Citation: 2012TCC153
Date: 201205__
Docket: 2010-1013(IT)G
BETWEEN:
ROBERT PELUSO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 2010-1016(IT)G
AND BETWEEN:
JOANNE PELUSO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 2010-1017(IT)G
AND BETWEEN:
9136-9702 QUÉBEC INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 2010-1042(IT)G
AND BETWEEN:
GESTION JONQUIÈRE 412 INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 2010-1044(IT)G
AND BETWEEN:
ROSANNE BERAZNIK,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 2010-1046(IT)G
AND BETWEEN:
ROSEMARY PELUSO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 2010-1047(IT)G
AND BETWEEN:
HYMAN BERAZNIK,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Jorré J.
Introduction
[1] The issue in
these appeals is whether certain parcels of land held by two limited
partnerships were converted from inventory to capital property thereby giving
rise to capital gains rather than income on their disposition in the 2005 or
2006 taxation years.
What is a Change of Use that converts Inventory to Property
whose disposition results in a Capital Gain?
[2] It is useful to begin by recalling what kinds of
property can give rise to a capital gain. Broadly speaking, there are three
kinds of property whose disposition will give rise to a capital gain:
1. An investment. An example would be
a shopping centre held as a long‑term investment for its income.
2. A capital asset of a business. An
example would be the factory and the land under the factory of an automobile
manufacturer.
3. In the case of an individual, a
property held for the individual's personal use such as a cottage.
[3] As a result, the land dispositions in issue will
give rise to a capital gain if it is shown that there has been a clear
conversion of the property in issue from inventory to a use of the property
that will give rise to a capital gain.
[4] Such a change requires “a clear and unequivocal
positive act implementing” the change.
The
Facts
[5] The first
limited partnership in question is the Meander Limited Partnership. The Meander
land sales in issue affect all the appellants.
[6] There second
limited partnership in question is the JR Investments
Limited Partnership. The JR land sales in issue only affect Joanne Peluso and Rosanne Beraznik.
[7] The
appellants called as witnesses Mr. Steven Taylor, a builder who had dealings
with Meander, and Mr. Hyman Beraznik; the respondent called Mr. Jean-Guy
Boilard, who was the person responsible for day-to-day management of the
development of the Meander land.
[8] With one
exception, it turns out that there is no real controversy in the evidence. The
one exception, which relates to the timing of a decision, does not affect the
outcome. As a result, I will simply state the facts without reviewing the
evidence.
[9] There is no
dispute that the lands in question were all initially acquired as inventory.
[10] The Cliffton
Group Inc. managed both limited partnerships.
[11] The Cliffton
Group has been in operation for some 30 years; its focus is the acquisition and
management of income producing commercial real estate as a long-term
investment. Ownership of the real estate is carried out through other legal
entities with Cliffton managing the properties; the other entities pay
management fees to Cliffton. Its head office is in Montreal.
[12] The real
estate consists primarily of shopping centres although over time it
has also included industrial and office properties.
[13] Mr. Hyman
Beraznik and Mrs. Joanne Peluso jointly manage the
Cliffton Group. Mr. Beraznik has the prime responsibility for the
financing and acquisition of properties. Both have decades of experience in the
business.
[14] During its existence the Cliffton Group has been
involved with the acquisition of and development of land for sale in only three
instances.
[15] The first was in the city of Laval, Quebec. The second was the land held by JR Investments Limited Partnership in the Charlesbourg borough of Quebec City. The third was the land held by
the Meander Limited
Partnership in the Les
Rivières borough of Quebec
City.
[16] The first two projects were related to the shopping
centre leasing activities of the Cliffton Group. In both of those cases the
land was adjoining or near a shopping centre owned by the Cliffton Group;
Cliffton sought to develop the land so that residential neighbourhoods would
develop near their shopping centres thereby increasing the amount of business
at the shopping centres and their profitability.
The
Meander Limited Partnership Property
[17] In the case of Meander there was no link to the
shopping
centres. As the JR
project was coming to an end Mr. Jean-Guy
Boilard, who had been managing the JR project, brought the Meander project to
the Cliffton Group.
[18] The Cliffton
Group eventually decided to buy the land on behalf of an entity to be formed.
The ownership was transferred to the Meander Limited Partnership.
[19] The intention was to develop the purchased land by putting in services and selling off
lots to builders. This was to be done in several phases.
[20] It is very clear from the testimony of all three
witnesses that there were great difficulties in carrying out the development of
phase 1 and in delivering serviced lots on the dates contracted for to the
builders.
[21] A major factor in this was the decision by the city
that all the wiring in the development should be underground. This was a new
requirement.
[22] When Hydro Quebec was approached they advised that they had not done underground wiring for
several years and they could not do the wiring within the required timeframe.
[23] As a result the development costs were much higher
than planned and there was a very difficult and stressful situation: for
example, at times it was necessary to rent generators, temporary above ground
electric wiring had to be installed at great expense, some home purchasers had
to move in without power while others had to move in without a telephone line
and there were also purchasers who had to stay in hotels for a period.
[24] The net result was that profits were only about a
quarter of what was expected and that is without taking account of the costs
that may arise out of litigation regarding phase 1 that is still pending.
[25] The evidence is quite clear that because of these
difficulties the Meander Limited Partnership decided not to proceed with any of
the phases after phase 1.
[26] This decision was made, at the earliest, in August
of 2004 and, at the latest, in December 2004.
[27] What was this decision? It was a decision not to
carry out any of the phases after the completion of phase 1. In direct examination
Mr. Beraznik was quite clear that as of the beginning of
December, just before he went on holiday, he had made no decision as to what
the Meander Limited Partnership should do next.
[28] In
re-examination he indicated that at that point he had not spoken to his
partner, Mrs. Joanne Peluso, but if they had spoken
they would have probably agreed that they would like to sell the land. He also
stated that they might well have been open to other possibilities such as a
joint venture with someone else to develop rental properties or a joint venture
with someone else where they would put up the land and the other party would
take care of all the work including having services put in.
[29] When at the beginning of December he informed Mr. Boilard that it was over, Mr. Boilard asked: what
would he do? Would he sell? They also discussed what the land might be worth. Mr. Beraznik said that they could discuss this
further after he came back from his vacation.
[30] Shortly after Mr. Beraznik left on his vacation he received three
messages from his office about callers. He said the he would call them back
once he reached San Francisco.
[31] He called all
three from San Francisco. All three calls were about possible purchases of the
Meander land planned for phase 2. Possible prices were raised in the calls. He
told all of them he would think about it if they made an offer.
[32] Mr.
Beraznik then called Mrs. Peluso and they agreed that they would decide what to do
once offers came in.
[33] Two
offers came in before he returned from San Francisco
and Mrs. Peluso
started examining them. Eventually, they decided to accept an offer from a
numbered company which, they later learned, was owned by Mr. Stéphan Huot.
[34] That offer
was accepted by Meander on 17 December 2004.
[35] Soon after that the construction companies who made
the other offer sued Meander. That lawsuit had the effect of delaying the
closing of the sale of phase 2. Both the Québec Superior Court and, at the end
of May 2008, the Québec Court of Appeal held in favor of Meander.
[36] During a discussion that Mr. Beraznik
had with Mr. Huot when they were at the courthouse
because of the lawsuit, Mr. Huot said to Mr. Beraznik that he wanted to
buy all of the Meander
lands.
[37] It was agreed that Mr. Huot would buy the land in phases and that because he
was to pay cash those phases would be staged over a number of years.
[38] Accordingly, Meander accepted an offer to purchase
for what would have been phase 3 on 4 May 2005; the act of sale for phase 4 is
dated 15 August 2006.
[39] Meander never
listed the land for sale with a broker.
[40] The
Meander financial statements for 2004 simply show the land sales as being
income whereas the financial statements for 2005 and 2006 distinguish between
“land sales – development” that correspond with sales of Phase 1 lots and
“gain on sale” for the sale of land that was originally destined for phases
other than phase 1. Note one of the financial statements for 2006 contain the
statement “In 2005 the partnership abandoned
the land development business, except to finish off the project already
started, and is selling off the remainder of the land in bulk.”
[41] According to Mr. Beraznik the accountant
made this distinction between the phase 1 land and the other land on the
financial statements for 2005 and 2006 as a result of attending a course where
the accountant learned about changes of use.
Analysis --
Meander
[42] Part of the Appellant’s argument was devoted to
arguing that vacant land could change from inventory to a use which would give
rise to a capital gain on disposition. The Respondent did not argue the
contrary and I accept that it is possible to convert vacant land from inventory
to a use which will give rise to a capital gain.
[43] These facts do not show that there was a change of
use of the property from inventory to a use which would give rise to a capital
gain on the disposition of the land in issue, the land other than the Phase 1
land.
[44] There is nothing in the evidence that shows that
there was a conversion of the land to an investment. There is nothing in the
evidence to show a conversion of the land to a capital asset to be used by the
business.
[45] There was a clear decision to stop further
development; there was no action or decision to do anything else before the
sales. One could perhaps qualify this as a "change of plan" but that
is not a change of use to the kind of use which would result in a capital gain
on disposition of the land.
[46] There was simply a sale in bulk of each phase.
[47] These facts fall squarely within the principles
illustrated by the decision of the Federal Court of Appeal in Edmund Peachey
Ltd. v. The Queen.
[48] In Peachey, farm land, known as the Codlin
Farm, was acquired for development into serviced residential lots in 1956. In
1960 an application was made to rezone the farmland for residential development
and in 1961 the land was zoned industrial preventing residential development.
As a result Peachey abandoned its plan to develop the Codlin Farm and,
more generally, decided to wind down its other house building activities.
[49] Nothing else was done with the Codlin Farm and, in
1971, the Farm was sold as a result of an unsolicited offer, the first offer
received for the farm land.
[50] The Federal Court of Appeal held that the
disposition was on income account because nothing was done to change the use to
a use which would result in a later disposition of the property giving rise to
a capital gain. At paragraph 10 the Court stated, in part:
… [The Court referred to the following passage of
the decision of President Jackett (as he then was) in Les Entreprises
Chelsea Limitée v. MNR, [1970] C.T.C. 598, 70 D.T.C. 6379:]
In my view, where one finds such a business, as long
as there continues to be land of the original inventory of the business in the
ownership of the company, it is reasonable to assume that the business has
not been brought to an end in the absence of some evidence that something has
been done to bring the business to an end, as, for example, where the
corporation takes the land out of the business and dedicates it to the creation
of some structure to be used as the capital asset of another business.
It is, in my view, a proper statement of the law and
the learned trial judge was right to rely on it. I agree with the learned trial
judge that a clear and unequivocal positive act implementing a change of
intention would be necessary to change the character of the land in question
from a trading asset to a capital asset — and that on the facts here present,
there was no evidence of such a positive or overt act. There was no documentary
evidence to indicate that the new intention had been carried into reality,
there was no dedicating of the land for another purpose. All that we have here
is the expressed intention of the appellant to thenceforth hold the land as a
capital asset. That is not, in my view, sufficient of itself to convert the
proceeds of sale from trading proceeds to proceeds from the sale of a capital
asset.
(Emphasis
added to the quote from Les Entreprises Chelsea Limitée).
[51] In the absence of a conversion to some other use of
the property such that its disposition would give rise to a capital gain it is
clear from the principles in Peachey the disposition of the land in
issue remains a disposition on income account; a mere bulk sale of inventory,
which is what we have here, does not convert the gain on disposition from an
income gain to a capital gain.
[52] Had the Meander partnership entered into a joint
venture with another company or partnership to develop rental properties on the
land and then, at some later time, because of intervening events, disposed of,
say, a portion of the land that had gone into that joint venture, depending on
the circumstances, it might well be that that disposition would be on capital
account. That is a very different situation from the situation here.
[53] The Appellant put a certain amount of emphasis on
the treatment of the property in issue in the financial statements and on the
fact that the sales resulted from unsolicited offers.
[54] Whether disposition of a property will give rise to
an income gain or a capital gain depends on the reason for its acquisition or,
where the issues is a change of use, the existence of a change of use. In
evaluating the reason for acquisition or the existence of a change of use the
courts look not only to stated intention but also to all the surrounding
circumstances, inter alia, to see if there is objective evidence that
will confirm the stated intention.
[55] It is in this context that factors such as
unsolicited offers or the way in which the financial statements treat a
property may be considered for the purpose of evaluating the character of the
property. Neither the fact that an offer is unsolicited nor the fact that
there was a particular treatment in the financial statements can in
themselves convert property that is inventory to property that will give
rise to a capital gain on disposition.
[56] Accordingly, the Meander gain was on income
account.
JR Investments
Limited Partnership
[57] The issue in the case of the JR Partnership is the
sale of four parcels of land in Charlesbourg, specifically:
·
a sale in 2005
to Fondation de la Faune for an amount of $180,000,
·
a sale in 2006
to Centre Jardin Hamel for $58,500,
·
a sale in 2006
to Développement de la Capitale for $401,315 and
·
a
second sale in 2006 to Développement de la Capitale for $360,000.
[58] The
Cliffton group had been developing the Charlesbourg land for many years. As previously explained it had
originated in an effort to increase the number of residents near one of the
shopping
centres of the group,
thereby helping to increase business at the shopping centre. Most of the Charlesbourg land sold by the partnership
consisted of serviced lots and was reported on income account.
[59] The four lots I have referred to above were
reported as capital gains.
[60] The partnership wanted to develop the first parcel
of land in question but was unable to and was sold to Fondation de la Faune. It
was not serviced land.
[61] With
respect to the land sold to Centre Jardin Hamel, at some point it was discovered that a small
triangular parcel of land owned by the partnership had been used by the garden
centre for its business for many years. After some negotiations, the
partnership sold the land to the garden centre for its municipal valuation. It
was also unserviced land.
[62] Finally, the two sales to Développement de la
Capitale were also sales of unserviced land.
Analysis JR
Land
[63] The
applicable principles are the same as I have previously described in dealing
with the Meander property.
[64] The
four sales in question may not have been the usual sale of serviced lots but
there is nothing in the evidence to suggest that at any point these lots were to
be held as an investment or otherwise converted from inventory to a kind of use
that would result in these properties producing a capital gain on their
disposition.
[65] The
mere fact that the parcels of land in question were sold unserviced does not in
itself convert these sales into sales producing capital gains.
Conclusion
[66] For these reasons the appeals will be dismissed
with costs.
Signed at Montreal, Quebec,
this 11th day of May 2012.
« Gaston Jorré »
Email this Content