Roger J Smith v. Minister of National Revenue, [1979] CTC 2361, 79 DTC 349

The Assistant Chairman:—Roger J Smith, the appellant, has appealed to this Board from assessments for income tax for each of the 1972,1973 and 1974 taxation years. The appellant, in each of those years, sold an interest in real property and he reported the gains in connection therewith as capital gains and subjected only one-half of the gains to capital gains tax. The Minister considered the transactions and was of the view that the gains were a trading profit, and increased the income of the appellant in each of the three years accordingly. The issue in the appeal is whether or not any or all of the gains the appellant realized in the years in question in connection with the disposition of real property is a trading profit. Counsel advised me that there was no dispute as to dollars. The transactions related to the purchase and sale of a portion of Lot 20, Concession 5, in the Town of Whitby, in the Province of Ontario, and the sale of a portion of Lot 25, Concession 8, also in the Town of Whitby. The two pieces of property are approximately 1 to 1 /2 miles apart.

The appellant is a member of the Law Society of Upper Canada and was called to the bar in 1967. He practised his profession in the City of Toronto from then until 1977 when he moved his practice to Whitby, Ontario. His practice was mainly that of a barrister, but some small portion was devoted to real estate practice. His father and grandfather had both lived on a farm on the outskirts of Ottawa and he desired for his wife and family to have a home in a rural area close to Toronto so that he could commute. He had in mind that he would have a home on a parcel of land of about 8 to 10 acres.

In the early part of 1973, Jack Lambersky, a friend with whom the appellant had gone to university and who was now an insurance adjustor, knowing the appellant’s wishes as to a home informed him that there were two parcels of land available, one of 10 acres and one of 14 acres, ina quasi-residential area around the intersection of Winchester Road and Thickson Road, a short distance from the eastern extremity of Brooklin which was a few miles from Whitby. The appellant examined the properties and was Satisfied with them. Lambersky was to take one lot and the appellant the other. Lambersky then made an offer on the properties and the appellant paid a $1,000 deposit on each lot. The lots were contiguous. After the offers were made, Lambersky, who if I recall the evidence correctly had recently been married, had financial difficulties and advised the appellant he could not go through with his purchase. The appellant decided to go through on his own and in July 1972 closed the purchase, buying both lots. In making the offer on the lots, which had a total cost of $55,000, the appellant was of the view that the price was cheaper than what he would pay for similar property closer to the City of Toronto.

Before he actually acquired the properties, the appellant was in touch with Mr Foxton, who was a Toronto real estate broker as well as a friend of the appellant, and hired him to take a look at the properties. He really had not, from a financial point of view, examined the properties until he ascertained that he was going to have to buy both of them. Foxton advised him about ten days before the purchase that he believed the appellant would get out of the properties what he was paying, if not more, it was at this time that Foxton advised him of the provisions of The Planning Act of the Province of Ontario and informed him that, on purchase, the two lots would merge since he was the sole owner and that he could not get severance. He thought he could get it later on and proceeded to buy the properties. The total purchase price was approximately $20,000 cash and $35,000 by way of mortgage back to the vendor. The money to close the purchase of Lot 20 was borrowed from his parents.

When he went into the transaction with Lambersky it was his intention to take either parcel—and either parcel would have been satisfactory to him—and build a house for his family. It ended up that he had, not two lots—one of 10 acres and one of 14 acres—which were separate, but rather, one lot of 24 acres. Rather than saying that this was not what he wanted, the appellant, in effect, was somewhat in a state of panic as he did not need or want the property. Since he could not get a severance, he decided how he could extricate himself from his dilemma. He spoke to three people; namely, his brother, a Dr Saiphoo and a Mr McKague, who was a lawyer known to the appellant and who practised law near him in the City of Toronto, about his position and they were willing to help him out. A trust document was designed and, pursuant to it, on the basis that the whole property was worth $100,000, he sold a 15% interest to his brother, an 18% interest to Dr Saiphoo and a 25% interest to Mr McKague. The effect was that he sold 58% of the property for approximately $58,000, making a profit for himself over and above the purchase price and still having 10 acres himself. (The trust document was not filed as an exhibit but it was stated to be similar to the trust document prepared with respect to Lot 25 which will be referred to later.) The appellant stated that, over the years, he paid back the money he had borrowed from his parents to close the purchase of Lot 20 even though he had made more than his purchase price on the sale of the 58% interest to the three above-mentioned persons. It should be noted that 58% of 24 acres equals approximately 14 acres. This sale closed in August 1972, about one month after he had purchased the property. Notwithstanding the fact that the appellant still had 10 acres of his original property, he continued to look for a 10-acre parcel. While at this point in time, in the chronology of events, reference could be made to Lot 25, it appears to be best to first complete the narrative with respect to Lot 20. In connection with Lot 20, the said McKague, in March 1973, bought a further 25% interest in the 24 acres which then left the appellant with 17% of the original purchase. The parties who became involved in the purchase from the appellant of Lot 25, which will be covered later, then purchased the balance of the appellant’s interest in Lot 20 in October 1973.

As mentioned previously, having disposed of a portion of Lot 20 in August 1972, the appellant was still interested in obtaining a parcel of land of about 10 acres for the purpose previously expressed, namely of having a home for his family. The said McKague, in September 1972, came to the appellant to ascertain whether or not he was still interested in obtaining a parcel of land in the same general area as Lot 20. On being advised by the appellant that he was interested, McKague informed him that he had a client who had paid a deposit of $5,000 to acquire a parcel of land of 83 acres about 1 1/2 miles from Lot 20 for the sum of $79,000. The purchase price on closing would be cash with a mortgage of $45,000 back to the vendor. The property had a house on it which could be renovated in which the appellant and his family could live. He bought the property, which was Lot 25, closing the transaction on October 6, 1972, about two months after the Original sale in connection with Lot 20. He had canvassed the area generally and could not find any lot that he wanted. There were some lots of about the size he wanted but the purchase price was between $60,000 and $70,000. The 83-acre lot was satisfactory, but he did realize that there could be no severance.

In the early winter of 1972, after having purchased Lot 25, he commenced to renovate the house and build on to it, which building and renovation continued until early 1974 when it was completed. One difficulty he experienced in the renovation was the location insofar as tradesmen were concerned as he had to get them to go there for only that one job. At all times, in the words of the appellant, he had to scramble to get money to renovate, etc. In early July 1973, before renovations were completed, he and his family moved into the house and have lived there ever since. As an aside, initially he commuted to Toronto from these premises, but in 1977 he closed his practice in Toronto and set one up in Whitby.

In April 1973 he received an offer (Exhibit A-1), which was irrevocable until May 19, 1973, to buy all of the property except 7 acres for the sum of $191,750. The purchase price was to be satisfied with approximately $60,000 in cash and the balance by way of mortgage back at 8% interest. The offer was not accepted. The offer was not solicited by the appellant. At this point in time, had he accepted the offer, he would have made about $100,000 profit. Shortly thereafter he was approached by John Jurgeneit, a real estate broker from Toronto. Apparently Jurgeneit felt there was considerable development in the area and came to him with a proposition which resulted in an agreement affecting all the 83 acres (Exhibit A-2). As previously stated, Exhibit A-2 which affected Lot 25 was similar to the agreement which was used to dispose of the appellant’s interest in Lot 20. Exhibit A-2 is a complex, involved and unusual agreement clearly showing the draftsmanship ability and skill of the appellant. The appellant stated that he studied and read textbooks to learn how to draw up the document. This I take it was done, at the earliest, between the date Lambersky said he could not go through with the purchase and the date of sale in August 1972, as a similar agreement was used in that sale. The agreement is a full seven pages. The appellant is called the Trustee, and the purchaser is called the Participant. The portion of Lot 25 purchased by the appellant is said by Exhibit A-2 to consist of 83.05 acres. By Exhibit A-2 the appellant has divided that portion into two parts—Part I consisting of 76.79 acres and Part II of 6.26 acres. The effect is that the appellant is to retain Part II, and the agreement relates to Part I. It should be mentioned that the home was in Part Il when the appellant purchased the land and it is that home which he renovated and now lives in. The interest in the 76.79 acres was divided into ten units. There were purchased from the appellant eight units and he himself retained two units on the initial sale in June 1973.

There are numerous recitals in the agreement before coming to the operative part. Some of those recitals, in part, read as follows:

AND WHEREAS this Agreement .. . is an Agreement between the parties, their heirs, executors and assigns only as to the future division of the liabilities, profits and assets relating to Part I.

AND WHEREAS it is agreed and acknowledged that the Trustee now holds and will continue to hold hereafter until the disposition of either the whole of Parts I and II or Part I only the legal title in fee simple to both Parts I and ll ...

AND WHEREAS it is agreed and acknowledged that this Agreement does not and does not purport to include the real property on Part II or any buildings located on either of Parts I or II (including the residential premises now owned and occupied by the Trustee and located on Part Il).

AND WHEREAS it is agreed and acknowledged that the lands designated as Part I are to be valued at $230,000 .. .

AND WHEREAS it is agreed and acknowledged that the participant is desirous of participating in a one tenth (1/10) pro-rata share of all future liabilities, profits and assets as to Part I only.

AND WHEREAS the Trustee has agreed to sell a one tenth (1/10) pro-rata share of the beneficial interest in the trust upon full payment of the sum of $23,000 by the participant as to Part I only.

AND WHEREAS if Parts I and II are necessarily sold in one total package notwithstanding that this Agreement is intended to affect the lands designated as Part I only, all of the lands and premises shown as Part II including the residential dwelling presently located thereon is to be valued by two independent appraisals of the then current market value at the time of any such sale, plus an additional payment of 10% based on the value of all of the lands and premises designated as Part II and as so appraised.

AND WHEREAS the Trustee will be entitled to a pro-rata share of the whole consideration as to either or both of Part I and Il on the basis of his absolute ownership of the whole of the lands and premises on Part II and the Trustee’s now retained 2/10 share of the whole of the lands designated as Part I.

NOW THEREFORE WITNESSETH that in consideration of the sum of $23,000 . . . the Trustee . . . agrees to apportion and sell a 1/10 share of all future liabilities, profits and assets as to any and all of the real property designated as Part I on the Plan of Survey attached hereto as Schedule “A”.

Turning to the agreement (Exhibit A-2), paragraph 1 et seq thereof states that the trustee, for $23,000 “agrees to apportion and sell 1/10 share of all future liabilities, profits and assets as to any and all of the real property designated as Part l . . The purchase price is payable with interest over a 5-year period from June 30, 1973. The participant or purchaser has a right to extend the payment period for a further period of 5 years to June 30, 1983. Should the purchaser default, and receive notice of that default from the trustee, if the default is not cured within 90 days, all money previously paid is forfeited and the agreement is null and void. The agreement (Exhibit A-2) mentions the name of the person or persons who are to purchase the other seven units. It should be noted that two units were retained by the ap- pellant/trustee, but he stated that he would have sold them at that time had he been able to find a buyer. The agreement states that, after June 30, 1975, a majority of the participants may compel the sale of Part I only, and not Parts I and II unless the trustee consents. Clause 8, since it contemplates the possible sale of Part II (the portion retained by the appellant), is quoted here in total as follows:

The majority of the participants shall have the right by vote to remove and replace the Trustee from and after June 30,1978, provided that as conditions precedent to so doing, all of the monies then owing to the Trustee by all of the participants are paid in full to the Trustee and provided further that any or all of the participants purchase and pay for in full the Trustee’s now retained 2/10 share of Part I and all of the lands and premises designated as Part II at a price to be determined by two independent appraisals of the then current market value of the lands and premises then comprising Parts I and II respectively, together with an additional payment of 10% of the then appraised market value of Part II, and provided further and it is a condition of this article that the Trustee in his sole and absolute discretion may elect to retain ownership of Part Il in which event the aforesaid terms would apply only to the participants’ purchase of the Trustee’s 2/10 share of Part I only.

As previously indicated, Exhibit A-2 is an agreement between the appellant and one participant, even though it names all the other participants. Similar agreements were entered into by the appellant and each of the seven other participants affecting a total of eight out of ten units. In 1974 the appellant sold a portion of his two remaining units.

Pursuant to that agreement, the appellant received money in 1973 and 1974, two of the three years under appeal. He also received money in 1974 with respect to the sale of a portion of his retained units in that year. As mentioned previously, the eight participants who signed with the appellant agreements similar to Exhibit A-2 with respect to Lot 25 bought from him in 1973 his remaining interest in Lot 20.

To summarize, the appellant purchased 24 acres of land in 1972 and, a short period of time later, sold 58% of those 24 acres. A short period of time later he purchased about 83 acres. In March 1973, he sold about 60% of the interest that he had retained with respect to his first purchase. In April 1973 he received, but did not act on, an offer to buy about 76 acres. A little over a month later he prepared an agreement affecting all the 83 acres and he sold eight of ten units affecting about 76 of those acres. He retained two of those units for himself as well as keeping approximately 7 acres. In October 1973 he sold the balance of his original purchase. The appellant stated that he would have willingly sold the two units he retained (presumably in 1973) if anyone had wanted to buy. In 1974 he did sell a portion of those two units he had retained. Other than the real estate transactions referred to in these Reasons, the appellant has not bought or sold any other real property.

The submission on behalf of the appellant was that it was clear that the appellant entered into the transaction relating to Lot 20, and likewise Lot 25, with the intention of building a home for himself and his family. True that, while he did not build on any portion of Lot 20, he did so build and renovate on Lot 25. He bought the two parcels in Lot 20 because he felt it was inappropriate to let Lambersky suffer the consequences of an uncompleted transaction, and, in addition, it was the appellant’s money which was used as the deposit. He felt that failure to complete the transaction could have been a reflection on himself. It would appear that, with respect to Lot 25, it was clear what his intention was—to build a home. This is evidenced by two facts, namely, that shortly after purchasing Lot 25 he commenced to renovate the house and moved into it in the summer of 1973 and is now living there. In addition, several months after purchasing it, he did not accept an offer which, if accepted, would have produced a profit in the vicinity of $100,000.

The Crown’s position with respect to Lot 20 was that the appellant, through the advice of a real estate agent (Foxton), was aware before purchasing it that Lot 20 was worth the value he was paying for it and more. He also knew that there was development activity in the area. A few short weeks after purchasing it, when he was in a panic, he got three people to buy 58% of the acreage he had purchased, which produced to him more than the purchase price he laid out for the whole property. He learned how to draft an agreement like Exhibit A-2, he drafted it, specified the participants, and closed the transaction. He never built on the property. As to Lot 25, it was only about 12 miles away. He still knew of the development activity in the general area. It was pointed out that the 83 acres which he purchased of Lot 25 was not only in excess of what he wanted, but about 3 / times as large as Lot 20. While his intention to build a house to live in is evident by his virtual immediate steps to renovate the house on the property and the fact that he moved into it—Does that intent apply to the whole 83 acres? The suggestion was put forth that the intention was to sell the unneeded portion. Certainly, if the appellant did not initially know real estate in this general area, by this time he was well acquainted with it.

As I understand the matter, there were, with respect to Lot 20, two different vendors of two contiguous parcels to Lambersky; Smith was not a purchaser. While he paid the deposit, I presume he gave the money to Lambersky who paid the vendors. Shortly before closing, when Lambersky could not go through with the purchase, the appellant got a real estate agent to check the area. He was advised that the land was worth the purchase price and he would not loose, and there was considerable development in the area. What happened was that the land was purchased after having borrowed the cash on closing from his parents. It was stated he panicked and looked for people to help him out. He located three and sold them 58% interest in the land and he retained 42%. He stated that he repaid his parents over the years. In other words, he did not use the cash received on the sale of the 58% interest for this purpose. His 42% represented about 10 acres. That is what he originally wanted, but he did not build his home on any portion of Lot 20. He searched for another parcel of 10 acres or thereabouts. He found an 83-acre parcel and bought it. It had a building on it and he commenced to renovate that building. Several months after buying, he received a formal offer for all but 7 acres. He did not accept, even though it would have produced about $100,000 profit. He did however, shortly after that date, go into the trust arrangement reserving to himself over 6 acres and setting up the balance as ten units—eight of which he sold immediately and retained two for himself, which two he stated he would have sold at the same time had there been a buyer. By this time he had disposed of a large portion of the 10 acres he had retained, for some unknown reason, of the first purchase and, a short while later, sold the balance of it.

The appellant contended that, when Lambersky made the offer to purchase Lot 20, he (the appellant) wanted to build a home. I would accept that up until the time Lambersky backed out. The appellant did not just proceed to buy the property. He got a real estate expert to appraise the property and, having been informed that there was development in the area and that the property was worth the money and maybe a little more, then he bought. I believe the intention of building a home had now vanished and it was a matter, when he bought the property, of turning the property over, expecting to make a profit. I am of the view that the profit gained from the sale of Lot 20 was profit from a business and consequently taxable as the Minister has assessed.

The same intent existed when that portion of Lot 25 was purchased—a home—but that parcel was 83 acres and he only wanted about 10. The facts clearly established that he wanted a home there. He renovated the house that was on the property and moved his family and is now living there. That is the part that is described as Part II on Exhibit A-2. However, does that intent for those 10 acres (it was actually around 7 acres) turn out to be the intention for all 83 acres? Ten acres was the figure used from the beginning, first with respect to Lot 20 and then with respect to Lot 25. There was no intent expressed with respect to the excess acreage. It appears to me that the only reasonable conclusion one could draw with respect to the excess acreage was that it was to be disposed of at the appellant’s convenience. It is noted that the agreement (Exhibit A-2) not only does not rule out the possibility of selling Part Il property (his reserve acreage and home), but actually covers what would happen if it were sold with the Part I property. I am of the view that the profit the appellant realized on the interest which he sold in Lot 25, up to and including the 1974 taxation year, is from an adventure in the nature of trade and, in that respect, the assessment has been properly made.

In the result, judgment will go dismissing the appellant’s appeal.

Appeal dismissed.