Vincent Debenedictis, Giovanna Debenedictis v. Minister of National Revenue, [1983] CTC 2183, 83 DTC 167

The Assistant Chairman:—At the commencement of the hearing of the above appeals, counsel for the parties agreed that both matters were to be heard on common evidence.

The above-named taxpayers appealed to this Board from assessments for income tax for the 1974, 1975 and 1976 taxation years. There had also been a dispute between the Minister of National Revenue and another taxpayer, Anthony DiSilvestro. That dispute was resolved, which leaves only the above two cases to be dealt with.

In 1974 each appellant sold an interest in a parcel of land. They filed their income tax returns on the basis that the gains realized were on capital account. On assessment the respondent treated the gains as ordinary income. The issue thus becomes whether or not their gains are trading profits for the year of sale of the property in question.

The land in question was acquired in 1956. Registered title was taken in the names of three persons as tenants-in-common. Those persons were the appellant Vincent DeBenedictis, Anthony DiSilvestro and Luigi Bianchin. Beneficial ownership of the interest held by Vincent DeBenedictis rested in him and his wife, the appellant Giovanna DeBenedictis. In 1971 Luigi Bianchin sold his interest in the land to Vincent DeBenedictis and Anthony DiSilvestro in equal shares.

For estate planning purposes the appellants’ interests in the land were sold in 1974 to a company controlled by Vincent DeBenedictis for his children. The consideration paid was a demand promissory note. The City of Hamilton expropriated about seventeen acres of land in 1975. It made a payment of compensation to the DeBenedictis estate planning company. That payment enabled the company to make a payment in 1976 on the promissory notes held by the appellants.

The Minister, in making the assessments for 1974 and 1975 which are under appeal, did not impose tax on a taxable income different in amount from that reported. He viewed the 1974 gains as income and, therefore, deleted as inapplicable the subparagraph 40(1 )(a)(iii) reserves which had been claimed. He substituted reserves in the same amount, however, under paragraph 20(1 )(n) of the Income Tax Act. For 1976 the Minister’s finding that the gains were income resulted in assessments based on taxable incomes very substantially higher than those declared. The Minister included in income the amounts allowed as reserves in 1975 and he refused to permit deductions in respect of annuity payments claimed by the appellants under section 61 of the Act.

As previously mentioned, the issue is whether the gains realized on the 1974 sales were on capital or income account. The appellants pleaded that at the time the land was purchased it was their intention and that of Mr DiSilvestro and Mr Bianchin to construct on the land houses for their personal use.

At the time of the purchase in 1956 the land, which was vacant, was situated in Barton Township on the outskirts of the City of Hamilton. At that time the parcel was thought to have an area of twenty acres. Following the 1974 sale a survey was made and it was discovered that the area was twenty-three acres. Hydro was then available, but municipal water and sewer services were not. However, the Township permitted the erection of houses equipped with wells and septic tanks.

At the time of purchase the land was subject to a subdivision control bylaw passed under the Planning Act. A copy of the by-law was entered in evidence as Exhibit R-1. It is unnecessary to set forth the provisions of that by-law in detail, save to note that it prevented the division of the land into three parcels even remotely approaching equality in area unless either a plan of subdivision was registered or a consent to the registration of the deed was secured from the Planning Committee.

Mr DeBenedictis had emigrated from Italy to Canada in 1951. Initially, he worked as a labourer in the construction industry. Subsequently, he became qualified as an electrician. In this line of work he was subject to lay-off. In 1954 or 1955 he commenced the business of building houses for sale. Initially, at least, he did this work in his spare time and during periods of lay-off. During the period from 1955 to 1959 he bought lots and built a very substantial number of houses for resale. All lots bought and sold in connection with this enterprise were fully serviced. In 1957 or 1958 he and his wife moved into one of those houses. They lived there for three years, then moved to another house which he had built. The appellants lived in that house until 1964 when they moved to yet another house build by Mr DeBenedictis. The couple still live there.

Anthony DiSilvestro is the brother of the appellant Giovanna DeBenedictis. During the 1955 to 1959 period he, too, was engaged in the business of buying lots and building houses on them for resale. Mr DiSilvestro and Mr DeBenedictis appear to have built houses in the same areas during the same periods of time and, also, they appear, not infrequently, to have sold lots to one another. In short, there was a pattern of business association between them in connection with the house-building business.

Mr DeBenedictis testified that he bought his interest in the land now in question with the intention of erecting his “dream” house for use as a personal residence and that he had no other purpose in mind. He had discussed this intention with his wife who agreed that the land was what she wanted.

Mrs DeBenedictis gave evidence to the same effect. She said she wanted a beautiful home. It was, she said, very important to her. She visited the land before the purchase was made. She referred to it as “the farm”.

In a case such as this direct evidence of subjective intention must be scrutinized with considerable care. In Birmount Holdings Limited v The Queen, [1977] CTC 34; 77 DTC 5031, Sweet, DJ, said at 40 [5035]:

I now deal with the plaintiff's position that the transaction in the realty was not an adventure in the nature of trade and that the realty was acquired as an investment, which resulted in a capital gain.

One starts with the principle that the intention of the purchaser is a material factor and the time as of which that intention is material is the time of acquisition. (Warnford Court (Canada) Limited v MNR [64 DTC 5103] (1964) CTC 173; MNR v Lawee [72 DTC 6342] (1972) CTC 359).

Evidence to be considered in deciding as to the purchaser’s intention is what he himself says it was. However, the purchaser’s declaration of intention is only one of the factors to be considered. In some cases there may be other evidence more cogent by far than the purchaser’s statement. In this connection, Cattanach, J, in MNR v Lawee (supra), said:

“Declarations of intention by persons assessed to income tax will not secure immunity therefrom. A professed intention cannot be considered as determining what it is that the concrete acts amount to. It is only part of the evidence. Statements made as to what the respondent’s intention was at the time of acquisition of the land must be considered along with all the objective facts.”

Accordingly, if there be circumstances which are supportive of the purchaser’s declaration of intention or contradictory to or inconsistent with it, they, too, must be taken into consideration.

It is essential to consider whether the conduct of the appellants was consistent with their declared intention.

It was asserted that the intention of the appellants and Messrs DiSilvestro and Bianchin was to divide the land in question into three equal parts so that each could build his residence. Mr DeBenedictis’ evidence, however, was that there was no discussion among the co-owners as to the division of the land. In any event, no attempt was made at any time either to register a three-lot plan of subdivision or to secure a consent from the Planning Committee to a severance. In light of Mr DeBenedictis’ extensive experience in the building business, I very much doubt his statement that he was unaware of the by-law until just before the hearing of these appeals.

In 1959 the City of Hamilton annexed the area of Barton Township containing the land in question. Thereafter, it was no longer possible to build without municipal sewer and water services. They were, according to Mr DeBenedictis, far away from the land in question. Counsel for the appellants suggested that annexation frustrated his clients’ intention to build. I do not believe that it did. Annexations do not occur without warning. It is most unlikely that Mr DeBenedictis failed to understand that annexation would make it more difficult and more expensive to build because of the servicing requirement and, notwithstanding that, he did nothing.

Mr DeBenedictis explained that at the time of the purchase their “dream” was to build a $4,000 to $5,000 square foot house and that they planned to wait until they had enough money to proceed. No attempt was made to show that the appellants could not find enough money, whether by borrowing or otherwise, during the 1956 to 1959 period in order to build. The failure to attempt to build during that period from 1956 to 1959, when it could readily have been done, and the building of another residence during that period cast doubt on the declared original intention.

The mortgage back to the vendors given in 1956 contained a partial discharge clause. Such a clause is as consistent with a desire on the part of the three purchasers to develop a subdivision as with a plan to divide the land among themselves.

The lands were listed for sale in 1959. Mr DeBenedictis testified that he did not sign any listing agreement and was unaware that any co-owner had done so. It would not appear that the co-owner who did list was conscious of the appellant’s alleged intention. Furthermore, it seems that Mr DeBenedictis was much better acquainted with the listing agent than on the rare social basis to which he was prepared to admit. That agent, Mr Cupido, had either sold or attempted to sell one of the appellant’s residences.

The appellants placed great reliance on a document, a photocopy of which was entered as Exhibit A-3, as evidence of their intention from the outset to build a personal residence. The document is a handwritten agreement between the two appellants dated October 25, 1956. It recites the purchase of the land by Vincent DeBenedictis, in partnership with Anthony DiSilvestro and Luigi Bianchin, for the purpose of building their own individual residences and the contribution of moneys for the purchase not only by Vincent DeBenedictis, but also by Giovanna DeBenedictis. The agreement set forth is that “. .. although the land has been registered in the name of Vincent DeBenedictis by virtue of a Deed registered on the 1st day of October 1956 as No 48561, the said land is owned in common by Vincent and Giovanna DeBenedictis and any residence built on it in the future shall also be owned in common”. The words, “any residence”, cast some doubt on the recited purpose and suggest that the building of a residence may very well not have been the appellants’ exclusive objective.

Mr DeBenedictis and Mr DiSilvestro were examined for discovery in 1976 in connection with the expropriation proceedings. It should be remembered that in 1956 the two were not only brothers-in-law, but they were from time to time then associates in the building business. It would appear that Mr DiSilvestro testified on discovery that he bought the land because he liked it and that he knew that sooner or later it would be valuable and could be developed. Mr DiSilvestro’s intention is not what is relevant here and, furthermore, secondhand evidence of what he said is unreliable. However, the failure to call him to give evidence in this proceeding does lead me to doubt that the full story has been told. I say this because Mr DiSilvestro appears to have been associated with the appellants not only as a co-owner of the land in question, but also in other business ventures, one of which included land development. In the 1960s Mr DeBenedictis ceased to build houses. His business activities for most of the decade involved building as a contractor on land owned by others. This business was carried on by Eaglewood Construction Limited. The principals of that company werre Vincent DeBenedictis, Mr DiSilvestro and a Mr Falcone. In 1969 Mr DeBenedictis and Mr DiSilvestro formed another company, Vin-Ton Contracting Limited, for the purpose of carrying on the business of a land developer. The land developed by that company included a parcel bought by Mr DiSilvestro in 1957 and an adjacent parcel of land bought by Mr DiSilvestro’s wife and the appellant Giovanna DeBenedictis in 1967.

In summary, this is a case in which raw land was purchased by Mr DeBenedictis, a person experienced in dealing in land. It was not used for the stated purpose when such use was possible and it was held thereafter in an unproductive state for a very long period of time during which a rapid increase in value was evident. It has not been established on the balance of probabilities that the purchase by the appellants was not a speculative adventure in the nature of trade. I can find no basis for the submission made by counsel for the appellants that Mrs DeBenedictis stands in a different position from that of her husband. Their counsel was unable to suggest any such basis.

Because the gains were income from a business the Minister was correct in regarding the 1974 and 1975 deductions of reserves as having been allowed under paragraph 20(1 )(n) of the Act. the inclusions in the appellants’ 1976 incomes were, therefore, required by paragraph 12(1 )(e) of the Act. Subsection 60(2) does not include amounts required by paragraph 12(1 )(e) of the Act to be included in income in the enumeration of inclusions in respect of which income-averaging annuity contract payments are deductible. For the foregoing reasons, the appeals will be dismissed.

Appeal dismissed.