The Chairman (orally; October 29, 1974):
1 This is an appeal by Arnold Prochnau against the reassessment of the Minister of National Revenue for the 1970 taxation year.
2 There is a similar appeal involving his brother Raymond Prochnau, and it is agreed by all parties that the decision in the Arnold Prochnau case will be binding in respect of the Raymond Prochnau case also.
3 The case arises out of the adding back to income of a profit made on the sale of shares in a piece of real estate owned by the appellants.
4 I might say at the outset that the facts have given me a great many problems and, as is the case in every instance of trying to determine whether or not taxpayers were engaged in an adventure in the nature of a trade, one must try to discover what the appellants' intention really was at the time that they purchased the land in question. This is a very difficult thing to do, and I think the only way that one can really do it is by testing the evidence of the appellants on the surrounding circumstances.
5 I find that the surrounding circumstances in this case can be manipulated, if such be the proper word, to both favour and hurt the appellants.
6 The facts are, briefly, that in January of 1968 the appellants, who since about 1956 had been engaged in the building of custom homes and 3-, 7- and 14-suite apartment buildings, purchased a piece of property known as the Martin Estate property, in an expanding area of the City of Edmonton. According to Arnold Prochnau, who was the moving force behind the whole transaction, their intention was to create a retirement plan for themselves, and he personally felt that this was a good site in a good location, being only one block away from a brand-new enclosed shopping mall.
7 He and his brother purchased the property and the offer to purchase indicates that the property was zoned R-5, which would allow a walk-up apartment building of the type that they had planned. The type of building they had planned was most unusual in that it was to consist of two 48-unit apartment buildings, each of the 48-unit buildings to be self-contained, but there would be a common wall of concrete block separating the two. Plans were drawn by a Mr Holland and, in February of 1968 he was instructed to apply to the City for a permit. At that time, it was discovered that the property was zoned R-5 Classified, which, I have been told by Mr Boyer, a solicitor, meant that it was more of a floating zoning, and needed the approval of a Development Board in the City before the permit could be granted. This was applied for but the application was turned down.
8 At the same time the appellants were investigating the possibility of obtaining financing for their project, and they found that Montreal Trust was interested. However, as time went on and the frustrations with the City Planners continued, a period of tight money came along, and although the Montreal Trust was not averse to the project, it just did not have money available for such an enterprise.
9 The appellants then began to wonder what they were going to do with this piece of property for which they had paid some considerable sum, $175,000 I think it was, and which contained about an acre and a half of land upon which they were going to build this unique building, which, as another unique side effect or aspect, was to be the largest frame building in the City of Edmonton at that time. It was to be, as I have said, what is known as “a walk-up apartment” and, in addition, each section, or each 48-suite unit, was to have one elevator.
10 They subsequently looked to the vendor to see whether recourse could be had to him for financial support and, in the course of doing so, they retained a solicitor in this City by the name of Donald John Boyer who, as a result of investigations, discovered that the City planners had failed to register a caveat on this land. After considerable effort and negotiation with the City Solicitor, and after pointing out to the City the difficult position that municipality might be in in the event of a lawsuit, the rezoning, or a compliance with what they thought was the original zoning, was achieved and a permit was issued.
11 The problem was now, of course, that financing was difficult. Canada Life Assurance Company came into the picture, but its officers were not interested in having two separate mortgages on this building. What had happened was that the appellants had each had a corporation available as a vehicle by which he would hold his 50% interest in this building, and neither of these corporations had any assets. The assets were in Bylane Custom Builders Limited, which was the incorporation of the business that the brothers had been carrying on together since the fifties.
12 The property was subsequently involved in a complicated financing transaction whereby Canada Life, which wished to take an equity position in the property, insisted on the property being registered in its name, with a leaseback for 99 years. The property was to be constructed by Bylane Custom Builders Limited and, from the beginning, was treated as belonging to Bylane Investments Limited, another company in which each of the appellants held a 50% interest.
13 In the course of relating these facts, I have not mentioned, but that does not mean I have overlooked, other incorporated companies that were available for use by the appellants but, because of the peculiar type of financing involved, the field narrowed itself down to Bylane Custom Builders Limited as the owner, transferring the property to Canada Life, taking a leaseback, constructing the buildings by mortgaging out and transferring the interest in the lease to Bylane Investments whose only revenue came from the building from the time the first rental of apartments, in December of 1969, began.
14 The project, as Mr Arnold Prochnau had anticipated, was a success from the outset. In the first four months of operation, it showed a considerable profit for that period of time and, at the date of the sale of the shares in the company to R Robertson Leasehold Limited, there were sufficient funds in the company bank account to allow the purchaser to utilize some hundred thousand dollars of the company's funds; thus it can be clearly seen that the foresight of Arnold Prochnau, who, as I have indicated, was really the alter ego of Raymond Prochnau in this transaction, had been accurate and, as he had foreseen, this was a solid investment.
15 During the course of the period of time the two brothers owned it, that is, between January 1968 and September 30, 1970, a man by the name of Rasmussen, who was a chartered accountant in this City, approached them with a verbal offer which Arnold Prochnau refused. Almost immediately a higher offer, in written form, was presented and accepted. The result was a substantial profit to the appellants.
16 I think it is unnecessary to do so, but perhaps for the record I should point out that it is well established income tax law that for income tax purposes it makes no difference whether the shares or the assets of the company were sold. In this case the shares were sold and the offer to purchase contained the provision that the purchaser would change the name of the company, presumably because the name “Bylane” had become associated with the Prochnau brothers.
17 The question now is whether or not the appellants had a secondary intention, as was very aptly explained by Mr Justice Noël, as he then was, in Racine et al v Minister of National Revenue, [1965] C.T.C. 150, 65 D.T.C. 5098, when referring to the decision in Regal Heights Ltd v Minister of National Revenue, [1960] C.T.C. 384, 60 D.T.C. 1270, which first brought forth the theory of secondary intention.
18 I must consider that Arnold Prochnau was aware of the progress that was taking place in the area of the Southgate Shopping Centre, that it was an area of expansion, that it was a good site and, in his view, a sound investment. After he had said that they intended to keep this as an investment, I asked him whether it made any difference to him whether or not he kept the building or the cash and he said no, it made no difference to him, because he had been advised by accountants that the sale of the shares would result in a capital gain.
19 Raymond Prochnau, in giving his evidence, really was called for the sole purpose of stating his intention, which is the least that one could expect from an appellant in this sort of a case. He said that it made no difference to him if he kept the building or if he turned it into money, because it was still an investment.
20 I do not consider Raymond to be very knowledgeable in the business end of the operation. I think he was, perhaps, as Arnold has said, the man in the field supervising, the man who really got the building done; nevertheless, in answer to a question put to him by Crown counsel as to when he actually came to this conclusion that it made no difference whether he had the building or the money, he said clearly and without hesitation: “When we got the offer to sell the shares.”
21 As I have said, many things mitigate against these appellants. They were in the business of building apartments and selling them. I have not overlooked that fact. Nor do I overlook the fact that they still, to this day, have 72 rental suites which they have retained.
22 As I have said, it is very, very difficult to know with any degree of certainty what really went on in the minds of these appellants at the time they purchased the land, but I must say that I have been extremely impressed with the evidence of Mr Boyer, who was called to tell how the zoning was finally obtained. He pointed out that, after succeeding with the City, financing was a real problem; that, as he put it, “most institutional lenders wouldn't touch highrises in that area with a ten-foot pole”. Edmonton, he said in effect—or that is the inference I draw from his evidence—was still, in that area at least, “a walk-up apartment area” and so he was concerned with regard to their ability to obtain the necessary financing. In order to properly advise them and to estimate the availability of funds for their project, he sought an answer from Arnold Prochnau as to what he and his brother intended to do, that is, whether they intended to build the project and sell it, or build it and retain it, and he was told it was for retention, not for sale. I cannot think of any reason for believing, nor is there anything in the evidence from which I could draw such an inference, that this was not an honest and forthright answer by a client to a solicitor who had been the appellants' saviour, to that date in any event, in making this land, in which they had such a considerable sum of money invested, usable by them for their intended purpose.
23 I am aware that at the time the Prochnaus sold it they did not have any money of their own invested in it. However, it was a good investment. They could have kept it and, I think, have been very satisfied with the results. There is no doubt whatsoever in my mind that they intended, in September of 1970, to sell that property at the best possible price; but I cannot find, on all the evidence, that their reason for purchasing the property in January of 1968 was simply to make a profit, or that they had a clear-cut secondary intention to turn the property to account at the first opportunity and thereby be caught within “the secondary intention rule” of the Regal Heights and the Racine cases.
24 So therefore, really, on the extraneous evidence of Mr Boyer as distinguished from the evidence of the appellants, I find support for their allegation that their primary and only intention at the time of purchase, which is the time of importance, was to build and hold this as an investment.
25 Having come to this conclusion, I must find that they have satisfied the onus upon them, and the appeals will be allowed and the assessment vacated.
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