The Queen v. Borinsky, 77 DTC 5389, [1977] CTC 570 (FCTD)

Collier, J:—In November of 1955 Harold and Jacob Borinsky, brothers, along with Max Borinsky, Jacob’s son, bought a farm of roughly 154 acres. The purchase price was approximately $175,000. By 1969, about 140 acres remained. In that year the property was sold for $1,236,600.

In reassessments for 1969, 1970 and 1971 (the years here in review), the Minister of National Revenue, in respect of the three Borinskys, treated their shares of the gain as income. The Borinskys contended it was on the capital side. The Tax Review Board found in their favour. From that decision the plaintiff, through the Minister, appeals to this Court.

As has been said many times, the question, especially in cases concerned with an adventure in the nature of trade, is essentially one of fact: “These cases must all depend on their particular facts. . . .”” [1]

I therefore turn to the facts here.

Harold Borinsky is now 79 years old. Jacob is 81. Max is 57. Around 1909 the brothers came with their father to the Toronto area from Russia. The father first worked in a foundry. He wanted to farm. In Russia, Jews had not been permitted to do this. He began farming in Stouffville, about 30 miles from Toronto. The two boys helped on the farm until it was sold some time before the end of World War I.7 [2] The family then went into the creamery business; whether singly, or as a unit, is not clear.

The two sons did not receive too much in the way of formal education. They worked.

Jacob was in the creamery business until 1923 when he went to California. He was in the dairy business there. He returned to Toronto in 1928. He went into the marketing of butter and eggs and subsequently expanded into processed cheese. When margarine was legalized in Canada in 1948 he went into that business on a large scale. Max started with his father’s business around 1936, at the age of 16. This enterprise had its own plant in 1944. As it expanded, a bigger plant was required and obtained. All this was before 1955. It was known as Monarch Fine Foods Ltd. Its gross sales ran into millions. In 1955 it was the principal endeavour of Jacob and his son. In 1962 an American corporation bought control. Max remained in Monarch’s employ for a further 18 months.

Until the purchase of their interest in the farm property in 1955, Jacob and Max Borinsky had not engaged in real estate ventures of any kind, whether for investment, speculation or income purposes. There had been plant and realty purchases for the Monarch company. As individuals they had bought their own homes. They had sold and bought other homes, as the family needs required.

After Monarch was taken over, Jacob and Max and their family began to acquire land and buildings for income purposes. They started first in 1963 with land for an apartment building. The structure itself was completed in the following two years. In 1967 the family began acquiring land for development as industrial sites. They also bought existing industrial buildings. They continue doing that today, as economic conditions warrant. Exhibit 9 is a list and description of the various acquisitions and developments since 1963. It includes another apartment project. The total number of developed properties is in the neighbourhood of 42. None of the lands or buildings on them have ever been sold. They are held for rental income. The gross revenue is very substantial.

I go now to Harold Borinsky’s history. I have already recounted some of his earlier endeavours. He remained in the creamery business until 1948. Back in 1920 he and a neighbour bought a commercial premise in Toronto. They made some improvements to it and rented to tenants. That building was sold in 1942. After leaving the creamery business in 1948 he bought a hotel on King Street in Toronto. He and his son operated it. It was sold in 1960. He still receives mortgage payments in respect of that transaction.

In 1955 there was this situation. Jacob and his son were engaged full time with the affairs of Monarch. Harold had retired from the creamery business. He was the owner of a hotel. He had more time on his hands. He and his son spent alternate days only at the hotel.

Harold became interested in purchasing property for industrial site development purposes. He found the property giving rise to this litigation. It was called the Bagg Farm. It was in the then Township of Vaughan. It was ideally located just near the outskirts of Toronto, approximately 12 miles from the downtown core. It was very close to two main highways and two important Toronto thoroughfares.

Harold discussed the matter with his brother. Jacob was willing to participate but wanted his son to join in as well. It was agreed between the two brothers they would participate equally. Jacob could then bring his son into the transaction in respect of his 50% interest. That was done.

At the time of purchase the Township of Vaughan had practically no zoning by-laws. The area was rural. There was no municipal sewer and water services. The Borinskys knew this. They felt it would just be a matter of time before industrial development would be permitted and municipal services became available. I accept their evidence on that point. Their expectation was, to me, understandable and logical.

The Borinskys could have paid for the farm outright. Instead they paid $60,000 in cash and signed a mortgage for the balance. The mortgage provided for half-yearly payments of $5,000 for 10 years, with the final balance payable on December 8, 1965. The document permitted prepayment without notice or bonus. In fact it was paid before its full term.

Harold took over the management of the property. There were two houses on the land. Those were rented to individual tenants. The farmland itself was leased to a dairy which ran cattle on it. Difficulties and problems immediately arose with the tenants of the houses. There was a turnover of tenants. Some owed rent. Others did not pay utility bills. The Borinskys were obliged to pay them. Harold Borinsky’s wife was not well. He was still managing the hotel.

Because of all these problems an option to purchase was, on June 11, 1956, given to one Phillips. The option was open for 16 days. If exercised, the purchase price was to be $246,400, payable as follows: $138,400 in cash by November 30, 1956, and a mortgage of $108,000 payable in half-yearly instalments of $5,000 each.

The option was not exercised. The problems with tenants lessened. No further options were ever given.

The houses and the farmland itself continued to be rented until the property was disposed of in 1969. The rental income at times exceeded and at times was less than the taxes, maintenance and other costs (not including the mortgage payments).

All three Borinskys testified that at the time of the acquisition of the Bagg Farm their only intention was to hold it for investment. Their purpose was to build on it, in due time, industrial buildings and rent them. The investment would thus be a source of income.

The plaintiff points to the Phillips option (and to other matters) as evidence of objective facts refuting the taxpayers’ avowed intention. I shall deal later with the rival contentions.

At some stage (the exact date is unclear but I got the impression it was before the Kagan transaction*) [3] the Borinskys consulted engineers about the development of the property as an industrial site. What their recommendation was, I do not know.

In November 1958, 3 acres at the south-east corner of the property were sold to a David Kagan. Kagan was in the electrical manufacturing business. He wanted to construct an industrial building for his operation. He approached Harold Borinsky in respect of this transaction. The price was $3,800 per acre. There were a number of Stipulations attached to this sale. The Planning Board of the Township had to consent; Kagan had to obtain a building permit for the erection of an industrial building of not less than 5,000 square feet; the minimum cost of the building was to be $40,000; the property was to be zoned for light industrial purposes; the building was to be erected by November 15, 1959. If the building was not completed in accordance with the agreement, then the Borinskys had the option to buy back the 3 acres for the price at which they had sold to Kagan.

The reason for the Kagan arrangement seems quite clear. It was to be a testing of the waters. The Borinskys were content to let Kagan be the one to obtain a zoning authorization permitting industrial development. Sewer and water services would, obviously, be a matter for discussion, as well, with the Township. Jacob and Max Borinsky were still basically engaged in Monarch’s affairs and destinies.

Unfortunately, the testing of the waters by Kagan did not come about. The Canadian National Railway had a rail line in the area. It expropriated some part of Kagan’s 3 acres. That expropriation effectively put an end to the feasibility of Kagan constructing a building as specified. The Borinskys enlisted legal help to recover the land in accordance with the return-option provision. Those efforts were not successful.

In 1960 the official plan of the Township of Vaughan was amended. Certain areas were designated as residential, industrial or rural. The Bagg Farm was left in the latter category. By 1962 the area in which the farm was located was denoted as industrial. A complementary zoning by-law would have had to be passed as development in fact took place. In 1962 certain municipal sewer and water services became available. Those services could or would have embraced the Borinsky property. They were never, in fact, supplied.

I have already recounted the sale of Monarch in 1962 and the entry of Jacob and Max into the purchases of land and development of commercial properties in 1963. The ages of the senior Borinskys at that time must be kept in mind. Jacob was 67. Harold was 65. It should also be remembered that Harold was not part of the new ventures embarked upon by his brother and nephew after those two relinquished their interest in Monarch.

From 1955 to the mid-1960’s development in the Township of Vaughan was relatively stagnant. After that time it increased. Land values began to go up.

some time after the Kagan expropriation (the dates are again unclear but probably in the early 1960’s), the Canadian National Railway twice expropriated parcels of the Borinsky property. Approximately 11 acres were taken. The railway was constructing or expanding marshalling yards. The effect of this work was testified to be a neutral factor in the development or value of the farm property. The net gains received by the Borinskys on the expropriations were assessed by the Department of National Revenue as income. The Borinskys, on the advice of their chartered accountant, did not appeal the assessments. It was felt the amount at stake did not warrant the probable costs of litigation.

I proceed now to the sale of the property in 1969.

From 1958 on, the Borinskys had never listed for sale, or advertised, solicited or encouraged the sale of the holding. Nor had they taken any steps to that end. In the latter part of 1968 a real estate agent came to Harold Borinsky with offers to purchase. There were three (Exhibits 7, 8 and 10). Harold, at trial, felt this interest had been stimulated by an article in the Toronto Star suggesting Metropolitan Toronto was going to expand in a direction which would envelop the property. Harold discussed the matter of sale with Max. Jacob was in Florida.

Harold wanted to accept the best offer and sell. He was then 71 years old. His wife was still ill. He had become tired of waiting for the property to be developed to provide income. The offers to purchase included 20-year mortgages back by the purchasers. The payments would, with his other sources, augment the moneys available to provide for the future needs of himself and his wife. He conceded that he knew a sale would net him a “nice” profit.

Max did not want to sell. He discussed the matter by telephone with his father. His father, too, did not want to sell. Both preferred to hold on to the property in order to carry out their initial goal of developing it as an industrial site. They felt it was still ideal for the purpose, if the necessary zoning and services could be obtained. They gave serious consideration to buying out Harold’s interest. Before doing so they sought the advice of their chartered accountant, Mr Cole. He counselled against their proposal. He felt that purchasing Harold’s interest might cause family friction at a later time when the property was dealt with. I can well appreciate the soundness of that advice. It was accepted.

An agreement for sale and purchase dated December 20, 1968 was entered into. The sale and mortgage documents were completed in 1969.

I now go to the contention of capital gain versus income.

At the outset I should say I accept the testimony of the three Borinskys. They impressed me as truthful and trustworthy witnesses. In assessing their credibility I was mindful that it was in their interest, particularly in matters of “intention”, to tailor their testimony in order to obtain the best tax result. I am satisfied they did not do so. Their evidence Is, in my view, consistent with the reasonable inferences and probabilities to be drawn from the other objective facts here present.

The plaintiff contends the taxpayers never had a realistic intention, at the time of acquisition, to hold the property for industrial site development purposes; for them merely to say they intended that result Is insufficient; the so-called objective facts belie the avowed intention.

The plaintiff points to the following matters. At the time the farm was acquired the designated use was rural or agricultural. No services were available. The taxpayer, it is said, took no realistic steps to try and obtain a change in use designation or the provision of services and water; there was never any reasonable assurance the property could be used for the purposes they “hoped”. The granting of the Phillips option within 8 months of the acquisition is relied on as negativing their professed intention.

I do not agree with these submissions. The evidence of Max Borinsky, which I accept, is that ihe taxpayers were in no hurry to develop the site. Monarch was st;!! an active interest. Harold Borinsky still had the hotel. There was no plan to develop the property all at once, or immediately. It was their belief (and I have found it justified) the necessary changes in use designation and provision of municipal services would come about in due time.

As to the Phillips option, I accept Max Borinsky’s evidence that he and his father did not really want to give the option. The impetus came from Harold. He was managing the property. He was disgruntled with the tenant problems. As I see it, the granting of the Phillips option cannot reasonably be related back to the time when the farm was acquired to show there was no realistic intent to hold and develop the property. To put it another way, I am not persuaded the granting of the Phillips option indicates that at the time of buying the farm the taxpayers had, in their minds, as an operating motive, the possibility of resale at an enhanced value.

I accept the testimony of the Borinskys that their purpose, at the time they acquired the Bagg Farm, was for the reasons given by them.* [4] In essence that was to develop the property to provide a source of rental income for the two Borinsky families. There was not, in my opinion, the speculative intent found in D C McDonald v The Queen, [1974] CTC 836; 74 DTC 6644 (FCA).* [5]

The plaintiff urges that at all key times, and of course at the outset, the taxpayer had a flexible or ambivalent intent—a wait and see approach: we may develop and build, or we may not. For the reasons I have already given I reject that submission.

Finally, the plaintiff argues that if the taxpayers had, at the lime of acquisition, the primary intent to develop the property as an industrial site, they had also, at the same time, as an operating motive in the purchase, the possibility of reselling. The principle formulated by Noël, J in Racine, Demers and Nolin v MNR, [1965] 2 Ex CR 338; [1965] CTC 150; 65 DTC 5098, is relied upon:t [6]

To give to a transaction which involves the acquisition of capital the double character of also being at the same time an adventure in the nature of trade, the purchaser must have in his mind, at the moment of the purchase, the possibility of reselling as an operating motivation for the acquisition; that is to say that he must have had in mind that upon a certain type of circumstances arising he had hopes of being able to resell it at a profit instead of using the thing purchased for purposes of capital.

There was not, in my opinion, any so-called “secondary intention” here at the moment of purchase. Max Borinsky, in cross-examination, said that selling property at a profit is always a thought. That is very true. The vast majority of homeowners have in the back of their minds the knowledge that at some time they might be able to sell their home at a profit. But in most cases this possibility is not a motivation actuating or impelling the purchase in the first instance. On the facts as I find them here, that was the case with the Borinskys. Eventual circumstances might dictate a sale. But the purchase of the Bagg Farm was not motivated, in part or in whole, by the possibility of resale.

It is of some relevance, although by no means conclusive, that the property here was held for approximately 14 years. The probabilities are it could have been sold for a profit long before it was. The general pattern of Jacob and Max Borinsky in acquiring properties and retaining them for income purposes is also a factor to be considered. Again, it is not conclusive. They sometimes hold properties for several years before actual development work is done.

The appeal of the plaintiff is dismissed. The judgment of the Tax Review Board, dated April 1, 1976, is affirmed.

This appeal (T-2626-76) in respect of Harold Borinsky is in respect of the 1969 taxation year. The appeals in respect of his 1970 and 1971 taxation years were heard on common evidence. The appeals in respect of Jacob Borinsky and Max Borinsky were also heard at the same time and on the same evidence.

These reasons will apply in the other eight appeals.

The defendants in each action were represented by one solicitor and counsel. The defendants will therefore recover one set of taxed costs from the plaintiff.