John F. Stroz and Edward S. Stroz v. Minister of National Revenue, [1990] 1 CTC 2417, 90 DTC 1271

Brule, T.C.J.:—These appeals, heard on common evidence, involve the taxpayers' participation with a group of others in the sale of real property the profits from which the Minister reassessed as being income to the appellants. The taxation years involved are 1979, 1980, 1981 and 1982.

At the outset of the hearing counsel for the appellant Edward Stroz pointed out that on reassessment by the Minister, the taxpayer was not given a deduc- tion of some $4,578 originally claimed by the taxpayer in 1982. Counsel for the Minister agreed that this was correct and accordingly the matter will be referred back to the Minister.

The sole issue involved is whether or not the profit derived from the sale was income from a business within the meaning of the Income Tax Act. If not the profit may be considered as a capital gain.

Facts

The appellants, along with 24 others, became members of a joint venture. Each appellant held approximately a 5 per cent interest in the undertaking. Land was purchased on behalf of the joint venture in 1969 and comprised of some 138 acres in Chinguacousy Township, near Brampton, Ontario. The purchase price was approximately $1,150,000 and all but about $300,000 was financed by mortgages. At the time the property was rented for $125 per month.

The members of the joint venture entered into an agreement as of June 1, 1969, which agreement was not signed by all participants and by most, and long after its date of June 1, 1969.

The significant parts of the agreement are as follows: Clause 2 says, "The purpose of the Syndicate is to purchase, develop, retain as an investment and/ or sell the lands (purchased)".

Clause 3 provides for a Rider which grants to George Jellaczyc's company, a real estate broker (George Jellaczyc being a member of the joint venture) as agent an exclusive right to sell the land for a ten year period at a 5 per cent commission. This clause directs that the agent “manage the Syndicate and develop the whole or any part of the lands for investment and/or re-sale purposes . . .”.

In December of 1973 a Management Contract was entered into with Gdynia Developments Ltd. (the company formed to hold the property) and Ruland Realty Ltd. giving this latter company a commission if it was successful in rezoning at least one-half of the property for residential purposes. It is interesting to note that Rudolph P. Bratly, indirectly one of the interested parties in the joint venture, was also involved with Ruland Realty Ltd.

In June of 1976, the appellant John Stroz, a lawyer, received a redraft of the 1973 management contract which reflected certain amendments. This new agreement still included a provision for sale of the property and a commission payment.

In 1976 five acres of the property were expropriated by the Government of Ontario, and the remaining property of some 133 acres was sold in June 1979, one day before the agreement with Jellaczyc terminated. The property was sold through Jellaczyc for some $6,435,000. The share of the gain received by the appellants is the subject of these appeals.

Appellant's Position

Both appellants testified that they did not deal in development of real property, and entered the joint venture for investment purposes to have land for security and not for a quick profit.

Counsel, in support of the appellant's position referred the Court to the following cases:

Crystal Glass Canada Ltd. v. Canada, [1989] 1 C.T.C. 330; 89 D.T.C. 5143;

M.N.R. v. Valclair Investment Co., [1964] C.T.C. 22; 64 D.T.C. 5014;

M.N.R. v. Cosmos Inc., [1964] C.T.C. 34; 64 D.T.C. 5020;

M.N.R. v. M. Lawee and N.E. Lawee, [1972] C.T.C. 359; 72 D.T.C. 6342;

Montfort Lakes Estates Inc. v. The Queen, [1980] C.T.C. 27; 79 D.T.C. 5467;

Hayes v. M.N.R., [1989] 2 C.T.C. 2008; 89 D.T.C. 334.

In addition, counsel reviewed the 14 assumptions made by the Minister in his reply to notice of appeal and suggested that no evidence had been presented supporting some of the assumptions. He also stressed that the appellants should be considered separately from other members of the joint venture.

Minister's Position

Counsel for the Minister maintained that this joint venture was, as commonly called, an adventure in the nature of trade, and that resale of the land was contemplated from the very outset as one of the possibilities.

In support of this position the Court was directed to the joint venture agreement which set out the possibility of sale and which appointed George Jellaczyc Real Estate Ltd., as agent, an exclusive right to sell the lands at a price acceptable to the owners. Mr. Jellaczyc, the principal in this company, was a member of the joint venture group. A copy of the agreement submitted to the Court revealed that all but two of the participants showed their approval by signing the document. This included both of the appellants in this appeal.

The group also retained a manager, company, which was owned by an individual who indirectly had an interest in the lands. The manager was to obtain rezoning of the property, and if successful in rezoning at least one-half of the land was to receive 10 per cent of the net profits on the sale of the property.

Counsel suggested that the only way for the participants to recover their investment was to sell for a profit, which they did.

The following cases were presented to the Court:

J. Matuszek v. M.N.R. (unreported), August 1989;

Irene Ungar v. M.N.R., [1989] 2 C.T.C. 2088; 89 D.T.C. 349;

Mohawk Horning Ltd. et al. v. The Queen, [1986] 2 C.T.C. 89; 86 D.T.C. 6297;

Hummel Corporation v. The Queen, [1979] C.T.C. 483; 79 D.T.C. 5426;

Andrew Wynnyk et al. v. M.N.R., [1978] C.T.C. 2724; 78 D.T.C. 1529;

Birmount Holdings Ltd. v. The Queen, [1978] C.T.C. 358; 78 D.T.C. 6254;

and

De Salaberry Realties Ltd. v. The Queen, [1976] C.T.C. 656; 76 D.T.C. 6408.

Counsel said that enough evidence was present along with the presentation of the various authorities to show that this joint venture should be considered as an adventure in the nature of trade and that the profits should be treated as business income.

Analysis

It may have been the stated intention of the appellants that they considered their participation purely as investments but, even if this were so, they must take the position of the dominant intention of the group. See Len Sardo v. The Queen, [1988] 2 C.T.C. 290; 88 D.T.C. 6464. The appellants signed the agreement which contemplated a sale and thus to a certain extent acquiesced. John Stroz indicated he signed the agreement some four years after its date without reading it. This I find strange and certainly not an excuse for a practising solicitor. Edward Stroz signed because his brother had signed, also without reading the document.

Counsel for the appellants in reviewing the assumptions made by the Minister told this Court that no evidence had been presented to support various assumptions. In this regard I quote from Collier, J. at page 292 (D.T.C. 6465) in the Sardo case, supra:

The onus is on the appellants to show that the reassessments are in error. Where the onus lies has been settled by numerous authorities binding on this Court. It is sufficient to refer to two judgments of the Supreme Court of Canada in this regard: Anderson Logging Company v. The King, [1925] S.C.R. 45 and Johnston v. M.N.R. 3 D.T.C. 1182.

In the case of Leonard Reeves Incorporated v. M.N.R., [1985] 2 C.T.C. 2054; 85 D.T.C. 419 certain guidelines are stated at pages 2058-59 (D.T.C. 421 and 422) regarding “trading cases” as set out by Christie, A.C.J.T.C. These bear repeating. He said as follows:

1. If the appellant is a corporation, the relevant intentions to be attributed to it are those which the natural person by whom it was managed and controlled had for it:

Metropolitan Motels Corporation v. M.N.R., [1966] C.T.C. 246; 66 D.T.C. 5208 per Jackett, P. (as he then was) at 247 (D.T.C. 5209).

2. 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 5051 and Wiss v. M.N.R., [1972] C.T.C. 264; 72 D.T.C. 6231 per Heald, J. at 264 (D.T.C. 6231-2). If the appellant is a corporation and the person by whom it is managed and controlled places it in the passive or subservient role described, the intentions to be attributed to the appellant are those of the active or dominant member.

3. The direct evidence of a person who has an interest in the outcome of an appeal regarding the intention behind a transaction or series of transactions is not determinative of the existence of the stated intention. Generally speaking the intention is to be ascertained from the entire course of conduct and relevant circumstances and the inferences flowing therefrom: Gairdner Securities Limited v. M.N.R., [1952] C.T.C. 371; 52 D.T.C. 1171 per Cameron, J. at 381 (D.T.C. 1175) and Racine et al. v. M.N.R., [1965] C.T.C. 150; 65 D.T.C. 5098 per Noël, J. at 159 (D.T.C. 5103).

4. A consideration of statements in Articles of Incorporation regarding the objects of the corporation or restrictions on the businesses it may carry on is not helpful. What the company did in fact is paramount: Regal Heights Ltd. v. M.N.R., [1960] C.T.C. 384; 60 D.T.C. 1270 per Judson, J. at 390 (D.T.C. 1272-3): Glacier Realties Limited v. The Queen, [1980] C.T.C. 308; 80 D.T.C. 6243 per Addy, J. at 310 (D.T.C. 6245). The same is true with respect to what may be said in a partnership agreement regarding the nature of the partnership's business.

5. Evidence of transactions of the sale and purchase of real estate by an appellant after the years under review in an appeal is admissible: Os/er Hammond & Nanton Ltd. v. M.N.R., [1963] C.T.C. 164; 63 D.T.C. 1119 per Judson, J. at 166 (D.T.C. 1120); G. W. Golden Construction Ltd. v. M.N.R., [1967] C.T.C. 111; 67 D.T.C. 5080 per Ritchie, J. at 114 (D.T.C. 5082) and Fyke v. M.N.R., [1964] C.T.C. 54; 64 D.T.C. 5032 per Cameron, J. at 56 (D.T.C. 5033). The weight to be assigned to evidence of this kind will depend on the circumstances of particular cases. Evidence of an intended sale and purchase that for some reason was not consummated is also admissible. The comment respecting assignability of weight also applies to evidence of this type.

6. The fact that real estate is not advertised for sale and that an offer which results in a sale and purchase is unsolicited is not preclusive of there having been a primary intention on the part of the appellant at the time of purchasing the property to sell it at any time he regarded it as financially favourable to do so. Lack of advertising and the fact of an unsolicited offer are simply matters to be weighed together with the other relevant evidence: Slater et al. v. M.N.R., [1966] C.T.C. 53; 66 D.T.C. 5047 at 5050.

7. If an individual who is an appellant has a history of trading in real estate or if the appellant is a corporation that is controlled by such a person, this is a relevant consideration which points away from the purchase in issue being made with the primary intention of securing an income-producing asset: Vaughan Construction Company Ltd. v. M.N.R., [1970] C.T.C. 350; 70 D.T.C. 6268 per Laskin, J. (as he then was) at 353 (D.T.C. 6270) and Slater at 60 (D.T.C. 5051).

It is not necessary to consider each of these propositions in relation to the present appeals. It is sufficient to point out that the appellants were passive members of the group, especially Edward Stroz, but their intentions become those of the active members, especially when neither raised any objections to the sale. There [sic] also had previous dealings in real property purchases and joint ventures. Following the other guidelines and relating them to the present appeals and the evidence presented and documents submitted I can only conclude that the profits here be classed as business income.

It is interesting to note that the cases of Matuszek and Ungar, supra, both dealt with this same joint venture and both were dismissed by this Court.

The result is that the appeal of John F. Stroz is dismissed and the appeal of Edward S. Stroz is allowed on the basis that for the 1982 taxation year the appellant be allowed a deduction of $4,578 but in all other respects the appeal is dismissed. This latter matter will be referred back to the Minister for reconsideration and reassessment.

Appeals dismissed.