Dalmation Investments LTD v. Minister of National Revenue, [1985] 1 CTC 2354, 85 DTC 334

Cardin, TCJ:—The appeal of Dalmation Investments Limited (the “company”) is from a reassessment of income tax with respect to the 1979 taxation year. The issue is whether the proceeds of disposition of a property situated at 166 James St North, in the City of Hamilton, Ontario, was on capital or revenue account.

The appellant corporation’s president and sole shareholder in 1979, Mr Bagovich (a Yugoslav), came to Canada in 1953 and, having had previous experience in the field, he obtained work with Canadian Pacific Hotels, more particularly in Regina, Saskatchewan, where I understand he became manager. The company was involved in the building of new houses and renovating old houses for sale. It had remodelled a hotel and also invested in term deposits. The company’s real estate transactions, according to Mr Bagovich, were done one at a time. Mr Bagovich was also a shareholder in Lokrum Developments Limited, holding a 25 per cent interest with three other shareholders. In 1973 Lokrum Developments Limited developed and built a shopping centre in Grimsby, Ontario, which was sold. Mr Bagovich does not deny that he has had experience in the development and construction industry and that he was familiar with property values, particularly in the Hamilton area.

On November 1, 1978, the appellant made a conditional offer through an agent, Mr Takefman, to purchase for $130,000 the subject property on which stood an old church building then being used as a grocery store (Exhibit A-1). Mr Bagovich’s first intention was to convert the building into a banquet hall by building a second floor in the very high-ceilinged church. The transaction was conditional upon the obtention of a building permit on the premises.

Mr Bagovich was advised by the municipal authorities that there wasn’t sufficient parking space on the property for a banquet hall and the building permit was refused. The real estate agent, Mr Takefman, received the same answer from the Planning Department of the City of Hamilton in his personal effort to obtain the permit.

After notice of withdrawal of the offer to purchase had been delivered to the prospective vendor (Exhibit A-2), Mr Bagovich considered building a hamburger stand and a doughnut shop on the premises, and a zoning verification certificate for the construction of the two projects was obtained (Exhibit A-4).

To build the hamburger stand and the doughnut shop with adequate parking facilities, the church had to be demolished at a cost.

After considering various aspects of the new project, Mr Bagovich, on December 8, 1978, made a second offer to purchase but reduced the purchase price from $130,000 to $115,000. The offer was accepted (Exhibit A-5).

A contract for the demolition of the church was entered into with Varga Wrecking Limited for $5,500 (Exhibit A-7). After the contract was signed, a contractor interested in obtaining the stained-glass windows, the long wooden beams and other construction materials of the church offered Mr Bagovich to demolish the church free of charge. Mr Bagovich succeeded in having the contract with Varga Wrecking Limited cancelled with a penalty payment of $550. The contractor demolished the church more or less satisfactorily.

A survey plan of the subject property, for building permit purposes, was made by Mr Denis Peters, a qualified land surveyor (Exhibit A-6). Inquiries with respect to the necessary equipment were made by Mr Bagovich of Mr Robert Young, of Food Equipment Company, who testified that equipment for both the hamburg stand and doughnut shop had been discussed and even plans for the location of the equipment drawn up.

The services of Mr Peter Rasins, an architect from Toronto, were retained. Mr Rasins testified that he had made rough sketches of the hamburger and doughnut shops and their most favourable site with parking areas for fast food restaurants, and had given Mr Bagovich a preliminary estimate of the cost.

It is my understanding that late in 1977 or early 1978, Mr Bagovich had been interested in acquiring a 60,000 square-foot hotel in Smiths Falls, Ontario, (the Carousel Inn) and offered $400,000 for the property. The asking price, he was told, was $900,000 and he lost interest. One year later, however, Mr Bagovich was approached by a real estate agent inquiring whether he was still interested in buying the Carousel Inn. He was and repeated his offer of $400,000 and the transaction was closed for $420,000 on January 18, 1979. After considerable renovation and remodelling, the hotel is now being operated by Mr Bagovich under the name of Mariner’s Inn.

On or about April 3, 1979, Mr Korros, a licensed real estate agent with Delphian Real Estate Limited, acting for a Mr George Loumanis since 1976, testified that he had contacted Mr Takefman, the agent involved in the purchase by Mr Bagovich of the subject property, and informed him that he had a buyer for the property if it was for sale. Mr Takefman then contacted Mr Bagovich who, on receiving the information, answered “Sure I would sell if the offer was good enough”.

An offer was made by Mr Loumanis to purchase the property for $150,000 in which both Messrs. Takefman and Korros were involved in a double agency. Mr Bagovich made a counter-offer for $165,000 which was accepted and the sale closed on April 12, 1979 (Exhibit A-8). The profit realized by the appellant corporation was $34,829.

The respondent does not dispute that the appellant’s primary intention in acquiring the James St North property was to construct two “fast food” outlets, he submits however that the appellant must have had a secondary intention of reselling the property at a profit at the time of purchase, December 8, 1978. He pointed out that the appellant’s fast food outlet projects had not been frustrated in any way but the appellant had simply not proceeded on the construction prior to the date of sale, April 12, 1979. Mr Bagovich’s evidence is that the architect, Mr Rasins, had not finished the plans when the offer to purchase was made, early in April 1979, but that he had not abandoned the plan to build the fast food buildings even though he had acquired the Carousel Inn in Smiths Falls. It was established that the appellant was capable of financing both projects. Mr Bagovich, according to the evidence, had not solicited, advertised nor even expected to receive an offer of purchase from anyone. Indeed technically, he refused the offer of $150,000 and made a counter-offer of $165,000, which would have been an unlikely gesture if the acquisition of the Carousel Inn was causing the appellant financial problems. The appellant’s fast food outlet project was evidently a sound business venture since a hamburger stand and a doughnut shop were in fact subsequently built on the site.

The appellant company, as contended by the respondent, was in the construction business as was Mr Bagovich personally, who admitted having some knowledge of the value of properties in the Hamilton area. It is admitted that when the subject was sold, the church having been demolished, the property consisted of an empty lot. It is also a fact that the property had been in the appellant’s possession but for a period of only a few months. These tests are, under certain circumstances, invaluable as guidelines but I do not believe that they are in themselves determinative nor were they meant to obliterate all the other facts and circumstances which might point to an opposite conclusion.

I have no reason to doubt any of Mr Bagovich’s testimony which was in no way shaken by counsel for the respondent’s able cross-examination. Mr Bagovich’s declared intention was supported by documentary evidence and established a logical and realistic progression in the appellant’s plan to build the fast food outlets on the property. In my opinion, the preponderance of the evidence is overwhelmingly in support of the appellant’s declared intention, (which is not contested by the respondent) and its contention that there existed no secondary intention at the time the property was purchased of reselling it at a profit.

The various steps taken after the acquisition of the property with respect to the hamburger stand and the doughnut shop project, corroborated both by documentary and oral evidence of witnesses involved at the planning stage, destroy in my view, the Minister’s assumption that the appellant had, upon acquisition, a secondary intention of reselling the property at a profit.

The mere possibility that a secondary intention may have existed is not sufficient ground to conclude that one did exist. In the circumstances of this appeal, not excluding the fact that the appellant sold the property shortly after acquiring it even though the declared project had in no way been frustrated or obstructed, I must come to the conclusion that, on the basis of the evidence, the appellant has established that at the time it acquired the property, its resale at a profit was not a motivating factor, a secondary objective nor even a calculated possibility.

The appeal is therefore allowed and the matter referred back to the Minister for reconsideration and reassessment on the basis that the profit realized from the proceeds of disposition of a property on James St North, in the amount of $34,829, was on capital account. The appellant is allowed party and party costs.

Appeal allowed.