Mario Di Renzo, Eva Di Renzo, Benedetto Di Renzo, and Benedetto Di Renzo and Rose Di Renzo, Executors of the Estate of the Late Antonio Di Renzo v. Her Majesty the Queen, [1994] 1 CTC 2486, 94 DTC 1782

Christie, A.C.J.T.C.C.:— These appeals were heard together on common evidence. The reassessment under appeal in every instance relates to 1988. The issue is whether the profit realized by each appellant on the disposition of real estate at 7 Christopher Court, Guelph, Ontario, ("the property") is a capital gain or ordinary business income.

On March 23, 1993, Antonio Di Renzo ("Tony") was examined orally for discovery. He died on April 19, 1993. At the commencement of the trial counsel for the appellants, Mr. Maiocco, made application under paragraph 100(6)(a) [1] of the Tax Court of Canada Rules (General Procedure) to read into evidence all of the evidence given by Tony on the examination for discovery. Counsel for the respondent, Mr. Ghan, did not object. But he entered a caveat that the weight to be assigned to the evidence should be considered in the light of the fact that Tony did not testify before the Court. The application was granted.

The only persons who testified at trial were the appellants, Benedetto Di Renzo ("Ben") and Mario Di Renzo ("Mario"). At the commencement of the trial Mr. Maiocco said: "We propose to make Eva Di Renzo available if Mr. Ghan would like to examine her but I don"t propose to call her." He added that the reason for this would be clear from other evidence. Mr. Ghan did not seek to question her.

Ben is the brother of Tony and Mario and husband of the appellant, Eva Di Renzo ("Eva"). At the time of the hearing he was 49 years old. He was born in Italy and received a grade 8 education there. He started work as a bartender in a hotel in Italy when he was 15 and did this for five years. He came to Canada when he was 20. Ben worked in a grocery store and factory for two years and then took a course in hairdressing. He worked in that business for 18 years. He got involved with Tony and Mario in the construction business and sold the hairdressing business eight years ago. Since then he has been engaged full time in the construction business.

In 1975 Dira Construction Ltd. ("Dira") was incorporated. Ben, Tony, Mario and Ben's brother-in-law, Alfonso Ranalli ("Alfonso"), who was in the masonry business with Mario, each held 25 per cent of the shares. Tony had graduated in architectural technology from the Ryerson Polytechnical Institute. In 1979 he was the only full-time employee of Dira.

Ben concentrated on matters relating to finance and performed the functions of the company secretary and bookkeeper. He was involved in administrative matters such as paying bills, finding tenants for investment properties, collecting rents, etc. Mario and Alfonso contributed work on a part-time basis while continuing their business. Eva did some cleaning work and from time to time minded the telephone. In 1980 or 1981 Alfonso had a stroke and because of this terminated his association with Dira, whereupon Ben, Mario and Tony each became owner of one-third of the shares. Ben described Tony as "the driving force of the company” and "the leader". He did the basic selection of investments and dealt with architects, engineers, staff at city hall, etc. He was the "construction manager”. Mario was the on-site supervisor of construction. Full confidence and trust existed among the brothers and they dealt with each other on a very informal basis.

Prior to the incorporation of Dira, Ben, Mario, Alfonso, Eva and Alfonso's wife, Nicolina, invested in two properties. After incorporation Tony was involved in all the real estate transactions.

On September 2, 1987, Tony signed an agreement of purchase and sale regarding the property. The purchaser is "Tony Di Renzo in trust". At this time Tony was acting for himself, Mario and Ben. Their interest in the property was: Tony 1/3, Mario 1/3, Ben 1/3. The vendor was Reid's Heritage Homes and 671714 Ontario Ltd. The document was signed on behalf of the vendor on September 3, 1987. The original offer was $450,000. The vendor countered with $550,000 and the price agreed to was $525,000. The existing mortgage for $240,000 was assumed by the purchaser and the balance of $285,000 was paid in cash. The completion date was December 8, 1987. The agreement included this clause:

This offer is conditional for five business days upon the purchaser satisfying himself that the maximum number of apartment units, as per existing city by-law, can be built on the site without interfering with the Hydro easement and/or other city by-laws.

This condition was removed by Tony in writing on September 9, 1987, he then being satisfied about the maximum number of apartment units. The source of the $285,000 was $271,103 from a bank account related to the Grandvale Centre, an office building owned by the three brothers and Eva; $4,155.50 from an account related to the Kortright Plaza, owned by the three brothers; $9,741.50 from Tony's personal account.

The evidence of Ben is that the purpose of acquiring the property was the construction thereon of apartments to be rented. Eva simply accepted his advice about the acquisition of the property and exercised no independent judgment about the matter. He said: "She left all the financial side, all the financial business, all the personal investment completely up to me. So I informed her of our discussing the possibility, discussing the desire to have an investment into an apartment building and I made her aware of this piece of land that was available and of our intention of buying it and she just would leave all decision up to me. She always kept out of whatever, whichever way I was investing the moneys."

On December 2, 1987, Tony, Mario and Ben entered into a joint venture agreement regarding the property. The preambles read:

WHEREAS the parties hereto desire to purchase certain property (the "Property") situate in the City of Guelph, in the County of Wellington, more particularly described in Schedule "I" hereto;

AND WHEREAS the parties hereto desire to enter into and form a joint venture for the purpose of developing the property and desire to set out their respective rights and obligations and to provide for the management and operation thereof;

NOW THEREFORE THIS INDENTURE WITNESSETH that in consideration of the premises and covenants herein contained, and other good and valuable consideration (the receipt of which each party hereto irrevocably acknowledges), the parties hereto covenant and agree as follows:

Clauses 1.01 and 1.02 under the heading THE VENTURE read:

1.01 The parties hereto hereby form a joint venture (the "venture") for the purpose of acquiring the property, developing and operating it.

1.02 The venture shall commence on the date of this agreement and shall continue until terminated in accordance with this agreement.

Under the heading PURCHASE OF PROPERTY, Tony, Ben and Mario are shown as each having a 33 per cent interest in the property. Other headings relating to FINANCIAL MATTERS, MANAGEMENT, ADVANCES AND OTHER FINANCING, RESTRICTION OR TRANSFER, INSOLVENCY, BANKRUPTCY AND PROHIBITED TRANSFERS, PERMITTED TRANSFERS, BUY—SELL, etc., are included in the lengthy agreement.

The three brothers had entered into similar agreements with respect to other properties acquired by them. On December 2, 1987, Ben and Eva entered into an agreement whereby she was allowed to purchase one-half of Ben’s interest in the property. The preambles read:

WHEREAS Benedetto has entered into an agreement dated December 2, 1987 between himself, Antonio V. DiRenzo and Mario A. DiRenzo (the "Venture Agreement”) with regard to the purchase and development of Block 59, Plan 728, City of Guelph, County of Wellington;

AND WHEREAS Eva desires to purchase a one-sixth interest in such Venture;

AND WHEREAS the parties to the venture agreement are prepared to consent to the purchase by Eva of a one-sixth interest provided such interest is created by dividing Benedetto’s one-third interest in half;

AND WHEREAS the parties desire to set out in this agreement the terms of such purchase by Eva;

AND WHEREAS prior to such transfer, Eva agrees to become a party to the Venture Agreement and be bound by the terms thereof, but shall not be entitled to any separate representation or votes;

Tony and Mario agreed in writing to the proposed sale to Eva.

The property consisted of some two acres and was located in a residential area that included a major shopping centre. It was fully serviced. From the time of entering into the agreement of purchase and sale in September 1987 Tony was busy preparing for construction. Examples of this activity that are in evidence are a letter from Tony to Reid's Heritage Homes Ltd. dated October 9, 1987, that reads in part: "the closing date on this parcel of land is approaching and we would like to start doing some topographical survey immediately. We, therefore, ask that you remove or have removed the imported fill on this land”; a letter from Niagara Elevator Inc. in response to a call from Tony about elevators for the proposed apartment building on the property that reads in part: “In confirmation of our telephone conversation of today, we would appreciate quoting your elevator needs for your proposed apartment project"; a letter to Tony from Delta Elevator Co., the first paragraph of which reads: "Enclosed, please find a contract for maintenance on one Econolift and a contract to install a five stop hydraulic elevator. The proposal should be self explanatory”; two documents dated October 21 and 27, 1987, prepared by Tony containing information about elevators and other data relating to the property; miscellaneous sketches pertaining to the apartment; a document labelled “Drainage Plan of Lots Abutting Christopher Court" received by Tony from D. Atkinson; another drainage plan relating to the lot adjoining the property with Tony's name on it that was received from the Engineer's Department, City of Guelph; three documents dated April 1988, each called a Site Grading Plan prepared for Dira by William R. Jarrett Architect Inc. The stamp on the documents indicate that they were received by the Guelph Department of Planning and Development on June 8, 1988. This is shortly before June 17, 1988, which is the date on which the offer by Roncur Holdings Inc. ("Roncur") to purchase the property was accepted by Tony. The evidence is, however, that the possibility of the offer being made was not known to the vendors at that time.

Through his efforts Tony also discovered that more than 50 to 55 units, originally thought to be the maximum, could be constructed on the property. Depending on the amount of underground parking available this could be increased to 85 to 90 units. In evidence are a number of architectural sketches prepared by him concerning different building possibilities on the property. The conceivability of constructing two buildings was considered with care, but because of the configuration of the property this was discarded by December 1987. On January 4, 1988, Tony wrote Mr. John McCuaig of Ontario Hydro as follows:

Re: Hydro Easement on Block 59 PI. 728, Christopher Court., Guelph

As you may be aware, the city of Guelph's zoning bylaw for this parcel of land allows for an apartment building of about eight storey to be built on it. Since a major Hydro Easement crosses the entire length of this land, we wish to know from you the restrictions which Ontario Hydro would impose on our project in as far as the easement is concerned.

I am enclosing one copy of two preliminary development proposals, noted as "Option A" and “Option B”, for the land we own and would like to receive your comments relating to the proximity of the building to the hydro easement, as well as your comments relating to the parking layout and any other information relevant to this project. We cannot proceed any further in our design development without first receiving your evaluation of our preliminary design, and therefore, wish to ask that you respond as soon as possible.

Please call at anytime should you require additional information or should you wish to meet me in your Office.

At this time the number of apartment units to be constructed was 87.

During March 1988 there were discussions with Mr. Paul Platt of the Royal Bank about financing the development of the property. The increase from 50-55 to 87 units was important in this regard. Platt had been supplied for some time with financial statements of Dira, Grandvale Centre and Kortright Plaza. The bank was interested in financing the development of the property.

As previously indicated the property was acquired by Ben and the others pursuant to an offer to purchase dated September 2, 1987 that was accepted the next day. The completion date was December 8, 1987. Thereafter Tony received inquiries from real estate agents about whether the property was for sale. The answer was no. But eventually he received an unsolicited offer in writing dated June 15, 1988, from Roncur for $950,000. Bargaining followed and on June 17, 1988, Roncur offered $1,075,000 which was accepted the same day. The time for completion of the agreement was September 15, 1988.

The basic reason given for selling the property is that the three brothers were overwhelmed by the magnitude of the profit — some $550,000 minus expenses related to acquisition and disposition — in relation to the size of their investment and the time factor, which was a lapse of some 9-1/2 months.

There is in evidence a significant document relating to the dealings in real estate by the appellants and Tony during the 19 year period July 1969 to December 1988. The only names that require special mention are these: Vincenzo and Bruna Barzotti, who are husband and wife and Vincenzo is the brother of Eva; Angelo Maiocco is counsel for the appellants on these appeals and Mario Maiocco is his brother. The document (Exhibit A-17) reads:

[Chart not reproduced.]

The offices of Dira are located at 200 Edingburg Road North. Dira constructed houses on two lots conveyed to it and sold them. The Grange Road property was subdivided into eleven lots on which Dira built homes and sold them. The proceeds from the Fife Road property were invested in Venture Heights. Venture Heights is 93 acres of farmland just outside the limits of Guelph. Ben said it was a long term investment and development would take place over 10-20 years. There is also in evidence a document depicting properties acquired by Dira and 557506 Ontario Inc. At incorporation the shareholders of the numbered company were Ben, Mario, Tony and Alfonso in equal numbers. Alfonso later sold his shares to the other three. The document (Exhibit A-18) reads:

[Chart not reproduced.]

With respect to item numbered 1, the evidence is that the number of houses built and sold per annum varied from 2 to 25. The estimated average per annum was 8 to 10.

The ground lease relates to property in the City of Guelph.The remaining term is for 69 or 70 years. Ben noted that he and other members of the family kept in their own names those properties acquired as investments, and the acquisition of property for the purpose of business development and sale were assets of Dira and, although not specifically mentioned, presumably of Woodfield Homes. This is in conformity with the information in Exhibits A-17 and A-18. In the course of being cross-examined, Ben reiterated more than once that the property had been acquired for the purpose of producing rental income from the apartments to be constructed thereon.

Mario is 46 years old. He was born in Italy where he attained a grade 5 education. At 13 years he commenced an apprenticeship as a bricklayer. At 16 years, in 1963, he emigrated to Canada and on arrival commenced work with a masonry contractor. He stayed there for three years. He then went into the masonry business in partnership with his brother-in-law Alfonso. He later went to work for Dira. His employment with the company was that of “job site supervisor". This included supervising work done by independent contractors for Dira. He also contributed directly to construction work and did service calls and maintenance. He had no "office responsibilities”. Exhibit A-17 was reviewed with this witness, but it is sufficient to specifically deal only with what he had to say about item 8, i.e., the property. In discussions with Tony he was convinced that to invest in apartments was a sound idea. Mario said that decisions about the acquisition of real estate were left to Tony and Ben. He (Mario) was kept informed. After the property was acquired and he learned that 90 apartments might be constructed he asked how it was to be financed. His brothers explained in a general way and said that if necessary another partner could be added. Mario also expressed concern over his lack of experience in constructing to a height of eight or ten floors, but Tony assured him that when he worked in Toronto he had gained such experience. He (Tony) added that an additional supervisor could be employed for a few months or Tony could move his office temporarily to the property ana supervise himself. Mario was asked this question by his counsel and gave this reply:

Q. When you bought or became a partner in the purchase of this property on Christopher Court, did you yourself think at any time that you might turn around and sell the land?

A. Never.

Later he said that the property was bought to construct an apartment building on it and there was no interest in selling. He was then asked why, if there was no interest in selling it, he agreed to the sale. He replied:

That is a good question. The main reason I think was the amount of money. We had never, the place was never for sale and then someone walked into the office with, I think was around a million dollars, I think double the profit I think it was and Tony started proposing about it this is too good a deal, too much money to let it go.

The witness confirmed what is indicated in item 8 of Exhibit A-17 that the proceeds from the sale of the property were invested in the Speedvale Avenue property.

In summary the evidence given by Tony on his examination for discovery is that his purpose, and that of his brothers, in acquiring the property was to construct apartments to produce rental income for them. With reference to the property he said: “1 really felt that I had something that was worth a lot to the three of us as a long-term investment. This was a jewel.” The sale of the property originated with an unsolicited offer from Roncur. The real estate agent who conveyed this to Tony had approached the latter indicating that if he was interested in selling the property the agent could get in the vicinity of $600,000 on a quick sale. This occurred between September 2 and December 8, 1987 which are the dates on which Tony signed the document agreeing to purchase the property and the completion date of its acquisition. He rejected the offer. His evidence about this is: "And I said to Joe (the real estate agent) the land is not for sale. We're not interested in selling it. I bought it for a long-term investment. We wanted to build there rental and it’s not for sale.” The same agent approached Tony again in December 1987 or January 1988 indicating he had someone interested in buying the property for $700,000. This was also rejected. The overriding factor that precipitated the acceptance of the offer by Roncur was its magnitude. Tony said: "And now the fact that he’s talking $1,000,000 and, my God, I nave been working for 15 years, I have never heard of millions of dollars. It's a big amount so I say, Okay bring it (the offer) in.”

There are four guidelines or principles applicable to trading cases arising under the Act that can be usefully, specifically referred to in respect of this litigation. In Hall v. The Queen, [1986] 1 C.T.C. 399, 86 D.T.C. 6208 (F.C.T.D.), Mr. Justice Collier said at page 405 (D.T.C. 6213):

But all these cases involving capital gain versus income, or adventure in the nature of trade, must depend on their own particular facts. This was pointed out by 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 page 907 (C.T.C. 390, D.T.C. 1273). I refer also to the comment of Kerwin, C.J. in McIntosh v. M.N.R., [1958] S.C.R. 119, [1958] C.T.C. 18, 58 D.T.C. 1021 at page 121 (C.T.C. 20, D.T.C. 1022):

It is impossible to lay down a test that will meet the multifarious circumstances that may arise in all fields of human endeavour . . . it is a question of fact in each case. . . .

In Leonard Reeves Inc. v. M.N.R., [1985] 2 C.T.C. 2054, 85 D.T.C. 419 (T.C.C.), this is said at page 2058 (D.T.C. 421):

If the appellant entered into a partnership or a syndicate or some other arrangement with others for the purpose of dealing in land and played a passive role leaving it to another to be the active or dominant member, that member's intentions are attributable to the appellant: M.N.R. v. Lane, [1964] C.T.C. 81, 64 D.T.C. 5049 per Noël, J. at page 91 (D.T.C. 5051), and Wiss v. M.N.R., [1972] C.T.C. 264, 72 D.T.C. 6231, per Heald, J. at page 264 (D.T.C. 6231-32).

The foregoing was cited with approval by Mr. Justice Collier in Sardo v. The Queen, [1988] 2 C.T.C. 290, 88 D.T.C. 6464 at page 292 (D.T.C. 6465).

Where the issue is whether the profit on the acquisition and disposition of real estate is on capital or revenue account the fact that the taxpayer has a history of trading in real estate points away from a capital gain. This is not, however, conclusive. It is something to be weighed along with the other relevant circumstances: O & M Investments Ltd. v. M.N.R., [1985] 2 C.T.C. 2207, 85 D.T.C. 535 (T.C.C.), at page 2209 (D.T.C. 537). The same can be said about a brief lapse of time between the acquisition and disposition of real estate.

I am satisfied on the whole of the evidence that it has been established on a balance of probability that at the time of the acquisition of the property the exclusive motivating intention of each of the three brothers was to develop it into apartments and retain it on the long term as a revenue producing asset. Eva’s role was strictly passive and the intention to be attributed to her is that of Ben on December 2, 1987 when 50 per cent of his interest in the property was transferred to her. His intention at that time was as is just indicated.

Ben and Mario impressed me as honest and straightforward witnesses. There is nothing in the evidence or other material before the Court to cast doubt on the veracity of the evidence given by Tony on being examined for discovery. Further the evidence of things done in relation to the property between September 1987 and June 1988, such as planning for a topographical survey; inquiries about elevators; architectural sketches concerning different building possibilities on the property, etc., are, I believe, consistent with the conclusion I have arrived at. In my opinion the same consistency flows from the pattern of investments to be found in Exhibits A-17 and A-18.

After the hearing counsel for the appellants made a submission in writing in support of a request that his clients be awarded costs on a solicitor and client basis. Counsel for the respondent challenged the request in writing.

It is clear that such an award can be made only in exceptional circumstances. There are a number of authorities pertaining to the award of costs on the basis requested, but it is sufficient to refer to relatively recent pronouncements in this regard by this Court, the Federal Court of Appeal and the Federal Court-Trial Division.

In Rummel v. M.N.R., [1990] 2 C.T.C. 2524, 90 D.T.C. 1868 (T.C.C.), Sarchuk, J.T.C.C. said at page 2524 (D.T.C. 1869):

Costs as between solicitor and client are exceptional and generally to be awarded only on the ground of misconduct connected with the litigation (Amway of Canada Ltd. v. The Queen, [1986] 2 C.T.C. 339, [1986] 2 F.C. 312). An award of costs on a solicitor and client basis is ordered only in rare and exceptional cases to mark the Court's disapproval of the parties conduct in the litigation (Isaacs v. MHG International Ltd., 45 O.R. (2d) 693, 7 D.L.R. (4th) 570). The submissions made on behalf of the appellant fail to establish misconduct which would warrant the award of costs on a solicitor and client basis.

In The Queen v. Lee, [1991] 2 C.T.C. 344, 91 D.T.C. 5596 (F.C.A.), the original hearing was before this Court. The trial judge awarded the appellant costs on a solicitor and client basis. Counsel for the Minister of National Revenue made application under the Tax Court of Canada Rules of Practice and Procedure for the Award of Costs (Income Tax) to have the matter reviewed. On March 15, 1991, Brulé, J.T.C.C. delivered reasons approving the costs awarded. There was a further review by the Federal Court of Appeal under section 28 of the Federal Court Act. It set aside Judge Brulé’s decision and referred the matter back to the Tax Court of Canada for taxation of costs on a party and party basis. Heald, J.A. speaking for the Court said at page 346 (D.T.C. 5598):

In my opinion, Judge Brulé was in error when he relied on the intrinsic merits of the taxpayer's appeal. Such a basis was disapproved of in the Reading & Bates case ((1986) 2 F.T.R. 241 at page 264). The decision of this Court in Amway Corp., supra, at page 340 (C.T.C.)) is also relevant. In that case, Mr. Justice Mahoney stated: "Costs as between solicitor and client are exceptional and generally to be awarded only on the ground of misconduct connected with the litigation.” He added at page 341:

While an appellate court is reluctant to interfere with what is essentially an exercise of judicial discretion, it will necessarily do so when that exercise of discretion is not supported by reasons or apparent on the record.

In Toronto-Dominion Bank v. Canada Trustco Mortgage Co. (1992), 50 F.T.R. 317, 40 C.P.R. (3d) 68 (T.D.), Mr. Justice Strayer said at page 318 (C.P.R. 70):

In any event I see no basis for awarding costs on a solicitor-client basis. Such costs should only be awarded where the misconduct of the opposite party in the preparation and presentation of the case has caused unnecessary expense to the party applying for such costs, or where the proceeding was so futile, vexatious, or frivolous, that the other party has knowingly or recklessly put the applicant for such costs to completely unnecessary expense in response. Neither of those conditions apply here.

He added at page 319 (C.P.R. 71):

With respect to the defendant's request for special directions as to costs, the jurisprudence is clear that such directions should be given in only rare cases. (Diversified Products Corp. v. Tye-Sil Corp. (1988), 22 F.T.R. 241, 23 C.P.R. (3d) 313 (F.C.T.D.)).

In the light of the foregoing there is, in my opinion, no evidence before me upon which I can properly order the respondent to pay costs to the appellants on a solicitor and client basis. This is the primary focus of the appellants’ argument: "The taxpayers submit that Revenue Canada failed to investigate the relevant facts with any or reasonable care prior to reassessing the taxpayers. The taxpayers submit that in exercising its statutory duty to assess the taxpayers Revenue Canada acted recklessly, wilfully ignoring critical and relevant facts.”

In particular misconduct regarding the conduct of the litigation that would warrant awarding costs on the basis sought has not been established.

The appeals are allowed. The appellants are entitled to party and party costs.

Appeals allowed.