George Meles, Eleanor Meles, Ruth Goldberg and Jack Goldberg v. Minister of National Revenue, [1978] CTC 2273, 78 DTC 1199

The Chairman:—The appeals of George Meles, Eleanor Meles, Ruth Goldberg and Jack Goldberg from assessments in respect of the 1972-1973 taxation years were, by consent, heard on common evidence.

The issue in each of the said appeals is whether the profits derived from the purchase and sale of a 50-acre parcel of land in Scarborough is to be considered as a capital gain or whether it is taxable income from a business within the meaning of sections 3, 9 and 248 of the Income Tax Act, SC 1970-71-72, c 63, as amended. Mr George Meles, one of the appellants, acted as representative for the other named appellants.

Facts

Based on evidence given by Mr George Meles and by Mr Fred Skurka, a party to the subject transaction who was subpoenaed by the respondent, the pertinent facts in this appeal can be summarized as follows:

In 1965 Mr Jack Goldberg had been approached by unnamed parties to invest in property in the Scarborough area but declined to do so. However, he set about looking for land for himself in that area for purposes of investment and found the subject property, a 50.18-acre parcel of land, situated on Lot 22, Concession 4, in the Township of Scarborough.

Mr Jack Goldberg then consulted his accountant, Mr Fred Skurka, and proposed that the 50.18 acres of land be purchased by them on a 50%-50% basis. Mr Skurka, a chartered accountant, in his testimony, stated that a 50% share of the land was too great an investment for him and he suggested that his father-in-law, Mr Morris Levitt (a builder) would be interested in 25% interest in the land. Mr Goldberg agreed and stated that one of his neighbours might be willing to join in the venture. The neighbour was Mr George Meles who in fact agreed to participate in the transaction.

Although no formal partnership was ever signed, the distribution of the interests in the land were:

On October 27, 1965 Mr Goldberg, in trust, signed an agreement of purchase and sale and the land was subsequently purchased for $150,000 (Exhibits R-1 and R-2).

Mr Meles, in giving evidence, stated that the purpose for which the land was purchased was to develop the land so as to build a shopping centre in one corner of the land and a townhouse project to be developed on the remaining portions of land. Mr Meles stated that, after the land was purchased, a dispute arose when Mr Morris Levitt’s continuous insistence on selling the land reached a point where, in Mr Meles’ words, it constituted harassment and he attributed ulterior motives to Mr Levitt in explanation of his eagerness to sell the property. Another source of friction was Mr Levitt’s insistence that his son, Sol Levitt, act as solicitor for the group.

In order to substantiate his contention that the intention in purchasing the land in 1965 was to develop a shopping centre, Mr Meles produced as Exhibit A-3 a letter dated September 19, 1974.

Exhibit A-3 reads as follows:

Canadian Imperial

Bank of Commerce

September 19, 1974

Mr George Meles,

Toronto,

Ontario.

Dear Sir,

This will confirm our discussion that in the late 1960’s when I. was the Manager of our Adelaide & Peter Branch you discussed with me your participation in a parcel of land located at the S/E corner of Passmore & McCowan, Scarborough. At that time you enquired whether the Bank would be interested in renting in that location and we advised that until the land was re-zoned we could not make a decision. So many customers discussed these proposals with us that until the land is actually ready for development we do not wish to do a complete investigation.

We confirm that you have been a satisfactory customer of the Bank for many years and all commitments have been met as agreed. Should you have proceeded with the project then the Bank would have given your request for your share of the financing full consideration and we know of no reason why it would not have been granted.

Yours very truly,

(signed) G J Brand

G J Brand

Manager

Exhibit A-4, an undated letter from Charles Herman Real Estate Ltd, who had been contracted by Mr Meles to search for potential tenants, reads as follows:

Charles Herman

Real Estate Ltd.

422 Glengrove Ave W,

Toronto 12

Mr George Meles,

157 Searle Avenue,

Downsview, Ontario

Dear Mr Meles:

Re: Southeast corner McGowan and

Passmore Avenue, Scarborough

Further to your request for information, this will confirm that you made enquiries of me and my firm during the year 1969 or 1970 requesting us to seek a potential tenant for your land. You suggested to us that we might find a “Chain Store’’ who might be prepared to occupy the lands and carry on business there.

This will further confirm our advice to you that we were able to determine that the lands at that time were zoned agricultural and we were unable due to that fact to obtain any commitments whatsoever from any Chain Store.

We further confirm with you that we indicated that once the zoning had been changed to a proper commercial zoning, that we could then carry the enquiries further. We did not hear further from you thereafter and we therefore assumed that our services were not required.

Yours very truly,

(signed) Charles Herman CH:mbs Charles Herman

It is to be noted that the letters were written to Mr Meles and one is dated as late as September 19, 1974. More importantly, however, both letters deal with the rezoning of the land subject of this appeal and which was zoned, and it is my understanding that it is still zoned, as agricultural land. Mr Meles, in his testimony, admitted that the land was known to have been zoned as agricultural land and that no effort whatever had been made to have the zoning changed. Mr Meles also Stated that there were no services, no water and no electricity on the subject land and admitted no development took place on the land.

Moguls Investments Limited was incorporated to act as the holding company for the four appellants’ 50% interest as well as for the 50% interests held by Prudon Investments Limited and Levitt Built Homes Limited. The distribution of the shares in the company was divided according to their respective interest in the land above stated. Mr Fred Skurka, in his testimony, confirmed that he had been approached by his client, Mr Jack Goldberg, to purchase /2 interest in the land but that he preferred to share his /2 interest in the land with his father-in-law. Mr Goldberg then sought out Mr Meles to share his /2 interest in the land, which resulted in Moguls Investments Limited being incorporated as a holding company for that purpose. Mr Skurka stated that the subject land was in the path of growth and that there was a potential for profit in a few years.

The witness did not only state that at the time of purchase there was a possibility that the land would be sold but he also stated that the development of the land had not been envisaged and that the purchase was “purely speculative in nature”.

Referring to the cadastral plan produced by Mr Meles as Exhibit A-1 in which the subject land was located and which indicated in the legend the potential existence of a shopping centre, Mr Skurka stated that he had never before seen the plan and that, in his opinion, it did not exist until quite recently. Mr Skurka reaffirmed that at the time of purchase no serious thought had been given to the development of a shopping centre or anything else on the land.

Although, in my view, it is really immaterial in deciding the issue in this appeal, Mr Skurka, on being cross-examined by Mr Meles on the dispute with Mr Levitt, admitted that there was a dispute between Mr Levitt and Mr Goldberg principally because of Mr Levitt’s insistence that his son, Sol Levitt, be the solicitor for the group. This dispute continued up to the time the land was sold and resulted in the payment by the group of double legal fees.

As to Mr Meles’ statement that Mr Levitt was forcing his opinion of selling the land to the point of harassment, Mr Skurka admitted that there was considerable friction between Mr Levitt and Mr Goldberg and that Mr Levitt had, on several occasions, suggested selling the land but had not insisted. Mr Skurka admitted that he was in an awkward position in the dispute between his father-in-law and Mr Goldberg and that he may have, on occasion, expressed the view that the land should not be sold. However, he also stated that he was not part of the offer to purchase which Mr Meles produced as Exhibit A-2, in which Mr Goldberg “in trust” sought to purchase Mr Levitt’s interest in the land and which Mr Levitt refused to sign. Mr Meles seemed to imply that were it not for Mr Levitt, the development of a shopping centre would have been proceeded with. Mr Skurka’s view is that there never was any intention of developing the land.

Subsequently, the land was sold in January of 1972, and each of the appellants realized a profit of $99,350 as their respective share in the disposition of the subject property. This profit was included in each of the appellants’ income for that year and a mortgage reserve in the amount of $81,713.50 pursuant to paragraph 20(1)(n) of the Income Tax Act, SC 1970-71-72, c 63, as amended, was allowed. In 1973 the mortgage reserve of $81,713.50 was included in each of the appellants’ income for that year and a further reserve of $79,400.60 was allowed to each appellant.

Mr Meles, on behalf of the other appellants, seemed to be arguing that the intention of the parties concerned was to purchase the land for the purpose of developing a shopping centre. But, owing to the dispute between Mr Goldberg and Mr Levitt, the plans were frustrated and there was no alternative but to sell the property. Mr Meles also contends that even though Mr Skurka and Mr Levitt may not have intended to develop the land, the intention that he had at the time of purchase was to develop it.

These affirmations are not borne out by the facts. The project was Originated by Mr Goldberg who, according to evidence given by Mr Skurka, dealt in real property. Mr Meles was the last to join the group. Mr Skurka, who, with his father-in-law, held 50% of the interest in the land and to whom Mr Goldberg first went before purchasing the land, stated that there was no intention of developing the land at the time of purchase, that the purchase was purely speculative. Mr Meles also suggests that even though Mr Levitt and Mr Skurka may have speculated in the land, he did not. Here again the facts do not support Mr Meles’ contentions. The zoning of the land, the lack of services on the land, the absence of any effort on the part of anyone to have the zoning changed, the lack of any service plans for the development and even the insignificant and belated effort made by Mr Meles himself to interest possible tenants in a possible shopping centre on the property, convinces me that at the time of purchase there was no intention on the part of any of the purchasers to develop the land.

Mr Meles quoted the case of Norman Kwong v MNR, 25 Tax ABC 418; 61 DTC 40, in support of his contentions.

In that case the taxpayer and some friends had purchased a piece of land to set up a market garden and subsequently found that the land purchased was too valuable to use for that purpose. The land was sold and the profit derived from the disposition was treated as a capital gain.

Mr Meles suggests that the situation in which the appellants find themselves is quite similar and that the profit realized should also be considered as capital gain.

In the Kwong case (supra) the evidence adduced confirmed that the purchasers’ intention at the time they acquired the property was for the specific purpose of making a market garden. In the instant appeal there is no valid evidence that the purchasers’ intention at the time of the: purchase was to develop it in any way. Whether or not this was the first land transaction entered into by any of the appellants, the fact is that they purchased the land ‘without having any specific plan of developing it as a capital asset making the transaction a pure speculation in raw land and constituting an adventure in the nature of trade. The profit derived from such a transaction is taxable income within the meaning of sections 3, 9 and 248 of the Income Tax Act (supra).

For these reasons the appeals are dismissed.

Appeals dismissed.