H Fine and Sons Limited v. Minister of National Revenue, [1979] CTC 2226, 79 DTC 239

Roland St-Onge:—The appeal of H Fine and Sons Limited came before me at the City of Ottawa, Ontario on November 29, 1978 and January 30, 1979 and it is with respect to the selling of land in the appellant company’s 1973 taxation year.

The contentions of the parties are well spelled out in the notice of appeal and the reply to the notice of appeal as follows:

A. Statement of Facts

1. In the mid 1950s, Messrs Hyman Fine, David Fine, Reuben Fine and Louis Fine carried on the business of fruit and vegetable merchants in partnership. (The business had been commenced many years prior by Mr Hyman Fine who was later joined by his three sons, the said David, Reuben and Louis Fine.) The business had for a long while been carried out from certain premises (containing offices and warehouse) situated on Mann Avenue in the City of Ottawa. The business was expanding and the partners saw the possibility that the business would outgrow the then facilities.

2. Sometime between 1953 and 1955 the partners were advised by Government officials that a railway siding along the Mann Avenue warehouse would soon no longer be available. Because the railway siding was of extreme importance to the carrying on of the business, the partners saw the need to acquire other land having a railway siding facility. Land with a railway siding facility was acquired on Johnston Road which is situated in the southern part of the City of Ottawa and at the time of purchase was well located for the business being carried on.

3. In 1957 the partners caused to be incorporated H Fine and Sons Limited, the appellant herein, for the purposes of carrying on the business of the partnership. The partnership transferred to the appellant corporation all of its assets in connection with the carrying on of its business.

4. In the meantime, the traffic pattern of the City of Ottawa was being altered. In the beginning of the 1960s, work commenced on construction of the Queensway, a four to six lane divided highway sweeping through and bisecting the City of Ottawa, giving unimpeded access to Highway 17 to and from Montreal. Also, at about the same time, road transportation was beginning to be used more and more in the business of the appellant.

5. The National Capital Commission was owner of certain property on Belfast Road (‘Belfast Road property’) in the City of Ottawa. This site was contiguous to railway track lines and was close to a cloverleaf leading to the Queensway Highway. The National Capital Commission expressed a desire to sell lots in that area to persons including the appellant, who would build well constructed, harmoniously and spaciously laid-out buildings.

6. The appellant appreciated the ideal location of the Belfast Road property and realized that for its business this site, as compared to the Johnston Road property, was more appropriate from which to operate since, among other things, the Johnston Road property was far from the Queensway and much time would be lost travelling to and from the Queensway.

7. In 1962 the appellant acquired from the National Capital Commission for the purposes of constructing an office and warehouse a lot on Belfast Road; plans were drafted and construction was commenced of a building (comprising 64,000 square feet) for a warehouse and offices. Initial construction was completed in 1966; additional expansion of the warehouse took place subsequently. (Now comprising 73,000 square feet—this addition is mine.)

8. The Belfast Road property was divided by a railway siding. The warehouse was to the east of the siding; vacant land was on the west. The appellant was of the view that expansion of the warehouse in a westerly direction was now not economically possible because of the position of the siding and therefore the vacant land became surplus to its needs.

9. In 1973 the appellant sold the surplus land.

10. By notice of re-assessment dated July 7,1976 the respondent assessed the appellant income tax purportedly on the basis that the sale in 1973 of the excess land was a venture in nature of trade and the profit arising therefrom is to be included in the appellant’s income. The appellant objected to the said assessment and a new notice of re-assessment was issued dated March 7, 1978.

B. Statutory Provisions Upon Which the Appellant Relies and the Reasons Which it Intends to Submit

11. The appellant is of the view that the sale of a part of the Belfast property which was surplus to its needs was on account of capital for the following reasons, inter alia:

(a) the Belfast Road property was acquired for a single purpose: to construct thereon a warehouse, which the appellant in fact did;

(b) the appellant is not in the business of buying or selling land;

(c) the appellant’s shareholders have no background or experience in real estate; the only property any shareholder may have previously purchased was for residential and/or recreational purposes.

(d) The appellant held the Belfast Road property for over ten years before concluding that part thereof was surplus to its needs and it was not economic to retain ownership of the surplus land.

On the other hand, the respondent made the following assumptions of fact:

3. (a) in looking for an alternate site on which to expand its business from the Mann Avenue site during the early 1950’s, the appellant acquired a property on Johnston Road in the City of Ottawa comprised of 16.69 acres in 1958;

(b) the Johnston Road property was found to be not suitable for the appellant’s business, which it then sold for a gain in separate parcels to several different buyers;

(c) the appellant acquired a parcel of land comprised of 10.684 acres by deed dated June 28, 1962, situated on Belfast Road;

(d) the parcel acquired was far larger than any possible need the appellant might have for it;

(e) on October 15, 1969, the appellant acquired a further parcel contiguous to the Belfast Road parcel of .674 acres;

(f) in 1966, the appellant’s business was relocated to the Belfast Road site where a warehouse was built;

(g) in early 1973, the appellant sold 4.158 acres of the 11.358 acre site which it owned on Belfast Road to Auto Electric Service Co Ltd for $190,000 by which sale it realized a gain of $140,092.86;

(h) subsequent to the sale in paragraph (g) herein, the appellant advertised further portions of the Belfast Road property for sale;

(i) the gain in paragraph (g) herein was from a venture in the nature of a trade.

Paragraphs 1 to 4 inclusive of the notice of appeal are admitted by the respondent.

At the hearing, two witnesses were heard: Mr David Fine, President of the appellant company since 1964, and Mr Douglas MacDonald who was in charge of all acquisitions for the National Capital Commission up to 1965.

Mr David Fine testified that in 1921 his father Hyman started the business of selling fresh fruit and vegetables at 52 George Street in Ottawa. In 1942, due to the expansion of the business, new premises had to be found and the said business was moved to Nicholas and Wilbrod. Three years later, this site was expropriated by the National Capital Commission and the latter assisted Mr Hyman Fine to relocate his business on Mann Avenue on a lot of 1.6 acres. A warehouse was built thereon and, with parking facilities, the entire lot was occupied. The new site was close to downtown and afforded better access to the Queensway. At that place (Mann Avenue), the business was operated from 1951 to 1964 and 90% of the merchandise (perishables) arrived by railway from the Niagara Peninsula or Montreal. Consequently the presence of a railway was very important to the appellant’s business. Around 1955, Hyman learned that the railway tracks would be removed and decided to buy some 17 acres on Johnston Road, far from downtown but close to railroad sidings. Appar ently, it was more advantantageous at that time to be closer to railroads. The said land was purchased in one piece in the father’s name instead of the partnership’s (Hyman, Lewis, Reuben and David Fine) for $30,000.

David explained that if, at that time, his father had acquired more land than needed, the reason was that he had to buy it in one piece.

In 1958 the land was transferred to H Fine and Sons Limited for the same price. The same year 4.5 acres thereof were sold to A G Henry (in trust) for $20,000. In 1972, 2.7 acres were sold to Denis Boyle (in trust) for $155,000. In 1973, 5.73 acres wers sold to Bell Canada for $134,727 and 4.1 acres were sold to Ottawa Motor Sales (1970) Ltd for $123,162.

In January 1961 an offer was made to the National Capital Commission to buy some 10 acres of land on Belfast Road because it was closer to the Queensway, near a railway and also because the Mann Avenue location was no longer sufficient to cope with the expansion of the business.

This piece of land was separated by a spur so that one side had 7 acres and the other 3-1/2.

David explained that they had to buy the whole piece of land or nothing; that they had a long-term plan and did not want at the beginning to build two warehouses and that the warehouse was built on the larger site. He admitted that the Johnston Road property was vacant land and was never used as part of the appellant’s business; that additional land was acquired from Campeau Corporation for $6000 to obtain the services and realize a plan of subdivision; that the lots were sold by a real estate agent; that the Belfast property had also vacant land which was not used as part of the appellant’s business and that all this vacant surplus land was in the appellant’s books for a certain length of time.

The witness filed, among other exhibits, some financial statements to show the appellant’s position in 1971 and 1972.

In 1972, the appellant company decided to borrow some $300,000 at the prime rate plus 4% to 5%. Then, because of the risk involved, it decided to dispose of the surplus land and repay the bank loans. Since then, the appellant company was very flourishing and its sales figures increased from 5 to 16 million dollars.

Two resolutions were filed to show that on September 30, 1962, Hyman Fine transferred his shares of the appellant company to his three sons David, Lewis and Reuben and on February 20, 1964 he resigned as Director and President of the said company.

The evidence has also revealed that the Johnston property was divided into 21 lots and sold through a real estate agent and that the father had incorporated two of the companies, Fine Flowers Incorporated and Black Magic Earth Incorporated and that only in 1962 did he transfer the appellant companies’ shares to his three sons and keep the flower business and that he has been in many other real estate transactions.

Mr Douglas MacDonald, called on behalf of the respondent, testified that the Belfast site was first discussed on May 19, 1958 with Mr Hyman Fine who was requesting land over and above what he had on Mann Avenue; that he doubts he had insisted that Mr Fine buy the whole ten acres because it was surplus land to the company; that according to the agreement, once the warehouse was built, the balance of the land could be sold and that it was not clear whether the NCC could prevent speculation of this land; that he did not know of any other company that had 1.5 acres and would require 10 acres to relocate its business in that area.

Counsel for the appellant summarized the facts as follows:

1. the father was the principal shareholder until he transferred his shares to his three sons;

2. the appellant company’s business had to be relocated on three occasions and always near a railway;

3. the father had to buy the whole parcel of land on Johnston Road (38 acres) because it belonged to one single owner;

4. around 1962, the appellant’s business had to be relocated near the Queensway and a railway and consequently the Belfast Road property was acquired;

5. the Johnston and the Belfast properties were acquired for the business and remained in the appellant’s hands for some 12 years;

6. when Dominion Stores which bought 40% of the goods ceased to purchase from the appellant, the latter had to borrow some $300,000 and around 1972, because of the losses in that year, the bank wanted to be reimbursed;

7. the appellant sold 4 acres of the Belfast property to Auto Electric Service Co Ltd and the money served to discharge the liabilities to the bank.

Then he argued that the appellant company was incorporated to distribute fruits and vegetables and not to become a trader in land; that at the time of acquisition, the properties were purchased for the purpose of the business and that there is no evidence to show that the intention of the appellant was to resell the excess land at a profit.

He cited, among others, the following cases:

Rudolph P Cohen, Liquidator of G MG Building Corporation Limited (in Voluntary Liquidation) v MNR, [1970] CTC 386; 70 DTC 6244;

Place des Soeurs Inc v MNR, [1978] CTC 3188; 78 DTC 1862, and that buying of land for expansion of the business was a wise business decision.

Counsel for the respondent argued that the land was acquired for business purposes but that the appellant company had also the secondary intention of selling the excess land at the best opportunity; that on two occasions, the appellant company bought more land than needed and Mr David Fine was the only one who testified when it is known that the father was the main shareholder and the maker of the decision; that two months after the acquisition of the Johnston property at $30,000, four acres thereof were sold at $20,000; that, in both cases, a plan of subdivision was prepared which is a characteristic of an entity dealing in land.

He argued that Mr MacDonald’s evidence should be taken into consideration, especially when Mr David Fine testified that he had only a general knowledge about the real estate activities of his father. Counsel for the respondent went on to say that because the appellant company did not discharge the onus, the appeal should be dismissed.

According to the evidence adduced, it is self-evident that the father, Mr Hyman Fine, was the guiding light of the companies involved; that around 1954, he acquired more land than was needed for his business and sold it in five different transactions at substantial profits; that in 1962, he again acquired more land than was needed for his business, kept one third of it to build a warehouse for the appellant’s business and in 1973 some four acres thereof were sold at substantial profits.

It has to be noted that when the transactions under discussion occurred, Mr Hyman Fine was still the owner of the appellant company, and had not yet resigned as President nor transferred shares to his sons. The only one who could swear that on two different occasions the land had to be acquired in one piece was not present to testify on this very important fact. There is no evidence to show that the Johnston property had to be acquired in one piece and Mr MacDonald testified that Mr Hyman Fine was not required to buy the whole 10 acres on Belfast Road.

It is obvious that Mr Hyman Fine, who did not testify, knew that the excess land acquired in 1954 was very valuable and could easily be disposed of at the best opportunity and at substantial profits.

The fact that the appellant company had a debt of some $300,000 in 1972 should not prevent the Board from thinking that Mr Hyman Fine repeated in 1962 what he had done in 1954, namely that he acquired more land than he needed for his business and although he would have been the best witness in the case at bar, there is no evidence to show that he was unable to testify.

In recent years, the Federal Court has given great weight to the credibility of the witnesses, namely:

T K Sales Ltd v MNR, [1973] CTC 340; 73 DTC 5284;

S & S Properties Ltd v The Queen, [1978] CTC 412; 78 DTC 6294.

In the present case, the Board cannot use this jurisprudence in favour of the appellant company because its main actor who lives in Ottawa did not testify.

The appellant company which had the onus to prove that the respondent’s reassessment was wrong in fact and in law, failed to do so, and consequently the appeal is dismissed.

In accordance with the above facts, the appeal is dismissed.

Appeal dismissed.