John Bentzen v. Her Majesty the Queen, [1973] CTC 702, 73 DTC 5517

Urie, J:—This is an appeal from the decision of the Tax Review Board dated November 20, 1972, affirming an assessment relating to a profit realized by the plaintiff in his 1969 taxation year from the sale of a tugboat named Pacific Pilot from which, it was agreed by counsel for the parties hereto, the plaintiff’s profit was $15,762.28. This sum was added to the plaintiff’s taxable income by the Minister in making his assessment for the 1969 taxation year.

The evidence disclosed that the plaintiff, a native of Denmark and a shipwright by trade, had emigrated to Vancouver Island in 1958 after spending a short time at Port Arthur, Ontario with a brother Arne who had preceded him to Canada. He found employment in his trade at Maple Bay Marina and Shipyard Limited near Sidney and worked there for approximately three years at which time he had an opportunity to purchase the business. He recruited his two brothers, the second of whom, Leif, had followed him to Canada, and two other shareholders to join him in the acquisition. They have operated the marina apparently with increasing success since that time.

Their business consists of renting dock space, comprising about 200 berths, to both transient and permanent power-boaters, repairing boats and their engines, providing ways to haul boats out of the water for the repair and maintenance of their hulls, building custom boats and operating a grocery store and gas pumps for the convenience of boaters. They have never engaged in the business of buying and selling boats.

For the first two years the plaintiff, his family and his brother Arne lived together in quarters over the grocery store but when Arne married he and his wife rented a pleasure boat for living quarters and having found they liked this mode of living, after a year, he bought a 75-foot tug for that purpose. They have lived on it ever since. The tug has also been used on an average of twice a week during that period for towing and sea rescue operations in cooperation with the air-sea rescue forces. It has always been berthed at the marina and is ready to go to sea at a moment’s notice.

The plaintiff testified that, having seen how happy his brother and his wife were in their living quarters on a boat, he could, as he expressed it, see the advantages for him and his family also to live on a boat, at least for the summer months. As a result, in 1965 he purchased a 50-foot pleasure boat called the Wanderer from an American customer for the appraised value of $5,600. The cost thereof increased to $9,011.67 after payment of duties, taxes; inspection costs, attorney’s fees and the like. The plaintiff testified that he felt that at this time this was more than he could afford and in addition, since the vessel was not entirely suitable for his needs, after posting a notice of its availability for sale on the marina notice board, he sold it for $12,000. In the late fall of 1967, not having abandoned his desire to live at least part time on a boat and having heard that the Pacific Pilot, a 55-foot tug boat which had sunk and been salvaged but not repaired, was for sale, he arranged for its purchase for $2,000. During the next two years he and his two brothers spent over 1,000 hours of their spare time in repairing and overhauling the Pacific Pilot at a cost of $2,556.72 for materials without any charge for their labour.

During this period the plaintiff and his family never lived on the boat except for a couple of camping trips but it was used on some occasions for towing purposes. Before the rehabilitation was completed, particularly that to the forecastle which the plaintiff intended to use as living quarters, a Mr Hansen who operates a barge company and who required a larger tug than that which he then had, made an unsolicited offer to purchase the Pacific Pilot for a sum “that I could not turn down”. The sale was completed for a sale price of $20,319 which resulted in the said profit of $15,762.28 after deducting from the sale price the original cost of $2,000 and the cost of materials used in the repairs amounting as above stated to the sum of $2,556.72.

To make the sale the plaintiff testified that he had to take back as part of the sale price a small 21-foot tug called The Natco upon which the agreed value was $2,500. The plaintiff overhauled this tug at an out-of-pocket cost of $412 exclusive of labour and ultimately sold it for $4,500. He stated that it was not suitable for living purposes due to its small size. The net proceeds derived from the two sales were loaned by the plaintiff to the company for expansion purposes and he continued to live in the apartment over the store abandoning for the moment his idea of living on a boat.

In reply to a question by his counsel he stated that his only purpose in buying the tug was for living accommodation for his family and himself at least during the summer months and for part-time towing of disabled boats and in air-sea rescue work. The plaintiff’s brother Arne, in his testimony, corroborated all of the evidence adduced by the plaintiff.

The sole question to be decided in the appeal is whether the profit arising from the sale of the Pacific Pilot was a profit from the business within the meaning of sections 3 and 4 of the Income Tax Act as they stood in 1969. They read as follows:

WORLD INCOME

3. The income of a taxpayer for a taxation year for the purposes of this Part is his income for the year from all sources inside or outside Canada and, without restricting the generality of the foregoing, includes income for the year from all

(a) businesses,

(b) property, and

(c) offices and employments.

INCOME FROM BUSINESS OR PROPERTY

4. Subject to the other provisions of this Part, income for a taxation year from a business or property is the profit therefrom for the year.

These of course must be read together with paragraph 139(1 )(e) of the Act, which reads as follows:

(e) “business” includes a profession, calling, trade, manufacture or undertaking of any kind whatsoever and includes an adventure or concern in the nature of trade but does not include an office or employment;

Counsel for the defendant argued that the assessment should be upheld on the basis of the close alliance between the plaintiff’s trade and the business in which he was employed, as well as in which he was a shareholder and the acquisition, repair and sale of the tug boat. In support of his argument he pointed out that in his personal capacity the plaintiff had participated in the purchase, repair and sale of three boats—the Wanderer, Pacific Pilot and The Natco—on all of which he had made a profit and, further, that he and his family had not yet lived full time on a boat which the plaintiff testified had been the reason for each acquisition. From these facts he asked me to draw the inference that the plaintiff had at least a secondary intention when he purchased and rehabilitated the Pacific Pilot.

On the other hand, counsel for the plaintiff suggested that if the plaintiff had not been a shipwright by trade the Minister would have had no basis for his assessment. He argued that the sale of the Pacific Pilot resulted in a fortuitous profit and that there was nothing in the evidence adduced by the plaintiff and his witness that there was ever any change in his original intention of providing a home for his family.

It has been frequently stated both in Canadian and English courts that “an accretion to capital does not become income merely because the original capital was invested in the hope and expectation that it would rise in value; if it does so rise its realization does not make it income . . . a profit motive is not sufficient to constitute a carrying on of a trade” (Leeming v Jones, 15 TC 333).

Therefore, to determine whether a profit derived from the sale of a capital or investment asset is a capital or income receipt in the hands of the vendor, a court must examine the intention of the vendor upon his acquisition of the asset and the whole course of his conduct in dealing with it.

The words of Thorson, P in Cragg v MNR, [1951] CTC 322 at 327: 52 DTC 1005 at 1007, are appropriate in considering this case:

There is, I think, no doubt that each of the profits made by the appellant could, by itself, have been properly considered a capital gain and the Court must be careful before it decides that a series of profits, each one of which would by itself have been a capital gain, has become profit or gain from a business. Such a decision cannot depend solely on the number of transactions in the series, or the period of time in which they occurred, or the amount of profit made, or the kind of property involved. Nor can it rest on statements of intention on the part of the taxpayer. The question in each case is what is the property [sic] deduction to be drawn from the taxpayer’s whole course of conduct viewed in the light of all the circumstances. The conclusion in each case must be one of fact.

The plaintiff herein engaged in three separate transactions of purchase and sale of boats from which the Minister has inferred that he was engaged in a course of conduct which made one of them, the sale of the Pacific Pilot, an adventure in the nature of a trade within the meaning of the Income Tax Act. Apparently he treated the profit from the sale of the Wanderer as a non-taxable gain and counsel for the defendant stated in argument that there was no question that the profit from the sale of The Natco, which was taken as part of the sale price of the Pacific Pilot, was not taxable. What makes the sale of the Pacific Pilot different? Defence counsel seemed to put it on three bases, (a) because the plaintiff was a shipwright by trade, (b) because the proceeds of sale were loaned back to the company for expansion purposes, and (c) because the plaintiff had never lived on either of the two boats which he stated he had purchased in anticipation of using them for living quarters.

In Harvey v Caulcott, [1952] TR 101, a builder built twelve shops, five of which he sold immediately, five of which he assigned to his wife who in turn mortgaged them and used the proceeds in the builder’s business, one of which he assigned to his mother and the last of which he retained for himself. Some twenty years later two of the shops assigned to the wife and a house purchased by the builder for one of his foremen were sold and the Inland Revenue contended that the profits derived from the sales were receipts of the builder in his business and included them in the taxable income of the business. At page 102 Donovan, J wrote:

Then, said the Inspector of Taxes, the proceeds of sale in 1946 and 1948 were used in the appellant’s business—“ploughed back” is the expression used—and not reinvested in outside investments. That again is neither here nor there. You can put the proceeds of private investments into your business without the investment becoming retrospectively trading stock. Such a use of the proceeds is no proof that you have turned the investment into trading stock. There were no other circumstances to establish such a change of character in the nature of these two properties. Nevertheless, the General Commissioners said:

“We hold that the profits were assessable under Case 1 of Schedule D.”

That means one of two things: either they are so assessable notwithstanding that the properties were investments; or that the profits are assessable because at the time of the sale the properties had become trading stock. If the decision bears the first of those meanings then it is clearly

wrong, because a builder can have a private investment just as much as anybody else, in the same way as a stockjobber can have a private investment in shares. The Crown does not contend the opposite. If it bears the second of those meanings, then there is no evidence from which it could reasonably be concluded that at the time of sale these properties had become trading stock.* [1]

Using this authority then, the fact that the plaintiff loaned the proceeds of sale back to his company is, as Donovan, J said “neither here nor there”. Similarly, just because the plaintiff happens to be a shipwright by trade does not, of necessity, change any transaction in which a profit arises in part due to the employment of his tradesman’s skill from a capital one to an income one. The result in my view is that bases (a) and (b) of the defendant’s contentions are disposed of.

To deal with contention (c) above I must deal with the plaintiff’s testimony. During it I observed him with care, particularly during cross- examination, as a result of which I am of the opinion that he was honest and candid in every way. I accept his evidence as truthful and find corroboration thereof in his brother’s testimony, with the honesty and sincerity of which I was also greatly impressed. Neither of these witnesses’ evidence was the slightest impeached during cross-examination and I am of the opinion that the plaintiff’s avowed intention of purchasing the Pacific Pilot for living accommodation for him and his family in the summer and for part-time towing and air-sea rescue work, corroborated as it was by his brother, was wholly believable.

While the plaintiff denied that he had any alternative or secondary intention at the time of his purchase of the boat of selling it at a profit, the principles relating to such a proposition should be examined and in this connection the words of Noël, J, as he then was, in Racine, Demers and Nolin v MNR, 65 DTC 5098 at 5103 ([1965] CTC 150 at 159) are pertinent:

In examining this question whether the appellants had, at the time of the purchase, what has sometimes been called a “secondary intention” of reselling the commercial enterprise if circumstances made that desirable, it is important to consider what this idea involves. It is not, in fact, sufficient to find merely that if a purchaser had stopped to think at the moment of the purchase, he would be obliged to admit that if at the conclusion of the purchase an attractive offer were made to him he would resell it, for every person buying a house for his family, a painting for his house machinery for his business or a building for his factory would be obliged to admit, if this person were honest and if the transaction were not based exclusively on a sentimental attachment, that if he were offered a sufficiently high price a moment after the purchase, he would resell. Thus it appears that the fact alone that a person buying a property with the aim of using it as capital could be induced to resell it if a sufficiently high price were offered to him, is not sufficient to change an acquisition of capital into an adventure in the nature of trade. In fact, this is not what must be understood by a “secondary intention” if one wants to utilize the term.

To give to a transaction which involves the acquisition of capital the double character of also being at the same time an adventure in the nature of trade, the purchaser must have in his mind, at the moment of purchase, the possibility of reselling as an operating motivation for the acquisition; that is to say that he must have had in mind that upon a certain type of circumstances arising he had hopes of being able to resell it at a profit instead of using the thing purchased for purposes of capital. Generally speaking, a decision that such a motivation exists will have to be used on inferences flowing from circumstances surrounding the. transaction rather than on direct evidence of what the purchaser had in mind.

In my opinion there is no direct evidence or evidence from which inferences could be drawn indicating that the plaintiff at the moment of purchase had in his mind the possibility of reselling “as an operating motivation for the acquisition’. On the contrary, there are at least four pieces of uncontradicted evidence from which the inferences leading to the opposite conclusion could be reached, namely that the sole motivating factor was that of providing a floating home for his family and for towing and air-sea rescue work:

(a) the evidence of Arne Bentzen confirming that his brother had long wanted to emulate his life-style by living on a boat;

(b) the evidence that on at least two occasions the plaintiff and his family used the boat for camping expeditions although it was not yet ready for full-time living accommodation also confirms the plaintiff’s interest in the use of his boat as a home;

(c) the evidence that neither the plaintiff nor his company had ever been in the business of buying and selling boats except in the circumstances herein recited;

(d) the evidence that during the time it was in his possession he had used it for towing jobs.

The plaintiff, therefore, did not, in my opinion, have any intention at the time of acquisition other than to repair and refurbish the Pacific Pilot for living accommodation and towing and air-sea rescue work and his whole course of conduct subsequent to the purchase confirms that this was so.

In that respect his position differs markedly from that of the respondents in C/R v Livingston, 11 TC 538, cited by counsel for the defendant in that the respondents there, who were ship repairers, converted a cargo vessel into a steam-drifter with the sole object in mind of reselling the vessel. While it was an isolated transaction the expenditures on that vessel were made “for the purpose of making it marketable at a profit” (the Lord President at page 543). Since 1 have found here that there was no such profit motive at the time of acquisition and none existed until the unsolicited offer was received which the plaintiff “could not turn down”, it follows, in my view, that the sale of the Pacific Pilot resulted in a fortuitous profit from the sale of a capital asset and was not a sale in the course of an adventure in the nature of a trade.

The appeal will be allowed and the plaintiff’s assessment for his 1969 taxation year will be referred back to the defendant for reassessment on the basis that the profit of $15,762.28 arising out of the sale of the Pacific Pilot was not a profit from a business. The plaintiff will be entitled to his taxed costs.