Horvath v. The Queen, 80 DTC 6350, [1980] CTC 467 (FCTD)

Walsh, J:—This is an appeal from reassessments of plaintiff’s 1973 and 1974 income tax returns so as to include in the computation of plaintiff’s income for his 1973 taxation year the sum of $29,387.10 being the gain on the sale of a property owned by the plaintiff on Eagle Street, in the City of Cambridge, less an allowable reserve thereon of $3,387.10 and the gain on the sale of a Pinebush Road property in the said City of Cambridge in the amount of $26,000. The reassessment for the 1974 taxation year included in the computation of income for that year the sum of $4,443.19 being the 1973 reserve on the Eagle Street property less the 1974 reserve on the said property.

Plaintiff appealed to the Tax Review Board which by decision dated September 7, 1977, dismissed the appeal. Plaintiff and wife commenced a catering business from their home on Elliott Street in Galt in the year 1965 and when this became inconvenient in May he purchased premises at 8 Queen Street in Hespeler. The ground floor was rented to him and the upstairs contained a banquet hall known as “The International Hall” which he leased for meetings providing the catering for the banquets therein. In 1966 he recognized the need in Galt of a business combining banquet facilities which could also be used for outside catering so he sold the Queen Street premises in Hespeler and on March 7,1967, made an offer to purchase a piece of property (hereinafter referred to as Eagle Street property) which straddled the separate municipalities of Preston and Galt. Preston, Galt and Hespeler subsequently became amalgamated into the present City of Cambridge. He encountered serious difficulties in obtaining a building permit, on which the offer was conditional as was the consent of the committees of adjustment for each of the municipalities. He encountered problems with the then City of Galt. The original date for closing was July 1, 1967, but because of the problems encountered he abandoned his intention to use this property for his catering and banquet business and purchased a parcel of land in July 1967 on Hespeler Road in Galt about one mile from the Eagle Street property. He obtained a building permit to construct a banquet hall, tavern and catering facilities on it but after construction had commenced and the excavation was partly completed the building permit was rescinded.

It is plaintiff’s contention that about the same the vendor of the Eagle Street property threatened a law suit to force the sale of the property and on legal advice he completed the purchase in October of 1967. Eventually he was able to obtain a building permit and modified plans to complete the construction on the Hespeler Road property and build his facility there. He then no longer required the Eagle Street property and listed it for sale. He had some plans if he could not sell of erecting a motel complex combining a building in Galt and a parking area in Preston but would have required additional land to meet municipal requirements so these plans were deferred. In January 1973 with the amalgamation of the municipalities of Preston and Galt into the City of Cambridge the permit problems disappeared and the Eagle Street property was sold to a purchaser who had originally been interested in leasing it.

His catering and restaurant business prospered on the Hespeler property where he had built it, operating under the name of the Matador Tavern, but in 1972 he had some health problems and sold the business. He also accepted in July 1973 an unsolicited offer for the sale of the Eagle Street property which he then sold.

With respect to the Pinebush property he purchased this in 1965 at the time he had sold a rental property on Water Street north of Galt and had some proceeds to reinvest. He contends that he bought it as an investment and received rental income during the years 1965 to 1970. The property began to deteriorate however and he encountered periods of vacancy and vandalism and as the neighbourhood had deteriorated he did not consider it economically justifiable to expend further funds to improve the property. He therefore sold it during 1973 also as a result of an unsolicited offer.

It is his contention that he never engaged in the purchase and sale of developed or undeveloped land nor construction buildings for resale, his business always being that of a caterer and banqueteer.

The defendant contends that the profit on the sale of both properties resulted from a business venture in the nature of trade.

The agreed statement of facts makes reference to no less than eight residential properties bought by him and his wife between 1957 and 1964, the last three being vacant lots, on the last two of which he built houses. He made no less than 5 moves during the years 1960 and 1961 but in testifying he gave reasons which to him in any event were valid for each move. Gains made on the sales were slight if any after taking into consideration alterations and improvements which he had made, real estate agents’ commissions and legal fees.

Other properties not purchased for purposes of personal residence during the period from 1960 to 1972 are more significant and are also referred to in the agreed statement of facts. He bought a property at 50 Water Street in Galt as a long term investment in 1960 at a time when it was badly run down. He made alterations so that part of it could be used by a tenant as a real estate office. Two years later he expanded it on the vacant lot behind. In 1965 he sold it to the tenant who was renting the real estate office for $38,500. Although he had only paid $15,000 in 1960, he estimates that the additions he made cost about $5,000 plus $3,100 of renovations and repairs in the original building as well as doing minor maintenance from time to time himself. In cross-examination it was brought out that his total income from this building even without claiming capital cost allowance only amounted to $2,265 from 1962 to 1965 and that he had made no estimate of potential income from the building at the time he bought it or the cost of necessary repairs. He stated that his reason for selling it was that he needed money at that time to invest in his catering business.

The second such property was at 1-8 Queen Street, Hespeler, which he bought in May 1965 and sold on October 1, 1966. The ground floor contained a smoke shop with one pool table behind and a ladies’ wear shop and it was the banquet hall above which was what interested him. He had to stucco the outside and put in a washroom and bar facilities for the banquet hall. He bought it for $17,500 and spent about $9,500 on additions and alterations, and there was a downstairs restaurant which went bankrupt and he had to buy its kitchen equipment for $3,400 in order to make it possible to rent it. After his renovations he was eventually able to rent all the premises. There were only parking facilities for 12 to 15 cars and no other parking nearby so it was not convenient for his banquet hall. He sold the property in October 1966 for $50,000, understanding that he could continue to use the premises for his catering business for a while. He had lost about $1,400 in rental during the period he held the property. He was apparently not assessed for income tax on the profits from the sale of this property. On November 7,1966, he bought property at 26-28 Queen Street, Hespeler, but sold it on July 1, 1967. It had an acre of land behind it which he intended to use as a parking lot but was unable to get a permit for it. Although he had sold the property at 1-8 Queen Street in October 1966 he was still occupying it for over a year, but refused to sign a long term lease as he wished to eventually locate elsewhere. Finally the purchaser told him to move. He had bought this property for $5,500 but had put in $3,641.45 in alterations and repairs. He had had to put in restaurant equipment which could not be removed and build new store fronts and windows to rent the units. He sold it for $15,000 and realized a profit of about $5,000 after real estate agents’ commissions and legal fees. He also needed to raise money at the time for the purchase of the property on Hespeler Street where he eventually built his restaurant. He made a purchase offer for the Eagle Street property in Galt and Preston in March 1967, intending to have parking on the front and his restaurant building and catering hall at the back. He had no problem getting the necessary permit from Preston but could not from Galt. It was necessary to apply for a zoning change from light industrial to commercial and Galt imposed some conditions which he considered too onerous. While there was some question as to whether he could not have built without a permit from Galt he decided to abandon the project and buy the property at 250 Hespeler Street in Galt which was more satisfactory in any event for his purposes. He claims that he was threatened with a law suit by the vendor if he did not go through with the purchase but there is no written evidence of it and since the offer was a conditional one it appears unlikely that any such action would have succeeded. In any event he bought the property for $10,000 on October 30, 1967, although he had already purchased the Hespeler Street property, where he eventually built, on July 20,1967, and no longer required the Eagle Street property.

He explained that Highway 401 runs between what were at that time Hespeler and Galt with Highway 24 intercepting it. Galt and Preston are south of Highway 401 and Hespeler is to the north. Highway 24 is the main north-south artery. The Eagle Street property was one half mile south of Highway 401 and the 250 Hespeler Street property one mile south of Highway 401 and thereby closer to Galt. Galt is the larger municipality having a population of 36,000 while Hespeler has some 5,000 and Preston 15,000 and as his business is mainly from Galt it was better to be closer to that town. On Highway 24 there are now perhaps five motels as well as several dining restaurants but at the time there were not more than two motels and three and four restaurants. When he commenced building on Hespeler he had no further use for the Eagle Street property and listed it for sale. He had an offer from the Dairy Queen. They had the same building problems as he had encountered so did not take it up. He listed it for sale with a real estate agent in 1969 at a price between $22,500 and $25,500, the real estate agent establishing these figures. Hespeler Street is the continuation of Highway 24 and was zoned as commercial so there was no problem in getting a building permit. When it was revoked after his foundation work had started it was because it had been decided to cut a bypass road through part of the property’s southerly boundary. He had purchased five acres however and did not require it all so he relocated his building on another portion of the property. At first he had difficulty getting a permit for it and the matter was settled on the day before he went to court in the expropriation proceedings. This was on September 25, 1968, and he opened his restaurant The Matador Tavern in 1969 and operated it until June 1972. He added an addition at the back in 1971 for a banquet hall. The business was very successful employing 70 people but he had to be there from 10:00 AM or 11:00 Am until 2:00 AM or 3:00 AM and developed a heart condition so sold it in 1973 at a substantial profit.

Mr Horvath further testified that the reason that the Eagle Street property had gone up in value from 1967 to 1973 was because of the amalgamation of the two cities, eliminating building permit problems. By this time there were tennis courts, office buildings, taverns and other businesses along Hespeler Road (Highway 24).

During the same period he had bought three properties intending them as investments for each of his children, namely on 27 Borden Street, Galt, bought on November 15, 1966, sold in April 1967 for $9,500. He was taxed for a profit on this in the amount of $42.07. A second one at 105 Spruce Street was bought on November 15, 1966 for $15,400 and sold at a slight profit on April 28, 1967, of $572.70 for which he was also assessed. The third one at 92-94 Shade Street was bought in November 1966 for $14,268.90 and was sold to the City of Galt on September 10,1968 for $23,000. They required the land as an arena and threatened to expropriate. The gain on this sale was $8,651.10. In addition to these three sales he was taxed on a gain of $3,264.10 on the sale of the 26-28 Queen Street property.

He stated that his motivation for the sales of the three properties which he had acquired originally as investments for his children was that he needed money badly at the time in connection with the construction of the Hespeler Street buildings. What these sales do show however is that he was occasionally taxed as a trader in real estate and did not protest same. It has been well established by the jurisprudence however that the statement “once a trader always a trader” is not always correct and that even a trader can occasionally acquire an asset as an investment and later sell it at a profit which is capital gain and not an adventure in the nature of trade. The fact that a person has been a trader in real estate however for a profit is a relevant factor in determining whether the profit from the subject sales is income or capital gain. In April 1971 plaintiff and his wife incorporated J-MAR Developments Limited, and thereafter any further purchases by him of real estate were made in the name of that company. It owned some rental properties and has sold perhaps two. What he did subsquently does not directly affect the assessments in issue but it confirms that plaintiff is knowledgeable in the real estate field, although primarliy a restaurateur and caterer.

I turn now to the Pinebush property which was purchased on May 17, 1965, one day after the sale of the Water Street property and two days after the purchase of the property at 1-8 Queen Street.

As a result of the sale of the Water Street property he had some money to reinvest which he used for the purchase of these two properties. Pinebush Road is the extension of Eagle Street which !s intercepted by Highway 24. The Pinebush property is less than one-half mile from his Eagle Street property. Eagle Street is parallel to Highway 401 which is about one-half mile to the north. When he purchased the property he made no estimates as to repair costs and did not think it was in bad shape. He advertised for tenants most of whom he obtained on a month to month basis. He began to have trouble collecting rental and on one occasion found strangers in one of the premises, being the brother-in-law of the tenant who had gone back to Newfoundland. During an argument with him the tenant insulted Mrs Horvath and police were called and Mr Horvath threatened him with arrest. While the tenant evantually left intentional damage was done, the wall being kicked in. It seems that he was not careful enough in choosing tenants at the time. Recapitulating details of net income from the property from 1966 to 1973 indicates that the total net income from rentals during that period was $235. Evidently it was not a good investment. He was approached in 1973 by the purchaser and his lawyer who wanted to use the property as a used car lot. He conceded that he had never claimed capital cost allowance on it and that the fire insurance was only $7,000 so that the value of the building was evidently low, the principal value being in the land. He had tried to sell it in 1968 or 1969 to raise money for the Matador Restaurant addition but without success. The property had a mortgage on it at $13,500. Profit realized on the sale in 1973 was $26,000.

Jurisprudence in this area is very well known but when it comes to apply it to a given state of facts it becomes more difficult. We might start with the leading case of Irrigation Industries Limited v MNR, [1962] SCR 346; [1962] CTC 215; 62 DTC 1131, in which Martland, J referred with approval to a general statement of principle by Lord Buckmaster in Leeming v Jones, [1930] AC 415 at 420 where he stated:

an accretion to capital does not become income merely because the original capital was invested in the hope and expectation that it would rise in value; if it does so rise, its realization does not make it income.

Reference was also made in the same judgment to the statement of Rowlatt, J at an earlier stage in the proceedings when in referring it back to the Commissioners he said:

I do not indicate which way it ought to be, but I commend the Commissioners to consider what took place in the nature of organizing the speculation, maturing the property, and disposing of the property, and when they have considered all that, to say whether they think it was an adventure in the nature of trade or not.

In the leading case on the doctrine of secondary intention that of Paul Racine, Amédée Demers and François Nolin v MNR, [1965] CTC 150; 65 DTC 5098, Noel, J stated at 5103:

_.. 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 not what must be understood by a “secondary intention’’ if one wants to utilize this term.

In the case of Wolf Von Richthofen v MNR, [1968] CTC 544; 68 DTC 5346 Jackett, P stated at 546 [5348]:

Putting the matter another way, where a person carries on business as a trader in real estate and some other business at the same time, if he buys a parcel of land for re-sale at a profit and does so re-sell it, the resulting profit is a profit from his trading business even though he found a use for the land in his other business during the period that he owned it; but, on the other hand, a profit that he makes upon the sale of land acquired for the sole purpose of being used, and that has in fact been used, as part of the capital assets of the other business is not, as such, a profit from his business as a trader in real estate, and the length of the period between purchase and sale of a parcel of land by such a person is not relevant except in so far as it is some indication as to whether the land was inventory of the trading business or a capital asset of the other business.

The facts in this latter case bear some resemblance to the present at least with respect to the Eagle Street property since plaintiff may be said to have carried on business to some extent as a trader in real estate as well as his primary business as a caterer and restaurant proprietor.

All of these cases and others were referred to in a judgment I rendered in the case of Ben Arthur Shuckett v MNR, [1970] CTC 284; 70 DTC 6213, in which the taxpayer had previously been assessed as a trader with respect to other property, but in connection with the assessment before the Court in which the judgment referred to was rendered it was found that the lots in question were acquired for the sole purpose of being used by the hotel in the hotel business he was operating and were only sold after being so used for some 8 years when the hotel business and assets were sold so that the profit realized was treated as capital gain.

In the case of Choice Realty Corporation v Her Majesty the Queen, [1978] CTC 613; 78 DTC 6415, one Louis Dubrovsky and the late Harry Dubrovsky together with a Mr Gregory were the prime movers in the project. The two Dubrovskys had been held to be taxable on the basis of the doctrine of secondary intention in a previous case (Harry Dubrovsky and Louis Dubrovsky v MNR, [1970] CTC 403; 70 DTC 6278, and again in the case of (Varennes Holdings Corporation v The Queen), [1975] CTC 230; 75 DTC 5164, a development near Montreal in which Ace Holdings, another of Mr. Louis Dubrovsky’s companies was involved. Despite this I stated at 622 [6423]:

. . . However, as is frequently stated, each case must depend on its own facts and even a speculator is entitled to make a capital gain on land dealings on occasion if the facts indicate a bona fide intention of development of the property for income producing purposes and no secondary intention of disposing of it at a profit in the event that the original intention is frustrated or because an offer which is too good to refuse has been made.

After then referring to the quotation in the judgment of Noel, J in the Racine, Demers and Nolin case (supra) I stated at 624 [6423]:

In the present case there is not a vestige of secondary intention. The parties clearly wanted to develop all the property for revenue producing purposes. Their plans were partially frustrated when they were unable to get the entire property zoned as commercial.

It is true that in that case they did continue to develop the portion of the property which could be developed as a shopping centre, eventually selling the rest of the land at a profit which was found to be capital gain.

In The Queen v Stanfold Investment Corp, [1974] CTC 19; 74 DTC 6035, the Court said:

The mere fact that it was general knowledge at the time of the purchase that the area in question, which eventually became part of the City of Laval, was developing rapidly and that a person buying land there would most likely find that it would increase in value, is not sufficient, in my view, to indicate that this was the secondary intention of the defendant at the time the purchase was made. On the contrary, the evidence discloses that the sole intention was that the defendant would develop the property itself as a revenue-producing investment and the mere fact that the defendant no doubt realized that there was little, if any, risk of loss and on the other hand a reasonable expectation of profit even if its intention was frustrated and it was forced to sell the land, is not in my view sufficient to establish that this was a secondary intention of the defendant at the time of purchase. Knowledge and intention are not synonymous.

With respect to the Eagle Street property it is certain that when Mr Horvath first made the purchase offer he was intending to use the property for his catering business and that he was not buying it as an investment nor did he have any primary or even secondary intention of reselling it at a profit if this project were frustrated as it was. Serious doubt is cast on his intentions in that although he had already purchased the Hespeler Street property where he eventually built his Matador Restaurant on July 20, 1967, and therefore no longer required the Eagle Street property for this purpose he nevertheless proceeded to buy it some three months later on October 30. He contends that he did this because of threats that he would be sued if he did not carry through with the purchase. He was unable to support this contention and in fact his purchase offer being clearly conditional on his success in obtaining a building permit and the consent of the committees of adjust- ment of the municipalities it is difficult to see how he was in any jeopardy if he did not go through with the purchase. There was a subsequent dispute between his attorneys and those of the vendor as to the payment for the costs involved in applying to the committees of adjustment and in addition to this his attorneys asked for an extension of the closing date for the transaction. There is a letter from the vendor’s lawyer stating that unless Mr Horvath is prepared to accept the charges in dispute then they take the position that there is in fact a contract between the parties since there was no agreement in the meaning of the words used. On August 24 Mr Horvath’s lawyer advised that they had now been instructed to proceed without obtaining the endorsement of the City of Galt committee of adjustment so that they would close upon receiving the stamped approval of the Town of Preston alone. In his report on title to Mr Horvath on November 2, 1967 the attorney states “You indicated that you were prepared to complete the purchase without obtaining the consent of the City of Galt, in spite of the danger of such a course of action and accordingly you completed the transaction without the City of Galt approval thereto. Separate deeds were obtained for the property lying in each municipality. As we indicated to you we cannot be held responsible to you for any penalty which you might incur by virtue of this handling of the purchase”.

Mr Horvath persisted in buying the property therefore although he no longer needed it for his business. Furthermore I do not believe that this indicates that it was acquired as an investment. It was vacant land and yielded no revenue, and it was only by chance that as the result of the amalgamation of the cities, which could not be foreseen at the time, the building permit problems with the City of Galt were eliminated. Meanwhile one attempt to sell to the Dairy Queen had been frustrated for the same reason that a building permit could not be obtained.

Defendant’s counsel argues that it is the intention at the time of the actual purchase of the property and not the intention at the time of the conditional offer to purchase which must be taken into consideration. Certainly at the time of the offer to purchase there was no secondary intention, nor at the time of the actual purchase at which time I believe Mr Horvath did not have any intention of buying the property other than for eventual resale at a profit. For a person who is not a trader the Irrigation Industries Limited case might be applied to conclude that an accretion to capital does not become income merely because the original capital was invested in the hope and expectation that it would rise in value, but for someone in Mr Horvath’s dual position as a trader in real estate (although prior to that date in a very small way) and a caterer and restaurateur, his primary business, it would appear that it would be the Von Richthofen case (supra) which would apply and that the resulting profit would have to be considered as a profit of his trading business in real estate.

With respect to the Pinebush property the situation is somewhat similar. He bought it allegedly as an investment because he had some money to reinvest at the time arising from the sale of the Water Street property. It was in a developing location and with his knowledge of the area he could foresee that it would increase in value.

As in the case of most of his purchases he obtained it at a good price with only a small cash payment involved. He had made no estimates of repair costs nor had he examined the rental revenue which could be obtained from it. It is evident that most of the value was in the land and not the building and in fact he obtained little or no revenue from it during the 7 years that he held it before eventually selling it at a substantial profit. As was stated in the case of MNR v James A Taylor, [1956] CTC 189; 56 DTC 1125, at 212 [1138] by Thorson, P.

. . . And the taxpayer’s declaration that he entered upon the transaction without any intention of making a profit on the sale of the purchased property should be scrutinized with care. It is what he did that must be considered and his declaration that he did not intend to make a profit may be overborne by other considerations of a business or trading nature motivating the transaction.

I have little difficulty in finding that this too was a profit arising from an adventure in the nature of trade and not a capital profit from the sale of an investment.

The plaintiff undoubtedly had encountered unusual difficulties and had hard luck in his attempts to establish and later expand his catering business with subsequent development into a restaurant business and undoubtedly many of his purchases and sales of property were necessitated to raise money for this as it was not until 1970 that it commenced to become at all profitable, after which the profits escalated rapidly until he was eventually able to sell out at a very good profit. Nevertheless in the interval he became very experienced in negotiating the purchases and sales of real property and while his profits on such sales were initially very moderate, the properties being for the most part run down and of little value, and he was able to derive little if any income from them in the interval he usually succeeded in making some profit on the resales. Quite properly some of these profits were taxed as income from a trading venture, and in other cases the Minister judged that they constituted capital gain. In the present two instances of the sales of the Eagle Street property and the Pinebush property both in 1973, the 1974 taxation year including the 1973 reserve the assessments were I believe properly made. Plaintiff’s action is therefore dismissed with costs.