Guy Tremblay [TRANSLATION]:—The case at bar was heard at Montreal, Quebec on June 10, 1977.
1. Point at Issue
It must be decided whether the profit of $16,179.09 derived from a sale of lands made by the appellant on March 20, 1970, less than a month after the date of purchase, is taxable. At that time the appellant had as a partner in the transaction a company the purpose of which was to buy and sell land.
2. Burden of Proof
The appellant has the burden of showing that the respondent’s assessment is incorrect. This burden of proof derives not from one particular section ot the Income Tax Act but from a number of judicial decisions, including the judgment delivered by the Supreme Court of Canada in Ft IV S Johnston v MNR, [1948] CTC 195; 3 DTC 1182.
3. Facts
3.1 The appellant, a nurse, is the wife of Mr Jean Yves Lortie, bailiff of the Superior Court of Quebec.
3.2 The appellant, in her testimony, stated that she did not take part in the transactions which are the subject of the present dispute except by signing the contracts in the place where she was told to sign and by providing the sum of $7,500. For the negotiations she relied on her husband. This was her first investment.
3.3 The sum of $7,500 which she provided was not borrowed. It was the result of her savings. These savings were supposed to have accrued from her work from the time when she became a nurse in 1962 until her marriage in May or June 1966, at a salary of $65 to $70 a week.
3.4 Mr Jean Yves Lortie, the appellant’s husband, was in fact the appellant’s principal witness. The notarized transactions concerning this case may be described as follows:
(a) On February 27, 1970 the appellant and Les Entreprises Marcal Inc purchased from Claude Campeau lots 166, 167 and 168 of the official cadastral survey of St-Colomban, County of Deux-Montagnes. These lots, according to the contract, had an area of 312 acres. The price written on the deed was $60,000. The sum of $38,800 was acknowledged to have been paid, and the balance of $21,200 was to be paid in the following way: $5,000 on December 31, 1970 and $16,200 on December 31, 1971. Messrs Jean Yves Lortie and Omer Lortie, his brother, became joint and several guarantors with the purchasers. This contract, filed as No A-1, was registered the same day as No 137-974.
(b) On February 28, 1970, another contract, a counter-letter, was made between the same parties, stipulating that the amount of $60,000 appearing on the preceding contract was not the real'amount paid for lots 166, 167 and 168. The real amount was $46,800, the same amount as appeared on the promise of sale concluded between the parties on January 22, 1970. A copy of this document was filed as No A-2.
According to evidence given by the respondent’s representative in his affidavit, this contract was registered at Deux-Montagnes on the same day, February 28, 1970, as No 147-005. The Board doubts this. The contract (Exhibit A-1) bore the number 137-974 and had been registered on February 27. How could a contract have been registered the following day, February 28, as No 147-005? Does this mean that more than 9,000 deeds were registered in one day in the registry office of Deux-Montagnes? Furthermore, since Exhibit A-2 was a counter-letter, it was in no one’s interest to make it public by registering it on the very day it was signed.
(c) On March 20, 1970, the appellant and Les Entreprises Marcal Inc hold lots 166, 167 and 168, mentioned above, to Im-Val Inc for a price of $156,000, or $500 for each of the 312 acres. The vendor acknowledged having received the sum of $78,000. The balance of $78,000 is payable in the following way; fifteen $5,000 cheques payable monthly beginning in June 1970, and a final cheque for $3,000. A copy of this contract was filed as No A-3.
According to the respondent’s representative, in his affidavit, this contract was registered at Deux-Montagnes on the same day, as No 138-262. (The Board notes that the registration numbers are becoming smaller instead of continuing to increase. In spite of the affidavit of the respondent’s representative, the Board believes that Exhibit A-2 was not registered on February 28, 1970).
(d) On the same: day, March 20, 1970, a counter letter was signed between the parties stipulating, among other things, that the price of $156;000 stated in the previous contract (Exhibit A-3) was fictitious and the real price was $78,000. The price of $500 per acre was thus reduced to $250. In clause 3 of the counter-letter, it is stated that the reasons for which the parties put the fictitious price of $156,000 are reasons “absolutely personal to the parties hereto’’.
(e) On December 11, 1973, a deed of retrocession was made by Im-Val Inc to Les Entreprises Marcal Inc and to the appellant, regarding lots 1 to 107 of the official subdivision of lot 166 of the official cadastral survey of the parish of St-Colomban. This retrocession was made in consideration of the full and final release by the assignees (Les Entreprises Marcal Inc and the appellant) made to Im-Val Inc for the amount of $78.000 plus interest then owing to the assignees.
3.5 Les Entreprises Marcal Inc, incorporated in 1963, had as its object the purchase and sale of real estate. The principal shareholders were Mr Omer Lortie and his wife Dame Louise Leblanc-Lortie. This company conducted about fifteen real property transactions.
3.6 According to the testimony of Mr Jean Yves Lortie, the purpose of buying the land at St-Colomban was to establish a campground, since the location was suitable for this. The campground was to be managed and supervised by André Lortie, brother of Jean Yves and Omer Lortie.
3.7 According to the testimony of Mr Jean Yves Lortie and also of André Lortie, their family is made up of thirteen brothers and sisters. Because of the spirit of co-operation which prevails in the family, they try to help the ones who are not yet established. This is how they tried to help André. Until 1969, André was a physical education instructor in the army. Because of an accident, he could not continue in this career. He was hired by the bailiff’s office where Jean Yves works. André’s work consisted, among other things, of accompanying a bailiff when two people were needed to make a seizure or something of the kind. He did not enjoy this very much. In the autumn of 1969, with a view to helping André set himself up in business, they bought a warehouse where seized objects, among other things, were stored while awaiting sale. André had taken charge of the warehouse. Shortly afterwards, because of certain circumstances, business at the warehouse ran into unforeseen difficulties. The warehouse was in fact sold in 1972. In late 1969 or early 1970, André suggested to Jean Yves that they should buy land to set up a campground. Their brother-in-law, Guy Provencher, could help, since he had experience in this field. After discussing the matter with Omer Lortie, they decided to look for a piece of land. Les Entreprises Marcal Inc was to act as purchaser. Since the appellant had liquid assets of $7,500, they decided to ask her if she would be interested in investing in this purchase. She agreed. Lots 166, 167 and 168 of St-Colomban were purchased according to contract A-1. The attraction of this site was that it was divided in two by a river, which could satisfy the campers’ needs without the necessity of making an artificial lake.
3.8 However, immediately after the purchase problems began to arise, according to Mr Jean Yves Lortie. Apparently these problems involved the area of the property and the felling of trees.
3.9 In fact, an action at law was brought in the Superior Court, district of Terrebonne, by the former owner, Mr Claude Campeau, against the purchasers (Les Entreprises Marcal Inc and the appellant) and the guarantors (Omer Lortie and Jean Yves Lortie), claiming the sum of $11,442.53 on the ground, inter alia, that the area of the property was not 312 acres but 350.35, or 38.35 acres more.
3.10 The defendants replied by denying the principal action and presenting a counterclaim of $5,802.47 on the ground, inter alia that Mr Campeau had felled timber on lot 168 after the land was sold without being entitled to do so.
3.11 The procedure instituting action, namely the plaintiff’s declaration (filed as Exhibit A-4), is dated June 29, 1972. The defence and counterclaim (filed as Exhibit A-5) is dated July 27, 1972.
3.12 The witness, Jean Yves Lortie, explained under cross-examination the reason for the counter-letter of February 28, 1970 (Exhibit A-2). This counter-letter established the real amount of the sale, namely $46,800 instead of $60,000. The latter sum had been shown on the official contract signed the day before, February 27, 1970, so that the land could be resold for a higher price.
3.13 The area of the land purchased on February 27, 1970 and later sold on March 20, 1970 to Im-Val Inc proved to be increased by 38.35 acres, according to the plans made by surveyor Jean Blondin (the St- Jérôme town surveyor).
Mr Blondin’s services had been retained by Im-Val Inc on or about February 10, 1970, according to the affidavit filed by Mr Pierre W Peron, a representative of the respondent. This affidavit had been accepted as evidence by agreement and was filed after the investigation. Mr Blondin’s work consisted in preparing plans for subdividing lots 166, 167 and 168, which are the subject of contracts A-1, A-2 and A-3.
3.14 On April 15, 1970, according to Mr Peron’s affidavit, the surveyor Blondin submitted his report and the plan for subdividing the lots.
3.15 On July 13, 1970 the plans were registered. By these plans, lot 166 was subdivided from 1 to 107, lot 167 from 1 to 107, and lot 168 from 1 to 131.
3.16 As a consequence of the increase in area the purchaser, Im-Val Inc, had to pay an additional amount of $250 per acre, in compliance with a clause in the contract (Exhibit A-3) and the counter-letter changing the price per acre from $500 to $250.
3.17 Because of difficulties in payment, part of the land sold, namely lot 166 was retroceded by Im-Val Inc to the vendors on December 11, 1973 (para 3.4 (e)).
3.18 On January 31, 1975, the respondent included in the appellant’s income the sum of $19,814.55; this sum is considered to be the appellant’s commercial income from the transaction which is the subject of this dispute.
3.19 On March 18, 1975 the appellant filed an objection.
3.20 On May 19, 1976, the respondent sent a notification to the appellant maintaining his position that commercial profit and not capital gain was involved, but he also allowed a reduction of $16,179.09 as a deposit on an amount payable.
3.21 On August 17, 1976 an appeal was submtited to the Tax. Review Board.
4. Act, Precedents and Comments
4.1 Act
Sections 3, 4 and paragraph 139(1)(e) of the old Act may be useful in the case at bar:
3. The income of a taxpayer for a taxation year for the purposes of this part is his income for the year from all sources inside or outside Canada and. without restricting the generality of the foregoing, includes income for the year from all
(a) businesses,
(b) property, and
(c) offices and employments.
4. Subject to the other provisions of this part, income for a taxation year from a business or property is the profit therefrom for the year.
139. (1) In this Act,
(e) “business” includes a profession, calling, trade, manufacture or undertaking of any kind whatsoever and includes an adventure or concern in the nature of trade and does not include an office or employment;
4.2 Precedents
A number of precedents were principally cited by counsel for the respondent: J J Aimé Roy v MNR, 13 Tax ABC 1; 55 DTC 273; Leslie Todd v MNR, 15 Tax ABC 42; 56 DTC 208; No 341 v MNR, 15 Tax ABC 103; 56 DTC 231; Jacob Spelt v MNR, 31 Tax ABC 320, 63 DTC 267; Arthur Dansereau v MNR, 37 Tax ABC 425: 65 DTC 169; Wilfred John Wallace v MNR, 38 Tax ABC 246; 65 DTC 310; Evelyn Nozick v MNR, 39 Tax ABC 361: 65 DTC 687; Leonard Walter Stewart v MNR, 41 Tax ABC 297; 66 DTC 474; Guerino Romano v MNR, 41 Tax ABC 302; 66 DTC 490; Helene Mikula v MNR, 42 Tax ABC 54: 66 DTC 636; Byron B Kennedy v MNR, [1952] CTC 59; 52 DTC 1070; T Campbell v MNR, [1952] CTC 334; 52 DTC 1187; Toby Barnett v MNR, [1957] CTC 355; 57 DTC 1255; Bayridge Estates Limited v MNR, [1959] CTC 158; 59 DTC 1098: Regal Heights Limited v MNR, [1960] CTC 384; 60 DTC 1270; Essex House Limited v MNR, [1961] CTC 270; 61 DTC 1135; Donald C Brown v MNR, [1961] CTC 432; 61 DTC 1255; J-Euclide Perron v MNR, [1962] CTC 457; 62 DTC 1288; Samuel Lyons v MNR, [1962] CTC 478; 62 DTC 1297; MNR v James A Taylor, [1956] CTC 189; 56 DTC 1125; Harry C Walker, Walyrie Klak and William Alexander Rueb v MNR, [1963] CTC 441; 63 DTC 1280; MNR v Clifton H Lane [1964] CTC 81; 64 DTC 5049; William Slater et al v MNR; [1966] CTC 53; 66 DTC 5047; David Rothenberg v MNR, [1965] CTC 1; 64 DTC 255; Harold Diamond et al v MNR, [1966] CTC 670; 66 DTC 5434; Stanley W Carr v MNR, [1965] CTC 334; 65 DTC 5201.
4.3 Comments
4.3.1 The precedents and legal theory have long since formulated certain key points to be considered when deciding whether profits are commercial or capital in nature.
The English Commission on taxation, which made its report in 1955, established six points (badges of trade):
1 the object of the sale:
2 the duration of ownership;
3 the number of similar transactions by the same person;
4 work done in connection with the property..;
5 the circumstances which caused the sale;
6 intention.
4.3.2 Canadian precedents consider almost the same factors:
1 intention;
2 the relationship between the transaction and the taxpayer’s business;
3 nature of the transaction and goods involved in it;
4 number and repetition of transactions:
5 the objects of the corporation.
4.3.3 In the case at bar, the factors to which the parties refer are the following:
(a) intention:
— the intention was to invest, says the appellant;
—, the purchase was made with a view to resale, says the respondent;
(b) duration of ownership:
— the period of one month between purchase and sale is indicative, says the respondent, of commercial profit;
— circumstances made it necessary to sell so quickly, explains the appellant;
(c) partnership with Les Entreprises Marcal Inc:
— Les Entreprises Marcal Inc has as its object the purchase and sale of land; the appellant does not hold shares in Les Entre- prises Marcal Inc; she is not a person connected with this company and is a legal person independent of the company;
(d) number of transactions:
— this is the appellant’s only transaction; according to the respondent, it is at least an adventure in the nature of trade (paragraph 139(1 )(e)) ;
(e) object of the sale:
— by its nature a piece of land is usually an object of investment, especially if one plans to set up a campground on it-^however, it can be an object of trade if the investment was only a pretext, or if the buyer changed his mind too readily.
4.3.4 At first glance, what strikes the Board is perhaps this very readiness with which the buyers suddenly changed their minds about the campground and decided to sell. The reasons given (the area of the land was inadequate and there were problems about felling timber) do not appear very convincing. As for the timber, no evidence was given that the problem arose suddenly the day after the contract was signed. On the contrary, the evidence has shown that the problem materialized on July 27, 1972, more than two years after the contract was signed, at the time of the defence proceeding and counterclaim against the action brought by Mr Claude Campeau. As to the area of the land, thirty acres more or less could not make a great difference. This land had in fact been inspected by the parties involved and considered to be large enough for a campground. Ascertaining the exact acreage was then a minor point as regards carrying out the plan.
The Board wonders why the surveyor, Blondin, began surveying on February 15, 1970, between the promise of sale signed on January 22, 1970 (paragraph 3.4(b)) and the signature by the appellant and her partners of the notarized contract on February 27, 1970; and he had been hired by Im-Val Inc, the future buyer.
Furthermore, Mr Blondin was hired, according to the evidence, not only to calculate the area of the land but also to prepare plans for subdividing lots 166, 167 and 168 (paragraph 3.13). How could Im-Val Inc have given him such instructions if it were not already certain that it would acquire the land? When the ^surveyor submitted his report on April 15, 1970, the appellant and her partners had already resold the land as of March 20.
This series of facts does not help the appellant to discharge the burden which rests with her; rather, it makes the Board sceptical as to the intention underlying this transaction.
The only effect of the admission by Jean Yves Lortie, the appellant’s husband and principal representative, that the fictitious price of $60,000 was shown on the contract (A-1) so that the land could be resold at a higher price, is to change the Board’s scepticism into a certainty that the intention to sell was already present when the contract of purchase was made on February 27,1970.
4.3.5 Though the foregoing paragraph has already settled the basic question in the case, the Board wishes to emphasize one point which leaves it sceptical: the source of the money. The Board would have understood, if the appellant had received gifts from her husband over the years. However, it has difficulty understanding how over about 4 years, from 1962 to 1966 (paragraph 3.3), she could have accumulated the sum of $7,500 with a salary of $65 to $70 a week (paragraph 3.3). On $3,500 in these years, could someone pay for food, accommodation, clothes and taxes and manage to save $6,000 in 4 years? (The sum of $6,000; carefully invested, could have grown to $7,500 in January 1970.) It is possible, but only in very special circumstances which the appellant had the burden of proving. The Board is far from being convinced that the money was given to the appellant by Mr Jean Yves Lortie or Les Entreprises Marcal Inc for the purposes of this transaction. Nonetheless it remains sceptical, because of the weakness of the evidence, that it could really have belonged to the appellant.
4.3.6 The Board does not doubt that there was a spirit of co-operation among members of the Lortie family. It believes that in the fall of 1969 they really did discuss plans for a campground to help the appellant’s brother-in-law. However, it also believes that overly favourable circumstances caused the plan to be changed.
4.3.7 The transaction which is the subject of the present dispute was the only one in which the appellant took part. This fact by itself cannot make the Board conclude that a capital gain was involved; neither can the fact that she personally did not know what she was doing, and only took part in the transaction by signing her name and contributing the money (paragraph 3.2). She was in fact acting through her agent, her husband, who took care of everything and knew everything about the transaction. He even knew enough to increase the price fictitiously in order to sell at a higher price.
4.3.8 In view of the burden of proof which rested with the appellant, and considering that the appellant did not discharge this burden, the Board must conclude that this was at least an adventure or concern in the nature of trade.
5. Conclusion
The appeal is dismissed in accordance with the above-mentioned reasons for judgment.
Appeal dismissed.-.