Her Majesty the Queen v. McKee Construction (1967) Lid, [1976] CTC 467, 76 DTC 6256

Smith, DJ:—This case comes before the Court by way of appeal by the plaintiff (conducted as a trial de novo), from a judgment of the Tax Review Board allowing the appeal of the defendant from an assessment for income tax made by the Minister of National Revenue in computing the defendant’s income for the 1970 taxation year. The matter in dispute is the inclusion in the assessment of the defendant’s income for that year of $20,011 realized by the defendant as a profit on the sale of real property.

In 1968 Dellas McKee, with his partner, Carl Victor, purchased as equal partners an acre of land in an undeveloped district of Calgary known as Foothills Industrial Park. The partnership name was Kee-Roy Holdings, but a private company named Kee-Roy Holdings Ltd was incorporated soon afterwards, which took over the partnership, McKee and Victor each holding half the company’s shares. Early in 1970 McKee bought Victor’s interest in the company and then changed its name to McKee Construction (1967) Ltd in whose name the real property was vested.

On December 20, 1970 the property was sold to Alberta Gas Trunk Line Company for $55,000, the sale resulting in a profit to Mr McKee of $20,011. Immediately after McKee and Victor purchased the property in 1968 they planned and constructed a building on it, with floor space of some 3,200 square feet. Victor had been operating a small construction firm and was himself a bricklayer. He did most of the wall construction, which was of cement blocks, and McKee, who in addition to a regular job with Gulf Oil Company had carpentry experience, did most of the wood construction.

Between late 1968, when the building was practically completed, and January 1970 parts of the building were rented for varying periods of time. Then on January 15, 1970 the whole building was rented for a year to a single corporate tenant for $575 per month, which according to the evidence would have produced, for the first time, sufficient revenue to cover operating expenses and a little more. Unfortunately, the tenant’s parent company became bankrupt, which led to the bankruptcy of the tenant. The liquidator paid the rent till December, when he vacated the premises. The sale to Alberta Gas Trunk Line followed in a few weeks.

The question for resolution by the Court is whether the purchase of the land and construction of the building constituted an investment made with a view to obtaining revenue from rents paid by tenants or whether the purchase and construction were made with the purpose of realizing a profit on the resale. On the first hypothesis the profit of $20,011 would be a capital gain, but on the second it would be profit from a transaction in the nature of trade and would be income of the defendant taxable for the taxation year in which it was realized.

Dellas McKee, in his evidence, maintained that when the property was purchased in 1968 the only purpose of the partners was to build on it and hold it as a revenue-bearing investment. He had no recollection of ever discussing with Mr Victor the possibility of sale. His counsel stressed the fact that part of the building was rented in late 1968 and that the first date on which the property was listed for sale was January 14, 1969. Counsel also emphasized that though the property was listed several times, twice with one agency and then with two others, each on an exclusive listing basis, there were periods of weeks and one of months when no listing existed, which he submitted indicated no keen desire to sell. Finally, he pointed to the fact that except for the first listing, which was for sale only, at $62,000, all the listings were for both sale and lease. In his submission the purpose of renting was always present in the owners’ minds and should be regarded as the primary purpose, with sale something to be sought if renting proved unsuccessful.

Against this line of argument are a number of facts pointing to a different conclusion. Mr Victor, called as a witness by the Crown, disagreed completely as to the purpose that led to the purchase of the land. He said they did talk before the purchase about the possibility of selling, that in fact their purpose was to buy, construct a building and then sell at a profit, reinvesting the proceeds in other land and doing the same thing again. If they were unable to sell at a profit they would have to keep the property and rent it to others. This is weighty evidence from a man who was one of the two partners in the transaction but who had no interest in the property at the date of its resale in December 1970 and who has no interest in the outcome of this litigation. Nor was there any suggestion in the evidence that he might be prejudiced against Mr McKee. Counsel for the plaintiff submitted that the fact that all the listings with real estate agents contained listings for sale and that the first listing, made within a couple of months after the building was almost completed (apparenily it never was fully completed), contained no listing for leasing, support the conclusion that the purpose of sale was not only always present but was the primary purpose in purchasing the land.

A further significant fact disclosed by the evidence is that from January 14, 1969, when the property was first listed for sale, until the sale was made on December 20, 1970, there was always a “For Sale” sign displayed on the property.

Another factor is that neither Mr McKee nor Mr Victor had any funds of their own available to put through the transaction. The money to buy the land was borrowed from their banks, and the money to pay for construction of the building was borrowed from a trust company, secured by a mortgage on the property. They were financially unable to carry out certain improvements that were specifically required by the City of Calgary before an occupancy permit would be given to them. While they may not have comprehended all the expenses they might be called upon to meet, the shortage of money they were faced with so early seems more consistent with the purpose of making a quick sale rather than of making a revenue-bearing investment.

Prior to hearing Mr Victor’s evidence I had some doubts as to the proper interpretation of the facts. These doubts were resolved by his evidence. My conclusion is that the purpose of the purchase was as stated by Mr Victor, to build, sell at a profit and reinvest in other land with the same end in view. I see no reason for doubting the accuracy of his memory on this, the central point in the whole transaction. There was thus from the beginning an element of speculation in the matter, which in these circumstances made it a transaction in the nature of trade. The profit made on the resale is, therefore, income of the defendant for the taxation year 1970.

The judgment of the Tax Review Board is reversed and the assessment of the Minister is restored.

The plaintiff is entitled to costs.