Cohen v. The Queen, 78 DTC 6099, [1978] CTC 63 (FCTD), aff'd 80 DTC 6250, [1980] CTC 318 (FCA)

Décary, J:—The question at issue in this action, being an appeal from a decision of the Tax Review Board, is whether or not the owners of a piece of land, upon part of which has been built a revenueproducing property were, for income tax purposes, deriving a profit from a business when they sold part of the land.

The plaintiff, Mr Cohen, and his partner, Mr Zalkind, to whom, by consent, this judgment shall apply, have been building housing for rental from 1940 up to 1953. All the apartment houses have been kept.

The object matter of this action is part of the remaining land on Bourret Street, Côte des Neiges, Montreal, that has been sold after four apartment buildings had been built on 15% of the land. Like in their other purchases, the partners claimed they had not been able to buy only the land required for the apartment building and services; they had to buy the whole lot for sale or not buy at all; with that constant process they could not not acquire surplus land; on each piece of land thus purchased one or many apartment buildings were erected; the partners may have been the most active developer-owners of apartment buildings in the Côte des Neiges and Snowdon area.

The income tax issue seems restricted to the years 1965 and 1966, for which years defendant has considered that the profit on the sale of the land on Bourret was income from a business for an amount of $29,491.50 for 1965 and $76,077.25 for 1966 but the statement of claim refers in addition to the years 1967 and 1968.

There were, previous to 1965, certain sales of part of the land on Bourret Street. The whole area of the land is not very huge: 138,000 square feet. Out of these transactions two were a straight exchange and one was a sale for the purpose of building a synagogue. The plaintiff’s partner, Mr Zalkind, being a prominent member of that congregation, the land could not not have been sold. That leaves four transactions from 1953 to 1965 on the Bourret land that appear to have more indicia of business transactions. There were other sales of land in other locations out of the eight parcels of land upon which apartment houses were built.

Turning now to the facts, I do find: the land, the profit upon which IS in issue, was kept from 1953 to 1965, that is, a period of 13 years; such a length of time does not make the land appear as stock-in-trade or inventory, but rather as investment; it is so if only the 1965 sale on Bourret is looked at and the other sales on that land and elsewhere are ignored; indeed, as per Exhibit R-1, Annex A, plaintiff and his partner have sold quite a few parcels of land that were not required to build upon; from May 1, 1961 to May 1963, nine parcels of excess land were sold; the gross profit thereon was $318,780; these sales concern two areas, Rosemont on one hand and Jeanne Mance and Chabanel on the other; the net profits of these sales were subject to income tax, plaintiff and his partner having agreed to be taxed on these profits inasmuch as they were not to be taxed on the profits derived from the Bourret land; during the year 1965, three parcels of the land held in Rosemont were sold at a gross profit of $45,948.06; they also sold 64,990 square feet out of 138,000 square feet of the Bourret land at a gross profit of $211,217.50; that latter profit was held to be capital gain; as far as I may reconcile, plaintiff and his partner entered into twelve sales that generated a gross profit of $576,035.

Plaintiff and his partner have never sold any of the apartment houses they have built; the total original cost of the buildings owned is $4,400,000; these sources of income gave in gross rentals in 1965, $440,000, in 1966, $452,000, in 1967, $635,000 and in 1968, $650,000; the apartment houses had over 1,000 units for rental.

Called as a witness, the Honourable Senator Lazarus Phillips, QC, who represented plaintiff and his partner in the 1961-1965 matter, said that it had then been agreed to with the Minister of National Revenue that plaintiff and Mr Zalkind were to be taxed on certain land profits but not on land profits derived from the Bourret property. The change of heart on the part of the Minister in 1967 is not by any means a common occurrence. Questioned by the Court, Mr Phillips said that he could not recall, in his long career as a tax practitioner, more than a few similar instances.

Mr Klein, counsel for plaintiff, contended that defendant was estopped from reassessing in view of that agreement because the estoppel related to facts.

In the present case, the transactions of plaintiff and his partner were reviewed for the years 1960 to 1965. For the year 1965 an amount of $22,974.03 was held to be income and for each the plaintiff and his partner an amount of half a profit of $211,217.50, that is $105,603.75 was held to be capital. Plaintiff and his partner each agreed to those assessments: they did not lodge any objection. To agree with the view of counsel for plaintiff, I should have to conclude that the 1965 assessment and the previous ones were a contract between the Minister and the taxpayer and a valid one at that. To so reason, in my view, is to forget the power granted the Minister by subsection 46(4) of the Act, which reads:

46. (4) The Minister may at any time assess tax, interest or penalties under this Part or notify in writing any person by whom a return of income for a taxation year has been filed that no tax is payable for the taxation year, and may

(a) at any time, if the taxpayer or person filing the return

(i) has made any misrepresentation or committed any fraud in filing the return or in supplying any information under this Act, or

(ii) has filed with the Minister a waiver in prescribed form within 4 years from the day of mailing a notice of an original assessment or of a notification that no tax is payable for a taxation year, and

(b) within 4 years from the day referred to in subparagraph (ii) of paragraph (a), in any other case,

re-assess or make additional assessments, or assess tax, interest or penalties under this Part, as the circumstances require.

In the present instance plaintiff and his partner had been held exempt from tax on their profit on the Bourret land by an assessment notice which is dated February 7, 1967 and the same profit was held to be taxable by the assessment issued within the 4-year delay, on July 2, 1970. It is my opinion that it is not because the taxpayer has agreed as to the nature of a profit that there is less of an assessment than if he had not agreed. It is still taxation by statute, not by contract and it is the Act that governs, not any kind of arrangement, and in the present instance, the Minister had the right to reassess by virtue of subsection 46(4) of the Act, whatever arrangement may have been arrived at in 1967. I do not feel it necessary to review the cases on the subject matter of estoppel.

Now let us examine the facts and ascertain as best possible the nature of the profit of $105,603.75 that each the plaintiff and Mr Zalkind realized in 1965.

Looking at the course of conduct of plaintiff and his partner from their first association in 1929 for the manufacturing of shoes, and then for their holding of income-producing apartment houses, one does not find as many badges of dealers in real estate as badges of developer-owners. As plaintiff described himself, he is a developerowner. The figure of over 1,000 apartment units strikes me as being the result of the conduct of an investor, not that of a dealer in land, but nevertheless, plaintiff and his partner did deal in land even if they were sort of forced to because they had to buy unneeded land.

I do not for one moment believe that it is realistic to expect a developer to be able to buy exactly the number of square feet he needs for the building and its services. That, at times, plaintiff and his partner have bought land that was not needed, but that they had to buy, does not per se render them dealers in land, because their intention was never to buy in order to sell, though their intention, corroborated by their course of conduct, may change with the years, and so the character of the land.

The land they sold had been held some 13 years. That in itself, if no regard is given to the course of conduct nor to the number of sales, is not an indication that it is an item of inventory or stock-in- trade but is, rather, an indication of a capital item. Furthermore, plaintiff said that his partner, due to his old age, did not want to build anything else on Bourret and that, in fact, is the essential reason why a sale occurred. Still, one cannot not look at the course of conduct for the excess land and at the number of sales.

Considering their course of conduct, one has to admit that they have been mainly investors in income-producing property, being apartment houses; that they helped developing districts of Montreal by building apartment houses; that they could not build apartment houses without buying land; that they could not always acquire land of the dimension needed; that they had to buy unneeded land in order to be able to build; that, one day, they could have to dispose of excess land. They were investors, firstly, in apartment houses and by way of consequence, in view of the excess land, they had to dispose of that excess; they could not not try to turn that unneeded vacant land into profit.

The fact that 15% of the area of the land is used to build apartment houses to be held and which are held as capital assets being a source of income through rentals does not imprint the remaining 85% of the land with the same character of capital asset unless it be intended to be used and it was used effectively as an adjunct to the building for the benefit and enjoyment, one way or the other, of the tenants. There is nothing in evidence establishing that the land was intended to be an adjunct and that it was an adjunct to the apartment houses for the benefit and enjoyment of the tenants.

In the matter of Irrigation Industries Ltd v MNR, [1962] SCR 346; [1962] CTC 215; 62 DTC 1131, the Supreme Court has decided that a non-income-producing item, ie non-dividend-paying mining shares, could be the object of an investment as well as an income-producing item. At page 351 [219, 1133], we read these remarks of Martland, J, who wrote the opinion of the majority of the Court:

I cannot agree that the question as to whether or not an isolated transaction in securities is to constitute an adventure in the nature of trade can be determined solely upon that basis. In my opinion, a person who puts money into a business enterprise by the purchase of the shares of a company on an isolated occasion, and not as a part of his regular business, cannot be said to have engaged in an adventure in the nature of trade merely because the purchase was speculative in that, at that time, he did not intend to hold the shares indefinitely, but intended, if possible, to sell them at a profit as soon as he reasonably could.

The criteria of isolated transaction and of not being part of the regular business are not satisfied by plaintiff and his partner because there were many instances of sales of unneeded land. That, in their case, was ancillary or accessory to the carrying on of the business of renting units of apartment houses as the excess land was not intended to be and was not in fact used as an adjunct to the apartment houses for the benefit and enjoyment of the tenants.

Before the case of Irrigation Industries Ltd (supra), the Supreme Court in the matter of Sutton Lumber & Trading Co Ltd v MNR, [1953] 2 SCR 77; [1953] CTC 237; 53 DTC 1158, had applied the test of the course of conduct. That case, though it concerns a company, is also applicable to the course of conduct of an individual. At page 93 [253, 1167], we read these remarks of Locke, J, who wrote the unanimous judgment of the Court:

It may be noted that the memorandum of the appellant, while including the power to sell or dispose of timber properties, to deal in timber licenses is not one of the objects stated as it was in the Anderson case. Had it in fact included such an object, the evidence in this case demonstrated that the company at no time carried on or intended to carry on any such business. Unlike that case, in the present matter all the available evidence as to the activities carried on or intended to be carried on by the company in the fifty years prior to the time of the trial of this action was given or tendered by the appellant. The decision in that case does not, in my opinion, affect this matter.

I should think that that excerpt allows one to say that the course of conduct has priority over the objects of a company, which are in fact its avowed intention, and also over the intention of an individual.

In the case at hand, plaintiff and his partner used only 15% of the area to build apartment houses as a source of income; maybe they did not have, at the time of purchase, the intention of selling any part of the excess land, that is 85% of it, but the facts show that during a 10-year period, 1955 to 1965, eight sales of parcels of that very land took place and that these eight sales are apart from the parcels sold on the other properties.

In my view, the intention and the course of conduct has not changed as to the holding of investments, being apartment houses, for not one has yet been sold, but the intention and the course of conduct concerning the excess land has evolved from investment or capital assets to inventory or stock-in-trade by being sold by parcels, on the Bourret land and on the other lands and by not being used for the benefit and enjoyment of tenants.

It not being permitted to look only at the sale at issue but having to scrutinize not so much the intention as the way that intention was carried out, that is, the course of conduct and, if, effectively that course of conduct was one of investor in the 85% of the land remaining after building the apartment houses, I cannot avoid coming to the conclusion that in view of the number of sales in the past and in view of the fact that the 85% of the land was never used as an adjunct to the apartment houses for the benefit and enjoyment of the tenants, the length of time the land has been held ceases being important when we see the other sales in the same land that preceded the 1965 sale. The profits of $29,491.50 and $76,077.25 made by each the plaintiff and Mr Zalkind are properly included in computing their income for the years 1965 and 1966.

The action is dismissed with costs against plaintiff.