Biffis and Cappuccitti v. The Queen, 86 DTC 6403, [1986] 2 CTC 184 (FCTD)

Strayer, J.:—This appeal together with that of Rocco Cappuccitti v. The Queen (T-1437-84) and Frances Cappuccitti v. The Queen (T-1439-84) were all heard together on the same evidence, by order of the Associate Chief Justice.

The essential issue is whether the purchase and resale by the three plaintiffs of The Poyntz Plaza in Penetang, Ontario in 1974 generated a capital gain or an income gain for them.

On or about February 27, 1974 the plaintiffs, Rocco Cappuccitti and Frances Cappuccitti, who are husband and wife, agreed to buy the shopping centre for $250,000. Sometime during the first half of March, as a result of a visit to the shopping centre by Mr. Cappuccitti and the plaintiff Luigi Biffis, it was agreed that Mr. Biffis would be allowed to become a one-third owner of the shopping centre, without the immediate necessity of providing his share of the down payment. Shortly thereafter a Mr. Anthony expressed to Mr. Biffis interest in purchasing the shopping centre with the result that the three plaintiffs agreed before the end of March 1974 that they would sell the shopping centre to Pancol Limited, Mr. Anthony's company, for $575,000 and an agreement of purchase and sale to this effect was executed on April 1, 1974. Thus within a period of less than five weeks the property had been purchased and resold and the net gain for each of the plaintiffs, which is not disputed, was $101,391. The plaintiffs respectively treated this as a Capital gain in respect of their taxation years 1974, 1975, 1976. The Minister of National Revenue reassessed each of them with respect to each of these years treating this amount as an income gain. It is these reasessments which each of the plaintiffs appeals. It was agreed that the assessments for each of these taxation years for each of these plaintiffs, in so far as these appeals are concerned, depend on the determination of whether the profit from the resale of the shopping centre was a capital gain or an income gain. The plaintiffs appealed to the Tax Court of Canada and in each case the appeal was dismissed on the grounds that there was at least a secondary intention on the part of the plaintiffs at the time of the purchase to resell the shopping centre at a profit.

Many of the background facts are set out in the judgment of the Tax Court and need not be repeated. The matter was of course retried before me and it would appear to me that the evidence before me did not in all respects deal with the same matters as it did in the Tax Court, or perhaps the emphasis was placed somewhat differently.

It was agreed by all parties that the legal principles relevant to such a case are well stated in Racine et al. v. Minister of National Revenue, [1965] C.T.C. 150; 65 D.T.C. 5098 (Ex. Ct.). In that case it was held that while a purchaser may have more than one intention in purchasing property (that is, his primary intention may be long-term investment but he may also have a secondary intention of reselling at a profit) to establish such a secondary intention, the possibility of reselling at a profit must be an “operating motivation” for the acquisition. This means that he must have had in mind at the time of purchase that upon a certain type of circumstance arising he would hope to be able to resell at a profit, with the result that this partly induced him to make the purchase. It was also noted in that case that an inference does arise from the fact of a rapid resale that the original intention in purchasing was resale at a profit; but this inference is legitimate only if there is no satisfactory explanation for the resale. See also e.g., Hiwako Investments Limited v. The Queen, [1978] C.T.C. 378; 78 D.T.C. 6281 (F.C.A.); Warnford Court (Canada) Limited v. M.N.R., [1964] C.T.C. 175; 64 D.T.C. 5103 (Ex. Ct.). The Minister in the present appeal contends that when the plaintiffs purchased the shopping centre the prospect of resale at a profit was a motivating factor for the purchase.

I am satisfied, on balance, that resale at a profit was not a motivating factor in the original purchase. First, it is amply demonstrated in the schedule which is Exhibit P-22 that each of the plaintiffs, as well as Ontario Potato Distributing Inc. (a company half owned by the plaintiff Rocco Cappuccitti) were and are major owners of property, very little of which has ever been resold. The schedule shows the dates of purchase of all their real property and its current status or date of sale if sold. An inference could certainly be drawn from the schedule that these three individuals and the company mentioned were much more likely to have been purchasing for purposes of investment than for quick resale. It is also worth noting that in the same schedule is a list of the property of Alset Construction Company Limited, which is 50 per cent owned by Mr. Biffis and 20 per cent owned by Mr. Cappuccitti. This obviously is a company which engages in land speculation and development and does resell property. This would tend to suggest that in so far as these two plaintiffs are concerned their land transactions essentially of a speculative nature have been conducted through this company.

The evidence was to the effect that the plaintiff Rocco Cappuccitti first learned of this property by indicating to Stephen Crane, a real estate agent, that he was interested in purchasing an “income property". Crane happened to have a new listing for the Poyntz Plaza which he described to Mr. Cappuccitti and the sale occurred shortly after that. This was the evidence of both Mr. Cappuccitti and Mr. Crane. The latter is an independent witness who has no direct interest in this case and his evidence was quite definite. The evidence also indicates — and it is corroborated in material respects — that very shortly after agreeing to purchase the shopping centre, as a result of discussions with Mr. Biffis efforts were undertaken at once to obtain rezoning and building permits in order to expand the shopping centre and to replace two houses on the property with an apartment building. This suggests a serious effort to improve the property as an income-earning investment. Both bridge financing and long-term financing had been arranged by the plaintiffs prior to the resale of the property, again indicating an expectation of holding it indefinitely. No advertising or other efforts were undertaken by the plaintiffs to resell the property. The fact that the property had been on the market for a year prior to it being listed with Mr. Crane's firm would also have suggested to the plaintiffs that a quick resale was not too likely. Further, there was evidence that there had been some change in circumstances in the interval between the plaintiffs agreeing to purchase the property and their agreement to sell it to Mr. Anthony. Mr. Biffis had learned that another shopping centre in the general area was being expanded and was starting to have doubts about the availability of tenants for an enlarged Poyntz Plaza. Given the rather casual “market research" which the plaintiffs did both in buying and selling this property I do not, however, give a great deal of weight to this particular evidence.

It appears to me that the judgment of the Tax Court is based on an inference that there was some kind of pre-arranged design among Mr. Biffis, Mr. Cappuccitti and Mr. Anthony for the quick turnover of this property. The learned Judge of the Tax Court may have had evidence before him which allowed him to draw such an inference but none has been presented to me. Such evidence as it was was quite to the contrary, namely that it was by accident that Anthony learned of the property being available and that he had a need for such property on behalf of a client. Although the learned Tax Court Judge stresses the role of Biffis as one seemingly likely to be involved in speculative ventures, the evidence before me was that Biffis knew nothing about the purchase by the Cappuccittis of the Poyntz Plaza until well after they had signed the agreement to purchase. As noted above, Biffis' personal land holdings had been largely long-term and his presence in the transaction does not necessarily prove a speculative purpose.

Like the learned Judge of the Tax Court, I am somewhat unconvinced of the proposition that the purchase by the plaintiffs of the apartment building in Owen Sound must be seen as a substitute long-term investment by the plaintiffs to replace the Poyntz Plaza in their investment plans. But the fact remains that they did proceed to buy the apartment building and they still own it today, some 12 years later (minus some surplus land which they resold). The difficulty I have with the relationship between that purchase and the sale of the shopping centre is that the evidence was very confusing as to the relevant times as to when the Cappuccittis had knowledge of the Owen Sound possibility and when decisions were taken both to sell Poyntz Plaza and to buy the Owen Sound apartment building.

Admittedly the evidence is not unequivocal. It can be argued that Biffis was brought in as a partner either because of his organizational skills for development of the property as an income property, or on the contrary because of his ability to obtain rapidly municipal approvals for redevelopment which would quickly enhance the value of the property for resale. The evidence was also conflicting as to whether Anthony had made one or several increasing offers for the property and different inferences might be drawn depending on the correct facts.

However, the plaintiffs have submitted sufficient evidence to provide a reasonable explanation for the quick resale of the property and the defendant has produced no evidence to the contrary.

The appeal is therefore allowed with the result that the reassessments for 1974, 1975, 1976 with respect to each of the plaintiffs will be referred back to the Minister for reassessment on the basis that $101,391.34 (in the case of Rocco Cappuccitti) or of $101,391.55 (in the case of the other two plaintiffs) respectively gained from the sale was a capital gain.

Appeal allowed.