W. Hanley & Co. Ltd. v. The Queen, 90 DTC 6354, [1990] 2 CTC 71 (FCTD)

Collier, J.: —This is an appeal by the plaintiff company against reassessment by the Minister of National Revenue of its 1977 income tax. The plaintiff had received a share of profits from the sale of two large rental apartment units in the amount of $146,237.57. It reported it as a capital gain. The Minister assessed the full amount as income. Then, this appeal to this court.

As always in litigation, but especially in tax cases of this nature, the facts are paramount. "These cases must all depend on their particular facts . . ." per Judson, J. in Regal Heights Ltd. v. M.N.R., [1960] S.C.R. 902; [1960] C.T.C. 384; 60 D.T.C. 1270 at 390 (D.T.C. 1273; S.C.R. 907). [1]

The plaintiff is a British Columbia company, which carries on a real estate appraisal and consultation business. It was incorporated in 1969. Mr. Wesley Hanley is the president and principal shareholder. He is a chartered surveyor of the Royal Institute in the U.K. and a professional member of the B.C. Real Estate Institute. Prior to incorporating his company, he had been an appraiser with Coronation Mortgage. That company, for practical purposes, went out of business.

Hanley then determined to become self-employed and formed his company. He did appraisals and mortgage brokerage work up to 1975 or 1976. He did not obtain a real estate agent's license until 1973.

In early 1970, a bank manager referred a Mr. Adolph Skog and a Mr. K. Johansson to Hanley for assistance and advice. They were the principals and officers of Carlton Contractors Ltd. (Carlton). The company owned a desirable three acre piece of land in the University Endowment Lands in Vancouver, B.C. The principals wanted to sell it; they were not builders or developers; or they might be interested in some kind of joint venture with a developer.

Hanley spent six to nine months searching out potential buyers or developers. He eventually interested Grosvenor International Limited (Grosvenor), a federal Canadian company, having an office in Vancouver, B.C. This company was part of the Grosvenor Group which had been in business in the United Kingdom for over 300 years. The group has been in business in Canada since 1963. Neville Gibson was the President and C.E.O. of Grosvenor.

Meetings took place in October 1970. The proposals put forward were that Grosvenor would consider buying the land and developing it as self-owned condominiums. Carlton and Hanley would have an interest in the scheme. Grosvenor was given until December 1, 1970 to investigate and study the matter.

Grosvenor dealt with Hanley in respect of the proposition. Hanley represented himself and kept Carlton closely advised of developments. Hanley set out his position and that of Carlton in a letter dated November 24, 1970 (Exhibit 2). He proposed, among other things, that he be a management consultant throughout the life of the project, that he would investigate "and/or" arrange financing for the proposed venture, and that he be appointed agent in the selling, leasing or rental of the units. None of those things took place. He also set out his fees in the form of a payment upon the signing of any joint venture, and a 7 per cent interest in it. A further meeting took place, on December 1, with Hanley and Grosvenor. Gibson took notes and set them out in a memo to one of his subordinates (Exhibit 9). On December 4, draft heads of agreement were sent by Grosvenor to Hanley (Exhibit 10). The general intent of the proposal was set out as follows:

General Intent

The General Intent of this Agreement is that Messrs. Scog and Johannson will sell the land described above to Grosvenor International Limited for the sum of $750,000 (Seven Hundred and Fifty Thousand Dollars). Grosvenor International will develop this land as a self-owned apartment complex and that upon the sale of all such apartments the net profits will be shared, in the manner set out below, between Grosvenor International Limited, Messrs. Scog and Johannson and Messrs. Hanley and Associates.

After the sale of the last unit, any excess profits were to be distributed on the basis of 58 per cent to Grosvenor, 35 per cent to Carlton, and 7 per cent to Hanley.

An agreement was eventually signed on January 28, 1971 (Exhibit 3). The parties were Carlton as vendor and Grosvenor. Neither Hanley nor his company were a party. The opening paragraphs of the document were as follows:

Whereas:

A. The Vendor and Grosvenor International have agreed to enter into this Agreement with respect to the sale and purchase and subsequent development of the Land (hereinafter defined).

B. If found to be economically viable Grosvenor International will develop the Land as a self-owned apartment complex pursuant to the “Strata Titles Act".

In the definition section, "Hanley" meant W. Hanley and Company Ltd., the present plaintiff.

Carlton agreed to sell the land for $750,000. Grosvenor agreed to develop the property into apartments. Once the apartments were completed, and the last one sold, any excess funds remaining above the overall costs were to be distributed as follows:

58 per cent to Grosvenor

35 per cent to Carlton

7 per cent to Hanley

The reason the plaintiff was given a 7 per cent interest is as follows: The sale price for the land, put forward by Carlton, was $900,000. In order to get a reduction in price to $750,000, Grosvenor agreed to the percentage interests which I have set out. Carlton took a $200,000 down payment, and a $550,000 mortgage by Grosvenor. Hanley had successfully brought the two parties together. He had calculated his finder's fee at approximately $28,000. It had been agreed by all that he would be paid $7,500 by Carlton on the signing of the agreement. For his work, and in lieu of the remaining fee, he was given a 7 per cent ultimate interest in the project. It was always possible the interest would be worth little, or nothing.

Article V of the agreement gave Grosvenor the option of developing the property as leased, or rental apartments. If that were the route to be taken, when 95 per cent or more of the apartments had been leased, any excess profits were to be paid annually to the same companies, and in the same proportions, as in the case of the sale as condominiums.

Finally, there was this:

5.08 Sale of Apartments after Rental

If at any time after the apartments have been leased or rented, Grosvenor International determines for any reason whatsoever that the apartments and other buildings (if any) should be sold either individually as self-owned apartments or in toto, then Grosvenor International shall be entitled to do so and the net sale proceeds shall be distributed in the following priority:

(a) First: Grosvenor International shall be reimbursed the amount which is referred to as the investment in Section 5.03(b)

(b) Second: Grosvenor International shall be reimbursed any accumulated losses of interest due to it pursuant to Section 5.03(b) and it shall be reimbursed any deficit incurred by it in the leasing or rental of the apartments pursuant to this Article V

(c) Third: the balance of the net sale proceeds shall be divided between Grosvenor International, the Vendor and Hanley in the same proportions as set out in Section 5.06.

Development of the project then went ahead. Grosvenor, as it had the right, elected, in 1971, to develop as apartments for lease or rent. The evidence is that Grosvenor decided to hold the property indefinitely as a long term investment; the project was not for sale; financing was projected for 30-35 years (evidence of Gibson). The project, named Chancellor Court, was completed early in 1973. This was Grosvenor's first high-rise, rental apartment building in Canada.

Carlton and Hanley had been advised of the decision to go rental. Hanley wrote Grosvenor on March 14, 1973 (Exhibit 5). He felt that the change had affected the fees he might have received if Chancellor Court had gone condo minium, as originally contemplated. Hanley had first opportunity, for three months, as agent to sell the condominiums.

Grosvenor replied, indicating that it was going to look after the management and leasing of the units. Gibson noted that Carlton and Hanley's financial participation in any profits from the rentals would likely be "some years off”. He went on to suggest they might like to sell their interests to Grosvenor. Gibson said both were not interested in selling.

A year or two later Grosvenor tried to buy the two participants out, but again they declined.

In 1972, an N.D.P. government came to power in British Columbia. That government brought in rent control legislation. Grosvenor had encountered a lot of bad experience with their properties under rent control in England. It decided, because of rent controls, Chancellor Court was no longer a suitable long term investment. The complex was put on the market. It was sold in 1977. The net proceeds were distributed in accordance with the agreement as follows:

Grosvenor chose to declare its share as income. Gibson indicated this was because of the alternative options under the agreement. The evidence is unclear as to how Carlton treated its share. In any event, how those two participants chose to treat it for tax purposes, or how Revenue Canada assessed it, is not relevant. The issue is, on the facts and the law, whether the plaintiff's share was on account of capital or income.

That completes my summary of the facts.

At the trial, plaintiff's counsel contended the onus of proof, in this case, was on the defendant. After the re-assessment, Revenue Canada, by letter dated October 15, 1980, set out its position (Exhibit 13):

Re: Sale of Interest in Chancellor Court in 1977

We regret the delay in advising you of our position in the above matter.

Our findings are that you appear to have acquired your interest in the Chancellor Court project in exchange for your services that were to be provided. Accordingly the proceeds received by W. Hanley & Company Ltd. in 1977, amounting to $146,238.00 are taxable as income, not as a capital gain as originally reported.

We contend that the original intention in respect of the Chancellor Court was to develop and sell it as individual units—the inclusion of the rental clause in the January 1971 agreement was an "eleventh hour" decision. We also contend the decision to eventually rent rather than sell the development does not alter the basis upon which you originally acquired your interest, that is to provide your expertise to the development including arranging financing for the project.

We propose to revise the 1977 income tax return of W. Hanley & Company Ltd. in accordance with the above, thereby increasing taxable income by $73,114.00.

The plaintiff then turns to the pleadings. Certain portions of the pleadings of each of the parties do not, to my mind, fall within the rules of this Court.

Section B of the statement of claim is headed "Statutory Provisions upon which the Plaintiff relies and the reasons which it intends to submit”. Then follow paragraphs 12 and 13. I interpolate here that section A (headed "Statement of Facts") sets out, as required by Rule 408, a precise statement of the

material facts relied on. Paragraph 12 pleads reliance on certain sections of the Income Tax Act. That is not a plea of material facts. In paragraph 13 the plaintiff merely submitted its share of the net profit from the sale of Chancellor Court was a Capital gain, and should be taxed accordingly.

Section A of the defence is headed "Statement of Facts". A certain number of paragraphs in the statement of claim are admitted; certain further assertions are made in some cases. Paragraphs 12 and 13 of the statement of claim are denied. But paragraph 6 reads as follows:

6. With further reference to paragraphs 12 and 13, he states that:

(a) the parties entered into the agreement with the primary or at least dual intent, ab initio, and purpose of turning Chancellor Court to account for profit as soon as it was opportune to do so, that intent was carried out;

(b) the Plaintiff was engaged in the business of real estate appraisal, consultation and development;

(c) the Plaintiff had first opportunity to become selling agent for the sale of self-owned suites in Chancellor Court for a term of 3 months according to the agreement.

Section B of the defence is headed "The Statutory Provisions upon which the Deputy Attorney General Relies and the Reasons which he Intends to Submit”. Then, paragraph 7 pleads certain sections of the Income Tax Act. Paragraph 8 submits that the plaintiff's share of the profit “is income from a business or venture in the nature of trade".

Counsel for the plaintiff contended the Minister's basis for reassessment, as set out in the letter (Exhibit 13), is not what is now pleaded in the defence. The letter had stated the plaintiff's share was the result of services that were to be provided. There is, it is said, no mention of this in the defence. Reference was made to the following excerpt from Hillsdale Shopping Centre Ltd. v. M.N.R., [1981] C.T.C. 322; 81 D.T.C. 5261 (F.C.A.), at 328-29 (D.T.C. 5266):

If a taxpayer, after considering a reassessment made by the Minister, the Minister's reply to the taxpayer's objections and the Minister's pleadings in the appeal, has not been made aware of the basis upon which he is sought to be taxed, the onus of proving the taxpayer's liability in a proceeding similar to this one would lie upon the Minister. This defect may be due to a number of reasons such as a lack of clarity on the part of the Minister in expounding the alleged basis of the taxability which could include an attempt by the Minister to attach liability on one of two or more alternative bases thus failing to make clear to the taxpayer the assumption upon which he relies.

Kit-Win Holdings (1973) Ltd. v. The Queen, [1981] C.T.C. 43; 81 D.T.C. 5030 (F.C.T.D.) was also referred to. The Kit-Win case reviews other decisions cited by counsel for the plaintiff.

After consideration of the various decisions, I conclude the defendants pleading trangresses the principles set out. But, I also conclude the Minister has raised sufficiently the issue that what occurred here was ”. . . an adventure . . . in the nature of trade . . ." (subsection 248(1) of the statute). The onus fell on the Minister to prove it.

In my view, that onus has not been met.

Hanley spent considerable time and effort on behalf of Carlton to find a purchaser and developer. Through those efforts, Carlton and Grosvenor were brought together. Hanley, through his company, was entitled to a fee. The fee was for services rendered up to the completion of the sale-development agreement (Exhibit 3). Hanley elected to forego, in cash, approximately three quarters of the fee for services rendered. He was given, by the two contracting parties, a small percentage in possible future net profits.

When Grosvenor, early on, elected to change from the condominium route, to the rental long term investment route, Hanley kept his interest. He was unhappy about the change, because he no longer had the opportunity to earn income as a real estate agent on the sale of condominiums. (See his letter of March 21, 1973-Exhibit 6.) But he and Carlton declined to sell their interests to Grosvenor. For an example when an original income intention changed, see Armstrong v. The Queen, [1985] 2 C.T.C. 179; 85 D.T.C. 5396 (F.C.T.D.— Rouleau, J.). The facts there were, of course, quite dissimilar.

When Grosvenor eventually decided, in 1976, to sell the whole project, Hanley had no say in the matter. The reason for the sale by Grosvenor was quite clear. Rent controls had come into effect. Grosvenor felt Chancellor Court was no longer a suitable investment.

For all those reasons, I find the gain made by the plaintiff was not from an adventure in the nature of trade. The plaintiff therefore succeeds in this appeal.

The plaintiff also appealed a reassessment of its 1978 income: action T-576-83. The 1977 reassessment had reduced the total capital gain claimed by the plaintiff in that year. This required an adjustment of the refundable dividend tax on hand, which in turn reduced a dividend refund claimed for 1978. The plaintiff will therefore succeed, as well, in that appeal. These reasons will apply in that other action.

The plaintiff is entitled to its costs of this action.

Appeal allowed.