Lamarre
T.C.J.:
The
appellant
is
appealing
from
an
assessment
made
by
the
Minister
of
National
Revenue
(“the
Minister”)
for
the
1990
taxation
year
on
June
8,
1993,
pursuant
to
the
Income
Tax
Act
(“the
Act”),
and
another
assessment
made
pursuant
to
the
Act
on
May
10,
1993,
regarding
Part
III
tax.
In
calculating
its
income
for
1990
the
appellant
reported
a
profit
of
$3,173,929
on
the
disposition
of
an
office
building
located
at
144
Boulevard
de
F
Hôpital
in
the
Town
of
Gatineau
as
a
capital
gain,
and
included
the
taxable
portion
amounting
to
$2,313,780
in
its
income.
Following
this
disposition
the
appellant
made
an
election
in
accordance
with
to
s.
83(2)
of
the
Act
regarding
a
capital
dividend
of
$612,930,
which
was
paid
tax-free
to
its
shareholders.
In
assessing
the
appellant
the
Minister
considered
that
the
gain
made
was
not
a
capital
gain
but
business
income.
He
accordingly
cancelled
the
capital
gain
and
added
$3,173,929
to
the
appellant’s
income.
He
further
assessed
tax
pursuant
to
Part
III
of
the
Act
in
the
amount
of
$459,698
on
the
declared
dividend
of
$612,930.
The
respondent
admitted
that
the
appellant
was
incorporated
on
February
18,
1987
to
develop
and
carry
out
an
investment
project
which
involved
purchasing
land
in
the
Town
of
Gatineau,
building
a
six-storey
office
build-
ing
on
it
and
renting
it
to
various
tenants,
including
the
Town
of
Gatineau.
However,
she
maintained
that
from
the
time
the
purchase
was
made
and
the
building
constructed
the
appellant
had
a
secondary
intention
to
resell
at
a
profit,
and
this
was
denied
by
the
appellant
(see
paragraph
3
of
the
Notice
of
Appeal;
paragraphs
2
and
9(d)
of
the
Reply
to
the
Notice
of
Appeal;
and
paragraph
2
of
the
Answer).
The
appellant’s
shareholders
were:
|
NAME
|
PERCENTAGE
OF
APPELLANT’S
CAPITAL
|
|
STOCK
|
|
Claude
Bérard
|
30%
through
the
company
“Les
Carrières
de
la
Ga
|
|
tineau
Inc.”
|
|
Daniel
Moreau
|
12.5%
through
“151706
Canada
Inc.”
|
|
Jacques
Cormier
|
12.5%
through
“151706
Canada
Inc.”
|
|
Jacques
G.
Sauvé
|
12.5%
through
“151706
Canada
Inc.”
|
|
Gérald
Groulx
|
12.5%
through
“Les
Investissements
Gefra”
|
|
Gilles
Lauzon
|
10%
through
“144002
Canada
Inc.”
|
|
Yves
Letellier
|
5%
through
“155629
Canada
Inc.”
|
|
Maynard
Robinson
|
5%
|
At
the
start
of
the
hearing
the
parties
submitted
a
partial
agreement
on
the
facts,
by
which
they
admitted
the
following
facts:
[TRANSLATION]
I.
During
the
years
at
issue
Claude
Bérard
was
partly
engaged
personally
or
through
companies
in
purchasing
vacant
pieces
of
land,
subdividing
them
and
selling
the
lots
to
building
contractors
for
the
construction
of
single-family
homes.
2.
From
May
5,
1988
to
date
the
following
individuals
owned
and
continue
to
own,
directly
or
indirectly,
an
11,000
square
foot
commercial
rental
building
located
at
139
de
T
Hôpital
in
Gatineau:
Claude
Bérard
Jacques
Sauvé
Gilles
Lauzon
Daniel
Moreau
Jacques
Cormier
3.
From
January
20,
1988
to
date
the
following
individuals
owned
and
continue
to
own,
directly
or
indirectly,
a
14,000
square
foot
commercial
rental
building
located
at
360
Boulevard
Maloney
in
Gatineau:
Claude
Bérard
Jacques
Sauvé
Daniel
Moreau
Jacques
Cormier
Evidence
I
heard
the
following
testimony:
Jacques
Sauvé,
a
structural
engineer,
vice-president
of
the
appellant;
Gilles
Lauzon,
a
real
estate
broker;
Daniel
Moreau,
formerly
director
of
services
with
the
Town
of
Gatineau
for
10
years
and
now
a
restaurant
operator
and
owner
of
the
Brasserie
Le
Houblon,
located
at
455
Boulevard
de
1’Hopital
in
a
building
owned
by
him;
and
Claude
Bérard,
a
businessman
operating
in
various
businesses
including
a
real
estate
development
firm.
In
early
1987
the
Town
of
Gatineau
announced
its
intention
of
creating
a
new
town
centre
in
the
quadrangle
formed
by
de
l’Hôpital,
Maloney,
Montée
Paiement
and
St-René
boulevards.
At
the
same
time
it
announced
its
intention
of
leasing
office
space
in
the
future
town
centre
in
order
to
centralize
some
of
its
municipal
services
(the
town
hall,
clerical
services,
senior
management
and
human
resources).
It
accordingly
issued
a
call
for
tenders
for
the
rental
of
premises
in
a
building
to
be
built
inside
the
town
centre
quadrangle.
The
building
had
to
meet
certain
requirements,
namely
having
a
minimum
floor
space
of
30,000
square
feet
on
three
floors
or
a
maximum
of
60,000
square
feet
on
six
floors.
The
Town
offered
to
lease
an
approximate
floor
space
of
1,400
square
meters
(about
15,000
square
feet)
for
a
period
of
seven
or
ten
years.
According
to
the
Town
of
Gatineau’s
planning
guidelines
for
the
construction
of
its
new
town
centre,
the
building
in
question
was
to
be
built
in
a
commercial
zone
not
far
from
the
Maison
de
la
Culture
and
the
Hôtel
de
Ville,
which
was
to
be
built
in
1997
in
an
institutional
zone.
According
to
Mr.
Sauvé,
there
was
a
chance
for
the
group
of
investors
to
which
he
belonged
to
make
a
long-term
investment,
since
with
the
Town
as
a
tenant
they
expected
they
would
be
able
to
attract
other
businesses
to
the
building.
The
group
of
investors
referred
to
by
Mr.
Sauvé
consisted
of
Daniel
Moreau,
Gérald
Groulx,
an
insurance
broker,
Yves
Letellier,
a
lawyer,
Maynard
Robinson,
a
trucking
contractor,
Claude
Bérard,
Gilles
Lauzon,
Jacques
Cormier,
a
builder
who
is
now
deceased,
and
himself.
All
were
in
their
forties
at
the
time.
The
National
Bank
was
prepared
to
finance
the
project
and
the
Communauté
régionale
de
I’Outaouais
had
indicated
that
it
might
be
setting
up
a
satellite
office
in
Gatineau.
Various
partners
associated
with
the
project
also
wanted
to
become
tenants.
The
aforesaid
investors
accordingly
expected
to
be
able
to
make
the
project
financially
viable
fairly
quickly.
They
therefore
decided
to
submit
a
bid
to
the
Town
of
Gatineau
through
an
already
existing
company,
146607
Canada
Inc.
(“
146607”),
in
which
they
were
all
shareholders,
in
view
of
the
short
deadline
for
bidding
and
the
fact
that
the
company
had
a
little
liquidity
which
would
enable
it
to
obtain
financing
more
easily.
An
offer
to
lease
was
accordingly
submitted
to
the
Town
of
Gatineau
on
January
7,
1987;
in
it
they
proposed
to
put
up
a
60,000
square
foot
building
and
lease
floor
space
of
1,400
square
meters
(15,000
square
feet)
to
the
Town
at
a
rental
of
$159.84
net
per
square
meter
(all
expenses
included
except
for
janitorial
costs)
for
a
period
of
10
years.
In
the
general
presentation
of
the
offer
to
lease,
the
group
of
businessmen,
Bérard,
Moreau,
Cormier,
Groulx
and
Sauvé,
represented
itself
as
a
serious
group
which
had
taken
an
active
part
in
developing
the
area
surrounding
the
town
centre
and
had
proven
experience
in
the
planning,
design,
construction
and
rental
of
commercial
buildings.
The
offer
to
lease
also
indicated
that
the
group
had
been
responsible
for
completing
projects
with
a
total
overall
value
of
more
than
a
billion
dollars
(see
Exhibit
A-1,
tab
4).
This
bid
was
apparently
accepted
on
February
11,
1987,
and
the
appellant
company
created
a
week
later,
on
February
18,
1987.
146607
subsequently
assigned
its
rights
to
the
appellant
by
notarial
deed
dated
September
11,
1987.
The
amount
initially
invested
by
the
shareholders
was
$150,000,
$1,000
of
which
was
in
the
form
of
capital
stock
and
$149,000
in
the
form
of
advances.
An
option
to
purchase
was
signed
on
April
9,
1987,
by
which
Gérald
Groulx
agreed
to
sell
his
land
to
the
appellant
company,
represented
by
Claude
Bérard,
for
the
sum
of
$300,000.
This
land
was
located
at
the
corner
of
de
T
Hôpital
and
de
la
Gappe
boulevards,
in
the
heart
of
the
new
town
centre.
The
option
was
valid
for
a
period
of
six
months.
The
option
was
exercised
and
the
land
purchased
on
July
30,
1987.
On
April
13,
1987,
the
Communauté
régionale
de
1’Outaouais
agreed
to
lease
floor
space
from
146607
of
3,600
square
feet
in
the
building
to
be
built,
on
a
net,
net,
net
lease
(all
expenses
excluded)
for
a
term
of
seven
years,
with
an
option
to
renew
for
three
years,
beginning
on
January
1,
1988,
and
at
an
annual
rent
of
$13.60
per
square
foot
(see
Exhibit
A-1,
tab
8).
According
to
Mr.
Sauvé,
this
lease
brought
in
$5
more
per
square
foot
than
the
one
signed
with
the
Town,
in
view
of
the
fact
that
the
rent
was
net,
net,
net.
On
April
24,
1987,
the
Town
of
Gatineau
signed
a
memorandum
of
understanding
with
146607
by
which
the
Town
undertook
to
remove
the
restriction
which
prohibited
any
building
on
the
land
in
question.
At
the
same
time
the
Town
gave
official
sanction
to
the
rental
of
premises
in
the
building
to
be
built
and
146607
gave
a
bond
of
$30,000
if
the
construction
was
not
done
within
the
deadlines
and
on
the
terms
stipulated
by
the
Town.
The
lease
with
the
Town
was
not
to
be
signed
until
the
work
was
completed.
The
restriction
that
had
existed
since
December
19,
1985
was
finally
officially
removed
on
April
27,
1987.
Construction
began
after
the
issuance
of
a
permit
to
146607
on
May
12,
1987.
Construction,
which
was
to
have
taken
place
in
two
stages,
was
ultimately
completed
in
one
stage
as
a
sufficient
number
of
tenants
had
been
found,
and
the
work
ended
in
December
1987.
Jacques
Sauvé
did
the
framing
plans
for
the
building
and
construction
was
done
under
the
supervision
of
the
company
Termina
Construction,
owned
by
Jacques
Cormier.
The
partners
themselves
were
responsible
for
hiring
the
various
subcontractors.
The
appellant
entered
into
a
ten-year
lease
with
the
Town
of
Gatineau
for
part
of
the
second
and
third
floors
of
the
building,
in
accordance
with
the
terms
of
the
offer
to
lease.
The
appellant
also
entered
into
a
number
of
other
leases
with
various
tenants,
such
as
the
Communauté
régionale
de
1’Outaouais,
the
law
firm
Bélec,
Letellier,
two
accounting
firms,
Assurance-
Vie
Desjardins
and
the
companies
Landry,
Gauthier
&
Associés
Inc.
and
Immeubles
G.R.
Lauzon
Inc.
The
Town
took
possession
of
the
premises
in
January
1988
and
the
official
opening
of
the
new
building,
known
as
“Édifice
Pierre
Papin”,
took
place
in
spring
1988.
The
appellant
company
had
obtained
a
bridging
loan
of
$5,500,000
from
the
National
Bank
on
May
25,
1987,
and
each
of
the
eight
partners
personally
guaranteed
it.
This
loan
was
repayable
on
July
31,
1988
at
the
latest,
and
the
shareholders
were
to
invest
$450,000.
Ultimately,
they
only
had
to
lay
out
$150,000.
Indeed,
judging
from
the
appellant’s
financial
statements
even
this
investment
was
repaid
to
the
shareholders
in
the
first
year
(see
balance
sheet
at
September
30,
1988,
Exhibit
A-3,
tab
48).
In
the
bridging
loan,
the
National
Bank
undertook
to
advance
75
percent
of
the
economic
value
based
on
rental
income.
It
was
to
disburse
the
funds
35
days
after
completion
of
the
work
or
by
July
1,
1988
at
the
latest,
on
submission
of
leases
showing
annual
net,
net,
net
rental
income
of
$834,000.
A
projection
of
anticipated
rental
income
was
prepared
by
Mr.
Sauvé
on
October
5,
1988
(Exhibit
A-2,
tab
31).
According
to
Mr.
Sauvé,
there
was
still
plenty
of
space
not
leased
at
that
time.
According
to
this
projection,
the
ground
floor
was
to
be
leased
at
$22.50
per
square
foot
(all
the
projections
were
based
on
net,
net,
net
rent)
and
the
other
floors
at
$18.50
per
square
foot.
The
Town
of
Gatineau
had
signed
a
lease
in
which
the
rent
amounted
to
$10
per
square
foot
and
the
Commission
régionale
de
1’Outaouais
at
$13.60
per
square
foot.
For
the
period
from
1988
to
1993,
total
annual
rental
income
of
$1,008,453
was
anticipated.
In
fact,
less
than
two-thirds
of
the
floor
space
was
leased
in
October
1988
and
it
brought
in
$450,988
for
the
year.
The
profit
and
loss
statement
for
the
rental
of
the
building
for
1987
to
1990
(the
year
of
disposition)
was
filed
as
Exhibit
A-3,
tab
48.
It
reads
as
follows:
[TRANSLATION]
|
PROFIT
AND
LOSS
STATEMENTS
|
|
|
Year
|
1987
|
1988
|
1989
|
1990
|
|
Income
|
0
|
$450,988
|
$829,544
|
$1,048,653
|
|
Interest
|
$17,069
|
$451,550
|
$755,563
|
$
838,769
|
|
Expenses
|
$51,273
|
$581,689
|
$456,302
|
$
551,419
|
|
Depreciation
|
-
|
$
92,318
|
$119,502
|
-
|
|
Loss
|
$68,342
|
$605,186
|
$501,823
|
$
341,535
|
At
this
point
the
appellant’s
shareholders
were
in
negotiations
with
the
Bank
of
Nova
Scotia
to
negotiate
a
lease
with
it,
and
at
the
same
time
new
financing.
That
was
why
the
appellant
kept
its
bridging
loan
with
the
National
Bank
rather
than
securing
it
by
a
mortgage
on
the
building.
In
October
1988
the
building
was
nearly
70
percent
leased
and
the
Bank
of
Nova
Scotia
expressed
an
interest
in
leasing
the
ground
floor
of
the
building,
the
result
of
which
would
have
been
that
the
floor
space
was
nearly
75
percent
rented.
On
October
27,
1988
the
Bank
of
Nova
Scotia
finally
made
an
offer
to
lease
floor
space
of
4,000
square
feet
on
the
ground
floor
for
$23.50
per
square
foot
for
the
first
five
years
and
for
$26.50
per
square
foot
for
the
next
five
years.
This
offer
was
accepted
on
November
4,
1988.
On
July
11,
1989
the
appellant
obtained
financing
from
the
Bank
of
Nova
Scotia
in
the
form
of
a
bridging
loan
to
finish
the
improvements
to
the
premises.
As
a
result
of
this
new
agreement
the
appellant
repaid
the
National
Bank.
The
new
$7,000,000
loan
was
repayable
before
December
31,
1990
and
was
guaranteed
by
the
shareholders
personally.
Mr.
Sauvé
explained
that
it
was
more
advantageous
for
the
appellant
to
keep
short-term
financing
because
it
got
a
better
rate
of
interest
and
the
interest
was
fully
deductible.
This
was
therefore
temporarily
advisable.
According
to
Mr.
Sauvé,
it
was
less
costly
to
keep
financing
in
the
form
of
a
bridging
loan
as
long
as
the
building
was
not
completely
leased.
The
appellant’s
shareholders
used
the
same
method
of
financing
for
buildings
located
at
139
boulevard
de
1’Hopital
and
360
boulevard
Maloney
in
Gatineau,
buildings
which
they
still
own.
They
first
obtained
financing
in
the
form
of
a
bridging
loan
by
giving
personal
guarantees
for
a
period
of
about
five
or
six
years
and
then
guaranteeing
the
loan
by
a
mortgage.
Before
obtaining
this
new
financing
the
appellant’s
shareholders
experienced
certain
problems
leasing
the
still
vacant
third
of
the
building.
That
was
when
the
Town
of
Gatineau
indicated
that
it
wished
to
lease
additional
space.
Following
the
municipal
election
of
1988
the
Town
of
Gatineau,
under
the
administration
of
its
new
mayor,
developed
a
project
to
relocate
and
centralize
its
services
at
the
same
location
in
the
appellant’s
building.
The
size
of
this
project
meant
that
the
building
and
the
parking
area
had
to
be
expanded.
Initially
the
appellant
was
not
interested
since
the
rent
initially
agreed
to
with
the
Town
was
not
high
enough.
The
parties
ultimately
reached
an
agreement
in
which
the
Town
agreed
to
pay
$15.90
per
square
foot,
net,
net,
net.
According
to
Mr.
Sauvé,
this
price
was
capable
in
terms
of
the
financial
viability
of
the
building,
although
everyone
hoped
the
interest
rates
would
fall.
The
Town
subsequently
required
that
the
building
be
expanded
by
about
4,000
square
feet
as
a
condition
for
renting
any
additional
space.
This
meant
a
new
investment
for
the
appellant,
which
in
order
to
satisfy
the
Town
had
to
purchase
the
adjacent
land.
Finally,
the
Town
imposed
as
its
last
condition
for
renting
the
new
space
that
the
appellant
give
it
an
option
to
purchase
which
it
could
exercise
within
a
year.
The
proposed
purchase
price
was
$9,000,000
plus
the
cost
of
expanding
to
an
additional
floor
space
of
8,000
square
feet
(no
longer
4,000
square
feet),
estimated
by
the
appellant’s
shareholders
at
about
$800,000.
The
Town’s
demands
caused
a
lot
of
concern
among
the
group
of
shareholders.
This
is
indicated
in
the
minutes
entered
as
evidence.
The
Town’s
new
proposal
was
not
acceptable.
However,
there
were
those
who
pointed
out
that
the
Town
had
the
power
to
expropriate
them
if
its
proposal
was
rejected.
Others
suggested
that
they
might
gamble
that
the
Town
would
not
exercise
its
option.
Ultimately,
the
shareholders
felt
that
they
really
had
no
choice
and
at
a
meeting
held
on
May
15,
1989
they
accepted
all
the
conditions
imposed
by
the
Town.
The
appellant
accordingly
purchased
the
adjacent
land
from
the
Town
of
Gatineau
on
May
18,
1989
(in
order
to
carry
out
the
expansion
requested
by
the
Town)
for
the
sum
of
$144,736,
undertaking
not
to
resell
it
for
a
higher
price
if
the
Town
exercised
the
option.
On
June
20,
1989,
the
Town
signed
a
lease
in
which
it
undertook
to
lease
floor
space
area
of
over
20,000
square
feet
at
the
price
already
negotiated
of
$15.90
per
square
foot
for
eight
years
with
an
option
to
purchase,
in
accordance
with
the
terms
previously
agreed.
The
option
was
to
be
exercised
before
September
1,
1990.
Under
this
lease
the
Town
was
to
take
possession
of
the
premises
in
fall
1989.
As
agreed,
the
building
was
expanded
by
8,000
square
feet
over
a
four-
month
period.
Arrangements
were
made
to
move
some
tenants,
including
Assurances
Desjardins,
the
architect
Landry
and
Gilles
Lauzon.
On
April
18,
1990,
Mr.
Bérard
informed
the
appellant’s
shareholders
that
the
Town
had
decided
to
exercise
the
option.
This
news
was
very
badly
received
by
some
of
them,
who
according
to
the
minutes
of
the
meeting
suggested
that
they
would
be
the
losers
as
the
building
would
have
[TRANSLATION]
“a
much
higher
value
in
four
or
five
years”
(minutes
of
a
shareholder
meeting
held
on
April
18,
1990,
Exhibit
A-3,
tab
53).
Although
the
expansion
work
had
been
valued
at
some
$800,000,
including
the
cost
of
purchasing
the
land,
the
Town
bought
the
building
on
September
1,
1990
for
the
sum
of
$9,500,000
(namely
$9,000,000
as
agreed
in
the
lease
plus
$500,000
for
the
expansion
costs).
The
appellant
made
a
gain
of
$3,173,929
in
this
transaction.
On
July
30,
1990,
Gilles
Lauzon’s
office
billed
the
appellant
for
$285,000
in
connection
with
the
sale
of
the
building
located
at
144
Boulevard
de
T
Hôpital.
According
to
Messrs.
Sauvé
and
Lauzon
this
amount,
which
corresponded
to
3
percent
of
the
selling
price,
was
paid
to
Mr.
Lauzon
to
compensate
him
for
the
various
moves
he
had
had
to
make
as
a
result
of
the
transactions
with
the
Town.
The
lump
sum
was
determined
in
accordance
with
the
actual
cost
of
relocating,
arranging
offices
and
so
on
and,
they
said,
was
in
no
way
related
to
a
mandate
which
was
allegedly
given
to
Mr.
Lauzon
for
the
sale.
Mr.
Lauzon
explained
that
he
had
moved
his
office
from
a
very
lucrative
location
in
the
Promenades
de
1’Outaouais
to
set
up
in
the
new
building.
What
had
initially
been
a
good
investment
for
him
subsequently
proved
to
be
a
losing
proposition.
After
persuading
his
salespeople
to
go
with
him,
he
apparently
lost
several
of
them
after
the
new
move
made
necessary
by
the
Town
of
Gatineau.
He
said
this
was
why
he
negotiated
the
payment
of
this
amount
with
the
appellant’s
other
shareholders.
However,
it
should
be
noted
that
the
amount
was
billed
a
year
after
the
final
move
and
that
it
was
regarded
as
a
disbursement
resulting
from
the
sale
in
the
appellant’s
financial
statements
for
the
fiscal
year
ending
September
30,
1990.
Those
financial
statements
were
approved
by
a
resolution
of
the
shareholders
on
November
30,
1990.
According
to
Mr.
Sauvé,
no
advertising
was
ever
done
to
sell
the
building.
However,
an
initial
offer
to
purchase
was
made
by
Yves
Daigle
on
October
19,
1987,
for
$8,675,000,
and
was
given
to
the
accountant
for
study
and
subsequently
refused.
A
second
offer
for
$10.5
million
was
made
by
Mr.
Daigle,
under
which,
if
it
was
accepted,
the
appellant
would
agree
to
take
a
second
mortgage
and
accept
a
rental
guarantee.
This
second
offer
was
refused
for
the
reasons
stated
in
the
minutes
of
the
meeting
held
on
January
19,
1988,
which
read
as
follows:
[TRANSLATION]
The
building
is
only
50
percent
rented
at
present
and
they
feel
that
its
value
will
exceed
$11
million:
it
will
be
fully
leased
at
$18.50/sq.
ft.
net,
net,
net
and
$23.50/sq.
ft.
to
the
Bank
of
Nova
Scotia.
It
would
be
better
to
wait
for
a
more
solvent
purchaser
in
future
and
not
have
to
carry
a
second
mortgage
or
a
rental
guarantee.
If
interest
rates
continue
at
their
present
level
or
fall,
the
building
will
have
a
much
higher
value
in
five
or
six
years.
(See
Exhibit
A-3,
tab
53)
Previously,
146607
had
purchased
a
piece
of
land
from
a
company
in
which
Mr.
Bérard
had
interests.
A
commercial
office
building
was
built
on
this
land
(located
at
430
boulevard
de
(’Hôpital)
through
the
company
Termina
Construction,
owned
by
Mr.
Cormier.
The
land
was
bought
on
April
18,
1986
(according
to
Exhibit
I-2)
and
the
building
was
sold
on
May
1,
1987
(according
to
Exhibit
1-3).
146607
apparently
made
a
profit
of
$942,816,
which
was
treated
as
a
capital
gain
(see
146607’s
tax
return
for
the
1987
taxation
year,
Exhibit
I-1,
tab
8).
Mr.
Sauvé
said
that
in
that
case,
as
in
the
case
of
the
building
at
issue,
no
sale
was
solicited.
Limited
partner-
ships
were
very
popular
at
that
time
with
investors
who
were
looking
for
tax
relief.
These
partnerships
displayed
considerable
interest
in
this
type
of
building.
According
to
Mr.
Sauvé,
it
was
a
partnership
of
this
kind
which
was
the
purchaser.
The
deed
of
sale
(Exhibit
I-3)
shows
a
Mr.
Gaétan
Lemieux
as
the
purchaser.
As
well,
in
the
same
period,
another
building
(located
at
492
boulevard
de
1’Hopital)
was
built
and
sold
within
two
years
by
the
same
group
of
shareholders
under
the
auspices
of
another
company.
Once
again,
according
to
Mr.
Sauvé,
no
sale
was
solicited,
and
another
limited
partnership
purchased
the
building.
He
took
back
a
share
in
the
building
himself
to
accommodate
his
offices.
Mr.
Lauzon,
who
at
that
time
represented
the
largest
brokerage
firm
in
the
area,
said
that
it
was
quite
rare
to
receive
unsolicited
offers,
except
for
limited
partnerships
who
paid
higher
prices
for
buildings
than
their
actual
value,
given
the
tax
advantages
available.
According
to
him,
the
building
at
issue
was
in
great
demand
since
it
was
the
largest
construction
project
in
Gatineau.
Moreover,
the
building
was
very
well
located,
in
strategic
terms,
and
was
occupied
by
quality
tenants.
The
same
group
of
shareholders
also
owned
several
vacant
lots
which
they
intended
to
develop
either
as
residential
lots
or
as
commercial
buildings
through
other
companies.
Of
course,
everyone
said
they
had
become
involved
in
all
these
projects
with
the
intention
of
[TRANSLATION]
“building
some
equity”
and
keeping
these
buildings
for
the
long
term.
In
terms
of
the
buildings
that
were
sold,
with
the
exception
of
the
building
at
issue,
they
had
received
attractive
offers
which
could
not
be
refused
and
which
gave
them
the
chance
to
do
something
else.
Mr.
Bérard
added
that
personally
he
was
not
pleased
to
see
the
Town
of
Gatineau
exercise
the
option.
Immediately
afterwards,
he
said,
he
built
another
building
(located
at
160
boulevard
de
1’Hopital)
adjacent
to
the
building
at
issue,
with
other
investors
who
were
not
with
him
in
the
Hôtel
de
Ville
project.
He
said
he
still
had
an
interest
in
that
building.
He
said
he
financed
the
building,
like
the
others,
by
obtaining
a
bridging
loan,
which
he
had
just
transformed
into
a
loan
secured
by
a
mortgage,
after
owning
it
for
six
years.
Arguments
of
the
parties
Counsel
for
the
appellant
contended
that
in
1987
the
appellant
had
purchased
a
capital
asset
in
order
to
earn
income
from
property,
and
that
when
it
disposed
of
this
building
in
1990
it
made
a
capital
gain.
Alternatively,
he
argued
that
in
making
the
assessment
on
May
10,
1993,
the
Minister
had
not
acted
with
dispatch
in
examining
the
election
made
by
the
appellant
under
s.
83(2)
of
the
Act
on
February
22,
1991,
and
rather
had
acted
improperly,
wrongfully
and
belatedly,
thereby
causing
hardship
to
the
appellant,
and
for
these
reasons
asked
that
the
assessment
be
vacated.
Counsel
for
the
respondent
maintained
that
the
gain
made
on
the
building
at
issue
should
be
regarded
as
business
income,
not
as
a
capital
gain.
Having
regard
to
the
location
of
the
building,
the
experience
of
the
people
in
charge
of
the
appellant,
the
minimal
investment,
the
method
of
financing,
the
short
time
the
building
was
owned,
the
money
spent
at
the
time
of
disposition
and
all
the
other
factors
taken
together,
he
submitted
that
the
appellant
had,
at
the
time
the
building
was
purchased,
[TRANSLATION]
“the
intention
to
resell
at
a
profit
or
at
the
very
least
a
secondary
intention
to
resell
at
a
profit”.
He
also
argued
that
the
assessment
of
May
10,
1993,
made
in
accordance
with
Part
III
of
the
Act,
is
valid
and
was
examined
by
the
Minister
with
due
dispatch.
Analysis
In
order
to
show
that
the
disposition
of
the
building
at
issue
here
re-
sulted
in
a
capital
gain
and
not
business
income,
the
appellant
must
prove
that
the
building
was
not
purchased
in
the
course
of
carrying
on
a
business
of
selling
and
reselling
buildings
(Californian
Copper
Syndicate
v.
Harris
(1904),
5
T.C.
159;
Irrigation
Industries
Limited
v.
M.N.R.,
[1962]
C.T.C.
215
(S.C.C.)).
Additionally,
even
if
it
is
accepted
that
the
appellant
was
not
engaged
in
such
a
business,
the
appellant
must
also
show
that
the
purchase
of
the
building
in
question
was
not
an
adventure
in
the
nature
of
trade
and
made
in
order
to
dispose
of
the
building
in
question
at
a
profit
(see
M.N.R.
v.
Taylor,
56
D.T.C.
1125,
at
1131
(Ex.
C.R.).
To
do
this
it
must
show
on
a
balance
of
probabilities
that
its
primary
or
its
real
intention
was
to
purchase
the
building
to
operate
it
as
a
rental
income
property
and
not
to
resell
it
at
a
profit
(see
Les
Immeubles
M.H.T.
Ltée
v.
M.N.R.,
93
D.T.C.
70,
[1992]
2
C.T.C.
2326
(T.C.C.)).
In
the
instant
case,
it
appears
that
the
respondent
accepts
that
the
appellant’s
primary
intention
was
to
put
up
a
building
in
order
to
earn
rental
income
from
it.
However,
the
analysis
must
be
taken
further,
since
the
Court
must
consider
whether,
at
the
time
of
the
purchase,
the
appellant
had
a
secondary
intention
to
resell
the
building
if
the
circumstances
were
right.
In
other
words,
if
the
secondary
intention
to
resell
at
a
profit,
in
the
event
that
circumstances
were
such
that
it
was
more
advantageous
to
resell
the
building
at
a
profit
than
to
use
it
for
capital
purposes,
is
an
operating
motivation
which
prompted
the
appellant
to
purchase
the
building,
the
transaction
may
be
characterized
as
an
adventure
in
the
nature
of
trade
(see
Regal
Heights
Limited
v.
M.N.R.,
[1960]
C.T.C.
384
(S.C.C.);
Racine,
Demers
and
Nolin
v.
M.N.R.,
65
D.T.C.
5098,
[1965]
C.T.C.
150,
at
159
(Ex.
C.R.)).
This
decision
must
be
based
on
inferences
resulting
from
the
circumstances
surrounding
the
transaction
rather
than
direct
evidence
of
what
the
purchaser
had
in
mind
(see
Racine,
Demers,
supra,
at
159).
There
is
some
authority
for
the
proposition
that
the
appellant
does
not
have
to
prove
that
the
intention
to
resell
at
a
profit
was
not
an
operating
motivation
which
prompted
it
to
purchase
the
building
if
this
was
not
a
fact
which
was
taken
into
account
by
the
Minister
in
making
his
assessment
(see
Hiwacko
Investments
Ltd.
v.
The
Queen,
78
D.T.C.
6281,
[1978]
C.T.C.
378
(F.C.A.);
Kit-Win
Holdings
(1973)
Ltd.
v.
The
Queen,
[1981]
C.T.C.
43
(F.C.T.D.);
Les
Immeubles
M.H.T.
Ltée,
supra).
Counsel
for
the
appellant
relied
on
this
very
point
in
arguing
that
he
did
not
have
to
show
absence
of
secondary
intention.
In
paragraph
9(s)
of
the
Reply
to
the
Notice
of
Appeal
the
respondent
said
that
in
making
his
assessment
the
Minister
relied
inter
alia
on
the
following
presumption
of
fact:
[TRANSLATION]
(s)
having
regard
to
the
location
of
the
building,
the
experience
of
the
people
in
charge
of
the
appellant,
the
investment,
the
method
and
amount
of
financing
as
compared
with
the
cost
of
the
property,
the
short
time
it
was
owned,
the
money
spent
at
the
time
of
disposition
and
all
the
other
factors
taken
together,
at
the
time
of
the
purchase/construction
of
the
building
the
appellant
had
at
the
very
least
a
secondary
intention
of
reselling
at
a
profit...
According
to
counsel
for
the
respondent,
it
is
clear
from
reading
this
paragraph
that
the
concept
of
secondary
intention
was
the
basis
of
the
assessment.
In
my
opinion,
the
question
of
a
secondary
intention
to
resell
at
a
profit
as
an
operating
motivation
which
led
to
the
purchase
of
the
building
may
be
inferred
from
the
very
language
used
in
the
presumptions
of
fact
which
were
the
basis
for
the
assessment
and
which
are
set
out
in
the
Reply
to
the
Notice
of
Appeal.
The
onus
is
thus
on
the
appellant
to
show
that
there
was
no
such
intention.
In
the
instant
case
the
appellant
was
created
in
order
to
comply
with
the
undertaking
given
by
its
shareholders
in
the
bid
accepted
by
the
Town
of
Gatineau
to
construct
a
building
to
house
part
of
the
municipal
services
while
waiting
for
the
Hôtel
de
Ville
to
be
built.
The
appellant’s
shareholders
were
all
businessmen
who
had
a
quite
comprehensive
knowledge
of
real
estate.
Each
contributed
his
professional
knowledge
to
this
building
project,
which
was
initiated
by
the
Town
itself.
They
all
knew
that
the
Town
of
Gatineau
wanted
to
develop
a
new
town
centre
at
the
exact
location
where
one
of
the
shareholders
already
owned
land
that
would
be
used
as
a
site
for
the
future
building.
They
all
knew
that
the
land
located
in
this
quadrangle
or
its
vicinity
was
in
demand.
The
evidence
was
that
at
the
time
there
was
also
renewed
interest
in
limited
partnerships,
which
were
looking
for
this
type
of
land
at
prices
higher
than
its
actual
value,
in
view
of
the
tax
benefits
available
to
investors
in
such
partnerships.
Although
the
witnesses
stated
that
this
building
was
constructed
under
their
management
to
create
a
capital
asset,
in
my
opinion
this
is
not
indicated
by
the
evidence
surrounding
the
circumstances
of
the
transaction.
Each
shareholder
only
invested
a
very
small
amount
of
money
in
the
project
as
compared
with
the
actual
cost
of
financing.
The
partnership’s
profit
and
loss
statement
from
the
time
the
building
was
purchased
in
1987
to
the
time
it
was
disposed
of
in
1990
shows
quite
large
losses
in
each
of
those
years,
even
though
70
percent
of
the
building
was
leased.
Instead
of
decreasing
over
the
years,
the
“interest”
item
increased
significantly.
The
evidence
further
showed
that
although
the
building
was
still
running
at
a
loss
the
shareholders
recouped
the
initial
investment
of
$150,000
before
disposing
of
it.
They
did
not
repay
any
of
the
loan
principal.
All
these
points
hardly
support
the
argument
of
the
appellant’s
shareholders
that
they
got
involved
in
this
project
in
order
to
create
a
capital
asset.
Additionally,
at
the
time
of
the
bid
to
the
Town,
the
appellant’s
shareholders
knew
that
the
Town
was
prepared
to
commit
itself
as
a
tenant
for
a
maximum
period
of
10
years
since
at
that
time
it
had
already
planned
to
build
the
Hôtel
de
Ville.
They
also
knew
the
maximum
price
the
Town
was
prepared
to
pay
to
rent
15,000
square
feet
of
floor
space.
That
price,
$10
per
square
foot
net,
net,
net
was
clearly
insufficient
to
make
the
building
financially
viable.
The
witnesses
said
that
they
initially
accepted
this
amount
in
order
to
get
the
contract
with
the
Town.
Also,
with
the
Town
as
a
tenant,
they
were
counting
on
attracting
other
quality
tenants.
At
the
same
time,
if
we
look
at
the
minutes
of
January
19,
1988,
it
would
appear
that
the
consensus
was
that
they
should
wait
for
the
building
to
be
completely
rented
so
they
could
try
and
obtain
a
higher
price
for
it.
This
appears
to
confirm
the
shareholders’
intention
not
only
to
obtain
the
contract
with
the
Town
for
construction
of
the
building
but
to
resell
it
as
soon
as
it
was
fully
rented,
making
a
profit
on
the
venture.
Further,
the
question
of
the
commission
paid
to
Mr.
Lauzon
at
the
time
the
building
was
sold
in
my
view
confirms
that
the
shareholders
intended
from
the
start
of
this
entire
venture
to
resell
at
a
profit
as
soon
as
circumstances
permitted.
Despite
all
the
testimony
which
sought
to
show
that
this
commission
was
paid
not
in
connection
with
the
sale,
but
to
compensate
for
the
repeated
moves
that
Mr.
Lauzon
had
to
make,
the
dates
do
not
correspond
since
the
last
move
took
place
a
year
before
the
sale.
Moreover,
other
tenants
had
been
through
the
same
process
when
the
Town
exercised
the
option.
There
was
no
evidence
that
they
were
compensated
for
this.
Finally,
the
appellant’s
shareholders
approved
the
tax
return
showing
the
$285,000
as
an
expense
associated
with
the
sale.
In
my
view,
that
money
might
well
have
been
the
subject
of
a
prior
agreement
between
the
shareholders
that,
in
the
event
of
a
sale,
a
commission
would
be
paid
to
Mr.
Lauzon
for
the
part
he
played
as
real
estate
broker.
Finally,
the
evidence
was
that
four
other
buildings
were
constructed
following
the
same
process
and
by
the
same
group
of
shareholders,
through
different
partnerships,
at
almost
the
same
time.
These
buildings
were
constructed
in
the
quadrangle
where
the
new
town
centre
was,
or
in
that
vicinity.
Two
of
them
were
sold
at
a
profit
after
being
owned
for
a
short
time.
Additionally,
some
of
the
appellant’s
shareholders
also
own
vacant
land
for
residential
or
commercial
building
and
the
evidence
suggests
that
they
intend
to
resell
it
eventually
to
contractors.
I
am
therefore
of
the
view
that
there
is
sufficiently
clear
and
convincing
evidence
to
conclude
that
the
transaction
in
question
was
the
result
of
an
operation
prompted
from
the
outset
by
the
appellant’s
intention
to
resell
the
building
at
a
profit
as
soon
as
circumstances
permitted.
The
appellant
certainly
did
not
establish
the
contrary
on
a
balance
of
probabilities.
However,
I
realize
that
the
Town
may
not
have
been
the
ideal
purchaser
and
that
the
profit
made
may
have
been
less
than
was
anticipated
by
the
appellant’s
shareholders.
This
is
shown
by
the
minutes
of
shareholder
meetings
at
the
time
the
first
two
offers
were
refused
and
at
the
time
the
Town
decided
to
exercise
its
option.
In
my
opinion,
this
only
confirms
the
risktaking
nature
of
the
business
in
which
the
appellant
was
engaged.
I
therefore
conclude
that
the
gain
made
on
disposal
of
the
Pierre
Papin
building
resulted
in
business
income,
not
a
capital
gain.
Counsel
for
the
appellant
also
submitted
an
alternative
argument
that
the
assessment
made
pursuant
to
s.
185
of
Part
III
of
the
Act
should
be
vacated
since
the
Minister
did
not
act
with
due
dispatch
in
examining
the
election
made
by
the
appellant
under
s.
83(2)
of
the
Act.
In
Ginsberg
v.
Canada,
[1996]
3
F.C.
334,
96
DTC
6372
(C.A.),
the
Federal
Court
of
Appeal
held
that
this
could
not
be
a
valid
reason
for
vacating
an
assessment.
Although
the
appeal
in
that
case
concerned
the
making
of
an
assessment
under
s.
152(1)
of
the
Act,
the
rule
also
applies
to
any
assessment
made
under
Part
III
of
the
Act,
by
operation
of
s.
185(3)
of
the
Act.
The
appeal
is
accordingly
dismissed
with
costs
to
the
respondent.
Appeal
dismissed.
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