H. Fine and Sons Ltd. v. The Queen, 84 DTC 6520, [1984] CTC 500 (FCTD)

McNair, J:—This is an appeal by the taxpayer from a decision of the Tax Review Board dismissing an earlier appeal from an assessment of income tax for the 1973 taxation year.

The issue is whether a gain of $140,092.86 realized on the sale in 1973 of the westerly parcel of the taxpayer’s business property is attributable to capital account or income account. The Minister assessed it as income.

In 1921 Hyman Fine came out from Lithuania and started a fruit and produce business on George Street in Ottawa. The business grew and prospered over the years. The founder’s three sons eventually became partners in the business. Moves to other locations were made as the business grew and circumstances required.

In 1951, after several previous moves, the plaintiff relocated its business on property acquired on Mann Avenue. One reason was that the property afforded access to a railway siding. During these years, the plaintiff depended on the railway to supply its fruit and produce. In 1955, the plaintiff learned that the railway spur for the Mann Avenue site was to be removed. Hyman Fine felt that the business would require at least ten acres of land with a railway siding facility. This led the plaintiff to purchase in 1958 some 16 acres of land on Johnston Road. The plaintiff was obliged to purchase the whole parcel.

In 1957 H Fine and Sons Limited was incorporated to take over the business previously carried on in partnership. All the partnership assets were transferred to the corporation. Hyman Fine held 52 per cent of the shares with the remaining 48 per cent held equally between his three sons.

In the meantime, the traffic pattern of Ottawa was undergoing drastic change. In the early 1960s, construction of the Queensway commenced. This was a divided highway running through Ottawa from west to east giving unimpeded access to Montreal and other major points. About the same time, the plaintiff was becoming increasingly dependent on road transportation for the supply of its commodities.

In the late 1950s, the National Capital Commission became the owner of the property on Belfast Road in Ottawa for purposes of industrial development. This site was contiguous to railway spur lines and was close to a cloverleaf giving access to the Queensway.

The National Capital Commission adopted and promoted a policy of encouraging businesses to relocate in the Belfast Road development. There were restrictions on building and use. The plaintiff was one of such businesses encouraged to relocate.

The plaintiff recognized the advantages of the Belfast Road property as a business site over the Johnston Road property. It was much closer to the Queensway and the ready access thereto would enable it to give better service to its customers at reduced cost. Negotiations were entered into with NCC. By deed dated June 28, 1962, the plaintiff acquired from the Commission two parcels of land on Belfast Road, known as Block E and comprising a total of 10.684 acres, at a price of $76,925.

The property lay on the southerly side of Belfast Road and the two parcels were bisected by a railway spur strip running diagonally across the property in a southerly direction. In 1969, the plaintiff acquired the railway spur parcel at a price of $8,088. The three parcels thus became consolidated into one. At the time of the initial acquisition, the larger portion of Block E was the parcel lying to the right or easterly of the spur line. It consisted of 7.203 acres. The remaining westerly parcel was the smaller one, consisting of 3.481 acres. The plaintiffs warehouse was erected on the larger, easterly parcel.

In 1962, Hyman Fine left H Fine and Sons Limited to actively manage Fine’s Flowers Ltd. This was a flower business he started in 1957 which had been operated in conjunction with the plaintiffs business. There was an exchange of shares. Hyman Fine took over complete control of Fine’s Flowers Ltd and the stock ownership of H Fine and Sons Limited was transferred to the sons who thenceforth operated and managed the business on their own.

In 1972, the plaintiff incurred a net loss of $108,655 in its business operations. Bank loan indebtedness was in excess of $400,000. The bank was exerting pressure to repay or substantially reduce the loans. In consequence, the plaintiff decided to sell some of its property to reduce its outstanding liabilities and get back on a more even financial keel.

In 1973, the plaintiff embarked on this course and sold those properties considered to be surplus to its immediate business needs. The Johnston Road property was subdivided. One tract was sold for $155,000. Bell Canada acquired other parcels for a price of $134,727. The remaining parcels were sold for $123,162. The Johnston Road sale transactions occurred in October, 1973. Department of National Revenue acknowledged in an assessment review that the Johnston Road sale was capital gain, one of the grounds being that the taxpayer did not have a history of dealing in real estate.

The plaintiff had previously sold the westerly, subdivided parcel of its Belfast Road property to Auto Electric Service Company, Limited for $190,000. The parcel consisted of 4.421 acres. The deed of conveyance was dated February 27, 1973. The plaintiff tried later to repurchase it but the price was too high. This is the parcel that is the subject of the contested assessment.

Plaintiffs counsel contends that his client acquired the Belfast Road property for long range business expansion and not with the intention of resale, and that it held the property for over ten years before making the business decision to sell off the excess westerly parcel to satisfy its principal creditor. He further contends that there is no evidence to support a finding that the plaintiff was a trader in land.

Counsel for the respondent contends that the surplus parcel of the Belfast Road property was acquired with the primary or secondary intention of reselling it at a profit and that this is the only proper deduction to be drawn from the taxpayer’s whole course of conduct. He submits that the inevitable result is that the gain of $140,092.86 from the sale of the westerly parcel to Auto Electric Service Company, Limited was attributable to a venture in the nature of trade and therefore constituted profit from the plaintiffs business within the meaning of the Income Tax Act, and more particularly subsections 9(1) and 248(1) thereof.

The question posed is simply this: Did the gain from the sale of the subject parcel arise in the course of carrying on a business or from an adventure in the nature of trade, or did it result from a capital realization?

David Fine and Hyman Fine were witnesses for the plaintiff. The defendant called no evidence.

David Fine stated that the Belfast Road property was purchased with a view to long-term business expansion and that at least ten to twelve acres were required for that purpose. He put it this way under cross-examination:

Long-term expansion. We were not planning on building tomorrow or the next day.

We expected to be in business for many years, and our business had grown over the years, and we fully expected in time we would need more space.

Hyman Fine, the founder of the business and its principal architect for many years, reiterated that the plaintiff needed at least ten acres of land for its relocation on Belfast Road, having regard to the company’s expansion plans and propensity for growth. This is what he said during his examination-in-chief:

Q. How many acres were you looking for?

A. I was looking for 10 or 12.

Q. Why were you looking for 10 or 12?

A. Because I hoped that in time we would grow, because, as I told you a moment ago, I have three sons, and I have grandchildren coming in, and I wanted to grow.

Q. Were you looking for 10 or 12 acres for purposes of your business expansion?

A. Only.

The sections of the Income Tax Act which bear on the issue have been mentioned and it is unnecessary to set them out.

I reviewed the authorities cited by counsel and commend them for their careful research. Plaintiff's counsel placed much reliance on Cohen v MNR, [1970] CTC 386; 70 DTC 6244 and Jarvie Holdings Ltd v The Queen, [1980] CTC 525; 80 DTC 6395. Counsel for the respondent stressed Bestpipe Ltd et al v MNR, [1970] CTC 310; 70 DTC 6226 and Cragg v MNR, [1951] CTC 322; 51 DTC 1004.

In Cragg v MNR, Thorson, P, stated that the answer to the question posed in cases of this kind usually depended on the proper inference to be drawn from the taxpayer’s whole course of conduct viewed in light of all the circumstances and that the conclusion reached must be one of fact. What is sometimes lost sight of is the fact that the learned judge went on to find that the taxpayer was engaged in a scheme of profit-making. The learned President postulated the same principle in different form, but with an added caution, at 324 [1005]:

. . . The question on which side of the line an item of profit or gain falls is thus one of fact to be answered in the light of all the surrounding circumstances. Consequently, little, if any, help is to be derived from the actual decisions in other cases based, as they must be, upon the facts of the case in which they were given.

[Emphasis added]

The classic, objective test for establishing the line of demarcation between capital and income is stated in Californian Copper Syndicate Ltd v Harris (1904), 5 TC 159 at 166:

What is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts; the question to be determined being — Is the sum of gain that has been made a mere enhancement of value by realizing a security, or is it a gain made in an operation of business in carrying out a scheme for profit-making?

The Californian Copper Syndicate test was usefully applied in Barnett v MNR, ([1957] CTC 355; 57 DTC 1255). Here partners engaged in a fur business for a number of years purchased property near Toronto with a view to establishing a fur centre. The venture required financial assistance from New York interests. The financial support fell through and the partners sold the property to clear their liabilities. The sale resulted in a profit which was assessed as income. Cameron, J, set the assessment aside on the ground that the profit made was merely an enhancement of value by realizing a security for which there was no longer any use and that the gain resulting therefrom was entirely fortuitous and not the result of a scheme for profit-making. The learned judge stated the principle applicable to “an adventure in the nature of trade” at 366 [1261]:

. . . If the purchase had been made with the intention of subdividing the property and marketing it at a profit in the same way as would have been done by a speculator or dealer in real estate, there seems no doubt that the resulting gain would have been taxable as income from an adventure in the nature of trade notwithstanding that it was an isolated case. In such a case the transaction would have borne the badges of trade

The test was again applied in Jarvie Holdings Ltd v The Queen. The taxpayer had purchased land to obtain space for the consolidation of its growing business. There was excess acreage because the whole tract had to be acquired. The excess acreage was later sold to reduce indebtedness. The sale yielded a profit which was assessed as income and the Tax Review Board upheld the Minister’s assessment. The taxpayer appealed. The appeal was upheld on the ground that the motivating purpose in the purchase of the land was to permit consolidation of the plaintiff’s business activities thereon and that the known necessity of selling the excess acreage, existing at the time of acquisition, but with no then existing plan for profit, did not make the ultimate sale an adventure or concern in the nature of trade.

Maguire, DJ, proffered this additional rationale at 528 [6397-6398]:

The sale of the land was a sale of the part that was excess to the Plaintiffs requirements and constituted a recouping of part of the capital cost of the acquisition of this asset and therefore was not part of a transaction that should be characterized as an adventure in the nature of trade . . .

. . . The original plan or intention did not include nor visualize sale of excess acreage at a profit. Profit was not a motivating reason in purchasing.

In Sharon Mills Developments Limited v The Queen, [1983] CTC 384; 83 DTC 5420 the issue was whether the profit realized from the sale of a shopping centre purchased three years before was a capital gain or income from a speculative venture. The centre was sold to provide needed funds. It was held that the profit was a capital gain on the ground that the taxpayer’s intention at the time of purchase was to retain the property as a long-term investment.

Mr Justice Strayer made this significant statement at 388 [5423]:

Finally, it is well established that where there are valid business reasons for selling property which the taxpayer contends were bought for investment purposes, such reasons provide an answer to the inference that the property was really acquired for speculative purposes . . .

The Bestpipe case is distinguishable on its particular facts because the evidence there negated any balance of probability that the taxpayer had acquired the property for the purpose of constructing a manufacturing plant on it to the exclusion of any purpose of disposition at a profit. This was the ratio decidendi. In my view, the comments of the learned judge directed to secondary intention were not essential to the decision and do not qualify to stand as a clear statement of principle.

Secondary intention can only serve to support an inferential finding of an adventure or concern in the nature of trade when the operating motivation at the time of the acquisition of the property was the prospect of resale at a profit. See Hiwako Investments Ltd v The Queen, [1978] CTC 378; 78 DTC 6281 and S & S Properties Ltd v The Queen, [1978] CTC 412; 78 DTC 6294.

I am satisfied from the evidence that the plaintiff purchased the Belfast Road property as an investment for its present and future business needs and that its subsequent sale was brought about by fortuitous events that were not the culmination of any original scheme for profit-making. The plaintiff kept the property intact for ten years or more before becoming obliged to sell off the excess parcel to meet financial needs. Investment, not profit, was the dominant, motivating factor at the time of acquisition. There is no semblance of any conclusive evidence that the plaintiff was engaged in the business of buying and selling real estate. Nor is there any vestige of secondary intention. The transaction bears none of the usual badges of trade.

It is my opinion that the gain resulting from the sale of the westerly parcel of the Belfast Road property was merely an enhancement of value by realizing a security excess to the plaintiffs business needs and that it was not a business gain resulting from a scheme for profit-making. In the result, I find as a fact that there was no adventure or concern in the nature of trade and that the profit realized in the transaction was capital gain and not income.

The plaintiff has discharged the onus of establishing that the Minister’s assessment was wrong.

Accordingly, the appeal is allowed with costs and the assessment is referred back to the Minister for reassessment in accordance with these reasons for judgment.