Colin M Brown v. Minister of National Revenue, [1978] CTC 2184

A W Prociuk:—The appellant appeals from the respondent’s reassessment of his income for the taxation year 1972 wherein his portion of the net profit realized on the sale of some land in which the appellant held a 25% interest was treated as income. The appellant’s ground of appeal is that it was a capital accretion, and, further, that the fair market value of the land on Valuation Day was at least equal to the sale price and therefore there was no capital gain.

The appellant is 63 years of age and for the past 43 years was and still is a life insurance underwriter with London Life Insurance Company. Over 90% of his income is derived from the sale of life insurance policies. He had lived for many years at 465 Clarence Avenue, in London, Ontario, and is familiar with that part of the City. He became acquainted with two American real estate developers and builders, Elliott N Yarmon and S Joseph Tankoos. Some 13 years ago Yarmon approached the appellant and asked him if he would join him and Tankoos in the acquisition of some land in the 200 block on Queens Avenue with the intention of erecting an office building thereon. The appellant agreed. A company was incorporated in Ontario with the appellant holding 25% of the issued and outstanding common stock therein. The land was purchased, the office building constructed, known as 201 Queens Avenue Limited, and the company derived rental income therefrom. The appellant was the resident overseer or supervisor of that project. Bell Canada owned some land to the south of this building, known as 435 Clarence Avenue.

In the summer of 1968 it became known that Bell Canada wished to sell its said land. The appellant, Yarmon and Tankoos considered the possibility of acquiring this land and erecting thereon a multistorey parking garage with shops on the ground level as that appeared to be the best use of that property for their purpose. They were also concerned that if they didn’t buy the land, someone else would, likely resulting in use of same to the detriment and devaluation of their office building. They had the land appraised privately and the appellant states they were satisfied that that piece was worth at least $200,000. They were successful in purchasing same, using their company for that purpose, for $120,000, on September 27, 1968. In 1969 they had the land appraised again by a real estate appraiser who told them that it was worth close to $300,000.

The company engaged the services of Parking Design and Development Ltd, of Willowdale, Ontario to conduct a feasibility study in respect of the proposal of a multi-storey carpark with shops on this land. The report being some 8 pages of detailed study, dated March 24, 1969, filed as Exhibit A-1, was most encouraging to the appellant and particularly so to the other two majority shareholders. An architect had been engaged by Yarmon and Tankoos in the summer of 1968 when negotiations for the purchase of the land were still going. The architect, Mr S D F Reszetnik, prepared the preliminary sketches of the contemplated project (Exhibit A-2). The report (Exhibit A-1) concludes, inter alia, (1) “that the subject site on Clarence Street would be an excellent location for an approximately 320 stall multi-storey carpark, and (2) that such parking structure would be economically viable”.

To finance the project, Yarmon and Tankoos, through their company, entered into a sale-lease-back agreement with Standard Life Assurance Company, in September of 1968, which agreement was extended and somewhat revised in September of 1969 (see Exhibit A-3). The appellant went along with everything that the majority shareholders decided.

Also in September of 1969 the Municipal Council of the City of London, Ontario gave tentative approval to some further changes in the erection of this combined parking-retail store complex subject to its approval of a detailed report to be submitted by the company (see Exhibit A-4).

While all these negotiations and preparations were going on, the land was used for off-street parking. The cost of construction was reviewed again in 1970 and it was decided to build a smaller building. This decision was not proceeded with because Yarmon and Tankoos became engaged in building elsewhere and the appellant could do nothing about it.

In 1971 by majority decision the land was transferred for the sum of $145,000 from the company to its. three shareholders personally to each his respective undivided share. The appellant stated that this Came about at the instance of Tankoos who was apparently able to get some tax advantage in the United States. Tankoos died later on in 1971. Yarmon was heavily involved and preoccupied in his other businesses elsewhere in Canada and in the United States.

In February of 1972 Yarmon, the appellant states, advised him that he received an offer for the sale of this land in the sum of $225,000, which he (Yarmon) was prepared to accept. The appellant states that he had no choice but to agree. He was in no position to buy his partners out. The land was being bought on behalf of Canada Trust and it did not appear that this sale would in any way result in depreciation of the building owned by 201 Queens Avenue Limited. The sale was completed on March 1, 1972. The appellant’s share of the net profit was $19,513.22.

The respondent submits that at the time of the acquisition of the said property and at all material times thereafter, the appellant intended to trade in, deal in or otherwise turn the said property to account for profit and that the said profit was properly included in the appellant’s income by virtue of sections 3, 9 and subsection 248(1) of the Income Tax Act, SC 1970-71-72, c 63.

With great deference to counsel for the respondent, I am unable to arrive at the same conclusion. There is no evidence from which it could be inferred that the appellant’s intention was as alleged above. On the contrary, the evidence is strong that from the very outset his interest was that of investment with the two people whom he knew and with whom he had been in business (Queens Avenue building) for several years. The land was next door to the land and building in which he had a proprietary interest. If the original intention or the secondary one was to turn the asset to account at the first available opportunity, I fail to see why this could not have been done much earlier. It also would appear incongruous that so much time, expense and effort would be expanded on plans and agreements for construction when none of this in any way added to the appreciation of the value of the land directly or indirectly.

I am satisfied that the appellant has amply discharged the onus the Act has placed on him and is entitled to succeed.

The appeal accordingly is allowed and the whole matter referred back to the respondent for reassessment on that basis.

Appeal allowed.