Riznek Construction Ltd. v. The Queen, 79 DTC 5131, [1979] CTC 197 (FCTD)

Grant, J:—The plaintiff is a company incorporated under the laws of the Province of Ontario in the year 1960, and has at all material times carried on the business of a contractor in the construction industry since then. The plaintiff’s only witness, John Riznick, is a holder of all shares of that company except a few in the name of his wife and his father. He acts as General Manager thereof as well. Before 1960 he was engaged in the masonry business. The company engages in construction of commercial or industrial buildings only. It may build on land owned by a customer or on land which the company has owned itself, and after construction will then sell the land and a completed building to the customer. The company has also on occasion acquired land in its own name and constructed office or similar buildings thereon, which it retains as its own property for the purpose of realizing the rental therefrom as revenue producing.

Its charter authorizes it

to purchase, lease, take in exchange or otherwise acquire lands or interest therein, together with any buildings or structures that may be on the said lands or any of them, and to sell, lease, exchange, mortgage or otherwise dispose of the whole or any portion of the lands and all or any of the buildings or structures that are now or may hereafter be erected thereon, and to take such security therefor as may be deemed necessary.

The said John Riznick is very experienced in the valuing of land in and around the City of Oshawa and well acquainted with the necessity of building in compliance with the zoning regulations in force at the site of any construction. He has used such knowledge of land values to acquire Suitable building sites for the plaintiff company before the market value thereof increased, and is an astute businessman.

In June of 1964, on behalf of the company, Riznick purchased an area of land approximately 250 feet by 215 feet at the north-west corner of the intersection of Provincial Highway number 2 (known as King Street in such city) and the Town Line. It was purchased in two separate transactions. For the first part the purchase price was $19,000 and later for a further 30 foot strip of land adjoining in the following September, the price for the latter being $3,300. There was situate on the property a shed which the plaintiff rented to another party until 1966, when it was demolished. That was the only revenue gained from such lands while the company owned it. The location was the extreme easterly end of Oshawa and on a busy highway.

At such time of purchase the property was zoned R2A which meant that only a duplex or single family dwelling could be erected thereon. The plaintiff states that such property was purchased by it with the intention of building a shopping plaza thereon and leasing the stores therein and retaining the same as an investment to provide rental income therefrom for the company. At such time the other three corners at such intersection were zoned for commercial use. Riznick knew that a shopping centre could not be built on such property unless the zoning authority was altered by the proper authorities to permit such construction. From his past experience and knowledge of such matters he was convinced at the time of such pur- chase that no difficulty would be experienced in obtaining such approval. He stated there was some need for such a service in that area and that municipalities were usually reasonable in imposing conditions in respect of such rezoning as it meant additional municipal assessment and taxation for them. He spoke to members of the Oshawa Planning Board and of the Municipal Council and received assurances from them that there would be no difficulty in securing amendments in the rezoning by-laws that would permit the construction of the plaza. I am convinced from his testimony that at the time of purchase of such lands he felt certain that the necessary permission would be granted to permit the construction of such shopping plaza on such property and that he would experience no difficulty in that respect. In view of past experience it was not unreasonable for him to have formed that conclusion.

On July 3, 1964, the plaintiff had his solicitor write to Oshawa City Council by way of application for the necessary rezoning of such lot to C3 which would permit the building of the plaza. On July the 6th, the Council passed a resolution referring the matter to the Planning Board. Such Board gave public notice of its meeting to be held on September the 9th, to consider such proposed amendment and invited interested parties to appear if they wished. A petition signed by thirteen of the eighteen properties within 300 feet of the site indicated they had no objection to this commercial development. This was filed with the Board. Many meetings were held thereafter with the Planning Board in an effort to get its approval but it consistently recommended to Council that there should be no change in the zoning of the land in question. It was suggested by members of such Board that a shopping plaza at such part of the city should be made larger and suggested an area of approximately twelve acres instead of the two acres that the plaintiff company owned at such site. Mr Riznick then proceeded to secure proxies for the purchase of such additional lands and eventually secured binding agreements for the purchase of all such additional lots except a small strip of land in the centre thereof, owned by one Phil Lakar. The latter assured Riznick he would sell the required land to him but always put off signing the required option. It was essential that the plaintiff company should be in a legal position to obtain ownership of all the lands which would be included in the rezoned area before the zoning by-laws and regulations would be altered.

In the meantime Riznick had contacted many prospective tenants and entered into leasing arrangements with them which were subject to the plaintiff securing the necessary authority to construct the plaza. The building of the various stores or other buildings therein would depend upon the needs of such prospective tenants. Before starting building the plaintiff company would require to know approximately what different tenants it might have and the extent of the building that they would require. Plans and estimates of the cost were prepared and tentative arrangements made for the financing of such structure. The trust company would not commit itself to loaning building funds until the appropriate zoning was approved by the municipality. The City of Oshawa eventually turned down the plan for the erection of the smaller plaza on the two acre property that the plaintiff company had first applied for. On September 18, 1967 the Planning Board reported that the fifteen acre parcel at the north-west corner of such intersection be rezoned from R-2A to C1, subject to eleven conditions, all of which might well have been fulfilled by the plaintiff company if they had been able to secure the lands owned by Lakar. On September 25, 1967, the City of Oshawa wrote to the plaintiff company advising it that its Council had passed a resolution authorizing the rezoning of such fifteen acre parcel subject to the eleven conditions suggested by the Planning Board. On September 24 of 1968 the City again wrote to the plaintiff company advising it the City Council on Monday, September 16, 1968 had approved the final site plan for the rezoning of such fifteen acre property. On September 17, 1968 the Planning Board wrote the plaintiff company advising them of a meeting of the Board recommending approval subject to such conditions above referred to and stated “you are now in a position to proceed to meet the other conditions of approval to your rezoning application and submit the material necessary for the site plan agreement.”

The plaintiff was never able to get Lakar to sign the necessary documents in connection with the sale of his lands to the plaintiff. Without that property available to it, the plaintiff could not meet the requirements of the Planning Board because such land was in the centre of the additional area required. If Lakar had given the plaintiff an option to buy the lands, it would have been able to meet all the conditions laid down by the Planning Board and the zoning by-law would have been amended to permit the construction of the plaza on the larger basis required. It became apparent to Riznick early in September of 1968 that he could not deal with Lakar and the plaintiff was frustrated from erecting the plaza.

One of the proposed tenants for the plaza that Riznick had interviewed was the Sun Oil Company. That company had, as an alternative, suggested purchasing the property. This was an unsolicited offer as far as the plaintiff company was concerned. On September 24,1968, (Tab 13, Exhibit 2) Riznick wrote to that company stating:

On your letter of three different types of proposals for a service centre in our shopping plaza at King Street East, Oshawa, we would be prepared to negotiate under one of the following proposals.

1. Land purchase, lot size, 254 feet by 249 feet—$80,000.

2. Land lease of $8,000 per year net net.

3. Building (3 bay) and land lease, $13,500 per year net net.

On September 14, 1968 Sunoco offered $70,000 for the property and an option was given by the plaintiff company for that amount to such oil company. When the option expired Sunoco wanted an extension thereof. Apparently Sunoco had been attempting themselves at this time to secure necessary amendments to the zoning by-law so that they might erect a service station if they secured the land from the plaintiff company. At the time of this request for an extension the plaintiff company said they would not renew it at the same amount but a higher price of $80,000 was suggested. Sunoco accepted the offer to sell on March 9 of 1970 at the sum of $80,000. The transaction was closed on September 30, 1970, within the plaintiff company’s 1971 fiscal year.

On such sale the plaintiff realized a profit of $62,336.90. The Minister of National Revenue deducted from such amount the plaintiff’s legal fees in connection with such transaction and assessed for the plaintiff’s 1971 taxation year a further $61,319.70 over and above the amount which the Plaintiff had inserted as its income for that year. The basis of the increase by the Minister on the sale of such property to the Sun Oil Company was that such profit was income from business within the meaning of Sections 3, 4 and paragraph 139(1)(e) of The Income Tax Act. The Minister alleges that the plaintiff acquired such property with a view to dealing in, trading in or otherwise turning that property to account for profit or in the alternative that the property was acquired and sold in the course of carrying out or carrying on a profit-making scheme. The plaintiff company duly filed a notice of objection to such re-assessment; on a further re-assessment the Minister confirmed his previous assessment.

The plaintiff had filed many letters betwen it and the Planning Board and Council, various options in respect of lands contained in the additional area required, leases, plans and estimates. These are corroborative of the various steps the plaintiff had taken in attempting to assemble the larger 15 acre area and also of its negotiations with prospective tenants and the preliminary preparations for construction of the plaza. However all these matters were necessary in the construction of the plaza irrespective of whether the plaintiff proposed to sell the plaza on its completion or retain it as an investment in the form of a building which would provide it with rental income. They cannot therefore be corroborative of the plaintiff’s alleged intention. The question to be decided in this appeal is whether, when the plaintiff company acquired this land and commenced arrangements for financing and the construction of the proposed plaza, it then had as one of its motivations the intention to dispose of the property by sale or otherwise for the purpose of realizing a profit thereon. Reicher v The Queen, [1975] CTC 659; 76 DTC 6001.

The plaintiff contends that at such time the sole intention of its officers was to hold the plaza as an investment from which it would receive the rents. The onus to establish that fact is on the plaintiff. R W S Johnston v MNR, [1948] CTC 195; 3 DTC 1182; Wi Hum sen v MNR, [1967] CTC 13; 67 DTC 5022; Harmony Investments Limited v MNR, [1965] CTC 14; 65 DTC 5009.

The intention that the plaintiff contends for would have been clearer in this case if there had ben more substantial evidence which verified the evidence of Riznick in that respect. However Lakar had led Riznick to believe that he would sign an option after the other owners had done so. His refusal to do so in September of 1968 when almost everything had been ac- complished to satisfy the Planning Board’s requirement was the sole cause of the plaintiff’s failure to carry out its construction. This frustration put the plaintiff company in the position that the land was useless to it unless it departed from its usual building of commercial properties only and commenced erecting residences thereon. Its only other alternative was to sell the land. There had been no attempts to resell the property at any time previous to the time that it became apparent to the plaintiff that it could not obtain the Lakar land. Riznick was a credible witness and although I would have preferred additional evidence that corroborated his testimony, I do accept it to the effect that it was the company’s intention and his to erect the plaza and then retain it as an investment.

On the balance sheet of the company dated June 30, 1974, it shows in its curent assets an item of “land for resale’’ $178,662. Riznick said this referred to 20 acres of land which the plaintiff company purchased east of Ottawa some six or eight years ago for commercial or industrial construction thereon. The plaintiff still owns it and intends to build thereon at an opportune time in the ordinary course of its business. He said the accountant who made out the statement erroneously described it as lands for resale as the intention of the company at all times was to build properties thereon.

He also referred to another property constructed by the plaintiff which it had intended to retain and rent as an investment. In that case one of the tenants had insisted on including in the lease an option to purchase and it later exercised this option. The plaintiff company is presently holding as an investment a building constructed by it in Bowmanville from which it derives rent. The funds from the sale of 1344 King Street was used to build that property. Riznick, in cross-examination, stated that on occasions when the company received an offer to buy land greatly in excess of market value, which it had purchased to build on, it had sold them. This would not constitute a secondary intention which would change an acquisition of capital into an adventure in the nature of business because matters arise subsequent to the acquisition of such property which may cause a contractor to alter his original plan. The fact that he, at a subsequent time has an offer of a very considerable profit and he accepts it, is not proof of his intention to so do at the time that he acquired the land in the first place. Racine, Demers and Nolin v MNR, [1965] CTC 150; 65 DTC 5098.

There is no evidence of any secondary intention on the part of the Plaintiff at the time of the acquisition of such lands to resell the same in the event that it was frustrated in its primary purpose nor are there any circumstances from which such an inference could be reasonably drawn. The Queen v Stan fold, Investment Company, [1974] CTC 19; 74 DTC 6035; Regal Heights Limited v MNR, [1960] SCR 9802; [1960] CTC 384; 60 DTC 1270.

The transaction did not constitute an adventure in the nature of trade and wasthereforea capital gain. Power R M v The Queen, [1975] CTC 580; 75 DTC 5388, Hiwako Investment Limited v The Queen, [1978] CTC 378; 78 DTC, 6281.

I therefore allow the appeal and refer the plaintiff’s income tax for its fiscal year of 1971 back to the Minister of National Revenue for reassessment on the basis that the sum of $61,319.70 realized on the sale of the said land to Sun Oil Company was not income in the hands of the plaintiff. The plaintiff should have its costs of these proceedings from the respondent.