James J Horvath v. Minister of National Revenue, [1977] CTC 2429, 77 DTC 302

Delmer E Taylor:—This is an appeal from income tax reassessments for the taxation years 1973 and 1974 in which the Minister of National Revenue increased the taxable income of the appellant by an amount of $29,387.10 for the year 1973, and by $4,443.19 for the year 1974, arising from the gain realized on two real estate transactions. The respondent relied, inter alia, upon section 3 and subsections 9(1) and 248(1) of the Income Tax Act, SC 1970-71-72, c 63.

Facts

The two properties in question are both in what is now the municipality of Cambridge, Ontario. One property, purchased in 1967, straddled the boundaries of what were then the municipalities of Galt and Hespeler, and which will be referred to as “Eagle Street’’; the other, purchased in 1965, was part of Lot 6 Concession 2, and will be referred to as “Pinebush”. In 1973 both properties were sold, a gain of $3,387.10 being taxed by the respondent after the allowable reserve for Eagle Street, and $26,000 for Pinebush, making the total additional taxable income in the reassessments. The amount of $4,443.19 represents the apportionment of the total gain on Eagle applicable to 1974, after due allowance for the reserve. A determination of the appeal for 1974 will therefore automatically flow from a determination of the nature of the transactions which occurred in 1973.

Contentions

The appellant’s position was that:

— The Eagle Street property was acquired and held as a long-term capital investment, as were all other properties held by him.

—The offer to purchase the Pinebush Road property was fortuitous and unsolicited and the sale resulted from the difficulties in which the taxpayer unexpectedly found himself at the time, having retired from the catering business and encountered problems with vacancy and vandalism due to the deterioration of the area where the Pinebush Road property was located.

—The offer to purchase the Eagle Street property was only completed under threat of a law suit to enforce specific performance. He originally intended to purchase the Eagle Street property as a place for the establishment of his catering business and it was sold to a person originally interested only in leasing the premises. It was only disposed of as a result of the inability of the taxpayer to incorporate the property into his catering business or related business.

The respondent contended that:

—the appellant acquired both the "Eagle Street Property” and the "Pinebush Property” with the intention at the time of acquisition of turning both properties to account for a profit at the first favourable opportunity.

Evidence

The evidence presented was detailed but, in summary, consisted of the view that the appellant had been involved with the restaurant and catering business for several years, commencing in 1965 first from his home and then from a property he purchased on Queen Street in Hespeler. After selling the Queen Street property because it was unsuitable for his expanding business, he purchased Eagle Street with the intention of establishing his business there. Encountering difficulties with municipal regulations, he purchased another property on Hespeler Road where he proceeded (again after some difficulties) to construct a banquet hall, tavern and catering facilities known as the Matador Tavern. He then listed Eagle Street for sale. Pinebush was rented continuously from 1965 to 1970 and due to deterioration in the area and vandalism, he finally sold it in 1973. These sales in 1973 (as also did the sale of the Matador Tavern in 1972) coincided with his desire to retire due to ill-health.

Under cross-examination, the appellant agreed to a considerable list of real estate transactions dating back to 1957 in which he had been involved, and the questioning of counsel for the respondent provided a background in which the source and flow of his available funds was quite apparent, culminating in the Matador Tavern. The appellant is now operating a gravel pit in the area, and has substantial investments resulting from his earlier business and investment operations.

Argument

Counsel for the appellant argued that the two transactions in question at the hearing were not to be related to the various other real estate transactions detailed by the appellant in his evidence. The two were quite distinct—Eagle Street was the location preferred by the appellant for his business, and only the frustrations detailed in the evidence prevented its completion; Pinebush had simply been a rental investment that eventually proved too costly and difficult to maintain.

Counsel for the respondent regarded all the appellant’s activity as indicating a clear purpose to engage in the business of buying and selling real estate at a profit.

Findings

The record of the appellant in the period since 1957 shows a distinct pattern of seizing opportunities in the real estate field and capitalizing on them. There is no question that on several of these transactions certain circumstances gave him some difficulty in achieving other even more primary objectives—and this includes Eagle Street—but the appellant quickly developed a competency in the field and was very capable in managing such affairs. Eagle Street had the possibility of filling his restaurant requirements, when it was purchased by him, but it also had other potential and he proceeded with his plans in another location, simply holding Eagle Street until an opportunity to sell arose. On Pinebush, the Board is convinced that he would not buy such a property with an apparently undesirable building and keep it occupied at marginal rentals, unless the ultimate value was in the land itself. The Board can find no reason to consider the two particular transactions which form the basis for this hearing in any different light than many others brought out in evidence, except that these two were probably somewhat larger. That is not a reason for considering them of a capital nature.

Having given my reasons for not accepting the position of the appellant in this matter, a further comment should be made on a major point of the argument given by counsel for the respondent, and I quote:

The most significant factor is intention. It is not necessary that the sole intention of the appellant in purchasing the property was resale at a profit. In fact, his primary intention could have been to build a business premises or to build a rental property, but it is sufficient that if at the time of purchasing the property the appellant considered the possibility of resale at a profit and that consideration was one of the operating motivating considerations that led to the purchase of the property, then that is a sufficient intent, a secondary intent if you will, as substantial case law has defined it, that is, a sufficient intent to characterize the transaction as an adventure in the nature of trade.

Suffice it to say that had the reassessment of the Minister rested on that proposition—"the appellant considered the possibility of resale at a profit’’—in my opinion, it would have been made on extremely tenuous grounds. I find no support in the case law cited by counsel to warrant the imposition of income tax merely on the consideration of a possibility, but the cross-examination by counsel showed that the appellant’s actions indicated a much stronger position than merely such passing reflection.

Decision

The real estate transactions, culminating in the sales of the properties referred to as “Eagle Street’’ and “Pinebush’’, are held to have been on operating, not on capital, account. The gain resulting therefrom is taxable as such, and the appeal relating to the reassessments for the taxation years 1973 and 1974 is dismissed.

Appeal dismissed.