Her Majesty the Queen v. Grant Kylio, [1976] CTC 409, [1976] DTC 6235

Collier, J:—This is an appeal from a decision of the Tax Review Board. The Minister of National Revenue in assessing the defendant’s taxable income for 1968 and 1969 included the profits or gains from the sale of two apartment buildings. The gain on the sale of one building in 1968 was $47,181. The other building, sold in 1969, realized $15,292.41. The then Chairman of the Tax Review Board (Judge Flanigan) allowed the defendant’s appeal from the assessments ([19751 CTC 2243; 75 DTC 194). He held the gains to be on the capital side. The Minister appealed to this Court. As always in cases of this kind the facts are paramount. The decision essentially depends on the particular facts.* [1]

The defendant taxpayer was the only witness in this case. One of the key issues is the intention with which the defendant acquired and disposed of, over a five-year period, interests in various apartment buildings. I have therefore endeavoured to keep in mind, in assessing credibility, the defendant’s personal stake in the outcome of this litigation. After considering all the facts, observing the defendant in the course of giving testimony, and weighing his evidence against the probabilities surrounding the various transactions to be related, I have

. . . no hesitation in coming to the conclusion that he is a credible witness! [2] . . .

The defendant is 48 years old. At the hearing of this appeal he was not employed. He was married, with three children ranging in age from 18 to 22. From 1950 to 1957 he had been a car salesman with an automobile dealership in Vancouver. The manager during part of that time was one Henry Block. Henry Block, with his brother Arthur, at some stage went into the real estate business in Vancouver. They are now the principals of a number of companies all related to Block Bros Industries Limited, the main corporate vehicle. That company is a public company, formed in 1962.

In 1957 the defendant went to work for Block Bros Realty. Until 1966, he was the manager of the Kingsway office. He did not himself at any time sell real estate. Throughout his whole association with the Block Bros organization his activities were essentially on the management side. In 1966 he went to the head office on Granville Street to assist in an expansion program. At that time he was given the title of Assistant to the President, Henry Block. From mid-1968 until 1972 his main activities for Block Bros were in the development of recreational property, particularly in the Cariboo area of British Columbia. From 1972 until he left Block Bros in February of 1976 he was chiefly engaged in developing for the organization a cataloguing system for read estate.

Throughout his employment he was paid a salary. Block Bros did not have a pension plan or retirement scheme for its employees, including the more senior ones such as the defendant. Block Bros employees were not permitted to buy or sell real estate for their own personal gain or advantage, except with the permission of the employer. The prohibition was primarily against buying real estate and then selling it for gain—for practical purposes, competing with the employer.

In 1964 the defendant embarked on a course of dealings with the object of providing his own pension or retirement plan. The essence of it was to purchase interests in apartment buildings. The apartments would be an investment, with the rental income from the suites the security for his later years. The defendant candidly admitted this scheme had, prior to the so-called “new Income Tax Act”, a further advantage. Depreciation in respect of any apartment building interests he was able to purchase could be set off against his ordinary income. The fastidious expression used at trial was a “tax shelter”. By that means there was the possibility of building up savings or funds which could be used to acquire more or better quality apartment investment interests.

In 1964 his personal assets were the family home, a car and shares in Block Bros Industries Limited worth $10,000. In that year he and the manager (Sawatsky) of another Block Bros office* [3] joined together to purchase a 20-suite apartment block in the Marpole area of Vancouver. This was described as the Montcalm property. The defendant put in approximately $1,000 of his own cash plus the legal costs of the transaction. The purchase of the building was essentially financed through first, second and third mortgages. The property was purchased from a Block Bros company. In November of the following year the defendant bought out his partner’s interest. Sawatsky had found a larger apartment block in which he wanted to invest; he also wanted to be on his own. The Montcalm property was managed by another Block Bros company which was in the business of property management. The defendant paid a management fee. The Montcalm property eventually progressed into a financial position where it was just paying its own way.

In 1966 the two Block brothers were personally building a brand new apartment block (27 suites) in the Marpole area. It was known as the Jordanaire. It was a much better and newer building than the Montcalm property and, of course, had more suites. Arthur Block indicated an interest in selling his one-half interest. The defendant made an offer of purchase which was accepted. He paid Arthur Block by transferring to him his shares in the public company, and by obtaining a second mortgage on the property. His cash equity outlay was approximately $10,000. Once Jordanaire was fuily rented it began to show a small return. Jordanaire was not managed by a Block Bros company but by the defendant. He did not charge for his services.

The defendant sold the Montcalm property in the spring of the same year. He said, and I accept his evidence, he did not feel he could afford both it and the Jordanaire property. He sustained a !oss of approximately $8,000 on the sale of the Montcalm building. He did not for tax purposes claim the loss as a deduction against income.

In 1967 a salesman drew his attention to another apartment building in Burnaby, BC. It was on Imperial Avenue, had 18 suites, and had been listed for sale through Block Bros. The defendant, because of his association and friendship with Henry Block, drew it to his attention. The two decided to buy. They did not make a thorough investigation. They relied primarily on the recommendation of the real estate salesman. Once the transaction was completed it was found a great deal of renovation would have to be done. The cost, when balanced against potential income, was unrealistic. After holding it for 60 days, they were able to sell it, using the services of the Block Bros organization. The defendant realized, on this transaction, a profit of $1,667. He was subsequently assessed by the Minister of National Revenue for tax on that gain. He did not appeal the assessment. He felt the legal costs of disputing it would probably be more than the amount involved. His purpose in buying an interest in the Imperial Avenue property was to increase his holdings of rental suites and so provide a greater income for his later years. I accept his evidence as to that purpose.

In February of 1968 the defendant was given an opportunity to acquire an interest in a new apartment building to be built near the Central Park area in Burnaby. The other principal was, once more, Henry Block. This building was ultimately named the Kay-Jean. It had 48 suites .The defendant was to have an interest of 10/48 (10 out of the 48 suites). Henry Block held the other 38/48 interest. The estimated cost of construction was approximately $480,000. The construction was carried out through a Block Bros company. As it neared completion, the costs had risen approximately $100,000 over estimate. The defendant was required to put up $40,000 more than he had anticipated. To raise the additional funds he obtained a second mortgage on Kay-Jean and sold his interest in Jordanaire.* [4] That sale was made to a purchaser introduced by Henry Block. The sale of the defendant’s interest in Jordanaire realized, as I have earlier recounted, $47,181. Part of the proceeds were put into the purchase of his interest in Kay-Jean.

The defendant testified that if the costs in Kay-Jean had not increased he would not have disposed of his interest in Jordanaire. He said, and I accept his evidence, his purpose in acquiring an interest in Kay-Jean was to increase his investment in rental suites. It was part of his long-term plan of acquiring a sufficient number, either in one particular property or in more than one property, to provide security for later years.

Kay-Jean, after completion, was managed by a Block Bros company. At the time of its sale (to be described) it was almost fully rented.

In December of 1969 he was given the opportunity to participate with Henry Block in the acquisition of an even larger apartment unit, the El Rancho. There are actually three separate buildings in this complex. It has 132 suites and is located near the Lougheed Mall in Burnaby. The defendant was originally to hold a 21% interest. Henry Block was to have the remainder. The defendant required approximately $110,000 as a “down payment”.

In the meantime he had acquired further shares in the Block Bros public company. To finance his 21% interest in El Rancho he proposed to sell all his other interests including Kay-Jean and his Block Bros shares. He sold his interest in Kay-Jean through the services of Block Bros.+ [5] He was unable at the time of committing himself to El Rancho to sell his Block Bros shares. An underwriting was taking place. He was advised by one of the Block brothers he was probably not permitted to sell his shares because of insider trading regulations.

When he was able to sell them, their market value had dropped considerably. He was forced to obtain further financing through second and third mortgages and to sign a note for $10,000. He put up, in respect of El Rancho, $30,000 to $40,000 cash, part of which came from the sale of the Kay-Jean property. Because of his financing problems he was compelled to reduce his interest in the El Rancho purchase from 21% to 15%.

The defendant said his purpose in getting into El Rancho was again to increase (for practical purposes) his quantitative holding of suites for income purposes, particularly in later years. El Rancho was a much larger complex than he had been in before. He wanted to consolidate and get into a larger operation such as this one. To do so he had to realize his other assets, including his interest in Kay-Jean. I accept his evidence and his intention as sworn to. It is consistent with his whole course of dealings starting in 1964.

At the time of trial, the defendant still holds his interest in El Rancho. There have been financial problems since the acquisition. He has had to take certain economic steps to retain his interest. But he has not sold.

That ends my review of the evidence.

Counsel for the defendant contends these five purchases and four sales over a period of five years were not with the intention of realizing a profit when an opportunity arose. He submits they were all part of an investment scheme in rental income producing suites. The object was to acquire interests in more and better suites to provide larger and more assured future income; the fact some gains were made in the progression is incidental. I accept and agree with those submissions.

Counsel for the plaintiff urged the gains realized on the way to the defendant’s professed ultimate goal ought to be treated as trading or income gains; that the defendant throughout the period 1964 to 1969 had gone into the business activity of buying, holding, and disposing of apartment buildings; that everything was done, in some way, through Block Bros, an organization obviously in the business of, among other things, trading in real property.

I do not agree. The defendant’s actions in endeavouring to create an upward progression in the apartment interests he acquired were, to my mind, much more consistent with an overall investment purpose than a mere trading purpose. In his employment he had no pension plan or retirement benefits scheme, as are found in many businesses today. It is true the interests he acquired commencing in 1964 were not held for long periods. But the dispositions were made only when the opportunity of improving upwards, or of acquiring a larger total interest, arose. In the case of Jordanaire part, at least, of the gain was immediately put into a new investment in the portfolio. In the case of Kay-Jean all of the gain was used to invest in El Rancho.

I dismiss what was termed the “Imperial Avenue” transaction. The building was held for only 60 days. It was a poor investment. The prudent course of disposing of it was taken.

In my opinion, the defendant’s association with, and the use of the advantages and facilities of Block Bros cannot militate against a finding in his favour. I suspect if he had not known Henry Block and had not gone to work for the Block Bros organization he would never have had the opportunity or resources to carry out his “retirement” scheme. The evidence indicates Henry Block had financial resources considerably beyond the defendant’s. The Block Bros organization was engaged in, among other things, the construction and management of apartment buildings, as well as the purchase and sale of those built or owned by others. It seems logical to me that the services and resources of that organization should be used in the carrying out of the transactions I have described.

The appeal against the assessments is allowed.* [6] The plaintiff's action is dismissed. The assessments in question are referred back to the Minister with a direction that the amounts of $47,181 and $15,292.41 be deleted in the calculation of the defendant’s income for 1968 and 1969.

The defendant is entitled to costs.