CHLMP Developments LTD v. Minister of National Revenue, [1979] CTC 2727

Roland St-Onge:—The appeal of CHLMP Developments Ltd came before me on May 30, 1979, at the City of Kelowna, British Columbia, and the issue is whether the profit from the sale of a property is a capital gain or income in the appellant’s 1976 taxation year.

The property in question, located at the corner of Pandosy Street and Leon Avenue in the City of Kelowna, British Columbia, was purchased by the appellant on May 30, 1974 and sold seven and a half months later at a profit of $100,000. The respondent contended that the said property had been acquired with the primary, or at least the alternate intention to turn the same to account for profit by resale, and that intention was carried out.

Mr D G McConachie, a realtor knowledgeable in finance, accounting, agriculture and also income tax with respect to real estate matters, shareholder and director of the appellant company, testified as follows: The appellant company was incorporated for the specific purpose of buying five lots with one building thereon and to lease a part thereof to an associate company, Lupton Agencies Ltd, which was in the real estate business. According to the Real Estate Act of British Columbia, a real estate company must keep a certain level of capital, and this is why the new company was incorporated.

The five lots numbered 7, 8, 9, 10 and 11 were purchased for $315,000, with a down payment of $75,000, and a mortgage of $240,000 to the vendor, Reliable Holdings Ltd. The declared value of each lot was $40,000, except that lots 7 and 8 were valued at $40,000 plus $115,000 for improvements, for a total of $155,000.

The tenant therein was Jacobson-Pontiac-Buick Ltd whose lease was to expire at the end of September 1974. According to a letter filed as Exhibit A-2, the appellant company was ready to renew the lease on a month-to- month basis, in order to allow Jacobson-Pontiac-Buick Ltd to complete the construction of new premises.

Then a memo (Exhibit A-3) was sent by the witness to the staff of Lupton Agencies Ltd to lease the purchased property.

Discussions took place with two prospective tenants: Firestone of Canada which was not interested and John L Ritchie, a businessman of Kelowna who was interested in leasing two garages and a showroom for an auction gallery. When these discussions took place with Mr Ritchie, finance was difficult to obtain at a reasonable rate and the appellant company decided to lease the whole area to Mr Ritchie on a monthly basis for some $2000, but no lease was signed.

One day thereafter, Mr Ritchie asked the witness to come to his home and offered to buy lots 7 and 8 with improvements thereon for $270,000. This offer was so attractive and the financing so difficult to obtain that the appellant company decided to sell the said lots 7 and 8 with the improvements thereon.

The witness testified that this property was never listed for sale and that the appellant company’s intention was to retain it in order to rent the premises to its associate company, Lupton Agencies Ltd.

Because the mortgage covered the entire property, lots 9, 10 and 11 had to be sold. The witness contacted another realtor in order to erect a building on the said lots, but the lots were never listed for sale.

From 1974 to 1978, Mr Ritchie made substantial additions to the bare land, that is a building of some 4000 square feet was erected but, four years later, when he sold the said property at a public auction sale for $215,000, this amount was less than what he had paid for it and the same day the owner sold the said property for $240,000. This is almost a fairy tale.

Mr McConachie explained that the property was sold because of the economic situation at that time; that the Bank of Canada was directing the funds to residential properties rather than commercial enterprises; that the unsolicited offer from Mr Ritchie and the immediate profit of $75,000 was so attractive that it was foolish not to accept such an offer.

Then he explained that the appellant company took another step to find another property for their real estate firm. An offer by the appellant company (Exhibit A-7) was made to Clairex Holdings Ltd to purchase five acres at the corner of Springfield and Spall Road, with proposed subdivision of lot 29, Plan 415, City of Kelowna, for $412,800. The subdivision could not be realized and, for this reason, the appellant company did not purchase the Said property.

Then an offer to purchase the Cedar Creek Holdings property by the appellant company (Exhibit A-8) and a commitment by Lupton Agencies Ltd to lease space therein and to provide the required leasehold improvements to the said property were made. The appellant company was to obtain one quarter interest in the said property, but the other partners were lawyers and their documents were so long and so intricate that it discouraged the appellant company’s shareholders who did not want to deal with these lawyers.

The appellant company then purchased a 7 /2% interest in a building, borrowed $60,000 to effectuate the improvements and leased it to the real estate firm.

The witness terminated his testimony by saying that Mr Ritchie sold his property below the fair market value at $215,00 because it was disposed of by a public auction sale and that the fair market value of that property was $240,000.

Upon cross-examination, the witness admitted that Lupton Agencies Ltd had a long-term lease and explained that the rents were escalating and the owners would have been happy to obtain more money for the premises; that he had an option, either to keep two lots with a building thereon, or to build on the three lots; that the building was appropriate for their real estate business, having a showroom and office upstairs.

Then he admitted that the sign “property available’’ did not mention if it was for lease or sale.

Counsel for appellant summarized the facts and said that:

(1) the appellant company was incorporated to purchase and develop a property and to rent it to an associate company—this was carried out;

(2) an unsolicited offer at more than the fair market value was made and accepted by the appellant company;

(3) because of the Real Estate Regulations of British Columbia, the appellant company was incorporated to acquire a long term holding;

(4) because of the money market change and the unsolicited attractive offer, the appellant had to sell.

He then referred the Board to the weekly report and commentary, Canadian Current Tax on Capital Gain or Income—Secondary Intention Theory. Among other extracts, he read the following:

However, as it is frequently stated, each case must depend on its own facts, and even a speculator is entitled to make a capital gain on land dealings on occasion if the facts indicate a bona fide intention of development of the property for income producing purposes, and no secondary intention of disposing of it at a profit in the event that the original intention is frustrated or because an offer which is too good to refuse has been made.

Counsel for respondent argued that the onus is on the taxpayer and if the Board believes him, the decision should be in his favour. He also said that the intention is ambiguous and, in such a case, it would have been wise to have called Mr Ritchie as a witness; that the interest rate increase was foreseeable and it is doubtful whether the appellant company was able to carry out this project and that there was ambiguity in the sign.

It is always difficult to read into the mind of a person and the only way to guess about his intention is to look at his course of conduct and to analyze the proven facts. In the case at bar, there is only one thing against the appellant company: it’s sign “property available” without saying if it was for sale or lease. Knowing that the main witness is very astute and knowledgeable in income tax matters with respect to real estate transactions, I would be inclined to think that this was done on purpose. However there are so many other facts in his favour that the Board has to apply the standard of balance of probability and decide that this transaction was not an adventure in the nature of trade but capital gain.

In spite of the sign, I believe that the appellant company’s witness’s intention was to do the utmost to realize a capital gain for the appellant com- pany if the opportunity presented itself to them. The appellant’s witness followed the jurisprudence very carefully and the Board cannot hold that against him.

For all these reasons, the appeal is allowed and the matter is referred back to the respondent for reassessment accordingly.

Appeal allowed.