Araz Developments Inc., Sayouh Boyajian, Armine Boyajian, Ara Boyajian and Calabrina E. Boyajian v. Her Majesty the Queen, [1993] 2 CTC 2360, 93 DTC 922

Hamlyn, T.C.C.J.:—The appeal of Araz Developments Inc. ("Araz Developments") is in relation to a sale of a property situated on Lawrence Avenue in the City of Toronto (the "Lawrence property"). The appeal of the other four appellants is in relation to a sale of a property situated in the Town of Whitchurch-Stouffville (north of the City of Toronto) (the "Stouffville property"). The five appeals turn on whether the gains realized from the respective sales ought to have been treated on income or capital account. Upon consent, these appeals were heard together.

Jurisprudence

The profit-motive by itself is not sufficient to distinguish between business income and capital gains since both traders and investors are in search of profit. In this regard, Thorson, J. in M.N.R. v. Taylor, [1956] C.T.C. 189, 56 D.T.C. 1125 (Ex. Ct.) at pages 211-12 (D.T.C. 1137), made the following comments:

The intention to sell the purchased property at a profit is not of itself a test of whether the profit is subject to tax for the intention to make a profit may be just as much the purpose of an investment transaction as of a trading one.

This principle follows from the reasoning in Californian Copper Syndicate Ltd. v. Harris (1904), 5 T.C. 159 at pages 165-66 (Scot. Ex. Ct. 2nd Div.):

It is quite a well settled principle . . . that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit. . . assessable to income tax. But it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable, where what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business.

Further, it was held in M.N.R. v. Foreign Power Securities Corp., [1967] S.C.R. 295, [1967] C.T.C. 116, 67 D.T.C. 5084, that the determination of this issue rests, in part, upon the taxpayer's intention when acquiring the property.

Moreover, in appeals of this nature it is necessary to weigh the stated intention of the appellants against the conduct of the appellants in relation to the property in question. Mogan, J. in Bell v. M.N.R., [1989] 1 C.T.C. 2272, 89 D.T.C. 165 (T.C.C.) at pages 2279-80 (D.T.C. 170), found:

When the issue is capital gain or income as in these appeals, the appellants are required to testify and make a number of self-serving statements as to their intention at a particular time. In order for the appellants to succeed, such statements must be supported by objective evidence.

[Emphasis added.]

In terms of the evidence, no single factor is conclusively determinative of the issue and the surrounding circumstances must be considered, M.N.R. v. Taylor, supra, at page 214 (D.T.C. 1139).

In addition to the primary intention, one must look at whether the taxpayer had, at the time of acquiring the property, a secondary intention in the event that the primary intention could not be carried out. The meaning and application of "secondary intention” was succinctly described in Racine v. M.N.R., [1965] C.T.C. 150, 65 D.T.C. 5098 (Ex. Ct.) at page 159 (D.T.C. 5103):

To give to a transaction which involves the acquisition of capital the double character of also being at the same time an adventure in the nature of trade, the purchaser must have in his mind, at the moment of the purchase, the possibility of reselling as an operating motivation for the acquisition; that is to say that he must have had in mind that upon a certain type of circumstances arising he had hopes of being able to resell it at a profit instead of using the thing purchased for purposes of capital. Generally speaking, a decision that such a motivation exists will have to be based on inferences flowing from circumstances surrounding the transaction rather than on direct evidence of what the purchaser had in mind.

Therefore, a taxpayer has a secondary intention to trade if the possibility of an early resale at a profit is a motivating consideration at the time the taxpayer makes the decision to acquire the particular property.

The decisive time in the determination of whether there was a secondary intention is when the taxpayer enters into a binding agreement to purchase the property (Dickson v. The Queen, [1977] C.T.C. 64, 77 D.T.C. 5061 (F.C.A.)).

Araz Developments Inc.

The gain in question was realized in the appellant's 1988 taxation year on the disposition of real property consisting of a four storey building and land described as Thomson Court, Civic No. 2680 Lawrence Avenue East, Scarborough, in the Province of Ontario.

The Lawrence property was originally acquired as vacant land in 1983 by Uniboy Canada Ltd. ("Uniboy"), a corporation owned jointly by Ara Boyajian and his brother, Sayouh Boyajian.

In 1985, Uniboy divided its properties between the appellant (which is a corporation owned by Ara Boyajian) and Sebian Developments Ltd. ("Sebian Developments") (a corporation owned by Sayouh Boyajian). As a result, the Lawrence property (which was still vacant land) was transferred to the appellant on July 1, 1985. The appellant's evidence showed that the transfer of the Lawrence property from Uniboy to the appellant was effected at the fair market value of the property on July 1,1985 and Uniboy treated the resulting gain as being on capital account.

The appellant immediately commenced construction of a four storey mixed commercial and residential building on the Lawrence property. Construction of the building was completed in June of 1986. The construction of the building cost approximately $2,100,000. At that time the Lawrence property was substantially leased.

The Lawrence property was subsequently sold on July 28, 1987 and the appellant realized a gain of $2,711,990 on the sale, of which $406,300 was reported as taxable gain in the 1988 taxation year after taking a reserve of $1,343,288.

The Minister has reassessed the appellant by treating the proceeds of the sale of the Lawrence property as being on income account and including the amount of $697,058 in the appellant's income for 1988, after permitting a reserve of $2,014,932.

The result of the Minister's reassessment has been to increase the taxable income of the appellant in its 1988 taxation year by the amount of $202,471.

Significant evidence

It was submitted by the evidence of a real estate agent, Mr. Chyung, that in March of 1987, the appellant, through Mr. Chyung, was approached by a group of individuals and received from them an unsolicited offer to purchase the building for $5,850,000. The group consisted of a number of doctors and dentists who sought to use the Lawrence property as a medical centre. The appellant found the offer to be very favourable and the price offered was well in excess of the appellant's assessment of market value of the Lawrence property. The offer was accepted by the appellant.

Mr. Ara Boyajian was, during the relevant period of time, the sole shareholder and operating mind behind the appellant, Araz Developments.

As indicated, the property was originally acquired by Uniboy and eventually transferred to the appellant company. Uniboy originally acquired an interest in the property pursuant to a conditional offer; the condition relating to the attainment of planning proposals of Uniboy. The Uniboy proposal was to convert the existing zoning from residential to commercial and to build a commercial building. The municipality exacted a compromise to its existing zoning requirements to which Uniboy agreed, and then the purchase was completed. The zoning compromise ended with the proposed building being zoned for 40 per cent residential and the balance commercial. At this point, the property was conveyed to the appellant as part of the dissolution of Uniboy.

Mr. Ara Boyajian further stated that the intention, in relation to this property when acquired, was to build a commercial building and hold it as an income producing property. However, in order to obtain the zoning change it was necessary to put in the residential component. Even with this change Mr. Ara Boyajian maintained the proposal was the same, namely to hold the property, build the building and earn an income from the rental yields. He further asserted that in 1985, the building was built using the best materials and developed in an aesthetically pleasing manner to the point that it won a design award. Mr. Ara Boyajian also acted as the appellant's leasing agent. Mr. Boyajian primarily used his own funds for the construction. Eventually these funds were recouped by way of an institutional mortgage. The financial records indicate that the building at 65 per cent occupancy rate carried itself and had a positive net income. Moreover, the appellant's projections indicated that at 100 per cent occupancy rate, the building would yield substantial net income.

Mr. Boyajian’s evidence further indicated that when the appellant received Mr. Chyung's clients’ unsolicited offer at a price much higher than the anticipated market value of the building, the building was not on the market, however, when Mr. Chyung presented the proposal on the same day, a listing agreement was signed with Mr Chyune. At the time of the offer, Mr. Boyajian said the real estate market that prevailed in Toronto was in a frenzy. He also indicated that while the asset was conceived, designed and built to be held, he nonetheless decided to accept the offer because of its magnitude.

Mr. Ara Boyajian also stated that the Lawrence property was his first experience with a residential leasehold market and that after a short period, he found he did not like this market; he encountered several landlord and tenant problems including some illegal activities engaged in by the residential tenants including assaults and drug dealing.

The property transaction history of Mr. Ara Boyajian, Araz Developments and Uniboy was examined in detail. It would appear that each transaction was approached differently at the acquisition stage and at the development stage. Each property served a different specified purpose. Some properties were acquired, developed and sold; others were acquired, developed and held for their potential yield and others were acquired and held pending zoning and development proposals. On two occasions, property dispositions were declared as sales on account of income.

The operating mind behind the appellant, as indicated, was and is Mr. Ara Boyajian. Mr. Boyajian is not an unsophisticated person in matters of business. He is well educated and conducts all his business activities with precision, care and caution. He is not given to business proposals without first calculating the factors involved and seeks from his real estate endeavours to pursue these matters with the minimum of risk. He finances most of his projects from his own funds.

He stated at length that his long-term property investment policy was motivated by his originating background wherein both he and his family were stateless persons without any permanent status. He also declared that to his family their residence in Canada and their attainment of citizenship were important factors and that land holding is tied to their cultural and family values as well as to their historical status problems.

Araz Developments Inc. analysis

Several factors must be examined in relation te the stated intention of the taxpayer at the time of acquisition of the property including the corporate structure and activities of the appellant, the asset in question and how the appellant dealt with it, the ability of the appellant to finance the undertaking, the property transaction history of the appellant, the market conditions and how the appellant dealt in the marketplace.

It was established in Indépendant Gaz Service Inc. v. The Queen, [1988] 1 C.T.C. 309, 88 D.T.C. 6230 (F.C.T.D.) at page 310 (D.T.C. 6231), that if the appellant is a corporation, the relevant intent to be determined is that of the controlling shareholder. In this case, the operating mind behind the appellant company is Mr. Ara Boyajian. The analysis of the intention is therefore the intention Mr. Ara Boyajian had at the time of the acquisition.

It is true that the business of the appellant company is that of land developing. It was shown through the evidence that the appellant acquired property, developed property, held some property and sold some property. It is an established principle in law that a person in the real estate developing business is not precluded from making an investment in a building” (No. 13 v. M.N.R. (1950), Tax A.B.C. 397,51 D.T.C. 116 at page 402 (D.T.C. 120)). Thus the facts must be examined closely.

At trial, the appellant, through Mr. Ara Boyajian, gave evidence that from the time of acquisition, he intended to keep it as an investment quite apart from his business of buying land, constructing buildings and selling the development. Mr. Ara Boyajian established that the Lawrence property was his "gem" and that he wanted to keep it as an investment; he constructed the building using the best materials and developed the project in such an aesthetically pleasing manner that it ultimately won a design award.

As previously found, Mr. Ara Boyajian is a very sophisticated businessman whose business ventures are well-thought-out and planned with precise care. These elements were present in the Lawrence property.

There was evidence that the property in question yielded a good return. The property, at a 65 per cent occupancy rate, was carrying itself and had a positive net income. Projections indicated that at 100 per cent occupancy rate, the building would yield a substantial income.

The reasons given by Mr. Ara Boyajian for finally disposing of the property were the appellant received an unsolicited offer at a price higher than the estimated market value and that Mr. Ara Boyajian developed a distaste for the residential tenancy business. The appellant's position as a consequence was that it could not turn the offer down. Mr. Boyajian’s position was corroborated by the evidence of the real estate agent, Mr. Ron Chyung. He testified that the property was only listed when the appellant received the offer from the group of professionals.

As indicated by the Exchequer Court in Racine v. M.N.R., supra, at page 159 (D.T.C. 5103), the Court cannot infer that there is a secondary intention to engage in trading through the fact that the property was sold greatly in excess of its fair market value:

. . . the fact alone that a person buying a property with the aim of using it as capital could be induced to resell it if a sufficiently high price were offered to him, is not sufficient to change an acquisition of capital into an adventure in the nature of trade.

The actions of Mr. Ara Boyajian throughout, including his prior property transactions indicated he (through the respective companies including Araz Developments) dealt with each property separately in terms of inception, planning, use and in some cases disposition.

In relation to the Lawrence property, the concept was to buy only after zoning approval, develop in a precise manner, construct the building with the best materials, finance through the extensive use of personal funds and hold the property for its actual and potential yield.

There is no proof of a secondary intention at the time of the acquisition to resell the property. This is supported by the fact that the appellant was very successful in developing and holding the property and receiving the return of the yielded positive net income. The actions and conduct of the appellant are in harmony with the appellant's stated investment purpose. As a result, the profit realized is on account of capital and not on account of income.

Decision

The appeal in relation to the Lawrence property for Araz Developments Inc. is allowed and referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the sale of the Lawrence property was a sale on capital account.

The appellant is entitled to its costs.

Ara Boyajian et al.

The gain in question was realized in the appellants’ 1988 taxation year on the disposition of a parcel of land consisting of 82.39 acres located in the Town of Whitchurch-Stouffville, in the Province of Ontario.

The Stouffville property was acquired in 1988 by the appellants Ara Boyajian and his wife Calabrina E. Boyajian, Sayouh Boyajian and his wife Armine Boyajian, in equal shares as tenants in common.

The Stouffville property was sold for an amount of $7,630,000. The selling price of the property in question in the opinion of the appellants was well in excess of what the appellants thought the property was worth.

The Minister by reassessment has included in computing each of the appellants' income for the 1988 taxation year an amount as follows:

In 1988, a 74.5 acre parcel of land adjacent to the subject property was acquired by Araz Developments (owned by Ara Boyajian) and Sebian Developments (owned by Sayouh Boyajian), in equal shares as tenants in common and this property is still held in the same ownership. Both Araz Developments and Sebian Developments have for some time attempted to have the property rezoned to industrial so that they may develop an industrial park.

All four appellants testified as to the acquisition and disposition of the Stouffville property.

The appellants stated that their intention was to acquire this agriculturally zoned property and hold it for a long period of time. They expected through the years to have the property rezoned to industrial, develop the property and operate the industrial property as leasehold property. They further stated that the property was acquired as an income producing investment for the benefit of their six children. There was some documentary evidence, however brief, to support this evidence.

The subject property was sold after 32 days of holding. The appellants received an unsolicited offer in excess of what they felt was the market value. After some discussion, the other three appellants followed the views of Mr. Ara Boyajian and decided to sell the property.

In relation to the property holding of the Stouffville property, the appellants stated the same cultural views and family values presented as part of the Araz Developments case.

Ara Boyajian et al. analysis

The factors that must be considered in relation to the stated intention of the appellants at acquisition include the type of acquisition, the feasibility of the project, the financing, the length of time the property was held, the historical pattern of property dealing, the determination of the operative mind(s) in the decision-making process, the degree of sophistication of the appellants in terms of property transactions and the amelioration of the property.

In relation to the Stouffville property, there is some evidence that the appellants acquired it with the intent of holding it as an income producing investment for the benefit of their six children. The financing was to be their own.

However, there was no evidence that the property could yield any income to its owners without considerable time, effort and investment. Moreover, no detailed business plan or critical path was developed in relation to this purchase.

It was established in Leonard Reeves Inc. v. M.N.R., [1985] 2 C.T.C. 2054, 85 D.T.C. 419 at page 2058 (D.T.C. 421) (T.C.C.), referring to M.N.R. v. Lane, [1964] C.T.C. 81, 64 D.T.C. 5049 (Ex. Ct.), at page 91 (D.T.C. 5051) that:

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.

In this case, the dominant member was Mr. Ara Boyajian (I conclude from all the evidence that he was the directing mind and will of the ownership of the Stouffville property). As previously concluded, Mr. Ara Boyajian is a sophisticated businessman fully aware of the business of property acquisition, development and disposition. Although Calabrina, Sayouh and Armine Boyajian were reluctant to sell the property, they ultimately agreed with Mr. Ara Boya- jian's decision to dispose of the property. In light of the facts surrounding the acquisition of the property, and the actions of the parties, I conclude Mr. Ara Boyajian did have an operating motivation to sell the property if the opportunity arose. The finding of such motivation is reinforced by the fact that Mr. Ara Boyajian had already sold another property (the Lawrence property) at a considerable profit seven months before the Stouffville property was purchased. I can only conclude Mr. Ara Boyajian was aware that the property could probably be sold at a profit if the real estate market continued as structured and the parties so chose. The frenzied market situation existing in Toronto at the time of the Lawrence property sale continued on to the sale of the Stouffville property.

The short length of time (32 days) for which the appellants held the property also points to the supporting conclusion there was a secondary intention to sell the property if the price was right. The appellants referred to T.K. Sales Ltd. v. M.N.R., [1973] C.T.C. 340, 73 D.T.C. 5284 (F.C.T.D.), to advance their argument that even where a taxpayer is in the real estate trade, a gain on sale of a property may be treated as capital where the property was acquired for the purpose of producing income if the primary intention is frustrated and a sufficiently good offer is received. They claim that under such circumstances, the short period of time that elapsed between the purchase and sale of the property is irrelevant. This case is distinguished. In 7.K. Sales Ltd., supra, the appellant could not carry out his primary intention due to the illness of his wife, whereas in this case there is no evidence that the primary intention was frustrated.

I would therefore conclude, notwithstanding the stated intention, there is strong evidence of a secondary intention which was an operating motivation to sell the property if the circumstances warrant it. The gain resulting from the sale of the Stouffville property is consequently on income account.

Decision

The appeals of the appellants Ara Boyajian, Calabrina E. Boyajian, Sayouh Boyajian and Armine Boyajian in relation to the disposition of the Stouffville property are on account of income and the appeals are therefore dismissed.

These appeals having been heard on common evidence, only one counsel fee for the respondent is allowed for the said appeals.

Appeal allowed in part.