Date: 19980401

Docket: 95-1086-IT-G

BETWEEN:

154135 CANADA INC.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

LAMARRE J.T.C.C.

[1] The appellant is appealing from an assessment made by the Minister of National Revenue ("the Minister") for the 1990 taxation year on June 8, 1993, pursuant to the Income Tax Act ("the Act"), and another assessment made pursuant to the Act on May 10, 1993, regarding Part III tax.

[2] In calculating its income for 1990 the appellant reported a profit of $3,173,929 on the disposition of an office building located at 144 Boulevard de l'Hôpital in the Town of Gatineau as a capital gain, and included the taxable portion amounting to $2,313,780 in its income. Following this disposition the appellant made an election in accordance with to s. 83(2) of the Act regarding a capital dividend of $612,930, which was paid tax-free to its shareholders.

[3] In assessing the appellant the Minister considered that the gain made was not a capital gain but business income. He accordingly cancelled the capital gain and added $3,173,929 to the appellant's income. He further assessed tax pursuant to Part III of the Act in the amount of $459,698 on the declared dividend of $612,930.

[4] The respondent admitted that the appellant was incorporated on February 18, 1987 to develop and carry out an investment project which involved purchasing land in the Town of Gatineau, building a six-storey office building on it and renting it to various tenants, including the Town of Gatineau. However, she maintained that from the time the purchase was made and the building constructed the appellant had a secondary intention to resell at a profit, and this was denied by the appellant (see paragraph 3 of the Notice of Appeal; paragraphs 2 and 9(d) of the Reply to the Notice of Appeal; and paragraph 2 of the Answer).

[5] The appellant's shareholders were:

NAME PERCENTAGE OF APPELLANT'S CAPITAL STOCK

Claude Bérard 30% through the company "Les Carrières de la Gatineau Inc."

Daniel Moreau 12.5% through "151706 Canada Inc."

Jacques Cormier 12.5% through "151706 Canada Inc."

Jacques G. Sauvé 12.5% through "151706 Canada Inc."

Gérald Groulx 12.5% through "Les Investissements Gefra"

Gilles Lauzon 10% through "144002 Canada Inc."

Yves Letellier 5% through "155629 Canada Inc."

Maynard Robinson 5%

[6] At the start of the hearing the parties submitted a partial agreement on the facts, by which they admitted the following facts:

[TRANSLATION]

1. During the years at issue Claude Bérard was partly engaged personally or through companies in purchasing vacant pieces of land, subdividing them and selling the lots to building contractors for the construction of single-family homes.

2. From May 5, 1988 to date the following individuals owned and continue to own, directly or indirectly, an 11,000 square foot commercial rental building located at 139 de l'Hôpital in Gatineau:

Claude Bérard

Jacques Sauvé

Gilles Lauzon

Daniel Moreau

Jacques Cormier

3. From January 20, 1988 to date the following individuals owned and continue to own, directly or indirectly, a 14,000 square foot commercial rental building located at 360 Boulevard Maloney in Gatineau:

Claude Bérard

Jacques Sauvé

Daniel Moreau

Jacques Cormier

Evidence

[7] I heard the following testimony: Jacques Sauvé, a structural engineer, vice-president of the appellant; Gilles Lauzon, a real estate broker; Daniel Moreau, formerly director of services with the Town of Gatineau for 10 years and now a restaurant operator and owner of the Brasserie Le Houblon, located at 455 Boulevard de l'Hôpital in a building owned by him; and Claude Bérard, a businessman operating in various businesses including a real estate development firm.

[8] In early 1987 the Town of Gatineau announced its intention of creating a new town centre in the quadrangle formed by de l'Hôpital, Maloney, Montée Paiement and St-René boulevards. At the same time it announced its intention of leasing office space in the future town centre in order to centralize some of its municipal services (the town hall, clerical services, senior management and human resources).

[9] It accordingly issued a call for tenders for the rental of premises in a building to be built inside the town centre quadrangle. The building had to meet certain requirements, namely having a minimum floor space of 30,000 square feet on three floors or a maximum of 60,000 square feet on six floors. The Town offered to lease an approximate floor space of 1,400 square meters (about 15,000 square feet) for a period of seven or ten years.

[10] According to the Town of Gatineau's planning guidelines for the construction of its new town centre, the building in question was to be built in a commercial zone not far from the Maison de la Culture and the Hôtel de Ville, which was to be built in 1997 in an institutional zone.

[11] According to Mr. Sauvé, there was a chance for the group of investors to which he belonged to make a long-term investment, since with the Town as a tenant they expected they would be able to attract other businesses to the building.

[12] The group of investors referred to by Mr. Sauvé consisted of Daniel Moreau, Gérald Groulx, an insurance broker, Yves Letellier, a lawyer, Maynard Robinson, a trucking contractor, Claude Bérard, Gilles Lauzon, Jacques Cormier, a builder who is now deceased, and himself. All were in their forties at the time.

[13] The National Bank was prepared to finance the project and the Communauté régionale de l'Outaouais had indicated that it might be setting up a satellite office in Gatineau. Various partners associated with the project also wanted to become tenants. The aforesaid investors accordingly expected to be able to make the project financially viable fairly quickly.

[14] They therefore decided to submit a bid to the Town of Gatineau through an already existing company, 146607 Canada Inc. ("146607"), in which they were all shareholders, in view of the short deadline for bidding and the fact that the company had a little liquidity which would enable it to obtain financing more easily.

[15] An offer to lease was accordingly submitted to the Town of Gatineau on January 7, 1987; in it they proposed to put up a 60,000 square foot building and lease floor space of 1,400 square meters (15,000 square feet) to the Town at a rental of $159.84 net per square meter (all expenses included except for janitorial costs) for a period of 10 years. In the general presentation of the offer to lease, the group of businessmen, Bérard, Moreau, Cormier, Groulx and Sauvé, represented itself as a serious group which had taken an active part in developing the area surrounding the town centre and had proven experience in the planning, design, construction and rental of commercial buildings. The offer to lease also indicated that the group had been responsible for completing projects with a total overall value of more than a billion dollars (see Exhibit A-1, tab 4).

[16] This bid was apparently accepted on February 11, 1987, and the appellant company created a week later, on February 18, 1987. 146607 subsequently assigned its rights to the appellant by notarial deed dated September 11, 1987.

[17] The amount initially invested by the shareholders was $150,000, $1,000 of which was in the form of capital stock and $149,000 in the form of advances.

[18] An option to purchase was signed on April 9, 1987, by which Gérald Groulx agreed to sell his land to the appellant company, represented by Claude Bérard, for the sum of $300,000. This land was located at the corner of de l'Hôpital and de la Gappe boulevards, in the heart of the new town centre. The option was valid for a period of six months. The option was exercised and the land purchased on July 30, 1987.

[19] On April 13, 1987, the Communauté régionale de l'Outaouais agreed to lease floor space from 146607 of 3,600 square feet in the building to be built, on a net, net, net lease (all expenses excluded) for a term of seven years, with an option to renew for three years, beginning on January 1, 1988, and at an annual rent of $13.60 per square foot (see Exhibit A-1, tab 8). According to Mr. Sauvé, this lease brought in $5 more per square foot than the one signed with the Town, in view of the fact that the rent was net, net, net.

[20] On April 24, 1987, the Town of Gatineau signed a memorandum of understanding with 146607 by which the Town undertook to remove the restriction which prohibited any building on the land in question. At the same time the Town gave official sanction to the rental of premises in the building to be built and 146607 gave a bond of $30,000 if the construction was not done within the deadlines and on the terms stipulated by the Town. The lease with the Town was not to be signed until the work was completed. The restriction that had existed since December 19, 1985 was finally officially removed on April 27, 1987.

[21] Construction began after the issuance of a permit to 146607 on May 12, 1987. Construction, which was to have taken place in two stages, was ultimately completed in one stage as a sufficient number of tenants had been found, and the work ended in December 1987. Jacques Sauvé did the framing plans for the building and construction was done under the supervision of the company Termina Construction, owned by Jacques Cormier. The partners themselves were responsible for hiring the various subcontractors.

[22] The appellant entered into a ten-year lease with the Town of Gatineau for part of the second and third floors of the building, in accordance with the terms of the offer to lease. The appellant also entered into a number of other leases with various tenants, such as the Communauté régionale de l'Outaouais, the law firm Bélec, Letellier, two accounting firms, Assurance-Vie Desjardins and the companies Landry, Gauthier & Associés Inc. and Immeubles G.R. Lauzon Inc.

[23] The Town took possession of the premises in January 1988 and the official opening of the new building, known as "Édifice Pierre Papin", took place in spring 1988.

[24] The appellant company had obtained a bridging loan of $5,500,000 from the National Bank on May 25, 1987, and each of the eight partners personally guaranteed it. This loan was repayable on July 31, 1988 at the latest, and the shareholders were to invest $450,000. Ultimately, they only had to lay out $150,000. Indeed, judging from the appellant's financial statements even this investment was repaid to the shareholders in the first year (see balance sheet at September 30, 1988, Exhibit A-3, tab 48).

[25] In the bridging loan, the National Bank undertook to advance 75 percent of the economic value based on rental income. It was to disburse the funds 35 days after completion of the work or by July 1, 1988 at the latest, on submission of leases showing annual net, net, net rental income of $834,000.

[26] A projection of anticipated rental income was prepared by Mr. Sauvé on October 5, 1988 (Exhibit A-2, tab 31). According to Mr. Sauvé, there was still plenty of space not leased at that time. According to this projection, the ground floor was to be leased at $22.50 per square foot (all the projections were based on net, net, net rent) and the other floors at $18.50 per square foot. The Town of Gatineau had signed a lease in which the rent amounted to $10 per square foot and the Commission régionale de l'Outaouais at $13.60 per square foot. For the period from 1988 to 1993, total annual rental income of $1,008,453 was anticipated. In fact, less than two-thirds of the floor space was leased in October 1988 and it brought in $450,988 for the year. The profit and loss statement for the rental of the building for 1987 to 1990 (the year of disposition) was filed as Exhibit A-3, tab 48. It reads as follows:

[TRANSLATION]

PROFIT AND LOSS STATEMENTS

Year 1987 1988 1989 1990

Income 0 $450,988 $829,544 $1,048,653

Interest $17,069 $451,550 $755,563 $ 838,769

Expenses $51,273 $581,689 $456,302 $ 551,419

Depreciation - $ 92,318 $119,502    -

Loss $68,342 $605,186 $501,823 $ 341,535

[27] At this point the appellant's shareholders were in negotiations with the Bank of Nova Scotia to negotiate a lease with it, and at the same time new financing. That was why the appellant kept its bridging loan with the National Bank rather than securing it by a mortgage on the building.

[28] In October 1988 the building was nearly 70 percent leased and the Bank of Nova Scotia expressed an interest in leasing the ground floor of the building, the result of which would have been that the floor space was nearly 75 percent rented.

[29] On October 27, 1988 the Bank of Nova Scotia finally made an offer to lease floor space of 4,000 square feet on the ground floor for $23.50 per square foot for the first five years and for $26.50 per square foot for the next five years. This offer was accepted on November 4, 1988.

[30] On July 11, 1989 the appellant obtained financing from the Bank of Nova Scotia in the form of a bridging loan to finish the improvements to the premises. As a result of this new agreement the appellant repaid the National Bank. The new $7,000,000 loan was repayable before December 31, 1990 and was guaranteed by the shareholders personally.

[31] Mr. Sauvé explained that it was more advantageous for the appellant to keep short-term financing because it got a better rate of interest and the interest was fully deductible. This was therefore temporarily advisable. According to Mr. Sauvé, it was less costly to keep financing in the form of a bridging loan as long as the building was not completely leased.

[32] The appellant's shareholders used the same method of financing for buildings located at 139 boulevard de l'Hôpital and 360 boulevard Maloney in Gatineau, buildings which they still own. They first obtained financing in the form of a bridging loan by giving personal guarantees for a period of about five or six years and then guaranteeing the loan by a mortgage.

[33] Before obtaining this new financing the appellant's shareholders experienced certain problems leasing the still vacant third of the building. That was when the Town of Gatineau indicated that it wished to lease additional space. Following the municipal election of 1988 the Town of Gatineau, under the administration of its new mayor, developed a project to relocate and centralize its services at the same location in the appellant's building. The size of this project meant that the building and the parking area had to be expanded.

[34] Initially the appellant was not interested since the rent initially agreed to with the Town was not high enough. The parties ultimately reached an agreement in which the Town agreed to pay $15.90 per square foot, net, net, net. According to Mr. Sauvé, this price was capable in terms of the financial viability of the building, although everyone hoped the interest rates would fall.

[35] The Town subsequently required that the building be expanded by about 4,000 square feet as a condition for renting any additional space. This meant a new investment for the appellant, which in order to satisfy the Town had to purchase the adjacent land.

[36] Finally, the Town imposed as its last condition for renting the new space that the appellant give it an option to purchase which it could exercise within a year. The proposed purchase price was $9,000,000 plus the cost of expanding to an additional floor space of 8,000 square feet (no longer 4,000 square feet), estimated by the appellant's shareholders at about $800,000.

[37] The Town's demands caused a lot of concern among the group of shareholders. This is indicated in the minutes entered as evidence. The Town's new proposal was not acceptable. However, there were those who pointed out that the Town had the power to expropriate them if its proposal was rejected. Others suggested that they might gamble that the Town would not exercise its option. Ultimately, the shareholders felt that they really had no choice and at a meeting held on May 15, 1989 they accepted all the conditions imposed by the Town.

[38] The appellant accordingly purchased the adjacent land from the Town of Gatineau on May 18, 1989 (in order to carry out the expansion requested by the Town) for the sum of $144,736, undertaking not to resell it for a higher price if the Town exercised the option.

[39] On June 20, 1989, the Town signed a lease in which it undertook to lease floor space area of over 20,000 square feet at the price already negotiated of $15.90 per square foot for eight years with an option to purchase, in accordance with the terms previously agreed. The option was to be exercised before September 1, 1990. Under this lease the Town was to take possession of the premises in fall 1989.

[40] As agreed, the building was expanded by 8,000 square feet over a four-month period. Arrangements were made to move some tenants, including Assurances Desjardins, the architect Landry and Gilles Lauzon.

[41] On April 18, 1990, Mr. Bérard informed the appellant's shareholders that the Town had decided to exercise the option. This news was very badly received by some of them, who according to the minutes of the meeting suggested that they would be the losers as the building would have [TRANSLATION] "a much higher value in four or five years" (minutes of a shareholder meeting held on April 18, 1990, Exhibit A-3, tab 53).

[42] Although the expansion work had been valued at some $800,000, including the cost of purchasing the land, the Town bought the building on September 1, 1990 for the sum of $9,500,000 (namely $9,000,000 as agreed in the lease plus $500,000 for the expansion costs). The appellant made a gain of $3,173,929 in this transaction.

[43] On July 30, 1990, Gilles Lauzon's office billed the appellant for $285,000 in connection with the sale of the building located at 144 Boulevard de l'Hôpital. According to Messrs. Sauvé and Lauzon this amount, which corresponded to 3 percent of the selling price, was paid to Mr. Lauzon to compensate him for the various moves he had had to make as a result of the transactions with the Town. The lump sum was determined in accordance with the actual cost of relocating, arranging offices and so on and, they said, was in no way related to a mandate which was allegedly given to Mr. Lauzon for the sale. Mr. Lauzon explained that he had moved his office from a very lucrative location in the Promenades de l'Outaouais to set up in the new building. What had initially been a good investment for him subsequently proved to be a losing proposition. After persuading his salespeople to go with him, he apparently lost several of them after the new move made necessary by the Town of Gatineau. He said this was why he negotiated the payment of this amount with the appellant's other shareholders. However, it should be noted that the amount was billed a year after the final move and that it was regarded as a disbursement resulting from the sale in the appellant's financial statements for the fiscal year ending September 30, 1990. Those financial statements were approved by a resolution of the shareholders on November 30, 1990.

[44] According to Mr. Sauvé, no advertising was ever done to sell the building. However, an initial offer to purchase was made by Yves Daigle on October 19, 1987, for $8,675,000, and was given to the accountant for study and subsequently refused. A second offer for $10.5 million was made by Mr. Daigle, under which, if it was accepted, the appellant would agree to take a second mortgage and accept a rental guarantee. This second offer was refused for the reasons stated in the minutes of the meeting held on January 19, 1988, which read as follows:

[TRANSLATION]

The building is only 50 percent rented at present and they feel that its value will exceed $11 million: it will be fully leased at $18.50/sq. ft. net, net, net and $23.50/sq. ft. to the Bank of Nova Scotia.

It would be better to wait for a more solvent purchaser in future and not have to carry a second mortgage or a rental guarantee.

If interest rates continue at their present level or fall, the building will have a much higher value in five or six years.

(See Exhibit A-3, tab 53)

[45] Previously, 146607 had purchased a piece of land from a company in which Mr. Bérard had interests. A commercial office building was built on this land (located at 430 boulevard de l'Hôpital) through the company Termina Construction, owned by Mr. Cormier. The land was bought on April 18, 1986 (according to Exhibit I-2) and the building was sold on May 1, 1987 (according to Exhibit I-3). 146607 apparently made a profit of $942,816, which was treated as a capital gain (see 146607's tax return for the 1987 taxation year, Exhibit I-1, tab 8). Mr. Sauvé said that in that case, as in the case of the building at issue, no sale was solicited. Limited partnerships were very popular at that time with investors who were looking for tax relief. These partnerships displayed considerable interest in this type of building. According to Mr. Sauvé, it was a partnership of this kind which was the purchaser. The deed of sale (Exhibit I-3) shows a Mr. Gaétan Lemieux as the purchaser.

[46] As well, in the same period, another building (located at 492 boulevard de l'Hôpital) was built and sold within two years by the same group of shareholders under the auspices of another company. Once again, according to Mr. Sauvé, no sale was solicited, and another limited partnership purchased the building. He took back a share in the building himself to accommodate his offices. Mr. Lauzon, who at that time represented the largest brokerage firm in the area, said that it was quite rare to receive unsolicited offers, except for limited partnerships who paid higher prices for buildings than their actual value, given the tax advantages available. According to him, the building at issue was in great demand since it was the largest construction project in Gatineau. Moreover, the building was very well located, in strategic terms, and was occupied by quality tenants.

[47] The same group of shareholders also owned several vacant lots which they intended to develop either as residential lots or as commercial buildings through other companies.

[48] Of course, everyone said they had become involved in all these projects with the intention of [TRANSLATION] "building some equity" and keeping these buildings for the long term. In terms of the buildings that were sold, with the exception of the building at issue, they had received attractive offers which could not be refused and which gave them the chance to do something else.

[49] Mr. Bérard added that personally he was not pleased to see the Town of Gatineau exercise the option. Immediately afterwards, he said, he built another building (located at 160 boulevard de l'Hôpital) adjacent to the building at issue, with other investors who were not with him in the Hôtel de Ville project. He said he still had an interest in that building. He said he financed the building, like the others, by obtaining a bridging loan, which he had just transformed into a loan secured by a mortgage, after owning it for six years.

Arguments of the parties

[50] Counsel for the appellant contended that in 1987 the appellant had purchased a capital asset in order to earn income from property, and that when it disposed of this building in 1990 it made a capital gain. Alternatively, he argued that in making the assessment on May 10, 1993, the Minister had not acted with dispatch in examining the election made by the appellant under s. 83(2) of the Act on February 22, 1991, and rather had acted improperly, wrongfully and belatedly, thereby causing hardship to the appellant, and for these reasons asked that the assessment be vacated.

[51] Counsel for the respondent maintained that the gain made on the building at issue should be regarded as business income, not as a capital gain. Having regard to the location of the building, the experience of the people in charge of the appellant, the minimal investment, the method of financing, the short time the building was owned, the money spent at the time of disposition and all the other factors taken together, he submitted that the appellant had, at the time the building was purchased, [TRANSLATION] "the intention to resell at a profit or at the very least a secondary intention to resell at a profit". He also argued that the assessment of May 10, 1993, made in accordance with Part III of the Act, is valid and was examined by the Minister with due dispatch.

Analysis

[52] In order to show that the disposition of the building at issue here resulted in a capital gain and not business income, the appellant must prove that the building was not purchased in the course of carrying on a business of selling and reselling buildings (Californian Copper Syndicate v. Harris (1904), 5 T.C. 159; Irrigation Industries Limited v. M.N.R., [1962] C.T.C. 215 (S.C.C.)). Additionally, even if it is accepted that the appellant was not engaged in such a business, the appellant must also show that the purchase of the building in question was not an adventure in the nature of trade and made in order to dispose of the building in question at a profit (see M.N.R. v. Taylor, 56 DTC 1125, at 1131 (Ex. C.R.). To do this it must show on a balance of probabilities that its primary or its real intention was to purchase the building to operate it as a rental income property and not to resell it at a profit (see Les Immeubles M.H.T. Ltée v. M.N.R., 93 DTC 70, [1992] 2 C.T.C. 2326 (T.C.C.)). In the instant case, it appears that the respondent accepts that the appellant's primary intention was to put up a building in order to earn rental income from it.

[53] However, the analysis must be taken further, since the Court must consider whether, at the time of the purchase, the appellant had a secondary intention to resell the building if the circumstances were right. In other words, if the secondary intention to resell at a profit, in the event that circumstances were such that it was more advantageous to resell the building at a profit than to use it for capital purposes, is an operating motivation which prompted the appellant to purchase the building, the transaction may be characterized as an adventure in the nature of trade (see Regal Heights Limited v. M.N.R., [1960] C.T.C. 384 (S.C.C.); Racine, Demers and Nolin v. M.N.R., 65 DTC 5098, [1965] C.T.C. 150, at 159 (Ex. C.R.)). This decision must be based on inferences resulting from the circumstances surrounding the transaction rather than direct evidence of what the purchaser had in mind (see Racine, Demers, supra, at 159).

[54] There is some authority for the proposition that the appellant does not have to prove that the intention to resell at a profit was not an operating motivation which prompted it to purchase the building if this was not a fact which was taken into account by the Minister in making his assessment (see Hiwacko Investments Ltd. v. The Queen, 78 DTC 6281, [1978] C.T.C. 378 (F.C.A.); Kit-Win Holdings (1973) Ltd. v. The Queen, [1981] C.T.C. 43 (F.C.T.D.); Les Immeubles M.H.T. Ltée, supra).

[55] Counsel for the appellant relied on this very point in arguing that he did not have to show absence of secondary intention. In paragraph 9(s) of the Reply to the Notice of Appeal the respondent said that in making his assessment the Minister relied inter alia on the following presumption of fact:

[TRANSLATION]

(s) having regard to the location of the building, the experience of the people in charge of the appellant, the investment, the method and amount of financing as compared with the cost of the property, the short time it was owned, the money spent at the time of disposition and all the other factors taken together, at the time of the purchase/construction of the building the appellant had at the very least a secondary intention of reselling at a profit . . .

[56] According to counsel for the respondent, it is clear from reading this paragraph that the concept of secondary intention was the basis of the assessment.

[57] In my opinion, the question of a secondary intention to resell at a profit as an operating motivation which led to the purchase of the building may be inferred from the very language used in the presumptions of fact which were the basis for the assessment and which are set out in the Reply to the Notice of Appeal. The onus is thus on the appellant to show that there was no such intention.

[58] In the instant case the appellant was created in order to comply with the undertaking given by its shareholders in the bid accepted by the Town of Gatineau to construct a building to house part of the municipal services while waiting for the Hôtel de Ville to be built.

[59] The appellant's shareholders were all businessmen who had a quite comprehensive knowledge of real estate. Each contributed his professional knowledge to this building project, which was initiated by the Town itself. They all knew that the Town of Gatineau wanted to develop a new town centre at the exact location where one of the shareholders already owned land that would be used as a site for the future building.

[60] They all knew that the land located in this quadrangle or its vicinity was in demand. The evidence was that at the time there was also renewed interest in limited partnerships, which were looking for this type of land at prices higher than its actual value, in view of the tax benefits available to investors in such partnerships.

[61] Although the witnesses stated that this building was constructed under their management to create a capital asset, in my opinion this is not indicated by the evidence surrounding the circumstances of the transaction. Each shareholder only invested a very small amount of money in the project as compared with the actual cost of financing. The partnership's profit and loss statement from the time the building was purchased in 1987 to the time it was disposed of in 1990 shows quite large losses in each of those years, even though 70 percent of the building was leased. Instead of decreasing over the years, the "interest" item increased significantly. The evidence further showed that although the building was still running at a loss the shareholders recouped the initial investment of $150,000 before disposing of it. They did not repay any of the loan principal. All these points hardly support the argument of the appellant's shareholders that they got involved in this project in order to create a capital asset.

[62] Additionally, at the time of the bid to the Town, the appellant's shareholders knew that the Town was prepared to commit itself as a tenant for a maximum period of 10 years since at that time it had already planned to build the Hôtel de Ville. They also knew the maximum price the Town was prepared to pay to rent 15,000 square feet of floor space. That price, $10 per square foot net, net, net was clearly insufficient to make the building financially viable. The witnesses said that they initially accepted this amount in order to get the contract with the Town. Also, with the Town as a tenant, they were counting on attracting other quality tenants. At the same time, if we look at the minutes of January 19, 1988, it would appear that the consensus was that they should wait for the building to be completely rented so they could try and obtain a higher price for it.

[63] This appears to confirm the shareholders' intention not only to obtain the contract with the Town for construction of the building but to resell it as soon as it was fully rented, making a profit on the venture.

[64] Further, the question of the commission paid to Mr. Lauzon at the time the building was sold in my view confirms that the shareholders intended from the start of this entire venture to resell at a profit as soon as circumstances permitted. Despite all the testimony which sought to show that this commission was paid not in connection with the sale, but to compensate for the repeated moves that Mr. Lauzon had to make, the dates do not correspond since the last move took place a year before the sale. Moreover, other tenants had been through the same process when the Town exercised the option. There was no evidence that they were compensated for this. Finally, the appellant's shareholders approved the tax return showing the $285,000 as an expense associated with the sale. In my view, that money might well have been the subject of a prior agreement between the shareholders that, in the event of a sale, a commission would be paid to Mr. Lauzon for the part he played as real estate broker.

[65] Finally, the evidence was that four other buildings were constructed following the same process and by the same group of shareholders, through different partnerships, at almost the same time. These buildings were constructed in the quadrangle where the new town centre was, or in that vicinity. Two of them were sold at a profit after being owned for a short time. Additionally, some of the appellant's shareholders also own vacant land for residential or commercial building and the evidence suggests that they intend to resell it eventually to contractors.

[66] I am therefore of the view that there is sufficiently clear and convincing evidence to conclude that the transaction in question was the result of an operation prompted from the outset by the appellant's intention to resell the building at a profit as soon as circumstances permitted. The appellant certainly did not establish the contrary on a balance of probabilities.

[67] However, I realize that the Town may not have been the ideal purchaser and that the profit made may have been less than was anticipated by the appellant's shareholders. This is shown by the minutes of shareholder meetings at the time the first two offers were refused and at the time the Town decided to exercise its option. In my opinion, this only confirms the risk-taking nature of the business in which the appellant was engaged.

[68] I therefore conclude that the gain made on disposal of the Pierre Papin building resulted in business income, not a capital gain.

[69] Counsel for the appellant also submitted an alternative argument that the assessment made pursuant to s. 185 of Part III of the Act should be vacated since the Minister did not act with due dispatch in examining the election made by the appellant under s. 83(2) of the Act.

[70] In Ginsberg v. Canada, [1996] 3 F.C. 334, 96 DTC 6372 (C.A.), the Federal Court of Appeal held that this could not be a valid reason for vacating an assessment. Although the appeal in that case concerned the making of an assessment under s. 152(1) of the Act, the rule also applies to any assessment made under Part III of the Act, by operation of s. 185(3) of the Act.

[71] The appeal is accordingly dismissed with costs to the respondent.

Signed at Ottawa, Canada, April 1, 1998.

Lucie Lamarre

J.T.C.C.

[OFFICIAL ENGLISH TRANSLATION]

Translation certified true on this 14th day of December 1998.

Kathryn Barnard, Revisor