Luigi Borrelli, Frank Borrelli v. Minister of National Revenue, [1982] CTC 2383, 82 DTC 1374

John B Goetz:— This is an appeal by Luigi Borrelli with respect to his 1977 taxation year. It was agreed that the appeal of Frank Borrelli, brother to the appellant, would be heard on common evidence.

On July 24, 1974, the appellant and his brother, Frank Borrelli, who were partners, purchased a parcel of land comprising 2.6 acres, Farm Lot 128, Concession 1, in the City of Windsor, in the County of Essex, Province of Ontario (hereinafter referred to as “the property”). The property was purchased by the Borrellis for the sum of $75,000 and sold on December 23, 1977 for the sum of $205,000.

The issue herein is simply whether the profit on the sale of the property was on account of income or capital.

Facts

Luigi Borrelli gave evidence indicating that he was a businessman and was 60 years of age. He was born in Italy and came to Canada in 1949 at the age of 28 years. He was employed in various labour jobs and in 1952 he opened a grocery store with his brother Frank as an equal partner, as they were throughout all of the dealings in this appeal. He made a good living from this grocery business, which is know as City Meat and Sausage. He enlarged the store in 1956 and he still owns and operates it. In 1968 he acquired a larger store with a 5-year lease which lease he was unable to renew. The store was closed in 1976 as a result of a government building being constructed in such a way that the rear entrance to the store was closed off. Ath this point in time it was a supermarket specializing in Italian and Arabian foods. Luigi Borrelli became the grape broker for the Windsor area and he still has that as a business.

In 1956 Frank Borrelli bought a piece of raw land with four of his brothers, while the appellant (Luigi) was in Italy. Frank purchased a portion of this property on behalf of Luigi, their holding being 20%.

In 1957 Luigi Borrelli bought another piece of land which abutted the other land which had been acquired by Frank Borrelli in 1956. The “1956 land” was in Frank’s name and the “1957 land” was in the name of Luigi Borrelli. The stated purpose for the purchase of this land was that the family, which was quite large, could live in close proximity to one another. There is no evidence of any family residence being built on this land or any concrete plans therefor.

In 1973 what is known as the “1956 land” was sold to Borrelli Bros Ltd, of which Luigi and Frank Borrelli were sole shareholders. In 1967 Borrelli Bros Ltd acquired further land which, when added to the appellants’ land purchased in 1957, composed an entire city block.

In 1973 the above-mentioned property was developed into a residential subdivision. To do this the Borrellis retained the services of lawyers, consulting engineers, etc and had all of the land subdivided and serviced. The reason given for the subdividing was that the family had become “Canadian- ized” and did not want to live so close together. The subdivision was known as Bertgheese Gardens. In 1973 the Borrellis started selling lots and continue to do so. There were 78 lots in this subdivision plan and all but 11 have been sold. Since 1973 Borrelli Bros Ltd purchased other land and subdivided it. This was in 1980 and became part of Bertgheese Gardens.

The stated purpose for purchasing “the property” as at July 24, 1974, was to construct a rest home for senior citizens. Exhibit A-1, a map of the City of Windsor, was filed and shows the subdivided land owned by Borrelli Bros Ltd and “the property” in question which is bordered by Little River Road and Lauzon Road. “The property” was raw land but immediately west and north there existed fully developed residential property. At this time the appellant (Luigi) says he was 52 years old and wanted to stay on in business. He states that at the time of purchase he had no intention of reselling but wanted another business. He considered the land excellent in that it was “a nice piece of land” with good people “in a nice area”. At the time of purchase, he believed that it was farming land and in order to be able to build a senior citizens’ home he needed a rezoning. In 1976 he retained the same firm of consulting engineers who had done the subdivision work on the Bertgheese Gardens property, for the purpose of designing a plan to extend the sewers south, across Little River Road to “the property”. It was too late because by that time Little River Road was paved.

Between 1974 and 1977, Luigi Borrelli talked to the City of Windsor Planning Department “a couple of times” in connection with the construction of a senior citizens’ home. He was advised that the land was designated for apartments.

The reason for his stated intention in building a senior citizens’ home and acquiring the property for that sole purpose, was that he had been advised by a friend who had been building senior citizens’ homes that there was money in it. He had no plans drawn up and had no experience whatsoever in the operation of a nursing home, or what was required in connection therewith. It was in 1975 that he learned from the Planning Department that he needed access to the Lauzon Road for the purpose of sewer and water connections. Luigi Borrelli’s brother-in-law owned a piece of land immediately adjoining “the property” and which faced on Lauzon Road. He says that he did not speak to him about an access road because he was short of money and he did not intend to go further ahead. He states, however, that in 1977 he was approached by his brother-in-law (Pipolo) who wantd to buy a part of “the property” for which Pipolo would trade a strip on the south end of his property, 40 feet in width. The strip was situated immediately west of and abutting the most southwest portion of the appellants’ “property”, and gave access to Lauzon Road and to water and sewer facilities.

He never pursued the access possibilities which was the only way that he would be able to construct a senior citizens’ home. When questioned why he did not build apartments as opposed to a senior citizens’ home, he stated that he thought that apartments were a losing proposition. However, he admitted that he had done no research in this regard. When further pressed with respect to access to Lauzon Road, he stated that he was waiting for funds and could not do anything.

In April 1977 Mr Luigi Borrelli consulted Frank Fuzio, a lawyer specializing in commercial and residential land development. Fazio had expertise in rezoning and subdivision plans. The purpose of retaining the services of Fazio was in the hope that he could expedite or assist him in the construction of a senior citizens’ home. The land, as it stood, could only handle 15 residential units per acre and in 1975 Mr Luigi Borrelli was told by the Planning Department that if he got access to Lauzon Road, then the Planning Department would give “the property” a higher density rating. Fazio indicated that Borrelli advised him that he could not get access to Lauzon Road, so he (Fazio) closed his file. In a short time thereafter Fazio approached the appellant (Luigi) on behalf of other clients who were developers (a specialty of Mr Fazio) and, through a nominee, purchased the property for $205,000 on December 23, 1977. Fazio realized that “the property” was designated as multiple residential which would include highrises. His clients, after purchasing the appellants’ property, acquired the relevant south portion abutting Lauzon Road from Pipolo. Fazio’s clients also purchased a piece of property immediately east of “the property” in question and had same rezoned as multiple residential where the density was 45 units per acre. The said clients having developing experience and the necessary funds, proceeded to construct residential apartments.

Findings

The Crown alleges in its Reply to Notice of Appeal that at the time of acquisition of the property in 1974, the appellant had in mind the possibility of realizing a profit upon resale as an operating motivation for his purchase. The appellant, on the other hand, says his sole intention at the time of acquisition was to build a senior citizens’ rest home. The burden of satisfying the Board that this declared intention of the appellant is bona fide rests squarely on the appellant.

In the case of Sam Grossman v MNR, [1979] CTC 2132; 79 DTC 141, a decision of my learned colleague D E Taylor, CA, the jurisprudence relating to the issue before me is most thoroughly examined. I quote from 2143 and 150 of that case:

From the Board level, the comments of the Chairman, the Honourable Lucien Cardin, QC, in Joseph Friedman v MNR, 78 DTC 1020, [1977] CTC 2611 should be noted at pages 1022 and 2614 respectively:

“In cases where the Board is to decide whether profits realized from the acquisition and disposition of properties are income or capital gain, the facts are the determining factor. The appellant’s declared intention of purchasing the properties as an investment in rental properties must, of course, be considered by the Board. However, the appellant’s course of conduct over a period of time substantiated by the facts will or will not corroborate the appellant’s declared intentions. In establishing these facts, the reasons given by the appellant for the acquisition and the disposition of the properties must be reasonable and credible.”

The taxpayers’ stated intention must be determined by an objective analysis of his conduct from the time of purchase to the time of resale.

First, the appellant knew nothing at all about the operation of a senior citizens’ rest home. He did not even make any inquiries as to licensing; Department of Health regulations and requirements; Municipal regulations and requirements; the physical operation of such a rest home; the structural design for such a rest home; and finally the obtaining of information from the government for grants for construction and operation. He was totally ignorant of such a business operation as an income investment.

Secondly, his lack of meaningful activity with respect to the attaining of his declared intention between June 1974 and December 1979 is most enlightening. There are several factors that mitigate against his ex post facto declaration. The property was raw land that he knew at the time of purchase would have to be rezoned. There was fully developed land to the North and West of his property. Its prospects for accretion in value were obvious. He only made “a couple of inquiries” at the Planning Department. He was told by the Planning Department in 1975 that the property required access to Lauzon Road to reach water and sewer facilities. It was not until mid-1976 that he asked for and obtained a plan from his firm of consulting engineers for a proposed sanitary sewer route crossing Little River Road at the North end of the property. By this time it was too late because that road had been paved some time after 1974. It was not until 1977 that he sought the assistance of the lawyer Fazio, who had extensive contacts with the Planning Department. Fazio fully understood the zoning problem concerning the obtaining of a higher density ratio. He met twice with the Planning Department and advised the appellant who told him he could not get access to Lauzon Road.

In September 1977 Fazio wrote Luigi Borrelli in which he said, in part, as follows:

September 27, 1977

Mr Luigi Borelli

850 Greendale Street

Windsor, Ontario

Dear Sir:

Re: Re-Zoning

Further to our letter of the 27th of May, 1977, this will advise you that since we have not received any further communication or instructions from you regarding the agreement relating to access onto Lauzon Road, we will not be able to proceed in this matter any further and therefore we are closing our file.

I think that the comments in the above letter dispose of any question of frustration.

Meanwhile from 1973 to date, Borrelli Bros Ltd and the appellant subdivided a city block, serviced the lots and engaged in the selling of same. The appellant must therefore have been quite conversant with the business of buying and selling real estate. Certainly profits accrued from this operation, such profits together with the appellant’s self-professed easy ability to get credit, belies his statement of being short of money to get access to Lauzon Road.

As early as December 9, 1977, Fazio had written the Department of Planning re: “Lauzon Road — Little River Road Planning Area, Borrelli/Ramos Construction Purchase”. Fazio received a full and complete reply on or about December 9, 1977. On December 23, 1977, the appellant sold the property at the suggestion of Fazio.

In Grossman (supra) at 2145 and 152 respectively, it is stated:

Therefore, at the risk of certain selective perception, one may elucidate as follows from the above summary of cases (particularly that of Hiwako, [1978] CTC 378; 78 DTC 6281):

(1) where there was “an expectation on the part of the purchaser, at the time of purchase, that . . . it could be sold at a profit and that such expectation . . . induced him to make the purchase”; or

(2) “If property is acquired when there is no business . . . ”; or

(3) “one possibility in the mind of the purchaser is to use the property as the Capital asset of a proposed business”; or

(4) . . . the purchaser has not considered how he will use it (the property)” (italics mine).

The Minister may then make the assumption that the gain is on income account, and assess accordingly. It then rests with the appellant, on appeal, to prove that “he was not motivated in making the purchase by an intention to use the property in an adventure or operation in the nature of trade”. That this is a major task for an appellant is indicated in the same judgment (Hiwako (supra)) at pages 6284 and 384 respectively:

“Where the subject of the purchase and re-sale is an active profit producing property, it may be more difficult to conceive of its having been acquired both as an investment in the sense of property to be held for the income arising therefrom and as a speculation in the sense of an undertaking or venture in the nature of trade. I am not aware of a clear cut decision with reference to a case of this kind but I do not regard it as theoretically impossible.” (Italics mine).

The total basic thrust of the Minister’s assessment must be attacked by the appellant, and the onus on the appellant is not discharged merely by a diffusion of this basic thrust through grammatical or constructional analysis, or by a demonstration of certain comparative similarities or differences over a range of jurisprudence. To succeed, the appellant must dislodge the Minister, in fact and in law, from the validity of the assessment inherent in the assumprions of trading which have been made.

In the instant case the Board is faced with a situation in which the four indices noted above all appear to be present in varying degrees, and the asset in question does not have the redeeming quality of being at acquisition “a profit-producing property” so strongly emphasized in the judgment reached in Hiwako (supra). Under such circumstances, it is not for the Minister to prove beyond any question the existence of “business”, “trading”, “speculation” or “an undertaking or venture in the nature of trade”. The appellant must show that rather than having identification as inventory for trade, the property had the character of an investment when purchased, was treated as an investment while held, and any disposition was made on grounds related to the curtailment, frustration or abandonment of its potential as an investment, not merely as the realization of the trading gain potential inherent in it. I fail to see how any of the evidence in this case can be interpreted as meeting any such criteria in showing investment characteristics, let alone one of sufficient quantity or quality to warrant rejection of the basic assumption made by the Minister — that the transaction in question was of a trading nature, and consisted of the acquisition and sale of an inventory item.

This quotation, in the main, sets forth the burden facing the appellant. The taxpayer’s declared intention as of the time of acquisition cannot be sustained having regard to his conduct between June 1974 and December 1977. From the facts before me, I have concluded that the purchase of “the property” was an adventure in the nature of trade.

Since I find that the appellant was motivated, at the time of acquisition, to re-sell the property, I need not deal with the appellant’s counsel’s objection to the Crown’s pleadings.

The appeal is dismissed.

Appeal dismissed.