Mikolaj Pietrow v. Minister of National Revenue, [1967] CTC 587, 68 DTC 5008

SHEPPARD, D.J.:—The appellant, who appeared without counsel, appeals against the decision of the Tax Appeal Board of October 25, 1966 affirming an assessment by the Minister of February 26, 1965 whereby the Minister increased the appel- lant’s income for the taxation year 1958 by the sum of $26,466.61 as the appellant’s share of the profit arising from the sale of 1516 Burnaby Street, Vancouver, and for the taxation year 1961 by the sum of $16,451.02 as the appellant’s share of the profit arising from the sale of 1435 West 11th Avenue, Vancouver.

The appellant contends such amounts were capital and the respondent contends that the amounts were income from a business within Sections 3 and 4, and 139(1) (e) of the Income Tax Act, R.S.C. 1952, c. 148. That is the issue. The following gives the history of each parcel of property referred to at the hearing.

In 1948 the appellant came to Vancouver. On December 22, 1950 he bought a lot at 1908 Commercial Drive, Vancouver and built thereon a building in which the appellant carried on a business under the name of Famous Furniture Company, and in 1958 the appellant discontinued that business and rented the property. In 1960 he sold the property. The proceeds were regarded as capital and are not in issue. In 1952 the brother, Kornelieusz, bought 2240 East Hastings Street and has since carried on there the business of Famous Upholstery Mfg. The brother had erected there a store and living quarters and the appellant and his father have since 1958 lived in the living quarters at the back of the store. In June of 1954 the appellant and his brother bought 2230 East Hastings Street, Vancouver and erected thereon a building consisting of two stores and six suites called the Ergo Apartment, which is still owned by the brothers and rented. The building was erected by the brothers entering into contracts with various trades. In July 1955 the appellant and his brother bought property at 1435 West 11th Avenue and erected thereon a building known as the Daisy Apartment consisting of eight suites. The appellant and his brother made the contracts with the trades and they borrowed on the property by mortgage $40,000.00 at 6% from the Manufacturers Life Insurance Company (Ex. 1). In June 1956 the building was completed and the suites rented. On November 21, 1957 the brother began to advertise the property for sale. On January 18, 1961 the property was sold to Moffat at a profit of $32,902.05 of which one-half was that of the appellant and was added to his income for the taxation year 1961.

In May 1956 the appellant and his brother bought a lot at 1516 Burnaby Street, borrowed on mortgage thereof $105,000 from the Manufacturers Life Insurance Company (Ex. 2) and built thereon a building of 23 suites known as the Laguna Apartment which was completed in December 1956 and the suites then rented. On December 6, 1957 the building was advertised for sale. Subsequently, on May 18, 1958, the property was sold for a profit of $52,933.23 of which one-half was the appellant’s, and the Minister by the assessment added his half to the appellant’s income for the taxation year 1958.

In April 1958 the appellant and his brother bought a lot at 1315 Bute Street, Vancouver, got a mortgage loan thereon for $250,000 from a mortgage company and built thereon a concrete building containing 39 suites known as the Sun Court Apartment. In August 1959 the construction was completed and the suites rented. The brother has since occupied the penthouse.

In October 1958 the appellant’s nephew and niece bought a lot at 1826 Adanac Street, Vancouver and built thereon the Astra Apartment which was completed in August 1959 ; the appellant bought a one-third interest. This property was advertised for sale on November 16, 1960 to January 15, 1961.

In 1960 the appellant bought a house in Merritt, B.C. which he has since rented for $70 per month. In 1965 the appellant bought five acres and a house in Surrey Municipality which he has rented at $140 per month. In 1967 he built thereon a triplex.

There was advertising of properties for sale in the Vancouver Sun as follows:

Daisy Apartment, 1435 West 11th Avenue, was advertised from November 21, 1957 to April 19, 1958 (Ex. 9) of which the advertisement of December 6, 1957 appears as follows:

S. Granville 11th

Builder Sells

Brand new block, 1 & 2 large bedroom suites, most modern, colored plumbing, mahogany kitchen.

Location 1485 W. 11th. Rough income $13,500.00, can be increased up to $15,000.00 per year. Mortgage $40,000.00, 5144:°%, payments monthly $273.50 principal & interest. Expenses approx. $2,400.00. Net approx. $7,000.00 after payment mortgage & expenses. Cash needed $45,000.00. Office address 2240 E. Hastings.

Laguna Apartment, 1516 Burnaby Street, was advertised from December 6, 1957 to April 19, 1958, and that of February 28, 1958 reads as follows (Ex. 9) :

West End 23 Suites

Builder Sells

Best Location in City

Brand New Block: 20—1 bedroom, 2—2 bedroom, 1—2 bedroom penthouse, large suites, modern colored plumbing, mahogany kitchen cabinets, G.E. fridges & stoves, colors yellow & green.

Location 1516 Burnaby St., only 2 blocks to beach & shopping. Gross income approx. $30,000.00 per yr. net income approx. $17,000.00, mtge. $105,000.00 6% monthly payments. $747,00 principal & interest, sell cash to mtge. F.P. best offer. Must sell quickly for very low price. Apply owner 2240 E. Hastings, office HA. 4480.

From November 16, 1960 to November 28, 1960 there were ten advertisements of three properties, namely, 1236 West 11th Avenue (the brother’s), 1435 West 11th Avenue (Daisy Apartment) and 1826 Adanac Street (Astra Apartment), of which the advertisement of November 16, 1960 reads as follows (Ex. 10) :

Owner sells—save $5000.00.

Brand new 11 suites 1236 - W 11th Ave., 1435 W. 11th Ave. and 1826 Adanac. Apply AL 5-8633 (Famous Upholstery Mfg.)

On December 15, 1960 to January 7, 1961 two properties were advertised, 1236 West 11th Avenue (the brother’s) and 1435 West 11th Avenue (Daisy Apartment) in four advertisements, of which that of December 15, 1960 reads:

Owner sells—save $5,000.00.

1236 W. 11th, 1435 W. 11, brand new blocks, 11 suites AL 5-8633.

The appellant filed a return which did not include as income the profits realized from the two properties, on Burnaby Street and on West 11th Avenue. On February 26, 1965 the Minister made the assessment and on October 25, 1966 the appellant appealed to the Tax Appeal Board and on the dismissal of that appeal he has appealed to this Court.

The test is whether the profit is deemed to be capital as merely derived from the realization of an investment or deemed to be income as profit realized from the carrying on of a business. That principle was stated in Californian Copper Syndicate v. Harris (1904), 5 T.C. 159 at 165 as follows :

It is quite a well settled principle in dealing with questions of assessment of Income Tax, that where the owner of an ordinary investment chooses to realize it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit in the sense of Schedule D of the Income Tax Act of 1842 assessable to Income Tax. But it is equally well established that enhanced values obtained from realization or conversion of securities may be so assessable, where what is done is not merely a realization or change of investment, but an Act done in what is truly the carrying on, or carrying out, of a business . . .

What is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts; the question to be determined being—Is the sum of gain that has been made a mere enhancement of value by realizing a security, or is it a gain made in an operation of business in carrying out a scheme for profit-making

and was approved in part in Commissioner of Taxes v. The Melbourne Trust, Limited, [1914] A.C. 1001 at 1010 by Lord Dunedin and in Campbell v. M.N.R., [1953] 1 S.C.R. 3 at 6; [1952] C.T.C. 334 at 337, by Locke, J., and fully approved in Cragg v. M.N.R., [1952] Ex. C.R. 40 at 41; [1951] C.T.C. 322 at 323, by Thorson, P.

The onus is on the appellant to prove error in the ssessment. by the Minister and in the findings of the Tax Appeal Board which dismissed the appeal: Johnston v. M.N.R., [1948] S.C.R. 486; [1948] C.T.C. 195, followed in Tougas v. M.N.R., [1955] Ex. CR. 124; [1955] C.T.C. 66; Dezura v. M.N.R., [1948] Ex. C.R. 10; [1947] C.T.C. 375, Thorson, P; Fyke v. M.N.R., [1964] Ex. C.R. 584; [1964] C.T.C. 54, and Mulholland v. M.N.R., [1952] Ex. C.R. 233.

The appellant contends that he was never in the business of a builder but owned the properties for the purpose of revenue and sold the two properties because he needed money for the Bute Street property, hence the sales were realizations of an. investment and a capital gain, not income.

On the other hand, the Minister contends that the profits were income from a business within Sections 3 and 4 of the Income Tax Act under the following circumstances :

(a) that the appellant and his brother were described as “builders” and thereby admitted they were builders by mortgages (Exhibits 1 and 2) to the Manufacturers Life Insurance Co. Exhibit 1 is for $40,000 and charges 1435 West 11th Avenue, the Daisy Apartment and Exhibit 2 is for $105,000 and charges 1516 Burnaby Street, the Laguna Apartment. Also they were described as builders in Exhibit 9.

(b) that there were badges of a business in buying property, obtaining loans secured by mortgage, building an apartment thereon, renting—which would show it profitable— then advertising and selling for a profit. Hence there were badges of business within Regal Heights Limited v. M.N.R., [1960] S.C.R. 902; [1960] C.T.C. 384, and Harvey Smith v. M.N.R., [1961] Ex. C.R. 186; [1960] C.T.C. 391.

At law there are facts to support the assessment by the Minister and the decision of the Tax Appeal Board. Therefore the issue is one of fact. The appellant contends he was not a builder nor were the properties bought to sell. The onus is on the appellant to prove error in the assessment, as every fact found or assumed in the assessment is taken against the appellant until disproven.

In Johnston v. M.N.R., supra, Rand, J. at p. 489 [p. 202] said:

Every such fact found or assumed by the assessor or the Minister must then be accepted as it was dealt with by these persons unless questioned by the appellant.

and Kellock, J. at p. 492 [p. 205] :

It is for him to substantiate the objection. If he does not do so he would, in my opinion, fail in his appeal . . . .

I further think that that situation persists right down to the time when the matter is in the Exchequer Court under the provisions of section 63.

In Dezura v. M.N.R., supra, Thorson, P. at p. 16 [p. 380] said:

If, on the other hand, he fails to show that the amount determined by the Minister is erroneous, he cannot justly complain if the amount stands.

On the hearing of this appeal the appellant alone gave evidence on his behalf and there are so many contradictions to his story that his evidence cannot be accepted as proof of error in the assessment.

(1) The appellant testified that he was not a builder; in contradiction to that he is described as a builder in mortgages of the Manufacturers Life Insurance Co., being Exhibits 1 and 2. Exhibit 1 is for $40,000 on 1485 West 11th Avenue, the Daisy Apartment, and Exhibit 2 is for $105,000 on 1516 Burnaby Street, the Laguna Apartment, both identified by the date and amount. The mortgage company would not advance the monies without knowing what was the appellant’s business and for what the money was wanted, as when the appellant was borrowing $250,000 from the mortgage company on the Sun Court Apartment, 1315 Bute Street, the company refused to advance any money until the mortgagors had entered into a contract with a construction company, and the mortgagors thereupon entered into a contract with Biely Construction Co. Ltd. In any event, by signing the mortgages (Exhibits 1 and 2) the appellant accepted everything written therein and therefore the money was lent by the mortgage company to the mortgagors and borrowed by the appellant and his brother, the mortgagors, as builders, a position in which the appellant admitted acting at least in respect of other property, for example, 1908 Commercial.

(2) The appellant said that he did not intend to sell any of the property, that the advertisements were issued by the brother as ‘‘gimmicks’’, that is for the purpose, not of selling the property advertised, but to bring potential customers into the brother’s store, Famous Upholstery Mfg. That statement is contradicted by the number of advertisements.

There were the following advertisements in the Vancouver Sun (referred to as Exhibits 9 and 10) :

1435 West 11th Ave.—from November 21, 1957 to April 19, 1958, 22 advertisements.

1516 Burnaby Street—from December 6, 1957 to April 19, 1958, 15 advertisements (Ex. 9).

As to 1236 West 11th (which is not the appellant’s but the brother’s), 1435 West 11th (which belongs to the appellant and his brother), and 1826 Adanac Street (in which the appellant, his nephew and niece each had a third interest) — from November 17 to November 25, 1960, 10 advertisements (Ex. 10) ; and 1236 West 11th and 1435 West 11th—from December 16, 1960 to January 7, 1961, 4 advertisements (Ex. 10), or a total of 51. Of the four specimen advertisements shown in full (Exhibits 9 and 10) only one reference is made to the Famous Upholstery Mfg., the others give the address to apply to as 2240 E. Hastings, or to a telephone number or to both.

It is not the usual way to advertise a company such as Famous Upholstery Mfg. by paying for and issuing that amount of advertising for the sale of property in which others have an interest who have no intention to sell. Further, the advertisements were treated by the appellant and others as real offers. In 1958 the appellant and the brother, pursuant to the advertisement, received a visit from a real estate agent and eventually the agent found a buyer for 1516 Burnaby Street and was paid a commission. Having sold that property advertisements were continued. In 1961 Moffat, seeing an advertisement, called on the brother, was referred to the appellant at the Adanac Street property where Moffat met the appellant. Moffat was offered three properties, the two properties on West 11th and the third, the Adanac Street property, called the Astra Apartment in which the appellant, his nephew and niece had each a one- third interest. Moffat was not told that the properties were not for sale but was told that they were for sale. The negotiations continued, there were offers and counter-offers and eventually he purchased 1435 West 11th Ave. for $92,000.

It would therefore appear that the advertised property in which the appellant had an interest was for sale.

The appellant also testified that they had sold the two properties, 1435 West 11th Ave. and 1516 Burnaby Street, as they needed the money for the apartment built on Bute Street. This contradicts his statement that the advertisements were mere “gimmicks”, that there was no intention to sell.

Further, there is a question whether any money was needed for the apartment on Bute Street or that either sale was to raise money for that purpose. The appellant has testified that they obtained a mortgage loan on the Bute Street property from a mortgage company for $250,000 and that the mortgage company would not advance any money to them, but if they employed a construction company the mortgage company would advance the money accordingly. The appellant and his brother then contracted with the Biely Construction Co. Ltd. and the money was advanced. Hence it is apparent that the mortgage company wanted to be assured that when the monies were advanced there would be a completed building on the property, and as the building was financed by the mortgage there could be no need of financing it from the sale of the other properties.

Again, the Burnaby Street property was sold in 1958 but the advertising continued and it was an advertisement seen in 1961 which Moffat answered and from which he subsequently bought the property on 11th Avenue. Also, after the purchase of the property on Bute Street and the construction of the apartment there had begun, the appellant continued buying other properties, which indicated that there was no need of funds. In April 1958 the appellant and his brother purchased the property on Bute Street and in August 1959 they completed the building. The appellant bought into other property after August 1959. He bought into the Adanac Street property and the Astra Apartment thereon which had been built by a nephew and niece and that was advertised for sale on November 16, 1960 to January 15, 1961, and offered to Moffat. In 1960 the appellant bought a house in Merritt; that was after the construction of the Bute Street apartment and before the sale to Moffat. In 1965 and after the sale to Moffat the appellant bought five acres and a house in Surrey which he rented at $140 and in 1967 he built a triplex thereon.

Under the circumstances the appellant should have produced some evidence as to the actual debt that required the selling of the two properties and how the proceeds derived from the sales were disbursed. In contrast he has merely given his statement that the sale of the two properties was required by the building of the Bute Street apartment, but that contradicted his evidence that the advertisements were ‘‘gimmicks’’, that is without any intention of selling.

Again, the brother was a material witness but he was not called to give evidence although that absence was referred to by the Tax Appeal Board.

The weight of the evidence of the appellant is not sufficient to shift the onus of proof nor to prove error in the assessment, and there is applicable that conclusion of Cameron, J. in Fyke v. M.N.R., supra at p. 592 [p. 60] as follows:

. . . the appellant in my view has failed to displace the onus cast on him to satisfy the Court that there is error in law or in fact in the assessment (see Johnston v. M.N.R.).

Under these circumstances the appeal is dismissed with costs to the respondent.