Witten v. The Queen, 91 DTC 5041, [1991] 1 CTC 139 (FCTD)

Jerome, A.C.J.:—This action by way of appeal from a judgment of the Tax Court of Canada dated March 27, 1986, [[1986] 1 C.T.C. 2385; 86 D.T.C. 1312] came on for hearing at Edmonton, Alberta on June 21, 1990. At issue is whether profits from the disposition of a property held by the plaintiff, as a partner in a partnership called Circle Ten (the "partnership" or “Circle Ten"), are to be characterized as income or capital gain. On June 21, 1990, I allowed the plaintiff's appeal for reasons given orally and indicated that these written reasons would follow.

The relevant facts are as follows. On September 24, 1956, ten young couples, including the plaintiff and his wife, formed the partnership known as Circle Ten with the stated objectives:

1. To gather for a social evening as often as is decided by a majority of those members entitled to vote.

2. To accumulate funds for profitable investments.

The initial members of Circle Ten were:

Mr. and Mrs. Lawrence Rollingher

Mr. and Mrs. Milton Sorokin

Mr. and Mrs. Patrick Greene

Mr. and Mrs. Norman Witten

Mr. and Mrs. Henry Brezer

Mr. and Mrs. Hymie Klein

Mr. and Mrs. Louis Lieberman

Mr. and Mrs. Hymie Lieberman

Dr. and Mrs. Robert Margolis

Mr. and Mrs. Shimon Laskin

Prior to 1959, Mr. and Mrs. Greene transferred their interest in the partnership to the remaining members and in May, 1964, Mr. and Mrs. Hymie Lieberman transferred their interest to the remaining partners but acquired a one-half share of the interest of Mr. and Mrs. Louis Lieberman. At all relevant times, therefore, there were seven couples with a one-eighth interest and two with a one-sixteenth interest.

The partnership’s constitution provided that the maximum number of members shall be ten married couples, that the couples should meet weekly, and that each male member would contribute $5/week (in 1959 it was increased to $10) regardless of whether a meeting was held. The funds were deposited in a trust account and when an amount of $500 was accumulated in the fund, it was converted into a revenue-bearing investment. Initially, the funds were invested in shares. The members later looked for a commercial or apartment building from which they could receive rental income. One project involving a purchase and lease of land to Burger Baron was turned down by the members at a special meeting on September 14, 1958 as being too speculative.

The members later became aware of a farm property (the "property") containing 42.16 acres, but they were inexperienced in real estate and therefore sought the advice of an elderly friend, Dr. Louis Albert Miller. Dr. Miller ultimately recommended the purchase of the property and agreed to participate to assist the members who felt that it was beyond their means. The property was purchased on November 23, 1959 in the name of Norman L. Witten. A declaration of trust, dated January 14, 1960, provided that:

. . .. Norman L. Witten holds the said land, as Purchaser, in trust for the following parties in the following proportions, namely:

(a) Circle Ten partnership an undivided fifty (50%) per cent interest, ...

(b) Dr. Louis Albert Miller syndicate an undivided fifty (50%) per cent interest,

The property has been held from 1959 to the present and has never been advertised for sale. On August 28, 1975, the Canadian National Railway Company CCNR") filed an expropriation plan with respect to a1.93-acre portion of the property. On January 21, 1977, a settlement was reached for a total price of $54,064.50, of which each one-eighth partner in Circle Ten was entitled to $3,379 (" expropriation one”). A further expropriation of a 16.64 acre portion of the lands, for compensation of $782,080, was settled in 1977 for which each one-eighth partner of Circle Ten was entitled to $48,880 (expropriation two"). The total compensation in 1977 with respect to expropriation one and expropriation two for each one-eighth partner was approximately $52,259.

In 1977, the City of Edmonton advised Circle Ten that it required 10.94 acres for a planned roadway. Negotiations continued until early 1979 when Circle Ten finally agreed to sell a 10.94 acre portion of the property to the City of Edmonton for $932,635 (the "1979 sale”). $58,290 was thus attributable to each one-eighth partner of Circle Ten.

The plaintiff filed his income tax returns for 1977 and 1979 and reported the proceeds from expropriation one, expropriation two and the 1979 sale as capital gains and the Minister reassessed them as gains on account of income. The plaintiff served notices of objection in respect of each of the 1977 and 1979 taxation years on May 27, 1982 and by notice of confirmation dated January 28, 1983, the Minister confirmed the reassessments. The plaintiff appealed the reassessments to the Tax Court of Canada and by judgment dated March 27, 1986, the Tax Court dismissed the plaintiff's appeal.

The Minister's position is summarized in paragraph 14 of the Defence filed in this action:

14. The Defendant submits that he correctly determined the profits upon expropriations and sale of portions of the said lands in the Plaintiff's 1977 and 1979 taxation years to be on income account in that a major motivating factor, if not the sole motivating factor for the Appellant at the time of acquiring his interest in the said lands was the possibility of turning the said lands to account by re-sale at a profit in the future and that the Plaintiff was thereby engaged, ab initio, in a business or an adventure in the nature of trade, as those terms have been statutorily and judicially defined.

This pleading accurately expresses the Minister's obligation under the law, as I understand it. There must be more than a sale and a profit and there must be more than the mere possibility of a sale at a profit in the mind of the taxpayer when he acquired the property. My colleagues have capsulized these principles in recent decisions. Mr. Justice Martin of the Federal Court-Trial Division recently held in Grouchy v. Canada, [1990] 1 C.T.C. 375; 90 D.T.C. 6267 at 378 (D.T.C. 6270):

The fact that a taxpayer admits at the time he acquired the property he knew that he would resell it immediately after the acquisition if he were offered a sufficiently high price would not of itself change the transaction from a capital one to an adventure in the nature of trade.

He relied upon the comments of Noël, J. (as he then was) in Racine v. M.N.R., [1965] 2 Ex. C.R. 338; [1965] C.T.C. 150; 65 D.T.C. 5098, which were approved by Mr. Justice Walsh of this Court in Pierce Investment Corp. v. M.N.R., [1974] C.T.C. 825; 74 D.T.C. 6608 at 831 (D.T.C. 6612):

It is not, in fact sufficient to find merely that if a purchaser had stopped to think at the moment of the purchase, he would be obliged to admit that if at the conclusion of the purchase an attractive offer were made to him he would resell it,for every person buying a house for his family, a painting for his house, machinery for his business or a building for his factory would be obliged to admit, if this person were honest and if the transaction were not based exclusively on a sentimental attachment, that if he were offered a sufficiently high price a moment after the purchase, he would resell. Thus, it appears that the fact alone that a person buying a property with the aim of using it as capital could be induced to resell it if a sufficiently high price were offered to him, is not sufficient to change an acquisition of capital into an adventure in the nature of trade. In fact, this is nat what must be understood by a "secondary intention” if one wants to utilize this term.

[Emphasis added.]

I think the most appropriate expression of the principle which governs this dispute was set out by Mr. Justice Noël in Racine, supra, at page 156 (D.T.C. 5103):

[Translation]

To give to a transaction which involves the acquisition of capital the double character of also being at the same time an adventure in the nature of trade, the purchaser must have in his mind, at the moment of the purchase, the possibility of reselling as an operating motivation for the acquisition; that is to say that he must have had in mind that upon a certain type of circumstance arising he had hopes of being able to resell it at a profit instead of using the thing purchased for purposes of capital. Generally speaking, a decision that such a motivation exists will have to be based on inferences flowing from circumstances surrounding the transaction rather than on direct evidence of what the purchaser had in mind.

[Emphasis added.]

The Minister will often impute an intention to a taxpayer as a result of a sale. Where a taxpayer acquires a property with the stated intention of holding it for the long term but sells it soon after, the Minister acts on the assumption that resale was always the intention and puts the taxpayer to the burden of proving that the sale was in pursuit of a secondary intention. Similarly, where a taxpayer who has traded frequently in real estate acquires a property for personal use and resells it, the Minister will act upon the assumption that the transaction was just one more in the real estate business and put the taxpayer to the burden of proving otherwise. Here, however, neither of those factors is in play. There is no evidence that the members of this partnership, either individually or collectively, ever traded in real estate at the time of the acquisition, and the first disposition of any property was not by a voluntary sale, but by expropriation that did not occur until 1977, nearly 20 years after the acquisition.

In addition to an agreed statement of facts there were three witnesses on behalf of the plaintiff, all members of the Circle Ten partnership, Norman Witten, the plaintiff, Dr. Margolis a dentist and Mrs. Viola Klein, widow of Hymie Klein who died in 1977. They were credible witnesses and 1 have no reason to disbelieve any of their testimony.

The formation of a club or partnership like Circle Ten is not at all uncommon. Across Canada such clubs are regularly formed for investment purposes, for social purposes or for both. Very often the idea develops to put a couple of dollars aside and do something with it. In some cases, it will be used for entertainment, in some the money is returned to the members and in others, as in this case, it is used as a form of investment. The plaintiff maintains that the lands were acquired as a long-term investment but he acknowledges that a future sale was certainly a possibility, provided the price was right. I would consider it unreasonable had he maintained otherwise, but that doesn't convince me that one eventuality was more dominant or more prominent in their minds than another. Why then should I conclude that the property was intended to be resold when it has not been, any more than I should conclude that it was intended to be developed when it has not been, or that it was intended to be rezoned when it has not been, except by the city, or that it was intended to be subdivided for the members when it has not been?

I also find that the formation of ten young couples into a partnership for any kind of acquisition is, by its very nature, more consistent with long-term than short-term ventures. The partnership never sold the property, still has it, has not advertised it or solicited offers in any way, rejected more than one unsolicited offer, and only released parts of it through expropriation or the threat of it. The plaintiff's whole course of conduct supports the conclusion that the property was purchased as an investment. The property was acquired as a longterm asset, the conduct of the members of Circle Ten has been consistent wit an investment motive, and the dispositions that have occurred to date do not change that intent. The objective facts are, on balance, more consistent with the taxpayer's stated intention than with the Minister's assumptions.

Conclusion

For all these reasons, I am satisfied that the taxpayer has met the onus of destroying the Minister's assumptions. I find that the Minister's conclusion was wrong. The transactions in fact concerned property acquired with the intention of a long-term holding. The expropriation transactions were unusual events. There is nothing in the evidence to persuade me that resale at a profit was ever more than one of several possibilities neither more likely nor less likely than any of the others, not dominant and certainly, not as Mr. Justice Noël describes it, an "operating motivation."

The profits arising from the expropriations in 1977 and the 1979 sale must therefore be considered to be a capital gain.

Accordingly, on June 21, 1990, the appeal was allowed with costs.

Appeal allowed.