Barry Hyman and Lucille Hyman v. Minister of National Revenue, [1988] 1 CTC 2516, 88 DTC 1352

Brulé T.C.J.: —

Issue

The appeals of the appellants, Barry Hyman and Lucille Hyman, were heard on common evidence at Edmonton, Alberta, on January 28, 1988. Both appeals are against assessments by the Minister of National Revenue relating to proceeds realized in 1980 on the sale of certain real property in which the appellants held an interest.

At issue is whether the Minister correctly assessed the appellants by deleting the amount of taxable gain reported and adding an amount, of $99,629.84, to each of the appellant's income for the 1980 taxation year.

Facts

The basic facts pertaining to these appeals can be summarized as follows:

On April 17, 1974, the appellants entered into a partnership agreement with eight other persons in which the appellant, Barry Hyman, acting as trustee for the partnership, purchased certain lands legally described as SE 1/4 31-53-23-W4th in Fort Saskatchewan, Alberta (hereafter "the land"). The agreement provided inter alia that each partner acquired a one-tenth interest in the land.

On February 4, 1977, a statement of claim was filed in the Supreme Court of Alberta by Mr. Sydney Wood against the appellant, Barry Hyman. Mr. Wood's claim was for specific performance of an agreement of purchase and sale dated October 26, 1976, wherein Barry Hyman agreed to sell the land to Midwest Estates Ltd. for the amount of $455,000.

Despite Mr. Wood's claim on the land, it remained in the hands of the partnership until it was sold on July 4, 1980. Prior to the sale of the land, the appellants had each increased their interest in the land to a one-sixth interest.

The offer to purchase accepted by the partnership was from Triple Five Corporation Ltd., for the amount of $900,000. Each appellant received, after disbursement, the amount of $130,583.60 from the sale.

In filing their 1980 tax return each appellant claimed that his or her share of the profits from the sale, being $99,629.24, was a capital gain. The Minister assessed the appellants on the basis that the profits of the sale were business income which should be computed in the appellants' income for the 1980 taxation year pursuant to subsection 9(1) of the Income Tax Act, S.C. 1970-71-72, c. 63, as amended (hereafter "the Act").

Evidence

The appellant, Lucille Hyman, was the first witness called to give evidence. She testified that when she acquired her one-tenth interest in the land, it was her only real property other than one rented house and one rented piece of land. Under the terms and conditions of the partnership agreement dated May 6, 1974 and filed as Exhibit A-2, it was agreed that once the initial down payments were made, every partner was responsible for the payment of $708.50 and interest per year until 1984. Clearly, she said she believed that the land was acquired as a long-term investment, notably with a view to develop it in the future. Then one night in 1976, Barry Hyman, her then husband, came home and announced that he had sold the land. As Mr. Hyman had acted unilaterally, the appellant recalled being surprised to learn about the sale. Other partners also condemned Mr. Hyman's decision to sell without their consent. Finally, the rift over the sale was so great that it lead to the marriage breakdown of the appellants and the withdrawal of some of the partners from the partnership (for instance, an assignment agreement dated February 10, 1978, was filed as Exhibit A-1).

Mrs. Hyman admitted to having signed in 1980 a document granting Mr. Larry Rollingher, an option to purchase the land. Later the same year, the land was sold to Triple Five Corporation Ltd., a corporation in which Mr. Rollingher had an interest, and a cheque for her share of the proceeds of the sale was forwarded to her by the acting solicitor of the partnership, Mr. Joseph Doz.

The appellant, Barry Hyman, was the second witness to testify. He stated that the land was bought in 1974 at a cost of approximately $200,000 as a longterm investment. Concerning his 1976 attempt to sell the land to Mr. Sydney Wood, he explained that he never solicited Mr. Wood's offer or any other offer between 1974 and 1976. Although, he said, he knew at the time he accepted Mr. Wood's offer that he had no authority to do so, he felt he had to act quickly. When the other partners found out about the sale, they resisted it. Soon thereafter a lawsuit (seeking the specific performance of the Wood-Hyman agreement of sale) was instituted in the Supreme Court of Alberta by Mr. Wood against Mr. Hyman. (The statement of claim was filed as Exhibit A-3). The matter was eventually settled out of court.

During his cross-examination, the appellant restated that even if profits from the sale of the land were contemplated, the primary intention of the partnership was the long-term development of the land. The only time the partnership was seriously prepared to abandon its development plan before the land was finally sold in 1980, was in 1978 when an offer of purchase was received from Delta Real Estate Ltd., filed as part of Exhibit R-1. This offer, which did not result in a conveyance of property, was for the purchase price of $1.5 million.

Mr. Joseph Doz was also called as a witness by counsel for the appellants and provided the following additional evidence. He is a lawyer and an officer of Zodiac Investment Corporation Ltd., (hereafter "Zodiac") the only corporate member of the partnership. Regarding the purchase of the land he said that, at the time he prepared the partnership agreement, the plan was to try to have the land annexed by the City of Edmonton, and then develop it. For two years after the purchase, there were never any discussions by the partnership about selling the land. In 1976 he recalled being surprised and upset on learning that Mr. Hyman had tried to sell the land to Mr. Wood. That, Mr. Doz declared, "started the troubles". Following Mr. Wood's lawsuit against Mr. Hyman, Mr. Doz sued Mr. Wood personally and brought an action to remove a Caveat filed by Mr. Wood. One approach used by Mr. Doz to establish a potential claim for damages against Mr. Wood was to solicit offers to purchase the land. This approach was successful until the land was sold in 1980.

Interestingly, Zodiac's financial statements and income tax return for 1980 filed as Exhibit A-11 show that it voluntarily treated its share of the profits of the sale as income. Questioned on that decision Mr. Doz answered that Zodiac's position within the partnership was different from the rest of the other partners. Mr. Doz explained that because of a loss position in Zodiac the Company's advisors said the profit on the sale would produce a more favourable result if it were treated as income, even though Mr. Doz personally believed it was capital.

The last witness heard was Mr. David Woynorowski, a land specialist working for Western Diversification, a government of Canada agency. His evidence was with respect to his examination of the partnership's records while an employee of Revenue Canada. This examination, he said, revealed that there were conflicts between the partners and that there were, at various times, after 1976, discussions of offers to purchase the land. Mr. Woynorowski conceded, however, that the material he consulted made no reference to telephone conversations, or to whether or not the offers were unsolicited, nor their purpose by the partners.

Appellant's Argument

Counsel for the appellants argued that the following facts support the proposition that the proceeds of the sale are capital gains:

— the partnership was not set up as a tax avoidance scheme;

— the appellants and Mr. Doz all testified that the purchase of the land was intended as a long-term investment;

— Mr. Hyman's 1976 attempt to sell the land was repudiated by the other partners and it resulted in lawsuits and conflict among partners;

— Mr. Doz' soliciting of offers to purchase from 1976 to 1980 was not done with the purpose of selling the land per se; it was done to establish damages against Mr. Wood;

— Mr. Doz said that selling the land at $900,000 was “giving it away”; yet it had to be done to avoid further litigation and save the investment;

— Mr. Doz distinguished Zodiac's situation from the appellant's situation.

Minister's Argument

It was the position of counsel for the Minister that both appellants shared the same speculative intention and that if Mrs. Hyman was upset about Mr. Hyman's 1976 attempt to sell the land, it was because she lost her friends in the partnership, and not because she was against the sale. It was further argued that the appellant’s alleged intention to develop the land was not corroborated in fact. The vacant land bought in 1974 was sold in the same state in 1980. Also, counsel was of the view that Mr. Doz' explanation of why the land was so actively on the market after 1976, is not acceptable considering that an appraisal report could have served to establish damages just as well as soliciting offers on the market.

Analysis

In order to succeed in these appeals, the appellants must establish on a balance of probability that their intention when they acquired their interest in the land was to invest, and not, as the Minister has assessed, to trade in real estate.

In the presentation of his arguments, counsel for the Minister cited case law in support of the proposition that the rapid turnover of unimproved or vacant lands is often held to be a venture in the nature of a trade: Bernard Lehrer v. M.N.R., [1972] C.T.C. 255; 72 D.T.C. 6224 (F.C.T.D.); Birmount Holdings Limited v. The Queen, [1978] C.T.C. 358; 78 D.T.C. 6254 (F.C.A.); Regal Heights Limited v. M.N.R., [1960] C.T.C. 384; 60 D.T.C. 1270 (S.C.C.).

In the case of Regal Heights, supra, where the facts at issue bear some resemblance to the present facts, four associates purchased 40 acres of land with a view to building a large shopping centre on the property. Two years later, when a department store with which they had been negotiating announced that it intended to locate elsewhere in the neighbourhood, it was decided that the property should be sold. Mr. Justice Judson who wrote the majority judgment for the Supreme Court of Canada held that the profits from the sale were correctly assessed by the Minister as taxable income. At page 390 (D.T.C. 1272-73), he stated:

. . . The question to be determined is not what business or trade the company might have carried on but rather what business, if any, it did in fact engage in. (Sutton Lumber and Trading Co. Ltd. v. M.N.R., [1953] 2 S.C.R. 77, at page 93 [1953] C.T.C. 237 at page 253.) What the promoters and the company did and intended to do is clear to me on the evidence, as it was to the learned trial judge. They failed to promote a shopping centre and they then disposed of their speculative property at a profit. This was a venture in the nature of trade and the profit from it is taxable within the meaning of sections 3, 4 and 139(1 )(e) of the Income Tax Act. These cases must all depend on their particular facts and there is no analogy between the sale of long-held bona fide capital assets, as in the Sutton Lumber case, and the realization of a profit from this speculative venture in the nature of trade.

In the present case, I believe that before the facts of this case are examined in the light of the decision of the Supreme Court of Canada in Regal Heights, supra, it should be emphasized that the appellants each started in 1974 with a one-tenth interest and ended up, before the land was sold in 1980, with a one-sixth interest. Furthermore, the evidence adduced suggests that the additional interests acquired by the appellants were purchased after 1976 from former partners disenchanted with Mr. Hyman's attempt to sell the land to Mr. Wood. Finally, having reviewed the evidence I find that the situation of the partnership was so significantly different after 1976, that I feel that a distinction should be made between property held between 1974 and 1976 and property held and acquired between 1976 and 1980 especially where the appellant Barry Hyman is concerned.

Until 1976, I do not believe that the appellants anticipated a quick sale, nor as it was in the case of Regal Heights, supra, that their venture was speculative. One important finding noted by Judson, J. that is not present here, is that the taxpayers' secondary intention to sell at a profit if they were unable to develop the land was just as strong and valid as their primary aim. In the present case, I see no evidence of such forceful secondary intention in 1974 or in the succeeding couple of years. Instead, there is evidence that Mr. Wood's offer to purchase was unsolicited, that Mr. Hyman knew he had no authority to accept the offer but accepted it quickly because he believed it to be an exceptional offer. Once the other partners (including Mrs. Hyman) learned of Mr. Hyman's attempt to sell, they angrily repudiated it.

My sense of what happened in 1976 is that Mr. Hyman grossly miscalculated his partners' reaction. To Mr. Hyman, Mr. Wood's offer was an unexpected opportunity to more than double his investment in two years. To the other partners, the offer was still not as attractive as the prospects of the development of the land.

It was submitted by counsel for the Minister that Mr. Doz' explanation for the reason why offers for the land were solicited as of 1976 should be dismissed in view of the fact that, instead of soliciting offers, an appraisal report would have been made to establish damages against Mr. Wood. Clearly, Mr. Doz chose in the circumstances a useful and legitimate way of quantifying his damages. Evidence shows that after 1976, the focus of the remaining members of the partnership shifted to seeking a solution to the problem and it appeared that they needed to find a buyer for the land. A buyer, Delta Real Estate Ltd., was in fact found in 1978, but for reasons of the existing litigation, the deal was not completed.

I can readily conclude that the appellants’ initial interest in the land was to acquire it as a capital asset. Then in 1976, the long-term investment climate changed so radically that the appellants had to seek a solution to unravel the problems and the best way was by disposition. Contrary to what was the case in Regal Heights, supra, this change of attitude toward their property interest was not the result of a secondary intention surfacing in the light of an unsuccessful development opportunity. In the present case, there was no such secondary intention at the time each of the appellants' one-tenth interest was acquired, and consequently no secondary intention could surface later. What happened here is that in 1976 the appellant Barry Hyman's one-tenth interest changed use from a capital asset to an income-producing asset. He wanted to sell for a profit. For other examples of cases where land was converted from capital to inventory see Matt Dawd v. M.N.R., [1981] C.T.C. 2999; 81 D.T.C. 888 (T.R.B.) and Magilb Development Corp. Ltd. v. M.N.R., [1982] C.T.C. 2278; 82 D.T.C. 1249 (T.R.B.).

Mrs. Hyman's interest never changed. She acquired the property as a capital investment, held it as such until forced to sell with the others in 1980.

Disposition of the Appeals

As a result of the foregoing, the appeals will be allowed and the assessments referred back to the Minister for reconsideration and reassessment on the basis that:

1. The appellant Barry Hyman's interest in the property changed use following his attempt to sell the land in 1976;

2. As a consequence of this change of use, Barry Hyman is deemed to have disposed of his interest in the property as a capital asset at its fair market value in 1976, (being one-tenth of the offer price of $455,000) and is deemed to have re-acquired his interest in the property as an income asset at that time at a similar cost;

3. Only the gain deemed to be realized upon the change of use of Barry Hyman's interest is a capital gain, that being the difference between his interest in the offered price of $455,000 and the adjusted cost base of his share in the partnership. All profits from 1976 to 1980 will be taxed as income.

4. The interest of Mrs. Hyman throughout will be treated on account of capital.

One set of costs is awarded to the appellants, the amount of such to be taxed.

Appeals allowed.