Zen v. The Queen, 85 DTC 5531, [1985] 2 CTC 313 (FCTD)

Muldoon, J:—The plaintiff appeals from an adverse decision of the Tax Review Board, rendered orally on January 19, 1983, whereby it was adjudged that his acquisition in September, 1976 and sale in December 1977, of land and commercial premises in New Westminster, generated a gain of income from the transaction. The Court finds that the decision under appeal was correct and that the appeal is accordingly to be dismissed.

In June, 1976, the plaintiff’s brother Giovanni Zen bought land described as Lot 132 of the South West Quarter of Section 21 Township 16, Plan 50163, New Westminster District, situated in the Municipality of Matsqui, in British Columbia. This is land which, with the commercial building, was later acquired by the plaintiff and sold by him 15 months later for a profit of $93,378.

Giovanni Zen bought the land from Triple H Holdings Ltd by deed of land dated June 8, 1976, in consideration of the purchase price of $126,000 (Exhibit 8).

By an instrument of mortgage dated June 8, 1976, (Exhibit 2), Giovanni Zen mortgaged that land in favour of Bancorp Polygon Limited for $350,000 which exactly corresponded with the then declared value shown on the document. This mortgage secured the construction loan on the raw land, according to the witness William Edward Damm, who was, at all material times, employed by the mortgagee.

By a deed of land, also dated June 8, 1976, (exhibit 4), Giovanni Zen conveyed all his right, title and interest absolutely unto the plaintiff, “in consideration of the sum of One Dollar ($1.00) and other good and valuable consideration". The declared value shown on that deed, exhibit 4, is $120,000. The deed was not registered in the New Westminster Land Registry Office until September 1, 1976. On October 5, 1976, the Registrar at that Office issued a “Certificate of Indefeasible Title’ to the land (exhibit 5) in the name of “Paul Zen, Contractor", showing his then current address. Apart from a land use contract lodged by The Corporation of the District of Matsqui, the certificate of title, as demonstrated in exhibit 5, is further subject only to “MM53119 [registered] 15.6.76 [at] 11:41 [owner of charge being] Bancorp Polygon Limited". That is the construction loan mortgage which was apparently registered a week after it was executed.

In the meanwhile, construction of the commercial building on the land had commenced in June 1976, with a commitment to lease the major portion of the projected premises from the “anchor” tenant, Boston Pizza. The premises became known by the address: 132 South Fraser Way.

Boston Pizza was considered to be the “anchor" tenant of 132 South Fraser Way because it sought and got its lease even before construction of the premises was under way, Boston Pizza’s rental charge was in the order of $1,860 per month, and Boston Pizza was considered to be a stable tenant as distinct from a tenant whose business depends on popular fads. According to the witness Walter James Treliving, S & T Holdings, a major shareholder of Boston Pizza International in British Columbia at the time, now sole owner, was aggressively seeking to open its pizzerias in Vancouver, Abbottsford, Chilliwack and of course at 132 South Fraser Way in particular, in 1976. It was seeking to open about 10 stores or restaurants in the lower mainland, including greater Vancouver. With the witness John Dennis Carroll, Mr Treliving was looking for such locations to hold on leases with a right of first refusal to buy the premises. Mr Carroll was, in 1976, a realtor in the service of Canada Permanent. Both gentlemen knew the plaintiff Paul Zen and his brother Giovanni Zen, the latter having been introduced to Mr Treliving by Mr Carroll.

Mr Carroll was the catalyst between S & T Holdings and Giovanni Zen and the plaintiff. Giovanni Zen wanted to be the builder for Boston Pizza's expansion plans, in association with the plaintiff, his brother. Mr Carroll advised the Zens that they could, after building the premises, either hold it or sell to someone else. He testified that he suggested many times to the brothers Zen that they build and sell, because, of course, such transactions were the source of his commission revenues. Such transactions were discussed, Mr Carroll said it was fair to say, as early as during construction.

Among the other tenants who eventually took leased space at 132 South Fraser Way in 1977 were (according to exhibit 6) Aqua-Rest Enterprises for nine months, and Standard Auto Glass of Canada for three months of that year. They each paid a monthly rental of $1,060 which for each was $800 less than Boston Pizza’s rental payments which had actually commenced on December 15, 1976.

When finally fully rented as of October 1977, the premises yielded $3,980 per month. There was a so-called "take-out" mortgage according to Mr Damm, representing a loan of $290,000 approximately, to be advanced by Pen-Mor Investment Services (Royal Trust). Abnormally, it was for a lesser amount than the construction loan mortgage. The reasons for this curious departure given by Mr Damm from his viewpoint were: (a) interest rates rose during construction and therefore the building could carry less debt than originally forecast; and (b) the amount of rental income was less than anticipated. However, the monthly rental from Boston Pizza was well known by the brothers Zen long before construction was completed and since the plaintiff and his brother knew, if they did not truly determine, the area and level of the other two rentable portions, it can hardly be said that the amount of monthly revenue was any wrenching surprise. Of course, what the plaintiff could not foresee was how long it would take to have 132 South Fraser Way fully occupied by paying tenants. In the meanwhile, total mortgage costs from June 1976, to December 1977, according to exhibit 7, were over $44,000, whereas rental income in 1976 and 1977, according to exhibit 6, was only approaching $34,000. That it would be a very closely-run operation at best can hardly have been overlooked or unforeseen by the plaintiff. The prospect of incurring losses was real and proximate from the outset. The prospect of retiring the mortgage loan debt in reasonable time and amount, short of sale for profit, was not bright.

The plaintiff, Paul Zen, testified that he is the holder of a Bachelor of Commerce degree from the University of British Columbia. He and his brother Giovanni Zen were, at all material times, associated in land acquisition, construction and development and sales transactions. It would appear from Mr Zen's testimony that he was involved in so many and various transactions at the time of his sale of 132 South Fraser Way that he could not even remember on cross-examination a multiple acquisition of strata lots from one, Giuseppe Peretti by deed, signed by brother Giovanni, as Peret- ti's attorney, dated December 15, 1977, and the passing on of those strata lots to the selfsame Giovanni Zen by deed dated December 21,1977. Exhibits 9 and 10 failed to refresh his memory because, it must be concluded, he was involved in such a plethora of dealings. His counsel argued that although the plaintiff was both a transferee from his brother’s principal and transferor to his brother of some 16 MURB strata lots within a week, it was nothing involving the plaintiff!

The plaintiff obviously enjoyed a closely fraternal and a successfully commercial relationship with his brother. He said that he was wanting to learn his brother’s business and his brother appeared, in a most kindly and familial way, to be helping the plaintiff in becoming established and in guiding him and permitting him to be associated in several aspects of that business which has been earlier characterized herein.

It was while the plaintiff was abroad in June, 1976, that Giovanni Zen acquired the property on South Fraser Way for the plaintiff. The latter testified that he did put $12,900 of his own money into the acquisition of the property. Mr Damm testified that during the construction Giovanni Zen several times referred him to the plaintiff: “Speak to Paul. It’s his building". And the plaintiff himself testified that it was specifically intended by both brothers that the plaintiff would “build it”, that is, would be the builder. The plaintiff did allow that his brother did the planning to the extent of negotiating with the mortgage companies and finding the best alternatives, and that he "may simply have given me a fait accompli”. The plaintiff further allowed that at that time he wanted to get involved and learn the trade with his brother — “building, investment, real estate, mostly".

The ’’fait accompli” was not designed to do very well in terms of net revenues, but nevertheless Mr Zen asserted that he never actually advertised the property for sale, because “it was not my intention to sell the property". One might wonder why not. Especially since the plaintiff testified in cross-examination that (a) despite what Mr Damm (and he himself) said he was positive that his involvement in the project began at an early stage; and (b) being clearly in charge with this "first attempt" and with only limited experience, he was afraid to find himself in financial difficulty in a short time.

Then, along came Mr Phil Cho, a realtor with a client ready, able and willing to buy 132 South Fraser Way. It was during or after the end of October 1977. The plaintiff was also willing. The plaintiff himself calculated his selling price to be $430,000, according to Mr Cho, who was instructed to get his clients to make a written offer. The offer was made and accepted, and the deed was completed in December 1977.

The plaintiff testified, and his counsel argued, that the plaintiff’s sole intention was to retain 132 South Fraser Way as an investment for the foreseeable future. On the facts of this case it is not believable that the bright, alert, well-educated person Mr Zen is, (who was, after returning to Canada, involved from the outset of planning the building and watching his brother's negotiations in an era of rising interest rates, who knew what the property could and did yield), did not have the concurrent, if not sole, intention of selling the property as soon as it was fully occupied by tenants. It is not believable that he did not have the intention to do that which he actually did — sell at a profit after 13 or 14 months. This was not a promising venture which went sour: this was an obviously marginal venture from the outset when the plaintiff accepted to be involved in it. On the evidence, the balance of probability inclines markedly against the plaintiff's contentions and in favour of the Minister's. Despite what was said to the contrary, it is most probable that one of the plaintiff's main motivating factors in acquiring and building 132 South Fraser Way was to resell it at a profit at the first opportunity.

Although this sort of case is basically to be determined on its facts, the principles are derived from the Income Tax Act as interpreted in the voluminous jurisprudence on the distinctions between trading transactions and capital transactions. The plaintiff's counsel referred to the following authorities:

Victor Ross v MNR, [1973] CTC 22; 73 DTC 5060;

Elgin Cooper Realties v MNR, [1969] CTC 426; 69 DTC 5276;

Farmer Construction Ltd v The Queen, [1984] CTC 370; 84 DTC 6331;

Carsons Camps Ltd v The Queen, [1984] CTC 46; 84 DTC 6070;

Colville-Reeves v The Queen, [1981] CTC 512; 82 DTC 6005;

The defendant's counsel cited these cases:

Regal Heights Ltd v MNR, [1960] SCR 902; [1960] CTC 46;

Racine et al v MNR, [1965] CTC 150; 65 DTC 5098;

Fraser v MNR, [1964] SCR 657; [1964] CTC 372;

The Queen v Schmigelski, [1976] CTC 397; 76 DTC 6226;

Birmount Holdings v MNR, [1978] CTC 358; 78 DTC 6254;

Tsao & Wong v MNR, [1982] CTC 2801; 82 DTC 1821;

Von Anrep v The Queen, [1983] CTC 84; 83 DTC 5100; and

W Rudolph Construction v The Queen, [1984] CTC 457; 84 DTC 6454.

Once perused, those well-known cases do not need to be analysed in detail here.

In sum, and for the above-expressed reasons, the plaintiff's appeal by way of this action is dismissed with costs.

Appeal dismissed.