Banksia Investments Limited v. Minister of National Revenue, [1984] CTC 2139, 84 DTC 1060

Rip, TCJ :—The appellant, Banksia Investments Limited, (hereinafter referred to as “Banksia”) appealed to the Tax Review Board from income tax assessments for 1974 and 1975 issued on the basis that profits it made on the sale of certain real estate were business profits arising from adventures in the nature of trade. The appeal was heard before the assistant chairman of the Tax Review Board, Mr Frank Dubrule, QC, who died prior to rendering a decision. The parties agreed that the appeal be considered on the record and transcript of the evidence and argument by another member. Pursuant to the Tax Court of Canada Act, the Tax Review Board was continued under the name of the Tax Court of Canada on July 18, 1983.

The hearing of the appeal, including argument, lasted some eight days. Unfortunately they were not consecutive days. The case started on September 18, 1978, and the argument concluded on December 19, 1979. Then on November 10, 1983, counsel was heard so as to assist this court in clarifying the issues and also to permit the amendment of pleadings. As can be expected, considerable oral evidence was given in addition to a partial agreement as to the facts. Approximately 100 exhibits were filed. I have had the oportunity of reviewing the late assistant chairman’s notes and have attempted to adopt them in these reasons.

The appellant reported gains as taxable capital gains and claimed the reserves with respect to the amount still due. The parties agreed that if the gains were on account of capital the appellant has properly reported the gains. The parties also agreed that if the gains are trading profits the assessments as made by the respondent are correct.

The appellant was incorporated in May 1968 and, at all relevant times, 2,000 common shares were issued and were held in approximately the following percentages by:

The original shareholders were the first four above-named; the fifth became a shareholder in October 1970 when he, in effect, acquired all his interest from Tomas, it is to be noted that, while the two Jindras (husband and wife) at all times owned 60 per cent of the shares, until October 1970, V J Jindra owned 55 per cent and his wife owned only 5 per cent. The shares were issued to each shareholder for one dollar ($1) each. The shareholders agreed between themselves to share all the expenses of the corporation in proportion to their shareholdings in the corporation. Dr V Jindra was the driving force and main factor influencing the activities of Banksia.

Both Jindras at all relevant times were practising dentists in the City of Toronto, Province of Ontario, while Hillar was a dental technician. Tomas and Jacobs initially operated a television sales business and an electronics business in partnership. Later they split up and each operated a separate business. At the commencement of the events relating to this appeal the business premises of all five persons were in the relatively same commercial area of Toronto. All of them had a European background. Dr V Jindra (the husband) was born in Czechoslovakia, spent some time in Germany, migrated to Australia where he first did some compulsory labour service. He then trained as a civil engineer. At the age of 25 he commenced studying dentistry and later qualified as a dentist. Sometime later he came to Canada to take a post-graduate course and finally decided to stay here. He passed the Dental Board exams in 1959. As to the background of the shareholders, all of whom gave evidence (except Hillar who, when the hearing started, was seriously ill and who died before the appeal was completed), there was no suggestion that any of them, except for Jacobs and the Jindras, had been involved in any previous real estate business transactions; although Jacobs had had an interest in a construction company many years before this interest was not relevant to this appeal.

After an incident in 1964, which seriously affected him, Dr V Jindra, together with his wife, purchased a dairy farm in that year for $150,000; the farm was situated near Steeles Avenue and Highway 10 in Mississauga, Ontario, near Toronto. The farm had an old house on it which, after the purchase, Mrs Jindra did not like and the Jindras never moved to this farm. Almost immediately after purchasing the Mississauga farm the Jindras saw an advertisement in the To- ronto Star for a farm property in Pickering, Ontario, just east of Toronto. The Jindras were taken with the Pickering farm and purchased the property for $150,000, “about the same price” as the first farm. The Jindras moved to Pickering in 1966 while at the same time retaining their residence in Toronto, part of which was used as offices by them in the practice of dentistry. The Pickering property was introduced to them by a Mr Barnoswki, a real estate agent.

At Pickering, Dr Jindra tried a cattle farming operation as well as a rabbit farming operation; he also had a couple of race horses and boarded some twelve to fifteen horses. The Mississauga farm was used as a source of hay for the horses on the Pickering farm. Both farming operations were losing money and after about a year and a half the Jindras resumed the practice of dentistry on a full-time basis.

Both farms were sold in 1968. The Pickering farm was sold first and the Mississauga farm was sold later. Each farm fetched approximately $275,000. The terms of payment included a cash payment, assumption of existing first mortgage, and a second mortgage back to the Jindras. The purchaser of the Pickering property defaulted on the first mortgage and the Jindras stayed on the Pickering farm as mortgagees in possession until the farm was eventually sold. The Jindras then moved back to Toronto in 1968.

Banksia purchased three parcels of land, all in the County of Durham, in the Province of Ontario. all the properties were either in, or partially in, the Village of Newcastle and partially in the Township of Clarke, abutting the northern limit of the said village. The first property (hereinafter called the “Frew property” or “Frew”) consisted of about 230 acres, about 88 acres of which were in the said village and the balance in the township. The village and township properties were separated at the village limits. On behalf of the appellant, Dr V Jindra and Hillar signed an offer to purchase on the 10th of February 1968, some three months before the appellant was incorporated. The purchase price was $163,000, payable by cash of about $50,000, assumption of a first mortgage of $28,000 and a mortgage back of $85,000. The Frew property was subject to by-law 67-3 passed on January 9, 1967, designating the area subject to subdivision control. Around April 1, 1969, the appellant purchased another parcel of land, sight unseen, consisting of about 100 acres (hereinafter called the “Colwill parcel”). The purchase price was $165,000, with approximately $50,000 being paid in cash, and the balance by a mortgage back. This property was entirely in the said village and was divided by CPR tracks. It ran to the northern limit of the village. Sometime in 1969, the appellant offered to and did buy a third property consisting of about 20 acres (hereinafter referred to as the “Hogeterp property”), all within the said village. The property deed was dated the 31st of October 1969, and was registered on the 3rd day of December 1969. The cost was $31,000, of which $20,000 was paid in cash and the balance by a mortgage back. This property was in two parcels as it was separated by a road running north and south, the westerly portion consisted of 17 acres. All of the properties, except the Frew property, which had an old house and farm building, consisted of vacant land.

The properties, except for the Hogeterp property, acquired by the appellant were sold. By agreement dated August 9, 1972, followed by a deed dated November 22, 1972, and registered January 16, 1973, the appellant sold approximately one acre of the Frew property for $27,000 cash. By agreement dated July 10, 1972, followed by a deed dated October 16, 1972 and registered January 12, 1973, the appellant sold approximately 30 acres of the Colwill parcel for $133,000, payable $53,000 cash with a mortgage back for the balance. By agree- ment dated January 13, 1973, followed later by deeds, the appellant sold 64/2 acres of the Colwill property on May 30, 1974 and an additional 184 acres of the Frew Property on June 1, 1974 for a price of $288,280 and $648,000 respectively. The consideration of the $288,280 was paid as follows: cash of about $75,000, assumption of first mortgage of $45,000 and mortgage back of $167,000. The consideration with respect to the second purchase was satisfied as follows: $195,000, assumption of first mortgage of about $70,000, and with a mortgage back for the balance.

The net profits from the above transactions were considered by the respondent to be income from a business or venture in the nature of trade and therefore taxable as income from a business. It is to be noted that 1973 is not subject to appeal since the appellant had no taxable income in the year.

Dr V Jindra gave the detailed evidence with respect to the case, which evidence was substantially corroborated by shareholders who were called as witnesses. He stated that all of the five shareholders were of one view: they wanted some land investment to protect their savings against government intervention, inflation and fluctuation in the value of currency. They wanted additional income in case of disability. As to the land which was acquired, it was to be improved; namely, structures of an industrial nature were to be constructed on some parts of the land and of a residential nature on other parts, which would complement or supplement the industrial part. By doing that they would have something of an income producing nature which would stay in their possession as a hedge against inflation as well as a source of income when they were too old, retired or if they were incapacitated. There was to be an industrial park “which we are still, until this very moment, pushing to implement” on the Hoge- terp property. This was the most important part of the plan. Immediately south of this property was the CNR main line track between Toronto and Montreal. A little north of this property was Highway 401. The other land was to be residential area to provide accommodation to workers employed by lessees in the industrial park. The built-up area of the said village when the appellant made its first purchase, was west of the Colwill parcel and south of the CPR tracks and north of Highway 401.

Dr V Jindra testified that after the purchase of the three parcels of land the appellant wanted to proceed with both the residential aspect and the industrial part as he understood there were no zoning restrictions. After the purchase, Dr V Jindra discussed the possibility of development and the obtaining of building permits with the village reeve and clerk and was later told a registered plan of subdivision was needed. To circumvent this procedure, on the advice of its lawyer, the appellant resorted to checkerboarding* [1] and, by this method, created 150 lots. Representatives of the appellant then attended on the clerk and advised him of their general plans. Shortly, thereafter, on March 26, 1971, the council of Newcastle passed a holding by-law which affected part of the appellant’s proposed residential land in that its use could not be changed. No plans were prepared for any residential structures but, about mid-September 1968, the appellant received a letter in general terms from a planner indicating fees, services provided and general information. A letter was received in August 1969 from another planner which was not solicited.

In 1969 the appellant was in need of funds. Dr Jindra arranged financing for the appellant to the extent of $100,000 with interest at 18 per cent per annum with Confinanza, a Lichtenstein anstalt. Dr. V Jindra had hoped to be able to have Confinanza participate in financing the project. The appellant made three draws totalling $61,500 in 1969; each draw was to be repaid within one year and one day after demand. Demand was made on September 17, 1973. However, the appellant had difficulty meeting its obligations and the terms of the loans from Confinanza had to be renegotiated in 1974.

In February 1970 there was correspondence with Holiday Inns initiated by the appellant with the possibility of one of their Inns being situated on Banksia property; the Holiday Inns advised the appellant that this was not in their plans. Notwithstanding this, in January 1971, the appellant wrote to the council of Newcastle for information concerning the village liquor law indicating the appellant was planning to build a 250-unit Holiday Inn. In the same letter the statement was made that the appellant had clients for the industrial park although no letter of intent or any agreement for purchase and sale or for lease of the land had been executed.

There were two letters exchanged between the appellant and the Minister of Trade and Development of Ontario in January 1971 as to the general development in the Newcastle area. Officers of the appellant attended public meetings of the council to talk about the development of the area but virtually were not heard. After regional government came to Durham County in 1973, there was no change in attitude towards development: the land would not be zoned commercial, industrial or residential.

The appellant knew that its plans would be costly. The appellant’s shareholders knew, or ought to have known, that individually and collectively they did not have sufficient resources to even remotely finance what was contemplated. It was obvious that from the very beginning substantial financing would have to be found for the project.

While the appellant held the properties the appellant and the shareholders were extremely reluctant to spend any money to determine if their purported plans had any economic substance or what, if anything, could be done with the land. No money was spent on feasibility studies because “we wanted some immediate return first”. Similarly Holiday Inns were never approached before the letter referred to above was sent to them since the letter was, in Dr Jindra’s words, a cheap way of finding out whether they were interested in the property.

The appellant did not have sufficient funding to finance the intended development. Dr V Jindra did not even know what the cost of any component of the development would be; all he had were “ball park” figures based on his own estimates.

When money was required on the purchase of the properties and subsequently for taxes and mortgage payments, and other expenses, the shareholders were to advance moneys to the appellant; $136,232 were advanced to the appellant as at the end of the appellant’s 1974 fiscal year by its shareholders. Hellar contributed his pro rata shares for 1971 and 1974 fiscal years but he was a delinquent for 1970 and 1973, the latter year because of illness. The appellant’s other funding came from the Confinanza loan, referred to earlier, as well as rental income ranging from $5,800 to $15,300 per year.

It would appear that the appellant’s plans for the properties were ambitious, perhaps too ambitious for the people involved. None of the shareholders of the appellant had the expertise or experience that such a venture would demand. And the appellant was not willing to investigate fully, through feasibility studies or otherwise, whether the venture was practical from an economic or social point of view. All the appellant had were “ball park” figures to support its plans, and there was no evidence whether the figures were really in the ball park. No assistance or advice was sought from independent parties. This lack of expertise, experience, the lack of investigation and advice by experts in and by themselves indicate nothing, but taken together, especially with the lack of ready financing, they indicate that the appellant ought to have known from the outset that it was less than certain that its plans for the properties would ever see the light of day.

Unfortunately I did not have the opportunity to observe the witnesses during examination and cross-examination. My impression of Dr V Jindra, taken from his evidence and the evidence of the other shareholders of the appellant who were witnesses during the trial, is that he is a man who was possessed with an idea to develop land in a certain specific manner which he hoped would yield income and he was very optimistic and persuasive in communicating his enthusiasm to others, in particular to the other shareholders. However, I believe he knew full well that if the appellant’s plans could not come to fruition, it did buy itself a potentially valuable piece of real estate which could be disposed of at a profit.

I am therefore of the view that the profits from the sales of the properties were on account of income and the appeal be dismissed.

Appeal dismissed