Future Investments Ltd. v. The Queen, 86 DTC 6224, [1986] 1 CTC 458 (FCTD)

Cullen, J.:—The plaintiff taxpayer, a private holding and investment company, was incorporated pursuant to The Companies Act of Saskatchewan on or about the beginning of 1962.

In 1966, the plaintiff and a Mr. Bill Linden purchased 20 subdivided 25' lots situated on Thomas Crescent in the City of Saskatoon, at a cost of $3,000. In 1975, the plaintiff purchased Linden's interest in the land for $8,000. After acquiring the same, the plaintiff received an offer from a construction company, offering to purchase all of the lots, which offer the plaintiff refused.

Subsequently, in 1977, the City of Saskatoon re-subdivided the land which the plaintiff owned, resulting in a different parcel of land being allocated to the plaintiff which was also subdivided into ten 50' lots, and zoned residential (for use as single-family dwellings).

In 1977, the City of Saskatoon serviced, together with other land in the district, these ten Thomas Crescent lots, at a cost to the plaintiff of $85,744.07, which was paid by the plaintiff on August 15, 1978. Prior to the servicing costs, the total investment — original cost plus annual property taxes — in the ten lots was $12,795.06; after servicing costs, the total investment by the plaintiff in the ten lots was $99,590.63.

In order to pay to the City these servicing costs, the plaintiff was obliged to borrow from an affiliated company, a substantial part of the money required to pay the bill. Subsequently, in 1978, the plaintiff sold three of the lots, lots 31, 32 and 33 (gross proceeds $48,000). These funds were applied to pay off the inter-corporate loan and to assist the plaintiff in financing residential construction on the remaining seven lots.

The plaintiff, a few weeks later, received, but rejected, an offer to purchase all seven remaining lots at an average price per lot greater than the average price realized on the sale of the aforesaid lots. The plaintiff proceeded to build houses on the remaining seven lots and received rental income therefrom.

By reassessment dated July 23, 1980, the Minister of National Revenue (“Minister”) reassessed the plaintiff taxpayer's 1978 return and added to previously assessed taxable income the sum of $6,264.35, claiming the difference between the selling price and the cost of the subject three lots to be a taxable profit. By notice of objection filed in October 1980, the plaintiff objected to the said reassessment on the ground that the acquisition and disposal of the property in question resulted in a capital gain and not a profit. By notice dated May 1, 1982, the Minister confirmed the reassessment.

The plaintiff appealed to the Tax Review Board and by judgment dated November 10, 1982 the Board dismissed the plaintiff’s appeal from which the plaintiff now appeals.

The issue here is whether the transaction constitutes a capital gain within section 39 of the Income Tax Act or an adventure in the nature of trade.

There is no dispute as to the amounts involved, and nothing turns on the fact that the lands sold were part of the property exchanged for the initial 20 lots.

However one might look for guidance or direction in cases of this nature and some tests are advanced in various authorities, Mr. Justice Collier has it right when he notes as he did in The Queen v. David Froese, [1977] C.T.C. 526; 77 D.T.C. 5364:

As always in cases of this kind, the question is essentially one of fact; each case must depend on its particular facts.

Also, if the plaintiff is to be successful, the onus is on it to rebut the assumption(s) made by the Minister of National Revenue.

At first blush, there is much to commend the case for the plaintiff. We have the direct evidence of Mr. R. B. Beavis, president and director of the plaintiff, that it was the intention of the plaintiff to purchase as an investment and as he stated, “we were in for the long haul. Our intention was to develop when feasible to do so.” An unsolicited offer to purchase prior to the city of Saskatoon putting in the services was rejected.

The Avalon purchase was an apartment building purchased by the plaintiff, remodelled at significant cost, and held as an investment. The purchase of 100 feet of frontage on First Avenue, Saskatoon, was intended as a site for “the Potash Building” but the plaintiff was unable to develop this project and couldn't make it work economically. This concept was the subject of an article in the Saskatoon Star-Phoenix. Another purchase, this time of a building, also couldn't be made to work and was sold at a loss. The plaintiffs were also involved to the extent of 40 per cent in a project called Village Holdings, a highrise operation which "we still own and are renting out and producing revenue”. A condominium, purchased and leased to a dentist and later to a doctor, was also a revenue-producer. This purchase required certain work to be done, namely, install floor coverings and appliances. And again, a purchase outside Canada is similarly an investment made by the plaintiff.

As some evidence of investment was the request outlined in a letter to City Hall on November 26, 1975 (Exhibit P-6): “There is every likely hood

(sic) that we will want to build on the above mentioned lots ourselves and would, therefore, request a right of first refusal on the first opportunity to purchase the balance of the block namely 146’, from the City.”

In that letter was a request to put the “services under local improvement”, which, according to the plaintiff, is commensurate with a longer- term proposition.

The plaintiff stated that they probably had a right to refuse the offer of the City of Saskatoon which would lead to a cash award, but they wanted the property because “cash would not serve our purposes”.

In the final analysis, the exchange took place, the plaintiff was billed $85,744.07 and it did not secure the 146 feet of frontage.

Just prior to the lots being subdivided, the plaintiff received an offer to purchase the 20 lots from Boychuk Construction and refused that offer because “we intended to develop the property”. The plaintiff built houses “as soon as possible” and rented them out for some period of time.

And finally, an unsolicited offer to purchase the remaining seven lots after the services were in at approximately $17,200 per lot was rejected by the plaintiff. This was about $1,200 more per lot than realized from the sale of the three lots in issue here.

However, looking at the whole picture, I cannot find that the plaintiff has satisfied the onus of rebutting the Minister's assumptions. There are weaknesses in the evidence endeavouring to establish the right to the treatment of this sale as a capital gain.

Right at the outset, we find it was the real estate agent, Mr. Bill Linden, who brought the deal to the attention of the plaintiff and who assumed 50 per cent of the cost and 50 per cent of the municipal taxes. There was no written agreement to this effect and the evidence of Mr. Beavis is that he cannot recollect discussing with Mr. Linden their mutual intentions for the property. Surely if purchased with the intention to hold for investment some agreement would have been made binding the two parties not to sell and to hold it for “investment purposes”. Next, the land could not be sold due to control by the City of Saskatoon, and therefore the property was available at a most reasonable cost, allowing for an assured profit when sold with services installed. Mr. Linden had no doubt about his right to sell his 50 per cent and in fact did sell to the plaintiff, which enabled Mr. Linden to meet his debts. It does indicate to me the possibility that Mr. Linden was in a position where he had to sell, and therefore not in a great bargaining position, but even accepting he was satisfied with the amount of money, we find him receiving $8,000 for a 50 per cent interest in the property that had been acquired for $1,500 just nine years earlier. In other words, in nine years that property had increased in value from $3,000 to $16,000. By 1978, at the time of the sale, lots sold on average at $16,000 per lot or the property was worth $160,000. The offer in Exhibit P13 shows an amount of $120,000 for seven lots. It must be remembered that the principals of the plaintiff were sophisticated, successful businessmen and well versed in the value of and.

Although the plaintiff’s evidence is that the property was purchased for investment, they had undertaken no study nor secured any study to indicate the future rental needs of the City of Saskatoon. They did not produce or secure any promotional literature for their project. I accept the plaintiffs point that it was premature to think of promotional literature until it was determined by the City of Saskatoon what kind of development would be allowed and when. Also, the fact that no income was received from the properties is not, in my view of the facts here, significant because no income was possible while the City of Saskatoon was in the process of determining how the land should be developed.

The knowledge by the plaintiff that the property was most easily saleable is indicated by the method used to advertise the ten lots for sale on August 1, 1978, namely, in the want ads section of the Star-Phoenix. (See excerpt from Exhibit DZ below).

TEN LOTS in a row. Fairhaven district. Minimum frontage 50 ft. Zoned

RIA. 652-4104.

Of all the evidence, this ad is the most damaging to the plaintiff’s case. First, it was placed in the newspaper the day after the City of Saskatoon completed servicing the lots, and second, it listed all ten lots for sale, not three. This is hardly commensurate with an intention to invest or look to the “long haul”. Here is a clear, unequivocal offer to sell all ten lots at the first available opportunity when a significant profit could be realized. It is hardly in line with only selling three to secure revenue to assist with costs of services and construction.

There were other features not in accord with the plaintiff’s assertion that they purchased as an investment. In the letter written by Mr. Beavis (Exhibit P6) referred to earlier, it does not indicate “we intend to build”, but rather, there is “every likely hood (sic)”. Also, the plaintiff accepted the. City Planning Director's undertaking that, "The other points you have raised (i.e. local improvements for cost of services, and first right of refusal of the 146' frontage) are being investigated by Mr. Wellerman and he will be replying in the near future.” That letter was written December 8, 1975, with the deed dated October 31, 1978, and the services completed July 31, 1978 and yet throughout that period the plaintiff has offered no evidence of any further attempt to have the City consider the two requests.

When cross-examined on the fact that the ad said ten lots in a row, and that they were obviously prepared to sell all ten, Mr. Beavis said, “It wasn't true because it didn't happen.”

I believe also that the plaintiff, from day one of the purchase of the 20 lots in 1966, was aware that the property would appreciate in value to a significant degree. The 100 foot frontage property on First Avenue was sold for a handsome profit greatly in excess of the cost of the land in 1966. The mere fact that a property can be sold for a profit is not in itself fatal to the plaintiff's case for capital gains treatment; here, however, under cross- examination, Mr. Beavis was asked, “Was it a significant factor (emphasis is mine) that they could be readily sold?" and he replied, “Yes we had an opportunity to sell but that was not part of our intention." My impression in listening to that reply was the clear indication that it was a “significant factor" that the land could be readily sold. Surely if it wasn’t, the plaintiff's reply would be, “Whether easily sold or not, we weren't interested because we wanted to develop the property," or some similar response to disabuse any thought that they were influenced by the land being readily saleable.

The rejections of the offers to purchase were not surprising because the plaintiff had knowledge of the Saskatoon market and the rapid increases in the cost of real estate. No advertising was really necessary, nor was it even necessary to list with an agent. (In fact a two-line want ad was adequate in the view of the plaintiff.)

Asking that the costs of services be put under local improvement taxes is commensurate with an investment position, as said earlier, but it is also in line with the sale for a profit where the total cost of services would not have to be recovered out of the purchase price.

For the reasons given, I cannot find the plaintiff has met the onus of rebutting the assumptions made by the Minister and accordingly the appeal is dismissed. Costs ordinarily follow the event, and, unless the parties have otherwise agreed, the defendant may have taxed costs.

Appeal dismissed.