Leduc v. The Queen, 81 DTC 5017, [1981] CTC 21 (FCTD)

Dubé, J:—The sole issue to be determined here is whether the sale of plaintiff’s interest in a lot of land in 1974 constituted a disposition of capital property giving rise to a capital gain, as alleged by him, or business income from an adventure in the nature of trade, as assessed by the Minister.

The plaintiff was president and manager, and owned half the shares of Habitat Pointe-Gatineau Inc (“Habitat”), a construction company incorporated under the laws of the Province of Quebec. He also operated a real estate firm under the name of “Immeubles Champlain”. The subject property is part of the sub-division of lot number 35 on the cadastre of the Village of Pointe-Gatineau.

On June 1,1972 Habitat sold the subject property to Lacelle Construction Ltée (“Lacelle”), another construction firm operating in the area, for the sum of $72,000. On February 9, 1973 Lacelle resold the same land to the plaintiff and Michel Parent*, [1] an employee of Immeubles Champlain, for the amount of $95,000. On October 16,1974 the plaintiff and Michel Parent sold the land to RSND Holdings Ltd (“RSND”) for the amount of $380,281. The Minister assessed the plaintiff for half the profit.

The plaintiff’s basic contention is that he did not re-purchase the subject property from Lacelle as a speculation, but to protect Habitat’s investment in the area: the disposition of the property to RSND would therefore be a capital gain.

Still according to the plaintiff, the fact that he was in the construction business and a real estate broker, and therefore knowledgeable in land transactions, does not mean that a disposition by him cannot give rise to a capital gain in the appropriate circumstances.

It is common ground, and by now well recognized by case law, that a person knowledgeable in real estate, such as a broker, may under certain circumstances complete a capital gain transaction. It is therefore necessary to look at all the relevant facts surrounding the several transactions leading to the final disposition of the subject property.

Habitat was engaged in the construction of single-family homes. The subject property was acquired in 1969 for that purpose. Habitat, however, experienced financial difficulties and became in need of funds, so in 1971 the plaintiff approached René Lacelle, president of Lacelle. At that time the municipal zoning on the subject property was for the most part multi-family residential, and for a small part commercial. The plaintiff claims that an oral agreement was entered into between Lacelle and Habitat to the effect that Lacelle would only construct single-family residences, or carriage homes, on the subject property. No such clause was included in the deed of sale and Rene Lacelle was not called to substantiate that allegation.

The plaintiff avers that he sold the property to, and purchased it back from Lacelle in order to prevent other contractors from building multi-family or commercial units on the land, which would adversely affect the remainder lots of Habitat. The plaintiff has learned through personal experience that multi-family and apartment buildings depreciate surrounding single-family lots.

In 1972 plaintiff had obtained a brokerage licence and commenced his real estate business with Michel Parent, another experienced real estate man, as an employee. The two joined to purchase the subject property at a cost of $95,000. According to the statement of claim and the plaintiff’s evidence, the latter relied on Michel Parent’s assurance that he would obtain long-term mortgage financing at a low interest rate for the full purchase price. Parent’s lender was to be one Bienvenue, then vacationing in Florida. Bienvenue would not advance any money until his return. So, both partners had to arrange for interim financing.

The financing was secured from Maurice Marois, who had previously loaned to Habitat. He loaned the entire $95,000, to be reimbursed on May 1, 1973 (within less than three months). The mortgage provided for a global amount of $5,000 as interest and an additional penalty of $5,000 if both capital and interest were not repaid on time.

When Bienvenue came back from Florida, still according to the plaintiff, it turned out that he would not finance the full amount, so an arrangement was made with Marois to extend the loan to September 1973.

On September 7, 1973 Leduc and Parent procured a loan from Heller- Natofin Ltd of Montreal in the amount of $110,000 at 14 /z %, to be reimbursed within two years.

In February 1974 Trizec Corporation Ltd contracted the plaintiff regarding the possibility of assembling land for a shopping centre, the assembly to include the subject property as well as other lots owned by Habitat. A contract was signed on February 11, 1974. The agreement provided that Leduc would not dispose of any of the parcels to any person other than Trizec during the currency of the agreement, which extended for a period of 150 days.

During that period, or in May 1974, plaintiff was approached by the Orlando Realty Corporation Limited and a group of companies, also for a land assembly for a shopping centre. On May 16, 1974 a contract was entered between the Orlando group and the plaintiff, conditional on the Trizec contract being terminated.

In June 1974 the plaintiff proceeded to make offers on properties within the land assembly area. As some owners refused to sell and an application for zoning to be changed to commercial use had not been approved by the end of July 1974, the Orlando group advised plaintiff to discontinue the operation.

While the plaintiff was working for the Orlando group, he was asked by RSND to assemble lots, again for a shopping centre. When the contract with Orlando was terminated, plaintiff entered into an agreement with RSND by deed of sale dated October 16, 1974 realizing as his portion of the proceeds of dispositon the amount of $131,983.

Again, the plaintiff’s central position is that he purchased the subject property back from Lacelle for the purpose of protecting Habitat’s remaining lots. He refers to a 1975 Federal Court decision, The Queen v Ginakes Brothers’ Limited, [1977] CTC 18; 77 DTC 5023. The defendant company therein operated a drive-in restaurant and learned that McDonald’s hamburgers had obtained an option on property situated across the street and had applied for a zoning change to permit the operation of a drive-in restaurant. The defendant obtained an option to purchase the property for $100,000 and finally sold the property for $135,000 with a restrictive covenant that it would not be used for a drive-in restaurant. The Court held that at the time the defendant acquired the option its sole purpose was to protect its business from competition: the “fortuitous profit’’ was a capital gain.

In another Federal Court decision, Ben Arthur Shuckett v MNR, [1970] CTC 284; 70 DTC 6213, a solicitor with a history of real estate trading, purchased a lot considered to be vital as access and parking for an hotel to be built. He later sold a portion of the lot to the corporation formed for that purpose. The Court ruled that the lot was not acquired with a view to resell at a profit, but for the sole purpose of being used by the hotel.

The plaintiff invites the Court to hold that his re-purchase of the subject property was an outlay to protect an investment and to stifle competition, and that the resale thereof was a capital transaction. Unfortunately for him, the circumstances surrounding the various transactions lead me to a different conclusion.

1. The fact that the plaintiff is a local builder and a broker knowledgeable in the sale of lands in that particular area is an element which has to be considered. It is not by itself conclusive, but it is very relevant.

2. The short-term financing secured at exorbitant rates (for the year 1973) is indicative of an intention to resell quickly. The plaintiff did testify that he was under the impression that the loan was renewable, and referred to a letter to that effect, but such a document was not produced.

3. The quick progression in the value of the land and the known intention of several parties to assemble lots in the area for a shopping centre, at the very same time when the plaintiff was transacting with the subject property, cannot but point to speculative intentions brewing in the latter’s mind.

4. While the plaintiff asserts that his sole interest in re-purchasing from Lacelie was to protect the remainder of the Habitat lots, there would obviously be no such intention in the mind of his partner, Michel Parent, who had no interest whatsoever in the future of Habitat. Parent was not invited to testify by the plaintiff. The defendant subpoenaed him, but decided no witnesses were needed.

5. If the plaintiff’s purpose was merely to protect the other lots, the property of Habitat, and since it was Habitat who sold the subject property to Lacelle in the first place, why was it not re-purchased by Habitat? The fact that the plaintiff decided to wear his broker’s and not his building contractor’s hat for that transaction would point more to a speculative intention than to a long-term objective on his part.

6. It is difficult to accept that the plaintiff would cause forty lots to be sold and re-purchased with the intention to protect the remaining twenty- five lots. Obviously, the risk would be disproportionate to the objective, as far as Leduc was concerned. As to Parent, the object would be inexistent.

7. The alleged desire to protect the remainder by selling to Lacelie was not corroborated. The plaintiff did claim that there was an oral agreement between the two that Lacelie would not erect multi-family or commercial buildings on the property, but Lacelie was never called upon to substantiate that allegation.

8. The plaintiff re-purchased the lots from Lacelie without any concrete assurance of adequate financing. The enigmatic Bienvenue (who did not testify) having failed to produce, the short term financing was obtained from Maurice Marois. Marois had already financed Habitat and needed no introduction from Parent. Since Parent did not deliver the financing and had no personal fund to contribute to the transaction, one wonders why he received half the profit. One logical explanation is that Parent, aware of the imminent arrival of a shopping centre, shared that information with the plaintiff, for a price.

9. In his three agreements with Trizec, Orlando and RSND the plaintiff undertook to have the local zoning by-laws changed to allow for commercial development, which was eventually done. Obviously, those undertakings are not reconcilable with his alleged intention to protect the subject property from commercial or multi-family developments.

10. The short period of time within which the plaintiff resold the subject property is more consistent with a venture in the nature of trade than with a long-term investment for the purpose of protecting a capital asset. The alacrity with which the plaintiff negotiated the offers and finally resold the subject property is a clear signal of his true objective. The logical inference to be drawn from all those quick transactions is that the intention to resell at a huge profit was present from the outset.

Under the circumstances I must conclude that the plaintiff re-purchased the said property speculatively and for the purpose of trading the same to account at a profit and that said profit constituted business income pursuant to subsections 9(1) and 248(1) of the Income Tax Act.

The plaintiff’s appeal, therefore, is dismissed with costs.