John Crosier, Lucille E Crosier, Albin Trella, Elizabeth Trella, Victor Prousky, Morris Prousky, 233482 Investments Limited, T Caravaggio & Son Limited, Manfred Feldt, Jean Mary Haschyc, Mendel Goldstein, Harry Teperman, David Irving Teperman, Burstein Bag Limited, Burstein Bag Limited v. Minister of National Revenue, [1980] CTC 2986, 80 DTC 1835

D E Taylor:—These are appeals heard on common evidence in Toronto, Ontario, on July 29, 1980 against income tax assessments for the years 1974 and 1975. The point at issue is whether the gain realized on the sale of certain real property should be taxed on capital or on income account. There were two separate properties involved—a 78-acre parcel of land in the Town of Oakville, Ontario (“Karopa”), and a 44.6-acre parcel of land also in the Town of Oakville (“Hilltown”).

The following schedule sets out the basic particulars of the property interest of the appellants:

The following information directly relevant to the appellant Burstein is common to all appellants with respect to either one or the other parcel of real estate as indicated above:

—The appellant held interest in two joint ventures known as Hilltown Developments Ltd (“Hilltown”) and Karopa Enterprises Ltd (“Karopa”);

—The subject assets of these joint ventures were two pieces of raw land abutting each other in the Town of Oakville near the border line with the City of Mississauga;

—The original participants and their respective percentage interests of Karopa were as follows:

—Shortly after the purchase of the Karopa Property, Doug Roher and Lou Sherriff, the beneficial owners of K Roher Construction Limited and Lyrad Construction Limited respectively, which corporations in partnership owned Briar Developments, declared personal bankruptcy and thereafter Briar Developments ceased its participation in Karopa;

Briar Developments (Roher & Sherriff)		29.7%
Burstein Bag Limited		26.9%
Crosier		1.4%
Goldstein		1.7%
McGuigan & Feldt		5.2%
Prousky (Victor & Morris)		2.3%
Trella (Elizabeth & Albin)		5.9%
Warwick		11.2%
Welta Wool		.2%
Feldstein		5%
Flishlek		.3%
Rotsteins		.3%
Steiglan		6.6%
Tomco		1.0%
233482 Investments Limited		7.7%
		100.0%
UUIJ I, IvVV,
(“Karopa”) for $832,742.00 satisfied as follows:
Cash	$245,207.97	29.4%
1st Mortgage	301,867.03	36.2%
2nd Mortgage	50,750.00	6.1 %
3rd Mortgage	234,492.00	28.2%
Taxes, etc	425.00	.1 %
	$832,742.00	100.0%

— During 1972, other participants of Karopa also encountered financial difficulties, and a reorganization occurred with the remaining participants taking over the vacated syndicate participation, the result being that the eventual composition of the Karopa joint venture was as follows:

Burstein Bag Limited	35.720%
T Caravaggio & Son Ltd	17.860%
233482 Investments Ltd	10.716%
Jean Haschyc	5.706%
Elizabeth Trella	5.706%
Albin Trella	3.224%
Joseph Rajca Jr	3.224%
Mendel Goldstein	3.572%
Manfred Feldt	3.572%
Prousky (Victor & Morris)	3.556%
John Crosier (husband &	1.786%
Lucille Crosier wife)	1.786%
Dorothy McGuigan	1.786%
Beverly Young	1.786%
	100.000 %

Limited for a consideration of $1,901,664, realizing a gross profit of $1,068,922.

—The original participants in Hilltown and their respective percentage interests were as follows:

Briar Developments	20%
Harry Teperman	10%
Irving Teperman	10%
Belkran Investments Limited	20%
Lew Stieglan (alias Sztieglan)	20%
Burstein Bag Limited	20%
	100%

—On August 29, 1969, Hilltown purchased from Old Stuff Limited Part of Lot 1, Concession 1, SDS Oakville, (the “property”) for $550,000 satisfied as follows:

Cash	$112,034.96	20.4%
1st Mortgage	224,912.08	40.9%
2nd Mortgage	128,930.00	23.4%
3rd Mortgage	83,870.00	15.2%
Taxes, etc	252.96	.1 %
	$550,000.00	100.0%

beneficial owners of K Roher Construction Limited and Lyrad Construction Limited respectively, which corporations in partnership owned Briar Developments, declared personal bankruptcy and thereafter Briar Developments ceased its participation in Hilltown;

—As a result of Briar Developments’ cessation from Hilltown, the remaining participants assumed the vacated participation, and the composition of the joint venture became as follows:

Harry Teperman	12.5%
Irving Teperman	12.5%
Belkran Investments Limited	25.0%
Lew Stieglan (Sztieglan)	25.0%
Burstein Bag Limited	25.0%
	100.00%

— In August, 1974, Hilltown sold the property to 281549 Ontario Limited for proceeds of $1,782,680.

In assessing the appellants, the respondent relied, inter alia, upon sections 3, 4, subsections 9(1) and 248(1) of the Income Tax Act, SC 1970-71-72, c 63, as amended.

Contentions

For the appellant:

—The appellant acquired its interest in the property as a capital investment.

—That intention was frustrated when insolvency forced Briar to withdraw from the group.

—The appellant and the group never dealt with the “property” in the way in which a trader in real estate would have dealt with that property. The property was held for five years and never listed for sale. No real estate broker was hired. No offers to purchase the property were solicited. No commission was paid by the group on the sale of the property.

— In light of the whole history of the property, the amount received by the appellant as proceeds of disposition of its interest in that property was a Capital receipt.

— In any event, the gain attributable to the portion of the appellant’s interest in the property that was acquired when Briar withdrew from the group was a Capital gain in that the appellant was forced to acquire that interest in order to protect its investment in the property.

For the respondent:

—At the moment of purchase of the property, the appellant had in its mind the possibility of reselling the property as an operating motivation for the acquisition.

Evidence

The evidence for the appellants consisted of the testimony of Mr S Haschyc, CA, husband of the appellant Jean Mary Haschyc, and the testimony of Mr Harry Burstein, of Burstein Bag Limited. In essence, Mr Haschyc had organized several of the appellants in the group who had contributed part of the capital requirements after Briar had declared bankruptcy. Haschyc’s purpose in so doing was that he believed the prospects of developing the property were very good, and that the investment could be profitable. Mr Burstein had the same view both at the time of the original investment and at the time of the Briar bankruptcy—that Briar intended to develop the property. He believed the new group could do so even after the bankruptcy and the group had contacted a Mr Dorosh, Manager of OMSAC Developments Limited, regarding a joint venture for the development of the property. This did not work out but eventually the property was sold to a Mr Sydney Doctors. Mr Burstein also indicated that substantial expansion had taken place in his company (“Burstein”) during the relevant years and the possibility of using the property in his own business had crossed his mind.

The Minister presented certain witnesses and documentary evidence which conflicted with the basic propositions of the appellants, which proposition was—frustration of an investment due to lack of precise municipal and zoning knowledge, and the bankruptcy of Briar.

Argument

For the appellants:

I think it’s not nearly as important what Mr Roher actually did prior to this project as it is what the various participants in the ownership of Karopa* [1] thought Mr Roher was going to do with the property at the time that they acquired an interest in it.

Now one can say that, one can look in this case to the intention of the various participants in Karopa and say but the plans were not very specific. The witnesses were both very general about what was going to happen. Mr Burstein said it would be industrial and then subsequently they were talking about commercial, hotels and whatnot. Mr Haschyc, on the other hand,—well, indicated exactly the same thing, that initially it would be industrial and then subsequently when Mr Dorosh got involved, it would be commercial.

Both Mr Burstein and Mr Haschyc, I think, indicated that that was their understanding of what Mr Roher was planning to do.

I think that what can be said of the situation after he left was . . . They just sat with it, meeting every so often and thinking about what could possibly be done.

The ultimate fallout of that was an attempt to get a new developer in place of Roher, and that led to Mr Burstein’s contact or Mr Haschyc’s contact with Mr Dorosh.

There was an exchange of letters and a series of meetings, and Mr Dorosh went out and looked at the property, talked about contacting the hotel chain for the purpose of putting up a hotel. I think there was some indication at one point that a motel village would be put on that property by Mr Dorosh.

_.. with Hilltown Investments . . . we are left basically with a group with not a great deal more experience than the Karopa group, but a little bit more.

_.. it is clear that from the start the group intended that Mr Roher would provide not only the development expertise, but also the connections with the financing, and subsequently when he disappeared into the blue, the group anticipated that Mr Dorosh would perform the same function, and I think felt that if the land were decently situated and properly serviced, as it appeared to have every possibility of being at the time they bought it, that it would not be very difficult at all to attract a developer who would then assist in developing and finding someone to do the financing.

I think it is clear that the amateurs who went into this project had a series of frustrations, the first of which was the bankruptcy of Roher and Sherriff, and the next of which was the inability to attract developers such as Dorosh, because of the situation between Oakville and Mississauga.

For the respondent:

As I understand their testimony and also their pleadings, my impression was that they were depending upon the fact that there was a boundary dispute between Oakville and Mississauga as the frustrating event, that that was the reason why they could not develop the property after Mr Roher and Mr Sherriff left them, but you have heard evidence of Mr Cumming and Mr Vickery who both said there was no boundary dispute ever between the town of Oakville and the city of Mississauga.

There is no evidence before you to show that they intended to develop the property in a certain way . . .

. . .there was no evidence that their instructions were that the property would be retained as, first of all, for development and income on the property and then retained as income (producing) property.

Findings

First to deal with the assertion that the property might have had practical value for Burstein expansion—the size of the property is entirely out of context with the reasonable requirement of Burstein. That assertion cannot be taken seriously.

To be successful, the appellant must show that the funds were contributed for the purpose of earning income (eg rentals) on the business use of the property itself from a defined and feasible investment opportunity, and that visible and practical progress was made toward that objective. Only then can the plea of frustration be of any possible value in overturning the Minister’s assessment. This is particularly true in a land acquisition when the appellant is in a minority position vis-a-vis control, and where the major, or a major, partner is in the business of developing land for resale. In the instant case, no evidence has been adduced which would clearly designate the use of the land, either before Briar or after, to an investment as opposed to an inventory purpose. In addition, both of the disadvantages noted above (minority position and a developer as a partner) plague the appellant in this matter. The appellant is not permitted to put forward as a defence that he “thought” Mr Roher would develop the property as an income-producing investment. There is simply no proof of that, and there was no progress made toward that objective before the bankruptcy. In addition, the Board would take into account that which Mr Roger actually did as opposed to what the appellant thought he might do.

The alternate proposition of the appellant is just as untenable as the basic proposition. The designation of additional funding as “capital” rather than “income” in principle results from the generic nature of the relevant asset itself. If the asset is not shown to have been “capital” at acquisition (and that has not been shown to be the case here), then taking larger proportions or adding to an appellant’s investment in it, will not of itself change its basic characteristics for income tax purposes. From an income tax viewpoint there was no capital investment base which the new group could claim at the time of bankruptcy.

The Board makes reference to the following cases:

Reg in Properties Limited v MNR, [1979] CTC 2149; 79 DTC 156; Sam Grossman v MNR, [1979] CTC 2132; 79 DTC 141; Susan Ann Swartz v MNR, [1980] CTC 2807; 80 DTC 1713; Trans-Canada Holdings Limited v MNR, [1980] CTC 2791; 80 DTC 1689.

Decision

The appeals are dismissed for all appellants relative to the particular property and the respective taxation year involved.

Appeals dismissed.