Place Des Soeurs Inc v. Minister of National Revenue, [1978] CTC 3188, [1978] DTC 1862

Guy Tremblay [TRANSLATION]:—The case at bar was. heard in Chicoutimi, Quebec, on October 18, 1977. The Tax Review Board needed stenographic notes during the proceedings and there were received on March 30, 1978.

1. Point at Issue

The issue is whether the profit of $89,404 from the sale in 1974 of a farm property and building is a capital gain or a taxable profit. This building was purchased by the appellant in 1971 at the same time as 216 acres of farm land. While the major portion of the land was purchased for the purpose of subdivision and resale, the building and the land on which it stands, on the other hand, were purchased, according to the appellant, as an investment.

2. Burden of Proof

The appellant has the burden of proving that the respondent’s assessments are incorrect. This burden of proof is based not on any particular section of the Income Tax Act but on several judicial decisions, including the decision of the Supreme Court of Canada in R W S Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

3. Facts

3.1 Place des Soeurs Inc, which was incorporated on December 3, 1971, purchaser that same month 216 acres of farm land with some buildings on it (warehouse, pigpen, barn).

3.2 The building which is the subject of the present dispute is an immense barn 217 feet long, 50 feet wide and 55 feet high. It was built of large timbers shipped from New Brunswick that had been used to construct a bridge.

3.3 The property (land and buildings) were purchased December 6, 1971 from Mr Gilles Tremblay, CGA, trustee, principal shareholder of the company, for $98,000 ($100,000 less $2,000 depreciation on the building). The contract of purchase was filed as Exhibit A-7.

3.4 Mr Gilles Tremblay was the appellant’s chief witness. He is its Vice President, and owns 14 of the 15 common shares in the company and all the preferred shares. He had purchased the building (Exhibit A-2) on August 19, 1971 from Les Petites Soeurs Franciscaines de Marie for $100,000 (land: $40,000; buildings: $60,000). This amount was paid by means of a loan from the Royal Bank (transfer and payment cheques: Exhibit A-3). It was agreed between the parties that the building and the land which are the subject of the present dispute were purchased for $44,000.

3.5 The transaction which was completed on August 19, 1971 had previously been the subject of various negotiations and a purchase option (Exhibit A-1) dated July 10, 1971.

Between the time of the purchase option and the purchase, following various interviews with the manager of the Royal Bank, Mr Gilles Tremblay came to the conclusion that such a purchase was advisable only if there was immediate and regular revenue to make it possible to meet the financial obligations under the contract. The prospective purchaser could not count on any lots being sold in the immediate future. He did not expect any sales for the next ten years. In making the loan the Royal Bank required that in that year leases for a total of $14,000 a year, that is, the amount necessary to repay the loan, be transferred (ExhibitA-5).

3.6 The property thus purchased is located in the parish of Chicoutimi. It is bounded to the southeast by Talbot Boulevard.

At the time of the purchase in 1971 construction on the large Place Saguenay shopping centre located two miles further north on Talbot Boulevard was just beginning. In 1977, according to Mr Tremblay, the site on which the renovated barn is located is still not a commercial lot.

3.7 During 1972 part of the property was sold to Mr Laurent Lapointe for $72,000, or $20,000 a year. Another part was subsequently sold to Mr H Boucher. These lots were located not far from the building that is the subject of the present dispute. The profits from these sales were declared by the appellant to be taxable as income from business. According to Mr Tremblay, these two sales were made ‘‘by chance”, that is, without his having expected to make them. He did not think he would be able to sell any lots for ten years.

3.8 Certain repairs (for approximately $10,000) were made to this building during 1971, 1972 and 1973 with a view to renting it and keeping the tenants: a professional cleaner, Ebénisterie du Saguenay (Saguenay cabinet-maker) and St-Hubert Importation. There were other tenants in the other buildings: Zeller’s, R Lemieux, Pierre Atkins, and so on.

3.9 According to Mr Tremblay, the barn (also called the “cathedral”) had been purchased as an investment, both because of its solid construction and because of its rental potential, and consequently potential for immediate income in accordance with the bank manager’s advice.

3.10 According to Mr Tremblay, however, the intention was to convert the “cathedral” into professional offices, including his own trustee’s office. Since 1959 he had moved his office seven times in eighteen years. He had no more room for bankruptcy inventories. These inventories were located in five or six different places in the city of Chicoutimi, and this was not practical. Also it was normal, according to the witness, for him to try to centralize his affairs in one building, a building which moreover had enough space to allow for future needs.

3.11 Appropriate work had to be done for this purpose, however. In June 1973 a plan was prepared by the firm Bouchard & Deraspe, at a cost of $545.78 (Exhibit A-10). It would have cost $250,000 to convert the entire building, a full $30,000 of which was for work on the offices which Mr Tremblay wished to occupy, that is, 4,000 square feet. Since the building was of wood, sprinklers would have had to be installed in order to meet fire safety standards, and this would have cost $50,000, according to Ludger Harvey & Fils of Jonquiére, the only company specializing in this area, according to the witness. This expenditure of $50,000 would have proved to be of no avail, moreover, because according to the City’s engineer, Mr Emile Daoût, the one-inch pipe supplying water to this part of Chicoutimi would not have produced the pressure needed to make the sprinklers function effectively. The fire insurance premiums alone would have cost $15,000, according to Mr Tremblay. Moreover, when Mr Tremblay spoke to his friends, who are businessmen, about converting his "cathedral” into professional offices, they discouraged him: it was too far from the city, "you’ll make a laughingstock of yourself, you’re ten years too early”.

The project for converting the "cathedral” into a professional office building was therefore cancelled in the fall of 1973.

3.12 It was in December 1973 that the first approach was made concerning the purchase of this part of the farm, including the barn. Without it having been put up for sale, a Mr Voisine, who said he was acting as agent for Mr Michel Bellavance of Quebec City, inquired whether the building was for sale and at what price. Mr Tremblay apparently replied: "That depends on what price you are offering. We’ll think about it.” In January 1974 Mr Voisine made an offer of $135,000. When presented to the other shareholders this offer was far from receiving unanimous approval. Mr Tremblay’s wife and the other members of the family were against it. Mr Tremblay, on the other hand, was considering his state of health (in 1963 he had had part of his stomach removed; he continued to be in fairly poor health, with a constant stomach ache, and in 1973 his doctor told him to be careful, because of the red patches reappearing on his stomach) and the financial situation (the outstanding mortgage was weighing heavily on him; it was not possible to pay the cost of the repairs out of the rental income, as is apparent from the financial statements for 1973; two of the tenants had declared bankruptcy; he was looking for tenants; he had a phobia about debts; he still owned $26,000). He accordingly decided to sell despite all opposition. Mr Tremblay was the principal shareholder, after all, and he was the one who "wore the pants”, to use his expression.

3.13 The sale took place on January 11, 1974 to Mr Michel Bellavance, at a price of $135,000 ($10,000 for the land and $125,00 for the building). The sum of $25,000 was paid in cash. The balance of $110,000, bearing interest at 9%, was to be paid in 180 monthly instalments of $1,105.10 each.

3.14 After the purchase Mr Michel Bellavance increased the rent, including that of St-Hubert Importation, which he raised from $500 to $1,500 a month. The building was subsequently resold to a Mr Poitras, at no profit. At the time the case was heard it was even possible that the appellant might have to repossess the building. The monthly payments were several months in arrears.

3.15 This project having been cancelled and the rental of the premises where his own office was located being about to terminate, he decided around March 1974 to purchase a building owned by Immeuble Boulevard Lamarche Inc, with a view to obtaining new premises. The asking price was $115,000, and Mr Tremblay purchased for $80,000. According to the witness, this was a good purchase since the building, which had been assessed at $72,000 by the municipal assessors, contained $40,000 worth of equipment and furnishings included in the cost of $80,000. In addition, the building was located in the commercial centre of the city of Chicoutimi. Subsequently, in order to expand, he bought an old house located on the adjacent property. Finally, in order to solve once and for all his file inventory problem, two small warehouses were built on the appellant’s property.

3.16 According to Mr Tremblay, the only other real estate transaction carried out by him was one in 1956 respecting a building located on Racine Street, in association with another businessman. After carrying out repairs costing $40,000, they were able to rent out 8 furnished apartments. In 1963 the building was sold pursuant to a notice from his associate because of a disagreement. This notice required his undivided share by putting the building up for sale. He did not purchase any other buildings until 1971, except the nuns’ farm, part of which is the subject of the present dispute, namely the part on which the renovated barn was located.

3.17 The appellant informed the Department of National Revenue of the transaction of January 11, 1974, emphasizing that it considered the resultant profit of $89,404 to be a capital gain and wished to know the Department’s decision. It was following visits made on Mr Tremblay’s own initiative to officers of the respondent that the latter decided to make a ruling. The respondent assessed the profit as income from a business, applying paragraph 20(1)(n) of the new Act. The respondent included in the calculation to the appellant’s income the sums of $16,165.41 and $2,106.72 for the 1974 and 1975 taxation years.

3.18 A notice of reassessment was issued on December 17, 1976, to which a notice of objection was filed on December 21, 1976.

3.19 Following the notification by the Department on March 11, 1977 confirming the notice of assessment, an appeal was brought before the Tax Review Board on April 5, 1977.

4. Act

The sections applicable in this case, which it is not necessary to quote at length, are as follows: 3, subsection 9(1) and paragraph 20(1 )(n) of the new Act.

5. Case Law

A large number of decisions were cited by the parties:

1. John C Cragg v MNR, 3 Tax ABC 203; [1951] CTC 322; 51 DTC 34; 52 DTC 1004;

2. No 225 v MNR, 12 Tax ABC 69; 55 DTC 32:

3. No 276 v MNR, 13 Tax ABC 289; 55 DTC 442;

4. Erminio Morassutti v MNR, 13 Tax ABC 40; 55 DTC 293;

5. No 290 v MNR, 14 Tax ABC 7; 55 DTC 569;

6. No 341 v MNR, 15 Tax ABC 103; 56 DTC 231 ;

7. No 467 v MNR, 18 Tax ABC 161 ; 57 DTC 537;

8. Rowland Francis May v MNR, 41 Tax ABC 319; 66 DTC 501; 9. Recreation Holdings Ltd v MNR, [1974] CTC 2059; 74 DTC 1017;

10. Thomas Campbell v MNR, 3 Tax ABC 315; [1952] CTC 334; 51 DTC 62; 52 DTC 1187;

11. No 159 v MNR, 10 Tax ABC 258; 54 DTC 191;

12. Samuel Lyons, Liquidation of Twenty Spadina Road Ltd v MNR. [1962] CTC 478; 62 DTC 1297;

13. Warnford Court (Canada) Ltd v MNR, [1964] CTC 175; 64 DTC 5103;

14. Erie Canning Co Ltd v MNR, [1968] Tax ABC 964; 68 DTC 711;

15. Villa Capri Apartments Ltd v MNR, [1970] CTC 464; 70 DTC 6307;

16. Quasar Investments Ltd v MNR, [1972] CTC 2666; 72 DTC 1541;

17. Baker Estates Ltd v MNR, 11 Tax ABC 391; 54 DTC 514;

18. Daniel Mettarlin v MNR, [1968] Tax ABC 1247; 69 DTC 26;

19. Muzly Lawee & Naima E Lawee v MNR, [1971] Tax ABC 232; 71 DTC 179; (

20. MNR v Muzly Lawee & Naima E Lawee, [1972] CTC 359; 72 DTC 6342;

21. First, Second, Third Torland Investments Ltd et al v MNR, [1969] CTC 134; 69 DTC 5109;

22. Lomax Co Ltd v MNR, [1968] Tax ABC 1022;68 DTC 748;

23. Glengate Investments Ltd v MNR, 31 Tax ABC 369; 63 DTC 322;

24. No 145 v MNR, 10 Tax ABC 69; 54 DTC 110;

25. John Cyril Williscroft v MNR, 7 Tax ABC 118; 52 DTC 344;

26. Her Majesty the Queen v Stanfold Investment Corp, [1974] CTC 19; 74 DTC 6035;

27. Atwater Western Corp v MNR, [1970] CTC 472; 70 DTC 6312;

28. La Cie d'Immeubles Courville Ltée v MNR, [1973] CTC 2024; 73 DTC 35;

29. Hiwako Investments Ltd v MNR, [1973] CTC 2142; 73 DTC 122;

30. Cosmos Inc v MNR, 28 Tax ABC 193; 61 DTC 721 ;

31. No 44 v MNR, 5 Tax ABC 413; 52 DTC 70;

32. Her Majesty the Queen v MRT Investments Ltd, [1976] CTC 294; 76 DTC 6158;

33. Birmount Holdings Ltd v Her Majesty the Queen, [1977] CTC 34; 77 DTC 5031 ;

34. Jack (Jake) Rubin v MNR, [1967] Tax ABC 255; 67 DTC 217;

35. MNR v Russel E Gibson, [1957] CTC 166; 57 DTC 1119;

36. Byron B Kennedy v MNR, [1952] CTC 59; 52 DTC 1070;

37. Allen B Darbyson v MNR, 19 Tax ABC 230; 58 DTC 305; 38. No 537 v MNR, 19 Tax ABC 458; 58 DTC 437;

39. Wakil Construction Co Ltd v MNR, [1970] Tax ABC 873; 70 DTC 1555;

40. Commonwealth Holiday Inns of Canada Ltd v MNR, [1970] Tax ABC 928; 70 DTC 1588;

41. Edon Development Ltd v MNR, 42 Tax ABC 57; 66 DTC 609;

42. Ideal Investments Ltd v MNR, [1965] CTC 470; 65 DTC 5282.

6. Comments

Having considered the facts proved, the relevant sections of the Act and the principles set out in the case, the Board finds that the most significant fact in the appellant’s evidence, apart from its express intention from the outset to keep the “cathedral” as an investment, is that it tried, made a real effort at investment, not so much by spending some ten thousand dollars in 1972 and 1973 (paragraph 3.8) as by the attempt to convert the building into an office building. The plans were prepared and it became apparent that even with an expenditure of $250,000, including $50,000 for the sprinklers, the building would not have been able to meet the fire safety standards (paragraph 3.11 of the facts).

The desire to keep the barn as an investment was to some extent the logical consequence of the decision made following the discussions with the bank manager, before the land was purchased, to the effect that immediate and regular income was needed to make it possible to meet the long-term obligations (paragraph 3.5).

The immediate reasons for the sale, according to the evidence, are, in addition to (a) the impossibility of making improvements to the building (high cost and insurmountable difficulty in complying with the fire safety standards); (b) the attractive offer from the prospective buyer (offer: $135,000; cost: $44,000); (c) the state of health of the principal shareholder, who in practice ran the company on his own; and (d) the company’s difficult immediate financial situation (paragraph 3.12 of the facts).

Counsel for the respondent did not succeed in his cross-examination in making the witness contradict himself or in weakening his testimony. The Board must state on this point that it does not in any way doubt the credibility of Mr Gilles Tremblay, the principal witness. No rebuttal evidence was presented by the Department of National Revenue. According to the above-mentioned cases, although the burden of proof is on the appellant’s shoulders, this is still not a matter of proof beyond a reasonable doubt but simply of a preponderance of the evidence. The Board feels that the appellant has discharged this burden in the case at bar.

Counsel for the respondent nevertheless raised several objections in his pleadings.

The lack of advertising is not crucial in the determination of a capital gain (First, Second and Third Torland Investment Ltd v MNR, [1969] CTC 134; 69 DTC 5109.) The Board did not have to take this factor into account in arriving at its findings. There is a presumption of a business purpose in the came of a company (MRT Investment Ltd v Her Majesty the Queen, [1976] CTC 294: 76 DTC 6158; MNR v Muzly Lawee and Naima E Lawee, [1972] CTC 359; 72 DTC 6342. The Board acknowledges that there is a presumption, particularly in the case at bar, where the appellant’s letters patent indicate the obvious purpose of conducting real estate transactions. In fact, all the dealings in farm property will be of a business nature, except the transaction involving the “cathedral”. In the case at bar, according to the evidence adduced, before the company was even established, even before Mr Gilles Tremblay purchased the farm as a whole, it had already been decided on the advice of the bank manager to keep a permanent income (paragraphs 3.5 and 3.9 of the facts). In addition, the idea of installing Mr Tremblay’s trustee’s office and other professional offices fiitted perfectly with this need. In short, although the commercial intention is evident in the case of most of the properties, the evidence has shown that there was one exception ab initio.

The respondent also argued that the taxpayer’s stated investment intention, even if contained in a contract, is not decisive either (Birmount Holdings Ltd v Her Majesty the Queen, [1977] CTC 34; 77 DTC 5031). Nevertheless, as a whole the facts surrounding the decision to invest confirm Mr Tremblay’s statement.

Again according to learned counsel for the respondent, the sale of the building in question was only one step in the series of sales. The evidence showed that this was a step that should not have happened, an unexpected step. The other real estate had been purchased for resale, but not the property which is the subject of the present dispute. In the cases cited by the respondent on this subject (see above list, Nos 34 to 36, and [1972] CTC 2400; 72 DTC 1325), the circumstances were not the same as in the case at bar. Inter alia, the factors which influenced the courts are that the taxpayers were agents or real estate brokers or house contractors, who bought lots in order to build single-family houses and resell them.

Finally, counsel for the respondent cited five cases (see above list, Nos 37 to 41) where disposal of excess property (the major portion of which had been purchased as an investment) was considered to be a commercial sale and the profit held to be income. In the case at bar, on the other hand, appellant had purchased the entire farm for resale except the “cathedral’', the subject of the dispute. Can it not be said, however, that a fortiori the sale of the “cathedral” must be considered a commercial sale or at least a “concern in the nature of trade”, within the meaning of the word “business” as defined in subsection 248(1) of the new Act? The Board does not think so. In the cases cited above, the evident intention of the taxpayers was to resell the excess portion of the land purchased as soon as possible. In the case at ba , the primary intention was to keep the “cathedral” as a profitable investment to make it possible to pay for the rest of the farm, which, because of its remote location, could not become a commercial proposition for another ten years or so. A building is not a commercial object in itself. The intention is the chief factor making it possible to decide whether the sale of a building should be considered as being in the nature of trade within the meaning of the Income Tax Act. Other circumstances may also be considered. In the case at bar the Board considers them immaterial as compared with the Original intention and the actions taken to carry out this intention. The Board does not even think that this is an adventure or concern in the nature of trade.

On the whole the Board is of the view that the burden of proof has been discharged and that, since no evidence was adduced, the appeal must be allowed.

7. Conclusion

The appeal is allowed and the matter referred back to the respondent for reassessment in accordance with the above reasons for judgment.

Appeal allowed.