Malte Von Anrep v. Her Majesty the Queen, [1983] CTC 84, 83 DTC 5100

Urie, J:—This is an appeal from a judgment of the Trial Division dismissing an appeal from a decision of the Tax Review Board. The appellant had appealed an income tax assessment made by the Minister of National Revenue which had added to the appellant’s 1972 taxable income the sum of $65,315.50 representing his share of the profit realized from the sale of Kim Carol Farms on the basis that such profit was on revenue account.

The undisputed facts can be briefly stated. The appellant was, and still is, a lawyer practising his profession in the City of St Catharines, Ontario. At all times material to the issue in this appeal he was a partner in a law firm with one Eugene Chorozy, the partnership having been formed in 1966, a few months after the appellant had been called to the bar. In March 1969, Mr Chorozy acquired a vineyard consisting of approximately 150 acres of land in the Township of Niagara, five or six miles east of St Catharines, for the sum of approximately $165,000. After some discussions with Mr Chorozy, in May 1969 the appellant was persuaded to go into an equal partnership with Mr Chorozy in the vineyard. In December of the same year a second vineyard was purchased across the road from the first for the sum of $85,000, title to which was taken in the names of Mr Chorozy and the appellant as partnership property.

Title to the first property appears to have remained solely in the name of Mr Chorozy. No formal partnership agreement was entered into defining the rights and obligations of the parties although, as between themselves, they acted in all respects as equal partners. The two farms were operated as a single going concern under the name of Kim Carol Farms during the balance of 1969 and in 1970, 1971 and until early 1972 when they were sold. The appellant acted as the managing partner in the grape-growing enterprise although the day-to-day operations were supervised by a paid manager, Mackenzie Stewart. The fiscal year for the business ended on October 31, and in each of the years 1970 and 1971 resulted in losses. In the 1972 year a profit was earned although that too would have turned into a loss, it was said, had the property been retained for the full year for reasons which are not relevant in this appeal.

As a result of an unsolicited offer to purchase the two vineyards, made to Mr Chorozy early in 1972, Kim Carol Farms were sold as a going concern, including all equipment relating thereto, to Bergman Farms Limited for the sum of approximately $425,000. The appellant’s share of the profit which accrued from the sale was $65,315.50. It is this sum which the Minister added to the income of appellant in the assessment under appeal as profit from a business, by virtue of section 3, and subsections 9(1) and 248(1) of the Income Tax Act.

The sole issue in the appeal is whether the Minister correctly determined that the appellant’s share of the profit realized from the sale was an income rather than a capital receipt.

The learned trial judge, in determining this issue at trial, reviewed the evidence of real estate dealings by the appellant and, more particularly, by his partner Mr Chorozy (who acknowledged that perhaps from as early as 1971 he was a trader in real estate) and reached the following conclusion:

.. .I am convinced that the profit that I referred to made in May of 1972 must be treated as income. I am influenced in that decision by the following facts and the evidence before me as follows:

(a) He went into partnership to practise law with Chorozy, knowing that the

latter was then a trader and dealer in the sale and purchase of real estate.

(b) He was then lured into this particular farm purchase and other purchases with his partner by the profits that Chorozy had made on the earlier deals which I have referred to.

(c) He had little money to invest in such enterprises and depended almost entirely on the money borrowed from others.

(d) The financing of the various transactions in which he took part raised problems. The interest rates paid in some of these mortgage loans were of such a nature that indicate an intention on the part of one borrowing at such a rate towards purchase and resale rather than holding onto a long-term investment such as the Plaintiff says. I have indicated in one case the interest was 18 per cent, although the term is only for one year.

(e) Another matter that I think is very relevant is the fact that the plaintiff in this case had no knowledge as to the growing of grapes. His partner had been raised on a farm which was a fruit farm, probably with some grapes on it, but had very little experience and knew very little about it and how two men with university educations could have thought that they could have taken over a farm without experience or whatever and hold it for the years that the Plaintiff says they intended to is rather difficult to understand. This is borne out by the fact that for the first two years they did suffer losses.

It is also difficult to understand if the Plaintiff’s intention was with his partner in most cases and with the several partners in the other cases, if his intention was to hold for a long-term period for the purpose of producing income on his retirement, that some provision for his protection and the protection of the others was not made. Even one not knowledgeable in law and the requirements of containing terms of such arrangements in writing would have known that some arrangement must be made. Apparently the parties, according to the Plaintiff, had little discussion about it. He knew what his partner would do. He knew his partner was a trader and as soon as a reasonable profit could be obtained that he would want to sell and unless his intentions were exactly the same and he hoped to make his profit, he as a reasonable lawyer would have had an agreement prepared whereby he would have the right to take over his partner’s share in such an event, or some other similar arrangements whereby he could be protected. That is particularly applicable in the case where they bought the property with the three investors from Toronto and which he eventually sold out in a fairly short period of time.

In my opinion the arrangements that existed between these two partners as to this farm all indicate a purchase on both of their parts with the purpose of reselling at a suitable opportunity to make a profit thereon to be realized. When one looks at the actual kind of sale, the evidence of the Plaintiff is he then had his financing arranged satisfactorily in long-term financing so that he wasn’t in a position where he had to sell. The losses were not such that he had to get rid of this property at the time. If his real intention had been to retain it he could easily have done so.

Much has been said about his early purchase of registered retirement savings plans and that this indicated that he was one who was a sound businessman and particularly interested in providing an income for himself upon retirement and there can be no doubt that a registered retirement savings plan which he had for that purpose was a good thing, but he disposed of it. He sold it. He sold it for this other opportunity of a rise in the price of land and a profit that might be made.

The thrust of counsel for the appellant’s able argument, as I understood it, was that the comment made by the trial judge at the conclusion of the ap- pedant’s argument at trial, before calling on counsel for the respondent, reading as follows:

Mr Erlichman, I am prepared to find in this case that the Plaintiff in this matter was probably lured into this purchase by the action of his partner who had been rather successful in his previous attempts and that by reason of that the purchase by him and his partner of the farm was made for the sole purpose of resale at the first opportunity of making a reasonable profit.

If you agree with that do you wish to say anything to the Court?

MR ERLICHMAN: No, My Lord.

so coloured his perception of the transaction that the learned judge overlooked or ignored evidence that would lead to the conclusion that the appellant ought not to be linked with the activities in real estate of his law partner. If he had taken that evidence into consideration he could not have found that in the transaction in issue they were partners in the business of dealing in real estate. Moreover, he said, the trial judge’s finding that Mr Chorozy was a trader in land at the time the law partnership was formed and at the time of the acquisition of Kim Carol Farms, was unsupported by and contrary to, the evidence. This, too, in his submission, coloured the judge’s appreciation of the character of the acquisition and disposal of the farms.

Counsel, in addition, referred to other findings and inferences drawn by the judge and alleged failures to consider evidence contradicting or failing to support those findings. In dealing with these contentions first it is unnecessary for me to review them in detail. Suffice it to say, that a careful review of the whole of the evidence has satisfied me that there was evidence to support the inferences he drew and the findings of fact which he made. A trial judge cannot be expected to refer in his reasons to all of the evidence which he considered in making those findings and in drawing those inferences. It is not without significance in considering his dealing with the evidence, that the trial had taken place during the day and a half immediately preceding the delivery of his judgment which was rendered orally following the conclusion of the trial. I think it extremely unlikely that such an experienced trial judge would have overlooked or ignored evidence which might have affected his findings in a trial which had just concluded. A trading case is essentially one determined on its facts. The decision with respect thereto involves an assessment of the evidence, attributing to it the weight which the judge deems should be given it and making findings based thereon. As I have said, I am quite unable to conclude on the record before us that the trial judge made improper findings in respect of the matters raised by counsel or drew inferences incapable of support from the evidence.

As earlier stated, the main thrust of the appellant’s argument, as I understood counsel, was two-pronged. First, the finding that the appellant was lured into the transaction in issue by his partner whose record of turning real estate purchases into profitable sales indicated that the purchase of the Kim Carol Farms was made solely for the purpose of resale at a profit at the first opportunity, is unsupported by the evidence and so coloured the whole of the judgment that it cannot stand.

Secondly, the learned trial judge erred in holding that Mr Chorozy was a trader at the time the law partnership was formed with the appellant or at the time the Kim Carol Farms were purchased in 1969, such findings being contrary to the evidence. It was said that not only was this error in the appreciation of the evidence sufficient in itself to vitiate the judgment appealed from but it also added weight to the first submission, supra. Since at the time of purchase Chorozy was not a trader then all the evidence supported the contentions of the appellant that the farm purchases were as a long-term in- come producing investment and not for resale as might have been inferred if, at the time of acquisition, Mr Chorozy had been an active, recognized trader in real estate.

With respect to the first contention, as I read the transcript of the evidence at trial, there is no direct evidence that a motivating factor in the purchase of the farms was the possibility of resale. No evidence was led as to any trend towards increasing values in vineyards in the area at and following the times of their acquisition. Neither was there evidence of any possibility of a change in zoning to permit a better or alternative use for the land than in the production of grapes. On the other hand, while there is evidence of some limited knowledge of farming by each of the partners by reason of their both having been born and raised on farms, there certainly is no evidence of sufficient expertise in the production and marketing of grapes to suggest that they could have a reasonable expectation of operating the farms ina profitable manner. The learned trial judge included this as one of the factors leading to his conclusion and, I think, quite properly did so since it was a reasonable inference on the evidence.

The investment in a mechanical grape harvester and additional acreage of grape plants neither assists nor hinders, to any appreciable extent, a determination of whether the parties initiated the expenditures to enhance the income producing possibility of the farms or to enhance the saleability of the farm operations at a profit. Those facts are, then, almost neutral in impact on the issue to be decided.

While the method of financing the purchase of the farms and of their operating expenses was said by appellant’s counsel to be irrelevant on the basis of what was said by Martland, J in Irrigation Industries Limited v MNR, [1962] CTC 215; 62 DTC 1131 that

.. .I would not think that the question of whether securities are purchased with the purchaser’s own funds, or with money borrowed by him is a significant factor in determining whether their purchase and subsequent sale is or is not an investment.

I cannot agree with counsel that the variety of the mortgages, their terms, the wide variation in the interest rates payable and the consequent cost thereof as that cost related to the anticipated revenues from the production and marketing of grapes, are factors which can be ignored or considered to be irrelevant. By the same token, the putting into place of longer term and less expensive financing not very long before the sale of the property is a relevant fact. It relieved to some extent the expense factor as well as the constant worry of refinancing short term mortgages. The trial judge noted that despite this the partnership sold the property to the first potential buyer. Was the inference adverse to the appellant’s contention as to his motive in purchasing the farms incapable of support on the evidence? I think not.

The failure of the partners, as knowledgeable lawyers, to document their legal relationships for their own protection is also, as the trial judge observed, a relevant fact.

As has been said so frequently in these so-called “trading cases”, the determination of the character of the transaction as being either one for revenue or capital account is each dependent on its own facts. Other than ascertaining the applicable principles, little assistance is derived from attempting to equate the facts in the various cases with those before the Court in a particular case. The appellant relied on the judgment of Jackett, P, as he then was, in Wolf von Richthofen v MNR, [1968] CTC 544; 68 DTC 5346, as illustrating the proper approach to be taken by the Courts in matters of this kind. I wholly agree that it does show the proper approach. President Jack- ett stated the following at 546 of the report:

.. .Certainly, if the property in question was acquired by the appellant with a view to re-sale at a profit, or if it was acquired with a view to using it in the farming business or re-sale at a profit as circumstances might make most expedient, then, in my view, when it was re-sold a little over a year after it was acquired, the sale must be regarded as having taken place in the course of the appellant’s real estate activities and the resultant profit must be regarded as a profit from a business. If, on the other hand, at the time when the appellant acquired the property, the only purpose he had in mind for it was to incorporate it in his farming business, and if he did make it a part of the property on which he carried on his farming business, its subsequent sale would be a sale of a capital asset of that business even though it occurred within a very short time after acquisition.

Putting the matter another way, where a person carries on business as a trader in real estate and some other business at the same time, if he buys a parcel of land for re-sale at a profit and does so re-sell it, the resulting profit is a profit from his trading business even though he found a use for the land in his other business during the period that he owned it; but, on the other hand, a profit that he makes upon the sale of land acquired for the sole purpose of being used, and that has in fact been used, as part of the capital assets of the other business is not, as such, a profit from his business as a trader in real estate, and the length of the period between purchase and sale of a parcel of land by such a person is not relevant except in so far as it is some indication as to whether the land was inventory of the trading business or a capital asset of the other business.

I must, therefore, decide whether the balance of probability on the evidence in this case is that the only purpose that motivated the appellant to acquire the property in question was to incorporate it in his farming business and that he did in fact make it part of the property on which he carried on his farming business before he sold it.

With respect, I think that that is the approach, although unstated, which was adopted by the trial judge in this case. It must not be overlooked that President Jackett was sitting as trial judge in the von Richthofen case and had the same issue to decide on the evidence in that case as did the trial judge here. Having heard the testimony, seen the documentary evidence and observed the witnesses, the learned judge in the case at bar, on a balance of probabilities, concluded that, despite what was said by the witnesses to the contrary, one of the main motivating factors in purchasing the Kim Carol Farms was to resell them at a profit at the first opportunity. There were, in my opinion, facts adduced in evidence enabling him to so conclude. That being so, I am bound by what was said by Ritchie, J in Stein v The Ship “Kathy K”: [1976] 2 SCR 802 at 807:

In the same case, Lord Sumner adopts the practice laid down by James LJ in The Sir Robert Peel, [3] at p 322, where he said:

The Court will not depart from the rule it has laid down that it will not overrule the decision of the Court below on a question of fact in which the judge has had the advantage of seeing the witnesses and observing their demeanour, unless they find some governing fact which in relation to others has created a wrong impression.

These passages were expressly adopted by Martland J, when delivering the judgment of this Court in Prudential Trust Co Ltd v Forseth, [4] at pp 216-7, where he also adopted the following passage from the judgment of Lord Shaw in Clark v Edinburgh Tramways Co [5] at p 36, which is quoted by Lord Sankey in Powell v Strea- tham Manor Nursing Home [6] at p 250:

Am I—who sits here without those advantages, sometimes broad and sometimes subtle, which are the privilege of the Judge who heard and tried the case—in a position, not having those privileges, to come to a clear conclusion that the Judge who had them was plainly wrong? If I cannot be satisfied in my own mind that the Judge with those privileges was plainly wrong, then it appears to me to be my duty to defer to his judgment.

These authorities are not to be taken as meaning that the findings of fact made at trial are immutable, but rather that they are not to be reversed unless it can be established that the learned trial judge made some palpable and overriding error which affected his assessment of the facts. While the Court of Appeal is seized with the duty of re-examining the evidence in order to be satisfied that no such error occurred, it is not, in my view, a part of its function to substitute its assessment of the balance of probability for the findings of the judge who presided at the trial.

While the trial judge here may not have been entirely accurate in holding that the applicant went into partnership with Chorozy “knowing” that the latter was then a trader and dealer in the sale and purchase of real estate, there is no doubt that Chorozy had in 1965, the year before the partnership was entered into, purchased a property which he subsequently sold at a profit. That, it might be inferred, as perhaps the trial judge did infer, was the beginning of his trading career. Whether the appellant knew or did not know of this transaction at the time of the formation of the partnership is not clear. However, there can be no doubt that shortly thereafter he became associated with Mr Chorozy in a real estate deal, and equally there is no doubt that he knew then of some of his partner’s other deals. It seems to me, therefore, that the inaccuracy of the finding is not a “palpable and overriding error which affected his [the trial judge’s] assessment of the facts”. It ought not to vitiate his judgement.

Nor, in my opinion, did his conclusion that the appellant was lured into the transaction for the purpose of making a profit from the sale of the farms, constitute an inference which was unsupported by the evidence. It is clear from the evidence of each of the partners that some persuasion was exerted by Chorozy to bring the appellant into the vineyard partnership. That the persuasive powers were brought to bear in the recognition of a possible profit on resale as well as a recognition of the capacity of the farms to carry the burdens of financing the acquisitions through the operations thereof until the property could be turned to a profit by sale is also an inference capable of being drawn from the evidence.

I have not, therefore, been persuaded that the learned trial judge was plainly wrong in any material finding of fact in this case. Accordingly, I would dismiss the appeal with costs.