, the taxpayer and an associate had bought a vacant piece of land in 1952 and incorporated two companies to hold the land, which was divided into two parcels. In 1953, they built a shopping centre on one parcel and sold it to Dominion Stores. The other parcel was sold at about the same time to an individual. In each case, the method of sale consisted in the sale of the shares of the company. The Exchequer Court and the Supreme Court concluded that business income was involved, even though the sale was made through the shares.

The rule in Fraser (p 5226) was considered by the Exchequer Court in Shipp et al v MNR, 67 DTC 5222. The Court had to decide whether the profit resulting from the sale by the appellants of their shares in Applewood Village Shopping Centre Limited was business income or a capital gain. The company was incorporated in 1953 and shares distributed among the appellants between 1953 and 1957. In 1959, the appellants sold their shares to NC Properties Limited, and the Minister of National Revenue included the resulting profit in the appellants’ income proportionately. The appellants objected, alleging that they had never carried on the business of buying and selling shares, and that the company was created to purchase a site for a shopping centre, and that in fact it had built and operated the shopping centre for four years. Additionally, the appellants had at no time put their shares up for sale. The respondent submitted that the land had been purchased by the company for resale and that the sale of shares was only an alternative means of selling the land.

The evidence showed that two of the taxpayers (the other two were their wives) had incorporated three other companies which bought lots, built houses on them and sold them, and that by doing so they were creating a market for a shopping centre in the area in question. Furthermore, before the shopping centre was built they received an offer to purchase the land, and it was not until 1959, in response to an unsolicited offer, that they sold the company’s shares.Finally, the incorporation of the company was prompted by genuine commercial considerations.

Gibson, J disposed of the respondent’s arguments as follows:

From the evidence it is clear that the appellants were not in the business of trading in shares.

To be taxable, therefore, the profit from the sale of these shares must be categorized as income as a result of trading in the “business” of real estate carried on by the appellants.

In my view, on the evidence, inter alia, the appellants established that this shopping centre was built in response to a demand which was created by the

other companies above referred to owned by the appellants; that this shopping centre company was not incorporated as an alternative method of the appellants to put through a real estate transaction; and that they did not incorporate the company as a shield for the purpose of attempting to get a profit on capital account.

(Separate legal entity)

In my view, on the facts of this case, it is not correct to assume for the purpose of the Income Tax Act that the corporation of Applewood Shopping Centre Limited does not exist as a separate legal person distinct from the appellants.

The principles of Ronald K Fraser v MNR, [1964] SCR 657; (64 DTC 5224), have no application here. Such principles apply when at the time of incorporation persons (1) have acquired real estate with the thought that it be sold as well as for income and (2) have caused a company to be incorporated for the express purpose of attempting to get profit on capital account which otherwise

would be income.

The husband appellants in this case, in my view, acquired the shares in Applewood Village Shopping Centre Limited as an investment; and the appellant wives by the gift transactions above referred to acquired them also as an investment; and the sale of such shares in 1959 was the realization of such investments.

It follows from this decision that the principle stated in Fraser is only applicable if two preconditions are established, namely (1) the properties must have been purchased with the intent of reselling them for a profit; (2) the taxpayer must have incorporated the companies and arranged that they purchase the properties for the express purpose of attempting to convert business income into a capital gain, by using the sale of shares as a means of disposing of the properties (see also: MNR v Kato et al, 69 DTC 5308, P 5315 (Cattanach, J) and Dumas v MNR, 78 DTC 1704 (Mr St-Onge, Member)).

None of these conditions apply in the case at bar. It has been clearly shown that the three building projects (Jardins des Seigneurs, Place des Seigneurs and Immeubles des Seigneurs) were not purchased with the intent of reselling at a profit. The incorporation of Couillard Entreprises Inc, Couillard Entreprises (Division Domiciliaire) Inc and Immeubles des Seigneurs Inc and the merger of these companies with Domaine Du Versant Inc, resulting in Couillard Entreprises Inc, was certainly not undertaken for the express purpose of attempting to convert business income into a capital gain, since each of these companies, except for Domaine Du Versant, Inc, sold buildings or land from time to time and reported the profits so realized as operating profits. This method of financing building projects held as investments and the reasons for the merger have been explained at length. There is no basis in the evidence for concluding, directly or by implication, that one or other of these companies was used as a device to camouflage the true nature of the transactions in question. Moreover, the respondent had not made any allegation of fact regarding the preconditions for the rule in Fraser to apply, and he has presented no evidence on this point. Accordingly, the sale of the shares of Couillard Entreprises Inc must be regarded solely as a sale of shares.

7.04.2.1.4 Finally, the refusal by the shareholders of the companies of several offers they received to purchase the three properties confirms the intent to keep the properties, which were in due course owned by the merged companies (para 5.02.22 — Part 2).

7.04.2.1.5 In conclusion, the appellant has shifted the burden of proof upon it with regard to the sale of the shares. Its evidence was not substantially contradicted. The profit must be regarded as a capital gain.

7.04.2.2 The properties sold: Le Bourgogne, Manoir Lévis, Desjardins and Le Murray

7.04.2.2.1 Nature of the property, intent, time the properties were held

By their very nature the Le Bourgogne, Manoir Lévis, Desjardins and Le Murray housing complexes are investments. Jackett, C J, in Ronald F T Maclsaac v MNR, [1974] CTC 576; 74 DTC 6380, stated regarding the housing complex which was the subject of that case:

The transaction in question here, taken by itself, is, prima facie, the sale of a revenue-producing asset and, if that were the end of the matter, the resultant profit would not be a profit from a business.

In the case at bar the housing complexes were treated as investments in the appellant’s financial statements. They were not included in inventory, and the appellant took the capital cost allowance on these properties. The appellant held the buildings for several years: Le Murray, fifteen years; Le Bourgogne, six years; Manoir Lévis, five years; Le Desjardins, four years (see paras 5.02.45 to 5.02.48).

All these points support the appellant’s argument that the appellant’s original intent in purchasing these properties was to invest.

The intent to keep them is confirmed by the refusals of purchase offers for any of their housing complexes, including the four which are the subject of the case at bar, but Messrs Paul Morin, Henri Paquet and William Boyd, as well as the testamentary clause: (para 5.02.51) relating to the apartment buildings. Mr Couillard’s will is dated October 8, 1969. At this time, the Le Murray, Le Bourgogne and Desjardins buildings had already been built and the Manoir Lévis was under construction.

7.04.2.2.2 Circumstances of the sale

Between September 1973 and June 1974 the appellant sold the four housing complexes in question. These sales were made as a result of his failure with the Association des Payeurs de Taxe in June 1973, and as a result of the disastrous break with the Ruel brothers in August 1973.

According to Mr William Boyd, who met him at the end of 1973, Mr Couil- lard was a dejected man who wanted to liquidate everything: “I am going to sell everything I own and go to my summer camp in the bush”.

Throughout this period he was in a discouraged frame of mind and took to drinking (para 5.02.33). From another standpoint, it would appear that because of the increase in school and municipal taxes, he wanted to realize on his investments immediately rather than lose everything. The testimony of Messrs Paul Laberge and Léopold Marotte are in agreement on this point (para 5.02.49).

All these points support the appellant’s argument.

7.04.2.2.3 The taxpayer’s activities

In arriving at the conclusion that the profit resulting from the sales was a business profit, the respondent relied primarily on this point, namely the taxpayer’s activities.

It is true, on the one hand, that Mr Couillard, both personally and through his companies, had completed hundreds and hundreds of real estate transactions since he had been in business. On the other hand, the evidence showed that Rollard Couillard and his companies were engaged in two types of activity involving real estate: one of investment, and the other of buying and selling. The one complemented the other (see paras 5.02.15 — part 2, 5.02.16, 5.02.21 and 5.02.22).

7.04.2.2.4 The Board is of the opinion that the appellant has shifted the burden of proof and that there has been no substantial evidence in rebuttal on which the Board could base a decision to uphold the assessment. The profit must therefore be regarded as a Capital gain.

7.04.3 Penalty

7.04.3.1 The amount of $56,565.11 interest was not included in Mr Couil- lard’s income for his 1974 taxation year. The respondent imposed a penalty of $5,188.32. The bookkeeper, Mr Gilles Béland, who prepared the tax return for 1974, explained in his testimony how the omission occurred (trans pp 1207 to 1210, and in cross-examination, pp 1230 to 1256).

7.04.3.2 The interest of $56,565.11 was reported in 1973 as “earned interest outstanding” in computing the income in accordance with the financial statements by the accountants Marotte, Boily, Giguere et Cie. Since for tax purposes Rolland Couillard reported his interest income according to the cash method, the amount of “earned interest outstanding” in 1973 was deducted from the income in accordance with the financial statements in computing the taxable income for 1973. These documents were submitted to the respondent with Rolland Couillard’s tax return for 1973 (see Exhibit 1-26).

In November 1974, Gilles Béland replaced the accountants Marotte, Boily, Giguere et Cie in preparing the financial statements and tax returns of Rolland Couillard and his companies. On that date the interest of $56,565.11 had already been cashed and there was no entry in the books indicating receipt of $56,565.11 In interest income. On the contrary, the bookkeeper at the time, Carol Coulombe, credited this amount to accounts receivable without specifying that it represented interest income. When Gilles Beland prepared the financial statements and tax return of Rolland Couillard for 1974, he was unable to discover the existence of $56,565.11 in interest income and he omitted it.

Under close cross-examination, it appeared that after a careful study of the 1973 financial statements and the books of account for 1974 kept by Mr Carol Coulombe, Mr Béland could have detected the $56,565.11, even though the bookkeeping was inadequate in that certain accounts or certain entries had not been made correctly.

However, the Board is persuaded that the error was made by Mr Beland in good faith.

Mr Couillard, however, would have seen the financial statements prepared by Mr Béland, and did not notice the error. According to Mr Béland, Mr Couillard relied on his accountant.

In this case, in which the burden of proof is with the respondent, the evidence as a whole showed that although the amount was objectively substantial, the omission was not caused by a gross error of the taxpayer, but by an error of the accountant which cannot even be described as “gross”. It was not possible for Mr Couillard, who had assets of over four million dollars in 1974, and a net worth of over two and a half million dollars, to detect from reading his financial statements an error of $56,565.11 placed in the wrong account. Further, the evidence as a whole did not show, not only with regard to the matter of the penalty but concerning all the other points at issue, that Mr Couillard, who owned a huge business, regularly kept his books improperly or prepared inadequate financial statements: quite the contrary. The Board allows the appeal on this point and quashes the penalty.

8. Conclusion

The appeals in the cases of Immeubles Versant Nord Inc (77-739), Immeubles du Coteau Lévis Inc (77-740) and Place Prévert Inc (77-741) are allowed in part, regarding the profits resulting from sales of the properties involved as Capital gains in accordance with the reasons given in the foregoing reasons for judgment, and the whole is referred back to the respondent for reassessment.

The appeal of Couillard Entreprises (Division Construction) Inc (77-609) is allowed in part and the whole referred back to the respondent in accordance with the agreement (para 4.02.1) entered into between the parties on the quantum of the profits which must be taxed and thus be the subject of a reassessment.

The appeal of Estate Rolland Couillard (76-862) is allowed as to the penalty. With regard to the other points, it is allowed in part, regarding the profits, resulting from the sale of the properties and the shares involved, as a capital gain in accordance with the reasons given in the foregoing reasons for judgment, and the matter is referred back to the respondent for reassessment in accordance with the agreements on the value of the property at December 31, 1971.

Appeals allowed. Appeal of Couillard Estate allowed in part.