Thom v. The Queen, 79 DTC 5324, [1979] CTC 403 (FCTD)

Grant, DJ:—As the issues in these two cases are identical and the plaintiffs are husband and wife with the same counsel acting, the actions were tried together and this judgment will suffice for both cases.

Sadler’s Auto Electric Limited (hereinafter called “the Sadler Company”), is Ontario incorporated and from 1964 to 1974 carried on the business of manufacturing and selling automobile parts in the city of St Catharines. One George William Sadler and the Canada Trust Company as executors of the estate of his wife, the late Bertha Agnes Sadler owned all the outstanding shares in such company. By a share purchase agreement dated February 29,1964, the said Sadler and such executor company sold all such shares to the plaintiff David Thom for a total sum of $90,000. On April 1, 1964, the plaintiff David Thom assigned to K and D Thom Limited, an Ontario Company incorporated by him in the previous month, all his rights under such purchase agreement. At all relevant times K & D Thom Limited has remained the beneficial owner of all issued shares in the Sadler Company, and all shares in K and D Thom Limited have been owned by David Thorn and his wife Kathleen Thorn.

Both before 1964 and thereafter until 1974, the company carried on its said business on premises municipally known as 73 Ontario Street, St Catharines, Ontario. Until 1974 such real estate had at all material times been owned by William Sadler and the estate of his said wife who at the time of such share purchase agreement entered into a lease thereof, also, dated February 29, 1964, to the said Sadler company for a term of ten years and one month at an annual rental of $7,200 payable monthly in advance. The plaintiff David Thorn guaranteed payment of such rent and all other obligations of the lessee company under the provisions of such lease. Such lease also provided that, in consideration of such guarantee by the plaintiff David Thom, the lessors granted to him, his heirs, executors, administrators, successors and assigns, the exclusive right, privilege and option of purchasing such real estate for the sum of $70,000 at any time during the term of such lease.

The plaintiff Kathleen Thom had provided more than one-half of the capital required for the down payment of $50,000 under such share purchase agreement and it was understood and agreed between such two plaintiffs that he had acquired such option for his said wife and himself in equal shares.

The Sadler Company continued to carry on its business in such real estate under the guidance of the plaintiff David Thom paying rent therefor in accordance with the terms of such lease from March of 1964 until early in 1974.

At the time of the preparation of such lease David Thom’s solicitor had advised him to secure such option so that he could be certain of retaining the premises for such business when the lease expired or sooner if he should desire to do so. The location of the lot and building were particularly Suitable to the business and was well known to the customers. There is no doubt but that it was the intention of both plaintiffs at the time of the acquisition of such option to retain the same as a Capital asset to be used in the purchase of such building and land if and when that became necessary for its retention as the place of business of the Sadler Company.

Such parties had no different intention in respect of such option until late in 1973. The plaintiffs were aware of the gradual increase in the value of said lands from 1964. By 1974, an office building was erected on adjoining lands. The option, by 1973, had become an asset of considerable increased value. Because of this it is reasonable to assume that they would not have allowed the option to expire in 1974 whether they were then still carrying on the business or not. It is also reasonable to assume that the optionors would not then have extended the option on the same terms. The decision to exercise the option therefore was not made simply because of the opportunity to resell at the profit realized.

Early in 1973 the plaintiffs discovered that the Sadler Company had been the victim of considerable embezzlement of its funds. Some of such company’s employees then started business in opposition to it and deprived such company of about 40% of its trade so that it was unable to operate profitably. The plaintiffs made up their minds late in 1973 to cease carrying on such business and to sell the assets of the company.

They therefore listed the property for sale with a local real estate agent about November 1, 1973 with instructions to ask $150,000 for it. As no sale was realized they then listed it with another agent who said he might realize that price for it in five months but that he had a party willing to then pay $120,000 for it. An agreement of sale was entered into with Artell Developments, as purchasers, at such sale price, on February 9, 1974. The plaintiff’s solicitors, on February 21, duly gave notice of exercising such option. The plaintiffs, on April 19, received the deed to such property from The Canada Trust Company as executors of the estates of George William Sadler and Bertha Agnes Sadler, deceased, in their joint names. They completed the sale of the property to Artell Developments Limited on May 31, 1974.

At the time of exercising such option the plaintiffs had abandoned any thought of carrying on business in such premises and their sole purpose and intention then was to acquire the same for the purpose of completing such resale. In their income tax returns for the 1974 taxation year, each plaintiff reported a capital gain of $25,000 on the disposition of their halfinterest in such real estate, calculated on the basis of a total cost price of $70,00 and total selling price of $120,000. By a notice of reassessment dated November 12, 1976, the Minister of National Revenue reassessed such income of each plaintiff by including such gain of $25,000 as income rather than capital gain on the basis that it was income arising by virtue of a business or an adventure in the nature of trade. The plaintiffs duly filed a notice of objection to such reassessment but the Minister of National Revenue, by notice dated October 18, 1977, confirmed the reassessment so previously made by him. The plaintiffs have appealed directly to this Court, rather than to the Tax Review Board, pursuant to subsection 172(2) of the Income Tax Act. As stated in Hill-Clark-Frances Ltd v MNR, [1960] CTC 303; 60 DTC 1245 at 306 [1247], ‘‘the question to be determined is whether in the circumstances these transactions were made in the course of the appellant’s business or in the course of carrying on an undertaking or an adventure or concern in the nature of trade. If so, the profit therefrom was income for the purposes of the Income Tax Act, under ss 3,4 and paragraph 139(1)(e) [of the former Act].”

The plaintiffs have never engaged in the business of buying and selling real estate. If they had simply sold and assigned the option to the purchasers who could then have exercised the same, there could be no doubt but that they were simply disposing of a capital asset and the profit realized would have been considered to be a capital gain. But for the unfortunate circumstances which developed in 1973, they would in all probability have continued to carry on the business in such premises and completed the purchase of such lands prior to the termination of such option and lease.

The defendant does not contradict the facts related but submits that the time at which the intention of the taxpayer is to be determined is when he exercised the option as opposed to the occasion when he obtained it in the first place. He relies on the case of Warnford Court (Canada) Limited v MNR, [1964] CTC 175; 64 DTC 5103, wherein Jackett, P stated at 176 [5104] “For the purpose of determining whether a transaction is a transaction in the course of a businesss or is a venture in the nature of trade, the time as of which the intention of the purchaser is significant is ordinarily, in my opinion, the time when the purchase agreement becomes legally binding rather than the time when legal title is acquired.”

In that case, the purchaser acquired his interest in the property by virtue of a purchase agreement which was binding on both vendor and purchaser immediately upon execution. There was no option involved. It is my opinion that such case supports the contention of the plaintiffs that the proper time to consider the intention of the optionee for such purpose is when he acquires a binding option from the optionor. At that time he acquires an enforceable right to complete the purchase according to the terms of the option. The optionor has no such right of enforcement until the optionee gives notice of his intention to exercise—but does that matter? It is the right of the optionee to acquire the property with which we are concerned. Further, if the plaintiff’s right to purchase under the terms of the option had become a capital asset when it was acquired, what difference does it make that they should decide to sell the same at a profit, particularly under the circumstances above related.

The defendants also rely on the decision of the Tax Appeal Board in Everready Motors Ltd v MNR, [1970] Tax ABC 1211; 70 DTC 1769. That case concerned the exercise of an option to purchase for the purpose of resale at a profit and in that respect resembles, to some extent, the present case, but there the Board stated ‘‘the transaction being considered herein does constitute a plunge in the waters of commerce amounting to an adventure or concern in the nature of trade to a sufficient extent to bring it within the definition of business contained in paragraph (e) of subsection (1) of section 139 of the [former] Income Tax Act.”

The difference between that case and the one being considered is that, in the latter, the determination to sell was occasioned by the state of business and the subsequent sale followed the taxpayer placing the land with a real estate agent to sell.

In Her Majesty the Queen v Ginakes Brothers Limited, [1977] CTC 18; 77 DTC 5023 and Westcon Engineering and Contractors Ltd v The Queen, [1977] CTC 567; 77 DTC 5398, the subject matter was an option to purchase land. In both cases, the trial judge indicated the crucial time for determining the intention of the purchasing taxpayer was at the time of acquiring the option.

Counsel for the defendant urges that the plaintiffs; appeals should fail in any event because the option was an asset of the trust rather than of the parties, but I fail to see any merit in such argument. The only trust involved was that the option was in the name of the husband alone and he admittedly held one-half thereof for his wife who had contributed money for the purchase of the shares. This fact should not deprive either of such parties of their rights under the Act.

In all the circumstantces of this case, I find that the sale of the plaintiffs’ land on May 31, 1974 was a liquidation or realization of a capital asset which the plaintiffs had acquired under such lease and option.

For these reasons, the appeal in both cases should be referred back to the Minister for reassessment on the basis of capital gain rather than income. In calculating the amount of such gain, regard should be had to the fact that it is only that portion thereof which accrued after January 1, 1972 which is subject to tax. For that purpose, the cost of the property at the time of sale is deemed to be the Valuation Day value of the option (which is to be ascertained) plus the actual sum of $70,000 paid to purchase the same in 1974. See paragraph 39(1 )(a); subparagraph 40(1)(a)(i); paragraph 54(h); subparagraph 54(a)(ii) of the Act and subsections 26(3) and (4) of the Income Tax Application Rules, 1971.

The plaintiffs should have their costs of the appeals from the defendant but limited to one-half of the counsel fee in each case.