Sam Grossman v. Minister of National Revenue, [1979] CTC 2132, 79 DTC 141

Delmer E Taylor:—This is an appeal heard in Montreal, Quebec, against an income tax assessment for the taxation year 1973, in which the Minister of National Revenue taxed the profit on the sale of real property as income rather than as capital. In his Reply to Notice of Appeal, the respondent relied, inter alia, on section 3, and subsections 9(1) and 248(1) of the Income Tax Act, SC 1970-71-72, c 63, as amended.

Facts

The appellant resides in the City of Outremont, Province of Quebec. He has been the proprietor of an office equipment business since 1962. On or about January 15,1967, he purchased from Mrs Eleanor Black, his niece, an undivided interest in a vacant property situated in the City of Hamilton, Ontario, known as part of Lot 1, Concession 8, Stonechurch Road East (hereinafter referred to as “the property”). Prior to the said purchase, the property was owned by one Yetta Freman, one Lucia Falcone, one Gina Liberale and the said Mrs Black, all of the City of Hamilton (hereinafter referred to as the “partners”), each holding a one-quarter beneficial interest in the said property. On or about October 31, 1973, the said property was sold to Chedoke Developments Incorporated (hereinafter referred to as “Chedoke”) for the total consideration of $240,000, with a balance of the price outstanding of $150,000. In computing his income for the 1973 taxation year, the appellant included a taxable capital gain of $737.50, being 1/8 of the capital gain calculated upon the said sale to Chedoke after deduction of the reserve permitted by subparagraph 40(1 )(a)(iii) of the Income Tax Act. By notice of reassessment dated July 7, 1975, the respondent added to his income the amount of $6,749.38 being 1/8 of the net profit from the sale of the said property, after deduction of the reserve permitted by paragraph 20(1)(n) of the Income Tax Act, and the amount of the gain calculated and previously declared by the appellant.

Contentions

It was the position of the appellant that:

— he purchased an interest in the property in question as a long-term investment;

— he had never engaged in the business of buying and selling real estate for gain;

— prior to January, 1967, he had never invested his savings in real estate;

— he did not at any time actively pursue the sale of his interest in the said property nor deal with the property in any manner such as a trader or speculator would;

—any gain realized by him upon the disposition of the said property constituted a capital gain accruing as the result of the normal and gradual appreciation in value of a property;

—no portion of the proceeds of the sale of the property in question should be treated as profit realized in respect of an adventure in the nature of trade.

The respondent contended that:

—the vacant land was located in a speculative area that was obviously going to be swallowed up by the advancement of urbanization in Hamilton;

—the speculative nature of the deal was well known by the appellant when he acquired his interest in this vacant land in 1967;

—the appellant and his co-owners have never attempted to develop and make the said property an income-producing asset;

—since 1967, the appellant has always intended to realize a profit by selling the said property;

—on May 6,1973, the appellant and his co-owners listed the said property for sale with Arthur Weisz Real Estate;

—by acquiring and selling his interest in the said property, the appellant was engaged in an adventure in the nature of trade;

— in the course of this adventure, the appellant has been associated with persons related to acknowledged traders in real estate;

— Mr Zoltan Freeman and Mr Emil Black, who were married to the appellant’s co-owners, have personally traded in real estate for many years and were all directors of the real estate company Freeland Developments Ltd for a long time;

— Messrs Zoltan Freeman and Emil Black were shareholders of Chedoke Developments Incorporated, the purchaser of the said land on October 31, 1973.

Evidence

The appellant gave evidence he knew that Mr Emil Black (a later witness hereinafter referred to as ‘‘Black’’) had been involved in some real estate dealings in the Hamilton, Ontario area prior to 1967. He stated that Black asked him to take over a part of his wife’s (Mrs Black’s) interest in the property, because Black could not keep up the mortgage payments. He (Mr Grossman) knew Mrs Yetta Freeman, as well as Mrs Eleanor Black, but did not know Gina Liberale or Lucia Falcone. Black told him the land in which his wife had a 25% interest was already more valuable than when it had been purchased. His (Grossman’s) understanding was that the partners were holding the land for future development as a residential subdivision, and that he (Grossman) could expect income from the property (probably from rentals) when it was rezoned in the future. Sale of all or part of the property had not been ruled out in his original discussions with Black, but he did not recall that it had been raised with him sepcifically. He did not inspect the property before purchasing his interest; was not looking for a “quick profit”; took no active role or interest in the matter, other than to make the payments required of him from time to time; and relied solely upon Black. When the land had been rezoned “industrial” rather than “residential” several years after his investment, Black had phoned him to say that the property would be put up for sale since the partners were unable to build houses on it. He received his portion of the sale price by cheque from Chedoke, and was unaware at that time that two of the principals of that company were Black and Zoltan Freeman (husband of Mrs Yetta Freeman). The appellant believed land was always a stable investment, and was only interested in some annual return on his investment. He wanted to be as certain as possible that there was no risk in the acquisition, and he was not concerned if it took several years before he received some income.

Mr Emil Black, now a traffic manager by occupation, outlined his earlier real estate involvement with Zoltan Freeman, Gina Liberale and Mr Filippo Falcone (husband of Lucia Falcone). It was apparently on a fairly modest scale (prior to the matter at issue) and had resulted from their common association at their place of employment. Nevertheless, it was evident that he had developed some limited expertise in the real estate field and that he was the prime mover in the acquisition of the property. According to this witness, the appellant Grossman could make no contribution to the eventual development of the property since he lived in Montreal and had no experience in the field, but Grossman had some funds available and could have assisted in a financial way if requested to do so. The property consisting of 23 acres had been purchased in 1966 at a cost of $50,000, the partners putting up $10,000 as down payment, assuming an existing mortgage of $23,000 and the vendors taking back a mortgage for the balance. The property had been refinanced in 1972 for a total of $39,600. There are two other shareholders in Chedoke, a Mr Weisz (noted earlier) and a Mr Katz, also active in the real estate field. During the period the partners held the property, Black had expected great things from it—it was about a mile from the closest residential development and in 1966 already there were three houses near the property. To him it appeared an ideal site for a residential development. Black stated he had been active with other owners of property in the area in the efforts at rezoning, but had been disappointed when in 1970 or 1971 the property had been classified as industrial. He had not expected any difficulties in getting the necessary services once the property had been zoned, and the partners then could have proceeded to build houses, either by themselves or in conjunction with some other experienced developer. Black was aware at the time of acquisition that there was a prospect of resale at a profit, particularly after rezoning, but he asserted that his primary intention had been to develop the land. He could have sold the part of his wife’s interest in the property to any of the partners but preferred to have the appellant (Grossman) interested in the project. He had gone into Chedoke because he knew that Mr Weisz had access to large amounts of capital, which would be required for any development. The property had been listed for $388,000 in 1971 or 1972, but had finally been sold to Chedoke for $240,000. Virtually nothing had been done to the property from 1966 to 1973, and there had been little if any income that he could recall from using it during that period of time. The property remained, even in 1978, still only slightly developed for industrial purposes. At the present time he is also involved in some other substantial real estate holdings either personally or in corporations.

Argument

Counsel for the appellant put forward as the main points in support of the taxpayer that:

—the involvement and intentions of the other partners were irrelevant; — there were no “badges of trade”;

— Mr Grossman’s role had only been to supply funds, and in doing so he had made an investment;

—the property was held for a considerable period of time;

—there was no evidence from the respondent that the property was acquired in a speculative area;

—the investment in land itself, on a long-term basis, is recognized as an acceptable means of making a capital investment;

—the fact that the investor consciously intended to take advantage of appreciation in value is not something that would give rise to the taxability of the ultimate profit on that appreciation in value.

Counsel submitted to the Board the following jurisprudence in support of the appeal:

Irrigation Industries Limited v MNR, [1962] CTC 215; 62 DTC 1131; MNR v Vaiclair Investment Company Limited, [1964] CTC 22; 64 DTC 5014; MNR v Cosmos Inc, [1964] CTC 34; 64 DTC 5020; Bead Realties Limited v MNR, [1971] CTC 774; 71 DTC 5453; MNR v Muzly Lawee and Naima E Lawee, [1972] CTC 359; 72 DTC 6342; Erwin Schmigelski v MNR, [1975] CTC 217; 75 DTC 117; Clemow Realty Limited v Her Majesty The Queen, [1976] CTC 129; 76 DTC 6094.

Counsel for the respondent noted these points:

—the fact that this was a single transaction for the taxpayer did not negate the Minister’s assessment;

—the intention of the appellant could only be considered that of the partnership, under the particular circumstances of this case;

—the taxpayer had no specific development plans;

—the taxpayer had no means of financing the general plans to which he had alluded;

— no effort was made to develop the land;

—there was no income from the land;

—at the minimum, there was a secondary intention on the part of the appellant to realize a profit on the sale;

—when you buy land with the intention, however remote, of selling it . .. (the) profit (is) income.

In the opinion of counsel, the Minister’s position in the assessment was founded on the following jurisprudence:

The Queen v Douglas Lloyd Anderson et al, [1973] CTC 606; 73 DTC 5444; Irwin A Blackstone v The Queen, [1973] CTC 842; 74 DTC 6020; Carribean Properties Limited v The Queen, [1974] CTC 858; 74 DTC 6660; James J Horvath v MNR, [1977] CTC 2429: 77 DTC 302; Arnold Kostiner, Marsted Holdings Ltd, Hyman Fisher v MNR, [1978] CTC 3063; 78 DTC 1746; Arthur E Kruger et al v MNR, [1977] CTC 2311 ; 77 DTC 208; MNR v Clifton H Lane, [1964] CTC 81; 64 DTC 5049; David C McDonald v The Queen, [1974] CTC 836; 74 DTC 6644; Brian McKinney &SG Watson v MNR, [1978] CTC 2675; 78 DTC 1490; Paul Racine, Amédée Demers & François Nolin v MNR, [1965] CTC 150; 65 DTC 5098; Regal Heights Ltd v MNR, [1960] CTC 46; 60 DTC 1041; Regal Heights Ltd v MNR, [1960] CTC 384; 60 DTC 1270; David Rothenberg v MNR, [1965] CTC 1; 65 DTC 5001; W Slater et al v MNR, [1966] CTC 53; 66 DTC 5047; MNR v James A Taylor, [1956] CTC 189; 56 DTC 1125.

Findings

It is difficult to take seriously any contention that the development of the land itself was considered as a real prospect by the investors. I cannot conclude that the original partners had either experience in that field, any idea of the additional capital requirements, or of the difficulties inherent in such a scheme for home building. There were no plans, programs or objectives of substance prepared before or after the purchase. That situation did not change merely by the addition of the appellant to the group. The plea that the zoning of the land as industrial rather than residential frustrated the plans is hollow indeed in the face of the lack of any plans, residential or industrial. It would be more easily asserted that the rezoning of the property as anything other than its original agricultural designation (which rezoning Mr Black expected at the time of purchase) would bring with it some gain, and only the specific classification as industrial, commercial or residential would determine the quantum of that gain. The Board appreciates that perhaps the partnership was not as fortunate as it might have been—the land was zoned industrial rather than residential —but there is no basis therein to assert frustration of any evident objective and, as indicated above, it cannot be alleged that the group was required to abandon its plan—there wasn't any plan.* [1]

It would be well also to note that counsel for the appellant raised the argument that while the other partners might find themselves in a different tax position because of their earlier and more varied real estate involvement, that could not and should not affect the appellant’s position since his purpose had been solely for investment. While the “taxation by association’’ maxim should be cautiously invoked, I would think that there are at least two reasons why this appellant could not segregate himself from any common purpose and objective of the transaction under review. First, it should have been, and I suggest would have been, just as obvious to him as it is to the Board that any development plans which the partners had in 1967 were quite unrealistic, in fact unattainable under the circumstances; and secondly, the appellant’s own understandable and laudable regard for land itself as an investment, irregardless of any utilization, was clearly the main, if not the sole motivation for the capital he contributed. It is noted that when Black reached the point of anticipating a requirement for substantial capital (in Chedoke) he engaged new partners with funds; he did not ask the appellant to stay in and provide funds. Whatever plan or program was held by the partners at the time of the acquisition of the property in 1966 devolved equally upon the appellant by his acquisition of an interest share in 1967. He was aware that already the land had increased in value, and his passive participation leaves the Board with no alternative but to regard the purpose of the group (whatever that is determined to be) as also the purpose of the appellant. The group acquired an asset from which income could not be realized in any measure comparable to the quantum of the capital invested, and there is no evidence of intention to utilize the property for the production of income. Income, in the sense of regular income on an investment, could only be realized, in fact even anticipated, after further and substantial investment of additional capital —probably as a result of construction activity of some type. A gain, however, could be realized, or at the minimum be reasonably anticipated, simply by holding the asset, without the addition of new capital. The real character of the appellant’s evidence is simple and direct, and it is consistent with Black’s evidence—land is a good acquisition, particularly in an area of development potential; increased value can be expected normally

by holding it for resale at an appropriate time. This was the purpose of the acquisition of the property and the issue to be determined is whether the results which flowed from that objective constituted a gain on capital account as a result of a simple accretion to value using the asset as an investment, or whether it was on income acount, from a venture in the nature of trade, using the asset as an inventory item.

The evidence would indicate that only by a sale or turnover of the asset itself could the appellant realize any gain, suffer any loss, or even hope to recover his investment. A “turnover” (such as using the property as the contribution of the partners in a larger development project) would have had characteristics similar to a sale and, in my view, for income tax purposes, would hardly have been distinguishable.

The Board appreciates that counsel for the appellant, in submitting the case law supporting his client’s appeal, did recognize that a careful review is warranted to ascertain if the assertion of a capital gain can be sustained. The Board would suggest that the following summary might be useful:

Irrigation Industries (supra), in my view, provides general parameters but has specific applicability under circumstances where the property in question is company shares of stock. Certain quotations from [1962] CTC at pages 220 and 221, and from 62 DTC at pages 1133 and 134 respectively would minimize its use to the appellant in this matter:

The nature of the property in question here is shares issued from the treasury of a corporation and we have not been referred to any reported case in which profit from one isolated purchase and sale of shares, by a person not engaged in the business of trading in securities, has been claimed to be taxable.

Corporate snares are in a different position because they constitute something the purchase of which is, in itself, an investment. They are not, in themselves, articles of commerce, but represent an interest in a corporation which is itself created for the purpose of doing business. Their acquisition is a well recognized method of investing capital in a business enterprise.

However, the above case does set out one situation—the clear possibility existed that the property in Irrigation Industries (supra) could produce income—there was the possibility that dividends might be anticipated under certain circumstances, without harming the capital itself.

The case of Va/clair (supra) carries the proposition in Irrigation Industries even further, and clearly excludes from income (in that case) the gain on a transaction in land fulfilling this basic requirement as an investment even when no purpose other than eventual resale was put forward by the appellant. I quote from [1964] CTC at page 28 and from 64 DTC at page 5018:

In respect of jurisprudence I think it indicates that when a purchase is made—such as in the instant case—in order for it to qualify as an investment, the object purchased must be at least susceptible of yielding an annual return such as rental, dividends or interest.

In the case of Commissioners of Inland Revenue v Reinhold, 34 TC 389, Lord Carmont at page 392, referring to the observations of Lord Dunedin in the case of Leeming v Jones, [1930] AC 415, 420, 423, sets out, in the following terms, the requirements necessary to constitute an investment:

. . . Lord Dunedin says, in the case I have already cited, at page 423:

‘. . . The fact that a man does not mean to hold an investment may be an item of evidence tending to show whether he is carrying on a trade or concern in the nature of trade in respect of his investments, but per se it leads to no conclusion whatever.’

I draw attention to Lord Dunedin’s language being used with reference to ‘an investment’, meaning thereby, as I think, the purchase of something normally used to produce an annual return such as lands, houses or stocks and shares. The language would, of course, cover the purchase of houses as in the present case, but would not cover a situation in which a purchaser bought a commodity which from its nature can give no annual return. . ..

Shares sometimes called growth stocks which, at the date of their purchase, are not on a dividend-paying basis, often form part of an investment company’s portfolio and are considered, for tax purposes, as investments, since they are susceptible not only of capital growth but also of producing income. I think the same can be said of the purchase of the instant property.

Counsel for the appellant contended that because the taxpayer was concerned with the gain to be derived from the long-term prospect of selling the property rather than the meagre return which it yielded, the money expended in acquiring it was not an investment.

I do not think that the amount of return is important; it may vary with the circumstances. Thus, a vacant property in the centre of the city, when used for automobile parking space, sometimes commands high rentals. True, the return was a very modest sum; nevertheless, I think the farmland in issue falls well within the definition previously described.

In addition, in Va/clair (supra) a lucid examination was made of the terms “undertaking” and “adventure in the nature of trade”, and it was concluded at pages 31 and 5019 respectively:

The purchase of land is one of the oldest types of long-term investment, and, since diversification of investments was one of the Company’s main objects insofar as the facts are concerned, in my opinion practically the only risk that it ran was the duration of such waiting period. I am of the opinion that the elements of speculation and risk were negligible in the transaction in issue and did not amount to nor can it be regarded as an undertaking or an adventure in the nature of trade within the meaning of the Act.

Even if the transaction in question may be appropriately called “an adventure”, this does not mean that it will attract income tax—unless it is also established that it bears the badges of trade. I think that it is particularly in this latter respect that the weakness of the appellant’s case is revealed. (Italics mine).

A cursory review of the following extracts from pages 33 and 5020 respectively of Valclair (supra) could leave a taxpayer with a high degree of comfort:

. . . it cannot be said that in the present case the respondent carried out the transaction in issue in a manner characteristic of those who are trading in real estate. Indeed the passive role played by the respondent was the antithesis of what one would expect from a trader under like circumstances.

In my view the evidence establishes that the gain in question was the realization by the respondent of a capital accretion on an investment which is not subject to tax.

I would suggest, however, that considerable enlightenment on that proposition may be found in later judgments of the Courts, and that great caution should be used in any attempt to extrapolate general principles from the very specific and significant circumstances of that case, which are highlighted at pages 26 and 5016 respectively:

In respect of the purpose or intent of the Company in purchasing the property, Mr Blain stated that the Company had a superabundance of cash surplus and they were looking to diversify their investments, which were almost entirely in stocks and bonds, ‘pour que advenant une crise sur le marché ou quelque chose, nous puissions avoir des mises solides dans d’autres secteurs de l’économie’. After making a study of the property, he thought it was a reasonable and sound investment and was of the opinion that, if held for a long period, it would yield a capital appreciation. . ..

MNR v Cosmos Inc (supra) is a case which was decided in favour of the taxpayer on specific arguments such as those proposed in Valclair (supra).

In Bead Realties Limited (supra), while the judgment upheld the taxpayer’s appeal, it should be noted that the company intended to utilize the property as an investment for production of income, and the point at issue was whether or not the unintended eventual sale had altered the taxable results which flowed from that posture. I have already indicated I find little merit in the contention of the appellant in this case that a similar investment intention had been the motivation for the purchase.

In MNR v M & N E Lawee (supra), there was no indication that the taxpayers had entertained thoughts of resale at the time of acquisition, which Situation is the opposite of the one we have in the instant appeal. The following paragraph from [1972] CTC 373 and 72 DTC 6353 respectively of that judgment appropriately curtails the value of that case in support of the instant appeal:

After giving careful consideration to all the evidence, I am satisfied that the respondents acquired the lots here in question for the purpose of investment to the exclusion of any purpose of trading therein. (Italics mine)

It is my reading of Lawee (supra) that the judgment of Cattanach J given in favour of the taxpayer on the specific set of facts recited therein should not be taken as confirmation of any general proposition covering all such transactions in land. Rather, that decision should be viewed within the framework of a subsequent and detailed judgment delivered by the same learned Justice in McDonald (supra) (to which additional reference will be made later in this decision), and also within the framework of a comment to be found at pages 44 and 5038 respectively of Birmount Holdings Limited v Her Majesty The Queen, [1977] CTC 34; 77 DTC 5031, a decision of the Federal Court-Trial Division:

I have not overlooked the statements of Cattanach, J, in MNR v Lawee (supra). As I interpret Lawee in this connection, it does no more than state that land may be the subject matter of an investment, that all purchases of land bought in the hope of making a profit are not necessarily adventures in the nature of trade and whether such a purchase would be an adventure in the nature of trade would depend upon the circumstances of each case.

The Board notes that while the Schmigelski matter (supra) referred to by counsel for the appellant appears to be strong support for the contention in this instant appeal, that was a decision of the Tax Review Board and on appeal by the Minister of National Revenue that decision was reversed at the Federal Court level, the reasons for that reversal being given at [1976] CTC 397 and 76 DTC 6226.

Finally, for the appellant, counsel would have the Board rely substantially upon the reference to be found at pages 135, [1976] CTC and 6099, 76 DTC respectively in Clemow Realty Limited (supra)-.

Even if a property is bought with the express purpose of reselling same at a profit this does not necessarily result in a conclusion that the gain resulted from an adventure in the nature of trade by virtue of the definition of ‘business’ in paragraph 139(e) of the Act in effect in 1971 and was not the realization of capital gain on an investment. This was the finding of the Supreme Court in the case of Irrigation Industries Limited v MNR, 1962 SCR 346 [1962] CTC 215; 62 DTC 1131; in which Martland, J referred with approval to a general statement of the principle by Lord Buckmaster in Leeming v Jones, (1930) AC 415, where he stated at 420:

“an accretion to capital does not become income merely because the original capital was invested in the hope and expectation that it would rise in value; if it does so rise, its realization does not make it income.”’

However, in upholding the taxpayer in Clemow (supra), the learned Justice did so primarily by finding there was no evidence of a secondary intention (or any intention) to sell the property.

Conversely, the essence of the instant appeal, according to counsel for the respondent, is summarized in the question posed by the Chairman of this Board, the Honourable L Cardin, QC, in McKinney (supra) at pages 2676, [1978] CTC and 1491, 78 DTC respectively, and the answer provided at pages 2678 and 1492 respectively in dismissing that appeal:

The question which to me appears fundamental in these appeals is whether a speculative purchase of vacant land from which only a nominal income is derived and where the most profitable selling price is awaited for whatever period of time, can be for tax purposes, considered as a long-term capital investment?

The answer to the question as to whether land purchased with the intention of reselling it at a profit even though it produces some income and is held for a long period of time awaiting an accretion of its selling price can be considered as a long-term capital investment is clearly given in the Federal Court of Appeal decision in the case of David C McDonald v The Queen, (1974) CTC 836 at 837; 74 DTC 6644 at 6645, where it is stated:

. . Since his intention from the beginning was to sell at a profit from then on its characterization as a venture remained and thus the validity of the taxation on his gain on the sale also remained.”

The viewpoints of counsel come down to opposite interpretations of the taxing result under circumstances where the fact, and the only fact put forward, is that the appellant purchased land with the single and acknowledged purpose of holding it for later sale at a profit. The Board recognizes that such a theoretical situation (this one fact alone) is virtually impossible to conceive but, if imaginable, it does not lend itself in my opinion to the conclusion advanced by counsel for the appellant that it is unquestionably a capital gain. I would point out that emphasis must be placed upon the words “necessarily” and “merely”, in the quotation from Clemow given above, and I would interpret the use of these words to mean that the prospect existed of the gain being declared either on income or on capital account, after due examination of all relevant circumstances. Possibly the most generous view that could be taken is that the single point (intention to resell) as it is reviewed in Clemow (supra), while not favourable to the appellant, would not alone be fatal to his case. However, that would still leave the appellant with the formidable task of showing that the intention to use the property itself in the transaction (prima facie trading in character) should not be classified as a venture in the nature of trade. To purchase a property and hold it for only one purpose—resale—appears to me to be the simplest possible definition of trading. I would view the jurisprudence indicated above to show that there could remain specific sets of circumstances in which such trading does not give rise to a trading gain for income tax purposes, but that the identification of those circumstances would require distinction of an exacting nature.

In that connection, I would make reference to the comments of Mr Justice Pigeon in MNR v James N Sissons, [1969] CTC 184; 69 DTC 5152, (see Kostiner et al v MNR, [1978] CTC 3063 at page 3071; 78 DTC 1746 at page 1752),

. . . to escape taxation on his gain from the operation he has to show that it is to be characterized as an investment. Otherwise, the conclusion is inescapable that it is an adventure in the nature of trade.

It is well to remember that in rendering their judgments, it would appear the learned Judges of the Courts kept in mind not only the more usual situation (an appellant claiming a capital rather than a trading gain) but also the reverse prospect (an appellant claiming a trading rather than a capital loss). From this larger perspective, it may be that the Courts are indicating that only a total review of how the taxpayer dealt with the property (as one would deal with an investment or as one would deal with an inventory item) provides a determination of the basic question.

A useful recapitulation of the vital factors involved in such a total review is provided in Birmount Holdings Limited v The Queen, [1978] CTC 358 at page 364, 78 DIC 6254 at page 6258:

The evidence adduced establishes, inter alia, in my opinion, the following relevant objective facts and circumstances:

1. The clause in the purchase agreement referred to supra, stipulating that the subject property be suitable for subdivision and residential development and that it contains no waste land unsuitable for such purposes.

2. The clause in the same agreement permitting partial discharges of mortgages on a pro rata basis and referred to earlier herein.

3. The letter written by Mr Mentzelopoulos on October 24, 1960 to appellant’s Toronto solicitors stating that any new lease for the property must contain a provision that any tenancy be temporary, terminable on a maximum of six months notice.

4. The land was unimproved land in proximity to the City of Toronto and within the limits of the Metropolitan area.

5. The purchase price of the land was in excess of $5,000 per acre, the income therefrom when used as a farm was negligible.

6. Mr Mentzelopoulos only glimpsed the property on the way to the airport, observing hundreds of acres of barren land which did not appear to disturb him in any way.

7. No effort was made to develop the property so as to produce income and the possibility of doing so was never investigated.

Further enlightenment on the approach to be taken by this Board may be found in one of the recent judgments, that of Cattanach J in Schmigelski (earlier noted), [1976] CTC 397; 76 DTC 6226. The learned Justice of the Federal Court, Trial Division, in giving his reasons for allowing the Minister’s appeal from an earlier decision of the Tax Review Board which had been favourable to the taxpayer, made the following comments at pages 403, 404, 405, 6230, 6231 and 6232 respectively:

I am convinced that from the outset the defendant’s intention was to hold the land until it had increased in price and then dispose of it at a gain. . ..

On the basis of the facts outlined the defendant’s sole purpose in purchasing an undivided two-third interest in the property, for security as he described it, must have been to realize an accretion to the purchase price by sale at a time he deemed it expedient to sell. . . .

However the fact that a purchaser buys land with the purpose of selling it at a profit standing alone does not render an eventual sale at a profit a venture in the nature of trade rather than an investment. . . .

In the present instance the land produced no revenue and, in my view, the defendant did not exhibit any pride of possession nor did he experience any aesthetic enjoyment from its possession. . . .

The cumulative effect of these circumstances leads me to the conclusion that the land was the subject matter of an adventure or concern in the nature of trade.

It is difficult to see any fundamental difference in the issue which faced the learned Justice in Schmigelski (supra) and that which faces the Board in the instant case.

This view is further reinforced by an examination of the 1978 decisions of this Board and of the Federal Court, which touch upon this matter. Since they are fairly recent, these decisions and judgments may be subject to further appeal and analysis, but the general perspective which can be seen in them must be of interest. From the Board level, the comments of the Chairman, the Honourable Lucien Cardin, QC, in Joseph Friedman v MNR, [1977] CTC 2611; 78 DTC 1020, should be noted at pages 2614 and 1022 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.

And in Ray D Sader v MNR, [1978] CTC 2668; 78 DTC 1487, Mr Cardin pointed out at pages 2669 and 1489 respectively:

Although the taxpayer’s declared intention must be taken into account, it is of little probative value when there is no evidence of any effort made or steps taken to carry out the project.

Turning to the judgments rendered by the Courts, in a situation similar to the appeal before the Board, the Court ruled against the taxpayer in the judgment of Her Majesty the Queen v Edmund Peachey Limited, [1978] CTC 606; 78 DTC 6411.

Further, in Norton Investments Ltd v Her Majesty the Queen, [1978] CTC 154; 78 DTC 6078, the Federal Court of Appeal commented as follows at pages 156 and 6079 respectively:

The question of whether or not a given transaction is one which is capital in nature or is one entered into in the course of business or as a venture in the nature of trade, the profit from which is taxable, is, as has been frequently said, essentially one of fact depending on the intention of the parties at the time of acquisition of the asset. The evidence adduced at trial clearly supports the finding of the learned Trial Judge that the Appellant was not in the business of developing vacant city lots but rather

“its business or plan was to hold them and either lease to local developers on a long term basis, or sell them to would-be developers or others.” (Reasons for Judgment [1976] CTC at 453; 76 DTC 6269 at 5.

From this he concluded, properly, in our view, that in respect of Melville 2 and 3 there was not a so-called secondary intention. Rather there were two alternative, equally dominant, intentions or plans—the first, “to lease to a developer on a long term basis; the second, to turn the properties to acount by sale, if a satisfactory opportunity arose”. Ample support for this conclusion is derived from not only the direct testimony to that effect by a director of the Appellant company, but also from the evidence of the short term leases each containing the ‘sale and development’ clauses and the willingness of the Appellant to accept a low return on its investment in the properties. The learned Trial Judge had the obligation to accept or reject the explanations of the Appellant for the latter two pieces of evidence and in the whole context of the transactions, he was quite entitled to reject them. We are thus unable to say that his inferences were not supported by the evidence.

It is also clear from his reasons that he gave consideration to the contention of Appellant’s counsel that its long history of capital investment in British Columbia indicated that its real intention in purchasing Melville 2 and 3 was in accord with its tradition of buying and holding property as long term investments which were capital in nature. The Trial Judge obviously deemed that the contention lacked persuasiveness when weighed against the other evidence which, to him, indicated the contrary intention, at least with respect to the acquisitions of Melville 2 and 3.

Nor is this view in any way affected, we think, by the Appellant’s submission that the threat of expropriation and the unsolicited offer to purchase the subject properties provided the impelling motives for the sale at a much earlier time than had originally been contemplated.

In view of the significance of the Norton judgment referred to above, and its affinity to the instant case, a quotation from the judgment of the Federal Court at the Trial Division level [1976] CTC 451; 76 DTC 6267, at pages 6268 and 453 respectively would be in order:

On behalf of the plaintiff it is contended the purchase of the three Melville Street properties, and particularly 2 and 3, was part of its traditional policy in respect of its interests in British Columbia: to invest on a long term basis, accept (for United Kingdom tax reasons) a low return, and hope for accretion in capital value. The premature disposal of the two properties in question, it is asserted, was brought about by the real threat of expropriation, and the fortuitous unsolicited offer of purchase by the developer, Dominion. All this, it is urged, puts the gain into the capital side of the tax ledger.

I am, on the facts here, unable to accede to the plaintiff’s position. Mr Kaye, in cross-examination, gave, to my mind, a frank answer as to the intentions and purposes of those who controlled the destinies and affairs of the plaintiff company. He said the properties were acquired for investment purposes. He described that in this way: The plaintiff was not in the business of developing sites such as these (essentially vacant city lots) on its own; its business or plan was to hold them and either lease to local developers on a long term basis, or sell them* [2] to would-be- developers, or others.

There was not here, as I see it, in respect of these properties, a so-called ‘secondary intention’. There was, at the outset, an alternative, equally dominant intention or plan: to turn the properties to account by sale, if a satisfactory opportunity arose.

Finally, I would make reference to a judgment in favour of the taxpayer— Hiwako Investments Limited v Her Majesty the Queen, [1978] CTC 378; 78 DTC 6281. This judgment of the Federal Court of Appeal reviewed and reversed an earlier judgment of the Federal Court, Trial Division, which had itself upheld a previous dismissal of the appeal at the level of the Tax Review Board. The point at issue therein is identified and examined at pages 380 and 6282 respectively:

The sole question to be decided is whether the profit realized by the sale of the property that was being operated as a profit-producing property (or was being used as the principal capital asset of a business) was properly characterized as profit from a “business” by the assessments attacked by the appeal.

My study of the record does not persuade me that such sale completed an adventure or concern in the nature of trade. Moreover, in my view, there is no evidence on which such a conclusion could be reached.

As I understand it, the only evidence relied on in support of that conclusion is, in essence, that the appellant had in mind, in making the purchase, the prospect of inflation in land values. However, in my view, the choice, as an investment, of an income producing property (such as developed real property or “growth” stock) with a prospect of increasing capital value to offset chronic depreciation in the value of money, as opposed, for example, to a choice of bonds designed to produce a fixed amount on maturity, is not evidence of a purchase for re-sale amounting to the launching of an adventure or concern in the nature of trade.

Recognizing that the asset in question in Hiwako (an 880-unit apartment block) was a profit-producing property at acquisition and during the time it was held, the Court again at pages 380 and 6282 respectively sets out that which I regard as of major significance in reviewing the instant case:

I do not read the evidence in this case as being open to an inference that a prospect of re-sale at a profit was a motivating reason for the purchase and I do not read the learned trial judge’s finding of fact in the last paragraph of his judgment as amounting to more than a finding that the investment was in a profit producing property that would increase in value and that circumstances in the future might dictate a change in investments. (Italics mine.)

That seems to be quite opposite to the intention and objective of this appellant, as the Board sees the evidence before it. While the final result, and some of the clarification of this complex issue which can be read in the Hiwako judgment (supra) might be viewed as encouragement to this appellant, the following specific quotations at pages 383 and 6285 respectively serve to establish definite boundaries:

Had the alleged assumption been that there was an expectation on the part of the purchaser, at the time of purchase, that, in the event that the investment did not prove to be profitable, it could be sold at a profit, and that such expectation was one of the factors that induced him to make the purchase, such assumption, if not disproved, might (I do not say that it would) support the assessments based on “trading” if not disproved.

If property is acquired when there is no business even though one possibility in the mind of the purchaser is to use the property as the capital asset of a proposed business—or the purchaser has not considered how he will use it—a re-sale may be the consummation of a venture in the nature of trade.

Therefore, at the risk of certain selective perception, one may elucidate as follows from the above summary of cases (particularly that of Hiwako (Supra)):

(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 expec

(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 384 and 6285 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 assumptions of trading which have been made.

Conclusions

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 /ts 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 ones 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.

Decision

The appeal is dismissed.

Appeal dismissed.