Marksim Storage Ltd. v. MNR, 73 DTC 158, [1973] CTC 2185 (T.R.B.), rev'd 76 DTC 6401, [1976] CTC 665 (FCTD)

The Assistant Chairman:—These are the appeals of Marksim Storage Limited and Heleis Storage Limited from assessments to income tax for the 1963, 1964 and 1965 taxation years, and of Freda Limited and Audrey Cold Storage Limited from assessments to income tax for the 1963 and 1964 taxation years, all of which were heard simultaneously on common evidence. The management fees, claimed as deductible expenses in the notices of appeal, having been consented to by the appellants, the two principal issues remaining in these appeals are—first, whether the profit realized from the sale of property referred to as the Gutta Percha & Rubber Limited property (hereinafter called “Gutta Percha property”) in September 1963 was the result of a transaction on capital account and a non-taxable capital gain or, secondly, whether the profit arose from an adventure in the nature of trade and was therefore taxable income.

The second issue arising from an amendment to the notices of appeal agreed to by the respondent and accepted by the Board is whether Audrey Cold Storage and Freda Limited, having sold on July 31, 1964 their interests in a partnership carrying on a dry-storage warehouse business under the name of Ayer Storage (Ontario) composed of the four appellant companies, to a company called Ivanhoe Storage Limited, were taxable on their share of profits derived from the sale of the Gutta Percha property for their 1964 and subsequent taxation years.

On June 30, 1960 Ayer Storage (Toronto) Limited purchased for $500,000 from the Gutta Percha a large property consisting of land and some nineteen buildings. Parts of the premises were leased back to Gutta Percha under lease agreements expiring September 1, 1960, December 1, 1960 and December 31, 1961.

In September 1961 Gutta Percha, in removing its heavy machinery from the premises, caused substantial structural damage to the buildings for which Ayer Storage (Toronto) Limited was eventually compensated by a reduction of $110,000 on the sale price of the property.

Having come to the conclusion that the cost of restoring the buildings for dry storage purposes was so great that it made the whole proposal uneconomical, it was decided that the best use of the property would be for the construction of a highrise apartment building. On November 3, 1961, by supplementary letters patent, the name of Ayer Storage (Toronto) Limited was changed to Ivanhoe Storage Limited.

In order to acquire the financing necessary for the construction of a highrise apartment building on the site, Ivanhoe Storage Limited (formerly Ayer Storage (Toronto) Limited) on February 9, 1962 transferred at cost the Gutta Percha property to Ayer Storage (Ontario) a partnership whose members were Marksim Storage Limited with a 25% interest in the partnership, Heleis Storage Limited with a 25% interest, Freda Limited with 35% interest and Audrey Cold Storage Limited with a 15% interest in the partnership.

On June 3, 1963, Ayer Storage (Ontario) sold the Gutta Percha property to Combo Construction Limited and Joseph Zentil, and realized from the sale a profit of $589,514.80.

On July 31, 1964, pursuant to an agreement, Ivanhoe Storage Limited purchased from Freda Limited and Audrey Cold Storage Limited their combined 50% interest in the Ayer Storage (Ontario) partnership. As of August 1, 1964, the beginning of the partnership’s 1964 fiscal year, the respective partnership interests were Marksim Storage Limited 25%, Heleis Storage Limited 25%, Ivanhoe Storage Limited 50%. From evidence adduced, the principal shareholder of Ivanhoe Storage Limited and the controlling figure in the Ayer Storage (Ontario) partnership was Mr M G Lawrence, Jr who was principally engaged in the warehousing business.

In the spring of 1960 Mr Lawrence was informed by Lyons and Son Ltd, realtors, that the Gutta Percha property consisting of 7 acres of land and 600,000 square feet of floor space was for sale at $500,000. There is no evidence that Mr Lawrence, who was principally interested in cold-storage warehousing, had, prior to the Gutta Percha offer, been seeking to expand his operations in the dry-storage warehousing field in Toronto. What is on record is that Mr Lawrence, prior to purchasing the property, made only a very cursory inspection of the Gutta Percha property and, although he was a qualified engineer as well as an experienced warehouseman, he failed to notice that the buildings in which the vulcanizing machinery was installed extending to some 4 or 5 storeys high had no floors, that in the other buildings the floors of the upper storeys were not strong enough for economical warehousing, that the elevators were too small and too slow for efficiency and that there were no loading platforms to any of the buildings which are necessary for such a business.

The Gutta Percha property was, however, used for warehousing and lift trucks were purchased and hundreds of pallets were bought. Mr Turner, an experienced warehouseman, who was hired as manager for the Gutta Percha property by Ayer Storage (Toronto) Limited, stated that after considerable advertisement the buildings were used for warehousing as they became available according to the Gutta Percha lease. By December 1960 some 130,000 square feet of floor space in different buildings were used for warehousing. Only one light manufacturing company considered by Mr Turner as an important tenant, and towards which considerable advertisement was directed, actually leased floor space. Although not without extra work and services according to letters received from customers, some of which were solicited by Mr Turner, it would appear that the warehousing arrangements provided in the Gutta Percha property were quite satisfactory. In Mr Turner’s opinion the buildings could have been made suitable for warehousing with some additional funds. However, Mr Lawrence decided otherwise and although finances were available for repairing the ‘buildings, $200,000 was paid in February 1962 for the purchase of the $310,000 mortgage on the Gutta Percha property instead— $110,000 being the amount allowed by Gutta Percha for damages to the building and deductible from the purchase price.

In 1960 Mr Lawrence had arranged a meeting of real estate people, including Lyons Realties, on the Gutta Percha premises in order to show them what was available presumably for warehousing and light manufacturing. The property was therefore well known to several realtors. As early as February 17, 1961 offers for the purchase of the Gutta Percha property were made to Mr Lawrence who, in his testimony, stated that he did not solicit the offers, that he did not recall having seen the offers and that in any event he could not have considered them. The Board noted that in his testimony Mr Lawrence’s memory was faulty and that he could not recall several important events.

In the summer of 1961, one year after the purchase of the property, Ayer Storage (Toronto) Limited attempted to sell part of the Gutta Percha lands to the City of Toronto to be used as a sports field but this was rejected by the City.

In June 1962 the partnership retained the services of an architect to draw preliminary plans for a series of apartment buildings on the Gutta Percha property and a lawyer was retained to have the land re-zoned for highrise apartments.

In November 1962 Mr Lawrence, according to his evidence, had made arrangements for the construction of a drive-in theatre on the property for which he would receive an annual rent of $40,000. Whether or not the drive-in theatre project was a ploy to force the city to rezone the land for highrise apartments is of relatively little importance. The fact is that the land was re-zoned and that the sale of the Gutta Percha property, which was conditional upon the re-zoning of the land, was sold to Combo Construction Limited and Joseph Zentil for $680,000 on or about the date the re-zoning was authorized.

From the facts of this case, although Mr Lawrence may have had the idea of utilizing the Gutta Percha buildings for warehousing purposes and did, in fact, operate a limited warehousing business for a short period of time, he did not in my opinion purchase the property exclusively for that purpose. In spite of Mr Lawrence’s affirmation that no speculation was involved and that he had in mind no other purpose than operating a warehouse on the Gutta Percha property, the facts indicate otherwise. Had Mr Lawrence’s sole intention been to expand his dry-storage business in the Gutta Percha properties, his first preoccupation would have been to ascertain that the buildings were in fact suitable for warehousing and had they not been suitable for economical warehousing, as in fact they were not, Mr Lawrence would not have bought the property. Mr Lawrence was offered 7 acres of land on which were erected some 19 buildings—all for $500,000. It was a great bargain and not publicly known. Mr M O Simpson, Jr, of Gutta Percha, who made the offer to Mr Lawrence, had insisted that the deal be kept quiet. Mr Lawrence’s impression that “he felt he was buying a city for $500,000”, does not necessarily mean for warehousing purposes only.

In my view, Mr Lawrence was impressed much more by the possibility of acquiring 7 acres of land in the downtown area of Toronto than he was by the possibility of using the buildings for warehousing. At that price Mr Lawrence was reasonably certain he could realize a profit on the property no matter what he did with it—sell part of it as a park, construct a drive-in theatre, build highrise apartments or sell the property outright. I am of the opinion that Mr Lawrence, notwithstanding the fact that he did operate a limited warehousing Operation for a short time, had at the time of the purchase of the Gutta Percha property a strong secondary intention of turning the bargain acquisition to account and that he made relatively little effort to render the buildings purchased suitable for warehousing if that ever was his principal intention.

I came to the conclusion that the profit realized by the partnership, Ayer Storage (Ontario), in the sale of the Gutta Percha property is as a result of an adventure in the nature of trade and is therefore taxable ir. ome.

The second issue is whether Audrey Cold Storage Limited and Freda Limited, having sold their interests in the partnership of Ayer Storage (Ontario) to Ivanhoe Storage Limited on July 31, 1964 (the last day of the partnership’s fiscal year), are taxable on their shares of the profit realized from the sale of the Percha property which was completed on September 15, 1963.

Counsel for the respondent holds that a partnership is not a legal entity and that when Ivanhoe purchased the interests of Audrey Cold Storage Limited and Freda Limited, the partnership was automatically dissolved, each of the partners being liable for tax on its share of the profits derived from the sale of the Gutta Percha property.

Counsel for the appellant contends that the partnership was not dissolved by the sale of the interests of two of the partners, but that the continuation of the partnership was provided for by the agreement of sale of these interests (Exhibit A-30) dated July 31, 1964, whereby the purchaser replaced the vendors in all respects in the partnership.

I do not believe that a partnership is automatically dissolved in all circumstances on the sale of the interest of one or more of the partners. I do not see any legal reason why the remaining partners cannot continue the partnership with the purchasers of the old partners’ interests if it is their declared intention to do so as is the case in the present instance and, in my opinion, The Partnerships Act of Ontario at sections 32 and 33 provides for such a contingency. I am of the opinion, therefore, that the partnership, Ayer Storage (Ontario), was not dissolved by the sale of the interests in Freda Limited and Audrey Cold Storage Limited to Ivanhoe Storage Limited.

Counsel for the respondent further holds that the amount of $722,- 004.11 received by Freda Limited and Audrey Cold Storage Limited for the sale of their interests in Ayer Storage (Ontario) included their shares of the profits derived from the sale of the Gutta Percha property and therefore are taxable on these profits.

According to the agreement of sale of July 31, 1964 the vendors sold all their rights, titles and interests of every nature in the partnership, and the purchaser discharged the vendors and assumed all the debts, contract liabilities and engagements of the vendors relative to the business of the partnership.

In my view the value of their respective interest in all the assets of the partnership is reflected as the selling price of the vendors’ interests in the Ayer Storage (Ontario) partnership created on December 31, 1958—whatever their assets may be. On July 31, 1964, the last day of the partnership’s fiscal year, these assets were transferred from the vendors to the purchaser which, by the same token, assumed the vendors’ liabilities which include, in my opinion, the appropriate share of the partnership’s liability for tax payable in the 1964 taxation year on the profit derived from the sale of the Gutta Percha property as a result of an adventure in the nature of trade.

I am of the view, therefore, that Freda Limited and Audrey Cold Storage Limited were not properly assessed with respect to the profit derived from the sale of the Gutta Percha property in the 1964 and subsquent taxation years, and that as a result of the purchase by Ivanhoe Storage Limited of the interests of Freda Limited and Audrey Cold Storage Limited, the profit which would otherwise have accrued to Audrey Cold Storage Limited and Freda Limited accrued to Ivanhoe Storage Limited which has in my opinion assumed, among other things, the tax liability on the profit derived from the sale of the Gutta Percha property.

In arriving at this conclusion, I think it is important to note that the Board was not seized with, nor did it consider, whether the transaction between Ivanhoe Storage Limited, and Audrey Cold Storage Limited and Freda Limited was of a capital or income nature. The Board in these appeals was seized simply with determining whether the four appellants were properly assessed on their share of the profits derived from the sale of the Gutta Percha property by the partnership.

In the circumstances Marksim Storage Limited and Heleis Storage Limited were properly assessed on the said profits but Freda Limited and Audrey Cold Storage Limited, having sold their interests in the partnership efore the end of the partnership’s 1964 fiscal year, were not properly assessed on profits which had accrued to Ivanhoe Storage Limited during the 1964 fiscal year.

A third point was raised by the appellant in this appeal asking that the Board, for the sake of equity and accuracy, refer the matter back to the Minister to determine whether the value of the land of the Gutta Percha property should not be increased by $10,000. This point was not an issue in the appeal, nor was there any evidence produced on which the Board might decide the reasonableness of the request. Even if such action were within the jurisdiction of the Board, and I am of the opinion that it is not, it would be neither reasonable nor logical to refer to the Minister a point which is not at issue, with which the Board is not seized, and concerning which no evidence whatever was produced. The Board declines to accept this request.

In conclusion, therefore, I hold that the profit realized by the partnership from the sale of the Gutta Percha property in the amount of $589,514.80 was the result of an adventure in the nature of trade; that Marksim Storage Limited and He-leis Storage Limited were properly assessed for 1964 and 1965 in respect of the said profit and their appeals are hereby dismissed in their entirety.

The management fee issue having been abandoned by all four appellants, the appeals of Freda Limited and Audrey Cold Storage Limited are dismissed in respect of the taxation year 1963 and their assessments for those years are left undisturbed.

Freda Limited and Audrey Cold Storage Limited, having sold their interests in the partnership to Ivanhoe Storage Limited before the end of the partnership’s 1964 fiscal year, were not properly assessed in respect of the said profits for their 1964 taxation year, and their appeals are therefore allowed in part and the matter referred back to the Ministre for re-consideration and reassessment in respect of that year.

Appeals allowed in part.