Venneri v. The Queen

Venneri v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2005-05-20
Neutral citation
2005 TCC 329
File numbers
2003-648(IT)G
Judges and Taxing Officers
Pierre R. Dussault
Subjects
Income Tax Act
Decision Content
Docket: 2003‑648(IT)G
BETWEEN:
CARLO VENNERI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
____________________________________________________________________
Appeal heard on April 13, 2005, at Montréal, Quebec
Before: The Honourable Judge Pierre R. Dussault
Appearances:
Counsel for the Appellant:
Serge Fournier
Counsel for the Respondent:
Anne Poirier
____________________________________________________________________
JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 1998, 1999 and 2000 taxation years are dismissed, with costs to the Respondent, in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 20th day of May 2005.
"P.R. Dussault"
Dussault J.
Translation certified true
on this 15th day of March 2006.
Garth McLeod, Translator
Citation: 2005TCC329
Date: 20050520
Docket: 2003‑648(IT)G
BETWEEN:
CARLO VENNERI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Dussault J.
[1] These are appeals from assessments made under the Income Tax Act (the "Act") for the 1998, 1999 and 2000 taxation years.
[2] Three points are at issue.
· The first is whether a loss incurred in 1998, when a claim that the Appellant held against 2959‑5451 Québec Inc. became a bad debt, was a business investment loss or simply a capital loss. This characterization also has an impact on the 2000 year, since the Appellant carried forward to that year a non-capital loss resulting from a business investment loss incurred in 1998.
· The second issue concerns the proceeds of disposition, in 1999, of a rental property located at 100 Île de Mai and the determination of the resulting terminal loss and capital loss.
· The third issue concerns the claim for interest expenses of $5,707 for 1999.
[3] In making the assessments, the Minister of National Revenue (the "Minister") relied on the assumptions of fact found in subparagraphs 12(a) to (ss) of the Amended Reply to the Notice of Appeal (the "Reply"). These subparagraphs read as follows:
[TRANSLATION]
(a) The Appellant is a dental surgeon; during the years in issue, he carried on his activities at his clinic located on Jean‑Talon Boulevard East, in Montreal;
(b) His spouse, his two sisters and another employee worked with him;
(c) Apart from his professional income, he reported rental income and conducted real estate transactions;
(d) At the time of the audit by an officer of the Minister of National Revenue, the auditor found that internal control of the business was insufficient and that there was a lack of control over computerized records;
(e) The Appellant held personal and business bank accounts, which were used independently of the transactions performed;
(f) For example, a personal line of credit account could be used as a personal liability in one year and a professional liability in the following year;
(g) Monitoring the transactions conducted by the Appellant was a complex matter, since he could use a number of accounts for a single transaction;
(h) The Appellant often used members of his family as nominees to conduct his real estate and financial transactions;
(i) By the notices of assessment issued on May 7, 2002, the Minister of National Revenue in particular disallowed the business investment loss for 1998, the terminal loss and capital loss resulting from the disposition of 100 Île de Mai and interest expenses, for the reasons explained below:
Business investment loss in 1998
(j) In computing his income for the 1998 taxation year, the Appellant claimed a business investment loss of $247,929, representing the balance of loans made to 2959‑5451 Québec Inc., plus certain adjustments;
(k) 2959‑5451 Québec Inc. was incorporated on July 15, 1992, and the sole shareholder of the corporation at that time was the Appellant's spouse;
(l) The corporation's economic activity was landholding;
(m) On September 3, 1992, the corporation purchased the mortgage receivable of $650,995 on a vacant lot in Ste‑Marthe‑sur‑le‑Lac;
(n) That purchase was financed by a mortgage with the National Bank, guaranteed by the Appellant;
(o) That same vacant lot had initially been acquired in 1988 by 160441 Canada Inc., of which the Appellant was a 25 percent shareholder;
(p) The lot was the sole asset of 160441 Canada Inc. and was subject to a mortgage;
(q) On February 4, 1993, 2959‑5451 Québec Inc. exercised its mortgage creditor's right and seized the vacant lot;
(r) 160441 Canada Inc. declared bankruptcy after the lot was seized, and there has been no further activity in that corporation since November 30, 1991;
(s) The vacant lot was transferred from 160441 Canada Inc. to 2959‑5451 Québec Inc.;
(t) On June 3, 1993, the Appellant bought back the shares of 2959‑5451 Québec Inc. belonging to his spouse for the sum of $1, subsequently becoming the sole shareholder of that corporation;
(u) The Appellant repaid the first mortgage and replaced it with a second out of a personal line of credit of $435,000 with the Laurentian Bank;
(v) Those transactions enabled the Appellant to protect his investment and not to operate a business;
(w) No other transaction was conducted by 2959‑5451 Québec Inc.;
(x) No employee was hired by the company;
(y) No business activity other than landholding was carried on by the corporation;
(z) 2959‑5451 Québec was not a small business corporation within the meaning of the Act;
(aa) On July 31, 1998, 2959‑5451 Québec Inc. sold the vacant lot;
(bb) The transaction was of a capital nature and a capital loss of $230,952 was allowed on the disposition of the lot;
(cc) For the 2000 taxation year, a non-capital loss of $67,147 carried forward from 1998 was disallowed in view of the fact that the business investment loss had been disallowed;
Capital loss and terminal loss (100 Île de Mai)
(dd) In computing his income for the 1999 taxation year, the Appellant claimed a terminal loss of $113,000 and a capital loss of $63,600 on the disposition of a property located at 100 Île de Mai, in Boisbriand;
(ee) The property at 100 Île de Mai was acquired by the Appellant and his spouse on July 31, 1998, for $473,600, that is, $303,100 for the building and $170,500 for the lot;
(ff) In 1999, the Appellant reported that he had sold that property for $300,000, that is, $190,100 for the building and $106,900 for the lot;
(gg) The contract of sale entered into on July 14, 1999, before Pierre Girard, notary, states that the selling price of the immovable was $456,000 and that the tax base for the land transfer tax was equal to the municipal assessment of $473,000;
(hh) On May 3, 1999, a promise of purchase and sale in the amount of $456,000 was accepted by the vendor;
(ii) The Appellant submitted a promise of purchase and sale dated June 3, 1999, stating a purchase price of $300,000;
(jj) The Appellant also submitted a signed counter letter dated July 14, 1999, which states that the actual price of the transaction was $300,000;
(kk) Another document, dated May 19, 1999, cites a selling price of $272,000;
(ll) In view of the major discrepancies between the documents submitted and of the explanations obtained by the Appellant, the disposition price of the Île de Mai property was set in accordance with the contract of sale entered into before Pierre Girard, notary;
(mm) The terminal loss on disposition of the building was corrected to $16,458;
(nn) The capital loss on disposal of the land was corrected to $9,258;
Interest expenses
(oo) In computing his income for the 1998 taxation year, the Appellant claimed interest expenses, which were disallowed in part, as it appears from the following table:
Interest expense
Claimed
Allowed
Disallowed
Professional income
$15,899
$15,899
$0
Personal
$13,675
$130
$13,545
Rental income
$4,133
$2,096
$2,037
Total:
$33,707
$18,125
$15,582
(pp) In computing his income for the 1999 taxation year, the Appellant claimed interest expenses, which were disallowed in part, as it appears in the following table:
Interest expense
Claimed
Allowed
Disallowed
Professional income
$17,406
$14,699
$2,707
Personal
$12,662
$2,355
$10,307
Rental income
$3,737
$1,898
$1,839
Total:
$33,805
$18,952
$14,853
(qq) An analysis of the interest expenses claimed for 1998 and 1999 shows that the disallowed expenses are those that the Appellant was unable to show were incurred for the purpose of earning income from a business or property;
(rr) The interest expense deductions of $15,582 for 1998 and $14,853 for 1999 are not permitted under the Income Tax Act;
(ss) for the 1998 taxation year, interest of $10,428 was capitalized in the cost of the vacant lot in Sainte‑Marthe‑sur‑le‑Lac;
[4] Certain adjustments and clarifications are necessary concerning the first point in issue. According to counsel for the Respondent, the Minister found that the sale by 2959‑5451 Québec Inc. of the lot located in Sainte‑Marthe‑sur‑le‑Lac resulted in a capital loss. Furthermore, and this point is not reflected in the Reply, the Appellant was allowed a capital loss under subsection 50(1) of the Act in the amount of his claim on 2959‑5451 Québec Inc., since the loans that he had made to that corporation became bad debts. However, the Appellant believes that that capital loss should be considered as a business investment loss, since he contends that 2959‑5451 Québec Inc. was a small business corporation.
[5] On the subject of interest expenses disallowed in 1998 and 1999, the Appellant now disputes only the disallowance of the deduction of $5,707 of the $10,307 amount disallowed in 1999 on the ground that it consisted of interest expenses for personal loans.
(1) Loss in respect of the loans made to 2959‑5451 Québec Inc.
(a) Summary of the evidence
[6] In his testimony, the Appellant explained the circumstances in which the lot in Sainte‑Marthe‑sur‑le‑Lac, Quebec, was acquired by 160441 Canada Inc. The lot, of nearly 500,000 square feet, ran along Boulevard des Promenades over a distance of nearly 1,000 feet. It was approximately one kilometre from the municipal limits of Deux‑Montagnes and three kilometres from the site of a commuter train station planned for that municipality. The lot, 30 percent of the area of which was located in a commercial zone and 70 percent in a residential zone, not far from a shopping centre, was, according to the Appellant, in a highly strategic position favourable to its development. He said that the part located in the residential zone, which he wanted to develop first, would have allowed for the construction of approximately 60 houses on lots of 5,000 square feet each.
[7] It was thus for the purpose of entering into a partnership with a builder to construct and sell the residences that the Appellant and three other persons, one of whom was a real estate agent, acquired the lot in 1988 through 160441 Canada Inc., of which they had each become 25 percent shareholders. The real estate market was rising at the time and financing of $500,000 was obtained from the Ace Mortgage company. Each shareholder, except for the Appellant, had to mortgage his residence as a guarantee. The Appellant provided a personal guarantee.
[8] According to the Appellant, the project was to build single-family residences worth $70,000 to $100,000. The cost to install municipal services was estimated at $1,000,000, and the total profit anticipated was in the order of $450,000. The Appellant stated that he knew a builder who was already working on another development project in the surrounding area and who subsequently could have become a partner in theirs.
[9] In early 1989, land surveyors were contacted about the development. They purportedly presented a project and submitted a plan. At the same time, the shareholders learned that the municipality was considering realigning Boulevard des Promenades and that it was suspending the issuing of building permits. According to the Appellant, the realignment of Boulevard des Promenades was likely to make the acquired land less attractive and to increase the cost of municipal services. Meetings were thus held with the director general, urban planners and elected municipal representatives, as well as with the owners of other lots along Boulevard des Promenades, for the purpose of preventing the contemplated change. As the Appellant said, they had to wait and hope that the alignment of Boulevard des Promenades would not be altered.
[10] As he explained, subsequently, in 1990, the real estate market declined so that the project had to be put on hold. In his view, it was then illogical to go ahead with a project that would not sell. They therefore had to wait until the market rebounded. In the meantime, the corporation was financed through investments by the shareholders, but that became increasingly difficult, to such an extent that two shareholders had to declare bankruptcy. The Appellant stated that he had in fact been the only one who could continue. The hypothecary creditor, Ace Mortgage, demanded payment. According to the Appellant, its claim amounted to $690,000 in 1992, and the balance of the selling price of the land, $170,000, which was guaranteed by a second hypothec, was also payable.
[11] In 1992, on his lawyer's advice, the Appellant incorporated 2959‑5451 Québec Inc., of which his spouse, Caroline Walton, was the sole shareholder, in order to negotiate with Ace Mortgage through a person that Ace Mortgage did not know. Negotiations indeed began, and, in September 1992, 2959‑5451 Québec Inc. bought back Ace Mortgage's mortgage loan for $560,000, which was advanced by the Appellant. The land owned by 160441 Canada Inc. was seized by 2959‑5451 Québec Inc. and was subsequently the subject of a court sale. 2959‑5451 Québec Inc. was the purchaser. The court sale had the effect of extinguishing the second mortgage. 2959‑5451 Québec Inc. acquired the lot without incurring any outlay, since it then became the sole mortgage creditor. In 1993, the Appellant became the sole shareholder of that corporation by acquiring the shares held by his spouse.
[12] As to the sum of $560,000 lent to 2959‑5451 Québec Inc. to acquire the mortgage from Ace Mortgage, the Appellant stated that he had obtained it through a loan backed by mortgages on a condominium, a lot and a two-unit house that he owned at the time. He purportedly also provided as a guarantee a $50,000 term deposit acquired with the funds from a bank line of credit.
[13] The Appellant said that he had asked the co‑shareholders of 160441 Canada Inc. to join with him in the new corporation, 2959‑5451 Québec Inc., and to make new investments in order to pursue the initial project, but, he said, they no longer had the means or the desire to do so.
[14] In 1993, the issuing of building permits was still suspended, and the Boulevard des Promenades realignment project was still under study. The Appellant said that more meetings were held with the general manager of the municipality to defeat the proposed change. He said that he still believed in his project and that, at that time, he had met with a number of builders who might eventually be interested in becoming partners with him in order to develop it.
[15] In 1996, the Appellant purportedly disputed the municipal assessment of the land, which was reduced from $500,000 to $341,700 at that time.
[16] The decision to realign Boulevard des Promenades was ultimately made in 1997. As a result of the new alignment, the land lost all access to Boulevard des Promenades. The Appellant then tried to get the municipality at least to build a street providing the lot with an access route to the new alignment of the boulevard. Exhibits A‑2, A‑3 and A‑4 filed in evidence are letters showing that that request was made in late 1997 and early 1998. However, according to the Appellant, the municipality never responded to them favourably.
[17] The Appellant also stated that the Boulevard des Promenades realignment work began in May 1998. In July 1998, 2959‑5451 Québec Inc. disposed of the land at a loss in response to an unsolicited offer. The Appellant also said that he did not remember whether the land had been put up for sale at any time in the previous years.
[18] The Appellant filed two other documents in evidence showing the action he had taken. Exhibit A‑5 is a bill for fees of $113.96, dated September 20, 1995, which is addressed to him, for a copy of the plans that were purportedly prepared by the land surveyors in 1988 or 1989. Those plans were not filed in evidence.
[19] Exhibit A‑1 is a report sent to the Appellant by Qualilab Inspection Inc. entitled "Environmental Soil Characterization" concerning the land in Sainte‑Marthe‑sur‑le‑Lac. The report, dated February 24, 1998, had been requested by the Appellant to ensure that the land was not contaminated. A bill for fees of $2,070.45 was attached to the report.
[20] In cross-examination of the Appellant, counsel for the Respondent drew attention to the resolution of 2959‑5451 Québec Inc. dated January 22, 1993, authorizing it, following the seizure of the land, to act as purchaser in the court sale in order "to protect its claim" (Exhibit I‑1, Tab 15, second last page). The Appellant's comment on this point was that the idea had essentially been to retake possession of the land in order to develop it.
[21] In addition, the financial statements filed by 2959‑5451 Québec Inc. with its returns of income for its 1996 to 1998 taxation years show that the corporation had no turnover and that the only transaction conducted was the sale of the land in 1998 (Exhibit I‑1, tabs 16 to 19). The Appellant confirmed that no other transactions had been conducted with respect to the land and that the land had no municipal services. However, he stated that provisions had been made for them.
[22] The Appellant reiterated that the anticipated development could not be carried out as a result of circumstances beyond his control, that is to say the decline in the real estate market, as well as the problems caused by the realignment of Boulevard des Promenades and the suspension of the issuing of building permits. It should also be noted that the corporation never acquired any other lands or assets.
[23] Pierre Gagnon, the Appellant's accountant, stated, for his part, that the Appellant had consulted him concerning the Sainte‑Marthe‑sur‑le‑Lac land, in particular regarding the shareholders' contributions to 160441 Canada Inc. and the solvency problems the latter had experienced between 1989 and 1992. He said that the Appellant had had no debt and that he was the only one able to continue financing the purchase of the land. In his view, it was therefore logical for the Appellant to take control of the investment and to enter into a partnership with a builder to develop his project, with the land representing his contribution.
[24] The sale of the Sainte‑Marthe‑sur‑le‑Lac land by 2959‑5451 Québec Inc. was one of a series of transactions conducted on July 31, 1998. First, the Sainte‑Marthe‑sur‑le‑Lac land was sold by 2959‑5154 Québec Inc. to Georges Labonté for $341,700 (Exhibit I‑1, Tab 24). Lucille Lafond, Mr. Labonté's spouse, then sold a property located at 194 Rue Félix Leclerc, in Boisbriand, Quebec, to Ida Venneri, the Appellant's sister, for $149,500 (Exhibit I‑1, Tab 26). Then Mr. Labonté sold a property located at 100 Île de Mai, in Boisbriand, Quebec, to the Appellant and Caroline Walton, his spouse, for $473,600 (Exhibit I‑1, Tab 27). Mr. Labonté paid the Appellant $20,376 to cover tax adjustments. The Appellant stated that he had obtained the sum of $332,121 from mortgage loans taken out at the time of those transactions. He explained that he had turned $265,696 over to 2959‑5451 Québec Inc. and paid the difference, that is $66,425, for the purchase of the two properties located at 194 Rue Félix Leclerc and 100 Île de Mai (Exhibit I‑1, Tab 25). Subsequently, 2959‑5451 Québec Inc. purportedly paid the balance of a line of credit of the Appellant guaranteed by a mortgage in the amount of $262,094.18.
(b) Positions of the parties
[25] With respect to the nature of the loss related to the loans made by the Appellant to 2959‑5451 Québec Inc., counsel for the Appellant contended that it was a business investment loss since, that corporation operated a small business. In his view, the corporation was not created to earn income from property or to realize capital gains. It was essentially created to acquire a lot and to develop a project in partnership with a builder and thus to make a profit on the sale of subdivided lots. Counsel for the Appellant ruled out any secondary intent to resell the land at a profit.
[26] He emphasized that if the business did not generate a profit this was as a result of circumstances beyond the Appellant's control, that is to say unfavourable economic conditions and the Boulevard des Promenades realignment project, together with the suspension that accompanied it. The realignment project greatly affected the value of the land. He also recalled the steps the Appellant had taken with the municipality to oppose the proposed realignment.
[27] Counsel for the Appellant also mentioned the plans that were purportedly prepared and the negotiations conducted with builders.
[28] He also noted the negotiations with the mortgage lender Ace Mortgage to reduce the loan and the repossession of the land by 2959‑5451 Québec Inc. to continue the project, in an attempt to show the Appellant's determination and tenacity in pursuing his development project despite the difficulties encountered.
[29] According to counsel for the Appellant, these various factors point to the establishment of a business for the purpose of the construction of residences by 2959‑5451 Québec Inc., as a result of which the loss incurred by the Appellant should be considered a business investment loss.
[30] In support of his position, counsel for the Appellant referred to the decisions in Belzile v. The Queen, 2004 DTC 2418, Barrette et al. v. The Queen, 2004 DTC 2951, Gill et al. v. M.N.R., 98 DTC 2048, and Lake Superior Investments Limited v. M.N.R., 93 DTC 898.
[31] For her part, counsel for the Respondent claimed that 2959‑5451 Québec Inc. was not a small business corporation since no business was in fact carried on.
[32] On that point, she emphasized the utter lack of any revenues or operations of the corporation, whose only expenses shown in the financial statements were taxes, interest and professional fees.
[33] According to counsel for the Respondent, there was no evidence of any land development activity whatever. Nor were there any documents showing any real partnership with a builder in order to develop the land. She also pointed out that the land was a vacant lot that had no water or sewer services.
[34] She stated that neither 160441 Canada Inc. nor, subsequently, 2959‑5451 Québec Inc. had had a business plan, and no one had conducted a market study. She also emphasized that the Appellant had no experience in the real estate development field.
[35] In short, according to counsel for the Respondent, 2959‑5451 Québec Inc. did not carry on a business. She questioned the Appellant's intention to engage in land development, recalling 2959‑5451 Québec Inc.'s resolution of January 22, 1993, which stated that the corporation would bid in the court sale of the land in order "to protect its claim". She also stated that the difficulties encountered until 1992 had not subsequently disappeared and that the Appellant himself had stated that that development was even less feasible in 1993, so that, from that moment on, the project could have seemed unrealizable. She referred as well to the financial statements of 2959‑5451 Québec Inc. for the fiscal year ended August 31, 1996, which state, with respect to the nature of the activities, that the corporation "is holding a piece of land for speculation and development purposes" (Exhibit I‑1, Tab 16, page 5, of the financial statements).
[36] In support of the argument that 2959‑5451 Québec Inc. carried on no business, counsel for the Respondent relied on the decision of the Federal Court of Appeal in Boulanger v. Canada, 2003 DTC 5630, [2003] F.C.J. No. 1336 (Q.L.) and on that same court's decision in Hudon v. Canada, 2001 DTC 5630, [2001] F.C.J. No. 1616 (Q.L.), which was cited in the first decision. She also relied on Interpretation Bulletin IT‑218R of September 16, 1986,[1] which states, in particular, the factors that must be considered in determining the nature of gains from the sale of real estate, in concluding that no business was carried on in relation to the Sainte‑Marthe‑sur‑le‑Lac land.
(c) Analysis
[37] Under paragraph 39(1)(c) of the Act, for the Appellant's loss to be considered a business investment loss, it must be in respect of a debt owing by a Canadian-controlled private corporation that is a "small business corporation". That expression is defined in subsection 248(1) of the Act as follows:
"small business corporation", at any particular time, means, subject to subsection 110.6(15), a particular corporation that is a Canadian-controlled private corporation all or substantially all of the fair market value of the assets of which at that time is attributable to assets that are
(a) used principally in an active business carried on primarily in Canada by the particular corporation or by a corporation related to it,
(b) shares of the capital stock or indebtedness of one or more small business corporations that are at that time connected with the particular corporation (within the meaning of subsection 186(4) on the assumption that the small business corporation is at that time a "payer corporation" within the meaning of that subsection), or,
(c) assets described in paragraphs 248(1) "small business corporation" (a) and 248(1) "small business corporation" (b),
including, for the purpose of paragraph 39(1)(c), a corporation that was at any time in the 12 months preceding that time a small business corporation, and, for the purpose of this definition, the fair market value of a net income stabilization account shall be deemed to be nil.
[38] The only asset of 2959‑5451 Québec Inc. was the vacant lot located in Sainte‑Marthe‑sur‑le‑Lac, which it disposed of in 1998. It must therefore be determined whether that lot was used in an active business of the corporation.
[39] Subsection 248(1) defines the expression "active business" as follows:
"active business", in relation to any business carried on by a taxpayer resident in Canada, means any business carried on by the taxpayer other than a specified investment business or a personal services business.
[40] In Boulanger v. Canada, 2003 DTC 5630, [2003] F.C.J. No. 1336 (Q.L.), 2003 FCA 332, Létourneau J.A. of the Federal Court of Appeal made the following comments on the concept of active business, at paragraphs 4 and 5:
4 The Act does not define the concept of an "active business." Determining the requirements applicable to the definition of this concept is a question of law. But the application of the definition itself to the facts of the case is a mixed question of fact and law: Hudon v. Canada, 2001 FCA 320, at paragraph 43.
5 The substance of the concept of carrying on an active business is itself somewhat elusive. As our colleague Madam Justice Desjardins stated in Hudon, supra at paragraph 62, at one end of the spectrum there are businesses which have not begun operations and at the other there are dormant businesses, while in between there are many activities "which are signs that a company is operating and which should fall within the spectrum of the concept of carrying on business, even though, for example, the activities are carried on for the purpose of reaching an agreement which eventually is not reached or even though they do not result in the earning of income." It follows from this assertion that each case should be examined on its individual merits and factual circumstances. [...]
[41] In addition, the following comments appear in Interpretation Bulletin IT‑364 of March 14, 1977, Commencement of Business Operations, at paragraph 2:
2. It is not possible to be specific about the point in time when a contemplated business becomes an actual business. Generally speaking, it is the Department's view that a business commences whenever some significant activity is undertaken that is a regular part of the income-earning process in that type of business or is an essential preliminary to normal operations. In order that there be a finding that a business has commenced, it is necessary that there be a fairly specific concept of the type of activity to be carried on and a sufficient organizational structure assembled to undertake at least the essential preliminaries. This requirement is applicable whether the projected business is intended to be a continuing one or is to be a single transaction in the form of an adventure in the nature of trade. Where an activity consists merely of a review of various business possibilities in the expectation or hope that information will be obtained to justify going into a business of some kind, such an activity does not represent the commencement of a business. A business would be reviewed as being merely contemplated for the future if no serious or reasonably continuous efforts are being made to begin normal business operations. The comments in this paragraph do not apply, of course, to an existing business that is considering expansion or diversification as distinct from the undertaking of a new and separate business.
[Emphasis added.]
[42] The evidence brought by the Appellant and his accountant, Pierre Gagnon, established beyond a shadow of a doubt that the Sainte‑Marthe‑sur‑le‑Lac land was acquired by 160441 Canada Inc., then by 2959‑5451 Québec Inc., for the sole purpose of developing it, mainly for residential housing, in partnership with a builder. The anticipated income was the profit to be shared with the builder at the time of the sale of the residences. There was no question of reselling the land itself at a profit. Moreover, the Appellant stated that the land had never previously been put up for sale.
[43] The evidence reveals no actual activity that could establish that 2959‑5451 Québec Inc. had an active business. The Appellant clearly stated that 160441 Canada Inc. had initially requested plans from land surveyors. However, no plans were filed in evidence. Only an invoice for $113.96 dated September 20, 1995, for a copy of the plans was filed in evidence (Exhibit A‑5). The Appellant also stated that he had met with builders who might have been interested in his project and in entering into a partnership with 160441 Canada Inc. and, later on, with 2959‑5451 Québec Inc. for the purpose of engaging in the planned development. Here again, it must be noted that these were preliminary steps that culminated in no real partnership or any contract whatever. In fact, there is every reason to believe that, as a result of the Boulevard des Promenades realignment proposed by the municipality and suspension of the issuing of building permits, the decision to proceed with the development and commence the business was never made. As the Appellant said, it was necessary to wait. Nor was the action taken with the municipality to oppose the proposed realignment in order to protect the value of the land and its development potential of an activity that may be considered as relating to the carrying on of a business. It was action taken to protect the value of an asset.
[44] In 1992, following a difficult economic period and problems relating to the financing of 160441 Canada Inc. by its shareholders, 2959‑5451 Québec Inc. was created. It acquired the mortgage loan from Ace Mortgage and purchased the land at the court sale. The Appellant subsequently became the sole shareholder of that new corporation. Although he stated that he had wanted to pursue his initial project to develop the land in partnership with a builder, here again only preliminary steps in that direction can be observed. As the issue of the Boulevard des Promenades realignment had not yet been resolved, no decision on the development of the land was taken, and 2959‑5451 Québec Inc. remained completely inactive until the land was sold in 1998. In fact, from start to finish, no activity that was likely to generate income was carried on, precisely because the decision to proceed with the development and to commence the business was never made. It is true that the circumstances in which that decision was never made were beyond the Appellant's control. However, that does not alter the situation. The mere intention eventually to develop a residential project on the acquired land once conditions became favourable is not sufficient grounds for stating that a business was commenced. While preliminary plans were indeed prepared for 160441 Canada Inc. shortly after the land was acquired, 2959‑5451 Québec Inc. did nothing new when it acquired the land itself. There is nothing surprising in that since the Appellant was still awaiting, and continued until the end to await, a favourable decision from the municipality not to realign Boulevard des Promenades, or, at the very least, to build a street providing access to the land from the newly realigned boulevard. In the circumstances, it is not surprising either that the Appellant was unable to provide a specific business plan or market study for proceeding with the land's development. The only study that was conducted was one entitled, "Environmental Soil Characterization", to determine whether or not the land was contaminated, the report on which was submitted to the Appellant in February 1998, a few months after the land was sold by 2959‑5451 Québec Inc. (Exhibit A‑1). As the decision to realign Boulevard des Promenades had been taken by that time and was unfavourable to the corporation (see Exhibits A‑2, A‑3 and A‑4), it cannot reasonably be considered that that study was commissioned by the Appellant with a view to selling the land rather than eventually undertaking its development.
[45] I therefore find that 2959‑5451 Québec Inc. did not carry on an active business. Accordingly, the loss incurred by the Appellant in respect of his claim on that corporation may not be considered a business investment loss under the definition of paragraph 39(1)(c) of the Act.
(2) Sale of the property located at 100 Île de Mai, in Boisbriand
(a) Summary of the evidence
[46] As noted above, this property was acquired by the Appellant and his spouse on July 31, 1998, for $473,600, an amount that corresponded at the time to the municipal assessment value. However, the Appellant stated "that an assessment had been made at $300,000 or $350,000", since renovations proved to be necessary. However, no assessment was filed in evidence. The property was acquired by the Appellant and his spouse as a rental property. As the vendor had expressed his intention to rent it out for a few months, the Appellant agreed to do so for $1,000 a month. However, that rental proved to go on longer than initially anticipated. According to the Appellant, following the renovations, the property could have been rented for $2,500 a month.
[47] On July 14, 1999, the property was sold to Lidia Zanon and Jean‑Pierre Beauchamp. The selling price stated in the notarial deed is $456,000 (Exhibit I‑1, Tab 28). The allocation made by the notary was based on that amount, which was purportedly used, in particular, to repay a mortgage loan the stated balance of which was $405,485.18. The Appellant stated that he had never seen the distribution document intended for the purchaser and that he thought the balance of the mortgage loan was $105,000. The notary's statement of distributions shows that an amount of $105,485.18 was "supplemented by the vendors' financing on the property located at 2940 Hill Park Circle, Montreal". That same document also shows an amount of $300,000 in parentheses ($300,000) and notes that the vendor gave $11,250 to the purchaser "for work to be done on the property". However, on the same date, the parties signed a counter letter setting the actual amount of the transaction at $300,000. According to that counter letter, the price of $456,000 stated in the notarial deed "was determined solely for the purpose of obtaining mortgage financing." The Appellant stated that the notary himself had prepared that counter letter. The last sentence of the counter letter reads: [translation] "The parties agree that the actual price of the transaction is $300,000 and that that amount shall be used for the purpose of any tax return." (Exhibit I‑1, Tab 32)
[48] In his testimony, the Appellant stated that the actual amount of the transaction was indeed $300,000, which was the maximum amount that the purchaser was prepared to pay. In addition, he said, one of the conditions was that he himself lend the purchaser $28,000. Thus, the offer of purchase and sale of May 3, 1999, for an amount of $456,000 was made by Jean‑Pierre Beauchamp solely for the purpose of obtaining greater mortgage financing (Exhibit I‑1, Tab 29). An initial counter letter of May 19, 1999, signed by the Appellant and Mr. Beauchamp, states that the offer "of $456,000, with a cash payment of $114,000" was made so that Mr. Beauchamp could obtain a mortgage of $342,000. That initial counter letter states that the price that should appear on the notarial deed would be $272,000 (Exhibit I‑1, Tab 30).
[49] In his testimony, Jean‑Pierre Beauchamp stated that the offer of purchase and sale for $456,000 had indeed been made for the purpose of obtaining a larger mortgage loan from the bank in order to finance the purchase of $300,000, as well as renovations, the cost of which he had estimated at between $40,000 and $50,000. He was unable to say anything about the discussions or negotiations that had taken place between May 3 and July 14, 1999, saying that he did not remember any details and that his spouse could do that better than he. Nor did he explain the counter letter of May 19, 1999, stating that the price in the contract would be set at $272,000 (Exhibit I‑1, Tab 30). However, he acknowledged the $28,000 loan made by the vendors and mentioned that that loan was still not entirely repaid (Exhibit I‑1, Tab 33).
[50] In fact, if the $28,000 loan is added to the sum of $272,000 to which reference is made in the counter letter of May 19, 1999, the result is the $300,000 amount stated in the counter letter of July 14, 1999, which, according to both the Appellant and Mr. Beauchamp, was the price actually paid. Another document signed by the parties on June 3, 1999, states that the vendor would receive $272,000 at the notary's office and that the balance of the selling price would be $28,000, with interest at the rate of three percent per annum and repayment of the principal at the end of a period of two years (Exhibit I‑1, Tab 31).
[51] In an affidavit signed on September 26, 2002, Mr. Beauchamp explained the observed discrepancies a little more clearly. He stated that he had obtained a loan of only $311,000 backed by a first mortgage. As the Appellant had granted a mortgage for the balance of the selling price, that is $28,000, it was thus $272,000 out of the $311,000 amount obtained that Mr. Beauchamp said he had paid the Appellant. The balance of $39,000 was purportedly used to do renovation work on the property (Exhibit I‑1, Tab 38).
[52] Lastly, Mr. Beauchamp stated that he did not remember saying at the time of the audit that the selling price had been $339,000. However, in her testimony, the auditor from the Canada Customs and Revenue Agency said that, in an interview with Mr. Beauchamp o