Alexandroff v. The Queen, 95 DTC 767, [1995] 1 CTC 2434 (TCC)

Christie A.C.J.T.C.C.:-The issue in this appeal is whether the appellant’s share of the profit on the disposition of the Swansea Shopping Centre, also sometimes known as the Southport Shopping Centre, 34 Southport Street, Toronto (’’the property"), is a capital gain or business income.[1] In his return of income the appellant reported his share as a capital gain. The respondent reassessed on the basis that it was business income. The agreement to acquire the property was made on November 8, 1985, and it was disposed of on December 17, 1987. It was therefore held for some 25 months and one week.

The shares of 644503 Ontario Ltd. ("the numbered company") were equally divided among Mr. Bryon Alexandroff, Mr. Larry Ungerman and Mr. Paul Slavens. Slavens owned the shares of Paul Slavens Real Estate Ltd. (’’Slavens Real Estate”). It was engaged in the real estate brokerage business. Ungerman operated his own real estate brokerage business. In 1985 Alexandroff was employed as a sales representative by Slavens Real Estate. In 1986 he acquired a real estate brokers licence and in July of that year he was employed as such by Slavens Real Estate.

On November 8, 1985, the numbered company entered into an agreement of purchase and sale as purchaser of the property: "In trust for a company incorporated or to be incorporated or other legal entity". The vendor was H. L. & M. Marcus Investments Inc. ("Marcus"). Slavens Real Estate is described in the agreement as "agent". The purchase price was $2.95M. The existing mortgage of $1.45M with interest at ten per cent was to be assumed. It became due on October 4, 1989. In the meantime only monthly interest of $12,083 was payable. Also the vendor was to take back a second mortgage of $0.8M at ten per cent. This mortgage agreement was to run for five years from the date of closing with the right to pay all or any part of the principal at any time without notice or bonus. The balance of the purchase price ($0.7M) was to be paid on closing. A deposit of $0.1M made on entering into the agreement of purchase and sale was to be credited to the $0.7M on closing. The agreement was to be completed on April 22, 1986.

On November 8, 1985, a limited partnership named Swansea Shopping Centre Ltd. Partnership ("the limited partnership") was formed under the Limited Partnership Act of Ontario by the filing of the required declaration with the Registrar of Partnerships under section 3 of the Partnership Act of Ontario. The declaration filed with the Registrar of Partnerships specified that the numbered company was the general partner and Slavens was recorded as the initial limited partner. There were only two partners in the limited partnership, namely, the numbered company and Slavens. This was followed by a limited partnership agreement ("the partnership agreement") made on April 15, 1986. The parties to the agreement were the numbered company referred to as the "general partner" of the first part; Slavens referred to as the "original limited partner" of the second part and: "Each party who from time to time executes this agreement or a counterpart thereof as a subscriber for one or more limited partnership units and who is accepted as a limited partner, (hereinafter individually called a ‘limited partner’ and collectively called the ‘limited partners’)" of the third part.

The stated purpose of the limited partnership in clause 2.05 of the partnership agreement 1s owning and operating the property for income purposes. Clause 3.01 provided that the interest of the limited partners in the limited partnership shall initially be divided into eight units. Included in clause 5.01 is this: "The general partner will control and have responsibility for the business of the limited partnership and do or cause to be done in a prudent and reasonable manner any and all acts necessary, appropriate or incidental to the business of the limited partnership. Notwithstanding anything herein contained, the general partner shall not cause the limited partnership to sell or otherwise dispose of all or substantially all of its assets without the approval of the limited partners expressed by a special resolution". A special resolution is defined by reference to the definition of another phrase. Suffice it to say for present purposes that it was a resolution passed at a meeting of limited partners by affirmative vote representing at least 75 per cent of the total outstanding units or a written resolution signed by persons representing at least said 75 per cent. Included in clause 5.03 is this: "No limited partner may take part in the control of the business of the limited partnership nor may any limited partner have the power to sign for or to bind the limited partnership; however, a limited partner may from time to time examine into the state and progress of the business of the limited partnership". Clauses 5.07, 10.01 and 10.02 provide:

5.07 The limited partners hereby acknowledge and agree that the general partner has entered into irrevocable arrangements with Paul Slavens Real Estate Ltd., or any affiliate or subsidiary designated by it, whereby it will, because of its knowledge of the property, have the right to act as leasing agent, and when applicable, as sales agent for the limited partnership and to have any listing, whether for lease or sale, in connection therewith, in the event of leasing of available space or any sale of the Swansea Shopping Centre Project comprising the business of the limited partnership and shall be entitled to payment in the amount and on the terms usually paid to independent leasing or sales agents operating in the city of Toronto performing similar functions.

10.01 Each subscribing limited partner shall provide by way of initial capital contribution, for each unit acquired, the sum of $100,000, the sum of $12,500 which was delivered at the time of delivery of the subscription and the balance by cash or certified cheque on or before April 15, 1986.

10.02 Each subscribing limited partner shall further provide by way of capital contribution, for each unit acquired, the further sum of $100,000 such amount to be paid by way of delivery of a promissory note issued in favour of H.L. & M. Marcus Investments Inc., in relation to the acquisition of the property known as the Swansea Shopping Centre, forming the business of the limited partnership, such promissory note to be issued on the terms and conditions of the draft note appended hereto as Schedule A, and to be collaterally secured by a second mortgage issued by the limited partnership on the Swansea Shopping Centre project property, such second mortgage to be delivered on terms and conditions reasonably acceptable to the general partner.

The limited partners who signed the partnership agreement are: Jill Lustig, Paul Slavens (in trust), Bryon Alexandroff (in trust), Michael Lyons (in trust), Larry Ungerman, Richard Pasternac, Samuel Cohen (in trust) and Ronald Appleby (in trust). All except Slavens, Cohen and Appleby are appellants in these proceedings. The beneficiaries of the trusts were individuals and corporations who also became limited partners. The eight units were subscribed for and issued to these signatories. In total there were 26 limited partners. The appellants are 15 of them. Slavens held 3/4 of a unit. Among the appellants, Alexandroff held 3/4 of a unit and Ungerman held 1/4 of a unit. The holdings of the other thirteen appellants ranged from 1/2 to 1/25 of a unit.

In accordance with the partnership agreement the subscription price per unit was $200,000, one-half of which was payable by cash or certified cheque and $100,000 by way of promissory note with interest at ten per cent in favour of Marcus to be collaterally secured by a second mortgage on the property. The purchase of the property closed as scheduled on April 22, 1986. The source of the following ten paragraphs is a partial agreed statement of facts filed with the Court:

The first mortgage was assumed by the limited partnership from the vendor on closing and had a maturity date of October 4, 1989. The mortgagor was entitled to prepay the mortgage at any time without notice or bonus. In accordance with the terms of the first mortgage, the limited partnership only paid interest on the mortgage. The limited partners directed the limited partnership to pay interest on their behalfs on the individual promissory notes out of surplus cash flow from the property.

The general partner investigated replacement long-term first mortgage financing in or about the end of 1986 and the beginning of 1987. No refinancing was arranged.

The general partner, pursuant to its appointment as manager of the property under the agreement carried out its duties which included leasing of the premises and renewal of leases, arranging for repairs and maintenance to the property, dealing with tenant problems, collection of rents, including collection of present and past percentage rents that had not been pursued by the previous owner.

During 1985 and 1986, South Kingsway Village Ltd. ("SKVL")[2] an affiliate of Tridel, a major developer and builder in the Toronto area, had been developing a three-building condominium complex adjacent to the property. In order to facilitate the erection and construction of the condominium property, SKVL wished to construct and install an underground system of rock anchors and tie-back cables to assist in supporting the shoring of its development and approached the general partner for permission to encroach below grade under the property for such purpose. The limited partnership entered into an encroachment agreement dated June 28, 1986 with SKVL whereby the limited partnership agreed to allow SKVL to encroach beneath the property in consideration of $27,500 and an undertaking from SKVL to rectify any damages suffered.

At or about the time of the encroachment by SKVL the property experienced, inter alia, the following:

(a) settlement of floor slabs;

(b) gaps in the opening in the floor slabs and the partitions;

(c) cracking of the partitions;

(d) distortion of the door frames;

(e) hair line separation between mortar and bricks;

(f) ceiling tiles out of position and damaged;

(g) settlement of the parking area, breaking up the surface and the formation of potholes;

On March 24, 1987 the limited partnership returned $48,000 to the limited partners, in the aggregate, as a return of capital.

On July 27, 1987 the general partner on behalf of the limited partnership commenced an action against SKVL with respect to the encroachment.

On or about September 12, 1987, the general partner received an offer to purchase the property on an "as is where is" basis for $3,830,000. The sale was completed on December 17, 1987. After expenses of the sale, including legal fees and real estate commissions (of which Paul Slavens Real Estate Limited earned one-half or $76,600) the net profit per limited partnership unit was $81,290.

Prior to the sale of the property, the business relationship among the three principals of the general partner had deteriorated. Fourteen days after the sale of the property, the limited partnership was wound up and no other property was acquired by the limited partnership.

The action against SKVL was settled in or about April 1991 by the payment of $25,000 to the general partner.

The witnesses at trial were Alexandroff; Mr. Ronald S. Steinberg, husband of the appellant Donna Steinberg; Mr. Michael D. Lyons, an appellant; Mr. Richard M. Pasternac, an appellant; Dr. William J. Clark; Mr. John J. Busbridge. Clark gave expert evidence about the condition of the property in June 1987 and Busbridge gave the same kind of evidence regarding an examination in February 1987 into the cause of ground movement related to the property. Counsel for both parties agreed that the motivating intention of Alexandroff at the time the property was acquired from Marcus is also attributable to Ungerman, Slavens and the numbered company. It was further agreed that the evidence of Steinberg, Lyons and Pasternac is reflective of the position of the appellants other than Alexandroff and Ungerman.

Alexandroff is a 1970 graduate from the University of Toronto in industrial engineering, but he has not practised that profession. He became a real estate agent in the mid-19703. His employment by Slavens Real Estate has already been referred to. Since 1988 he has had his own real estate brokerage company, Alexandroff Real Estate Ltd.

He referred to the property as a neighbourhood plaza consisting of 14 stores with total rentable space of about 42,000 square feet. In 1987 the "major tenants or anchor tenants" were Mr. Grocer (Dominion Stores), Canadian Imperial Bank of Commerce, Shoppers Drug Mart. Alexandroff was familiar with the property, having sold it to Marcus and he had been subsequently involved in leasing some space for Marcus. He later became involved on behalf of Marcus in seeking a purchaser of the property and thereby became familiar with the leases pertaining to it. He was aware that additional residential units were being developed in the area of the property. Around the end of 1985 he spoke to Slavens and to Ungerman, an associate and long-time friend, about organizing a group to acquire the property. He gave this answer to a question put to him by his counsel:

Q. What was the role that each of the three of you was to play in this group?

A. Each of us had individual talents. I was familiar, obviously, with leasing in the plaza and was interested in getting a little bit more involved in management. Mr. Slavens, administering a real estate brokerage company, had good administrative skills and financial skills. Mr. Ungerman was qualified in the property management and sort of technical side of maintaining properties through some family properties that he owned.

Alexandroff had no prior involvement with a purchase group or syndicate of this kind.

Mr. Ron Appleby, a Toronto lawyer, joined Alexandroff, Slavens and Ungerman in organizing the investors. He was brought in because of "his expertise as a lawyer in helping structure deals of this nature". These were the criteria applied in selecting investors: "Basically they would have to have the requisite amount of money, dollars. They should have some interest in investing in income- producing property. They should be-as you formulate a group, we kept trying the names on each of us to make sure we had a homogeneous group, people from our same community and people who had common interests, who knew each other and didn’t have a problem with each other". Lyons was brought in by Alexandroff who told him the property was being acquired for income-producing purposes. There was no discussion about resale. Cohen came in through Appleby, Lustig through Slavens, Richard Pasternac through Ungerman.

There is in evidence documents prepared by Alexandroff pertaining to projections of income for the property. They are undated and there is no oral evidence about the date of preparation, but I infer from other evidence that they were prepared in 1985. It shows income as follows: 1986-$263,815; 1987-$263,815; 1988-$292,915; 1989-$313,915. The following is taken from the documents just referred to:

On the reasoning that follows Alexandroff concluded that the return on the $800,000 paid in cash or by cheque for the acquisition of the eight units would be in the order of five per cent per annum in respect of 1986: income $263,815-interest on the first and second mortgage $225,000 = $38,815 which is 4.85 per cent of $800,000. His percentages for 1987, 1988, 1989 were 5, 9, 10 1/2 respectively.[4] In this regard it should be borne in mind that the parties agreed that for the purposes of these appeals all of the leases were to be regarded as ’’net-net leases".[5]

After the agreement of sale and purchase was executed, unsolicited offers were made for the property. They were rejected. This also occurred after closing.

After the property was acquired the general partner carried out its management functions through Alexandroff, Ungerman and Appleby. Minutes of management meetings held on June 24 and July 22, 1986, are in evidence. The topics discussed were simply what one would expect at that kind of meeting; e.g., rents, repairs, tenant and parking lot problems. Mr. Grocer had written about potential vehicle damage because of a nearby pothole. There was talk about a "new skin" for the parking lot.

On September 18, 1986, there was a meeting of the partners and one of the topics discussed was the possibility of future acquisitions.

There is in evidence a letter from New York Life discussing a loan of $2,050,000 to be secured by a mortgage on the property. The term mentioned is seven to ten years with interest at the rate of 10.750 per cent. Other letters relating to the same subject are also in evidence. The term of the proposed loan increased to ten years.

Nothing came of this. Alexandroff said: "We had other things on our mind as well. It just fell off the table". There was also correspondence about a loan with Financial Trust which also came to naught. The mortgagee on the first mortgage on the property was Widpar Financial Group Inc. who by letter dated June 4, 1987, informed the numbered company that it was not interested in extending the term of the loan to 1991.

Alexandroff s evidence then turned to the encroachment agreement that is referred to in the facts agreed to that have already been cited. By letter dated June 13, 1986, (Exhibit A-l, Tab 23) addressed to Alexandroff from Mr. George Hughes, Project Manager of South Kingsway Development Ltd., he proposed the making of such an agreement. It reads in part:

Because of our concern that there be absolutely no possibility of movement on your property, we have decided to use a "caisson wall" system which is shown in detail on the attached shoring drawing. This system costs about three times as much as a conventional shoring pile and lagging system but meets the necessary criteria of performance standard.

Part of this system calls for installation of "tie backs" which are essentially anchors inserted in the shale substrata connected by rigid steel rod to the caisson wall in order to hold it upright. These "tie backs" would be installed so as, to be entirely clear of your building foot print and would have no effect on your building. Further if you decide to redevelop your site at some time in the future up to the property line, these can be removed by a simple cutting torch operation at the caisson wall. They are used for temporary support only.

We would like to enter into an agreement with you which would:

1. Give us permission to place tie backs as necessary along our common property line;

2. Provide that we would at our expense and with your cooperation have an engineering survey firm inspect your property and report in detail on the existing condition of said property in order that any future problems (should they develop) could be referenced to the present condition. (You would of course receive copies of this report.);

3. Give us permission to move equipment over your lane provided that we do not block or restrict your use of the lane at any time.

I am attaching for your review a copy of our most recent shoring drawings. Would you please review the same and get back to me as soon as possible outlining comments if any and giving your agreement in principle. A draft encroachment agreement will follow.

As far as the matter of compensation is concerned I underline that we are incurring considerable expense to make sure this job is being done properly so that it will have no material impact on yourselves. In similar situations on downtown projects, we have always reached agreements with nominal dollar values on the understanding that mutual interests are at stake and being served by proper design and execution of the job.

An agreement between the numbered company and SKVL was entered into on June 28, 1986.

The work done by SKVL created considerable commotion, noise, dust, etc. which precipitated complaints by the tenants on the property. By way of example I refer to a letter dated November 18, 1986, sent to Alexandroff by Family Video Place. It reads:

This is to confirm our discussion of August 19, 1986, regarding the shifting of the ground and/or the buildings in our plaza. To date there is a movement of the ground which is apparent as a gap in the sidewalk in front of the store of about one inch. In addition, the ground at the rear access roadway is also receding and cracking. I believe that there are also structural problems cropping up. I have been a tenant here in excess of a year and the problems started only after the excavation for the new apartment buildings were begun and I suspect that this may be the cause. I would advise that the problem be investigated. It is possible to minimize the effects.

A number of photographs taken by Alexandroff at the time the work was being done by SKVL shows fissures in the ground contiguous to property occupied by tenants. On December 22, 1986, Mr. Lionel C. Larry of Robins, Appleby, Kotler, Banks & Taub wrote Tridel Corporation. That letter reads in part:

Secondly, this letter is to put you on notice that there seems to be a shifting of ground and/or buildings on our client’s property. Our client already has received complaints from several tenants that there is movement of ground which is apparent in a gap in the sidewalk. In addition, the ground at the rear access roadway is receding the cracking, and other structural problems are being created. These deficiencies have only become evident following the commencement of excavation.

This letter is to serve as notice to you of the foregoing and to request in accordance with the terms of the encroachment agreement that you immediately attend to a rectification of these matters.

On January 16, 1987, Alexandroff wrote Larry in part as follows:

Further to our conversation this afternoon, I am writing to confirm the findings of my visit to Southport Shopping Centre with Larry Ungerman.

Basically, there appears to be accelerated areas of subterranean decay and shifting of the ground on the south side of the plaza on the lands abutting the Tridel site. Pavement outside the medical centre has severely settled and concrete sidewalks in front of the Video Store, Bakery and Shoppers Store is cracking and a large gap and settlement of concrete sidewalks is occurring in front of these and other stores on the south side. New fissures are evident in the service area driveways adjacent Tridel’s newly constructed retaining wall with the laneway appearing to be shifting as well.

There is also in evidence a document which is in the nature of a form prepared by an insurance broker relating to an incident that occurred on March 25, 1987. With reference to "details” this is said: "Liability. Bodily injury, pieces of ceiling fell striking third party”. The insurance company involved was Hartford Fire Insurance.

On April 13, 1987, First General Construction (Toronto) Ltd. wrote Hartford Insurance in part as follows:

At your request we inspected the above mentioned property to determine the cause and extent of damage to the bathroom wall.

The bathroom wall separated from the rear wall due to a settlement in the floor. This settlement is due to the construction of a highrise building adjacent to this property. It is of our opinion that the ground water table was lowered causing the ground to settle.

The t-bar ceiling in the washroom collapsed when the wall shifted. The main tees separated from the perimeter j-trim moulding. The ceiling above, as it was resting on the washroom wall also shifted, causing the drop in ceiling tiles to hang. Should any more movement of the washroom occur, it is possible that some ceiling tiles will fall. Had this ceiling not been altered during the construction of the washroom partitions, this problem would not have occurred. In order to secure this ceiling, reconstruction of the grid and reinstallation of ceiling tiles are required above the washroom walls.

There was also an exchange of correspondence between Consumers’ Gas and the numbered company.

March 4, 1987, to the numbered company:

We have checked your concerns as outlined in your letter received February 24, 1987.

No evidence of any damage or leak was found.

Consumers’ Gas feels that no potential danger exists at the above site.

If you require any further information, please contact the undersigned at 495-5620.

May 20, 1987, to Consumers’ Gas:

Please be advised that we have again been notified by our engineering company that the gas fittings and lines outside of the buildings above have shifted due to the settlement of the lands due to excavation and construction at the site adjacent this plaza. Because it is felt that this could be a potentially dangerous situation, we are advising Consumers Gas immediately.

Please call the undersigned at 483-4337 for any further information.

May 29, 1987, to numbered company:

We have again checked the area of concern as highlighted in your letter dated May 20, 1987.

We received no readings of any gas escaping at this location but we will continue to monitor this area due to the adjacent construction.

Thank you for your concerns.

July 27, 1987, to Consumers’ Gas:

Further to our correspondence of May 1987 please be advised that we have again been notified by Golder Associates (Mr. J. R. Busbridge) that the relative movement of the ground and building could cause distress to the underground services which enter the building.

Subsequently, the consulting engineers are concerned about the gas supply which enters the south side of the building and have requested we inform you of their concern.

We trust you will act accordingly.

On March 26, 1987, M. L. Nixon, chief building official of the corporation of the city of Toronto, sent an "order to comply" to the numbered company. This is said under nature of contravention: "A recent inspection has revealed that settlement of the concrete floor slab has occurred in the easterly portion of the structure". This is said under remedial action to be Taken: "Provide this department with an engineering report indicating the structural stability of the structure".

Roger R. James Insurance Brokers Ltd. was concerned about the property and on July 16, 1987, it wrote Slavens in part as follows:

We have discussed the insurance situation on the Plaza. The Royal Insurance Company are quite concerned about the plaza and as indicated to you, sent an engineer down to inspect the premises. The report they have from their engineer is that the building is structurally sound but they are very concerned about it from a liability standpoint. As you are aware, the driveway area in some spots and the sidewalk areas and others have sunken quite considerably and there is also a bad area in one of the offices in the doctors section and therefore I have recommended to the Royal that they outline to us their main concerns in writing and I have advised them that I will bring these immediately to your attention and that you have already approached your engineers for his advice on how to solve the problem and hopefully between the two, this can be solved very quickly.

I would like to receive from you if I can, a copy of your engineers report that I can forward onto the Royal and also you mentioned that you have an undertaking from Tridel accepting responsibility and if we could have a copy of that, that would be very useful as well.

A report dated July 31, 1987, prepared by Morrison Hershfield Ltd. is in evidence as Exhibit A-2. It is entitled "Review of Conditions at Southport Shopping Centre, Southport Street, Toronto, Ontario" and is signed by W. J. Clarke. On September 3, 1987, Roger KR. James wrote Slavens as follows:

I have received your letter of Sept. 1 and the report which I forwarded on to the insurance company. I do know that they are going to be interested in the gas company report and I also know that they are concerned about the liability exposure at the premises. Their concern is that someone could very easily trip or get injured in the plaza or on the sidewalk and look to the owners of the plaza for recovery, and therefore back to the insurance company.

If you look at photo #7 that was enclosed and some of the other pictures regarding the sidewalks. They will show the areas of the prime concern of the insurance company.

The report also indicated a problem with ceiling tiles and that some had collapsed and this poses a liability problem.

What I think would be useful would be something in writing indicating that at least some of these will be taken care of immediately and your plans for the repairs.

On September 15, 1987, Alexandroff wrote Roger R. James as follows:

We are in receipt of your letter of Sept. 3, 1987 regarding certain matters at Southport Plaza.

As you are aware the gas company has notified us on several occasions that they have checked out the possibility of gas leakage and that there is no evidence of such. I am expecting a further written communication from Consumers Gas to that effect and I shall forward you a copy upon receipt.

Regarding the other matters referred to in your letter, please be advised that we are aware of these items, and that they are being attended to. Specifically the area of concern in photo #7 has been repaired as have several other areas in the parking lot that required attention.

We thank you for bringing these issues to our attention and again we wish to reiterate that the situation is being monitored and repairs effected as necessary.

Alexandroff said this about the Morrison Hershfield report in an exchange with counsel for the appellants:

A. My impression of the report was that there were many areas of concern in regard to the physical state of affairs of the property at Southport Plaza. There were problems that we hadn’t anticipated when this property was purchased and we had no knowledge yet of how they should be handled. We were not prepared. We read their recommendations and we read their assessment. A lot of it was technical and felt that this was going to be a challenge.

Q. Do you recall what your understanding was of what was happening on the inside of the plaza to cause the various things, the inside of the building?

A. There was settlement of the floor slab, basically around the perimeter areas of the building where it was separating from the walls. It looked like it was major stuff.

Q. In terms of the report you received, what was your understanding of the recommendations or the ability to repair that floor slab?

A. That it might be able to be done at some great expense.

Q. What was your reaction to having received the report that contemplated that kind of reconstruction?

A. We weren’t happy. We were particularly nervous about some of the liability problems and the ongoing bad will that we now were inheriting from the tenants as a result of something we had nothing to do about.

There was a falling-out with Tridel because of the effect on the property of the construction being done by SKVL. The upshot was the commencement of proceedings on July 29, 1987, by the numbered company against SKVL and Tridel in the Supreme Court of Ontario. The plaintiff claimed damages of $500,000 and costs.

In September 1987 Mr. J. Chan, as purchaser in trust for a corporation to be incorporated, and the numbered company, as vendor, entered into an agreement of purchase and sale in respect of the property. Chan signed the document on September 12 and it was signed on behalf of the company on September 14. The purchase price was $3,830,000. Details of payment need not be recited for the purpose of these reasons. The date for completion of the agreement was December 17, 1987. Included in what was agreed to by the purchaser 1s:

(d) that the vendor has made a claim against the owner of the abutting lands to the south of the property with respect to the encroachment agreement and that the vendor is entitled to all of the proceeds of that claim, whether awarded by a court or by out- of-court settlement; and

(e) that it is taking the property on an "as is, where is" basis, including, without limitation, the physical condition of the structures thereon and the terms and status of any tenancies and any vacancies.

The offer to purchase was unsolicited. Alexandroff said that it seemed to Slavens, Ungerman, Appleby and himself that this might be a opportune time to sell the property. He added: "It was starting to be a very cumbersome responsibility and we were concerned about the potential future damage to property". Once they had an offer signed by Chan in a form acceptable to them they "contacted all the limited partners for their input". Alexandroff spoke to Lyons and the latter agreed to the sale. The required special resolution to sell was passed. The group that formed the limited partnership did not as such have any further business dealings. Alexandroff said that if it were not for the problems experienced the property would not have been sold under any circumstances. But it had become a cumbersome responsibility. In cross-examination he agreed that apart from the SKVL construction there were repair problems with the property. He said it was an older property that had been neglected and was showing its age. The plaza had been constructed in 1969.

Dr. William J. Clark received a Ph.D. in civil engineering from the University of Alberta. Prior to that a B.Sc. in civil engineering and a M.Sc. in structural engineering had been conferred on him by Queen’s University. He described himself as a structural engineer. Counsel for the respondent acknowledged that he was qualified to give expert evidence in that field for the purpose of these appeals.

In 1987 his employer, Morrison Hershfield Ltd., was retained by the numbered company for the purpose of reviewing the condition of the property; to consider matters related to safety thereon; to develop conceptual repair schemes if such were thought to be in order and to prepare a report. The report is dated July 31, 1987, and has already been referred to.

In 1987 Dr. Clark visited the property on three occasions; June 15, 22, 24. His report was reviewed in some detail. It includes under the heading "Inspection Observations" references to gaps under baseboards, cracked floor slab, gaps at the partition wall/ceiling junction, tearing of the wall/wall joint and separation of the walls; cracked partitions and door frame distortions. These defects appeared in various rental units in the mall.

This is said at page 6:

In our visual examination of the mezzanine level interior and the westerly roof visible for that area, we saw nothing to suggest that the mezzanine floor, partition walls, or ceiling have experienced displacements, or that the visible roof has experienced settlement displacements. We saw no evidence of any water ponding on that roof, despite recent heavy rainfall.

Our visual inspection of the exterior walls of the original building indicated that the interior finishes, glazing, and exterior masonry are in excellent condition with nothing to suggest movement of those walls.

In the new Shoppers Drug Mart building, there is no sign of displacement of the floor, superstructure, or exterior walls. There are small cracks in drywall finish over doors in the south wall and an east side partition, but we do not consider these significant.

Paragraph 2.4 of the report reads:

Review of Work by Others

As mentioned earlier, Golder Associates have been retained by you as geotechnical consultants regarding this problem, and have issued a letter report dated July 17, 1987. Their work regarding monitoring of settlement displacements indicates significant recent high rates of settlement which suggest that the current settlement movements "are most probably associated with the adjacent construction activities".

On the basis of our investigation of conditions, we are in agreement with this opinion.

The Golder report also states that they "consider that the building structure is not at risk". We are in agreement with that opinion.

The document concludes with "recommended short-term remedial work" and "recommended long-term remedial work". One of the recommendations relating to the long term was a new structurally-supported floor slab rather than a slab on grade. The latter is supported entirely on the ground, the concrete having been poured directly on top of the ground. This would involve evacuation of all the tenants for a period of up to three months.

Mr. John R. Busbridge received a B.Sc. and a M.Sc. in 1967 and 1968 respectively. Both were conferred on him by the University of Strathclyde, Glasgow. He is employed as a geotechnical engineer by Golder Associates of Mississauga, Ontario. He is qualified to give expert evidence in that field. He described his profession in this way:

A geotechnical engineer specializes in the mechanical properties of soil and rock. In the civil engineering profession we apply this to problems with foundations for buildings, tunnel design, design of structures, earth structures such as dams.

Essentially, we specialize in problems associated and design of structures connected with soil and rock.

In November 1981 he co-authored a report entitled "Subsurface Investigation, Proposed Shoppers Drug Mart, Swansea Shopping Centre". A new building was constructed on the property to house Shoppers Drug Mart which was evacuating premises it previously occupied there. Because of the condition of the soil it was recommended that floor slab for the new building be supported on a deep foundation rather than as a slab on grade. This advice was accepted.

In 1987 Alexandroff contacted Busbridge about ascertaining the cause of settlement of ground at the property. After examining the site Busbridge wrote him on February 12, 1987, in part, as follows:

The paved areas surrounding the mall buildings show obvious signs of settlement. There appears to be settlement of the floor slab in several of the units in the eastern portion of the main mall building. This is reflected in gaps Opening up between the floor slabs and partitions, some cracking of partitions and distortion of door frames.

We are concerned that movement of the ground could be causing distress to gas services which enter the mall buildings from the south side (ï.e., from the lane between the mall and the excavations). Induced stress is likely to be severe because the buildings are on deep foundations and not settling with the surrounding soil. We request that our concerns are passed on as soon as possible to those responsible for the excavation and that Consumers’ Gas be notified so that they can inspect the connection.

The apparent ground movements could well be associated with the adjacent excavation. Causes of such settlement would be:

-settlement of adjacent ground due to stress relief;

—settlement of loose fill due to vibrations caused by pile driving and construction activity;

-settlement of loose fill due to groundwater lowering.

We suggest that you obtain any records of ground movements and groundwater levels which are available from the developers of the adjacent property. In addition, a copy of any pre-construction survey of the mall would be helpful in establishing the damage caused by the adjacent excavation. In addition, we recommend that independent monitoring of cracks is carried out in future. We can carry this out if requested.

A number of photographs depicting work being done by SKVL and damage to the plaza were put in evidence through Busbridge. The photographs were, however, taken by another employee of Golder Associates, Mr. D. DuBois. All of the damage shown is not necessarily attributed to SKVL. On March 3, 1987, DuBois wrote Alexandroff, in part, as follows:

On March 2, 1987 our engineer visited the above shopping mall and installed some tell tales across existing cracks in the building. These tell tales will provide a measurement of any further movement at their locations. As was described in our letter to you dated February 12, 1987, the mall is suffering some distress, which is reflected in gaps opening up between the floor slabs and partitions, some cracking of partitions and distortion of door frames. This distress is apparent in the eastern portion of the mall.

On May 19, 1987, DuBois wrote Alexandroff, in part, as follows:

We consider that the settlement of the ground relative to the building will cause distress to underground services which enter the building. We would remind you of our concern about the gas supply which enters the south side of the building and suggest that appropriate authorities are informed of our concern and the site conditions.

Again on July 17, 1987, DuBois wrote Alexandroff, in part, as follows:

Since May 14, 1987 the average rate of settlement of the two points on the sidewalk slab relative to the building is about 0.16 mm per day. Extrapolation of this average rate suggests that if this rate of settlement had occurred since about 1982, when we understand the sidewalk was constructed, the total relative movement would be about 250 mm. There is no evidence of such a large total movement of the sidewalk. We therefore consider that the movements currently being recorded are likely to have a more recent cause and are most probably associated with the adjacent construction activities.

We consider that the relative movement of the ground and the building could cause distress to the underground services which enter the building. As expressed in our telephone conversation of May 7, we are concerned about the gas supply which enters the south side of the building and trust that you have informed the appropriate authorities of our concern as agreed.

During our visit, the tenant of the medical building expressed concern about safety and stability of the air conditioning fan that is in the ceiling above their central hallway. Several ceiling tiles are separated from this fan. Comments on the stability of this fan are beyond our expertise, but we would suggest that you have this fan inspected.

The letters of March 3, May 19 and July 17 are all cosigned by Busbridge. Busbridge was asked this question by counsel for the appellants

and he gave this answer:

Q. By way of summary, based on all your observations, what was causing the damage that you observed and the separations you were observing at the site?

A. I would summarize the situation by saying that the decision by the owner in, I believe, 1982, to reconstruct the east part of the mall and still adopt a slab on grade for that part of the building, meant that it did not have entirely an adequate foundation for the soil on the site. What we saw was, to a large extent, caused by the construction activities of the adjacent Tridel excavation. So, we had seen a lot of settlement which had been triggered in a fairly short period of time by the excavation carried out by Tridel. But, nevertheless, the building had, I am sure, seen some settlement in the past because of the nature of the foundation before Tridel got on the adjacent site and would see some settlement in the future if that floor slab was not supported on deep foundations.

Later he added that he thought it highly probable that the majority of the damage he saw was directly attributable to the SKVL excavation.

Mr. Ronald S. Steinberg is a chartered accountant of some 33 years standing. He is a partner in the firm Price Waterhouse. As previously noted, he is the husband of Donna Steinberg. He became involved in the partnership through a client, Mr. Lustig. He studied the projections referred to earlier in these reasons that were prepared by Alexandroff and he also discussed them with Lustig. Based on them and other things, including intended management, he regarded what was being proposed as a "reasonable deal" and he recommended in favour of it. In the result Mrs. Jill Lustig, one of the signatories to the limited partnership agreement, acquired, according to a schedule attached to the partial agreed statement of facts, one-third of a unit. Mrs. Frances Storm, the wife of a business associate of Steinberg, took one-third of that unit and the other one-third went to Steinberg’s wife. He said that it had not been intended to sell the property. How this came about is related in this exchange between counsel for the appellant and the witness:

Q. Were you informed of the fact that there was an offer to sell the property?

A. Yes.

Q. That is the offer that ultimately resulted in the sale. How were you informed of that?

A. Lustig had called me and told me that there had been an offer to sell the property and contemporaneously with that, suggested that we had got some - damage had been happening to the property and I thought it was really just a paving the lot at that time. Whether it was the structure of the building, I don’t know, but there was paving and it was extremely serious and damaging and somebody wanted to come along and make an offer for the property. Since I believe you can’t continue to flog a dead horse, I said, "Look, if we have got problems I don’t want any. If there is an opportunity to sell the thing, then I guess we have to sell it”.

Q. What did you recommend to Mrs. Lustig in terms of their investment? A. The same thing. If that was going to be the seriousness of the situation, I recommended to everybody that we just get out.

Q. But for the damage that was being reported to you, would you have wished to sell the property?

A. No, it was never our intent to sell the property.

Michael D. Lyons was in the business of operating golf courses. Around Christmas of 1985 he was approached by Alexandroff who told him about the acquisition of the property. Lyons had known Alexandroff, Ungerman and Slavens for many years.

He was supplied with projections prepared by Alexandroff. In addition he visited the property to study it and "I did my own appraisal of what I saw and what the potential might be". He was impressed by the importance of some of the tenants and the cleanliness and attractiveness of the neighbourhood. He also noted the planned completion of highrise construction adjacent to the property. In his discussions with Alexandroff nothing was said about reselling the property. Therefore when and after he acquired one-half of a unit in the limited partnership there was no discussion of that kind. His wife Vikki also acquired one-half of a unit. The fact that precipitated his agreement to sell was the damage associated with the excavation by SKVL.

As already said Mr. Richard M. Pasternac is an appellant. He is a chartered accountant practising in North York. He was introduced to the property by his brother-in-law, Ungerman. They discussed what was intended regarding it and he carefully studied Alexandroff’s projections. After carefully analyzing the project in consultation with his father Morris, who is also a chartered accountant, they decided to get involved and each acquired one-half unit in the partnership. The firm of Pasternac and Pasternac were the accountants for the limited partnership and their task was the preparation of the year-end financial statements and interim statements as required. They were not involved in the management of the property.

The witness attended an organization meeting pertaining to the limited partnership on March 26, 1986. It was chaired by Appleby and it was made clear to those present that the intent ’’was to own and operate this plaza and hopefully make some money from the rents and be around for a long time and have a business relationship with this group that would hopefully flourish and maybe, in the future, purchase other properties as well".

With reference to the sale of the property Pasternac heard from Ungerman and they discussed the serious problems afflicting it. Ungerman said there was an offer to buy it and he was recommending sale. He asked Pasternac if he would like to sell. This exchange followed between counsel for the appellant and the witness:

Q. What was your response in answer to that?

A. Well, initially I was upset about it, more from an emotional response than anything else. I didn’t really know the condition of the property at the time. I wasn’t privy to the engineering reports and the rest of it. So, naturally, I was kind of upset about it because, you know, it would have been difficult to replace an investment that was yielding those kinds of after-tax returns, but I listened to what he had to say. I told him to call me back and I spoke to my dad about it and he felt the same way I did. Larry called me the next day and said it was basically done, it was all agreed to by the other partners that they wanted to sell and they had a majority and it was sold.

His Honour: They had to have a 75 per cent?

The witness: Apparently, yes.

The disposition of this appeal turns on the answer to this question: when the property was purchased on November 8, 1985,[6] by the numbered company as trustee for the limited partnership, was the only motivating intention of both the trustee and the beneficiary of the trust its acquisition as an income-producing investment? In law the intention attributable to the numbered company is the intention that the natural person or persons responsible for the corporate act of acquiring the property had at the time of acquisition: O & M Investments Ltd. v. M.N.R., [1985] 2 C.T.C. 2207, 85 D.T.C. 535 (T.C.C.) at page 2209 (D.T.C. 537). In this case those persons are Alexandroff, Ungerman and Slavens.

The whole of the relevant evidence satisfies me that the only motivating intention of the numbered company, ascertained on the basis just described, was to acquire the property as an income- producing asset. There is nothing to suggest that the intention of that company, in its capacity as the general partner in the limited partnership, and the intention of Slavens, in his capacity as the initial limited partner, was different. Having regard to the deterioration in the property after it was purchased there is ample evidence on which to conclude that the decision made in 1987 to sell it was not inconsistent with that prior intention. It follows that the appeal succeeds.

As these reasons indicate, evidence was adduced at trial to establish the intention of persons who became limited partners under the terms of the partnership agreement of April 15, 1986. While I am prepared to accept that their intention was investment, as opposed to speculation in order to make a profit, I do not believe, on reflection, that their intention on acquiring an interest in the partnership is germane. What was received by them under the partnership agreement was an interest in a partnership that already held the property as a capital asset.

The appeal is allowed.

Appeal allowed.