Citation: 2013 TCC 354
Date: 20131104
Docket: 2011-494(IT)G
BETWEEN:
BRIAN WILLIAM KARAM,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
D’Arcy J.
[1]
The Appellant is a
member of a limited partnership (the “Limited Partnership”) which purchased 350
acres of land between 1990 and 1995 in the City of Kanata (now part of the City
of Ottawa). The Limited Partnership sold a portion of these lands, comprising 200
acres, in 2007. The 200 acres were referred to as the “Monarch Properties”. The
primary issue before the Court is whether the substantial gain realized on the
sale of the Monarch Properties is on account of income or capital.
[2]
There is a secondary
issue relating to an amount the Appellant received on the sale of the Monarch
Properties. As the Respondent noted in her Reply, I will only need to consider
this issue if I find the sale of the Monarch Properties was on account of
capital.
[3]
The Court heard from 22
witnesses. The witnesses testified over five full days, of which three days
were taken up by the oral testimony of the Appellant. Twenty
of the witnesses testified very briefly. The Appellant called all of the
witnesses.
The Appellant, the Limited Partnership and
the Lands
[4]
The Appellant began
practising as a real estate lawyer in 1973. Around this time, he began
investing in numerous real estate ventures. In addition to the real estate
venture at issue, he invested in the following:
-
Beginning in the 1970’s
and ending in the early 1980’s, a real estate development involving 100 acres
of land that contained 27 estate lots.
-
Between 1990 and 1998,
a subdivision containing 126 lots.
-
Beginning in June 2011,
another subdivision venture.
[5]
On April 27, 1990, 12
limited partners, including the Appellant, and a general partner formed the
Limited Partnership. The general partner was 830289 Ontario Limited, a
company controlled by the Appellant.
[6]
A number of the limited
partners testified. It is clear from this testimony that all of the limited
partners either were related to the Appellant or were friends of the Appellant.
The Minister of National Revenue (the “Minister”) has assessed all of the
limited partners in respect of the sale of the Monarch Properties. The limited
partners have chosen the Appellant to be the test case and have agreed to be
bound by the final decision of the Courts in this appeal. This is not
surprising since the Appellant, through the general partner, made all decisions
with respect to the Monarch Properties. Further, the limited partners testified
that they were not involved in any way with any lands held by the Limited
Partnership, including the Monarch Properties.
[7]
Exhibit A-1 is attached
as Appendix 1 to these Reasons for Judgment. It shows the three sections of
land that are relevant for the purposes of this appeal.
[8]
The first section is
the Monarch Properties. It comprises the three parcels of land numbered 1, 2
and 3 on Exhibit A-1. The parties referred to the three individual parcels of
land that comprise the Monarch Properties as the “Moore Property”, the
“McKinley Property” and the “Crowe Property”. The Monarch Properties comprise
200 acres and are the most westerly of the lands shown on Exhibit A-1.
[9]
The second section of
land was referred to as the “Neighbouring Properties”. It is located
immediately to the east of the Monarch Properties and comprises the parcels of
land numbered 4 and 5 on Exhibit A-1. The two individual parcels of land that
comprise the Neighbouring Properties total 180 acres and were referred to as
the “Van Doormaal” and “Van Gaal” properties. The Neighbouring Properties also
include the road referred to as Terry Fox Drive. Terry Fox Drive is significant
since, at the time the Limited Partnership purchased the Monarch Properties, it
was the so-called urban boundary.
[10]
The third section of
land was referred to as the “Calmar Properties”. It is located immediately to
the east of the Neighbouring Properties and comprises the parcels of land
numbered 7, 8 and 9. The three parcels of land that comprise the Calmar
Properties total 150 acres and were referred to as the “KTI”, “Centrefund” and
“Soho West” properties respectively. The Calmar Properties are the most
easterly of the three sections of land. At all relevant times, the Calmar
Properties were within the urban boundary.
[11]
During the hearing the
Monarch Properties, the Neighbouring Properties and the Calmar Properties were
referred to jointly as the “WestPark Lands”.
Summary of
Facts
[12]
The partners formed the
Limited Partnership to acquire interests in the Moore Property and the McKinley
Property and to acquire the first right of refusal to purchase the abutting
property to the west of the Moore Property.
[13]
The Appellant described
how he came to acquire the Moore Property on behalf of the Limited Partnership.
He noted that a client of his law firm, a Mr. Abraham, was trying to do a
land assembly of approximately 800 acres. This land assembly would have
comprised the Moore Property, the McKinley Property and the 600 acres to the
west of the Moore Property (during the hearing the 600 acres were referred
to as the “Brookfield Property”). Mr. Abraham had acquired the right to
purchase the Moore Property, but was not able to acquire either the McKinley Property
or the Brookfield Property. A group led by a Mr. McKinley (the “McKinley
group”) purchased these properties.
[14]
Mr. Abraham then
decided that he did not want to acquire the Moore Property. As a result, he
sold the right to purchase the Moore Property to the Appellant for $10,000. The
Appellant noted that the Moore Property was “in the middle of everything. . . .” It was
in Kanata and was close to two or three existing residential subdivisions.
[15]
The Limited Partnership
subsequently acquired the 100-acre Moore Property from a Mr. Moore for $2
million. The purchase price was satisfied by a $500,000 cash payment and a $1.5
million mortgage at 8%. The mortgage was fully open with monthly payments of
the 8% interest.
[16]
The Moore Property was
located outside of Kanata’s urban boundary and was zoned agricultural. A house
and some farm buildings were located on the Moore Property. The Limited
Partnership immediately leased the property to Mr. Moore for $600 per
month. This rent was paid until the end of 1995, when the rent was reduced to a
$1 per month. The Appellant testified that the Limited Partnership reduced the
rent to $1 per month in consideration of Mr. Moore extending the $1.5 million
mortgage.
[17]
The Limited Partnership
paid $200,000 of the $1.5 million mortgage during the term of the lease. The
Limited Partnership paid the balance of the mortgage, $1.3 million, in April 2007,
when it sold the Monarch Properties.
[18]
After the McKinley
group acquired the Brookfield Properties and the McKinley Property, it
approached the Appellant and attempted to purchase the Moore Property. Eventually
the McKinley group offered the Appellant $500,000 for the right to purchase the
Moore Property. The Appellant turned down the offer and instead purchased the 88-acre
McKinley Property for $1.95 million. The Appellant noted that he purchased the
McKinley Property because “. . . it was a next‑door property, and we just
felt that it would add value to what we were doing if we picked it up.”
[19]
The Limited Partnership
satisfied the purchase price for the McKinley Property by a $450,000 cash
payment and a $1.5 million mortgage at 8%. Similar to the mortgage on the Moore
Property, the mortgage on the McKinley Property was fully open with monthly
payments of the 8% interest.
The Limited Partnership paid the mortgage on the McKinley Property in full by
2000.
[20]
The McKinley Property
was also outside of the urban boundary and was zoned agricultural. There
were no buildings on the land. The Limited Partnership leased the McKinley Property
to a relative of Mr. Moore for $4,000 per year. The tenant farmed the land.
[21]
The Limited Partnership
Agreement states that the Limited Partnership also intended to acquire the
first right of refusal with regard to purchasing the abutting property to the
west of the Moore Property.
This appears to refer to the Brookfield Property. The Appellant did not explain
to the Court whether the Limited Partnership attempted to acquire this right or
if it actually did acquire the right.
[22]
The Limited Partnership
did acquire additional properties. It purchased the third and final piece of
the Monarch Properties, the 12-acre Crowe Property, in August 1993. The Limited
Partnership purchased the land because it “squared off” the properties”. The
Limited Partnership paid the $225,000 purchase price in cash. It borrowed
$150,000 from Investors Group to fund the purchase. The
Limited Partnership paid the Investors Group mortgage in full by the end of
2002.
[23]
The Limited Partnership
rented a home located on the Crowe Property to third parties. It originally
received rent of $820 per month, which at some point increased to $900 per
month.
[24]
In summary, by August
1993, the Limited Partnership had acquired all of the Monarch Properties.
[25]
In early 1992, certain
third parties, who had acquired the agricultural-zoned lands adjacent to the
Monarch Properties, asked the Limited Partnership to participate in
applications to the City of Kanata and the Regional Municipality of
Ottawa-Carleton to bring all of the lands (including the Monarch Properties) within
the urban boundary. The Limited Partnership elected not to participate in this
application.
[26]
However, in early 1994,
the Limited Partnership retained a consulting firm, Novatech, to prepare
applications to the City of Kanata and the Regional Municipality of
Ottawa-Carleton to have the Monarch Properties brought within the urban boundary.
A consortium of consultants was retained in the spring/summer of 1994.
[27]
While the consultants
were preparing the rezoning application, the Limited Partnership continued its
land assembly by entering into an agreement to purchase the 150-acre Calmar
Properties. Unlike the Monarch Properties, the Calmar Properties were within
the urban boundary.
They were zoned industrial.
The Appellant testified that the Limited Partnership could access water and
sewer lines from the east side of the Calmar lands, which could “feed” all of
the WestPark Lands. In addition, an area of the Calmar lands referred to as the
“Monahan Drain” drained the entire WestPark area.
[28]
As I will discuss later
in my Reasons for Judgment, I received conflicting evidence on the timing of
the acquisition of the Calmar Properties. On the basis of the testimony of the
Appellant and the objective documentary evidence before me, I have concluded
that the Limited Partnership purchased the Calmar Properties in 1995. What is
not clear is whether the Limited Partnership purchased the properties in early
1995
or October/November 1995.
[29]
The Appellant testified
that the Limited Partnership purchased the Calmar Properties from Arthur Andersen,
who held the lands as trustee in bankruptcy. The Appellant did not provide the
Court with the actual purchase price, but it appears to have been between
$850,000 and $900,000. The Limited Partnership satisfied the purchase price by
a $50,000 cash payment and a mortgage back of “$800-and-some-thousand dollars”
at 2%.
[30]
The Limited Partnership
filed the rezoning application prepared by Novatech and the other consultants
in July 1996. The application was to extend the Kanata urban boundary to
include the Monarch Properties and most of the Neighbouring Properties. A
lengthy document referred to as the WestPark Master Plan Report (the “WestPark
Master Plan”) set out the basis for the application. The plan incorporated all
of the WestPark Lands, specifically the Monarch Properties, the Neighbouring
Properties and the Calmar Properties.
[31]
The WestPark Master
Plan set out a proposal for a mixed-use “wired community”. The community was to
mix residences, shops, community facilities and public space with workplaces
and education and research institutions. The key concepts were the availability
of electronic technology and the creation of a community where residents worked
in their homes or in nearby information technology plants.
[32]
The City of Kanata rejected the application on May 20, 1997.
Once the city rejected the application, the parties withdrew the identical
application made to the Regional Municipality of Ottawa-Carleton.
[33]
It appears the Limited
Partnership did not take any further steps to develop the Monarch Properties
until early 2001. During this period, it appeared to focus its attention on the
Calmar Properties. It sold 11 acres of the Calmar Properties to a third party
on December 11, 1998 for approximately $26,000 per acre and
11.5 acres of the Calmar Properties on June 10, 1999 for approximately $65,000
per acre.
The Appellant noted that between October 1997 and November 2001 the Limited
Partnership received numerous offers from third parties to purchase other
pieces of the Calmar Properties. These offers ranged from $17,800 per acre in
1997 to $120,000 per acre in 2001.
[34]
On April 30, 2001, the
Limited Partnership resubmitted the rezoning application to have the Monarch
Properties and most of the Neighbouring Properties brought within the urban
boundary. The parties refiled the WestPark Master Plan that had been prepared
for the 1996 application. They filed the application with the City of Ottawa, with
which the City of Kanata had been amalgamated. The Appellant testified that this second
application was made to coincide with similar applications that were made by
the owners of the Brookfield Property (the agricultural lands to the west of
the Monarch Properties) and the owner of the agricultural lands to the north of
the Monarch Properties (which were referred to as the “Tridel lands”).
[35]
In 2003, the City of
Ottawa rejected the applications filed in respect of the Monarch Properties,
the Neighbouring Properties, the Brookfield Property and the Tridel lands. All
of the parties appealed the city’s decisions to the Ontario Municipal Board
(the “OMB”). The OMB subsequently joined the appeals into a single appeal.
[36]
While the Limited
Partnership was waiting for the OMB to hear its appeal, it had the portion of
the Calmar Properties that it still owned rezoned from industrial to a zoning
called enterprise. This allowed for residential development on the
lands. The Appellant did not discuss the rezoning of the Calmar Properties; however,
the Appellant’s witness, Mr. Shotten, discussed it.
[37]
After the Limited
Partnership obtained the rezoning, it sold a 50% interest in the 125 acres of
the Calmar Properties that it still owned to a number of companies controlled
by the Cavanagh family (jointly referred to as the “Cavanagh Companies”). The
Appellant testified that the Limited Partnership required the resources and
skills of the Cavanagh Companies in order to develop the land.
[38]
The parties entered
into an agreement on November 30, 2004 that provided for the sale by the
Limited Partnership for $5 million of 50% of its interest in the Calmar
Properties. The Limited Partnership then entered into a joint venture
development agreement with one of the Cavanagh Companies (the “Joint Venture”).
The parties agreed to use their best efforts to ensure that they sold the lands
subject to the Joint Venture on a timely basis, with as large a residential
component as possible. The parties also agreed that another Cavanagh Company
would have the right to provide, for a fee, all servicing necessary to develop
and sell the property.
[39]
On August 11, 2005, the
OMB issued its decision, which provided that the urban boundary was to be
extended to include the Monarch Properties, the Neighbouring Properties, the
Brookfield Property and the Tridel lands.
[40]
Shortly after the OMB
released its decision, the Limited Partnership received an offer from the
Monarch Corporation to purchase the Monarch Properties. The Limited Partnership
declined the offer.
[41]
Between January and
July 2006, the Limited Partnership and the Cavanagh Companies sold a
significant portion of the Calmar Properties subject to the Joint Venture to a
number of home builders.
[42]
On December 19, 2006,
the Limited Partnership entered into an agreement to sell the Monarch
Properties to the Monarch Corporation for $24 million. The sale was closed on
April 11, 2007.
Credibility of the Appellant
[43]
I did not find the
Appellant to be a credible witness. I believe he was very selective in his
disclosure of the activities of the Limited Partnership, especially with
respect to the WestPark Lands. In addition, on several occasions, the objective
evidence before the Court contradicted his oral testimony. I will provide two
examples.
[44]
Early in his evidence-in-chief,
the Appellant testified that, while the Monarch Properties were outside the
urban boundary, they could still be used for certain activities other than
farming. He told the Court that the Limited Partnership investigated using some
of the lands for three of the purported permitted uses: a cemetery, a drive-in
theatre, and a golf driving range.
On cross-examination, counsel for the Respondent challenged the Appellant on
this point. He produced a document entitled “Official Plan of the Regional
Municipality of Ottawa-Carleton” which implies that land, such as the Monarch
Properties, that is zoned agricultural cannot be used for any of the purposes
noted by the Appellant.
[45]
After I had heard from
the Appellant’s witnesses, the parties provided the Court with a Partial
Statement of Agreed Facts. Paragraph 2 of the Partial Statement of Agreed Facts
states that the following uses were not permitted on the Monarch
Properties: cemetery, drive-in theatre and golf driving range.
[46]
At the time the
Appellant acquired the Monarch Properties, he was an experienced real estate
lawyer. I find it very difficult to believe that he did not know, when he
acquired the Monarch Properties on behalf of the Limited Partnership, the
permitted uses of the properties. Further, I do not accept that he would have pursued
certain uses, such as a cemetery, drive-in theatre or golf driving range,
without first determining that they were permitted uses. His testimony on this
point damaged his credibility and brought into question whether, as a question
of fact, the Limited Partnership did pursue these other uses.
[47]
Far more damaging to
the Appellant was his testimony with respect to the acquisition of the Calmar
Properties. On the first day of his examination-in-chief, the Appellant
described in some detail how he came to purchase the Calmar Properties on
behalf of the Limited Partnership. He stated that in September or October 1997,
after the City of Kanata had turned down the rezoning application, he received
a call from someone at Arthur Andersen. This person allegedly told the Appellant
that Arthur Andersen was “going to get rid of the [Calmar] property, and
because we’d worked on the WestPark project together, they wanted to give me
first chance at it.” The Appellant testified that he then flew to Toronto and negotiated the purchase of the Calmar Properties on behalf of the Limited
Partnership. He noted that he bought the Calmar Properties “so that we could
keep the WestPark concept together.”
[48]
The Appellant’s
testimony on the purchase was very detailed; however, it appears that the
events as he described them simply did not occur. During additional testimony-in-chief,
the Appellant provided numerous examples of proposals made by the Limited
Partnership and certain third parties to build commercial rental buildings on
the Calmar Properties.
One of these examples related to a February 1996 proposal to
build a computer chip plant on the Calmar Properties.
[49]
The third parties made
this proposal to the Appellant over a year and half before the October 1997
acquisition date previously provided to the Court with respect to the Calmar
Properties. When this was brought to the Appellant’s attention, he told the
Court a new story with respect to the acquisition of the Calmar Properties. He
testified that the Limited Partnership entered into an Agreement of Purchase
and Sale with Arthur Andersen for the Calmar Properties in early 1995,
not the September/October 1997 date previously provided to the Court. Arthur
Andersen, as trustee in bankruptcy, required court approval to sell the lands. The
Appellant stated that it took two years to obtain this court approval and that the
transaction closed on October 30, 1997.
[50]
The Appellant’s
testimony with respect to the acquisition of the Calmar Properties destroyed his
already damaged credibility. First, he told me a detailed story of how the
Limited Partnership, in order to protect the WestPark project, purchased the
lands after the City of Kanata had rejected the rezoning application. However,
after he produced the conflicting evidence, it became clear that this story did
not reflect what had actually occurred; he had negotiated the right to purchase
the property two years earlier, before the Limited Partnership had even
filed the rezoning application with the city.
Expert Witness
[51]
I heard from one expert
witness, a Pierre Dufresne. He provided his opinion on whether the Limited
Partnership, in the course of its ownership of the Monarch Properties and the
Calmar Properties, dealt with those properties “in the [same] manner as someone
in the land development business”.
[52]
Mr. Dufresne opined
that the Limited Partnership did not deal with the properties in the same
manner as someone in the land development business.
[53]
I did not find Mr.
Dufresne’s opinion to be helpful in reaching my decision.
[54]
His opinion is based
upon eight pages of assumed facts, which do not include all of the relevant
facts before me. Further, in certain instances, the assumed facts are not
consistent with the facts before me.
[55]
My second concern
relates to the actual opinion. Whether or not the Limited Partnership acted in
the same manner as Mr. Dufresne’s hypothetical person in the land development
business is not determinative of the issue before me. What I must determine is
whether the Limited Partnership and the Appellant purchased the Monarch Properties
with the intention to resell the lands.
Positions of the Parties
[56]
Counsel for the
Appellant argued that the Limited Partnership (and the Appellant) always held
the Monarch Properties as capital property. His argument relied on the
Appellant’s repeated assertion that he intended to build “live/work rentals
with a future-proof infrastructure” on the Monarch Properties.
[57]
Counsel stated that the
Limited Partnership did not carry on a land development business in respect of
the Monarch Properties. He noted that the Appellant had always classified the
Monarch Properties as an asset rather than inventory. In his view, the Limited
Partnership intended to carry on two businesses: “smart rentals” on the Monarch
Properties and a business that generated a revenue stream from technology such
as the transmission of electronic data over fibre optics. Further, the
Appellant and the Limited Partnership did not have the operating
motivation/secondary intention to resell the property.
[58]
In the alternative, the
Appellant argued that if the Monarch Properties are not characterized as being capital
property at the time of their acquisition, they were converted to capital
property on April 6, 2005, when there was a change in intention.
[59]
It is the Respondent’s
position that it was always the intention of the Limited Partnership and the
Appellant to resell the Monarch Properties. The Respondent argues that this was
the intention at the time the Appellant purchased the property on behalf of the
Limited Partnership and that intention did not change between the time the
property was acquired and the time it was sold.
[60]
Both counsel for the
Appellant and counsel for the Respondent argued that the Court must determine
the intention of the Limited Partnership at the time it acquired the Monarch
Properties.
Was the sale of the Monarch Properties on account of
income or capital?
[61]
The issue of whether
the sale of vacant land is on account of capital or income has been considered
by the courts on numerous occasions. Regardless of whether I am determining
whether the Limited Partnership was engaged in an adventure or concern in the
nature of trade with respect to the Monarch Properties or whether the lands were
held by the Limited Partnership in the course of a business, the most important
factor I must consider is the Appellant’s (and the Limited Partnership’s)
intention at the time of the purchase of the Monarch Properties.
[62]
In particular, I must
determine whether it was the Appellant’s and Limited Partnership’s intention to
hold and use the Monarch Properties as an investment to derive income therefrom
(the “smart rentals” concept) or whether it was their intention to realize a
profit from the sale of the Monarch Properties.
[63]
The learned authors
Hogg, Magee and Li, in Principles of Canadian Income Tax Law, summarize as
follows the method used by the courts to determine the intention of the
taxpayer in such situations:
How
to establish a taxpayer's intention? In the nature of things, the taxpayer's
oral evidence of his or her intention is self-serving and is bound to be
suspect, so the courts have tended to rely primarily on the objective facts
surrounding the purchase of the property, the subsequent course of dealing and
the circumstances of the sale in order to determine whether the taxpayer
acquired the property as an investment or as a speculation.
[64]
This is particularly
true in situations, such as the one before me, where the appellant is found not
to be a credible witness.
[65]
The most relevant objective
evidence before me is the Limited Partnership Agreement, the nature of the
property, and the documents filed by the Limited Partnership with the rezoning
application. I will first consider the Limited Partnership Agreement.
[66]
The language of the
Limited Partnership Agreement supports a finding that the intention of the
Appellant and the other limited partners, at the time the Monarch Properties
were acquired, was to resell the lands at a profit once the rezoning was
obtained and the lands had appreciated in value. Specifically, section 1.03 of
the Limited Partnership Agreement states the following:
1.03
The Partnership is established for the sole purpose of acquiring interests in
the two parcels of land described in Schedule “B” . . . and the first right of
refusal to purchase the abutting property to the west of the lands and developing
some of all of such lands or parts thereof and generally dealing in and with
such lands with a view to turning them to account at a profit. [Emphasis
added.]
[67]
This intention is also reflected
in Schedule C to the Limited Partnership Agreement, which deals with the
monthly costs of the Limited Partnership and provides, in part, as follows:
The
General Partner will be paid a fixed amount of $3,000.00 monthly for its
services until draft plan approval is obtained and every attempt will be
made to obtain same as soon as possible. At such time a decision will be made
as to whether to hold the property and allow it to appreciate or to sell.
[Emphasis added.]
[68]
There is no reference
in the Limited Partnership Agreement to the building of rental units on the
Monarch Properties for lease to third parties.
[69]
The Appellant, during
his testimony, tried to downplay the significance of this wording, implying
that he had based the Limited Partnership Agreement on a precedent and that the
wording did not reflect the actual intention of the parties. I do
not accept the Appellant’s testimony on this point. At the time he drafted this
agreement, the Appellant had been a practising real estate lawyer for 17 years.
I do not accept that he would not have turned his mind to the wording of a
partnership agreement relating to a $4 million purchase of real estate
involving 12 individuals. Further, as I will discuss, the above-noted wording
of the Limited Partnership Agreement is consistent with other objective
evidence before me.
[70]
I will next consider
the nature of the Monarch Properties.
[71]
At the time the Limited
Partnership purchased the Monarch Properties, they were located just outside of
the urban boundary, in an area subject to significant speculation. When the
Appellant purchased the Monarch Properties on behalf of the Limited Partnership
he knew that other developers had purchased the surrounding lands, which were
also outside of the urban boundary.
[72]
Something the Appellant
experienced when acquiring the Monarch Properties clearly evidences the speculative
nature of those lands: just before the Appellant purchased the McKinley
Property, he received a $500,000 offer for the right to purchase the Moore
Property. He had acquired this right a few months earlier for only $10,000.
[73]
At the end of the
hearing, the Appellant acknowledged the speculative nature of the Monarch
Properties. Paragraph 5 of the Partial Statement of Agreed Facts (filed at the
end of the evidentiary stage of the hearing) states the following:
Because
of the long term prospects to develop the Monarch property as part of an urban
area, the highest and Best Use of the lands until August of 2005 was their
speculative long term holding until incorporation into the Urban Area of the
Official Plan.
[74]
August 2005 is the
month in which the OMB issued its favourable decision with respect to the
rezoning request.
[75]
The fact that the
Monarch Properties only generated nominal revenue is also important. In the
five years after the Limited Partnership acquired the Monarch Properties it
received rental income of $11,200 per year. This was in respect of land that it
had acquired for $4 million and for which the annual carrying costs were at
least $325,000.
[76]
The location of the
property in an area subject to significant speculation and the nominal income
received from the land support a finding that price appreciation was the
primary motive of the Limited Partnership at the time it acquired the Monarch
Properties.
[77]
The documents filed
with the rezoning application also evidence an intention to resell the Monarch
Properties.
[78]
The Limited Partnership
filed two substantial documents with the City of Kanata in 1996 and 1997 as
part of its rezoning application: the WestPark Master Plan and the WestPark
Opportunity Justification study (the “WestPark Justification Study”).
[79]
The WestPark Master
Plan describes a mixed-use “wired” community for all of the Westpark Lands. The
community would revolve around a hub located on Terry Fox Drive. The hub would
feature a 20-acre university campus and a 150,000-square-foot shopping centre.
Lands adjacent to Terry Fox Drive would accommodate 2- to 4- storey mixed
residential, commercial and office buildings.
[80]
The lands to the east
of Terry Fox Drive (the Calmar Properties and some of the Neighbouring
Properties) would be used primarily for commercial development.
[81]
The land to the west of
Terry Fox Drive (the Monarch Properties and the remainder of the Neighbouring
Properties) would be for residential housing. This housing would in three
neighbourhoods. Two of these neighbourhoods would have “convenience centres” as
their focal points and include day care facilities, churches, and schools. The
third neighbourhood would have the central hub as its focus. Each of the
neighbourhoods would accommodate 20,000 square feet of commercial space for
neighbourhood commercial uses.
[82]
The WestPark Master
Plan states that the residential area would consist of 2,200 to 2,500 units
with a projected population of 6,500 to 7,500. There would be both multiple-unit
housing and detached housing, with 60% of the housing being detached units. The
WestPark Master Plan notes that “each neighbourhood will be comprised of a mix
of residential densities, ownership, price and building forms to ensure
affordability and social mix.”
[83]
After reading the WestPark
Master Plan, I have concluded that it envisages the sale of most of the WestPark
Lands, in particular the residential area, which includes all of the Monarch
Properties. The WestPark Justification Study verifies my conclusion.
[84]
In the section of the
WestPark Justification Study entitled “Market Analysis”, the authors attempt to
determine who would buy homes in a development such as WestPark. The study
states the following:
Thus,
the market to which the WestPark concept would appeal is quite likely to
be somewhat different from the general population as a whole. It is most likely
the ‘innovators’ and ‘early adoptors’ (16 percent of purchasers) who will buy
homes in an innovative integrated community development such as WestPark.
[Emphasis added.]
[85]
The authors then
estimate the general size of the market for the WestPark homes as follows:
-
the estimated 2,200 homes generated by WestPark
divided by a ten year build-out period produces 220 dwelling units per year;
and,
-
220 divided by 16 percent equals 1,375.
Therefore,
the regional market in which WestPark is situated must generate at least 1,375
new home sales per year.
[86]
The WestPark
Justification Study is based on the assumption that the applicants would build 2,200
residential homes on the WestPark Lands (including all of the Monarch
Properties) for sale to third parties. This provides very strong objective
evidence that the Appellant and the Limited Partnership intended to sell the
Monarch Properties if the city rezoned those lands.
[87]
In summary, it is clear
from the objective evidence before me that the Appellant and the Limited
Partnership purchased the Monarch Properties with the intention of reselling
the lands once they were included within the urban boundary.
[88]
There is no mention in
the partnership agreement, the WestPark Master Plan or the WestPark
Justification Study of the Limited Partnership using the lands (including the
Monarch Properties) exclusively for rental properties. That omission from the
WestPark Master Plan and the WestPark Justification Study is particularly
damaging to the Appellant’s argument since the Limited Partnership required the
city’s approval before it could build rental units.
[89]
Further, the Appellant
testified that no feasibility study was prepared for rental properties. In
fact, the Appellant did not provide the Court with any planning documents for
the 2,200 rental units he claimed the Limited Partnership intended to build on
the Monarch Properties. The Appellant’s oral testimony was the only evidence
that the Limited Partnership intended to use the Monarch Properties exclusively
for rental units. This was oral evidence from a witness whom I did not find
credible and whose testimony on this point was not consistent with the
objective evidence before me.
Appellant’s Alternative Argument
[90]
The Appellant argues,
in the alternative, that if the Monarch Properties are not characterized as having
been capital property at the time of their acquisition, they were converted to
capital property on April 6, 2005 when there was a change in intention.
[91]
Counsel for the
Appellant argued that the Limited Partnership’s intention changed during an
April 6, 2005 meeting that the Appellant had with senior officials from the
City of Ottawa, including the mayor. It is the Appellant’s position that,
during this meeting, he (and the Limited Partnership) committed to a “smart
community concept” consisting of “smart rentals” and related fibre
infrastructure on the Monarch Properties.
[92]
Counsel for the
Appellant argued that this was one of the reasons that between January and July
2006, the parties to the Joint Venture entered into the agreements to sell a
significant portion of the Calmar Properties to the home builders. Counsel argued
that this sale resulted in the Limited Partnership incurring a loss of $2.3
million.
[93]
The evidence before me
does not support the Appellant’s alternative argument.
[94]
In the first instance,
the Appellant testified that, after the meeting with the City of Ottawa, he
hoped that some rental units would be constructed on the Calmar Properties.
However, he knew that the city would only allow a few to be constructed. He hoped
that “the original WestPark master plan would apply to the balance of WestPark”.
[95]
The difficulty for the
Appellant is that, as I previously discussed, the WestPark Master Plan
envisages the building of 2,200 homes for resale on the Monarch Properties and
the relevant portions of the Neighbouring Properties. In short, by stating that
he intended to follow the WestPark Master Plan, the Appellant is stating that
his intention did not change after the meeting with the City of Ottawa.
[96]
The Appellant also
testified that the rental units would be built on the Monarch Properties and
single-family residential homes on the Van Doormaal Property. He offered no
documentary evidence to support this statement. Further, such a statement is
completely inconsistent with the WestPark Master Plan.
[97]
Mr. McGuinty, the
Appellant’s consultant who arranged and attended the meeting with the City of
Ottawa, testified that the concept was for some rental units, some residential
ownership, and some mixed-use commercial/retail. He also testified that the
city places limits on the number of rental units that can be built in a
specific area.
[98]
On the basis of the
evidence before me, I have concluded that the only commitment the Appellant
made at the meeting with the City of Ottawa was to ensure that the fibre
infrastructure was installed on the WestPark Lands to allow for “fibre to the
door”. He did not make a commitment to only build rental housing units on the
Monarch Properties.
[99]
It is not clear to me
what the significance is of the Appellant’s claim that the sale of the Calmar lands
to the builders in 2006 resulted in a loss of $2.3 million.
Although the Appellant did not provide any schedules showing how the loss was
calculated, he testified that he based the loss on the revenue realized in the
agreements filed as Exhibits A-69 to A-72. These agreements show a total
consideration (including the consideration for a number of options) of $33.6 million.
However, between October 2008 and July 2011 the parties renegotiated these
agreements with the total consideration increasing to $55.9 million. Even if
I accept that the Limited Partnership suffered a loss of $2.3 million on a
$33.6 million sale price (which I do not, in light of the limited evidence
before me), there is no evidence before me to support a finding that the
Limited Partnership incurred a loss once the sale price increased from $33.6 million
to $55.9 million.
[100]
Counsel for the
Appellant also argued that the sale of the Monarch Properties was not triggered
by the August 11, 2005 OMB decision, but rather occurred as a result of a
November 20, 2006 meeting the Appellant had with the owners of the Brookfield
and Tridel lands.
[101]
The Appellant testified
that this meeting triggered the sale decision for the following reason:
Well,
I was told by them for the first time that they weren’t going to have anything .
. . to do with fibre to the home as part of the CDP [Community Design Plan]
process. At that point, since they weren’t going to cooperate with me in terms
of allowing me to install fibre in their lands and have the appropriate
easements, my plans were completely frustrated.
[102]
There is no evidence
before me that, prior to November 2006, the Limited Partnership’s plan to
install fibre infrastructure on the WestPark Lands was contingent on the owners
of the Brookfield and Tridel lands agreeing to the installation of such fibre infrastructure
on their lands. There is no mention of reliance on their cooperation in the WestPark
Master Plan. In addition, there is no evidence that the Appellant referred to
such reliance when he made his “fibre to the door” commitment to Ottawa city
officials.
[103]
In fact, his testimony
on this issue is inconsistent with his testimony that one of the reasons he
purchased the Calmar Properties was that the fibre for all of WestPark could go
through that property.
In addition, the Appellant testified that one of the reasons he sold the 11-acre
portion of the Calmar Properties in December 1998 was to allow him to say that
there was fibre at the doorstep of WestPark.
Summary
[104]
It is my view, which is
based primarily on the objective evidence before me, that the Limited
Partnership purchased the Monarch Properties with the intention of reselling
the land at a profit once the land was included within the urban boundary. I
have also concluded that the Limited Partnership sold the Monarch Properties in
the course of its business of buying and selling land.
[105]
My conclusion that the
Limited Partnership was carrying on a business of buying and selling land is
based upon its activities between 1990 and 2006, including the following:
-
Between 1990 and 1995,
the Limited Partnership acquired 350 acres of land either in or on the border of
an expanding residential area. The area was subject to significant speculation.
-
In 1994, the Limited
Partnership retained a consortium of consultants to prepare a rezoning
application.
-
In 1996, within a year
of purchasing all of the 350 acres, the Limited Partnership filed a rezoning
application in an attempt to bring the Monarch Properties within the urban boundary.
The detailed documents that were part of the application envisage the
applicants building 2,200 residential homes on the Monarch Properties and a
portion of the Neighbouring Properties for sale to third parties.
-
In 1998 and 1999, the
Limited Partnership sold two parcels of its land.
-
Early in 2001, the
Limited Partnership refiled its rezoning application.
-
In 2003, the Limited
Partnership appealed the rejection of its second rezoning application to the
OMB.
-
Sometime during 2003
and 2004, the Limited Partnership had the Calmar Properties rezoned to increase
the allowed residential development on the lands.
-
In November 2004, the
Limited Partnership sold a 50% interest in the Calmar Properties and entered
into a joint venture agreement with the purchaser of the 50% interest. The
Limited Partnership agreed to sell the lands on a timely basis with as large a
residential component as possible.
-
In August 2005, the OMB
issued a decision providing that the urban boundary should be extended to
include the Monarch Properties.
-
Between January and
July 2006, the Limited Partnership sold a substantial portion of its 50%
interest in the Calmar Properties.
-
In December 2006, the
Limited Partnership sold the Monarch Properties.
[106]
In my view, these
activities together evidence the carrying on of a business. During the relevant
period, the Limited Partnership was engaged in a continuous operation whose
purpose was the buying and selling of land at a profit.
Second Issue
[107]
The second issue
relates to whether the Appellant received an amount as consideration for
services in respect of the sale of the Monarch Properties or as consideration
for representation services. I do not need to consider this issue since I have
determined that the gain realized by the Limited Partnership and the Appellant
from the sale of the Monarch Properties was on account of income.
[108]
For the foregoing reasons,
the appeal is dismissed, with costs to the Respondent. The Respondent shall
have 30 days to file submissions with the Court if she believes the Court should
award costs in excess of the tariff. Such submissions shall not exceed 30
pages. The Appellant shall have 30 days to file a reply (not to exceed 30
pages). The Respondent shall have 10 days to file an answer to the Appellant’s
reply (not to exceed 10 pages).
Signed at Ottawa, Canada this 4th day of November 2013.
“S. D’Arcy”
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