Green Heron Investments Limited v. Minister of National Revenue, [1984] CTC 2625, 84 DTC 1617

Cardin, TCJ:—The appeal of Green Heron Investments Limited is from a tax assessment whereby the Minister of National Revenue included in the appellant’s 1973 income a gain in the amount of $2,137,353 realized by the appellant on the sale of a certain parcel of land which the Minister considers as income from a business. For the appellant, the sale of the land on September 14, 1973, was the disposition of capital property and the gain realized thereon was on capital account.

The appellant is a corporation incorporated under the laws of Ontario whose beneficial shareholders were Mr Harry Hands and Mrs L Zaduck. In January of 1967, the appellant offered to purchase 27.5 acres of land being parts of Lots 3 and 4, Concession 4, North York (the property) for a consideration of $1,100,000.

The closing of the transaction was subject to a condition with respect to the rezoning of the property so as to allow the construction of multiple high-rise buildings (Exhibit A-1). The closing date of the transaction was January 10, 1968. Having obtained an extension for the closing date, the transaction was finally completed in November 1968 (Exhibit A-2).

The appellant contends that the land was acquired to erect three 23-storey apartment buildings, consisting of a total of 990 units. As early as September 6, 1967, the appellant had filed an application with the planning division of the Borough of North York (Exhibit A-4). The appellant encountered difficulties in having the appropriate zoning by-law authorized. As I understand the problem, the Conservation Authority feared that the construction of Highway 400 in the vicinity of a running creek could result in the flooding of at least part of the appellant’s property.

Although the appellant had not yet been successful in obtaining the required by-law for the construction of the project, he waived the zoning condition in the purchase and sale agreement and acquired the property in November 1968. Changes in the rezoning application were made reducing the area to be developed from 27.5 acres to 16.5 acres which would apparently not be in danger of being flooded.

A new application was filed with the Borough of North York’s planning division which was referred to the Ontario Municipal Board without success. The opinion of the Supreme Court of Ontario was sought (Exhibits A-9 to A-12).

After considerable negotiations and delays by order of the Ontario Municipal Board dated June 8, 1970, the appellant’s application was accepted and the required by-law #23386, amending by-law #7625, was passed by the Borough of North York permitting the appellant to construct three 23-storey buildings containing 990 units on 16.5 acres of the property.

Further difficulties arose when the Ontario Municipal Board in June of 1972 refused an application made to the Committee of Adjustment to permit the division of the property into three parts so as to separate the ownership of the three buildings to be erected thereon, thus allowing each building to be mortgaged separately (Exhibits A-14 and A-15).

The testimony of Mr Zaduck and the written evidence is sufficient for me to accept that the appellant’s intention was to construct the three high-rise buildings and that the rezoning of the property had been earnestly sought by the appellant prior to the date of purchase (Exhibit A-5, Exhibit A-8).

There is evidence that the appellant early in 1970 sought a partner with whom the joint venture could be entered into. Rossburn and Kings — Developers, Architects and Engineers were approached but negotiations were not proceeded with because it is alleged Rossburn and Kings wanted to purchase the property outright. At about that time, Julius Rood a builder and developer, approached the appellant to purchase the property and was advised that the land was not for sale.

In July 1971, a joint venture was discussed with Mr Del Zotto, owner and builder of apartment buildings but no agreement was successfully reached (Exhibit A-16).

On March 14, 1972, the appellant, Cosmic Construction Limited (Cosmic) and Hazad Construction Limited entered into a joint venture agreement whereby Cosmic represented by its president Aldo Lorenzetti would proceed with negota- tions to arrange a sale of 18.3 acres of the property to Ontario Housing Corporation (OHC). The agreement provides that if a letter of intent acceptable to the parties was not received by September 10, 1972, the joint venture agreement would be null and void. The agreement also provided that within 10 days after the termination of negotiations with OHC, Cosmic would be given an option to purchase a one-half undivided interest in the property for $1,350,000 (page 5, para (d) and page 8, para 5, Exhibit A-17).

Negotiations between Cosmic and OHC were protracted. In a letter dated August 9, 1972, Cosmic Construction set out the proposed project for the development of 990 suites on 18.1 acres of the property. On August 10, 1972, OHC declined to proceed with the negotiations because of the refusal by the Borough of North York to amend the necessary zoning by-law. However, by letter dated September 20, 1972, Cosmic was advised that the board of directors finally authorized OHC to proceed with the 900-unit housing project. The tentative agreement was that Cosmic would own and operate the project and a maximum of 40 per cent of the units would be leased back to Ontario Housing Corporation. OHC, however, was to explore the proposal with CMHC whose approval was necessary before the project could be proceeded with (Exhibit A-18).

The project with OHC and CMHC was never finalized and Cosmic, having given notice within the required delay of its intention to exercise the option given to it in the March 14, 1972 agreement, purchased a one-half undivided interest in the property for $1, 350, 000 (Exhibit A-19).

An offer to purchase the property was made on behalf of Steven Baron. It is alleged that Harry Hands (who, by then, was fatally ill) and Lorenzetti were willing to sell the property. Mr Zaduck in his testimony stated that he was unwilling to sell but was forced to do so in the circumstances. In any event, the sale of the property was finalized on September 14, 1973 for $4,850,000 (Exhibit A-20).

The first question to be asked is whether the appellant acquired the property in January 1968 with a primary intention of reselling it at a profit? The second is whether the resale of the land was, for the appellant, a motivating factor which prompted him to acquire the land constituting thereby a secondary intention on the part of the appellant that existed at the time of purchase?

On the basis of the evidence, I am satisfied that the appellant, through its president (Mr Harry Hands), acquired the property for the purpose of erecting three 23-storey buildings with the cooperation and the subsidies of both Ontario Housing Corporation and Central Mortgage and Housing Corporation. The efforts made by the appellant to have the property rezoned to permit the construction of its project prior to acquiring the property is, in my opinion, a significant factor in support of the appellant’s declared intention. The tenacity with which the appellant sought to have the property rezoned for over a period of five years in spite of the two refusals by North York Borough Council is indicative of Mr Hand’s confidence that the property would be rezoned and, indeed, it finally was rezoned and permitted the appellant to proceed with the project. The attachments to the sale contract of the property to Steven Baron (Exhibit A-20) reflect very well the difficulties that had to be surmounted by the appellant in order to have the property rezoned for the realization of this project.

The appellant’s plan to have his project financed at 100 per cent by OHC amd CMHC was not unusual for the appellant. Mrs Adamson, the appellant’s secretary and bookkeeper, testified that the appellant owned and managed several apartment buildings since 1959. Mr Klicksman, a chartered accountant, retained by the appellant since the mid-1950’s, stated in his testimony that Mr Hands was a wealthy man who had sufficient personal finances to cover interim financing if he so wished. Many of the appellant’s apartment buildings were financed by CMHC and/or OHC. Mr Hands, according to Mr Klicksman, would have had no difficulty in financing the 990 units if no agreement had been reached with CMHC.

Dr Brian Hands, son of the late Harry Hands and a medical doctor, testified that his father had a cardio-vascular disease and entered the hospital in 1968. Surgery, however, was not recommended and he was in and out of the hospital during the period of 1969 to 1971. Only 30 to 40 per cent of the blood flowed through vital organs and his general state of health, his memory and his concentration were severely affected. Mr Hands, according to his son, was incapable after 1970 of developing and managing a large project as was contemplated in 1967. Mr Harry Hands died in 1975.

The appellant’s 1967 project was, in my opinion, physically and financially feasible, particularly with the cooperation of CMHC. The required rezoning was eventually obtained but the project was not proceeded with, not only because of the protracted and frustrating negotiations with the Borough of North York, but also because Mr Hands, the instigator of the project, was seriously ill prior to the sale of the property in 1973.

The evidence supports the appellant’s declared intention of having acquired the property to construct three apartment buildings. He, however, was unable to do so because of circumstances beyond his control. There is no valid evidence before the Court that the appellant, at the time of acquisition, had a secondary intention of reselling the property at a profit.

There is no dispute as to the quantum of the gains realized by the appellant as a result of his transaction with Cosmic and the sale of the property to Steven Baron in 1973.

Judgment will go allowing the appeal and referring the matter back to the Minister for reconsideration and reassessment on the basis that the project in the amount of $2,137,353, realized by the appellant in the 1973 taxation year, is on capital account and subject to the capital gain tax.

Appeal allowed.