D
E
Taylor:—This
is
an
appeal
heard
in
Toronto,
Ontario,
on
February
27,
1981
against
an
income
tax
assessment
for
the
year
1973
in
which
the
Minister
of
National
Revenue
added
an
amount
of
$49,362.17
to
the
declared
income
of
the
appellant,
which
amount
resulted
from
the
proceeds
of
the
sale
of
a
certain
parcel
of
real
property,
after
making
appropriate
allowances
for
a
reserve
under
the
Income
Tax
Act.
The
point
at
issue
is
whether
or
not
the
real
estate
transaction
involved
should
be
characterized
as
on
income
or
capital
account,
the
position
of
the
Minister
being
that
it
was
on
income
account.
Certain
relevant
facts
can
be
ascertained
from
the
documentation
filed
with
the
Board
before
the
hearing:
From
the
notice
of
appeal
—The
appellant
is
a
corporation
incorproated
under
the
laws
of
the
Province
of
Ontario
on
June
21,
1957.
—On
January
28,
1965
the
appellant
purchased
Part
Lot
15,
Plan
99
in
the
City
of
Burlington
in
the
Regional
Municipality
of
Halton
for
a
consideration
of
$36,500
(hereinafter
called
the
“property”).
—On
June
25,
1973
the
appellant
sold
the
property
for
a
total
consideration
of
$475,000
with
a
mortgage
in
the
amount
of
$425,000
being
taken
back
by
the
appellant.
From
the
reply
to
notice
of
appeal
—The
appellant
treated
the
sale
of
the
property
as
a
capital
transaction,
and
reported
it
as
follows
in
computing
income
for
its
1973
taxation
year:
|
Proceeds
of
disposition
|
$475,000
|
|
Adjusted
cost
base
|
445,966
|
|
Outlays
|
24,023
|
|
Capital
Gain
|
5,011
|
|
Taxable
capital
gain
|
2,506
|
In
assessing
the
appellant,
the
respondent
relied,
inter
alia,
upon
sections
2,
3,
and
subsections
9(1)
and
248(1)
of
the
Income
Tax
Act,
SC
1970-71-72,
c
63,
as
amended.
Contentions
For
the
appellant:
—The
purpose
of
the
purchase
of
the
property
was
to
build
multi-unit
homes
for
rental
purposes.
From
the
time
of
its
purchase,
the
property
was
carried
on
the
books
of
the
appellant
as
a
capital
asset.
—
In
1965
the
appellant
successfully
made
application
to
the
Town
of
Burlington
(as
it
then
was)
to
rezone
the
property
from
“RA3”
to
“RM3”
in
preparation
for
its
anticipated
building
on
the
property.
—
In
1966
the
appellant
submitted
detailed
construction
drawings
to
the
Town
of
Burlington
for
a
multiple
unit
residential
complex
tentatively
named
“Glendor
Court”.
—
From
1966
to
1971
the
appellant
approached
many
lenders
with
a
view
to
seeking
financing
for
the
building
of
Glendor
Court
as
a
multiple
unit
residential
rental
complex.
The
appellant
was
unable
to
interest
any
lender
in
its
development
plan
for
the
property.
—
In
1969,
a
small
part
of
the
property
was
sold
to
the
Hydro-Electric
Power
Commission
of
Ontario
which
required
same.
The
proceeds
of
disposition
were
treated
as
a
receipt
on
account
of
capital
and
deducted
from
the
book
value
of
the
land
as
carried
on
the
books
of
the
Corporation.
—
In
1972
one
of
the
principals
of
the
appellant
became
ill
and
was
no
longer
able
nor
willing
to
continue
promoting
the
development
of
the
property.
The
remaining
two
principals
of
the
appellant
were
not
free
to
devote
sufficient
time
to
the
development
of
the
property
because
of
competing
business
interests
elsewhere.
—
Having
acquired
the
property
for
a
single
purpose,
namely
to
construct
thereon
multiple
unit
residential
buildings
for
the
production
of
rental
income
on
it
and
having
been
frustrated
in
its
attempts
to
finance
and
construct
same,
the
sale
by
the
appellant
of
the
property
eight
years
after
its
purchase
of
same
was
on
account
of
capital
and
not
on
account
of
income.
For
the
respondent:
—The
appellant
was
at
all
material
times
owned
and
controlled
by
three
shareholders,
to
wit:
Oswald
Delkus
Alfonsas
Skrebunas
Brunius
Sergautis
—At
least
one
of
the
three
shareholders
was
a
real
estate
broker
having
previous
speculative
dealings
in
land
and
being
knowledgeable
with
respect
to
real
estate.
—The
objects
of
incorporation
of
the
appellant
provided
that
it
could
purchase
lands
and
sell
whole
or
any
portion
of
the
lands.
—The
property
was
purchased
by
the
appellant
with
a
view
to
dealing
in,
trading
in
or
otherwise
turning
the
same
to
account
for
a
profit.
—
In
the
alternative,
the
respondent
submits
that
at
the
moment
of
purchase,
the
appellant
had
in
its
mind
the
possibility
of
reselling
the
property
as
an
operating
motivation
for
the
acquisition.
Evidence
In
summary,
the
significant
points
brought
out
were:
—Valleypark
had
been
engaged
during
the
same
time
period
(1965
to
1973)
in
the
acquisition,
subdivision,
development,
construction
and
sale
of
residential
real
property
at
a
completely
different
location
than
the
property
in
question
in
this
appeal.
—The
president
of
Valleypark
testified
that
the
particular
piece
of
property
in
question
had
not
been
part
of
the
above
section
of
the
business
endeavours—but
had
been
purchased
for
a
separate
and
distinct
reason—to
use
as
a
construction
site
for
rental
properties,
to
be
retained,
not
sold,
by
the
company.
—
Not
only
was
one
of
the
three
shareholders
knowledgeable
with
regard
to
local
real
estate
matters,
but
the
other
two
shareholders
were
a
builder
and
a
contractor
respectively
by
profession.
Simply
put,
the
company
was
a
reflection
of
three
persons,
each
one
directly
involved
personally
in
other
endeavours
with
the
land
sale,
development
or
construction
industry.
—The
subject
property
had
always
been
shown
on
the
balance
sheet
of
the
company
as
a
separate
long-term
item
identified
as
“Burlington
land
at
cost
plus
expenditures
thereon”.
It
was
unique
and
distinct
from
the
inventory
of
other
land
or
buildings
held
for
resale.
—The
three
“partners”
in
Valleypark
had
also
been
involved,
sometimes
separately,
sometimes
in
different
combinations
with
each
other,
in
acquiring,
developing,
retaining
and
earning
rental
income
from
several
properties,
in
addition
to
their
involvement
with
those
acquired
for
development
and
resale.
—
During
the
several
years
the
property
was
held,
consideration
was
given
to
several
alternate
methods
of
developing
the
property—breaking
the
development
into
a
“two
stage”
operation,
etc,
(all
according
to
the
appellant
in
an
effort
to
obtain
adequate
financing
for
the
project,
to
bring
it
to
fruition—always
though
as
an
investment—to
retain
and
rent
the
residences
built,
no
matter
what
they
were
like.)
—
Due
to
default
of
payments
by
the
purchasers,
the
appellant
was
required
to
re-assume
ownership
of
the
property,
and
after
holding
it
again
for
some
years,
re-sold
it
in
1980
for
a
total
of
$585,000.
Argument
Counsel
for
the
appellant
presented
a
substantial
list
of
case
law—and
to
his
credit
this
covered
the
range
on
both
sides
of
the
issue.
He
touched
on
certain
of
the
cases
upon
which
he
relied
and
his
major
points
were
made
in
the
following
concise
manner:
With
Californian
Copper
((1904)
5
TC
159),
no
case
like
this
should
possibly
be
heard
if
it
isn’t
cited
...
That
deals
with
intention
which
we
have
talked
a
great
deal
about.
Irrigation
Industries
(62
DTC
1131)
.
.
.
because
it
indicates
what
can
happen
as
a
project
gets
going
.
.
.
Sutton
Lumber
(53
DTC
1158
(SCC))
is
there
because
my
friend
cited
in
his
pleadings
the
fact
that
the
objects
of
the
company
were
important
.
.
.
The
Greenbranch
Investments
(80
DTC
6384)
indicates
a
certain
amount
of
frustration
in
dealing
with
illnesses
and
things
like
that
and
how
it
can
affect
these
affairs.
The
Choice
Realty
(78
DTC
6415).
.
.
because
it
indicated
that
efforts
to
develop
were
of
some
importance
in
considering
these
things
and
that
seemed
to
be
a
reasonable
case
from
that
point
of
view
and
it
also
had
frustration
involved
with
it
.
.
.
No.
13(51
DTC
117).
.
.
shows
that
one
operation
can
have
two
divisions
which
I
already
emphasized
.
.
.
Borinsky
(77
DTC
5389).
.
.
because
it
seemed
to
say
that
if
you
once
established
an
adequate
investment
intention
you
could
do
almost
anything
thereafter
and
still
win
but
that
is
probably
a
rather
colloquial
way
of
describing
that
case.
Coming
to
relating
the
facts
to
what
seems
to
be
the
thrust
of
the
law
in
this
area,
I
start
with
intention
because
that
is
where
I
have
to
start.
At
the
time
the
property
was
purchased
they
bought
(it)
to
build
rental
units
and
my
friend
has
so
far
not
indicated
any
(contrary)
evidence.
I
don’t
know
what
argument
he
is
going
to
have
but
he
hasn’t
indicated
any
evidence
at
least
to
gain-say
that
thought.
There
was
good
reason
to
expect
the
financing
so
the
intention
is
borne
out
in
the
sense
of
not
being
loose.
As
we
all
know
intention
is
in
somebody’s
head
but
it
is
always
nice
to
find
some
outside
facts
that
at
least
are
not
an
impediment
to
the
intention
and
hopefully
bolster
the
thoughts
that
were
created
in
the
intention.
The
company
had
no
reason
to
expect
to
be
frustrated
by
the
lack
of
finance.
There
were
no
impediments
in
the
zoning.
Mr
Delkus
and
Mr
Skrebunas
in
particular,
when
they
say
they
are
going
to
begin
a
rental
thing,
they
had
done
it
in
the
past.
It
was
not
a
anew
venture.
It
was
not
the
first
time
that
they
were
going
to
save
for
their
old
age
as
in
so
many
other
cases,
it
seems
to
come
out
of
the
blue.
In
this
case
it
was
a
pattern.
It
was
not
new.
They
acted
immediately
after
they
got
the
property.
They
moved
on
it.
That
is
another
indication
that
their
stated
intention
at
the
beginning
is
true.
They
had
a
continuous
search
for
dollars.
You
have
heard
that.
They
didn't
change
their
mind
at
any
time.
We
haven’t
heard
any
indication
that
they
changed
their
mind
to
another
intention
along
the
way
and
it
was
only
when—now
that
we
are
down
to
this
point
the
famous
unsolicited
offer
turned
up
and
there
it
was.
They
accepted
it
for
I
think
not
unreasonable
reasons.
They
were
heading
into
difficulties
and
that
was
clear
and
it
was
a
good
offer
for
Mr
Skrebunas
and
Mr
Delkus
and
Mr
Sergautis.
Now,
another
indicia
which
has
not
been
getting
large
billing
these
days
but
nonetheless
is
there,
is
they
had
the
property
for
eight
years,
very
patient,
very
patient
and
you
also
notice
that
between
1973
when
the
purchase
price
was
$475,000
total
with
a
mortgage
that
the
purchase
price
in
1980,
seven
years
later,
$585,000
with
a
bigger
mortgage
relatively
speaking.
There
was
less
cash.
So
that
you
can
see
that
as
far
as
just
those
two
figures
and
looking
at
them
there
hasn't
been
a
vast
change
in
the
pricing
in
the
seven-year
period
for
that
particular
property
even
though
there
has
been
everywhere
else.
In
fact,
if
you
put
an
inflationary
factor
in
it
the
thing
is
probably
worth
less
than
it
was
in
1973.
I
don’t
emphasize
frustration,
but
obviously
it
was
lurking
in
the
background
because
of
this
lack
of
financing,
but
the
evidence
doesn’t
make
a
big
issue
of
that.
One
partner
retired,
so
obviously
he
was
getting
less
and
less
interested
in
the
whole
thing.
I
think
that
there
was
frustration
even
though
Mr
Delkus
didn’t
admit
it.
As
far
as
secondary
intention
is
concerned,
one
always
has
to
address
these
matters.
I
submit
to
you
.
.
.
that
the
evidence
doesn’t
provide
any
indicia
of
secondary
intention.
They
did
accept
an
offer
at
a
price
above
what
they
thought
the
property
was
worth
but
the
cases
are
quite
clearly
saying
these
days
that
anything
can
be
bought
for
a
price.
Every
investment
is
going
to
be
sold
some
time
so
we
are
talking
about
intention,
not
the
fact
of
the
sale.
..
.
they
did
have
two
operations,
one
property
developed
for
resale,
the
other
property
for
rental
income
development.
.
.
.
you
have
a
company
having
developed
its
one
property
and
sold
it
as
it
always
planned
left
with
a
rental
proposition
which
was
to
be
its
long-term
future
and
it
carried
on
for
a
period
of
over
eight
years.
It
was
an
investment
for
the
company.
The
intention
of
its
officers
and
shareholders
was
it
would
be
such
an
investment
and
I
think
the
evidence
adequately
and
properly
supports
that
valid
conclusion.
Counsel
for
the
respondent
asserted:
.
.
.
in
a
case
like
this,
credibility
and
objective
facts
are
of
the
utmost
significance.
.
..
what
we
have
here
is
a
classic
situation
of
two
builders
and
a
real
estate
man,
the
company’s
only
other
operation
was
the
sale
of
land,
purchase
and
subdivision
of
land
for
profit.
They
have
another
parcel
of
land
they
may
have
some
kind
of
vague
intention
of
what
they
are
going
to
build.
It
is
interesting
to
note
that
the
first
thing
they
do
is
rezone.
.
.
.
a
classic
example
of
simply
adding
on
value
to
the
property
in
theory.
Evidently
it
didn’t
work
out
and
the
principals,
as
expected
of
people
in
their
trades,
were
quite
nimble
of
foot
and
said,
‘That
is
fine.
You
tell
us
what
you
will
give
us
money
for,
and
we
will
build
it.
If
you
want
to
give
us
money
for
smaller
premises,
we
will
build
it.
You
just
let
us
know
what
you
want.’
The
sub-
missions
concerning
the
financing,
all
these
submissions
concerning
plan
changes,
all
with
respect
for
the
most
part
had
to
do
with
this
second
stage.
They
had
to
do
with
an
ultimate
subdivision
of
the
property
as
far
as
I
understand
into
separate
parcels.
The
evidence
was
that
again
financing
was
the
reason
why
this
ultimately
wasn’t
carried
to
fruition.
However,
in
my
submission
it
is
interesting
to
note
that
subdivision
of
the
parcels
into
separate
parcels
was
a
primary
purpose
of
this
second-stage
activity.
Findings
I
see
little
reason
to
give
consideration
to
the
alternate
proposal
of
the
respondent—the
“secondary
intention’’.
The
property
was
purchased
either
for
the
purpose
alleged
by
the
appellant—(to
retain
as
an
investment)—or
it
was
acquired,
as
alleged
by
the
respondent,
for
the
same
purposes
as
the
other
property
owned
(to
be
developed
and
sold
by
Valleypark).
In
my
view,
the
evidence
supports
the
general
contentions
of
the
appellant—there
is
little
or
no
evidence
or
testimony
which
would
lead
to
any
other
conclusion.
Therefore,
as
I
view
the
appeal,
the
issue
is
whether
or
not
three
taxpayers,
all
familiar
individually
with
the
real
estate
development
business,
can
combine
their
talents
as
shareholders
in
a
corporation
devoted
in
one
arm
of
its
operations
(according
to
the
appellant)
to
such
real
estate
development
for
the
purpose
of
sale;
and
at
the
same
time
acquire
another
parcel
of
property
for
a
separate
and
opposite
development
purpose—to
retain
and
rent
it.
The
Minister
has
not
asserted
that
it
could
not
be
done,
only
that
it
was
not
done
in
this
case.
Certainly
the
case
law
presented
by
counsel
for
the
appellant
does
not
indicate
any
proscription
against
it
being
possible.
It
is
equally
clear
from
the
same
case
law
that
the
circumstances
must
be
unusual
and
be
clearly
identified
and
proven
to
permit
just
such
an
apparent
anomaly
to
exist.
In
my
opinion,
just
such
a
case
was
made
in
the
present
appeal.
The
evidence
is
that
the
property
in
question
was
purchased
and
held
by
the
appellant
for
the
sole
purpose
alleged
by
Valleypark.
There
is
no
evidence
to
the
contrary.
The
involvement
of
Valleypark
and
that
of
its
shareholders
on
“income
account”
aspects
of
the
real
estate
development
business
does
not
prevent
the
appellant
from
concurrently
engaging
in
other
real
estate
transactions,
the
results
of
which
may
be
treated
as
on
“capital
account”.
Decision
The
appeal
is
allowed
and
the
matter
referred
back
to
the
respondent
for
reconsideration
and
reassessment
accordingly.
Appeal
allowed.
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