Be-Vi Investment Corp. v. R., [1975] C.T.C. 636, 75 D.T.C. 5444

Heald, J:

1 The plaintiff is a body corporate incorporated in January of 1958 pursuant to the laws of the Province of Quebec.

2 This is an appeal from assessments of the plaintiff by the Department of National Revenue by which the gain arising from the sale of an apartment block owned by the plaintiff in Montreal was treated as income. The effect of such treatment was that, when the reserve under paragraph 85B(1)(d) of the Income Tax Act had been taken into account, there was added to the plaintiff's income, the sum of $60,537.26 for its 1968 taxation year, the sum of $6,988 for its 1969 taxation year and the sum of $6,989 for its 1970 taxation year. Plaintiff objected to said assessments and appealed same to the Tax Review Board. That Board dismissed plaintiff's appeal and this action is an appeal from that decision.

• (1) to carry on the business of a real estate development company; and

• (2) to acquire land for the purpose of erecting buildings thereon for sale.

4 The plaintiff's first transaction was the purchase in 1958 of a farm containing some 20 to 30 acres just outside of Montreal (in Dollard St Laurent). Said farm was subdivided in 1958 into two large lots. One of said lots was sold in 1958 at a gross profit to the plaintiff of some $22,000. The other lot was sold sometime in late 1959 or 1960 at a gross profit of approximately $23,500. The shares in the plaintiff corporation were held, at all times relevant to said transaction, by Mr Peter Vida, Mr Stephen Berend, his brother John Berend and one L L Marer, in equal shares. Thus each of the shareholders held a 25% interest in the company. Thereafter the company was dormant until 1963. After May 1, 1963 and at all times relevant to the issues in this action, plaintiff corporation's issued shares were beneficially owned on a fifty-fifty basis by the Berend group and the Vida group. The Berend group consisted of the two brothers, Stephen and John and they shared their interest in the plaintiff corporation on an equal basis. The Vida group consisted of Peter Vida, his wife Shirley, his children, and his wholly owned private corporation, Peter Vida Inc. Since May 1, 1963 Peter Vida has been president, John Berend vice-president and Stephen Berend secretary-treasurer. All three are the company directors. Peter Vida and John Berend gave evidence at the trial. I will deal firstly with the evidence of Peter Vida since he was, in all respects, the plaintiff's principal witness.

5 Mr Vida presently lives in Vancouver where he is the manager of the Industrial, Commercial, and Investment department of a large Vancouver real estate firm. Mr Vida was born in Hungary, emigrated to Canada in 1951, and lived in Montreal from 1951 until 1967 when he moved to Vancouver. In Montreal, he owned and operated a real estate business through his own private company, Peter Vida Inc. Additionally he had a considerable number of other interests. He owned 50% of the issued shares in Moquin and Vida Inc, a real estate brokerage company which was incorporated in 1952. In 1953, in partnership with Mr Moquin and one Perrault, he became owner of a one-third interest in a twelve suite apartment block which was constructed and later sold. In the years from 1958 to 1963, Mr Vida through his own company, Peter Vida Inc acquired land, built three warehouses thereon, and sold said warehouses as soon as they were completed. During these years, he was also operating his own real estate firm which was engaged mainly in the sale of commercial buildings. Mr Vida, through his own company, was a 50% owner of Hampshire Realty Company, the other partner being one George Winter. This company acquired land, constructed a 30-unit 3-storey apartment block thereon in 1956 or 1957 and sold this block within a year of its construction. Mr Vida acknowledged that said block was for sale from the instant it was completed in 1959 or 1960. He agreed that said block was pretty well filled with tenants at the time of sale and stated that tenant occupancy is always a factor in the sale value of apartment blocks. Mr Vida also became a 50% owner in Stanstead Investment Incorporated which company constructed an office building in Montreal in 1961. When he moved to Vancouver in 1967, he sold his interest in this company. When Mr Vida came to Vancouver, he incorporated a BC company under the name of Stanstead Investments Ltd. This company acquired several lots in BC in 1967 and 1968, eight or ten single family dwellings were constructed thereon and were sold as soon as they were completed. This BC company was entirely owned beneficially and managed by Peter Vida. Mr Vida, through his company Peter Vida Inc, also acquired one-third of the issued shares in Gulf Investments Limited, a Montreal company. This company acquired land in the late 1950s, built a number of pre-leased buildings thereon and then sold them. Mr Vida disposed of his interest in Gulf Investments on about June 1, 1963 through sale to one of his partners in the venture. In 1963 or 1964, Mr Vida in equal partnership with one Selzer acquired 20 to 30 acres of unserviced land in the Parish of St Hubert. He acknowledged that their intention in acquiring this land was to resell at a profit. However, this property was finally sold in 1966 at a loss.

6 In the early 1960s, Mr Vida also became a one-third partner in partnership with Interstate Investments Inc in the purchase of a city block of vacant land in the Town of Mount Royal. The land was purchased, rezoned and then sold off in parcels.

7 Coming now to the transaction in issue in this action—Mr Vida testified that in 1962 or 1963, he purchased two vacant lots on Sussex Street in downtown Montreal. Said lots are situated across the street from the Montreal Forum. The Children's Hospital is also nearby. He said that he purchased said lots, originally intended to construct thereon a 24 to 30 suite apartment block but did not proceed with this plan because, in his view, such a project would not be economical. He felt that if he was able to acquire another contiguous lot, he would be able to construct a larger block which would be, in his view, more economically viable. This however would result in a financial undertaking beyond his resources. Accordingly, he invited Stephen and John Berend to participate with him in this undertaking. The Berend brothers were close friends and neighbours of his, their friendship dating back some 45 years. The Berend brothers were co-owners of a lumber business in Montreal and have been actively engaged in the operation of that business for some 25 years. After considerable discussion, the Berend brothers agreed to participate with Mr Vida, using the vehicle of the plaintiff company. Thus, an agreement was entered into dated May 1, 1963 between Peter Vida and Stephen Berend (Exhibit 4). Under this agreement, the Vida group was to own one-half and the Berend group was to own one-half of the company's issued shares. This agreement provided, inter alia: that each partner would subscribe for additional shares or advance money by way of loans up to $65,000, said participation to be made by each partner in equal shares (para 5); that the partners would consult with each other concerning any expenditure in excess of $2,000 and that no such expenditure shall be made unless concurred in by both partners and that the day-to-day business of the company was to be conducted by Mr Vida (para 6). Paragraph 7 is, in my view, quite significant and accordingly, I quote it hereunder in full:

7. Notwithstanding the Parties' shareholdings in the company, any profit derived by the Company from the sale of the building to be erected shall be distributed as follows:—

Peter Vida Inc, Peter Vida
               and/or their nominees           --            66 2/3%;
           Berend and/or his nominees          --            33 1/3%;

Any profit derived from the operation and exploitation of the said building shall be distributed in the same ratio, but after deducting therefrom the amount representing interest on the Parties' respective investment into and to the loans to the Company and the reimbursement to each Party of the amount paid by him in connection with the insurance on the life of the other referred to in paragraph 15 herein;

8 Mr Vida's explanation as to why he was to receive a share of the net profits and a share of the profits from sale of the building in excess of his shareholder's equity in the company (662/3% compared to 50%) was that since he would be operating the block and looking after the construction thereof and since the Berend brothers were fully engaged in their own lumber business and would not be actively engaged in either the construction or operation of the block, it was agreed between the partners that he should be rewarded in this manner instead of some other type of arrangement such as a salary, for example.

9 Mr Vida said that all three partners were looking for a “pension type of investment”, that he was 43 years old in 1963, that he had no other pension (excepting a $100 annuity), and the purpose of all three of the partners was to acquire the apartment block and to retain same for investment income. In any event, the project proceeded, an adjoining lot having been acquired; arrangements were completed with the Montreal Trust Company for a first mortgage in the amount of $850,000. Stephen Berend and Vida put up the balance of the necessary cash. The total cost of the block, including land cost, was in the order of 1.2 million dollars. During the course of construction, the general contractor went bankrupt (in the fall of 1964). The result was that some fourteen liens were registered against the property. It took some three or four months for the liens to be removed from the title and this caused problems in raising further financing. The building was substantially completed at the time of the bankruptcy. However, the bankruptcy caused substantial delay in completion of the block. In January of 1965, 10 apartments had been rented which figure had increased to 20 by February. By August of 1965, 50% of the apartments had been rented. By February of 1966, some 83 suites had been rented out of a total of 112. Said apartment block, known as Sussex House was constructed of pre-stressed prefabricated reinforced concrete, was 16 storeys in height, with a pool on the roof, and containing restaurant facilities on the ground floor. At the time of the general contractor's bankruptcy, there was mostly finishing work left to be done (eg flooring, carpeting, etc). Mr Vida arranged for the completion work by hiring subcontractors. He paid all the bills, supervised the work of the building janitor, collected the rents, renewed the leases and looked after the building generally.

10 During the years 1963 to 1967 inclusive, the plaintiff company's only asset was Sussex House. By September of 1967 there was nearly full occupancy. On October 11, 1967 the plaintiff company sold Sussex House to one Fridrick Geller for a price of $1,342,500 thus making a profit on the sale which profit forms the subject matter of this action.

11 Mr Vida testified that he had received enquiries from real estate firms concerning possible sale of Sussex House from the time construction had commenced. However, he said that such enquiries were rebuffed since he and his partners were not interested in selling. He rejected any suggestion that the decision to construct Sussex House was related in any way to Expo 67 which was held in Montreal in 1967, pointing out that it was intended to complete the block in 1964 which would have been accomplished but for the bankruptcy of the general contractor. Mr Vida gave as the reason for the Sussex House sale his decision to move to Vancouver in 1967. He said that it was getting more and more difficult to do business in Quebec at that time, that the business and political atmosphere was not very good, and that his business was suffering because of the political climate. He explained that his real estate business was largely with companies looking to settle in Quebec, that because of the political climate, these companies were settling in Ontario instead of Quebec. He also felt that the situation was going to get worse. He advised his partners in Sussex House, the Berend brothers, of his decision to move. He said he discussed with them the possibility of retaining Sussex House and hiring a manager. The Berend brothers did not consider this a practical alternative and the result was the decision to sell. Mr Vida also sold his interest in the Stanstead office building referred to supra and his own family home.

12 The evidence establishes that as early as January of 1967, the principals of the plaintiff were trying to sell Sussex House. Mr Vida said that since he was in the real estate business in Montreal, he let it be known to his real estate associates that the property was for sale. Several offers were received through Valver Real Estate, another Montreal real estate firm, in June or July of 1967, negotiations ensued and resulted in the sale to Geller referred to supra. Valver Real Estate was paid a commission in excess of $30,000 by the plaintiff on the sale.

13 John Berend also gave evidence at the trial. He said that he and his brother were equal partners in all their business ventures including the Sussex House venture even though the agreement with Vida (Exhibit 4) was nominally with Stephen Berend only. He confirmed that he and his brother, like Vida, wanted a long term investment for retirement security and that was their purpose in participating in the Sussex House venture. He said he and his brother had no intention of selling at the beginning. When queried as to why they agreed to sell in October of 1967, he said “Peter (Vida) was the one who managed the whole thing—he did it all—neither my brother nor I had the knowledge or the time to get involved.” He expressed the view that if Vida had not moved to Vancouver, Sussex House would not have been sold. In cross-examination, he said that he and his brother “trusted Vida's judgment on real estate matters” and they left everything to Vida, and followed his judgment since neither he nor his brother had any experience in real estate dealings.

14 The principles set out by Noël, J in Racine v Minister of National Revenue, [1965] C.T.C. 150, 65 D.T.C. 5098, have application to the facts and circumstances present in this case. At page 5103 [DTC] of that judgment, Mr Justice Noël said:

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 the purchase, the possibility of reselling as an operating motivation for the acquisition; that is to say he must have had in mind that upon a certain type of circumstance 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 based on inferences flowing from circumstances surrounding the transaction rather than on direct evidence of what the purchaser had in mind.

15 Chief Justice Jackett, in the case of Pine Ridge Property Ltd v Minister of National Revenue, [1973] C.T.C. 201, expressed the view that the relevant facts as at time of purchase, subsequent events and the affirmations of the company's shareholders, should all be taken into consideration in deciding whether the sole motivation at the date of acquisition was the creation and retention of a capital asset.

16 In this case, the evidence clearly establishes that Peter Vida was the “mind” of the plaintiff corporation at all relevant times. The first land acquisition in which the Berend brothers were partners of Vida's in 1958 (the Dollard St Laurent farm) was acknowledged by Vida to have been his idea. He testified that said farm was “bought and sold at my suggestion”. Likewise it is clear both from Vida's evidence and the evidence of John Berend that the Sussex House venture was also Vida's idea. Vida invited the Berend brothers into the venture but all decisions concerning same were Vida's decisions, acquiesced in by the Berend brothers, because they trusted his judgment and expertise in real estate matters. They left “everything to Vida”. They were not real estate developers while Vida had spent years in that business. Vida was deeply involved in the construction of Sussex House. When problems arose before completion of construction through the bankruptcy of the general contractor, it was Vida who stepped in and arranged for completion of the building, and for the necessary additional financing. Upon completion, Vida was completely in control so far as the leasing and management of the block was concerned. Therefore, while, technically, and from a corporate point of view, the Berend brothers were owners of one-half of the issued shares of the plaintiff company and might, perhaps, have been able to frustrate any decision taken by Vida on behalf of the plaintiff company, this is not, in fact what transpired. The evidence clearly establishes that the Berend brothers were cast in the role of “silent partners”. While the corporate documents of the company along with the agreement between the partners of May 1, 1963 (Exhibit 4) provided for equal control by the partners, in fact Vida was in control at all times and while he consulted the Berend brothers and kept them informed, it was Vida who was the de facto mind of the plaintiff company.

17 The question which the court must consider and answer in the case at bar is the same question which I was called upon to answer in the case of Her Majesty the Queen v Dobroskay, [1974] C.T.C. 260, 74 D.T.C. 6158, namely, whether the circumstances surrounding subject transaction, together with subsequent events, corroborate or negate the taxpayers' intentions as expressed at trial some 12 years later. In the Dobroskay case, I held that said circumstances and subsequent events did negate the expressed intentions of the taxpayers at trial. I held likewise in the case of A Goldstein v Minister of National Revenue, [1973] C.T.C. 51, 73 D.T.C. 5088, where the testimony at trial of the taxpayer was contradicted by letters written by him some years previous to the trial.

18 After carefully considering all of the evidence, I have reached a like conclusion in this case. In my opinion, the circumstances surrounding this transaction together with subsequent events negate the expressed intentions at trial of Peter Vida and John Berend. I will now deal with the factors and circumstances which have impelled me to reach this conclusion.

19 I attach some significance to the specific objects of the plaintiff company. While this circumstance, if taken by itself, would not likely be conclusive, it is, in my view, a factor to be considered.

20 In the case of Western Leaseholds v Minister of National Revenue, [1959] C.T.C. 531, 59 D.T.C. 1316, Mr Justice Locke said at 542 [1322]:

In Anderson Logging Company v The King, [1925] S.C.R. 56; [1917–27] CTC 207, Duff J, as he then was, said that if the transaction in question belongs to a class of profit-making operations contemplated by the Memorandum of Association, prima facie at all events the profit derived from it is a profit derived from the business of the company. The presumption may, of course, be negatived by the evidence as was done in the case of Sutton Lumber & Trading Company v Minister of National Revenue, [1953] S.C.R. 77, [1953] C.T.C. 237. In the present case, however, the evidence, far from negativing the presumption, appears to me to support it.

21 In the case at bar, as in the Western Leaseholds case, the evidence, in my view, clearly supports the prima facie presumption referred to supra. The plaintiff only engaged for all practical purposes in two major land transactions—the first was the farm purchase in 1958, followed by subdivision and sale. This transaction was clearly in furtherance of the first object of the company as stated in the Letters Patent, ie to carry on the business of a real estate development com pany. The other transaction, the Sussex House transaction under review in this action, was, in my opinion, in furtherance of the second expressed object of the company, ie to acquire land for the purpose of erecting buildings thereon for sale. In examining this transaction, the court is entitled to consider the knowledge, business experience and similar transactions entered into by Peter Vida, the dominant partner in this enterprise.[FN1: <p>See for example,<em>Bel-Conn Limited</em>v<em>Minister of National Revenue</em>, [1969] C.T.C. 1, 69 D.T.C. 5026, Kerr, J.</p>] Mr Vida was in the real estate business in Montreal for 16 years. During that time, apart from operating said real estate business, he was involved in many transactions similar in character to subject transaction. I have detailed these transactions supra and need not repeat them here. Suffice it to say that many of these ventures involved the acquisition of raw land, the construction thereon of apartment blocks, houses, or warehouses and a sale shortly thereafter. In the case of the apartment block transactions, Mr Vida agreed that some of them were for sale upon completion and that tenant occupancy was always a factor in the sale value of apartment blocks. The pattern followed in the Sussex House transaction is similar to the pattern referred to supra. By September of 1967 there was nearly full occupancy. The gross rental revenue was $37,000 in 1965, $142,000 in 1966, and had risen to $201,000 in 1967. On Mr Vida's own evidence, it is clear that apartment buildings are purchased and sold, to a large extent, on the revenues generated. Thus October of 1967 was probably the first really opportune time, from the point of view of the plaintiff, at which Sussex House could be sold.

22 Another factor which, in my view, has to be considered, is the fact that the sale of Sussex House did not occur as the result of an unsolicited offer. The evidence is that the plaintiff was desirous of selling Sussex House as early as January of 1967, that, through his contacts in the real estate business in Montreal, he passed the word that Sussex House was for sale, it was sold and a commission of over $30,000 on the sale was paid to a Montreal real estate firm. Again, this circumstance, by itself, would not likely be conclusive and determinative, but I am in my view entitled to consider it.

23 The final factor which has influenced me in concluding that Peter Vida, and through him, the plaintiff company, had a secondary intention at the time of acquisition of subject property, is the presence in the partnership agreement of May 1, 1963 of paragraph 7 thereof. The provisions of paragraph 7 are somewhat unusual and, in my view significant. If Vida's sole operating motivation at time of acquisition was for a long term investment, there would have been no need for the provision for2/3of the profits on resale. Vida said the purpose of the2/3-1/3provisions was to properly compensate him for the extra work he would be doing for the company. However, if the sole intention was a long term investment, this extra compensation would be paid to Vida through the provision for payment of the net profit on a2/3-1/3basis. There would have been no need for the2/3-1/3provision in the event of sale. The inclusion of the sale provision in paragraph 7 fortifies my view that Vida, and through him, the plaintiff company, had a secondary intention, at the time of acquisition, to resell Sussex House as soon as its occupancy situation reached a level which would maximize the market value of the property. This is, of course, what transpired. The property was sold at a substantial profit, following a pattern established by Vida in earlier transactions.

24 Plaintiff's counsel cited five cases in support of his submission that the profit arising from the Sussex House transaction should be treated as a capital gain. Those cases are: Elgin Cooper Realties v Minister of National Revenue, [1969] C.T.C. 426, 69 D.T.C. 5276; Bead Realties v Minister of National Revenue, [1971] C.T.C. 774, 71 D.T.C. 5453; Victor Ross v Minister of National Revenue, [1973] C.T.C. 22, 73 D.T.C. 5060; The Queen v Stanfold Investment Corporation, [1974] C.T.C. 19, 74 D.T.C. 6035; and Branlyn Management Ltd v The Queen, [1974] C.T.C. 579, 74 D.T.C. 6471. Each of these cases are clearly distinguishable on their facts from the case at bar. In none of these cases do you have a clause in the partnership agreement such as paragraph 7 in Exhibit 4 in this case. Likewise, in some of the cases, there is not a history or pattern of real estate trading. In at least three of the cases (Bead, Ross, Stanfold) the land was never advertised for sale and the offer was an unsolicited one. The doctrine of frustration of the original intention was a factor in both the Stanfold and Branlyn cases. Thus, I have concluded none of the above citations apply to the facts and circumstances present in this case.

25 The principles which the court must apply when, as here, there is a conflict between direct evidence given by taxpayers and the objective facts and circumstances established in evidence, has been well stated by my brother Addy, J in the case of Power v The Queen, [1975] C.T.C. 580, 75 D.T.C. 5388. At 585 [5391–2] of that judgment, Addy, J said:

All issues must be determined by a careful consideration of all of the relevant evidence both direct and circumstantial. In any particular case, a specific piece of evidence might, by reason of the surrounding circumstances of that case, necessarily possess great probative value while, in another case, evidence to the same effect might carry little or no weight. The Court must also bear in mind that facts ofen speak louder than words and that free acts are very good indication of what a person really intends and overt acts and their results constitute an excellent means of deciding what the intention actually was. The issue of intention must therefore be resolved by a careful weighing of all the admissible evidence which is in any way relevant to that issue and the person or body charged with finding the facts must refrain from considering each piece of evidence independently but must examine it in the light of all the other evidence both direct and circumstantial.

26 The appeals are therefore dismissed and the plaintiff's action is dismissed with costs.