Louis Schwartz v. Minister of National Revenue, [1984] CTC 3022, 84 DTC 1836

Cardin, TCJ:—In computing his income for the 1980 taxation year, Louis Schwartz reported a taxable capital gain of $1,977.34 on the disposition of a 14.32-acre farm property as part of Lot 12, Concession 10, in the Township of Markham.

The notice of reassessment appealed from is dated September 23, 1982 by which the respondent included in the appellant’s 1980 income an amount of $14,351.08 as income from a business realized on the disposition by expropriation of the said property.

There are three issues in the appeal:

(1) whether the proceeds are on capital or on income account;

(2) whether the interest accrued in relation to the proceeds of expropriation falls within the purview of Remission Order SI/80/55;

(3) whether the proper year for the taxation of the proceeds is 1980 as assessed, or 1974 as contended in the notice of appeal.

During the Hungarian Revolution in 1956, the appellant fled from Hungary and emigrated to Canada. While in Canada, his knowledge of the English language being very limited, he was employed in menial jobs such as orderly in a nursing home and as janitor with the government of Ontario. He reached the age of retirement in 1969.

In July of 1969, the appellant acquired a one-tenth interest in a 20-acre farm in the Township of Markham. The other purchasers were relatives of the appellant. This property was not sold and is still held by the appellant.

In September of 1969, the appellant made an offer to purchase 14.32 acres of farm land also situated in the Township of Markham, the subject of this appeal. With his offer to purchase, the appellant made a deposit in his own name of $5,000. The appellant, who did not have sufficient money to finance the purchase, had counted on the participation of a relative in acquiring the property. The appellant’s relative, however, decided not to proceed with the purchase and the appellant was forced to look elsewhere for the necessary finance if forfeiture of the deposit was to be avoided.

The appellant contacted a countryman, Mr Hartman, one of the shareholders of Zimmerman Bros & Hartman Ltd, who agreed to participate in the purchase of the property. On September 26, 1969, the property was purchased for $69,552; Zimmerman Bros & Hartman Ltd acquired two thirds of the farm property; Erica Miko, a real estate agent employed by United Trust, acquired a one-sixth interest and the appellant, a one-sixth interest in the farm property. The vendor rented the house situated on the farm and continued to live there after the sale. The title to the property was taken in the name of Zimmerman Bros & Hartman Ltd.

On May 5, 1970, the government of Ontario released its plan for the development of the Toronto-Centred Region which established, among other things, a green-belt area to separate two urban centres. The subject property was within the green-belt.

On March 2, 1972, the Minister of Housing for Ontario, by Regulation 104/72 of the Planning Act restricted the use of the green-belt area to agricultural operations exclusively.

On February 4, 1974, the Minister of Housing for Ontario expropriated the subject property. The following amounts were received on the following dates as proceeds of the expropriation:

The compensation amount was settled and agreed to in August of 1979, and the group of owners of the property elected to have their fiscal year end in July 1980.

The appellant testified that he had acquired his interest in the subject property as well as in the 20-acre farm with his earnings, and his sole intention was to hold the lands as a long-term investment. His ownership of the lands, according to him, offered him peace of mind and constituted a major asset in his estate, providing security for himself and his heirs. Counsel for the respondent, in cross- examination, was unable to weaken the appellant’s testimony that he had acquired the lands to hold as a long-term investment and for no other purpose. In denying that he had acquired the property with the intention of reselling it at a profit, he added with considerable emotion that he had never agreed, at any time, to sell the land, and even refused to sign the expropriation documents.

On the basis of the facts and the circumstances of this appeal, I can accept that the appellant’s basic or primary intention in acquiring interests in both the 20-acre and the 14.32-acre farms was to hold them as long-term investments. However, with respect to his purchase of the one-sixth interest in the subject property, there exists, in my opinion, a secondary intention. After making a deposit of $5,000 with his offer to purchase, the appellant discovered that the relative, upon whose financial help he was relying to complete the purchase price, could not proceed with the transaction. He therefore was faced with the possibility of seeing his hard-earned $5,000 forfeited if another source of finance could not be found. It was with a view of acquiring the necessary finance to complete the purchase and protect his $5,000 that the appellant met with Mr Hartman and arranged for the purchase of the property with Zimmerman Brothers and Hartman Limited, and Mrs Erica Miko.

The shareholders of Zimmerman Brothers and Hartman Limited were Sam Zimmerman, Zoltan Zimmerman, Leslie Hartman and Martin Abramowitz. It is alleged in the respondent’s assumptions of fact that these shareholders or their wives were involved in syndicates which bought, held and sold land, and reported their gains as business income. Among the companies involved were Givat-Markham Inv Ltd, Mizrachi Inv Ltd, Attractive Home Builders Ltd, Mo- rovec Holdings Ltd and Maariv Investments Ltd. Counsel for the appellant argued that the respondent had not offered any evidence of the above assumptions of fact and had not established that Erica Miko was a real estate agent employed by National Trust, or that the appellant himself had earned commission income as a real estate agent, which is also alleged in the respondent’s reply.

I do not believe it necessary to quote the Supreme Court decision in Johnston v MNR, [1948] CTC 195; 3 DTC 1182, which held that the assumed facts on which the respondent based his assessments or reassessments are deemed to be correct and that the burden of showing that the respondent’s assessments are incorrect rests on the appellant.

The appellant did not even attempt to rebut the respondent’s assumptions and the Court therefore deems them to be correct. I must conclude, therefore, that the appellant, in accepting Zimmerman Brothers and Hartman Limited and Erica Miko as co-purchasers of the property in which he held but a one-sixth interest, must have been aware at the time of purchase in 1969 of the very great possibility that the land would be resold at a profit at the first opportunity, irrespective of his original desire to hold the land indefinitely. In my opinion, the appellant’s secondary intention arose when, prior to the purchase and in order to protect his $5,000 deposit, he chose as ço-purchasers persons who were known to be involved in the business of trading in land, and the resale of the property was a distinct possibility.

The appellant admitted that the income derived from the renting of the house was insufficient to meet the carrying costs of the farm as well as the necessary repairs and maintenance of the house which, he claimed, he paid for by himself. This means, of course, that the appellant, a man of relatively modest means, would, as suggested by counsel for the respondent, incur expenses for each year he held the land, knowing that the only way a benefit could ever accrue to him or to his heirs was by the sale of the land at some time in the immediate or distant future.

Although I can appreciate that the appellant’s earnest desire was to hold the land, the circumstances under which it was purchased by Zimmerman Brothers and Hartman Limited and a real estate agent, rule out the contention that the possibility of resale was not a motivating factor at the time of acquisition of the property. Having so concluded, I hold that the appellant’s share of the profit realized by the disposition of the subject property was on income account.

As to the second issue, the taxability or otherwise of accrued interest included in the proceeds of disposition by expropriation of the subject property, the Remission Order referred to in the notice of appeal as Order SI/80/55 refers to the following Remission Order:

The following Remission Order, pursuant to section 17 of the Financial Administration Act, was made by Order in Council PC 1980-499, February 8, 1980, Canada Gazette, Part II, February 27, 1980, and was subsequently amended by PC 1980-2681, October 9, 1980, Canada Gazette, Part II, October 22, 1980.

ORDER RESPECTING REMISSION OF

INCOME TAX ON INTEREST RECEIVED BY FORMER LANDOWNERS IN RESPECT OF LAND EXPROPRIATED AT MIRABEL, QUEBEC AND PICKERING, ONTARIO

Short Title

1. This Order may be cited as the Mirabel and Pickering Tax on Interest Remission Order.

Interpretation

2. In this Order, “taxpayer” means a person whose land at Mirabel, Quebec, or Pickering, Ontario, was expropriated, in the case of Mirabel, after 1968, and, in the case of Pickering, after 1972, and, in both cases, before the date hereof.

Remission of Income Taxes

3. Remission of income tax is hereby granted in favour of each taxpayer equal to the amount by which the amount of income tax payable by him exceeds the amount that would have been payable by him if all amounts received as interest in respect of the expropriation had not been so received.

Remission of Interest and Penalties

4. Remission is hereby granted of any interest and penalties payable under the Income Tax Act on the tax remitted by section 3.

It was clearly established by the appellant himself that the subject property was not situated in Pickering, Ontario, but in the Township of Markham, Ontario. The Remission Order therefore does not apply to the subject property and the interest accrued on the disposition of the property by expropriation must be included in the computation of the appellant’s income.

The third issue is the correct year for taxation of the proceeds of disposition of the subject property. The unrebutted evidence is that the group of owners of the property agreed to the amount of compensation in August of 1979. Further, it is alleged and not contradicted that the group elected to have their fiscal year end in July 1980 and the compensation payments, therefore, were finally settled within the appellant’s 1980 taxation year. The Minister’s reassessment of the appellant’s income for the 1980 year was not shown to be incorrect.

For these reasons, the appeal must be dismissed.

Appeal dismissed.