Estate of Earl Edward Walsh, Howard J Riopelle, John B Ebbs, Mathias P Jensen v. Minister of National Revenue, [1983] CTC 2114, 83 DTC 110

The Chairman:—The appeals of the Estate of Edward Earl Walsh, Howard J Riopelle, John B Ebbs, QC and Mathias P Jensen, from assessments with respect to the 1976 taxation year, were heard simultaneously and the decision in each appeal is being rendered on common evidence.

The issue is whether the profit realized by each of the appellants from the disposition of a property, referred to as the “Baseline” property, acquired in 1972 and sold in 1976, was income from an adventure in the nature of trade or whether it was a capital gain.

Summary of Facts

A partnership on the basis of equal sharing existed between the late Mr Edward Walsh, Mr Howard Riopelle and John B Ebbs, QC since 1959. During the period of 1959 to 1971, the partnership had, under the direction of Mr Ebbs, acquired several properties for investment purposes, most of which were retained by the partnership for several years. Very little if any development was effected on the properties held by the partnership. Mr Ebbs also held investment properties in his own name and limited development was effected on two or three of his personal properties.

Early in 1971 Mr Mathias Jensen, a real estate agent with the Royal Trust, informed Mr Ebbs of the availability of a commercially-zoned property on the Baseline Road in the City of Ottawa, situated opposite a property on which the construction of the Queensway Carleton Hospital was planned.

In December of 1971, an option to purchase “Baseline” from Loeb Limited for $150,000 ($100,000 open mortgage due in five years) was signed by Mr Ebbs in trust (Exhibit A-1). All of the purchase price was paid with borrowed money. There is no evidence that the financing of the project was ever considered by the appellants and no approach made to financial institutions for that purpose. For purposes of this transaction only, Mr Mathias Jensen was included on equal terms along with Mr Ebbs’ old partners, Messrs Walsh and Riopelle, in the formation of a new partnership. The intention of the partnership, as stated by Mr Ebbs, was to acquire the property for the purpose of building and operating a medical-dental building thereon.

The appellants allege that their plans to build the said building were frustrated by events beyond the partners’ control and the property was sold in January 1976 for $500,000 with a $250,000 mortgage back.

Submissions

The appellants submit that at the time of acquisition, the sole intention of the partners was to build and operate a medical-dental building and that no thought was given at the time of purchase to the possibility of resale, should the project not be executed.

It is the respondent’s submission that the partners never had the intention of building and operating a medical-dental building and that, at the time of purchase, it was intended that the property be sold at the first opportune moment. Alternatively, the respondent submits that if the partners had considered building and operating the proposed building, it also had at the time of purchase foreseen the possibility of reselling the property, should the construction project not be executed. The respondent therefore concludes that the partners had a secondary intention of resale which was a motivating factor in acquiring the property.

Findings of Fact

The nature of the historical holdings of the original partnership that existed between 1959 and 1971, and indeed the nature of Mr Ebbs’ personal holdings, which constituted a considerable part of the evidence, have but a very indirect bearing on the transaction in issue. I can accept that the original partnership, and indeed Mr Ebbs personally, acquired considerable property for purposes of investment, but that fact does not rule out the possibility that the same persons in a new partnership may well have entered into a transaction for reasons other than for investment purposes.

The appellant’s declared intention of acquiring the Baseline property for the sole purpose of building and operating a medical-dental building must be supported by facts that existed at the time of and subsequent to the acquisition of the property. The appellants’ whole course of conduct must be clearly seen to have been that of as bona fide developer and not that of a trader.

Whereas Mr Ebbs evidently was the only active member of the old partnership, Mr Jensen was most active in the new partnership which was formed specifically in relation to the acquisition of the Baseline property. Mr Jensen was a practising real estate agent and Mr Ebbs was very knowledgeable in real estate values and developments in the area but neither of them nor indeed any of their partners had any significant experience in building, developing and operating substantial rental properties.

There is no evidence that, prior to or any time after the acquisition of the subject, architectural plans were drawn or a feasibility study made of the project or that a building contractor was consulted or retained for the construction of the medical-dental building. Indeed, the only expenditures incurred by the partners for the whole period they held the property were the carrying charges.

The evidence that Mr Ebbs went to Toronto to see a medical-dental building is very vague and has little or no probative value in respect to the partners’ declared intention.

The drawing of a building produced as Exhibit A-3, which appeared in the Ottawa Journal of February 1, 1972 (Exhibit A-4), is admitted to have been merely an artist’s conception of a building complex and it has no relationship with or similarity to the unsigned and undated rough sketch of a floor plan which purports to show what I presume to be the divisions of the proposed building (Exhibit A-15).

The contacts made by Mr Jensen and Mr Ebbs with banks and other potential tenants for leasing floor space in a medical-dental building (Exhibits A-5 to A-14) in the absence of any formal detailed plans could only be very preliminary. There is no evidence that there was any follow-up of that correspondence and firm commitments for leases were never sought by the appellants which developers would normally have done at an early planning stage of the project. On the basis of the facts, the purpose of the correspondence (Exhibits A-5 to A-14) appears to have been to promote in the mind of a potential purchaser the possibility and indeed the suitability of building a medical-dental building on property situated opposite a hospital. The normal steps and precautionary measures always taken by businessmen engaged in a development of a project of the magnitude of the proposed building were apparently never considered by the appellants.

The evidence, in my view, does not support the appellants’ declared sole intention of acquiring the Baseline Road property for the purpose of constructing a medical-dental building and the appellants have not met that onus. Moreover, the appellants’ contention that circumstances beyond their control frustrated their project and forced them to sell the property appears to me to be equally without foundation.

The property was purchased on April 26, 1972 at a time when the construction of the Queensway Carleton Hospital was being discussed. It is the appellants’ submission that the delay in proceeding with the construction of the hospital was one of the compelling reasons which forced the appellants to sell. The first phase of construction of the hospital began in 1973 and construction was continued in 1974. By 1976 the hospital was operational.

By June of 1974 the appellants had not yet had plans drawn nor had they retained a contractor for the construction of the proposed building; Mr William Grimes, a real estate agent in the firm of C A Fitzsimmons & Co Ltd, approached Mr Ebbs with a proposal from his client, the Fuller Construction Company, to enter into the appellants’ partnership for the development of the building. It is alleged that the property was listed with C A Fitzsimmons & Co Ltd in order to somehow protect Mr Grimes’ commission since the transaction would entail a sale or transfer of the property and he was the person who had brought the parties together. The Fuller proposal was not accepted. However, as a result of listing the property with Fitzsimmons, another offer was received from Mr Karem Singh to purchase the property for $690,000. The offer was accepted by the appellants but Mr Singh could not finance the purchase and the transaction did not take place (Exhibit A-16).

In October 1975 the property was again listed for sale, this time through Royal Trust and the sale was successfully concluded. The commission for the sale was divided between Mr Jensen and Mr David Hyman, a real estate agent who had brought the offer from the eventual purchaser of the property.

The property acquired in April 1972 was therefore listed for sale as early as June 1974 and again in October 1975, at times when the hospital was already under construction.

The appellants also allege that their project was frustrated by rising costs of construction and increasing interest rates. These increased costs could normally have been foreseen in the years under review and would have been taken into account, had a feasibility study of the project been made prior to the acquisition of the property. The increase of construction costs referred to by Mr Ebbs also applied to Mr Gazzo, a competitor who, it was rumoured, was to build a medical-dental building on the hospital property. Mr Ebbs alleges that these rumours were another factor which frustrated the partnership’s realization of their project. In my opinion, such rumours, by themselves, do not constitute an unforeseen unsurmountable obstacle which would warrant the abandonment of a well-planned and well-organized project.

At the time the appellants listed their property for sale, the hospital was a reality and the development in the area was reasonably assured, whether or not Minto Construction went ahead with its townhouse project. Mr Ebbs’ contention was that Minto Construction’s decision not to proceed with the townhouse project at that time destroyed the project’s viability. I fail to see how Mr Ebbs and Mr Jensen, who were experienced in real estate values and potentials, would abort their intended project because of a decision of one developer in the area.

The last reasons which the appellants considered to have been a compelling factor in selling the property were personal and financial problems af- fectng Mr Walsh at that time. The financing of the project on the basis of the evidence was never seriously considered or discussed and Mr Walsh, who was not an active member of the new partnership, could easily have been replaced, had it been the partnership’s firm and sole intention of proceeding with the construction and operation of the medical-dental building.

The preponderance of the evidence, both prior to and after the acquisition of the Baseline property, does not lead me to conclude that the sole intention of the appellants was to build and operate a medical-dental building thereon. Nor do the reasons advanced as to why the property was sold in 1976 appear to me to constitute factors beyond the control of the appellants which completely frustrated their declared intention and rendered their project impossible to realize.

I must conclude on the basis of the evidence that the Baseline property was acquired by the appellants for the purpose of reselling it at the first opportunity and the profit realized by each of the appellants from the sale of the subject is therefore income from an adventure in the nature of trade.

For these reason, judgment will go dismissing the appeals.

Appeals dismissed.