Raffaele Gabriele, Frank Gabriele, Marie Latin!, Cenzo Latini, Pietro Ciccocelli, Donato Romano v. Minister of National Revenue, [1982] CTC 2292, 82 DTC 1327

The Chairman:—The appeal of Donato Romano, from reassessments with respect to the 1974 and 1975 taxation years, was heard simultaneously with those of Cenzo Latini, Frank Gabriele, Raffaele Gabriele, Pietro Ciccocelli and Marie Latini, on consent of the parties.

There are two issues in these appeals. The first is whether the profit realized by each of the above appellants from the proceeds of disposition of 41.04 acres of real property in Pickering, Ontario, acquired in 1966 and sold in 1974, was on income or capital account. If the Board were to find that the transaction was capital in nature, the parties have agreed that the fair market value of the property as at December 31, 1971 was $618,570.

The second issue, with respect to the 1974, 1975 and 1976 taxation years, concerns only three of the above taxpayers: Frank Gabriele, Raffaele Gabriele and Cenzo Latini. That issue is whether each of these three appellants was at all material times the beneficial owner of an 11.2% interest in the property and, therefore, liable for tax on his respective share of the profit realized on the sale of the property or whether, as claimed by the appellants, it was their spouses who were liable for tax, each of whom was the legal owner of the said 11.2% share of the property.

Appellant’s Statement of Facts

1. Donato Roman (“Romano”) was resident in Canada during the 1974 and 1975 taxation years and lived in the City of Toronto, in the Municipality of Metropolitan Toronto and Province of Ontario.

2. Romano is a sanitary engineer and is employed by the Borough of Etobicoke.

On or about July 24, 1967 Romano together with others purchased approximately 41.04 acres or real property (the “Property”) in Pickering, Ontario being more particularly described as part of Lot 5, Range 3, in the Township of Pickering for an aggregate purchase price of $82,000.

4. The aggregate purchase price was payable as follows:

(a) as to the amount of $24,734.31, by a cash down payment;

(b) as to the balance, by the vendor taking back a mortgage bearing interest at 7 /2%.

5. The property at the time of purchase consisted of vacant unserviced land.

6. The property was purchased by Romano and Frank Gabriele in trust for Romano and others. Pursuant to the terms and conditions of a trust agreement (the “Trust Agreement”) made August 10, 1966 among Frank Gabriele as Trustee and Gilda Gabriele, Emilia Gabriele, Elisa Latini, Marie Latini and Pietro Ciccocelli as beneficiaries, Frank Gabriele confirmed that he was holding a two-thirds interest in the Property in trust for the said beneficial owners.

7. In accordance with the terms of the Trust Agreement, the terms of which speak for themselves, the beneficial interests of the said beneficial owners were as follows:

(a) Gilda Gabriele;	13.3%
(b) Emilia Gabriele;	13.3%
(c) Elisa Latini;	13.3%
(d) Marie Latini;	13.3%
(e) Pietro Ciccocelli;	13.3%

8. Notwithstanding the terms of the Trust Agreement, however, the contributions made by Romano and the others to the downpayment of the purchase price were as follows:

(a) Donato Romano;	44.5%
(b) Gilda Gabriele;	11.2%
(c) Emilia Gabriele;	11.2%
(d) Elisa Latini;	11.2%
(e) Marie Latini;	11.2%
(f) Pietro Ciccocelli;	11.2%

9. The mortgage against the Property was repaid within one year of the date of purchase and the contributions made by Romano and the others to the repayment of principal and interest under the mortgage were on the same basis as set forth in paragraph 8 above.

10. In the case of Romano, Marie Latini and Pietro Ciccocelli the contributions made to the downpayment and the payment of mortgage interest and principal as set forth in paragraphs 8 and 9 above were made from their own funds.

11. Romano purchased his interest in the Property for the sole exclusive purpose of erecting thereon a residential home.

12. At the time of purchase of the Property it was the information, knowledge and belief of Romano that the Property would be serviced by the local municipality in the near future.

13. The Property is situate in the Township of Pickering and at the time of its purchase in 1966 was directly across a road from serviced land situate in the Township of Whitby. At the time of the purchase of the Property Romano was advised by the real estate agent acting for Romano and the others that the Property would be serviced in the near future.

14. Romano and the others made plans to erect residential homes for use by themselves on the property. A survey was commissioned dividing up the Property into the aliquot shares based on their respective contributions to the acquisition of the Property as set forth in paragraphs 8 and 9 above. Further, a basic design for a residential home was prepared for Romano and the others, it being their intention to use the same basic model for each of them with variations to suit the particular owner.

15. Romano and the others, however, experienced serious problems in having the Property serviced by the local municipality. They were advised that the local municipality had no intention of servicing the Property in the near future.

16. On or about May 12, 1970 Romano and the others received an unsolicited offer to purchase the Property from N & Z Investments Limited, an arm’s length purchaser, for a purchase price of $725,000.

17. Romano and the others made a counter-offer to sell the Property for a purchase price of $880,000. This counter-offer was not accepted by N & Z Investments Limited.

18. In 1974 Romano and the others sold the Property to Captain Central Holdings (1974) Limited, an arm’s length purchaser, for proceeds of disposition of $837,500. The offer made by the purchaser which resulted in the sale was unsolicited. As part of the transaction Romano and the others took back a first mortgage in the Property in the amount of $687,500.

19. Shortly before the sale referred to in the foregoing paragraph 18 hereof Marie Latini disposed of two-thirds of her interest in the Property to Max Glassman.

20. In filing his 1974 tax return Romano reported the sale of his interest in the Property as a disposition of capital property for tax purposes. The calculation of the capital gain realized by Romano and the others for tax purposes was deter mined as follows:

Proceeds of Disposition	$837,500.
Outlays and Expenses	34,574.
Net Proceeds of Disposition	$802,926.
Adjusted Cost Base (being the valuation day
value of the Property)	$800,000.
Capital Gain	$ 2,926.
Taxable Capital Gain	$ 1,463.

The taxable capital gain was reported for tax purposes as follows:

(a) Donato Romano	$648.	(44%)
(b) Gilda Gabriele	$163.	(11.2%)
(c) Emilia Gabriele	$163.	(11.2%)
(d) Elisa Latini	$163.	(11.2%)
(e) Marie Latini	$ 54.	( 3.7%)
(f) Max Glassman	$109.	( 7.5%)
(g) Pietro Ciccocelli	$163.	(11.2%)

21. On or about December 12, 1975, Mr Ben Fiore, accountant for Romano and the other owners of the Property received a letter from the Department of National Revenue, Taxation advising that the Department of National Revenue, Taxation were of the opinion that the valuation day value of the Property was $618,750. rather than $80,000. The Department of National Revenue, Taxation requested support for the adjusted cost base amount used by Romano and the others in filing their 1974 tax returns.

22. On or about January 30, 1976 Mr Fiore forwarded submissions as to the valuation day value of the Property to the Department of National Revenue, Taxation.

23. On or about March 3, 1977 Mr Fiore received a request from the Department to forward certain documents in connection with the Property, including:

(a) purchase agreement;

(b) trust agreement;

(c) sale agreement.

24. On or about March 11, 1977 Mr Fiore forwarded the documents requested by the Department as set forth in the foregoing paragraph.

25. On or about March 3, 1978 Romano and the others were advised that the Department proposed to re-assess on the following basis:

(a) the valuation day value of the property was $618,570. rather than $800,000;

(b) the capital gain resulting from the disposition was $184,356 and the taxable capital gain was $92,178.

26. Further, the Department proposed to reassess the spouses of Gilda Gabriele, Emilia Gabriele and Elisa Latini, being, respectively, Frank Gabriele, Raf- faele Gabriele and Cenzo Latini, and include in computing their income one-half of the gain reported by their wives. The March 3, 1978 letter of Revenue Canada advised that further submissions could be made by Romano and others.

27. On or about March 13, 1978 further submissions were made by Mr Fiore on behalf of Romano and the others.

28. On or about June 16, 1978 the Department issued re-assessments in respect of Romano and the others confirming the proposal set forth in the foregoing paragraphs 25 and 26 with the exception that the full amount of Emilia Gabriele’s, Elisa Latinis and Gilda Gabriele’s capital gain was included as a capital gain of their spouses, respectively, Raffaele Gabriele, Cenzo Latini and Frank Gabriele.

29. On or about September 13, 1978 a notice of objection was filed on behalf of Romano and the others requesting a re-assessment on the basis that the valuation day value of the property was accurate as reported by Romano and the others in filing their 1974 tax returns, that Emilia Gabriele, Gilda Gabriele and Elisa Latini rather than their respective spouses were the beneficial owners of their interests in the Property and, accordingly any capital gain resulting therefrom should be reported in their returns rather than the tax returns of their respective spouses and that the Department failed to take into consideration the entitlement of Romano and the others to claim a capital gain reserve under subparagraph 40(1 )(a)(iii) of the Income Tax Act (the “Act”).

30. By a Notice of Reassessment mailed January 30, 1980 Romano and the others were reassessed on the basis that the disposition of the Property by them in 1974 gave rise to an income receipt rather than a capital receipt. The resulting income gain to be shared among Romano and the others was determined by the Department to be as follows:

Proceeds	$837,500.
Outlays and Expenses	34,574,
Net Proceeds	$802,926.
Cost	82,000.
Income Gain	$720,926.
Income Reserve for 1974	$591,804.9
Income Inclusion for 1974	$129,121.10

The Department assessed this income gain on the following basis:

(a) Donato Romano	$57,387.16
(b) Frank Gabriele (Husband of Gilda Gabriele)	$14,346.79
(c) Raffaele Gabriele (Husband of Emilia Gabriele)	$14,346.79
(d) Marie Latini	$4,782.26
(e) Max Glassman	$9,564.52
(f) Pietro Ciccocelli	$14,346.79
(g) Cenzo Latini (Husband of Elisa Latini)	$14,346.79
	$129,121.10

The basic facts, as stated in the above quoted notice of appeal, were satisfactorily corroborated at the hearing by the testimony of Donato Romano, Cenzo Latini, Elisa Latini, Pietro Ciccocelli, Raffaele Gabriele, Emilia Gabriele, Frank Gabriele, Gelda Gabriele, Lindo Latini, a real estate agent and Ben Fiore, a public accountant.

With reference to the capital gain vs income issue, the appellants’ contention is that the land was acquired for the sole and exclusive purpose of building thereon residential properties for their personal uses. Owing to the difficulties and the delays in having the property serviced and as a result of frustrations, the appellants sold the property as the result of an unsolicited offer some eight years after its acquisition.

The respondent’s position was that the acquisition of the property was speculative, the appellants having in mind as an operating motivation the possibility of selling the property at a profit and the appellants’ intention at the time of purchase was to turn the property to account.

There can no longer be any doubt that the determination of the first issue can only be made on the basis of the intention the appellants had at the time they legally acquired the property in 1966. The sworn testimony of the six appellants that the property was purchased solely and exclusively for purposes of building six residences thereon and created a sort of family community cannot be ignored. The facts and the circumstances surrounding the acquisition however must be seen to corroborate and support that stated sole intention.

The basic facts as described by the appellants are plausible. They wanted to live as a family group; they had chosen a basic house plan to which changes could be made to suit individual needs and taste (Exhibit A-2); for their own purposes, they had divided the land proportionally to the contribution of each (Exhibit A-3) and the existence of serviced land opposite their property constituted a legitimate expectation that their land would also be serviced. From a financial point of view the appellants had made a substantial down payment on the purchase price; the mortgage was repaid within the year of the acquisition and there is no evidence that the appellants would have had any difficulty in financing the project.

The property was purchased with the assistance of Lindo Latini, a real estate agent (husband of Marie Latini, one of the appellants), who had assured the appellants that the land would be serviced but advised them, prior to purchase, that there could be a delay of six months to a year before the Town authorities proceeded with the servicing of the land. After the purchase and over a period of months, the appellants learned that the municipality did not intend to service the property in the near future. All of the appellants in their testimony expressed serious displeasure and annoyance with Mr Lindo Latini for having given them wrong information. Indeed, Mr Lindo Latini testified that he had been since then and for that reason, ostracized from the family group. The property was kept by the appellants from 1966 to 1974, at which time they sold the land as a result of an unsolicited offer.

Whether an offer to purchase was received and a counter offer made by the appellants in 1970 is not material to the issue unless a secondary intention of selling the property — if the original plan were to fail — can be clearly shown to have existed at the time the property was acquired and that the sale of the property had been a motivating factor in their acquisition of the land.

Among the points raised by the respondent in his written submission to establish that the property was acquired for purposes of turning it into account at the first favourable opportunity was the fact that Lindo Latini was a real estate agent and that his wife Marie Latini, one of the appellants, was knowledgeable in real estate transactions.

In reviewing the evidence the respondent pointed out that Cenzo Latini had purchased a parcel of raw land with a partner in the township of Gore in 1966 which was sold in 1969 at a substantial profit. The Gore property was alleged to have been acquired for purposes of building a house.

Frank Gabriele, Ralph Gabriele and Marie Latini, prior to the purchase of the Pickering land, had acquired a property in Oakville, again for the alleged purpose of building a house for each of them thereon.

The Oakville property was sold at a substantial profit in 1969.

The respondent alleges that because Cenzo Latini and Frank and Ralph Gabriele put their interest in the Pickering land in their wives’ name at the time of purchase, they must have been considering resale at that time.

The respondent also pointed out that Donato Romano, who ultimately paid for 44.5% interest in the land, received the same acreage as he would have received, had he remained with his original 33% interest in the land. It was suggested that Donato Romano considered that the Ontario Hydro’s right of way, which severed his parcel of land into two lots, would facilitate the resale and that he would, in any event, receive 44% of the profit on the eventual resale of the whole property.

At the hearing it was explained that Donato Romano’s allotted parcel of land, which had a considerably greater frontage on Pickering Road, had been considered as adequate compensation for his increased participation in the purchase of the land.

On the basis of the evidence, I am satisfied that it was the appellant’s intention of acquiring the land for the purpose stated; at the time of purchase, they could reasonably expect that the land would be serviced and, though upset and frustrated when they learned it would not, they nevertheless held the land for a period of seven years. There is evidence of serious disagreement among the appellants as to whether the land should be sold in 1970 when a substantial increase in the price offered was written back. Indeed, there was still objection to selling the land in 1974.

Do these facts however exclude the possibility of the existence of a secondary intention at the time the appellants acquired the property? The appellants form a family group, one member of which, Lindo Latini and his wife Marie, were knowledgeable in real estate transactions. Four of the appellants had, in two separate transactions, purchased raw land at about the time the Pickering property was acquired and realized a substantial profit from the disposition of the said properties in 1969.

It would be unrealistic to assume, under the circumstances, that no thought was ever given at the time of acquisition to what the appellants would do with the land, should their plans to build their houses on the property not materialize. That in itself however does not constitute a secondary intention, in my Opinion. The question, as I see it, is whether the sale of the property was a major consideration of the appellants and indeed a motivating factor at the time the property was acquired.

The facts do not support the proposition that the appellants acquired the property with a primary intention of turning it to account and there is, in my opinion, insufficient evidence in the circumstances to establish that the resale of the property was a motivating factor and a secondary intention of the appellants at the time they acquired it. I conclude therefore that the share of the profits realized by each of the appellants from the disposition of the property is capital in nature.

The second issue is whether Frank Gabriele, Raffaele Gabriele and Cenzo Latini were each the beneficial owner of an 11.2% interest in the property or whether their respective spouses each owned the 11.2% interest?

The Minister’s position is that all of the beneficial interest in each 11.2% interest in the property belonged to each of the above three appellants. The grounds for the respondent’s conclusion is that the spouses of the three appellants did not have separate resources nor could they have paid on their own account the cost of acquiring an interest in the property.

Counsel for the respondent relies on subsection 56(2) of the Income Tax Act, SC 1970-71-72, c 63, as amended, in support of the Minister’s assessment. His argument is that the three appellants themselves were, at all material times, the beneficial owners of their respective interest and on the disposition of the property, they directed the purchaser (Captain Central Holdings (1974) Limited) (Exhibit A-6) to pay their share of the proceeds of disposition to their wives.

Subsection 56(2) of the Act reads:

Indirect payments. A payment or transfer of property made pursuant to the direction of, or with the concurrence of, a taxpayer to some other person for the benefit of the taxpayer or as a benefit that the taxpayer desired to have conferred on the other person shall be included in computing the taxpayer’s income to the extent that it would be if the payment or transfer had been made to him.

It is difficult indeed to see, as suggested by counsel for the appellants, how Captain Central Holdings (1974) Limited, a third party, could do otherwise than pay to the wives their respective share of the proceeds since the wives were the registered owners of an undivided one-fifth interest in the two-thirds interest (Exhibit A-7) purchased by Frank Gabriele in trust in 1966. Whether or not the three appellants had any beneficial interest in the property, they could not in the circumstances either direct or prohibit Captain Central Holdings (1974) Limited from paying to the wives their respective share of the proceeds. Subsection 56(2) of the Act, in my opinion, is not applicable to the facts of these appeals.

On the basis of the evidence and in my opinion, the transfer of property to the wives was not made at the moment of the sale of the property but at the time of its acquisition in 1966. Whether the wives made any contribution toward the acquisition of the property is immaterial in applying the attribution rules of subsection 74(1) or (2) of the Act. Indeed, counsel for the respondent did not rely on either of those sections in argument.

Having come to the conclusion that the proceeds from the disposition of the property were on capital account, subsection 74(2) of the Act would normally apply. However, subsection 74(2) of the Act applies to the transfer of the properties made after 1971 and does not apply in this instance since the transfer of property from the three appellants to their wives took place in 1966.

As to the first issue, I hold therefore that the proceeds from the disposition of the Pickering property are on capital account.

With reference to the second issue, I hold that the proceeds from the disposition of three 11.2% interests in the property are not taxable in the hands of Frank Gabriele, Ralph Gabriele and Cenzo Latini respectively.

The appeals are allowed and the matter referred back to the Minister for reconsideration and reassessment in accordance with the above Reasons for Judgment.

Appeals allowed.