Anges Nickolaou v. Minister of National Revenue, [1978] CTC 2250

The Chairman:—This is the appeal of Anges Nickolaou from an assessment in respect of the 1972 taxation year.

The issue is whether the profit derived from the disposition of a gasoline service station in 1972 is income from the appellant’s business and/or an adventure in the nature of trade or whether it is a gain on account of capital. In the latter event what would be the capital gain on the disposition of the property on January 23, 1972 in relation to its fair market value on Valuation Day.

Counsel for the respondent stated that should the Board come to the conclusion that the profit realized in the subject transaction is capital in nature there is no dispute that the price received for the property on January 23, 1972 was its fair market value as at December 31, 1971 and no gain accrued from Valuation Day to the time of sale. The only issue to be determined therefore is whether the profit realized is income from a business or a capital gain. Counsel for the appellant amended paragraph 5 of the notice of appeal in order to correct the amount of $23,930.24 stated therein by substituting therefor the amount of $46,930.24.

Facts

Since the decisions in appeals determining the capital or income nature of the profits derived from the disposition of property are based largely on facts, it is necessary to summarize the pertinent facts as presented to the Board.

The appellant was born in Greece and acquired a 9th-grade education. At 16 he worked in a factory and attended night school. He also served with the armed forces and was taught the trade of mechanic.

The appellant arrived in Canada in 1968 and his first job was to pump gas at a service station until December of that year. In 1969 he worked for Chalet Oil Limited in Hamilton and then in Scarborough. It is my understanding that the appellant was selling gasoline on a commission basis. However, he alleges that the deliveries made were always short by some 40-50 gallons of gasoline and he left that company. The appellant then went to a real estate broker with a view to either renting or buying a service station which led to his first acquisition of a series of four service stations in five years.

In July of 1970 the appellant purchased a service station on Gerrard Street for $140,000 with a down-payment of $20,000, $12,500 of which was from the appellant’s own capital and some $10,000 borrowed from relatives or friends (Exhibit A-1). The station was in a poor state of repair and in fact was not used as a public service station. The station had one pump which serviced almost exclusively a taxi company located nearby. The appellant contacted Howden Petroleum Limited and entered into a 3-year contract for the purchase of all petroleum products (Exhibit A-2). Howden Petroleum Limited installed new gasoline pumps, lights and signs at no cost to the appellant. The appellant cleaned out the station, bought some paint and painted the building. The appellant was working some 14 hours a day and the service he gave his customers, as well as his discount prices, attracted more customers and the service station’s business increased. i

The appellant alleges that once the station had been cleaned and painted he was made offers to sell the property. In particular, a Mr Bob Singh wished to buy the property badly and made a first offer of $150,000; he then increased the offer to $160,000, both of which were refused by the appellant. However, he did accept an offer of $190,000 for the property (Exhibit A-3). The amount of cash received was $14,709 which is quite low as compared to the sale price.

The appellant claims that although he purchased the property for the purpose of investment and earning a living by operating a gas station, the income to him was too little for the time he was required to spend attending the station. More importantly, the appellant knew that the taxi-cab company which was the appellant’s biggest customer had purchased a property on Dundas Street and intended to move there. There apparently was no written lease with the taxi-cab company but there appears to have been a verbal agreement for the payment of rent for the space used up by the taxi company and a 30-day notice was to be given before the taxi company would vacate the premises.

The appellant claimed throughout his testimony that the resale of the property had not, at any time, entered his mind and that it was the lack of sufficient income from the business and the possible loss of the taxi-cab company that made him decide to sell to Mr Bob Singh (Exhibit A-3).

The taxpayer admitted that some money was given to Mr Mike Sarris in the form of a commission on the sale but that the payment was to help out Mr Sarris.

As things turned out, subsequently, the taxi-cab company did move and Mr Singh was unable to pay either the first or second mortgage and the appellant foreclosed on the mortgage in 1973.

In May of 1971 the appellant purchased another run-down service station at 402 Main Street for $60,000 in which the taxpayer assumed the first mortgage of $22,000 and the vendor took back a second mortgage (Exhibit A-4). Howden Petroleum Limited was again called in, another contract signed for a period of 5 years and Howden Petroleum Limited replaced the gas pumps, the lights and signs and the appellant worked hard to have a clean and efficient gas station. Although the appellant admitted that the business improved, the volume of business was too small and again the income was insufficient to warrant the long hours of work.

In July and August, once the business was running well, the appellant again received offers from a Mr Hassanali Dharssi. An offer of $90,000 offered by Mr Dharssi, with a down-payment of $47,000 was accepted by the appellant and the agreement of sale and purchase was signed on December 31, 1971 and the sale transaction was closed on January 23, 1972. Exhibit A-7 shows that even though the sale is claimed to have been unsolicited, a real estate commission of $2,000 was again paid to Mr Mike Sarris which, according to the appellant, was paid to help Mr Sarris out.

On March 18, 1972, notwithstanding a non-competition clause in the appellant’s contract with Mr Dharssi within a radius of 3 miles of the Main Station, the appellant purchased, -in his brother’s name but with his own money, another property used as a used car lot at 1401 Danforth Street. The appellant loaned his brother an amount of $40,000 (part of the sale price of the Main Station) plus an amount of $10,000 paid to the appellant by Ford of Canada for breaking its lease on land used as a car lot.

The 1401 Danforth Street property being a used car lot, the appellant himself spent between $10,000 to $20,000 on repairing the service station, and again using the petroleum company to install pumps, lights, signs, doors, etc. The appellant claims that he worked there half-days. However, solicitors. for Mr Dharssi, by registered mail, pointed out that the appellant, by contract of sale of the Main Station, could not operate a similar business within a radius of 3 miles for a period of 5 years.

-In November 1972 the appellant leased the service station at 1401 Danforth Street to Nick Syrianos for a. period of 10 years (Exhibit A-8). This lease contained an option to purchase clause valid for the first 2 years of the lease.

On December 22, 1972 the appellant, this time in his own name, bought back the service station at 1401 Danforth Street (Exhibit A-9).

Legal complications, which are not really pertinent to the issue in this appeal, arose when apparently Mr Syrianos and other tenants offered to sell the Danforth Street service station for $375,000. In December 1973 the appellant offered to sell and did sell to Amtrak Investments Limited the said service station through the services of Mike Sarris for $309,000, $90,000 of which was in cash and representing a profit of some $109,000 (Exhibit A-11). However, the appellant had to pay, from the selling price, an amount of $30,000 to the tenants for settlement out of court as well as $12,000 for lawyer’s fees and $12,000 for property tax.

On May 15, 1973 the appellant purchased another service station In the Township of King, on Highway 11. At that station the appellant operated a muffler franchise for a while but because of the distance of the station the appellant sold the franchise for $10,000 (Exhibit A-13), and as I understand it subsequently sold the service station.

The appellant testified that at one period he started an oil delivery company and purchased trucks. It is not clear to me whether that business is still operating. However, in March of 1977 the appellant purchased and is presently operating a service station with maintenance facilities, also on Danforth Street.

Contentions

Counsel for the appellant contends that the appellant’s whole course of conduct was based on capital investments in the operation of or the leasing of service stations and that the transactions in which he was engaged were a series of turnovers of capital property. Counsel claims that the appellant never purchased any of the properties with the intention of resale and that the evidence shows that the appellant was not engaged in the business of buying and selling service stations.

Counsel for the respondent, on the other hand, contended that the appellant’s conduct followed a pattern of purchasing run-down gasoline service stations, repairing and painting them, having Howden Petroleum Limited install new pumps, signs, lights, etc at no cost to the appellant and then disposing of them at a profit after a short period. Counsel claims that the fact that there were four such transactions in the period of five years indicates clearly that the appellant did not contemplate long-term investments.

Both counsel referred to several authorities in which the principles to be applied in deciding whether a transaction is capital in nature or a business transaction have been clearly set out. However, all the authorities indicate that such decisions depend principally on the interpretation and the appreciation of the almost limitless combination and permutation of the facts in a given case.

In my Opinion, there can be no doubt whatever that the appellant’s ultimate objective was to own and operate service stations and he worked extraordinarily hard to achieve that goal. The purchase of the Gerrard Station, in my view, might very well have been intended to be a long-term capital investment and that the appellant, at the time of the purchase, gave no thought to a possible resale of the station.

The repairs he made personally or had made by Howden Petroleum Limited to the service station, the long hours of service he gave to his clients and the discount price of gasoline, had the result of increasing the appellant’s volume of business. However, the potential volume of business at that station was not sufficient to produce sufficient income and the pending loss of the taxi-cab business, in my view, was a valid business reason to sell the service station. Although the down-payment on the sale of the Gerrard Street property was quite low, the amelioration that the appellant made to the Gerrard Station permitted the appellant, nevertheless, to realize a substantial profit.

The purchase of the Main Station, however, although still in keeping with the appellant’s dedication to Owning and operating a service station, in my view, was not exclusively a long-term investment and the success the appellant had had in the Gerrard Station in buying a run-down station and with personal hard work and the help of a petroleum company was again repeated and did in fact, in later purchases, become a definite pattern of operation.

The Main Station was much smaller than the Gerrard Station and it also was in a run-down condition according to the appellant’s testimony. Since one of the alleged reasons for selling the Gerrard Station was that the potential volume of gasoline sales was not sufficient to earn a decent income, it would seem to me, therefore, that a smaller service station would generate even less income. The appellant, who is a very astute businessman, must have realized this and must also have considered seriously at the time of purchasing the Main Station the possibility of making a profit on the sale of the garage after having repeated the procedure of cleaning and repairing the station and increasing the business. The Main Station was kept for only a matter of months before it was sold at a handsome profit with a considerable cash down-payment. It is alleged that this sale also was unsolicited. However, here again a commission was paid to Mike Sarris, a real estate agent and as I understand Mike Sarris was involved in most, if not in all, of the appellant’s transactions in buying and selling service stations.

Then came the purchase of the Danforth Street service station, the station on Highway 401 and another station on Danforth Street in the years subsequent to the year under review. Whatever legal difficulties encountered by the appellant in his transactions in dealing with service stations are not really material to the issue in this appeal. However, the pattern of buying a run-down service station and repairing it before sale, in my view, is most pertinent. The Danforth Street service station, when he purchased it, was really a used car lot and with the help of Howden Petroleum Limited the appellant managed to build an operating service station.

I am not unmindful that the appellant even now is operating a service station and that he owns and leases at least one other station. However, notwithstanding his ultimate aim of owning, operating or leasing service stations, the appellant had, in the purchase and sale of the Main Station, the subject of this appeal, albeit to enhance his financial position and the better to pursue his ultimate objective, at the time of purchase the intention of turning that particular property to account and, in my opinion, engaged in an adventure in the nature of trade.

The profit realized therefore from the purchase and sale of the Main Station in the 1972 taxation year is income in the appellant’s hands.

The appeal must therefore be dismissed.

Appeal dismissed.