Grant,
DJ:—This
is
an
appeal
by
the
plaintiff
from
reassessments
of
its
income
tax
return
for
the
years
1973
and
1974
by
the
Minister
of
National
Revenue.
The
plaintiff
had
sold
lands
owned
by
it
in
March
of
1973
by
which
it
had
realized
a
profit
of
$1,940,000.
In
its
said
returns
the
plaintiff
had
included
such
profit
as
a
capital
gain
but
the
Minister
had
reassessed
the
same
as
income
from
a
business
within
the
meaning
of
section
9
of
the
Income
Tax
Act.
Such
different
contentions
constitute
the
issue
in
this
appeal.
The
plaintiff
was
incorporated
as
an
Ontario
company
on
November
4,
1965.
The
objects
of
such
company
set
forth
in
its
charter
were
“To
acquire,
by
purchase,
lease,
exchange,
grant,
concession
or
otherwise,
and
to
hold,
subdivide,
lay
out
in
building
lots,
streets,
lanes
and
squares
and
otherwise
to
improve,
develop,
rent,
sell,
convey,
exchange,
lease
and
otherwise
dispose
and
generally
deal
in
lands
and
real
estate
of
any
and
every
kind
and
description”.
At
all
material
times
the
shares
of
the
plaintiff
company
were
equally
held
by
Pendevco
Development
Co
Ltd,
an
Ontario
incorporated
company
(hereinafter
called
Pendevco)
and
by
H
&
A
Supply
Company,
Limited
(hereinafter
referred
to
as
H
&
A)
or
their
nominees.
The
shareholders
of
Pendevco
were
Wes
Crozier,
Malcolm
Danbs,
William
Sinclair
and
Henry
Young
at
the
time
of
all
material
events
related
to
the
issue
herein.
Each
of
such
shareholders
were
engaged
in
the
construction
of
houses
on
their
own
behalf
and
separately.
Pendevco
was
never
in
the
construction
business
but
from
its
incorporation
in
1961
confined
itself
to
purchasing
larger
areas
of
land
than
its
individual
shareholders
could
themselves
finance
and
after
servicing
the
same
would
sell
to
its
shareholders
or
their
nominee
company
such
portion
of
the
land
each
shareholder
required,
it
served
as
a
land
bank
for
them.
H
&
A
was
an
Ontario
incorporated
company
and
at
all
material
times
its
principal
shareholder
was
one
William
Paul
Fraleigh
who
was
a
builder,
owner
and
manager
of
several
large
residential
rental
projects.
He
was
very
experienced
in
such
construction
and
knowledgeable
concerning
the
multiple
residential
rental
market
in
and
around
Hamilton.
On
November
13,
1964
Pendevco
purchased
the
land
which
forms
the
subject
of
this
appeal
from
strangers
at
a
price
of
$262,500.
At
this
time
it
was
the
intention
of
Pendevco
shareholders
to
erect
single
family
homes
on
the
land
but
this
intention
was
abandoned
before
the
plaintiff
company
herein
had
any
interest
in
the
matter.
From
the
time
of
the
advent
of
Fraleigh
into
the
enterprise
all
parties
realized
that
rental
apartments
would
be
the
form
of
construction
as
the
land
was
too
valuable
to
use
it
for
single
dwellings.
It
placed
a
mortgage
on
the
premises
to
provide
part
of
the
purchase
moneys
and
its
said
shareholders
also
advanced
money
to
it
for
this
purpose.
At
that
time
the
intention
of
such
shareholders
in
having
Pendevco
purchase
the
lands
was
that
each
of
them
might
purchase
from
Pendevco
lots
therefrom
as
they
needed
the
same
to
build
single
family
homes
thereon.
The
lands
at
the
time
of
purchase
consisted
of
approximately
66.75
acres
and
was
situate
in
the
township
of
Saltfleet
in
the
county
of
Wentworth
being
parts
of
lots
19
and
20
In
the
broken
front
concession
of
said
township
and
lay
about
/2
mile
east
of
the
eastern
boundary
of
the
city
of
Hamilton
and
8
miles
from
the
centre
of
Burlington
and
1%
miles
east
of
Highway
20.
At
the
time
of
purchase
it
was
vacant
and
zoned
as
a
holding
category
for
future
residential
use.
Subsequent
to
such
purchase
the
department
of
highways
purchased
8.75
acres
thereof
for
highway
purposes
leaving
about
58
acres
still
owned
by
the
plaintiff.
At
such
time
Fraleigh
was
interested
in
purchasing
such
lands
as
well.
He
is
engaged
in
many
types
of
business
as
well
as
real
estate.
In
his
testimony
he
stated
he
had
never
been
in
the
business
of
building
houses
for
resale.
He
built
homes,
warehouses
and
apartment
buildings
to
hold
and
rent.
In
some
of
his
enterprises
he
was
in
partnership
with
others.
Fraleigh
was
desirous
of
participating
with
the
said
shareholders
of
Pendevco
in
developing
the
said
property
and
they
realized
that
his
experience
in
arranging
a
plan
of
development,
securing
the
necessary
rezoning
and
securing
permission
from
the
Ontario
Municipal
Board
to
permit
high
density
building
on
the
land
would
be
valuable
to
them.
Eventually
on
September
1,
1965,
Pendevco
as
the
owner
and
Fraleigh
as
the
developer
entered
into
a
written
agreement
(Exhibit
12).
By
the
terms
thereof
Fraleigh
was
to
prepare
a
plan
of
development
for
the
land,
obtain
necessary
rezoning
and
if
at
the
end
of
that
period
Pendevco
chose
to
discontinue
its
arrangement
with
such
developer
it
might
do
so
but
on
the
terms
that
he
should
then
have
the
option
of
purchasing
such
land
at
$600,000.
However,
if
such
company
chose
to
continue
with
the
arrangement
the
land
was
to
be
conveyed
to
South
Shore
Estates
(Saltfleet)
Limited,
for
mortgages
back
in
the
sum
of
$600,000
less
any
amount
received
by
Pendevco
in
respect
of
any
part
of
the
lands
that
might
be
expropriated
in
the
meantime.
Paragraph
1
of
such
agreement
makes
it
clear
that
it
was
the
plan
of
all
parties
to
the
agreement
that
the
development
intended
was
to
be
of
high
density
construction
and
the
evidence
of
all
the
plaintiff’s
witnesses
who
testified
in
this
respect
was
that
it
was
their
intention
to
build
high
rise
apartments
to
be
held
by
the
plaintiff
to
produce
rental
income
for
themselves.
The
shareholders
Danbs
and
Crozier
testified
their
purpose
was
that
the
apartments
would
be
retained
by
the
group
to
provide
retirement
income.
Fraleigh
regarded
the
site
as
excellent
for
apartment
development
and
was
anxious
that
it
be
so
developed
that
he
might
have
the
washer
and
dryer
fees
from
the
various
buildings
as
well
as
his
share
of
the
rental.
From
all
the
evidence
I
am
convinced
that
at
the
date
of
this
agreement
all
parties
having
any
interest
in
the
development
fully
intended
that
the
development
of
such
lands
should
be
to
high
rise
rental
apartments
and
that
the
same
should
be
retained
by
the
plaintiff
company
to
provide
rental
income
for
the
shareholders.
None
of
the
parties
at
that
time
could
foresee
or
be
expected
to
anticipate
the
many
frustrating
problems
that
arose
through
the
following
years,
without
any
contributing
cause
on
their
part,
that
prevented
them
from
getting
on
with
such
development.
I
am
equally
convinced
that
at
such
time
such
parties
had
no
secondary
intention
to
resell
the
property
or
any
part
thereof
or
any
apartment
houses
built
thereon
or
to
build
houses
thereon
for
resale.
The
plaintiff
company
was
incorporated
pursuant
to
the
provision
of
paragraph
8
of
such
agreement
as
a
private
company.
In
September
1965
Fraleigh
engaged
Dr
Faludi’s
town
planning
consultants
to
prepare
a
complete
plan
of
development.
A
booklet
entitled
“South
Shore
Estates”
was
prepared
principally
for
the
information
of
the
Township
of
Saltfleet
council
and
the
Hamilton-Wentworth
Planning
area
board
to
whom
application
had
to
be
made
for
change
of
zoning
and
building
permits.
It
was
delivered
to
such
municipal
authorities
in
the
Spring
of
1966.
The
booklet
indicated
14
high
rise
apartment
buildings
ranging
from
7
to
24
stories
in
height
which
would
accommodate
3,082
dwelling
units
and
result
in
a
total
number
of
residents
in
the
development
in
excess
of
7,500
persons.
It
also
envisaged
2
churches,
a
school,
shopping
centre,
recreation
facilities
and
a
marina
with
over
2,700
feet
of
lake
frontage.
The
property
was
planned
as
a
self-contained
community
for
low
income
families
with
gatehouses
for
controlled
access
and
security.
The
shareholders
of
the
plaintiff
had
sufficient
funds
among
themselves
to
finance
the
cost
of
rezoning
and
installing
services
such
as
sewers.
They
anticipated
this
preliminary
work
would
cost
over
$500,000.
They
planned
that
Fraleigh
would
be
able
to
secure
mortgage
financing
for
the
construction
of
the
buildings
and
hoped
that
such
financing
might
be
confined
to
one
mortgage
company.
They
had
decided
not
to
subdivide
the
property.
Fraleigh
had
thought
there
would
be
no
problem
in
securing
a
favourable
recommendation
from
the
Hamilton-Wentworth
Planning
Area
Board
directed
to
the
Saltfleet
Township
Council
and
thereafter
they
would
only
require:
(a)
an
amendment
to
the
official
plan
to
permit
construction
of
a
shopping
centre
in
the
area:
(b)
an
amendment
to
zoning
By-Law
2175
to
permit
high
rise
apartments,
and
(c)
the
signing
of
a
development
agreement
with
the
municipality
to
provide
for
financial
and
servicing
obligations.
However
Mr
Murray
Pound,
the
director
of
planning
for
the
Hamilton-
Wentworth
Planning
Area
Board
advised
the
Saltfleet
council
against
such
Simple
procedure
and
advocated
that
a
subdivision
agreement
should
be
entered
into.
The
function
of
such
Board
was
only
advisory.
Problems
also
arose
with
the
council
in
respect
of
garbage
collection,
snow
removal,
policing
and
traffic
control.
On
June
8,
1966
such
council
approved
in
principle
the
zoning
changes.
In
January
1967
Pound
convinced
the
said
planning
board
that
the
official
plan
for
the
whole
of
Lakeshore
Neighbourhood
No
5
would
have
to
be
amended
so
as
to
provide
for
development
standards
for
the
whole
area.
This
was
done
but
delays
caused
the
matter
to
be
held
up
so
that
it
only
received
the
approval
of
the
Minister
of
Municipal
Affairs
on
May
14,1968.
The
necessary
zoning
by-law
which
permitted
the
construction
of
the
apartment
buildings
was
passed
by
the
council
of
the
township
of
Saltfleet
only
on
April
13,
1970
as
By-Law
No
2926.
It
was
approved
by
the
Ontario
Municipal
Board
on
December
7,
1971.
The
developers
had
hoped
that
such
zoning
by-law
would
be
passed
in
the
first
part
of
1967
and
as
a
result
of
the
many
delays
the
plaintiff
was
prevented
from
commencing
construction
of
such
apartments
for
over
a
period
of
three
years.
A
further
matter
that
caused
great
delay
was
the
signing
of
the
subdivision
agreement.
The
report
in
respect
thereof
being
technical
report
No
430
to
the
Hamilton-Wentworth
Planning
Area
Board
dated
January
14,
1970
but
the
Municipality
only
signed
the
subdivision
agreement
on
November
13,
1972.
During
the
time
that
the
plaintiff
was
waiting
for
the
zoning
by-law
to
be
finally
passed
(from
1967
to
the
Minister’s
approval
in
December
of
1971),
further
problems
arose
which
greatly
altered
the
cost
of
the
proposed
construction.
The
Municipality
imposed
capital
levies
on
apartment
construction
in
the
years
1968
and
1970
which
Fraleigh
testified
increased
the
cost
by
a
further
$1,100,000.
In
1969
the
Parks
Committee
of
the
Municipality
imposed
a
further
capital
levy.
By
the
time
the
zoning
by-law
was
finally
passed
in
1970,
mortgage
moneys
could
could
not
then
be
obtained
from
a
mortgagee
who
would
singly
make
the
advance.
By
agreement
date
of
January
17,
1967,
Pendevco
and
Fraleigh
entered
into
further
obligations
which
provided
that
the
sale
by
the
owner
to
the
plaintiff
herein
should
be
forthwith
completed
by
the
execution
of
the
usual
long
form
of
agreement
for
sale
at
the
price
of
$600,000
with
payment
thereof
spread
over
a
period
of
5
years.
It
also
provided
that
South
Shore
should
be
entitled
to
obtain
a
deed
to
any
part
of
the
said
lands
at
any
time
after
the
intitial
payment
of
$75,000
had
been
made,
upon
payment
of
$20,000
per
acre
and
any
amount
so
paid
should
be
credited
against
the
purchase
price
except
as
to
the
initial
down
payment.
By
such
agreement
the
developer
agreed
to
loan
South
Shore
the
sum
of
$75,000
and
in
default
of
so
doing
all
his
shares
in
South
Shore
should
be
forfeited
to
the
owner
Pendevco.
On
May
10,
1967,
the
amount
of
land
so
held
for
development
was
reduced
by
the
Provincial
Department
of
Highways
purchasing
about
8
acres
thereof
for
the
widening
of
the
Queen
Elizabeth
Way
and
in
addition
of
a
north
service
road
for
the
price
of
$85,000.
Pendevco,
Fraleigh
and
the
plaintiff
entered
into
a
further
agreement
dated
March
29,
1968.
By
its
terms
the
parties
acknowledged
that
the
said
agreements
of
September
1,
1965
and
January
17,
1967
had
expired
and
were
in
default
and
had
become
null
and
void.
Pendevco
then
agreed
to
grant
to
the
plaintiff
an
irrevocable
option
to
purchase
at
the
total
price
of
$515,000
the
balance
of
the
lands
then
remaining
consisted
of
58
acres
which
option
might
be
exercised
at
any
time
after
the
subdivision
plan
thereof
had
been
registered
but
not
later
than
April
1,
1970
and
its
exercise
was
dependent
on
Fraleigh
making
further
loans
to
the
plaintiff
owner.
It
also
provided
that
the
option
might
be
exercised
in
relation
to
parcels
containing
not
less
than
10
acres.
It
further
contained
a
covenant
on
the
part
of
Fraleigh
as
developer
to
proceed
immediately
with
registration
of
the
subdivision
plan
and
complete
re-zoning
so
that
construction
of
the
first
buildings
could
commence
at
the
earliest
possible
date.
It
also
directed
as
to
the
division
of
moneys
realized
by
the
purchaser
for
the
sale
or
development
of
the
said
lands
among
the
mortgager
thereon
and
the
shareholders.
The
option
referred
to
in
such
option
was
exercised
on
March
12,
1970
and
the
lands
were
conveyed
to
the
plaintiff
by
deed
dated
June
1,
1970.
In
April
of
1969
one
Saul
Kelner
made
an
unsolicited
offer
to
purchase
the
balance
of
the
property
for
the
sum
of
$1,832,400
but
the
same
was
not
accepted
by
the
plaintiff.
On
May
29,
1970,
the
plaintiff
made
an
application
to
the
Federal
government
through
Central
Mortgage
and
Housing
Corporation
to
obtain
from
it
funds
that
were
being
offered
by
such
government
to
assist
in
construction
of
low
cost
housing.
On
the
application
the
plaintiff
indicated
it
intended
building
2,228
suites.
Nothing
final
materialized
from
such
application.
In
July
of
1970,
Jesperson-Kay
Systems
Limtied
a
United
States
Company,
approached
the
plaintiff
about
purchasing
the
land
to
build
apartments
thereon.
In
a
letter
dated
July
3,
1970
from
Fraleigh
to
Jesperson-Kay
he
stated
that
South
Shore
was
prepared
to
sell
the
lands
for
$1,850,000.
An
agreement
for
sale
between
the
said
parties
dated
November
20,
1970,
was
signed
by
the
plaintiff
herein
but
not
by
the
proposed
purchaser.
The
price
set
therein
was
2
million
dollars.
This
proposed
sale
was
never
completed.
This
is
the
first
indication
in
the
evidence
of
any
intention
on
the
part
of
the
plaintiff
or
any
of
its
shareholders
to
sell
the
lands
rather
than
proceed
with
their
original
plans.
On
December
31,
1971,
an
agreement
was
entered
into
for
the
sale
of
such
property
to
one
Jack
Wallace,
a
real
estate
agent
who
had
acted
for
Jesperson-Kay
at
a
price
of
$1,975,000
but
this
sale
was
never
completed.
Thereafter
the
plaintiff
listed
the
lands
for
sale
and
eventually
entered
into
agreements
dated
October
3,
1972,
March
19,
1973
and
March
26,
1973
with
Dial
Development
Corporation
of
Omaha,
Nebraska
who
paid
$1,940,000
for
it.
Dial
bought
it
for
development
purposes
but
after
investigation
sold
it
for
$2,400,000.
Earlier
in
my
reasons
I
have
indicated
my
findings
as
to
the
intention
of
all
parties
having
any
itnerest
in
the
developement
of
such
lands
at
the
time
of
the
first
agreement
dated
September
1,
1965.
I
find
on
the
evidence
that
the
plaintiff
and
its
shareholders
and
all
such
other
parties
retained
those
same
intentions
and
as
well
had
no
secondary
intention
of
selling
the
same
or
any
part
thereof
at
the
time
of
such
second
and
third
agreements
dated
January
12th,
1967
and
March
29th,
1968
and
therefore
until
approximately
July
1,
1970
when
Fraleigh
gave
the
first
indication
of
intention
to
sell.
I
found
the
plaintiff’s
witnesses
to
be
truthful
and
credible
and
their
testimony
was
not
seriously
challenged
in
cross-examination.
I
have
no
hesitation
in
accepting
their
testimony.
Council
for
the
defendant
acknowledges
that
in
the
first
instance
there
was
no
primary
intention
on
the
part
of
the
plaintiff
or
those
instrumental
in
its
incorporation
and
management
to
obtain
the
land
for
the
purpose
of
resale
at
a
profit
either
before
or
after
apartment
buildings
were
erected
thereon.
I
think
all
the
evidence
including
the
agreement
of
September
1,
1965
between
Pendevco
and
Fraleigh
bear
this
out.
The
purpose
of
the
agreement
was
mainly
in
regard
to
the
arrangement
between
the
parties
associated
with
the
development
and
the
rights
of
one
or
more
shareholders
to
carry
on
with
the
development
if
others
did
not
wish
to
continue
further.
It
also
made
provision
for
the
incorporation
of
the
plaintiff
company
to
take
over
ownership
of
the
land
and
do
the
contemplated
construction
thereon.
I
find
nothing
in
such
agreement
that
is
inconsistent
with
the
declared
intention
of
the
various
parties
then
interested
in
the
project.
Paragraph
13
thereof
provides
for
the
right
of
the
developer,
or
the
shareholders
of
Pendevco,
the
then
owner,
or
any
of
them,
to
have
the
first
right
of
refusal
to
acquire
such
lands
or
part
thereof
if
the
plaintiff
might
sell
at
any
time.
Counsel
for
the
defendant
contends
such
paragraph
is
evidence
of
a
secondary
intention
to
sell
at
a
profit
at
some
later
date.
In
a
venture
such
as
that
proposed
by
the
interested
parties
herein
it
is
impossible
to
foresee
all
the
events
that
may
occur
in
relation
to
it
in
the
future.
It
is
wise
to
attempt
to
make
some
provision
for
all
possible
situations
that
may
arise.
In
my
opinion
the
insertion
in
the
agreement
of
provisions
such
as
those
contained
in
paragraph
13
is
no
proof
of
an
existing
intention
to
sell
when
an
opportune
time
arrives.
Such
paragraph
should
only
be
regarded
as
a
provision
to
determine
the
right
of
the
parties
among
themselves
if
such
situation
should
arise
and
is
no
proof
that
any
of
such
parties
at
the
time
of
acquisition
had
any
intention
of
selling
at
a
later
date.
Counsel
for
the
defendant
contends
that
at
the
time
of
acquisition
and
thereafter
the
parties
had
a
secondary
intention
of
selling
the
premises
at
a
profit
if
they
should
find
themselves
unable
to
complete
the
project
and
retain
it
as
a
rent
producing
asset
for
themselves.
He
compares
it
to
the
case
of
Regal
Heights
Limited
v
MNR,
[1960]
SCR
902;
[1960]
CTC
384;
60
DTC
1270.
I
have
not
overlooked
the
fact
that
the
4
shareholders
of
Pendevco
were
contractors
who,
prior
thereto,
were
engaged
in
the
business
of
buying
land
and
construction
homes
thereon
for
the
purpose
of
resale
and
that
by
reason
thereof
a
heavy
onus
lies
on
the
plaintiff
to
establish
its
contention
that
the
plaintiff’s
management
and
shareholders
intended
to
retain
the
apartment
building
to
be
erected
as
a
rent
producing
asset
for
themselves
and
that
the
question
of
resale
by
then
at
a
profit,
if
the
primary
intention
could
not
be
accomplished,
formed
no
part
of
their
reason
for
purchasing.
However,
I
am
convinced
that
this
was
a
distinct
and
different
enterprise
on
their
part
which
did
not
include
at
that
time
or
until
July
1970
any
intention
of
resale
of
any
part
of
such
project
or
any
part
thereof.
The
continued
compliance
by
the
plaintiff
with
the
various
demands
of
the
local
municipality
and
the
Hamilton-Wentworth
Planning
Board
from
1966
to
July
1970
is
some
indication
of
their
intention
to
erect
the
apartment
houses
and
retain
them
as
indicated.
The
parties
had
done
all
they
reasonably
could
to
meet
the
new
requirements
which
were
established
through
the
years
but
were
eventually
frustrated.
The
agreement
between
Pendevco
and
Fraleigh
dated
January
17,
1967,
is
more
than
an
option.
As
I
read
it
the
plaintiff
South
Shore
was
entitled
to
a
deed
of
the
land
upon
paying
the
amount
owing
by
it
and
Fraleigh
was
to
advance
to
it
these
sums
as
they
were
required.
On
the
same
day
an
agreement
of
sale
was
also
entered
into
between
Pendevco
and
South
Shore
setting
out
the
same
terms
for
payment
of
the
purchase
price.
For
these
reasons
I
find
that
the
sale
of
the
lands
in
question
was
a
disposal
of
a
Capital
asset.
The
taxpayer’s
appeal
should
therefore
be
allowed
with
costs
and
the
assessment
referred
back
to
the
Minister
for
reassessment
on
the
basis
that
the
proceeds
from
the
sale
of
such
lands
was
realization
of
a
Capital
asset.
Email this Content