S Donnenfield Construction Limited, Aldido Associates Limited, the Cuttyco Corporation Limited v. Minister of National Revenue, [1982] CTC 2428

M J Bonner:—The appellants appeal from assessments of income tax for their 1977 taxation years. They were members of a partnership named Ronto Development Company (hereinafter called “Ronto”). In the partnership financial statements the gain realized on the sale in that taxation year of a parcel of land at Brantford, Ontario, was treated as being in part income and in part on capital account. The statements were prepared on the theory that the portion of the gain which was on capital account was equal to that portion of the land which the appellants say they intended to develop and retain as a source of rental income. The Minister, on assessment, treated the entire gain as income.

The pleadings of the Cuttyco appeal raise a second issue as to the deductibility of an amount paid by it for an option to purchase land, which amount was subsequently forfeited. The parties agreed that this appellant is entitled to deduct $25,000 as an allowable capital loss. This agreement will be reflected in the final judgment.

The partnership was formed in 1971 with a view to buying serviced lots, building houses thereon and selling them. In 1973 there was a change of direction. Alan Solomon, president of one of the corporate partners, was the only witness called by the appellants. He testified that the partners decided that it was undesirable to continue to be dependent upon developers as a source of building lots and to forego the profits from the land development side of the housing industry. Further, it was decided to re-invest profits in revenue-producing properties.

It was envisaged that the land necessary for high density residential development and for commercial development (both being potential generators of rental income) might be secured in the course of the subdivision and development of large blocks of land into areas having varying but compatible uses. Mr Solomon testified that the low density residential component of a large block so developed would normally be built on and sold off first, that the part to be used for higher density housing would be built on next, and that, finally, business tenants could be attracted to the part reserved for commercial development by the population resident in the area as a result of the prior activities.

With the expanded operations in mind Ronto hired a planner. It bought three hundred and thirty-eight acres adjacent to the Brantford city limits under agreements dated in September of 1973. Mr Solomon testified that when the agreements were entered into the partners intended to develop approximately two-thirds of the land in lots for the erection of houses to be sold and the remaining one-third as a mobile home park to be retained with a view to leasing the mobile home spaces. The partnership was unable to secure the rezoning necessary for such a development. There was, he said, among municipalities in Ontario, a considerable hostility to mobile home park developments. The partners were well aware of that hostility. Mr Solomon felt that it would be an “uphill battle to get that land use”. After making a very tentative effort to secure the necessary municipal support for rezoning permitting a development which included an area to be used as a mobile home park, and after encountering opposition from the municipality, the development efforts made by Ronto changed course. The partnership sought and ultimately secured the many approvals necessary to develop the land in areas for single family dwellings, higher density residential uses and commercial uses.

Mr Solomon explained that although the partnership could have fought the city in the Ontario Municipal Board in an attempt to secure approval of the mobile home park concept, there were “trade-offs” involved. The profitability of development of a type acceptable to the municipality, the speed of development attainable with municipal cooperation, the profitability of development of the type preferred by the developer and the delays attendant on fighting or persuading the municipality all had to be considered and weighed.

The agreements to purchase called for closing on the earlier of two dates, namely 60 days after fulfillment or waiver of certain conditions precedent to the appellants’ obligation to close or September 18, 1974. The conditions in question, which were inserted for the benefit of the appellants, and which could be waived by them, included the securing of Official Plan amendments, rezoning and site plan and development agreements, all to the satisfaction of the appellants. None of the conditions was satisfied before June. 1974, when the transactions were closed. Long before then the appellants had abandoned their attempt to develop any part of the lands as a mobile home park. The appellants’ intention to develop a mobile home park or, more accurately, their desire to do so cannot be said to have existed at the time they became bound to complete the purchase.

Before closing they had made considerable progress toward securing the requisite approvals for a more conventional mixed use development. It was argued that the intention to use parts of the development, as revised in accordance with municipal dictates, for the erection of revenue-producing buildings stamped a part of the gain with the character of capital. The sale of the entire development which gave rise to the profit in issue was said to be the result of unforeseen circumstances. One of the partners was a corporation, the shares of which were owned by a Mr Todgham. The capital needed to carry on the development process was obtained by bank loans made to a large measure on the strength of Mr Todgham’s personal guarantee. In August or September of 1975 Mr Todgham became ill. In December of 1975 he died. His estate was reluctant to participate further in the development process. It was difficult to finance the development without Mr Todgham’s guarantee.

It is not at all clear on the evidence that the sale of blocks of land which, as a result of the development process, were formed and were rezoned for uses suitable for renting was not envisaged as a possibility from the outset. First, in an application made in February of 1976 to the Province of Ontario for exemption from tax under the Land Speculation Tax Act with respect to the then proposed sale of the entire subdivision, E A Goodman, solicitor for Ronto, stated:

Prior to the death of Mr Todgham, Ronto was proceeding to develop the lands in question with a view to selling the same to builders as lots.

Secondly, a decision to sell the entire property was, according to Document 16 of Exhibit R-1, made as early as September 1, 1975. That decision was quite possibly made in response to an offer to buy the entire property. That offer was made in August or September of 1975 by George Wimpey Canada Limited. Even if the decision then made was not final, it does not appear that Wimpey was warned not to covet any blocks suitable as sites for rental buildings. Thirdly, Mr Solomon testified at a public enquiry that the intention of Ronto in purchasing the land was to develop all of the land in blocks,* [1] to build for resale on some of the blocks and to sell the balance to other builders. He admitted on cross-examination that his earlier evidence had been correct.

The evidence does not warrant a conclusion that, at the time the conditions precedent to Ronto’s obligation to complete the purchases ceased to operate, there existed a firm intention, later frustrated by Mr Todgham’s death, to retain any part of the land for investment purposes. A desire to do so if possible or convenient may have existed. Desire is not intention. It was not shown that any portion or percentage of the land was dedicated to an investment purpose. There was no evidence, for example that any part of the cost of the development was capitalized because it was regarded, at the time, as a cost of development of land acquired as and intended to be held as a Capital asset.

This is, therefore, a case in which the partnership whose ordinary business included the development of land for resale, developed land and earned a profit on its resale. Such a profit is plainly income.

The appeals of S Donnenfield Construction Limited and Aldido Associates Limited must therefore fail. The appeal of The Cuttyco Corporation Limited succeeds only to the extent of the agreement previously mentioned.

Appeal of The Cuttyco Corporation Ltd allowed in part.

Other appeals dismissed.