KERR, J.:—This is an appeal from an assessment of the appellant for its 1965 taxation year, arising out of the purchase of a property by the appellant and its subsequent sale at a profit.
On March 1, 1964 the appellant purchased the “Medical Arts Building’’, sometimes herein referred to as ‘‘the building’’, in Windsor, Ontario, for $75,000. It sold the building in March 1965 for $110,000 and thereby realized a profit of $25,579.50, which amount was included by the Minister as income on assessing the appellant in respect of its 1965 taxation year. It is the inclusion of this amount that is in issue. The appellant says that it purchased the building with the sole intention of repairing it and renting it in order to earn investment income and not with the intention of reselling it, and that the amount in question is a profit realized on the fortuitous and unsolicited sale of an investment. The respondent says that the appellant acquired the building with a view to trading, dealing or turning it to profitable account and that the profit made on the sale was income from a business or an adventure in the nature of trade, within the meaning of. Sections, 3; 4 and 139(1) (e) of the Income Tax Act. . th ..... .
The appellant is an Ontario company incorporated by letters patent in 1957. Nearly all of its issued shares are owned by Mario Collavino and his brother Valentino. Mario I Collavino gave evidence. He is a general contractor and builder, building schools, hospitals and doing general construction work through the appellant company and other companies in which he owns an interest, including Collavino Brothers Construction Limited, which is owned by the two brothers; McCaul Contractors Limited, also owned by them; and Socius Developments Limited, in which they own a 50% interest. Mario is president of ; the appellant company and of Collavino Brothers Construction Limited and vice-president of Socius.
As to the activities of the several companies. Collavino Brothers Construction bought land and built homes on it and sold them prior to 1962. It did not build commercial properties for sale. It owns an office building, which it built on land that it had bought. It bought a house on Elrose Avenue, and repaired it and sold it, and declared its profit as income. It sold lots left over from its housing development. It built an apartment building, which was at first owned by the two Collavino brothers and their father, and they incorporated the appellant company to own it, and, after renting it for about four years, the appellant sold it in 1962 2, without making a profit on the sale. The reason for selling, according to Collavino, was to raise needed working capital.
McCaul Contractors constructs roads, sewers and like works. It has never owned or dealt in real estate.
Socius Developments acquired certain lakefront, land, subdivided it and serviced it. with roads and sold individual lots. It also bought a rundown cottage that was on the land and sold it. These were its real estate transactions, and it declared its profits on them for income tax purposes.
As regards the appellant company’s direct involvement in real estate transactions. It bought and still owns two homes which are rented to Valentino Collavino and his father. It bought land on Riverside Drive on which it intended to build a house and sell it, but did not carry out its intention to build and eventually sold the land or at least part of it. This land was originally held in the name of Collavino Brothers Construction but title somehow got into the appellant’s name. It purchased a house on Hall Avenue, which it repaired and sold and later repossessed and again sold it. There was a profit on the first sale which was declared as income, there was a loss on the second sale.
The witness, Mario Collavino, has spent his working years in the building industry and from a small start has become one of the major contractors in Windsor. In his evidence he spoke for the appellant.
The appellant purchased the Medical Arts Building from Medical Arts Building Company of Windsor, Limited, for $75,000 pursuant to an accepted Offer to Purchase (Exhibit A-3), which contained a proviso that the agreement would be null and void if the appellant would be unable to obtain a mortgage from Manufacturers Life Insurance Company for $90,000. The appellant received $60,000 from Manufacturers Life and contributed an additional $15,000 to pay the purchase price. The explanation for the $90,000 mortgage on a $75,000 purchase was that elevators were to be installed in the building at an estimated cost of $30,000 and other alterations were also needed.
Mario Collavino said that he and his brother and father had decided that they should diversify their business interests and obtain a building for revenue purposes. He asked an agent of Manufacturers Life to let him know of any building that might be for sale that would serve in that respect, and several months later an agent told him that the Medical Arts Building was for sale at $120,000. He thought it would be a good buy at that price and obtained information respecting the rents, leases, revenues, expenses, etc., of the building from L. W. Pastorius,* [1] building manager for the owners, as a result of which he decided that the price asked was too high. Six months later the owners got in touch with him and offered to sell the building for $75,000 and he accepted the offer. He said that the appellant purchased the building as an investment for rental income and that the necessary alterations would be done by Collavino Brothers Construction employees, who would thereby have work in otherwise slack periods. The work would be done not all at once but at convenient times.
The building is a 7-storey office structure, built about 1929, of reinforced concrete, with a stone front and solid masonry walls. At the time of purchase most of the tenants were medical doctors and dentists and ownership was in a company which they owned.
Collavino said things did not work out as well as he had expected. Several of the doctors moved out of the building and the vacancy rate increased, notwithstanding advertisements for tenants. The doctors, who hitherto had owned the building, began to look to the new owner for major alterations, air conditioning and creation of suites of offices to replace their existing offices, which were somewhat small. They wanted nearly everything immediately. Alterations were very extensive and presented a greater problem than he had anticipated. It was discovered that there were variances in the floor levels between adjoining offices. The partitions were of solid masonry. Alterations became a major work and was taking up most of the time of himself and his associates. Meanwhile Collavino Brothers Construction was picking up other work that would serve them better than being employed in making the alterations to this building.
That. was the situation when in March 1965 Pastorius asked him if he was interested in selling the building. Pastorius was enquiring on behalf of a tenant in the building, Dr. L. J. Fenech. He replied that he would be willing to sell for $110,000. Dr. Feneeh accepted and the sale was consummated (Exhibit A-4). The offer was unexpected, unsolicited. The building had not been offered or advertised for sale.
Mr. Pastorius is a resident partner in McDonald, Currie & Company, and is also an accountant for a Collavino companies. He gave evidence at the trial and corroborated much of Colla- vino’s testimony in respect of the purchase and sale of the building. Prior to its purchase by the appellant he had acted through a management firm as manager of the building and sat in at quarterly meetings of the directors. The owners were finding that expenses were increasing and revenues were not, an elevator was needed and there were other demands by tenants which, if met, would necessitate long-range financing. So the owners decided to sell. Just after this, by coincidence, Duncan Marshall, of Manufacturers Life, asked him if the building was for sale. He replied that if an offer were made it would be considered. He then discussed the matter with the owners and they fixed a price of $125,000. He then talked to Marshall who put him in touch with Mario Collavino. Collavino came with a real estate appraiser and looked into rent, revenues, leases, expenses, etc., and decided not to buy at the price asked. About five or six months afterwards the owners decided to sell for $75,000. At this time Collavino accepted the offer on behalf of the appellant.
Pastorius continued as manager of the building after its purchase by the appellant. He confirmed that some of the doctors moved out and that the vacancy rate rose. There were innumerable requests by the tenants for changes, and alterations were extensive, expensive and an inconvenience to the tenants. Installation of air conditioning was difficult, for the waiting rooms were in the core of the building and there was hot water heating and a lack of suitable air ducts for air conditioning. The tenants wanted the proposed elevator to be automatic. Then Dr. Fenech called him and asked what Colla vino had paid for the building and whether he would sell and at what price, as he was interested in buying it.
Pastorius got in touch with Collavino who said he would be willing to sell for $110,000. Dr. Fenech immediately accepted.
Collavino said that the painting work in the building was being done by National Painting Company and during the course of that work he had proposed to the members of that firm that they become equal partners with the appellant in the ownership of the building. There were discussions to that end and a mutual understanding was reached that they would purchase a half interest in the building. But the sale to Dr. Fenech put an end to the plan. The appellant paid them some $2,000 or $3,000* [2] because of what Collavino said he regarded as a moral obligation for he had proposed that they buy a half interest in. the building and they had become interested and agreed to the proposal but he backed out of it when the opportunity came to sell to Dr. Fenech.
The objects of the appellant company set forth in its incorporating charter dated December 4, 1957 (Exhibit A-l) were "‘to acquire lands together with any apartment buildings that may be on the said lands and thereafter to lease, mortgage, improve, alter and manage the said lands and buildings”. Supplementary letters patent dated April 27, 1964 (Exhibit A-2) added other objects, inter alia, to sell, lease, mortgage or otherwise dispose of lands and buildings, to improve, alter and manage the lands and buildings, to prepare building sites and to construct, reconstruct, alter, improve, decorate, furnish and maintain offices, flats, houses, factories, warehouses and lands. Collavino said that Manufacturers Life had requested the appellant to obtain the supplementary letters patent.
The question for determination is whether the profit. realized by the appellant on the sale of the building was income from a "‘business" within the meaning of Sections 3, 4 and 139(1) (e) of the Income Tax Act, which includes an adventure in the nature of trade. Stated in another way, the question is whether the profit was a capital gain or was income within the meaning of the applicable provisions of the Act.
For the appellant to escape taxation on its gain from the transaction it has the show that it acquired the building for revenue-producing purposes and that the transaction is to be characterized as an investment.* [3]
Although the transaction has certain features similar to ones that in other cases have influenced decisions that the transactions there concerned were adventures in the nature of trade, such as the relatively quick sale after a purchase financed principally by mortgage money, I have reached the conclusion that in this case the appellant acquired the building with the intention of keeping it as a revenue-producing property and that its subsequent sale was not a sale in the course of an adventure in the nature of trade. I have reached that conclusion largely on an acceptance of the testimony of Mario Collavino as being truthful.
If the purchase of the building and its sale so soon afterwards were left. without satisfactory explanation, a fair inference would be that the purchase was a speculative venture in which the appellant envisaged not only rental revenue for a time but also a profitable sale of the building should an. appropriate opportunity present. itself. And, if that were the situation, the profit realized on the sale would be a profit in the course of an adventure in the nature of trade, a profit from a ‘‘business’’, and taxable as income.
Such an inference would be supported to some extent by the fact that the Collavino family had dealings in the purchase and sale of real estate and the construction and renovation of buildings, and presumably. were not unaware of opportunities for purchase, repair and sale of buildings in Windsor. However, the principal business of their companies was construction as contractors for other parties. They had no business background of buying and selling commercial buildings, except the one apartment building which they had built and held. for some years and then sold to raise working capital. Their activities do not necessarily lead to a conclusion that the Medical Arts Building was not purchased as a revenue-producing investment.
Mario Collavino is an experienced. builder. He said. he knew that. the building was structurally sound. I have no doubt that he knew pretty well what he was buying, but his testimony that the renovation of the building presented greater difficulties and involved more expense and trouble than he had anticipated is reasonable and credible.
The appellant’s proposal to sell a half interest in the building to National Painting and the payment of several thousand dollars to that firm on the basis of a moral obligation appear on their face to be at variance with an intention on the part of the appellant to acquire and hold the building solely for revenueearning purposes. But by the time this proposal was made the appellant had become aware of the renovation problems and the unexpected demands of the tenants and. the increasing extent of rental vacancies. Retention of the full investment in the building was not as desirable as it had at first appeared to be. The payment to National Painting on a moral basis seems unusual in today’s business world, but no other basis for the payment was suggested in the course of the trial.
The building by its nature is capable of being held as a revenue-producing investment; or of being acquired and sold in the course of an adventure in the nature of trade. The repairs and alterations presumably made it more attractive for either of those purposes. The Collavinos made use of their own skills, facilities and employees in doing the work, and this, too, could serve either purpose.
I attach little importance to the application for supplementary letters patent extending the objects of the company, for they were obtained at the request of Manufacturers Life, which understandably took necessary precautions to ensure protection for its loan.
In evaluating the evidence, taken as a whole, the crucial consideration is whether I accept the testimony and explanations of Mario Collavino in respect of the intention and purpose of the appellant in acquiring the building initially and repairing and renovating it and selling it at the first opportunity, at a good profit, as being reasonable and credible and consistent with other proven facts on vital points. I was cognizant that he was an interested party and might give self-serving evidence. I regarded him carefully, perhaps even critically, while he was giving his evidence. But he impressed me favourably. He appeared to give his evidence frankly and candidly. It was not broken down in cross-examination. It was corroborated on material points by Pastorius, whom I have no reason to regard as other than truthful. It was not inconsistent in itself or with other evidence. It was not unreasonable or implausible.
It is not surprising that the tenants made unexpectedly great demands on the new owner. They were no longer owners themselves. They had sold to the appellant for $75,000 a building which a few months previously they had priced at $125,000. The expenses of repairs and renovations were greater than had been anticipated. Vacancies occurred, which advertising for tenants did not fill. The work was taking up too much of the time of the Collavinos and their employees. There developed, as I appreciate the evidence, a feeling of frustration and disappointment on the part of the appellant that induced a desire to reduce its involvement and investment. Taking in the National Painting people as partners seemed to serve that purpose. Dr. Fenech’s offer provided a complete solution. The offer was unexpected and unsolicited. It afforded the appellant a welcome way out. The building had not been put up or " advertised for sale.
While I realize that sometimes testimony is not as truthful as it appears to be, I observed Collavino with care and I do not think that I have good reason not to accept as truthful his evidence that the appellant purchased the building with the intention only of improving it and keeping it as a revenueproducing property, aS an investment, and that it was sold only because of unexpected problems and the receipt of an unsolicited offer that provided an opportunity to realize a fortuitous gain.
Having reached that conclusion it follows that, in my view, the sale of the building was the sale of a property acquired for revenue-producing purposes and was not a sale in the course of a venture in the nature of trade or a "‘business''.
Therefore, the appeal will be allowed and the assessment made upon the appellant for its 1965 taxation year will be referred back to the respondent for re-assessment on the basis that the profit of $25,579.50 arising out of the sale of the Medical Arts Building was not a profit from a business. The appellant will be entitled to be paid by the respondent its costs of the appeal, to be taxed.
*Pastorius gave evidence which is referred to later herein.
*My notes do not indicate the exact amount.
*See M.N.R. v. Sissons, [1969] C.T.C. 184; [1969] S.C.R. 507.