Trans-World Industrial Development Inc v. Minister of National Revenue, [1979] CTC 2465, 79 DTC 421

The Chairman:—This is the appeal of Trans-World Industrial Development Inc from a reassessment dated January 2,1976, in respect of the 1973 taxation year, in which the Minister of National Revenue considered as taxable business income, profits in the amount of $294,951 realized by the appellant on the disposition of a property situated on Cavendish Boulevard in Montreal (hereinafter referred to as the “Cavendish property’’) and added to the appellant’s declared income for 1973 an amount of $147,475.50. The appellant is appealing the Minister’s assessment on the ground that the profits realized from the disposition of the said property were a capital gain.

Summary of Facts

The principal shareholder and president of the appellant corporation is Mr Joseph Kracauer, holding with his three sons two-thirds of the shares. Mr Hermann Spindel, now deceased, owned with his family the remaining one-third interest in the company. The appellant company was incorporated on November 16, 1972 (Exhibit R-2).

Mr Kracauer, who described himself as an investor and developer, owned, either personally or in association with others, six industrial buildings, five office buildings and one school building, all situated in Montreal and all developed by Mr Kracauer. In Florida, Mr Kracauer owned three office buildings and a condominium (Exhibit A-3). None of these buildings were sold other than the subject property and an industrial building situated at 5605 de Gaspé in Montreal which as sold in 1968 to finance construction of holdings in Florida. The condominium in Florida was sold in 1970. For three years prior to the subject transaction Mr Spindel was Mr Kracauer’s project manager and was given the contract for the construction of an industrial plant on the subject property of $100,000 to compensate for his having been given one-third instead of one-half of the shares in the subject property. Mr Spindel was in the business of building factories which he leased on a net- net basis and he is alleged to have had several such holdings.

The subject property, 200,000 square feet in an area situated between Cote de Liesse and Metropolitan Boulevard in Montreal, was found by Mr Kracauer and considered to be an ideal location for an industrial building. On the 28th day of September, 1972, Mr Kracauer offered to purchase the property at a price of 90¢ per square foot, which was accepted by the owner, Mr Pierre Des Marais, on the same day (Exhibit A-1). A deposit of $5,000 was paid by Mr Kracauer on September 28, 1972, with the deed of sale to be executed within sixty days (Exhibit A-2). The deed of sale was signed by Mr Spindel and Mr Kracauer as purchasers on November 16,1972, (Exhibit A-7) the day the appellant’s letters patent were issued (Exhibit R-2).

The evidence is that at about this time Progress Lighting Corporation, a Canadian subsidiary of an American company known as Lighting Corporation of America (hereinafter referred to as “LCA”), sought to have the plant which it leased on Paré Street in Montreal expanded. The lack of available land necessary for the proposed expansion on that site forced Progress Lighting Corporation to seek accommodation elsewhere and, ultimately, found the subject property to be suitable for its purpose. Mr Julius Ehrenwerth, President of Progress Lighting Corporation, testified that the corporate policy of the parent company (LCA) was to lease all its premises and, in fact, did not itself own, nor allowed any of its subsidiaries to own, any immovable property. Indeed, on September 7, 1972, the parent company, LCA, had offered to lease for a period of twenty years a building, 400 feet by 250 feet, to be built by the Atlantic Construction Company on 200,000 square feet of land on a site close to the subject property in the Parish of St Laurent, at a rate of $1.35 per square foot (Exhibit A-10). The Atlantic Construction Company did not take up the offer.

However, on October 12, 1972, Mr Herbert Remstein, President of one of LCA’s American subsidiaries, made an offer to Mr Kracauer for LCA (on behalf of a corporation to be formed) to lease a building, 376 feet by 252 feet, to be built on the Cavendish property, also at a rate of $1.35 per square foot. Attached as an addendum to this offer to LCA was an option granting LCA the right to purchase the property within sixty days after the completion of the building at a selling price of $1,400,000 (Exhibit A-4).

The evidence given by Mr Kracauer as to the reasons for granting the purchase option was corroborated by Mr Ehrenwerth, President of LCA’s Canadian subsidiary, who was involved in the transaction, and by Mr Stanley Taviss, legal counsel for the appellant who had negotiated the final lease agreement signed on November 14, 1972 (Exhibit A-5), and who had drafted the purchase option (Exhibit A-6), neither of whom was in Court during Mr Kracauer’s testimony. In his evidence Mr Kracauer stated that he had been advised that LCA had made an application to the Department of Regional Economic Expansion (DREE) for a grant to its Canadian subsidiary. One of the conditions for obtaining a grant was that the recipient company be the owner of the building and the land. Mr Kracauer stated that he had been informed that LCA had sought such a grant once before from DREE and was refused. Very little hope was entertained by Mr Ehrenwerth or the officers of LCA that DREE would authorize the grant, but because of certain particular circumstances it was felt worth trying once again. Mr Kracauer agreed to grant the option to purchase to cover what was considered to have been a very remote possibility that LCA would obtain the grant.

Mr Spindel, who had brought LCA’s requirement of a substantial industrial building to Mr Kracauer’s attention, had also advised him that, in order to complete the lease transaction with LCA, a commission or some form of remuneration would have to be paid to certain officers of LCA. This was agreed to by Mr Kracauer and on December 6,1972, an agreement was signed by Robin Investments Ltd, whose shareholders were allegedly officers of LCA, and the appellant company (Exhibit A-8). Among other things, the agreement provided that the appellant would pay Robin Investments Ltd a commission of $7,500 every six months for the period the appellant received rental payments from LCA which, according to the terms of the lease agreement, was to be twenty years.

This agreement, however, included a second purchase option in favour of Robin Investments Ltd whereby the latter could purchase the Cavendish property for $1,400,000 effective for a period of 150 days after the expiration of the sixty-day option granted to LCA. It was alleged that Robin Investments Ltd had no finances to purchase the Cavendish property and that the option was sought to secure payments of the commissions it had earned in obtaining for the appellant the LCA lease agreement, should the appellant subsequently sell the property to someone other than LCA.

To everyone’s surprise, according to the evidence, the grant was eventually obtained from DREE and, although LCA‘s policy was not to purchase or own any industrial property or buildings for any of its subsidiaries, it was not indifferent to a $350,000 windfall and exercised its option, purchasing the subject property on June 4, 1973, for $1,543,000 (Exhibit A-9).

The evidence was that the sale price of $1,400,000 stipulated in LCA’s option to purchase dated October 12, 1972, had been given relatively little thought by Mr Kracauer since he never expected that the option would be exercised and the amount was based on a rough estimate of the current cost rate per square foot for industrial buildings.

Finding of Facts

The amounts assessed were not disputed and the Board must now determine whether or not the facts of this appeal support the Minister’s contention that the subject transaction was in the nature of trade.

Since the determination of the issue must be made on the basis of the pertinent facts, it is necessary to state here that I found Mr Kracauer, Mr Ehrenwerth and Mr Taviss to be credible witnesses whose testimonies were in no way shaken in cross-examination and that the documentary evidence constitutes, in my opinion, valid support of the oral evidence given by the witnesses.

I cannot find in the background of Mr Kracauer or Mr Spindel, the shareholders of the appellant corporation, any history of trading. On the contrary, the evidence indicates clearly that both Mr Kracauer and Mr Spindel were primarily interested in building and renting industrial property. It is the respondent’s contention that both Mr Kracauer and Mr Spindel had, other than their declared intention of acquiring the Cavendish property to develop it into an industrial rental property, a secondary intention at the time of acquisition of selling the property at a profit. The respondent points to the shareholder’s whole course of conduct in support of his allegation. Since there is no trading history that can be attributed to the shareholderes of the appellant, their whole course of conduct must refer to their granting a purchase option to LCA sixty days after completion of the building to be leased to LCA’s subsidiary and a second option to purchase granted to Robin Investments Ltd effective after expiration of LCA‘s purchase option. Had there been no evidenc of any other pertinent facts, it might well appear that the shareholder’s course of conduct was to acquire the property for resale.

I cannot, however, ignore that the appellant’s shareholders’ personal businesses ahd consistently been to invest, build and rent industrial properties on a net-net basis. I have no difficulty, on the basis of the evidence, in accepting that the shareholders’ primary intention of acquiring the Cavendish property was to develop it and rent it as a long term rental industrial property in keeping with the other holdings both the shareholders of the appellant company operated. There can be no doubt that Mr Kracauer and Mr Spindel were very knowledgeable businessmen and very cognizant of the value of the Cavendish property as an industrial site. In my opinion that does not in itself support the proposition that the property was acquired for speculation and for resale.

Whether it was by coincidence or otherwise, the facts are that LCA had made a formal offer to lease a building to be built on the subject property in keeping with LCA’s corporate policy even before the appellant had finalized the acquisition of the said property. The evidence appears clear to me that the primary intention of both the appellant and LCA was to have an industrial building developed on the Cavendish property which would be leased to LCA on a twenty year basis.

The determining question is whether the options to purchase granted by the appellant constitute a secondary intention of selling the property. The evidence was that at the time Mr Kracauer made an offer to purchase the Cavendish property his sole intention (and that of Mr Spindel) was to develop it as an industrial property similar to their other holdings. LCA’s lease offer, subsequently received by Mr Kracauer, was considered very attractive to the appellant’s shareholders as another source of rental income. The fact that LCA’s policy was to rent rather than own immovable property confirms the appellant’s intention of leasing the property. Considering that none of the officers of LCA expected that the DREE subsidy would be obtained, the granting of a purchase option to LCA places relatively little importance or significance on the possible resale of the property and the existence of a secondary intention on the part of Mr Kracauer and Mr Spindel. Although the appellant corporation was asked for, and indeed granted, the option to cover what had been described as a very remote possibility that the grant might be received, the option does not, in itself, constitute irrefutable proof that the sale of the property was a motivating factor on the part of the appellant in acquiring the property. I am also satisfied that the purchase option granted to Robin Investmens Ltd at the latter’s request does not, in the circumstances of this appeal, constitute a motivating factor of acquisition or of any other intention than that of Robin Investments Ltd in attempting to ensure that the commissions arising from its efforts in obtaining the lease for the appellant would be paid.

I cannot ignore the evidence, although certainly not conclusive, given by Mr Taviss as to the extreme care and the time he took in negotiating and drafting a net-net lease agreement with LCA and the obviously little attention paid to either the conditions or the price of the purchase options.

The very existence of the purchase options granted by the appellant would prima facie indicate that the appellant had a secondary intention of selling the property if the primary intention of developing it failed. Although this is without a doubt a border-line case, it would in my opinion be wrong, once all the evidence is reviewed and weighed, to conclude otherwise that the property was acquired with the sole intention of developing and renting it as an industrial rental property. Strange as it may first appear, the granting of purchase options in the circumstances of this appeal do not necessarily reflect the appellant’s alternative intention of selling the property. The options were conditions imposed by LCA and Robin Investments Ltd for their own purposes respectively so as to cover remote, but possible, eventualities. They were accepted by the appellant in order to finalize a long term lease of their industrial property in the firm belief that LCA would never obtain a DREE subsidy. The fact that LCA was granted the subsidy and the option had to be taken up was unforeseen and unexpected by both the appellant and LCA.

Decision

On the basis of all the facts and the evidence adduced, which I accept, I cannot logically conclude that the remote possibility of its sale was a motivating factor in the appellant’s acquisition of the Cavendish property. I conclude, therefore, that the gain realized by the appellant from the proceeds of the disposition of the subject property was not income from a business within the meaning of the Income Tax Act but was a capital gain.

For these reasons the appeal is allowed and the matter referred back to the Minister for reassessment.

Appeal allowed.