Louise Belanger-Coady v. Her Majesty the Queen (Informal Procedure), [1994] 1 CTC 2097

Bowman, J.T.C.C.:—This appeal is from an assessment for the appellant’s 1990 taxation year. Although the notice of appeal and the reply both referred to the 1988 and 1990 taxation years the appellant’s agent informed me that no issue was taken with the 1988 assessment.

The case involves a gain realized in 1990 by Mrs. Belanger-Coady (now Mrs. Belanger-Robinson as the result of a remarriage) on the sale of a parcel of land in Port Elgin, Ontario. The Minister on assessing treated the gain as being on revenue account. The appellant contends that it is on capital account.

In March 1988 the appellant’s husband, John Coady, submitted an offer in trust to purchase a parcel of beachfront property in Port Elgin comprising 15,000 square feet. The lot had formerly been the site of a restaurant that had burned down. By the time the transaction closed four persons had each acquired a 25 per cent interest in the property, as partners: Mr. Coady, the appellant, Mr. Murray McAlpine and Mr. Chacko Varghese.

The price of the property was $100,000 and the terms were $20,000 down and a three year vendor take-back mortgage bearing interest at ten per cent per annum. Each partner therefore put up $5,000 and contributed his or her pro rata share of the monthly mortgage payments of $715.59.

The appellant testified that her intention from the outset was to attract a good tenant who would rent the property from them, including a restaurant that they proposed to construct. It was estimated that a restaurant would cost between $260,000 and $300,000 to build.

The appellant approached a number of potential tenants, including McDonald's, Burger King and Red Lobster, and sent them a package of material describing the site. She advertised in newspapers in a number of cities such as London, Kitchener, Owen Sound and Toronto. She also communicated by telephone with a number of other prospective tenants. Her efforts, however, were unsuccessful and no tenants were forthcoming. The fact that the lot was vacant may have been a deterrent. Tenants were not interested unless there was a Suitable structure already built and the lender whom she approached was unwilling to lend money for construction unless they had a tenant.

They considered alternatives, such as putting up cottages but were informed that rezoning would be difficult if not impossible and that in any event the lot was too small. They discussed purchasing an adjacent lot but the owner was not interested in selling.

Mr. Coady was approached in 1990 by a Mr. Greg Schmalz who was interested in buying the property for $200,000. Mr. Coady, who by now was divorced from the appellant and was having financial difficulties, was interested in selling. The other partners could have bought his interest for $50,000 but in light of the difficulty they had had in leasing the property they decided to accept the offer. The property was therefore sold and the profit that is in issue here was realized.

The appellant was a credible witness. I accept her testimony that it was her intention to put up a restaurant and rent it to a triple-A tenant such as McDonald's. I also accept her description of the difficulties the partners had in finding a suitable tenant and in financing the construction of a restaurant as well as of the circumstances giving rise to the sale.

Nonetheless, and notwithstanding Mr. Gupta's able and persuasive presentation of his client’s case, I cannot agree that the gain was on capital account.

From time to time courts have endeavoured to set out the criteria to be applied in determining this type of question. An example is Happy Valley Farms Ltd. v. The Queen, [1986] 2 C.T.C. 259, 86 D.T.C. 6421 (F.C.T.D.), where six tests were listed: the nature of the property sold, the length of the period of ownership, the frequency or number of other similar transactions, work expended on or in connection with the property realized, the circumstances that were responsible for the sale and the taxpayer's motive.

In M.N.R. v. Taylor, [1956] C.T.C. 189, 56 D.T.C. 1125 (Ex. C.R.), Thorson, J. set out the classic statement of what constitutes an adventure in the nature of trade. His criteria were approved by the Supreme Court of Canada in Irrigation Industries Ltd. v. M.N.R., [1962] S.C.R. 346, [1962] C.T.C. 215, 62 D.T.C. 1131. In Racine, Demers and Nolin v. M.N.R., [1965] C.T.C. 150, 65 D.T.C. 5098 (Ex. C.R.), Noël, J. articulated at page 159 (D.T.C. 5103) the now familiar concept of secondary intention where he said that for the doctrine to apply "the purchaser must have in his mind . . . the possibility of reselling as an operating motivation for the acquisition".

All of the tests that have been formulated in the above and other cases are useful but essentially they emphasize the necessity of determining whether a transaction, when all of its aspects are taken into account, involves what is truly a disposition of a capital asset or is a commercial enterprise or an adventure in the nature of trade. Ultimately it is a question of fact and it boils down to a "commonsense appreciation of all the guiding features". (B.P. Australia Ltd. v. C.I.R., [1966] A.C. 224, [1965] 3 All E.R. 209 (A.C. 264).) No single factor predominates nor is its presence or absence necessarily determinative. Each factor must be assigned its appropriate weight in the context of the case as a whole.

Here we have a purchase of a piece of property on a shoestring with little or no thought as to how the stated intention was to be realized. No financing was arranged beforehand and no projections were made as to the anticipated income. The case is not dissimilar to that described in Regal Heights Ltd. v. M.N.R., [1960] S.C.R. 902, [1960] C.T.C. 384, 60 D.T.C. 1270, where Judson, J., speaking for the majority of the Supreme Court of Canada, said at pages 389- 90 (D.T.C. 1272):

There is no evidence that these promoters had any assurance when they entered upon this venture that they could interest any such department store. Their venture was entirely speculative. If it failed, the property was a valuable property, as is proved from the proceeds of the sales that they made. There is ample evidence to support the finding of the learned trial judge that this was an undertaking or venture in the nature of trade, a speculation in vacant land. These promoters were hopeful of putting the land to one use but that hope was not realized. They then sold at a substantial profit and that profit, in my opinion, is income and subject to taxation.

It seems to me to be clear from this and a number of other cases cited by counsel that even where the primary intention is the construction of an income producing property, all of the other circumstances of the transaction must be taken into account in determining whether the gain is "a mere enhancement of value by realizing a security, or is a gain made in an operation of a business in carrying out a scheme for profit making” (Californian Copper Syndicate Ltd. v. Harris (1904), 5 T.C. 159 (page 165)).

A statement by a taxpayer of intention to hold the property as a capital investment—even where it is accepted by the Court, as it is here—is not in itself a sufficient basis for treating a transaction as being on capital account where the other circumstances, such as the minimal down payment, the absence of any concrete plans for financing or constructing a proposed facility or for obtaining tenants or any projections as to profits, militate against such a conclusion. In this sense the purchase was speculative and the appellant's optimistic expectations that the intention of attracting a suitable tenant was bound to be realized are insufficient to rebut the inference that this venture was a commercial enterprise in which if a profit could not be made one way it would be made in another.

The appellant was a 25 per cent partner in the project. Although she seemed to have played an active role in it, she did not control it and we have no evidence of what intentions or expectations of the other partners might have been. Her profit was essentially her twenty-five per cent share of the profits of a partnership on the sale of a parcel of vacant land after the original intention of building a restaurant on it and leasing it was not able to be realized.

Some point was made of the fact that the appellant is a licensed real estate broker and that she had engaged in a number of other real estate transactions. The several other transactions are a minor consideration. I make no finding as to whether they were on revenue or capital account. I would have reached the same conclusion without them. As to her profession as a real estate broker this in itself is neutral. Real estate brokers may be knowledgeable in real estate but this does not by itself create a presumption that they are land speculators. Their experience could as easily make them knowledgable in identifying good long-term investment opportunities. Real estate brokers are as capable of making capital investments as anyone else and they should not have to surmount higher hurdles than other taxpayers.

Nonetheless, for the reasons that I have indicated, I do not think that the gain here is on capital account.

Accordingly, the appeal is dismissed.

Appeal dismissed.