Kerr, J —This is an anneal in respect of the income tax assessment of the appellant for his 1968 taxation year.
The contested issue relates to a profit realized on the sale of an apartment building property. The appellant claims that the building was constructed and operated as a capital asset to provide rental income: for him and his wife and to provide a place for them to live. The respondent claims that the profit is income from a business within the meaning of sections 3 and 4 and paragraph 139(1 )(e) of the Income Tax Act.
The apartment property is called “County Down”. It is in White Rock, British Columbia. The land was acquired by the appellant in 1964. Construction of the building was commenced in July 1265, and completed in 1966. The appellant and his wife moved into the build- ina in late 1965 and lived there and looked after and managed the property until it was sold in December 1967. The profit realized, the emount of which is not disputed, was $69,494.17.
The evidence indicates that County Down is a frame apartment building, with 27 suites. There are two penthouse suites, one of which was occupied by the appellant and his wife. The building has many attractive features, including a “U” shape that gives an unobstructed view to most of the tenants, an inner court yard, corridors with natural light and ventilation, an elevator, zone controlled heating, and special television antenna. According to the architect who designed the building, Mr Heiss, and other witnesses, there were features that were better than usually found in apartment buildings in White Rock, and they increased the cost of the building. County Down is near the business core of White Rock, which is about 28 miles south of Vancouver and is becoming a retirement locality.
A statement showing the source of the funds for the purchase of the land and construction of County Down (Exhibit A-1) was given in evidence. The land was acquired in 1964 for $4,600, part of which came from the proceeds of the sale of a duplex house owned by the appellant. The money for construction included $151,000 obtained on a mortgage from Western Canada Savings & Loan Company in July 1965, $20,000 obtained from one Maddock on a second mortgage, $10,000 on another mortgage (Oak), and several small personal loans. The statement puts the equity of the appellant in the property at $23,169.21, out of a total cost shown in the statement of $188,289.84. The building was constructed by Carline Construction Ltd, a company which the appellant caused to be incorporated in 1965, and which is owned by the appellant and his wife. The appellant used the company to build County Down and a number of houses. The appellant’s premises were used for the company’s office purposes.
The appellant has a historical background as a lumber-mill worker and house builder prior to building County Down. He had a grade XI education, married at about 19 years of age, took a course in lumber grading and shipping, started work in that capacity in 1950 and a few months later moved to Vancouver where he was employed as an export grader in a lumber mill. In 1950, making use of his basic knowledge, he built a small house on Tanner Street in Vancouver and lived there for about four years. In 1953 he bought a lot on Patrick Street in South Burnaby and built a home on it and he and his wife moved into it. This property was financed by sale of his first house and a mortgage. He lived there until 1957, then sold the Burnaby house and built another house in Surrey nearer his place of employment, .financing it by sale of the Burnaby home and through a mortgage. He lived there until 1959, then sold it and built a 4-suite apartment house and lived there in one of the suites for about two years, then traded it for a larger 7-suite apartment house, which he sold and acquired two more properties and later sold them. In 1961 he built a duplex at 112 Avenue, Surrey, in which he lived until he moved into County Down in 1965. During the years in which he was building those houses he was working night shift at the mill and putting up the houses in his spare time, getting credit and favourable prices from the mill. His earnings from the mill were about $300 to $400 per month, and there were some earned bonuses. His wife helped as much as she could in the building of the houses, painting and in other ways.
In 1966 and 1967 and in the years following the sale of County Down the appellant was actively engaged in the business of acquiring land and in building houses for sale, to a much greater extent after sale of County Down than prior thereto, all done in the name of Carline Construction. His 1968 income tax return shows that he received earnings of $7,600 from Carline, which was proceeds from the building of the houses, and $4,800 from similar sources in 1967. He is working manager for Carline at a salary of $20,000 for 1972, $16,000 for 1971. The appellant’s activities in acquiring land and building and selling houses in the years concerned were factors leading the respondent ‘o treat the County Down transaction as a business venture for profit.
The appellant testified that he left his job as a sawmill worker to work on the construction of County Down. As to his purpose in building it he said that he realized that he could not advance further in his sawmill occupation and he and his wife decided to build County Down and have it for rental income and as a home; he had been working night shift for years in the sawmill and had built some houses in his spare time, with his wife helping with some of the labour involved, such as painting; he had no thought of selling County Down until after numerous unexpected and disturbing problems developed in the operation of the apartments. The appellant and his wife testified as to those problems, including that of a senile tenant who wandered about, another tenant who was imagining she was hearing strange noises and was calling the appellant’s wife in the middle of the night, a tenant who was overrunning her bathtub, the occurrence of fires in some apartments, heart attacks suffered by other tenants, and the finding of one tenant dead in his apartment. Mrs Ross had to bear the brunt of these problems with the tenants, as she was looking after the building and her husband was away from it much of the time building another house, particularly in 1967, in order to augment their income. He said that their dream of operating the apartment building went sour and it was only after that situation had developed and he was being urged by a real estate salesman, Robinson, to sell the property, that he and his wife talked the situation over and decided to give up the operation of the apartment project and sell the property. In her testimony Mrs Ross corroborated her husband’s evidence both in detail and generally.
As to the sale of the property, the appellant said that Robinson, the real estate agent; approached him in the spring of 1967 and wanted him to sell, but he refused. A few months later Robinson again urged him to sell, and as by this time he was fed up with the problems in the operation of the apartments he agreed to give Robinson a listing for sale at an asking price of $270,000, which was based on a rental return basis. In September Robinson brought an offer from one Vyburin to buy the property for $252,000, on terms that would provide a down payment of $52,000, assumption of a first mortgage of $148,000, and a. second mortgage of $52,000 to the appellant that would give him monthly payments of $400. The down payment enabled him to pay $20,000 on his second mortgage borrowing to construct the building, and $10,000 on the Oak mortgage, plus the salesman’s commission of $6,500, and provided a balance that he was able to use to buy other land. He said that the monthly payment of $400 on the second mortgage was particularly attractive in the circumstances. He testified that he had made no other effort to sell the property and that after its sale he had not built nor operated any other apartment building.
The appellant’s income tax returns for the years ending February 28, 1967 and 1968 show rental income from County Down of $27,737 and $25,027, respectively, and there was an expectation of continuing rent returns of about those amounts.
Mr Robinson, the real estate salesman, testified that in the spring of 1967 he was trying to find a house for a client and he got in touch with the appellant respecting a house that the latter was then building. This led to him meeting the appellant in County Down, and he proposed that Ross put up the property for sale and engage him as his agent to sell the property. But Ross replied that he intended to keep the property as a home and was not interested in selling it. About six weeks later Robinson had a client, Vyburin, who owned an apartment building and wanted to sell it and purchase another one, so he went again to Ross. But again Ross rebuffed him and said that in no way was County Down for sale. Robinson said that again in June he was urging Ross to sell and he suggested a price to Ross. On this occasion he thought he could see a weakening on the part of Ross and so he persisted in his efforts to get Ross to give him a listing of the property for sale. Eventually Ross agreed to give him the listing at an asking price of $270,000. He then took Vyburin to see it, but Vyburin was unfavourably impressed with the rental return. Robinson then advertised it for sale in the Vancouver Sun, without the appellant being aware of it. In September he contacted Vyburin again and told him that he thought he could guarantee a sale of the apartment building owned by Vyburin, and he would also endeavour to get the County Down rents raised. Vyburin then made an offer, which Robinson took to the appellant, and after some negotiating an agreement for sale (Exhibit A-2) was entered into on October 7, 1967 on terms that included a sale price of $252,000, a down payment of $1,000 and a further payment of $51,000 on December, 1967, a first mortgage of $148,000, and a second mortgage of about $52,000 to the appellant that would give him monthly payments of $400, all subject io Vyburin being able to sell the apartment building he then owned, and subject also to new rental rates for the County Down apartments to be effective on December 1, 1967.
Mrs Ross, wife of the appellant, testified respecting their years prior to County Down when her husband was working in the sawmill and building houses in spare time; they had gradually moved up to a better standard of earnings and living, and decided to build County Down to be operated for rental revenue and to be also their home. She was active in giving ideas for the planning and facilities to be incorporated in the building. She was tired of her husband working night shift and trying to build houses in his spare time to supplement his mill earnings. It was their intention that they would have one of the penthouses as their own home and that she would be on hand to look after the building and apartments generally, attend to the needs of the tenants, do cleaning, look after the collection of the rents, and help otherwise to manage the building. They regarded White Rock as being a less expensive place than Vancouver in which to live. They intended to make County Down their home for the future and had never discussed or considered the possibility of selling it, until after the unexpected problems in its operation developed. Mrs Ross also said that in 1965 they had some young tenants who were unsatisfactory and they got rid of them; also that the occupancy in 1966 was at a level that was hardly sufficient for their commitments and her husband built a house to earn additional money; by the spring of 1967 occupancy had improved, but the unexpected and disturbing problems and difficulties with some of the tenants, already referred to, had developed; they had planned to have older tenants, but the problems that actually developed were much greater than they had expected. When Robinson first proposed that they sell the property they were not interested, but the problems continued and by the latter part of 1967 she felt that she could not continue to face them, she discussed the situation with her husband, and when Robinson came back later they decided to see whether a satisfactory sale could be arranged — and the sale to Vyburin eventually resulted. There was no cross-examination of Mrs Ross.
Mr Heiss, the architect, testified that the appellant wanted special features for the apartment building, a better than ordinary building, that he and his wife wanted it as their home, and that they never discussed with him the economics of the building or the resale value of the property.
Another witness, Mr Olson, called by the appellant, testified that he was in the building supplies business in the 1960’s and had supplied the appellant with building materials, including some for County Down. He had not discussed with the appellant his intentions in building County Down, but the appellant had indicated that he could almost sit back and live on the income he expected from the apartment wilding.
Another witness, Mr Axdmen, called by the appellant, testified that he worked with him in the mill and the appellant had told him that he wanted to get away from the sawmill work and was going to build the apartment building and would live there. The witness had expressed doubt that White Rock was a good place for an apartment project, but the appellant said that he had the land and had to start somewhere; and the possibility of selling the building had never been mentioned.
Mr Hanley, a retired gentleman who formerly had carried on a real estate business in White Rock and who was called as a witness by the appellant, testified that the appellant had been in and out of his office in connection with land that he wanted to sell (not the County Down land) and in his conversations he had indicated that he intended ‘o have one of the suites in County Down as his permanent home. Mr Hanley was convinced that he knew the appellant’s intentions in respect of County Down and said that there were “no ifs, ands or buts” about the appellant’s intentions to have his permanent home in the subject apartment building. This witness was not cross-examined.
Another witness was Mr Morris, the appellant’s brother-in-law, who testified that the appellant and his wife had always definitely said that they intended to stay in County Down, and he was positive that they had no intention, until after they had the troubles with the tenants, to cell the property.
The evidence shows that the appellant has a background and history as a builder of houses, in what I regard as a comparatively small way while he was working in the lumber mill and in his spare time using his skill and opportunities to augment his mill earnings. His County Down venture was on a much larger scale. It was financed mostly on mortgage money, as many projects of that kind are financed. In his situation he did not have the money to contribute a large equity to the cost of the project, but contributed his labour. After he sold County Down he went into building houses for sale in a large way, by this time having left his job in the mill, and reached a better financial position with the profit from the sale of County Down and a better credit rating.
While these activities are factors to be considered in determining the character of the County Down transaction they are not conclusive in that respect and not inconsistent with the appellant’s position that he constructed County Down as an investment to earn rental income and at the same time to give him and his wife a desirable place in which to live while operating the apartment building. They had previous experience in owning and operating small apartment houses while living in one of the apartments in such houses. The evidence of the appellant and his wife as to the difficulties encountered in the operation of County Down is uncontradicted. There is also independent evidence supporting their evidence that they built County Down for revenue earning purposes and as a place in which to live, with no intention of selling it. Mr Robinson was emphatic that when he first suggested to the appellant that he sell the property the appellant rejected the suggestion and said he was not interested in selling it, that he intended to keep it as a home. Mr Heiss, Mr Axdmen, Mr Olson, Mr Hanley and Mr Morris also corroborated the appellant’s testimony that County Down was to be a rental revenue earning investment and a home for the appellant and his wife. I have no doubt that those witnesses were willing to be of such help as they could to the appellant in his dispute with the income tax Department, yet I cannot think that they were not giving their evidence truthfully and according to their recollection. They professed to have some knowledge of the intentions and plans of the appellant and his wife in respect of County Down prior to its sale, and their associations with the appellant and his wife were such as to give them that knowledge.
The appellant built County Down, lived in it for about two years, and operated it for rental income. His wife played her full part. The undertaking looked to be one that would enable the appellant to leave his job in the mill, have a respectable income from the building, a place to live, and time on the side to build houses for sale for profit to augment his income. Their plans were realistic, their hopes and prospects were bright. It was not until after unexpected difficulties with tenants in the operation of the apartments arose that Mrs Ross felt they could not carry on as planned, and even then they rejected for a time the suggestion of Mr Robinson to sell and take a profit. The evidence of the appellant and his wife as to their intentions in building County Down for permanent revenue earning purposes and as a place to live while they operated the other apartments in the building, and that they sold it only because of unexpected problems in its operation, coupled with an unsolicited but favourable offer of purchase, is not unreasonable or implausible. It is corroborated by credible independent evidence, and I think that the evidence as a whole does not warrant an inference to be drawn that County Down was a speculative venture in which the appellant envisaged not only rental revenue for a time but also a profitable sale of the property at an appropriate opportunity, or that it was what amounts to an adventure in the nature of trade, or that the profit realized on its sale was a profit from a “business”.
Therefore the appeal will be allowed and the assessment made upon the appellant for his 1968 taxation year will be referred back to the respondent for reassessment on the basis that the profit realized on the sale of the County Down property was not a profit from a business. The appellant will be entitled to his costs of the appeal, to be taxed.