Eythor S Isfeld v. Minister of National Revenue, [1980] CTC 2970, 80 DTC 1882

D E Taylor:—This is an appeal heard in Winnipeg, Manitoba, on October 21, 1980, against an income tax assessment for the year 1975 in which the Minister of National Revenue taxed the profit realized from the sale of certain real property as on income rather than on capital account. The taxpayer reported, on his return of income for the 1975 taxation year, a capital gain on the disposition of the following property (all in the Province of Manitoba (“the property”)):

The reported proceeds of disposition on the property were $170,000. The reported aggregate of the adjusted cost base of the property was $51,216.10 and related outlays and expenses totalled $35,750. The reported gain was in the amount of $83,033.90. The taxpayer accordingly included the amount of $41,516.95 in his income for the 1975 taxation year as a taxable capital gain. In reassessing, the respondent allowed the taxpayer to deduct a loss carried back from his 1976 taxation year. The appellant relied, inter alia, upon sections 2, 3, 4, 38, 39, 40 and subparagraph 54(c)(iv) of the Income Tax Act as it was applicable to his 1975 taxation year, while the respondent relied, inter alia, upon sections 2, 3, 4, 9 and subsection 248(1) of the Income Tax Act, SC 1970-71-72, chapter 63, as amended.

Contentions

For the appellant:

—The taxpayer acquired the beneficial interest in the property on an intermittent basis over a period of several years for use for farming purposes.

—The taxpayer was at all relevant times indebted to Dr W Colert and/or members of his family, and as security for the indebtedness from time to time owing by himself, he permitted the legal title to the property to be acquired in the names of Dr Colert or members of his family rather than in his own name.

— Notwithstanding the fact that legal title was not registered in the taxpayer’s name, the taxpayer was at all relevant times the beneficial owner of the above property.

— In 1975, the taxpayer was heavily indebted to Dr Colert and/or members of his family. Dr Colert had advised him that he was prepared to force a sale of the property and to initiate legal proceedings against him in respect of the remaining indebtedness.

— In an attempt to minimize his losses, the taxpayer answered a classified advertisement in a local newspaper wherein C & L Realty indicated that they had a customer interested in purchasing a significant amount of property.

—As a result of his financial difficulties and discussions which ensued, the taxpayer agreed to sell the property to the party on whose behalf C & L Realty had placed the advertisement.

—The above property was at all relevant times capital property beneficially owned by the taxpayer the sale of which was due to circumstances not within the taxpayer’s control and contrary to his desire and intention in acquiring the property or at any time thereafter.

—The taxpayer further states that in view of the fact that the reassessment of the gain on the property as income was in error, the amount of the loss carry back from his 1976 taxation year should be adjusted accordingly.

—In the alternative, in the event that it is not found that the appellant was not at all relevant times the beneficial owner of the subject properties, then the appellant states that (at) the time that the legal title to any one particular property of the subject properties became registered in the name of Dr Colert or other members of his family, the appellant was granted an option to acquire that property, exercisable at any time, for an amount equal to the amount paid by Dr. Colert or members of his family in respect of the land.

For the respondent:

—The appellant purchased the beneficial ownership of the property by agreement dated April 9, 1975, for a total purchase price of $85,000;

—The appellant sold the property by agreement dated April 5, 1975 for a total sale price of $170,000; and

—a major motivating factor for the acquisition of the real property by the appellant was the possibility of resale at a profit.

—The gain from the sale of the real property was income from a business within the meaning of subsection 248(1) of the Income Tax Act and was properly reassessed as income of the appellant in respect of his 1975 taxation year.

Evidence

The appellant himself testified regarding the process by which the property had been acquired and spoke of his long and close relationship with Dr Colert. Dr Colert in separate testimony supported the position and proposition of the appellant. Numerous exhibits were filed dealing with the personal and business relations between the two men. There was no doubt that all the funds required came from Dr Colert, the only point at issue was whether or not it was by way of a loan from Dr Colert for which he took back the legal title to the property as security; or whether Dr Colert in addition to being in all cases the legal owner was also the beneficial owner. The date of April 5, 1975 was the date the appellant had signed the final agreement to sell the property, but the closing date was several weeks later. The date of April 9,1975 was the date on which Dr Colert signed an agreement transferring to the appellant the title to the property. Dr Colert at that time was in the hospital himself, and he has since retired from his medical practice. There was no assertion made of collusion between Dr Colert and the appellant for the purpose of reduction or distortion of any income tax liability, nor was there any indication of it at the hearing.

A real estate listing agreement dated February 12, 1975 between the appellant and C & L Realty Limited was also introduced into evidence as Exhibit A-20.

Argument

Counsel for the appellant reviewed case law which might support a conclusion that a beneficial interest for income tax purposes could be accepted by the Board if established at the hearing. Reference was made and jurisprudence cited by counsel to assert that the relationship between the appellant and Dr Colert could be characterized as a form of “constructive trust”.

Counsel for the respondent noted that the legal title had rested at all relevant times with Dr Colert. Further, the only purpose for the transfer of the legal title on April 9, 1975 was that the appellant knew on April 5, 1975 that he had agreed to sell the property (with a later closing date) and therefore he needed to buy the property with the express intention of selling it for a profit. That was clearly in the respondent’s mind a case of trading, not Capital gain.

In essence, the critical issue is whether the Board should accept that the beneficial interest rested with the appellant before April 9, 1975 and, if so, whether or not it was the sale of that beneficial interest which took place on April 5, 1975, not the sale of the legal interest.

On the alleged “beneficial interest” point proposed by the appellant, both counsel noted for the Board the serious difficulty in establishing and accepting evidence of any “beneficial interest”, particularly in real property, where that was different than the “legal interest” shown by the title deeds. However, they did agree that the prospect of doing so existed from a legal viewpoint and that it was open to the Board to so find. Essentially, each counsel relied upon the documented actions and relations between the two men which had been introduced into evidence as support for his own perspective—counsel for the appellant that the testimony of his two witnesses should be accepted; and the perspective of counsel for the respondent that such testimony did not correspond with the documented facts and should be rejected.

Findings

Dealing first with the alternative argument of the appellant, the Board finds that neither the appellant, nor his supporting witness Dr Colert, spoke of any “option”; that there is no mention or indication of an “option” in any documentation presented; and that the analysis of counsel for the appellant relative to this aspect of the matter did not demonstrate the existence of any “option”. That alternative argument fails.

That left the Board faced with the fact, however, that both the principal parties (the appellant and Dr Colert) agreed in all essential areas of the individual testimony regarding the central proposition—that the property in question always belonged to the appellant; that Dr Colert’s legal title thereto was designed only to eliminate the prospect of any of the appellant’s creditors seizing the property; and to provide Dr Colert with security for his loans. In effect, the credibility of these witnesses and their mutually corroborative testimony must be placed in direct opposition to the legal title deeds—counsel for the appellant relying upon the former, counsel for the respondent relying upon the latter.

In the view of the Board the documentary evidence (correspondence, notes, letters, agreements, etc.) between the appellant and Dr Colert was not such that it could be relied upon to conclusively demonstrate the perspective of either counsel, nor even sufficient to be used as corroboration of the personal testimony given. It is the Board’s view that the ambiguous, even sometimes conflicting and contradictory terms used in the documentary evidence between the two parties, “owner”, “renter”, “lessor”, “manager”, “purchase”, “sell”, “acquire”, “interest”, “payments”, etc, cannot be dissected in the context of the arrangements between the two principal parties so that any particular significance can be construed from them. That part of the documentary evidence (and it was a very major part) is therefore rejected as of any probative value whatever.

The Board has due regard for the fact that it would be a determination of serious proportions to accept the testimony of the appellant that he was the owner of the property, even though this was corroborated by another witness, and to reject the legally documented assertion of the Minister that the owner of the property was Dr Colert. This question of “credibility” has been touched upon in recent decisions of the Board (See J Vincent Toolsie v MNR, [1980] CTC 2239, 80 DTC 1209, and John J Neder v MNR, [1980] CTC 2031; 80 DTC 1040; [1980] CTC 511; 80 DTC 6348. I believe it to be a consistent pattern in decisions where the Board has regarded personal testimony as critical, that there has been some clear independent evidence supporting that testimony.

As noted earlier, the Board has disregarded the “letters, “notes”, “agreements”, etc, between the appellant and Dr Colert, but it should be noted that Dr Colert was not in the room during the appellant’s lengthy and detailed questioning by both counsel, nor was the appellant in the room during the testimony of Dr Colert. It would appear that Dr Colert suffered financially in this whole affair—both during the year before April 1975, and as a result of the sale—and yet his testimony was direct and consistent on all major points with that of the appellant. By any reasonable business standards the actions of Dr Colert were unusual and benevolent in the extreme but I have reviewed the documentation in which any third party was involved and before rejecting the personal testimony of these two witnesses, such documentation should be examined and weighed carefully.

Exhibit A-20 is a standard listing agreement which gives details of the property in question in this appeal, together with a sketch map. The critical portions therein as far as I am concerned read as follows:

In consideration of your listing, Advertising, and Offering my property known as ART ISFELD FARM for sale or exchange I hereby give you sole and exclusive authority irrevocable until the expiration hereof to offer for sale or exchange my Said property at the price of $150,000 and upon the terms set out below or at such price and on such terms as may be acceptable to me.

I agree to pay you a Commission of 10 (ten) percent on total sale price on any Sale or Exchange of my property from any source whatsoever effected:

(1) During the currency of this agreement, or

(2) Within six months following the expiry of this agreement should a sale or exchange of my property be made by me or by any one on my behalf either directly or indirectly to any person with whom you or your sub-agents have negotiated with respect to a sale or exchange during the term hereof and in such event I will advise you immediately of any such sale and pay you the commission as herein set out.

I will allow you to show prospective Purchasers over the property during reasonable hours and you may place your For Sale sign upon this property. All enquiries from any source whatever shall be referred to you and all offers submitted to me shall be brought to your attention before acceptance.

This agreement shall ensure to and be binding upon the heirs, executors, administrators and assigns of the parties to it, and where ever the singular is used it Shall include the plural.

This agreement to List shall expire at one minute before midnight of THE 1 DAY OF Sept 1975.

The document is signed not only by the appellant but also by Mrs Isfeld as his spouse. It was introduced by the appellant and only dealt with by the appellant. It had no relationship to Dr Colert and he did not deal with it in testimony. The appellant’s testimony was that he saw the following advertisement in the newspaper dated January 14, 1975 and answered it:

FARM LAND WANTED

We have a client requiring 900 to 1200 acres of grain land in Swan River Valley, preferably with good buildings, but not essential. Write stating full particulars to:

C & L Realty, 2727 Portage Avenue, Winnipeg, Man.

According to the appellant, a Mr Komaranski came to see him, they agreed on the price he wanted for the property, and he signed the listing agreement that night. There is no evidence that Dr Colert was ever even consulted about that listing, nor in fact that he was ever aware of it—he may Still be unaware of it to this day. To sign such a listing agreement can certainly be characterized as the action of a simple and foolish man who did not comprehend the possible risk, and there is much in the appellant’s conduct which would indicate just such a lack of sophistication or business knowledge. However, in my opinion, it was the action of a man who firmly believed he owned the property, and that the transfer of the title was only a technicality of which he was completely assured. I accept that action and documentation as satisfactory evidence in support of the personal testimony of the appellant and Dr Colert.

In view of the above finding, the Board does not find it necessary to determine whether or not there was some form of “constructive or implied trust” between Dr Colert and the appellant. However, for reference purposes, the case of Maria E Rafael v MNR, [1978] CTC 2398; 78 DTC 1300, could be reviewed. In that case, the Minister of National Revenue proposed just such a constructive trust in connection with real property in order to tax an individual whose name never appeared on the legal title to the property. The proposition of the Minister was rejected, but the principle asserted by the respondent therein was not unlike that argued in this case by counsel for the appellant.

Conclusion

To the degree that the Board is entitled to consider that it is common ground between counsel that the legal title to the property in the name of Dr Colert can be disregarded upon satisfactory evidence that the beneficial ownership rested with the appellant, the Board is prepared to find that the testimony of the two witnesses, together with the action of the appellant in Signing the listing agreement, does constitue such satisfactory evidence. For purposes of the assessment of income tax, the transfer of legal title to the appellant on April 9, 1975 should be ignored and the profit realized by him upon the disposition of his beneficial interest on April 5, 1975 is to be treated as on capital account.

Decision

The appeal is allowed and the matter referred back to the Minister for reconsideration and reassessment accordingly.

Appeal allowed.