Louis Goodman v. Minister of National Revenue, [1986] 1 CTC 2468, 86 DTC 1367

Taylor, T.CJ.:—This is an appeal heard in Toronto, Ontario, on March 26, 1986, against an income tax assessment for the year 1980 in which the Minister of National Revenue assessed a gain of $191,432 realized on a real estate transaction, as on income rather then on capital- account. The Notice of Appeal read in part as follows:

— The Appellant was called to the bar in Ontario in 1966 and, at all material times, carried on the practice of law in Toronto.

— Prior to his 1980 taxation year, the Appellant had acquired a number of real estate properties. Some of these properties were acquired for the purposes of earning rental income; others were acquired with a view to reselling them at a profit.

— Pursuant to an Offer to Purchase dated November 10, 1977, the Appellant acquired the sole beneficial interest in property located at 572 Bloor Street West in the City of Toronto, (hereinafter referred to as “the subject property"), with the intention of renting the building which was located on the property for the purposes of earning rental income. The purchase price for the subject property was $240,000.00.

— The Appellant arranged to lease the subject property to Consumers Distributing Company Limited.

— The Appellant arranged permanent financing for the subject property with The Manufacturers Life Insurance Company whereby the Appellant was able to recover all of the capital he had initially invested in it.

— The Appellant held the subject property as part of his portfolio of rental properties and earned rental income therefrom from 1978 until 1980. The monthly rental income generated by the subject property exceeded the monthly mortgage payments.

— In 1980, the Appellant’s professional practice ceased to generate a positive cash flow. In addition, interest costs relating to monies the Appellant had borrowed for other business purposes had escalated. As a result of these and other factors, the Appellant found that he was unable to satisfy his financial obligations.

— The Appellant therefore disposed of the property on or about April 29, 1980, pursuant to an unsolicited offer and realized a gain in the amount of $191,432.

The Appellant claims:

— that no part of the proceeds of disposition should be treated as income from a "business" within the meaning of that term as prescribed by subsection 248(1) of the Income Tax Act.

In the reply to notice of appeal the Minister added:

— . . . in the 1980 taxation year the Appellant held nine* [1] rental properties, one of which was located at 572 Bloor Street West, in the City of Toronto (the “subject property").

— . . . in the 1980 taxation year the Appellant disposed of eighteen properties, reporting the gains as business income. Of the eighteen properties disposed of in the 1980 taxation year twelve were held by syndicates of which the Appellant was a member and six were held by the Appellant alone.

— . . . the subject property was acquired by the Appellant in trust at a cost of $240,000.00.

— . . . in the 1980 taxation year the Appellant alone, or in syndication with others, disposed of the following properties, the gains thereon being reported by the Appellant as income in the year:

PROPERTIES HELD
SOLELY BY APPELLANT	SYNDICATED PROPERTIES
9 Isabella	26 Stephenson	8 Belong
41 Silverthorne	159 Eastwood	41 Coulson
129 Lamb	52 Saulter	115 Parkmount
391 Scarborough	238 Woodfield	18 Wolverleigh
479 Keele	312 Parliament	290 Waverley
192 Boulton	64 Seymour	151 Palmerston

— of the eighteen properties referred to .. . above the following were rental properties:

9 Isabella

290 Waverley

— at the end of the 1980 taxation year the Appellant alone, or in syndication with others, held the following properties:

330 Dundas	811-814 Dundas West
1438 Yonge	123 Yonge
16-18 Simcoe	1290 Bay
661-663 Yonge

— . . . the subject property was purchased speculatively by the appellant, with the intention of trading in and turning the property to account at a profit whenever a favourable opportunity presented itself.

— ... a motivating factor in the Appellant's decision to purchase the subject property was an expectation that it could be sold at a profit.

Mr. Goodman testified regarding the matter and although he agreed his legal practice had been largely in the real estate field, it was not exclusively so. He had gradually developed greater interest in the actual acquisition of real’ estate, and for several years before 1977 (although exactly how many was not made clear) he had participated with others in the acquisition and sale of various parcels of real estate (about ten in number), reporting any gain or loss on income account. These had generally been small “house” deals, with the exception of one at 2843 Keele Street, Toronto, an eight-plex residential apartment building, which he owned with others for about a year, collected rent and sold in 1978. The subject property purchase did not close until early in 1978 itself, and therefore, for all intents and purposes it is quite possible (as ! comprehend the information provided to the Court) that immediately after the sale of 2843 Keele Street, the only property owned by Mr. Goodman (either by himself or with others) was the subject property. It is possible there were one or two small “house” properties held for sale — though I doubt it, and in any event the gains or losses from these and from the many other “house” deals into which he entered during 1978, 1979 and 1980 — sold in 1980 — were reported on income account. This aspect of the matter — literally a snapshot of the situation as of the date of acquisition of 572 Bloor Street, was not clearly focussed by either party at the hearing, and accordingly if I had the view of counsel on it I might see it differently. But based upon what I can comprehend that was the situation.

So what were the circumstances which existed with regard to the subject property at the time of acquisition by Mr. Goodman, according to his own testimony and the documented records:

(a) He had been raised in the area, and had known of the property all his life.

(b) It was a good sound brick building — not new, but adequately maintained.

(c) It was at one of the busiest street corners in all of Metropolitan Toronto and situated between two subway entrances.

(d) It was already fully rented as a furniture store — and the lease had about three years more to run.

(e) The current rent was adequate, but not great ($25,200 per year) leading him to believe it could be increased — at worst in three years, earlier if the current tenant wanted to leave, and he could get a new tenant.

(f) The property was listed on the real estate market, with a real estate broker he knew.

(g) The down payment required was not too great, and he was satisfied that he could arrange financing.

(h) He could get a signed offer of purchase and sale, with a small five per cent deposit, and giving him three months to arrange financing etc.

On a personal basis it would appear to me:

(a) He had little if any of his funds tied up in other real estate.

(b) He had realized some modest success in his “house” deals — buying and selling, but nothing very substantial or stable.

(c) He could take on the obligations alone, and finance them alone.

(d) He was starting to lose interest in his law practice, and had enjoyed the direct real estate activity.

(e) He had some idea that the present tenants of the building might be interested in leaving the building, before the lease term was finished.

And what actually happened:

(a) He put up $12,000 of his own funds as a deposit — not a great amount, but for him about the maximum available.

(b) He received permission from the furniture store tenants to attempt to re-lease the premises.

(c) Even before the three-month period was up for closing the deal, he had signed a new ten-year lease with Consumers Distributing Company Limited (which he considered a first class tenant at the time) for $40,000 per year on a net-net-net lease basis — a considerable improvement.

(d) He easily obtained the entire bank and private financing to purchase the property.

(e) He arranged for long-term financing with Manufacturers Life after he had Consumers as a tenant — a $275,000 mortgage.

(f) He withdrew his own original capital contribution, paid off the interim financing, withdrew some $30,000 in “gain”, and then proceeded to earn a “net” return of about $7,000 per year — the only factor being the $40,000 rental income, and about $33,000 per year in mortgage payments.

(g) He was approached frequently to see if he would sell the property.

(h) He held it as such an “investment” for almost three years.

On the other side of the coin:

(a) He continued his “house” deals, and indeed became more aggressive in real estate transactions — finding the properties, optioning them, purchasing them, syndicating them, etc. — in his own words his operations were “ad hoc” — but designed to make him a profit on the trans- actions in any way he could. He always reported the results from such transactions on “income” account.

(b) His real estate deals from 1978 through 1980 resulted in him owning à part of many properties, but also with an enormous (about $370,000) banking obligation. Added to this was his virtual withdrawal from law practice, and the resultant drying up of his other income.

(c) He sold in 1980 as much of his “small” holdings as he could, (some 18 parcels of real estate in number) but this did not satisfy his banking obligations.

(d) He also accepted an offer to sell the subject property and from the gain realized paid about $100,000 off to his bank.

The “smaller” real estate transactions, those he conducted with other people, and the very “ad hoc” methods he used in his buying and selling of property, tend to put a trading hue on the entire spectrum of Mr. Goodman’s dealings, as the Minister has suggested. However, when viewed in its correct context — as an isolated, personal, solely held, commercial property

— the 572 Bloor Street deal should not be so coloured by his other activity. Mr. Goodman has been less than discreet and fastidious in recording and maintaining the distinctions between such activity which it could have been to his advantage to provide. And his answers to questions on critical points have been clouded and uncertain. Certainly it is confusing to note that he continued to acquire interests in other properties, at about the same time in 1980 that his financial situation was becoming desperate. Nevertheless the record of his conduct with this building, his utilization and eventual disposal of it, all tend to confirm his statement that he was greatly delighted at being able to acquire the building, and had every reason to hold to it as a good sound investment — indeed one that on the surface had great attraction. I fail to see the evidence which could point to a conclusion that he was motivated by an interest to sell, at the time of acquisition, or that even such a motivation was a strong secondary basis for such an acquisition. He was always aware (as I am sure his bank was also aware) that during the years 1977 through 1980 he had a good viable and indeed realizable equity in the building at 572 Bloor Street. That probably contributed to the ease with which he ran up obligations on other deals to some $370,000. Indirectly he may have used that equity in 572 Bloor Street, to finance his other real estate activities, but that does not change the character of the acquisition he made in 1977, and completed in early 1978. There is no indication that sale as a motivation entered into Mr. Goodman’s considerations at that time — and the evidence supports his assertion that he sold his investment property when he was virtually forced to do so.

I appreciate the relevant jurisprudence provided by counsel in this matter, all of which was helpful. But I would also note that in my view certain comparisons can be made between this instant situation and that in Hiwako Investments Limited v. M.N.R. [1978] C.T.C. 378; 78 D.T.C. 6281 in which the appellant was successful.

The appeal is allowed and the matter referred to the respondent for reconsideration and reassessment. The appellant is entitled to party and party costs.

Appeal allowed.