George Orzeck v. Minister of National Revenue, [1987] 2 CTC 2318, 87 DTC 618

Tremblay, T.C.J. [Translation]:—This appeal was heard on October 14, 1986 in the city of Montreal, Quebec. The case was taken under advisement on December 11, 1986.

1. Issue

According to the originating notice of appeal, the issue is whether the appellant, when computing his income for the 1976 to 1981 taxation years, was justified in regarding as capital gains the profits resulting from 14 sales (13, according to the respondent) of an undivided interest in a parcel of land located in the parish of St-Martin (now the city of Laval), province of Quebec. The appellant maintained that 12 of the 14 sales were made to municipalities, school boards, church parishes and the provincial government. Seven of these 12 sales were made by way of expropriation, while the remaining sales were made by mutual agreement to avoid expropriation. The land was acquired in 1955, and this was the only real estate purchase ever made by the appellant.

The respondent maintained that, at the time of the purchase in 1955, the land was located in an area of land speculation and that the appellant's intention was resale. The respondent concluded that what was involved was an adventure in the nature of trade.

2. Burden of Proof

2.01 The burden is on the appellant to show that the respondent's reassessments are incorrect. This burden of proof derives from a number of judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v. M.N.R., [1948] S.C.R. 486; [1948] C.T.C. 195; 3 D.T.C. 1182.

2.02 In the same judgment, the Court held that the facts assumed by the respondent in support of the notices of reassessment are also presumed to be true until proven otherwise. In the present case, the facts presumed by the respondent are set out in subparagraphs (a) to (z) of paragraph 4 of the respondent's reply to the notice of appeal.

At the start of the hearing, the appellant admitted or denied the said presumed facts as indicated below in parenthesis after each subparagraph.

[translation]

4. In reassessing the appellant for his 1976 to 1981 taxation years inclusive, the Minister of National Revenue relied on the following facts.

(a) The appellant’s occupation in 1955 involved the wholesaling of various

goods, and he has always been connected with the sales field (admitted).

(b) On October 28, 1955, the appellant purchased from Simon David Bosen a /24 interest in each of three parcels of land in part 177 of the parish of St-Martin (now the city of Laval) with respective areas of 1,151,012 square feet (contract registered as No. 98608), 2,182,171 square feet (contract registered as No. 98609) and 1,165,418 square feet (contract registered as No. 98610) (Exhibit A-1) (admitted).

(c) The appellant’s interest amounted to 374,883.41 square feet out of a total area of 4,498,601 square feet (admitted).

(d) The appellant was one of twelve owners of the said parcels of land (admitted, insofar as consistent with Exhibit A-1).

(e) The appellant's purchase interest in the land cost him $30,000, part of which was paid upon purchase, with the balance payable over the next two years (admitted).

(f) The land was located in an area of land speculation at the time of acquisition (denied).

(g) At the time of acquisition, the appellant and/or the group of owners to which he belonged had no plans to develop the land, except to resell it at a profit (denied).

(h) The said land remained vacant during the entire period of time relevant to this dispute (admitted).

(i) The appellant's sole intention at the time of and since the acquisition of the land was to resell it at a profit; the appellant moreover stated having had the intention of holding the land for only one or two years at most and then reselling it at a profit (denied).

(j) The appellant sold parts of his interest in the vacant parcels of land at various times, namely:

		Area sold	Balance of area
Date	Contract No.	Appellant's interest	Appellant's interest
01/10/58	130442	3,587 sq. ft.	371,296 sq. ft.
22/05/63	188598	2,377 sq. ft.	368,919 sq. ft.
06/11/63	198600	21,744 sq. ft.	347,175 sq. ft.
13/06/67	246589	28,382 sq. ft.	318,793 sq. ft.
17/10/67	251652	9,178 sq. ft.	309,615 sq. ft.
26/03/71	294489	47,499 sq. ft.	262,116 sq. ft.
05/10/71	302208	853 sq. ft.	261,263 sq. ft.
17/12/76	391284	34,328 sq. ft.	226,935 sq. ft.
20/06/78	427099	855 sq. ft.	226,080 sq. ft.
12/11/79	453986	8,056 sq. ft.	218,024 sq. ft.
17/04/80	461865	3,544 sq. ft.	214,080 sq. ft.
06/02/81	480194	1,141 sq. ft.	213,339 sq. ft.
22/12/81	499363	614 sq. ft.	212,725 sq. ft.

(k) None of the last six sales, made between December 17, 1976 and December 22, 1981, was included by the appellant in his tax returns, as either business income or a capital gain (admitted).

(l) On December 12, 1976, the appellant and eleven other owners sold a 411,931 square foot parcel of land to Lawrence et Frères Construction Ltée for $450,000, $37,500 or which represented the appellant's share (admitted).

(m) On June 6, 1978, the appellant and fourteen other owners sold a 10,263

square foot parcel of land to the city of Ste-Rose for $10,000 (admitted).

(n) On November 12, 1979, the appellant and twelve other owners sold five parcels of land totalling 96,673 square feet to Les Terrasses St-Charles for $96,660 (admitted).

(o) On April 17, 1980, the appellant and twelve other owners sold a 42,523 square foot parcel of land to the city of Laval for $59,700 (admitted).

(p) On February 6, 1981, the appellant and eleven other owners sold a 13,695 square foot parcel of land to the city of Laval for $21,900 (admitted — expropriation);

(q) On December 22, 1981, the appellant and thirteen other owners sold two parcels of land totalling 7,373 square feet to the city of Laval for $22,500 (admitted — expropriation);

(r) The appellant failed to include as business income in his taxable income for his 1976 through 1981 taxation years the sums of $8,841.74 in 1976, $8,106.59 in 1977, $6,220.29 in 1978, $1,989.02 in 1979, $3,053.53 in 1980 and $2,515.50 in 1981, the whole after deduction of the appropriate reserves, as shown in greater detail in Appendix 1, which forms an integral part of this document as though set out in full (admitted that none of the amounts were included in the tax return).

(s) The appellant failed to include interest income (from the balance of the land’s sale prices) in his taxable income for his 1977, 1978, 1980 and 1981 taxation years, in the amounts of $211.69 in 1977, $955.09 in 1978, $155.53 in 1980 and $155.53 in 1981, the whole as shown in greater detail in Appendix 1 (denied).

(t) The appellant was first assessed by the Minister of National Revenue for his 1976 through 1981 taxation years on the following dates:

Year	Date
1976	June 2, 1977
1977	June 27, 1978
1978	November 16, 1979
1979	June 17, 1980
1980	May 20, 1981
1981	May 28, 1982
	(admitted)

(u) All of the appellant’s income tax returns since 1976 indicate that they were prepared with the assistance of accounting firms (admitted).

(v) The appellant made a false statement of facts through negligence, carelessness or wilful omission in each of his income tax returns filed for 1976 through 1981 (admitted).

(w) Moreover, by not reporting the taxable income detailed in subparagraphs 4(r) and (s) above, the appellant knowingly, or under circumstances amounting to gross negligence, made a false statement or omission in his tax returns for 1976 through 1981, with the result that he paid less tax then required, and the amounts of the penalties pursuant to section 163(2) of the Income Tax Act are $410.94 for 1976, $459.26 for 1977, $414.84 for 1978, $92.65 for 1979, $146.97 for 1980 and $117.96 for 1981 (denied).

(x) The 1976 and 1977 taxation years are not statute-barred (admitted).

(y) Although the appellant kept very complete personal files on each and every transaction and the gains were clear, he wilfully concealed the truth and wilfully withheld the facts from his accountants (admitted that he knew about the transactions; denied the rest).

(z) The appellant admitted his intention of not declaring anything until all of

the land was sold, thus demonstrating a complete lack of concern (denied).

3. Facts

3.01 In addition to the above facts assumed by the respondent and admitted by the appellant, the respondent, in his reply to the notice of appeal, also admitted the facts set out in the preamble and in paragraphs 1 to 6 of the notice of appeal, subject to the restrictions stated below in paragraphs 5 and 6.

[translation]

This is an appeal from income tax assessments issued in notices of assessment dated May 25, 1983 for the 1976, 1977, 1978, 1979, 1980 and 1981 taxation years, such assessments having been confirmed through notification by the respondent on March 26, 1984.

1. For the past thirty years, the appellant has been employed as a wholesale sales representative in various fields (ladies lingerie and pharmaceutical products).

2. The appellant has, in his lifetime, made only one single real estate purchase, the one which is at issue here.

3. On October 20, 1955, the appellant purchased an undivided interest in a parcel of land located in the parish of St-Martin.

4. The appellant paid a large portion of the land's purchase price in cash and paid the balance within less than two years of its acquisition.

5. In spite of the sales of land which are at issue here, the appellant still owns a very large portion of his one and only real estate investment nearly thirty years after its purchase (the respondent does not admit the words “real estate development").

6. Between 1958 and the date hereof, the appellant made fourteen sales of interests in this land (the respondent maintains that there are thirteen sales involved).

3.02 The appellant, who was born in 1931, testified that, in 1955, when he was 25 years of age, he owned a ladies’ knitwear import business on Ste- Catherine Street in Montreal. The business was flourishing and he had some liquid funds.

He had little faith in money, however, owing to his experiences in France, which he left in 1980 to come to Canada. He had lived through the period when the franc was devalued from 100 to 10 francs. He remembers the farm where, because of his ethnic background, he had had to hide to survive during the war and the farmer who had been so proud of his land.

He had always wanted to purchase land which he could keep to prevent any hard knocks 20, 30 or 40 years later.

Before coming to Canada, the appellant had obtained bachelor’s degrees in arts and philosophy in France.

3.03 The appellant sought the advice of the notary who had prepared his father's will. He trusted him. Moreover, he did not really know anyone else who was capable of advising him and whom he would trust. He contacted the notary, who informed him: [translation] "I have a transaction; it is pressing; come and sign”. He was talking about a 4.5 million square foot parcel of land on the outskirts of town which the appellant would purchase in conjunction with other buyers. The appellant went to look over the site. There were many trees. The site was made up of three farms. The notary told him that the land offered security for life and that, if he did not want to sell, he could hold the land throughout his entire lifetime. The appellant did not have time to look into the matter more closely. He trusted the notary.

It was only later that the appellant realized that the land was indivisible and what problems this created. Nonetheless, at the time of the purchase, the land, to him, symbolized lifelong security and insurance, in the event of an economic crisis.

3.04 The appellant had not met the co-purchasers at the time of the purchase. He saw them once after that time, but could not have recognized them if he had met them. Later, after 1970, he contacted a few of the copurchasers under rather special circumstances. He paid the accountant in trust for the purchase of his interest in the land. The accountant always acted as intermediary between the co-owners and the notary who drew up the documents when transfers of money were required.

3.05 The appellant always kept accurate accounts with regard to the land. The total of the land's purchase price, that is, $30,000, plus taxes and interest paid each year, amounted to $148,157.84 as of December 31, 1981 (Exhibit A-5

— 25 pages).

The forces sales resulting from expropriation plus the sales by mutual agreement to avoid expropriation accounted for $72,578.75 out of a total of $75,579 in sales (Exhibit A-4 — 12 pages).

The 13 sales listed in subparagraph (j) of paragraph 4 of the reply to the notice of appeal, cited in paragraph 2.02 of the present judgment, were made to the following purchasers for the reasons indicated below:

1 —sale of October 1, 1958 to the parish of St-Pie X in the city of St-Martin — sale by mutual agreement, but the land would have been expropriated;

2 — sale of May 22, 1963, to the Saint-Nom de Jésus Anglican church — sale by mutual agreement, to avoid being forced to sell;

3 — sale of November 6, 1963, to the St-Martin Catholic school board, through expropriation;

4 — sale of June 13, 1967, to the city of Chomedy, pursuant to a judgment delivered on May 3, 1963;

5 — sale of October 17, 1967, to the parish of Saint-Nom de Jésus;

6 — sale of March 26, 1971, to the city of Laval, following expropriation to widen a street;

7 — sale of October 5, 1971, to the city of Laval, following expropriation for sewers;

8 — sale of December 17, 1976, to Lawrence & Frères Construction Ltée, to pay the municipal taxes of the owners in arrears;

9 — sale of June 20, 1978, to the province of Quebec's Ministère de la Voirie [department of highways], following expropriation;

10 — sale of November 12,1979, to Les Terrasses St-Charles Ltée, to pay the taxes of the owners in arrears;

11 — sale of April 17, 1980, to the city of Laval, by mutual agreement, to widen a street;

12 — sale of February 6, 1981, to the city of Laval, following expropriation to lengthen a street;

13 — sale of December 22, 1981, to the city of Laval, following expropriation to widen a street.

3.06 Considering the cost of the land, plus taxes and interest, the appellant always thought that he was in a deficit situation, since the sales were always for less than the overall cost. It was for this reason that he never informed his accountant of the sales of land when the latter was preparing his income tax returns. Moreover, he never tried to claim a deduction in respect of his property taxes.

3.07 He had always wanted to keep his land — it was his insurance — but, at the time of the purchase, he had not been aware of the problems that would result from its indivisibility. Each of the co-owners becomes liable for the taxes on the land as a whole. From 1970 to 1982, the appellant was obliged, on a number of occasions, to telephone co-owners in arrears.

In 1976 and 1979, sales were made simply to be able to pay municipal tax arrears. These are the sales described in subparagraphs (I) and (n) of paragraph 4 of the reply to the notice of appeal cited above in paragraph 2.02 of the present judgment (see also paragraph 3.05).

In July 1980, a notice of tax arrears in the amount of $111,942.63 was sent to the co-owners of the city of Laval (Exhibit A-2).

In 1982, the appellant and three other co-owners, who themselves were never in arrears, decided to oppose the sale of a parcel of land to Les Développements Pembrooke Inc. The delinquent co-owners wanted to sell as this was apparently the only way to obtain the money needed to pay the taxes. It was at this time that an agreement was concluded between the four non-deliquent co-owners and the other six co-owners. An exchange was made by notarial deed (Exhibit A-3). The appellant and the other three coowners, Sydney Leiter, Sadye Rosenstein and Morricz Srulovicz, would henceforth be able to retain their land.

3.08 Before this agreement was reached, the appellant had sought advice on how to go about keeping part of the land for himself alone. He was told that the only way he was to force the sale of the land held and then purchase another parcel for himself alone. He was not willing to sell, however.

3.09 According to the appellant, the land was never subdivided after its original purchase. There are no plans for the development of the land which he still holds in conjunction with the other three co-owners. This does not, however, prevent him from regularly visiting the land and feeling proud of it.

3.10 According to the appellant, he sold his business in about 1965. He has held a job ever since, as a pharmaceutical agent, among other things.

3.11 The respondent's witness and auditor, Sal Ciotti, appeared before the Court in order to explain how the reassessments at issue were computed using his worksheets (Exhibit 1-2) and the auditor's report (Exhibit 1-3).

According to this witness, the appellant had told him during the audit that, at the time of the purchase, his intention had been to sell the land within one or two years and that he had been waiting until all the land was sold before reporting the sales. The witness also filed his report recommending a penalty (Exhibit 1-4), in which the unreported interest is specifically stressed.

3.12 The following amounts were received by the appellant from the dispositions and resulting interest for the years in question:

Act, Case Law, Analysis

4.01 Act

The principal provisions involved in this appeal are section 9, paragraph 20(1 )(n) and subsection 163(2) of the Income Tax Act. They will be cited in the analysis if required.

4.02 Case Law

The parties referred to the following cases:

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

2. M.N.R. v. Lawee et al., [1972] C.T.C. 359; 72 D.T.C. 6342 (F.C.T.D.);

3. Colville-Reeves v. The Queen, [1981] CTC 512; 82 D.T.C. 6005 (F.C.T.D.)

4. Taylor, M. v. M.N.R., [1961] C.T.C. 211; 61 D.T.C. 1139:

5. Froese v. M.N.R., [1981] C.T.C. 2282; 81 D.T.C. 240 (T.R.B.);

6. Blackstone v. The Queen, [1973] C.T.C. 842; 74 D.T.C. 6020;

7. Grossman v. M.N.R., [1979] C.T.C. 2132; 79 D.T.C. 141 (T.R.B.);

8. McDonald v. The Queen, [1974] C.T.C. 836; 74 D.T.C. 6644;

9. Wynnyk et al. v. M.N.R., [1978] C.T.C. 2724; 78 D.T.C. 1529 (T.R.B.);

10. Palnick et al. v. M.N.R., [1985] 1 C.T.C. 2011; 85 D.T.C. 109 (T.C.C.);

11. Leaside Realty v. M.N.R., [1986] 1 C.T.C. 2024; 86 D.T.C. 1020 (T.C.C.);

12. Beghin v. M.N.R., [1985] 1 C.T.C. 2034; 85 D.T.C. 48;

13. Chin v. M.N.R., [1980] C.T.C. 2296; 80 D.T.C. 1246 (T.R.B.);

14. The Queen v. Anderson et al., [1973] C.T.C. 606; 73 D.T.C. 5444 (F.C.T.D.);

15. McKinney et al. v. M.N.R., [1978] C.T.C. 2675; 78 D.T.C. 1490 (T.R.B.).

4.03 Analysis

4.03.1 With this type of issue, that is, whether a profit from a transaction is a Capital gain or income, the courts refer to several criteria:

(1) the taxpayer's original intention in acquiring the asset;

(2) the relationship between the transaction and the taxpayer's business;

(3) the nature of the transaction and of the assets involved;

(4) the number and recurrence of the transactions;

(5) the tenture agreed upon.

The principal criterion is the taxpayer's original intention. In fact, all the other criteria serve only to aid in determining the taxpayer's intention.

4.03.2 In the present case, what is involved is the purchase of real estate. Moreover, the evidence, admitted by the respondent (paragraph 3.01; paragraph 2 of notice of appeal cited), indicates that it was the one and only real estate purchase ever made by the appellant.

Unlike a commercial asset such as merchandise (clothing or food), which is purchased for use and consumption or for resale, real estate is more in the nature of an investment property. This is a factor in the appellant's favour, although it is only one factor.

Another factor in the appellant’s favour in this appeal is the fact that there is no relationship between the land transactions and the appellant's trade or business. He is neither a real estate agent, nor a house builder.

The evidence reveals that, in the past 30 years, the appellant has worked as an employee and as a sales representative for pharmaceutical products and ladies’ lingerie.

4.03.3 What was the appellant's stated intention before the Court? He had purchased the land for the security it represented. In his experience, money had little value in an economic crisis. Land, on the other hand, does not diminish in value; on the contrary, it generally increases in value with time. This, in short, was why the appellant felt that, by purchasing a one-twelfth interest in the land in question, he was protecting himself in the event of an economic crisis.

4.03.4 The problem raised by counsel for the respondent is that the appellant and the co-owners had no plans to invest in apartment buildings, shopping centres, or the like. There are no development plans (paragraph 3.09) even for that portion of the land which the appellant acquired with the other co-owners in 1982 (paragraph 3.07). He has never drawn any income from the land other than through its disposition.

Citing Grossman (paragraph 4.02(7)), counsel for the respondent maintained that the lack of plans and income other than that obtained from the sale of parcels of land demonstrates that the appellant's sole aim was resale at a profit. Taylor, T.C.J., who delivered the judgment in Grossman (paragraph 4.02(7)), clearly stated, in Chin (paragraph 4.02(13)), that the fact that the asset acquired was vacant land and therefore non-income-producing did not in itself affect the way in which the profit realized on the transaction was to be treated. In other words, it is always necessary to consider the particular circumstances in a given case. Absolute principles are rare.

4.03.5 Further, referring to the arguments of counsel for the appellant to the effect that 60 per cent of the appellant's interest in the land had not been sold after more than 30 years, counsel for the respondent cited Wynnyk (paragraph 4.02(9)), in which Cardin, T.C.J. stated:

Whether the syndicate and/or the appellants held the land for 1 year or for 20 years, if, as in these appeals, the intention in acquiring the land was for resale at a profit, the nature of the transaction remains, nevertheless, an adventure in the nature of trade and is not a long-term capital investment.

I share Judge Cardin's view in the context of the Wynnyk case. The evidence in that case did, in fact, reveal that the syndicate's purpose was to speculate in vacant land at a time when surrounding land would be developed.

Moreover, the syndicate's objects were, inter alia, to “dispose of the said lands [ . . . ] for the mutual benefit of all the members of the syndicate”.

It is quite clear that, once such evidence has been adduced, the length of the tenure loses its importance. The decision to resell at the first opportunity exists from the outset. Whether the land is held for one or 30 years is immaterial.

Purchasing land in order to hold it as security for some future time — as a kind of "pension fund”, to use a well-known expression — is another matter, however. Clearly, at the end of the line, when the time has come, the land will have to be sold and a profit will be made, but time and the nature of the asset are precisely what constitute both the owner's security and his investment. The same can be said of someone who purchases gold as a hedge against hard times, simply because this metal constitutes one of the basic components of the monetary system and, thus, of the economy.

4.03.6 According to Mr. Ciotti, the appellant told him, during the audit, that he had intended to sell the parcels of land within one or two years of their acquisition, which is a total contradiction of the appellant's testimony.

If that had been his intention, then how does one explain the fact that only two sales (No. 8 and No. 10) were made voluntarily and that even those were made simply to avoid sales by the city of Laval to recover property taxes on the land (paragraph 3.05). One of the arguments put forward by counsel for the respondent was that perhaps the land had not been sold because there had been no opportunity to do so.

One of the facts assumed by the respondent is that, at the time of acquisition, in 1955, the parcels of land were located in an area of land speculation (paragraph 9(f) of the reply to the notice of appeal cited in paragraph 2.02).

If the appellant's intention had been to sell the land, then how does one explain the fact that, rather than sell land to Les Développement Pembrooke Inc. (paragraph 3.07), the appellant and three other co-owners, who shared his desire to hold the land, had part of the land transferred to them?

4.03.7 There are other indications that the appellant did not act as a person who had made a purchase for the purpose of resale. He did not borrow money to pay for the land, and although this in itself is not all that significant, that is the method often used by traders in real estate. The appellant paid for his interest in the land from his own savings in the space of three years. He never regarded his land as an inventory item, and he never deducted property taxes from his other income.

4.03.8 In my view, the above facts as a whole seemingly indicate that the appellant’s testimony with regard to his original intention must be held as credible.

As the Federal Court did in Lawee et al. (paragraph 4.02(2)), the Court in the present case accepts the appellant's argument relating to the security and pride which his ownership of the land afforded him, based on his personal experiences in France during and after the war (paragraph 3.02).

In my view, this is what motivated the appellant's purchase of the land in co-ownership with people with whom he had no association, either in a syndicate or otherwise. The only connection was their co-ownership.

Consequently, I find that the profit resulting from the transactions in this appeal is a capital gain.

4.03.9 Penalty

I am of the opinion that the penalty should be maintained for the income resulting from the taxable capital gains for the following reasons.

The appellant lives in a business environment and has his income tax returns prepared by an accountant each year. I find that he demonstrated gross negligence in not consulting his accountant concerning these transactions and the interest received. His accounting system with respect to the sales of land was so complete that there was, in my view, no justification for the complete absence of the results of the real estate transactions in his tax returns.

Conclusion

The appeal is allowed in part with costs and the matter is referred back to the respondent for reconsideration and reassessment in accordance with the reasons given above.

Appeal allowed.