The Queen v. Bassani, 85 DTC 5232, [1985] 1 CTC 314 (FCTD)

Reed, J:—This is an appeal by the plaintiff from a decision of the Tax Review Board holding that certain property purchased by the defendant in 1968 had been purchased as a capital acquisition and not as “an adventure in the nature of trade”. As such, the gain of $10,293.73 which accrued to the defendant for the 1973 taxtion year would be taxed as a capital gain (sections 3(b), 38-40 of the Income Tax Act, SC 1970-71-72, c 63, as amended) rather than as income from a business. (Refer: sections 3(a), 9 and 248(1) of the Act.)

The property in question was a 29 Z’-acre parcel of undeveloped raw land situated just outside the city limits of Edmonton. The defendant together with four other individuals acquired an undivided one-fifth interest in the land. The purchase price was $50,000, of which the defendant’s share was $4,000 immediately and $1,000 a year plus seven per cent interest. The defendant did not borrow funds to finance this acquisition; it was a cash outlay for him. The land was sold in 1973 for $191,750.

The issue is strictly one of credibility. Mr Bassani gave unequivocal and very credible evidence that his sole intention in purchasing a share in the property in 1968 had been to acquire a five- or six-acre parcel of land, which he could use at some undefined time in the future, to accommodate the expansion of his towing business. The defendant runs a towing service in the city of Edmonton, which in 1968 operated out of a one-acre lot near the centre of the city and a two-and- one-half acre rented lot in the west end. The business was such that it required space for the storage of 400 to 600 cars at a time.

Save for one factor, all the evidence given in this case is consistent with the taxpayer’s expressed intention. The property was in the same area of the city in which the taxpayer was already operating his towing business; on initial inspection the property appeared suitable for the taxpayer’s purposes (subsequently it was realized that a dust problem existed because of the proximity of a cement company); the taxpayer was not in the business of speculating in land; other business interests which he held were of the nature of acquisition for investment purposes; no active steps were taken by any of the five owners to sell the land; the sale in 1973 was in response to an unsolicited offer. Subsequent to the 1973 sale the taxpayer purchased another lot, nine blocks distant from the subject property and of five acres in extent, for the use of his business.

The only factor that casts doubt on the taxpayer’s expressed intention is that he did not discuss the potential subdivision of the property with the other four owners before purchasing the property; he had no understanding with them as to how the property would be divided; he had no assurance that he would obtain a portion of the land with sufficient road frontage to accommodate his towing business; there was no discussion as to whether his proposed use of the land was compatible with that of the other members of the group. At best this demonstrates a certain degree of carelessness as to whether his expressed intention could be accomplished.

The plaintiff argued that the credibility of the defendant’s expressed intention was also in doubt because he did not check zoning regulations prior to purchase, to ensure he could run a towing business from the site. This was satisfactorily explained by Mr Bassani. He indicated that he never had any doubt about zoning regulations because a transport company, Adby Transport, was located across the road from the subject property, and the subject property was being held, at the time of purchase, by Shell Oil Co for possible use as a service station.

The plaintiff also argued that the credibility of the defendant’s testimony was suspect because, after purchase, no immediate action was taken to subdivide the property. This, however, is not inconsistent with the taxpayer’s expressed intention not to use the property immediately, but to acquire it for future, not immediate expansion.

Equally, the defendant’s failure to attempt to sell his share of the property immediately on becoming aware in 1970 that the dust problem rendered it unsuitable for his business purposes does not conflict with what the defendant states to have been his intention at the time of purchase. The defendant explained that retention of the property, in 1970, was not costing him a great deal; he didn’t need the five to six acres immediately, and there was always the possibility that the government would do something about the dust problem. In addition of course, he was only one of five co-owners.

To return to the evidence surrounding the crucial aspect of the case, the defendant was first introduced to the proposal to purchase the property by a Mr Check, a long time friend of the family who was in the real estate business. (The defendant had previously indicated to this friend that he was interested in a parcel of land in the area in question for the future expansion of his towing business.) The defendant never met with the other members of the group but was told by Mr Check that they were all to take a piece of the property. The co-purchasers were: a Mr Kruger, who the defendant knew to be in the plumbing business; a Mr Larsen, who the defendant knew to be in the office furniture/in- terior design business; Pantel Holdings, a company the taxpayer knew to be in the coffee and tea business; and London Properties which was in effect Mr Check himself who, as noted above, was in the real estate business. Although Mr Bassani did not discuss the purchase with the others, nevertheless, he says he knew he was going to end up with five or six acres and he “thinks the others had the same intention”. No evidence was called from the other co-owners, so there is no evidence concerning their actual intentions.

It is clear that a gain made by one taxpayer in a group purchase of property may not be taxable as business income while the profits of the other members may be.

The different results follow from the different intentions of the different taxpayers at the time of the acquisition of the property.

That intention is a question of fact to be determined after considering all the evidence.

The Queen v Douglas Lloyd Anderson, et al, [1973] CTC 606 at 615; 73 DTC 5444 at 5451.

As noted above, the question in this case is solely one of credibility — are the statements of Mr Bassani with respect to his intentions at the time of purchase to be believed. It is my conclusion that Mr Bassani’s intention in acquiring the property was, as he asserts, to allow for future expansion of his business. His oral evidence is forcefully buttressed by the fact that he subsequently bought what might be called a replacement property, of the same size and in the same vicinity as the subject property. Also, that property (barring the dust problem which was unknown at the time of acquisition) was obviously suitable for the type of business he contemplated carrying on at the site. There was a lack of prudence, in not seeking prior to purchase, firmer arrangements respecting ultimate subdivision of the property. But on balance I do not think this undercuts the validity of his oral evidence. I attribute his lack of care with respect to future implementation of his plan to the fact that he did not intend to use the property immediately, but was acquiring it for expansion at some indefinite time in the future. Since the need to relocate his business was not an immediate problem the defendant was willing to leave the question of actual subdivision for future resolution. Also, there is no doubt that he was relying to a considerable extent on the representations of Mr Check.

Having concluded that the defendant’s primary intention in acquiring the property was as he asserts, the question arises as to whether there existed a secondary intention which might make the profit taxable as business income in the defendant’s hands. Counsel for the defendant contends that there is no burden on the taxpayer to disprove secondary intention because it has not been pleaded as an assumption by the Minister. (See Kit-Win Holdings (1973) Limited v The Queen, [1981] CTC 43 at 59; 81 DTC 5030 at 5042 (FCTD); Hiwako Investments Limited v The Queen, [1978] CTC 378 at 383; 78 DTC 6281 at 6284- 6285 (FCA); Woodbine Developments Ltd v The Queen, [1984] CTC 616 at 624; 84 DTC 6556 at 6563 (FCTD).

The relevant pleading is paragraph 5(d) of the statement of claim:

On the basis of, inter alia, the foregoing the Minister of National Revenue concluded that the land had not in fact been acquired for use and development but rather with the speculative intent to turn the same to account for profit by sale, which intent was carried out.

Counsel for the plaintiff argues that the Minister’s assumptions must be read as a whole, and that within that context he has pleaded secondary intention in a sufficient manner to cast the burden of proof on the defendant. Alternately, it is argued that the Minister has met the burden of proof if it rests on him and has proved secondary intention. I was referred to Mahoney, J’s decision in Progress Management Co Ltd v The Queen, [1975] CTC 244 at 248-249: 75 DTC 5174 at 5177 and its reference to the decision in Racine et al. v MNR, [1965] CTC 150 at 159; 65 DTC 5098 at 5103 for the relevant definition of secondary intention:

. . . the purchaser must have in his mind, at the moment of the purchase, the possibility of reselling as an operating motivation for the acquisition; . . .

Counsel for the plaintiff also argued that where there is really no distinction between primary and secondary intention and therefore the plaintiffs pleading is adequate to encompass an intention the defendant might have had to turn the property to a profit, had it not been possible to use it for his business purposes. For the proposition that primary and secondary intentions were really one, he cited the decision in Birmount Holdings Ltd v The Queen, [1978] CTC 358 at 365; 78 DTC 6254 at 6258 (FCA):

The authorities make it clear that the Court was required to consider the relevant facts as of the time of purchase together with subsequent events together with the statement by Mr Mentzelopoulos as to the intention of the appellant at the time of acquisition. If, after considering all these matters, the Court concludes that the possibility of turning the property to account for profit in any way which might present itself as convenient or expedient, including re-sale, was a major motivating factor, or that an investment intention was not the only motivating factor at time of acquisition, then the Court must find any profit ensuing from a resulting sale to be taxable as an adventure in the nature of trade.

I do not interpret the Court of Appeal decision in Birmount as removing from the Crown the necessity of pleading secondary intention expressly when they wish to shift the burden of proof to the taxpayer. In addition, I cannot interpret the assumptions pleaded by the Minister as containing an express allegation of secondary intention.* [1] Thus I accept the arguments of counsel for the defendant that in this case the onus remains with the Minister.

On the basis of the evidence, that onus has clearly not been met. The defendant’s evidence was that his sole intention at the time of acquisition was to purchase the property to allow for the expansion of his business. As noted above, I believe this evidence. He indicated that, of course, he expected property values to rise and that the land, when sold in the future, would be sold at a profit. This is no more than the common expectation of everyone in today’s economic climate. But, there is no evidence that the thought of resale at a profit was an “operating motivation’’ for the purchase by the defendant of the property.

Accordingly, the appeal will be dismissed.

Appeal dismissed.