Greenbranch Investments Ltd. v. The Queen, 80 DTC 6384, [1980] CTC 514 (FCTD)

Grant, DJ:—This is an appeal by the plaintiff from a reassessment of its 1973 income tax return by the Minister of National Revenue. It had sold property it owned in Brampton, Ontario in June 7, 1973 and had made a substantial profit thereby which it treated as capital gain and in its income tax returns for that year and included 50% of the taxable portion thereof as income only. By notice of reassessment dated October 4,1977, the Minister reassessed the plaintiff on its said tax returns by charging such profit as active business income rather than treating any portion thereof as capital gain. The plaintiff filed a notice of objection to such reassessment but the Minister confirmed the same.

The facts surrounding the plaintiffs acquisition and disposal of such property were as follows:

The plaintiff company is an Ontario incorporated entity having received its charter on April 12, 1955. One, Morris Green together with his daughter and son-in-law, Laurie and David Liefer, with one, James Craig were the original incorporators. Morris Green owned one-third of the issued shares of the company, his daughter and son-in-law another third and Craig the balance. The objects of the company were as follows:

(a) TO invest in any movable or immovable property whatsoever, and to change, alter or realize upon any such investments;

(b) TO acquire by purchase, lease, exchange or otherwise land and any estate or interest therein and any rights over or connected with land and any buildings or structures, and to turn the same to account as may seem expedient and in particular by constructing, reconstruction, altering, improving, decorating, furnishing and maintaining, apartment houses, offices, houses, buildings works and conveniences of all kinds and by consolidating, connecting or subdividing properties and by selling, leasing, exchanging mortgaging or otherwise disposing of the whole or any portion of such lands and all or any of the buildings or structures that are now or may hereafter be erected thereon; and to take such security therefor as may be deemed necessary;

(Cc) TO construct, lease or purchase or otherwise to acquire and hold, sell and deal in real and personal property of all kinds;

(d) TO erect, alter, improve, repair, maintain and manage residential, commercial and industrial buildings upon any lands in which the Company may have any interest; and .

(e) TO carry on the business of general contractors for and in the construction, erection, repair, alteration, maintenance and/or operation of residential, commercial and industrial buildings and works of whatsoever nature or kind.

The company’s affairs were managed by Morris Green who was President of the Company. On January 29, 1965, the plaintiff purchased a parcel of vacant land on Ardlen Drive in Brampton, Ontario for $172,000. On the plaintiff’s application the property was zoned for residential development. It will hereinafter be referred to as the Brampton Property. It is the plaintiff’s contention that its purpose in buying such property was to construct 152 maisonette units thereon and hold the same to derive rental income therefrom. In 1966, the plaintiff completed construction of 54 units and 98 were finished in 1967. The total cost of constructing the units and improving the property was approximately $1,289,054. They were rented to the public immediately and the plaintiff continued to receive rental income therefrom until 1969. The gross rental income from the property in 1968 was $252,561 and in the following year $220,501.

The plaintiff sold such property to Samuel Kaplan on April 30, 1969 at a total price of $2,325,000 with the purchaser giving back a third mortgage thereon to the plaintiff for $908,900 bearing interest at 8% per year.

In 1967, Craig transferred his share to the witness, David Green. Such witness is a solicitor, 37 years of age. He was called to the bar in 1971. When the subject property was first acquired in January 1965, this witness was then not a shareholder in the company and the events that he speaks of in relation to that period of time were learned by him from conversations with his father or other shareholders. He did not become active in the affairs of the Company until March of 1971. He did not know the whereabouts of Craig. He said that when the Company sold the property in 1969 to Kaplan, its officers were influenced to do so because trouble was experienced with the roof of some of the buildings by reason of an improper design thereof. Another reason for disposing of it was that one of the employees had been found to be stealing money from the Company and the company’s bank manager had persuaded the directors to sell the property which then yielded them a profit of $863,946. A third mortgage taken back as part of the purchase price thereof represented all profit except about $45,000. In its income tax returns for the year 1969, the company had shown such profit as income. It had done so on the advice of its accountant.

In attempting to ascertain the intention of the Company it is helpful to look at other purchases and sales that the taxpayer may have dealt with in or about the interval in which he was possessed of the subject property. A list of these are set out in Exhibit “J” and are as follows:

(1) In August of 1955 it purchased 37 acres of vacant land in North York for the price of $80,000. It sold the same without improvement thereon in the year 1957 for approximately $147,000. The taxpayer treated the profit thereon as income in its income tax returns.

(2) Number 2 on such exhibit is the purchase of the subject property in 1965 and is above described.

(3) In September of 1965, the taxpayer purchased an incompleted project on the Lakeshore Road in Burlington, at a sale under powers of sale in a mortgage. It paid $730,000. The taxpayer did extensive renovations thereon and rented the apartments until February of 1969. In 1968 the rentals were over $70,000 and in 1969 they were $160,000. It sold the property for $1,250,000, in February of 1969 but it had spent so much in the repair and the completion of the building that it suffered a net loss of $62,151. The reason given for selling the property was that it was losing money and in its income tax returns such last mentioned figure was shown as a capital disbursement. The purchaser of the building sued the taxpayer on the warranties that had been given by it to the effect that no latent or patent defects existed in the building. The law suit was settled in 1973. The taxpayer accountant made out the income tax return and treated it as a capital disbursement.

(4) In March 1967 the taxpayer purchased 8 /4 acres of vacant land in Dundas for $110,000 intending to develop same. It was rezoned for this purpose but remained vacant. It was sold in 1973 at a price of $204,000 to a syndicate for the development as David Green did not have the necessary experience or time to develop the same. The taxpayer treated this profit as income in its tax return for the year 1973 but received the benefit of a mortgage reserve in the amount of $76,042, pursuant to the provisions of paragraph 20(1)(n).

(5) In March 1967 the Company purchased 5 acres of vacant land in Grimsby for a price of $40,000 for the purpose of development. The property is still vacant and being held by the taxpayer.

(6) On such Exhibit “G” refers to the foreclosure of the subject lands in March of 1971.

David Green, the son of Morris Green was the plaintiff’s only witness. He gave testimony to the effect that at the time the plaintiff first acquired the Brampton property in 1955 that the intention of the plaintiff was to complete the maisonettes thereon and hold the property and rent it for the purpose of realizing revenue therefrom. Such witness was not then the shareholder of the Company and knew little about the company’s business. He was then only 12 years of age. His knowledge as to the intention of the Company in such respect was based only on what he heard from his father. The persons who could have testified with certainty as to the corporate intention at that time, if they were available, were the officers of the Company. The fact that the Company in its income tax returns for the year 1969 had shown the profit from the sale of such premises as income is an admission that the officers of the Company recognized at that time that the Company had acquired such property with the purpose of turning it to a profit when a Suitable occasion arose.

However, a person who in all other transactions, is a trader may set aside one property or more and hold the same as a capital asset from which to earn income. He will require clear evidence to rebut the presumption in favour of the Minister’s assessment to satisfy the Court that he intended at the time of purchase to retain the asset as capital from which he might derive income. It is therefore open to the Appellant Company to establish that notwithstanding its other ventures, its true intention in obtaining title by foreclosure in 1971 was to hold the same as a means of providing income. S & S Properties Limited v Her Majesty the Queen, [1978] CTC 412; 78 DTC 6294 at 419 [6298] where Walsh, J in quoting from Roy M Powers Her Majesty the Queen, [1975] CTC 580; 75 DTC 5388 and the judgment of Addy, J therein states:

Yet, one cannot say that, as a matter of law, every land developer is precluded from establishing that in a particular case there was no primary or secondary intention to speculate anymore than in a case such as the one at Bar where a mature man has never previously resold a piece of real estate at a profit, is one precluded from finding that, on his very first venture in this sphere, he did in fact have the intention of reselling at a profit when he originally purchased the lands. The issue of intention must therefore be resolved by a careful weighing of all of the admissible evidence which is in any way relevant to that issue and the person or body charged with finding the facts must refrain from considering each piece of evidence independently but must examine it in the light of all the other evidence both direct and circumstantial.

The period of time to which the Court must look to ascertain the intention of the taxpayer is the moment of acquisition of the property in question.

In Racine, Demers and Nolin v MNR, [1965] CTC 150; 65 DTC 5098 Noel, J states:

To give to a transaction which involves the acquisition of capital the double character of also being at the same time an adventure in the nature of trade, the purchaser must have in his mind, at the moment of the purchase, the possibility of reselling as an operating motivation for the acquisition; that is to say that he must have had in mind that upon a certain type of circumstances arising he had hopes of being able to resell it at a profit instead of using the thing purchased for purposes of capital. Generally speaking, a decision that such a motivation exists will have to be based on inferences flowing from circumstances surrounding the transaction rather than on direct evidence of what the purchaser had in mine.

It is my opinion that the proper time at which to ascertain the plaintiff’s intention in regard to the subject property was when it recovered ownership and title to the lands by final order of foreclosure on March 15, 1971.

Kaplan died in 1971. His executors made default on the second mortgage. The plaintiff paid the arrears thereon and brought action in the Supreme Court for foreclosure obtaining a final order on March 15, 1971 when it recovered possession of the property. Morris Green then was in charge of such property managing the same and the company derived rental income thereon from 1971 to 1973. On June 7, 1973, the plaintiff sold the property to one Philip Winn at a price of $2,585,000 taking back a second mortgage to the company for $1,148,500 bearing interest at 9% per year. In its income tax returns for that year, the plaintiff treated the profit realized from the sale as a capital gain and included 50% thereof as taxable income.

It computed the taxable portion of such profit as follows:

The plaintiff claims a reserve under subparagraph 40(1)(a)(iii) of the Income Tax Act because it had taken back a mortgage as part of the purchase price. It carried such reserve forward and included it in its income for the 1974 taxation year.

The defendant contends that such profit should be calculated as follows:

The defendant contends that the same constituted income from an active business of the plaintiff in the 1973 taxation year. It further contends that atall material times when the plaintiff acquired the title to such property its officers had the intention of dealing in, trading in, or otherwise turning the property to account for profit and at the moment of the purchase of the Brampton property, the company’s officers had in mind the possibility of reselling the same whenever a favourable opportunity would present itself. The defendant also pleads that the Minister included such profit of $1,095,995 in computing the income of the plaintiff because it was income from a business or adventure in the nature of trade within the meaning of section 3, 9 and 248 of the Act. He further argued that certain business activities of the plaintiff were sufficient that the income which arose therefrom was income from an active business carried on in Canada within the meaning of section 125 of the Act.

By way of explanation as to why it sold such property in 1973 instead of adhering to its alleged intention of retaining the property as a source of rental income the plaintiff offered a number of explanations. In its original statement of claim delivered October 23, 1978 it is stated in paragraph 10 thereof:

Early in 1973, Morris Green’s health deteriorated. He became unable to manage the property and for this reason the plaintiff decided to sell the property.

At the opening of trial the plaintiff asked leave to delete such paragraph and add the following in place thereof and leave was so granted. The amended paragraph reads:

However, in late 1971 because of management problems, serious structural defects in the building and the deterioration of Morris Green’s health, the plaintiff decided to sell the property.

It was arranged when the property was taken back in the spring of 1971 that David Green and his father Morris should jointly supervise the building and one Peter Nicholson was to manage the same with the bookkeeper to manage the rentals. David Green stated that when the title to the property was recovered by the final order of foreclosure on March 15, 1971, that it was the intention of the officers of the Company that the same should be retained as a source of providing income by way of rentals. At this time he was taking an active part in the affairs of the Company and was knowledgeable in respect thereof.

When the plaintiff then took possession of the buildings it was found during the summer of 1971 that the roofs of the buildings were still in bad repair and they were fixed at a cost of $40,000. It was found also that the foundation was shifting and faulty windows required repair.

In May of 1971, Morris Green suffered his 2nd heart attack and thereafter his condition worsened. By 1972 he was unable to assist in supervising. This left David alone to supervise the premises which were 35 miles from his office and as his law practice was increasing he had little time to attend at the Brampton premises. Nicholson quit working for the company in November of 1972 and the bookkeeper resigned about the same time. With all these problems and for those reasons, it was decided to sell the property. I have no hesitation in accepting the witness’s explanation as to why it was decided to sell the property at this time. The Company however, was also motivated by a desire to recover ts profit represented by the mortgage. The matter that gives me concern is as to the intention of the officers of the Company when they acquired the property. The property was not listed for sale but an offer was obtained on May 11, 1973 for a total price of $2,585,000. The sale was closed on June 7, of that year. A mortgage was then taken back from the purchaser for $1,148,500 as part of the purchase price.

When the mortgage became in default, the plaintiff could have offered the property for sale under powers of sale contained in the mortgage and if Sufficient bids were obtained it could have recovered its money owing on the mortgage in such manner. If it held the property as a mortgagee in possession without sale or foreclosure it would assume responsibilities that it might not incur if it acquired the title. After the final receipt of foreclosure in ordinary circumstances it would not be liable to account to the mortgagor. No doubt the plaintiffs considered all these matters and the advantage that it might have in acquiring title by foreclosure. In deciding what the intention of the Company was at such time I am influenced by the fact that no decision has been made to Sell the property until December of 1972. By that time, it had been met with all the problems associated with retaining the properties which I have herein before related. It took no active steps to sell until the spring of 1973. The problems that it had encountered in continuing to hold the property was sufficient to cause most persons to change their mind and by selling avoid the responsibilities associated with retaining it. I have no reason for doubting the testimony of David Green as to the purpose of the plaintiff company in obtaining title to the property by foreclosure on March 15, 1971. The several substantial reasons above specified for selling in 1973 also lends some support to his testimony.

As a result, I have come to the conclusion that at the time the plaintiff obtained title by foreclosure on March 15, 1971, its intention was to hold the lands and premises as a Capital asset for the purpose of producing income by way of rentals therefrom and that at such time it had no intention of selling the same at a later time for the purpose of realizing a profit therefrom. The witness David Green stated that consideration to such latter purpose was not given at that time.

As a result, I find that the profit realized from the sale by the plaintiff, on June 7, 1973, was a capital gain as distinguished from an income receipt.

Counsel indicated to me that if the said sum was found to be a capital gain, I need not deal with the question of the reserve under subparagraph 40(1)(a)(iii) of the Act.

The appeal is therefore allowed and the reassessment is referred back to the Minister for assessment on the basis that the said profit was a capital gain in the hands of the plaintiff.

The plaintiff is entitled to its costs in these proceedings from the defendant.