Colville-Reeves v. The Queen, 82 DTC 6005, [1981] CTC 512 (FCTD)

Mahoney, J:—The issue is whether a profit of $101,646.41 realized by the plaintiff in 1971, on the disposition of an interest in an apartment complex bought in 1970, was a capital gain or income. The plaintiff was, at all material times, an employee of A E LePage Limited, hereafter “LePage”, involved in leasing and selling commercial properties in Toronto. Specifically the plaintiff was not personally involved, as an employee of LePage, with apartment buildings. LePage is itself actively engaged, as a realtor, in all aspects of real estate. The plaintiff joined LePage on immigrating to Canada in 1961. His first employment was as assistant to Gordon Grey, vice-president in charge of the office leasing department.

The plaintiff’s subsequent personal real estate related transactions follow. Except where expressly indicated, all involved properties are located in or around Toronto.

1. In 1961, for $1,000, he acquired a 10% interest in a small Yonge Street commercial property. Grey was a member of the group. The property was sold in 1966.

2. In 1963, he bought a residence in which the family lived until 1968. It was rented from 1968 to 1975 and sold in 1975.

3. In 1964, he bought a personal cottage at Muldrew Lake which he sold in or about 1978 after buying another cottage on the same lake.

4. In 1964, he bought a / interest in a partnership, Tempus Investments, which has since purchased 13 residences, all of which it still owns. Tempus also bought 2 cottages and 2 vacant cottage lots at Muldrew Lake. One of the vacant lots was developed and sold, the other was sold undeveloped. Both cottages were sold, the second in 1979. Grey is also a / partner.

5. In 1965, the plaintiff bought a second cottage at Muldrew Lake for $8,900. He sold it in 1968 to pay an income tax assessment.

6. In 1966, he acquired a 30% interest in a small office building at 4985 Yonge Street for $9,500, the proceeds of the sale mentioned in paragraph 1. The plaintiff personally managed this property until it was sold in 1973. Grey also participated.

7. At Grey’s invitation, the plaintiff purchased 2 of the outstanding shares of Woburn Gate Limited, hereafter “Woburn”, in 1966. He understood that Woburn was developing some town houses in Scarboro and planned to build some in Etobicoke. The Scarboro town houses were subsequently sold. Woburn still owns the Etobicoke town houses. It is pleaded, and not denied, that Grey controlled Woburn.

8. In 1967, he acquired a 10% interest in a small walk-up office building on Eglinton Avenue for $9,000. Grey was also a member of the syndicate. It was intended to redevelop the property; however, it had not been redeveloped when it was sold in or about 1979.

9. In 1968, the plaintiff purchased a new residence.

10. In 1968, he acquired from Woburn a 12% interest in some rental town houses for $20,000. Grey was also a member of the purchasing syndicate known as Thornhill Investments. The plaintiff still owns this interest.

11. In 1968, he bought a 5% interest in another small Eglinton Avenue building for $3,500. This was sold in or about 1979. Grey, too, was interested.

12. In 1969, the plaintiff bought a 1% interest in undeveloped farm land at Markham which was expropriated in 1974. Grey also had an interest.

13. In 1970, he made the purchase that led to the 1971 sale in issue. I will return to it.

14. In 1970, the plaintiff acquired a 26% interest in another Eglinton Avenue building, which he still owns, for $26,000. Grey was also interested.

15. In 1971, he bought a 30% interest in a building at Yonge and Elm which he still owns, for $82,250, part of the proceeds of the sale in issue. Grey is in on this.

16. In 1971, he acquired a 50% interest in a property on Queen Street East, later converted to a squash club, which he still owns, for $5,000 down. Grey has the other 50%

17. In 1971, for $3,000 down, he bought a house for his mother, which he still owns.

18. In 1972, with Grey, the plaintiff acquired a / interest in a vacant land on Holly Street on which it is intended to build an office building. His interest cost him $10,000 and he still has it.

19. In 1972, the syndicate referred to in paragraph 15, of which he owns 30%, bought property adjoining its previous purchase. It is still owned.

20. In 1973, the same syndicate bought, and still owns, a further adjoining property.

21. He bought a new residence, which he still owns, in 1973.

22. In 1974, the plaintiff bought, as rental properties, a house and a town house in Aspen, Colorado, for $22,000 down. The house was sold in 1980. He still owns the town house.

23. In 1975, he bought a half interest in another cottage at Muldrew Lake. He acquired the other half interest in 1980 and still owns the cottage.

24. In 1978, the plaintiff bought 21 MURBs in Port Credit and Oakville. One was subject to an option that was exercised. He retains the rest.

25. In 1978, he acquired a half interest in a US company that bought five commercial properties for rental in Boston. This is still owned.

The transactions in issue involve a 295 suite apartment complex known as the Sandhurst in Scarboro. It was built, pursuant to a joint venture agreement, dated January 17, 1966, between Woburn and Goldlist Construction Limited, hereafter “Goldlist”, whereby Goldlist, inter alia, acquired a half interest in land which had been purchased by Woburn October 15, 1964. Goldlist is a large builder and operator of apartment accommodation in the Toronto area with a reputation for better than average quality construction. It is said to have had under its management between 1,500 and 2,000 suites at all times since 1966. It has sold properties that it has owned but does not actively seek to sell them. Its profit on the sale of the Sandhurst was considered a capital gain by the Minister of National Revenue.

Goldlist held half of its 50% interest in the Sandhurst in trust for Brian Magee, an officer of LePage. Magee had participated with Goldlist in a number of deals during the early 1960’s and the Sandhurst deal was a continuation of that relationship. Goldlist understood that Woburn was a limited company owned by Grey and Richard Costain (Canada) Ltd. Construction of the Sandhurst began in 1966 and the first occupancy was in August, 1968. LePage was responsible for leasing and management until mid-1970, when Goldlist Property Management Limited took over. The Goldlist interests had not been entirely satisfied with Lepage’s performance and wished, as neighboring competition increased, to take more aggressive action to keep tenants. This involved provision of a day care centre and upgrading in the area of repairs, landscaping, signing and security. This resulted in a gradual improvement of occupancy and cash flow. However, when the financial results for the six months ended December 31, 1970, were in, costs for the period proved higher than budgeted. As long as Woburn held the interest, Goldlist communicated only with Grey relative to it.

In December, 1970, the plaintiff was invited by Grey to take an interest in the Centre Syndicate which was intended to acquire Woburn’s interest in the Sandhurst. Costain was to be taken out of the picture. In the result, Grey and the plaintiff each took a 48% interest in Centre Syndicate and three other LePage employees shared the remaining 4%. By letter agreement, dated December 22, confirming a verbal agreement of December 2, Centre Syndicate, with Goldlist’s consent, bought Woburn’s 50% interest in the Sandhurst for $2,036,000.

The plaintiff’s evidence is that he knew nothing about the Sandhurst except that it was an apartment building built by George Goldlist. It is to be remembered that the plaintiff had acquired his interest in Woburn in 1966. The evidence does not disclose whether that was before or after Woburn entered into the joint venture with Goldlist. In any event, the plaintiff had had, through Woburn, an interest in the Sandhurst from at least its early stage of construction. To that extent, the plaintiff’s assertion that he had never bought part of an apartment building before Centre Syndicate is not quite accurate. His decision to participate in Centre Syndicate followed a 3 to 5 minute conversation with Grey. He had been given a projection from which he concluded that there would be no immediate cash flow generated by the Sandhurst but the long term projection was for a satisfactory cash flow. He knew that Goldlist built well. The Thornhill Investments’ town houses had been built by Goldlist and had, in the plaintiff’s words, “proved viable”.

The plaintiff’s required cash contribution was about $55,000. His net commission income for 1970 was over $210,000 and he was glad of the tax shelter that then permitted him to deduct his share of the Sandhurst’s entire 1970 loss, including full capital cost allowance, from his other income in arriving at his taxable income.

The plaintiff and Gary Griesdorf, then Goldlist’s vice-president of finance, were the only witnesses at this trial. Neither Goldlist nor the plaintiff took any active step to sell the Sandhurst. There is no evidence as to the actions, or lack thereof, of others interested in the property.

In late April, 1971, Griesdorf, was approached by Mr Farber of The Metropolitan Trust Company, hereafter “Metropolitan”. They met on May 3. Griesdorf was advised that Farber had a German client whom he thought would be interested in buying the Sandhurst for about $1,000,000, net of commission, cash to the outstanding first mortgage. Griesdorf considered the price very high and concluded that it would be a very long time, if ever, before the joint venture could realize a comparable return on their investment. He recommended the sale. On May 5, Goldlist gave Metropolitan a 10 day exclusive listing on the Sandhurst to permit Metropolitan to obtain a firm offer from its German client. Goldlist appears not yet to have discussed the potential offer with Centre Syndicate. On May 7, Metropolitan confirmed that if all the Sandhurst’s owners were agreeable to the sale on the terms discussed between Farber and Griesdorf, an offer would be made.

The plaintiff had nothing to do with the Sandhurst from the time he bought into Centre Syndicate until Grey phoned him to advise him of the pending offer. He regarded it as extremely high. He attended a meeting on May 11, 1971, at the Goldlist offices. While the indicated price was so high that the plaintiff could scarcely believe it, he did not want to sell because he had enough income for the year. I do not know what his income was up to May, 1971, but his net commissions for the entire year were $70,480, compared to over $210,000 the year before. In any event, the plaintiff felt that he had no option but to go along with Goldlist and others of the Centre Syndicate who did want to sell at the indicated price. On May 11, Griesdorf wrote Metropolitan and, the next day, Metropolitan made its offer. Goldlist accepted. The deal closed. The plaintiff’s share of the profit was $101,646.41.

The sole issue is whether that $101,646.41 was profit from a business within the extended meaning of “business” as defined by the Income Tax Act of the day:

“business” includes a profession, calling, trade, manufacture or undertaking of any kind whatsoever and includes an adventure or concern in the nature of trade but does not include an office or employment;

The questions to be answered are whether the plaintiff was, at the material time, in the business of trading in interests in real estate for his personal account or, if not, whether his investment in the Sandhurst was an adventure in the nature of trade. The availability of a tax shelter is undoubtedly a plus factor from the point of view of any taxpayer proposing to engage in any transaction; however, I fail to see that it can have any bearing whatever on the determination of whether he entered into the transaction in the course of his business or, if not, as an adventure in the nature of trade.

As to whether the plaintiff was a trader or dealer in real estate, a good many of his direct acquisitions were through participation in syndicates with, among others, Gordon Grey who has clearly been a great benefactor to his former aide. The defendant pleads that Grey was himself a trader in real estate and there is no evidence to the contrary. There is also no evidence of Grey’s personal real estate transactions aside from those in which the plaintiff participated. That a person associates himself with a trader in pertinent transactions is relevant but not conclusive to the determination whether or not the person is himself a trader.

The defendant pleads that Brian Magee was a trader in real estate and that was not refuted. That appears to be entirely irrelevant. There is no evidence that the plaintiff and Magee were involved together in any real estate transactions for their own accounts except the Sandhurst sale. Specifically, the evidence is that they were not jointly involved in the acquisition of their respective interests in the Sandhurst. The same is true of the plaintiff and Goldlist, who was also alleged to have been a trader, although the evidence is that its profit on the sale of the Sandhurst was not assessed to it as income.

As to the indirect acquisitions through shareholdings in companies, the defendant’s plea that Woburn was a trader has not been disproved. That, again, is of marginal relevance to the question of whether the plaintiff was a trader. Grey controlled Woburn and the plaintiff’s equity was 2 The bare fact of share ownership does not support an inference that the shareholder is engaged in the business of the company.

All of the foregoing leads to me to conclude that the question whether or not the plaintiff was, at the relevant time, a trader or dealer in real estate ought to be determined primarily with reference to his own activities, not that of his associates. His acquisitions and dispositions of personal use properties are neither here nor there. They have not been so frequent as to give rise to any question of trading. His other transactions have been relatively numerous. His acquisitions, other than for personal use, have all been revenue producing properties except for the Markham and Holly Street properties. The former was expropriated and the latter is still held. Whatever his intentions in buying them, he cannot be said to have dealt with them in trade. All interests acquired, except for that in issue and those most recently acquired and still held and, possibly, some of Tempus’ Muldrew Lake acquisitions, have been held by him and the syndicates a minimum of five years, most of them much longer.

With the possible exceptions identified above, all of the plaintiff’s nonpersonal use real estate acquisitions, over two decades, have been of a character and have been dealt with by him in a manner entirely consistent with his avowed objective of investing, rather than trading or dealing, in those interests. I accept that the plaintiff was not, when he bought and sold his interest in the Sandhurst, engaged in the business of trading or dealing in interests in real estate for his own account.

The question remains whether his acquisition of the interest in the Sandhurst was an adventure in the nature of trade. If his acquisition did not amount to that, then nothing in the circumstances of his ownership or disposition changed its character.

The plaintiff says that his intention in taking the participation in the Sandhurst offered him by Grey was to acquire yet another investment in real estate. The two apparent inconsistencies in his evidence: his oversight of his earlier interest, through Woburn, in the Sandhurst and his rationalization of his disinterest in selling the Sandhurst because of his high 1971 income level, do not raise doubts as to his credibility. The first was an understandable oversight; the latter a gratuitous banality. That he would sell was never in doubt; the evidence is clear that the offer was too good to refuse.

As I have already found, the whole of the circumstantial evidence falls heavily on the side of supporting the plaintiff’s testimony that he has been, over the course of two decades, an investor in real estate for his own account. The circumstantial evidence as to his acquisition of the interest in the Sandhurst is slight but, such as it is, does not tend to contradict his story, He clearly had funds to invest from his exceptional 1970 earnings and his obvious reliance on Grey in lieu of an independent assessment of the quality of the proposed investment was of a piece with the course of conduct that had served him well in the past.

The plaintiff has discharged the onus of proving that his profit on disposal of his interest in the Sandhurst was not income from a business as defined by the Income Tax Act. His 1971 return will be referred back for reassessment on that basis. The plaintiff is entitled to his costs.