Henry E Dickson v. Her Majesty the Queen, [1974] CTC 753, [1974] DTC 6653

Heald, J:—This is an appeal by the plaintiff from reassessments by the Minister of National Revenue for the 1968 and 1969 taxation years of the plaintiff’s income tax returns.

So far as the 1969 taxation year is concerned, the only issue was the propriety of the addition to income by the Minister of the sum of $12,000 alleged to have been received by the plaintiff from one Laurie Lively as interest income. At the trial counsel for both parties agreed that there had been an error in calculation of this amount and further agreed that the 1969 assessment should be referred back to the Minister for further reassessment on the basis that $5,000 instead of $12,000 should be added to the plaintiff’s 1969 income as interest income received from Laurie Lively.

So far as the 1968 taxation year is concerned, there are three matters in issue between the parties arising out of the Minister’s reassessment, which matters may be stated as follows:

(a) the inclusion as income of the sum of $265,700 being the profit realized by the plaintiff in 1968 on the sale of a 8.01 acre parcel of real property located in Fairview, County of Halifax, Nova Scotia (hereinafter referred to as the Clayton property);

(b) the inclusion as income of the sum of $15,618 being the profit realized by the plaintiff in 1968: on the sale of a portion of the real property owned by him on McIntosh Street, Spryfield, Nova Scotia (hereinafter referred to as the McIntosh property); and

(c) the inclusion as income of the sum: of $1,395.97 being the profit realized by the plaintiff in 1968 on the sale of a house and lot at 50 Auburn Avenue, Halifax (hereinafter referred to as the Auburn property).

The plaintiff, 61 years of age, is a professional mining engineer and lives at Canning, Nova Scotia. Prior to 1950 he was employed in his profession by various companies. In 1950 he purchased a firm known as Eastern Equipment of Fredericton, NB. This. company was a ‘distributor. of industrial tractors, scrapers and graders, and continued to be owned and operated by the plaintiff until 1970.

In 1955 the plaintiff commenced a company known as Wilson Equipment Ltd, this company having the same kind of operation, generally speaking, as Eastern Equipment. In 1956 the plaintiff started a company known as Ontario Tractor Parts Ltd, a company. which operated in Ontario and engaged in the business of selling running gear for crawler tractors. In 1958 the plaintiff started a company in the State of Massachusetts known as’ Dickson Equipment Corporation which company he owned and operated until 1964. This company. had the Allis- Chalmers franchise for Massachusetts. Eastern Equipment also had the same franchise for Nova Scotia and PEI. During the period from 1950 to 1970 the plaintiff was busily engaged in operating these various equipment companies. During at least a part of this period he said that he averaged 90 to 100 hours per week of work.

In 1964 and 1965 the plaintiff constructed a garage building for General Motors which was ‘leased to one of their Halifax dealers, Bob MacDonald Chevrolet, at a total land and building cost of $210,000, at an annual rental of $25,000. This property is on Kempt Road, about /4 mile distant from the Clayton property and about 2 miles in a north-westerly direction from downtown Halifax.

In the late 1950’s the plaintiff became acquainted with one William J Olie, a Halifax contractor and a fairly large developer in the Spryfield area of Halifax County. In early 1965 Olie approached the plaintiff suggesting that the plaintiff “back” him in the construction of some small apartment blocks. The plaintiff agreed with the result that a partnership agreement was entered into in July of, 1965 (Exhibit 25). The property hereinbefore described as the McIntosh property was registered in Olie’s name but under the agreement Olie acknowledged that he held the property in trust for himself and the plaintiff equally. The plaintiff advanced $5,000 and under the agreement, 01 ie was to do likewise. Paragraphs 9 and 10 of the said agreement read as follows:

9. Upon disposal of the building upon completion all profits are to be divided equally between both parties.

10. If after completion the property is not sold but is kept and rented the management shall be on a joint and equal partnership. and all profits will be distributed equally after management fees as agreed upon have been deducted therefrom.

lt seems, however, that Olie was not able to produce his $5,000 share and, as a result, a portion of said property (No 6 McIntosh Street) was purchased by. the plaintiff in August of 1966 and the balance (Nos 2 and 4 Mcintosh Street) on November 28, 1965. By 1966 there were completed on the property and known as Nos 2, 4 and 6 Mcintosh Street, three identical apartment blocks containing six apartments each. The plaintiff, having acquired No 6 McIntosh Street in August Of 1966, sold it to one Ehler on. January 3, 1967. As part of the purchase price for No 6 Mcintosh Street the plaintiff took “in trade” a house at 50 Auburn: Street, hereinbefore referred to as the Auburn property. This property was a house containing a basement apartment. The Auburn property was sold by the plaintiff in January of 1968 at a profit of $1,385.67, the profit referred to in issue (c) above.

The plaintiff sold Nos 2 and 4 Mcintosh Street in December of 1968. It is the profit on the sale of the McIntosh property in the sum of $15,618 which is the subject matter of issue (b) above referred to.

Turning now to the events leading to the acquisition and subsequent sale by the plaintiff of the Clayton property, the plaintiff testified that he first learned of this property in March of 1963 through one Laurie Nightingale. The plaintiff had known Nightingale socially for several years. He said that, in his view, Nightingale was knowledgeable in the development of raw land in the Halifax area and that he was experienced in buying raw land, servicing it and then selling it to developers. Nightingale advised the plaintiff that it was possible to obtain an option for approximately three weeks at an option cost of $2,000 on 101 acres of raw land in the Clayton Park area of Halifax County (later annexed by and now a part of the City of Halifax). Nightingale had no money of his own with which to take up the option. The plaintiff said the arrangement between he and Nightingale was that the plaintiff would pay the $2,000 for the option but that they were to be equal partners in the venture if Nightingale could raise his half share of the option money within two weeks. It transpired that Nightingale could not come up with his share of the money. The option was taken in early March in the plaintiff’s name and was to expire on March 25, 1963 if not taken up on or before said date (Exhibit 37). The price stated therein was to be $154,400, payable on April 10, 1963. The plaintiff, in testifying as to his intentions in taking this option, said that he knew that development was going on at the adjoining property and that he felt this land would sooner or later get developed, and that he wanted this land for a housing development. He said he had no definite plans at that time but that it was a good neighbourhood and therefore a desirable place to locate a housing development. In cross-examination, he said that to him this site represented “. . . a possible opportunity for a modest-sized site”.

During the three-week period of the option, the plaintiff was put in touch, by a friend, with Mr Lloyd Caldwell, a well-known Halifax solicitor. Mr Caldwell was the secretary, a director and a shareholder of a company known as Clayton Developments Ltd, a company extensively engaged in the development of approximately 144 acres in Clayton Park in suburban Halifax in the same area as the optioned land.

Caldwell testified that his company had been interested in acquiring the optioned land because it would integrate nicely with their current development, that they approached the owner of the optioned land, only to discover the existence of the plaintiff’s option. It thus appears that the plaintiff’s approach to Mr Caldwell was timely from the point of view of Caldwell and Clayton Developments Ltd. Caldwell suggested to the plaintiff that the plaintiff drop his option because, in Caldwell’s view, the price of the property stipulated therein was too high; that Caldwell negotiate a new price with the owners, and that the plaintiff become a participant in the new venture with Caldwell and his associates. The plaintiff agreed to this proposal. Caldwell did negotiate a better deal with the vendor and the plaintiff participated therein. The plaintiff invested $30,000 and, as a result, became the owner of a 28% interest in the company (Clayton Properties Ltd) which acquired the land previously optioned to the plaintiff. The plaintiff sold his 28% in Clayton Properties Ltd in August or September of 1967, making a profit thereon of $47,500 which was treated as a capital gain by the Income Tax Department and not taken into the plaintiffs income.

Mr Caldwell testified that at the annual meeting of the shareholders. of Clayton Properties Ltd, held on March 4, 1964, the plaintiff asked the company for permission to purchase from the company 5 acres of the total area of 101 acres, stating that he was “looking for a pension” and that if he obtained said 5 acres he would build a highrise apartment thereon for income. Pursuant to said request, the Company passed the following resolution as contained in the minutes of said shareholders meeting (Exhibit 4):

UPON MOTION it was resolved that the Company. sell to Mr Henry Dickson of Halifax, or his nominee, five acres of the Company’s land at Rockingham at raw land cost plus the proportionate costs of servicing such land, the area to be sold and the price to be paid to be determined by the Company’s Managers and engineering consultants in consultation with Mr Dickson.

Mr Caldwell said that he was not clear from his discussions with the plaintiff in 1963 and 1964 as to whether the plaintiff intended to use the 5 acres for a highrise apartment, as a commercial development or as row-housing. He also said that at the time of the original commitment to the plaintiff concerning the 5 acres as evidenced by the company minute of March 4, 1964 the company set no time limit within which the plaintiff would be required to purchase said 5 acres from the company. Caldwell said that by the end of 1964 the company was subdividing and selling lots in its development and that during 1964, 1965 and. 1966 he and his company had discussions with the plaintiff concerning the selection by the plaintiff of his 5-acre plot. By 1966 a plan of subdivision of Clayton Park had been approved and registered showing a certain Block “C” therein containing 8.01 acres. The plaintiff expressed an interest in acquiring his 5 acres from the said Block C”’. Plaintiff said it was his view that Block “C” was a choice piece of land. However, Caldwell and the company were advised by their planning consultants that the said Block “C” should not be broken up and that it should be developed by one owner. The plaintiff was advised of this decision which, he agreed to, although he said he would have been happier with the 5 acres. The result was an agreement between the Caldwell group as vendors and the plaintiff as purchaser dated November 8, 1967 (Exhibit 5) whereunder the plaintiff purchased said Block “C” containing 8.01 acres for a total purchase price of $137,600. The purchase price was computed on the basis of 5 acres at raw land cost plus servicing costs (in compliance with the commitment expressed in the minute of March 4, 1964 referred to supra) and the remaining 3.01 acres at market value.

Meanwhile, the plaintiff was encountering serious problems with the Income Tax Department concerning the income tax liability of two of his equipment companies (Eastern Equipment Limited and Equipment Sales Limited) and his own personal income tax. These problems had been going on for a number of years. On November 19, 1963 the Income Tax Department “raided” his offices, seized his books and records and launched upon a full-scale investigation of his affairs.

This investigation was still continuing in 1967. On June 8, 1967 his solicitor at the time, Mr W J Maclnnes, QC wrote a four-page letter to the Tax Department. The first paragraph of that letter states, inter alia:

. . . The Department has indicated that the tax liability is approximately $321,000.00, and it was indicated by Mr Carten at our meeting last week that the balance due is approximately $180,000.00.

During the period 1963 to 1967 the plaintiff, knowing that his ultimate tax liability would be substantial, made very large periodic payments on account of said liability, thus by June 1967 he had paid in approximately $140,000. In March of 1968 the Crown laid some 40 charges of tax evasion against the two companies and the plaintiff personally. These charges were reduced to 27 counts to which the three accused pleaded guilty. Fines and costs totalling almost $19,000 were assessed against the three accused on June 24, 1968. By this time the plaintiff had paid in another $60,000 to the Tax Department on. account of his ultimate tax liability.

Thus, plaintiff’s financial situation in the summer and fall months of 1967 was, to say the least, rather precarious. In evidence, he expressed it rather succinctly as follows: “My tax situation made my financial situation difficult.”

Because of this difficult financial position, the plaintiff commenced negotiations with the senior employees in his equipment businesses for the possible purchase by them of said businesses. These negotiations took place in July and August of 1967. Plaintiff’s proposal to his employees was that they make a cash down payment of $100,000. The employees were interested but did not have the cash for the downpayment. They tried to mortgage their homes thereby hoping to obtain said cash down-payment. They were unsuccessful in negotiating said house mortgages, mortgage loan moneys on houses apparently not being too easy to obtain at that particular time. Thus, plaintiff was advised in August of 1967 that said employees could not proceed at that time.

However, both parties were still hopeful that the sale could be consummated but in February of 1968 the employees’ solicitor advised his clients not to proceed with the purchase until the plaintiff’s income tax difficulties were cleared up and this decision was conveyed to the plaintiff. Apparently nothing further came of this proposed transaction.

In the meantime, one John R Fiske, a Halifax contractor, involved in raw land development and general construction work including apartment block construction, had learned of the 8:01 acre site acquired by the plaintiff. He said that his company was anxious to acquire raw land and accordingly he approached the plaintiff early in January of 1968. Considerable discussion ensued over the next few months about possible sale by the plaintiff to Fiske’s company. In February of 1968 the plaintiff and Fiske retained a firm of architects and planning engineers and some architectural work was commenced.

Finally, on May 28, 1968, the plaintiff sold the 8.01 acres known as the Clayton property to Fiske’s company (Exhibit 2). The purchase price was $403,300, of which $50,000 was a down-payment, $90,300 by assumption of an existing mortgage and the balance of $263,000 in five instalments, the last of such instalments being due and payable in 1973.

lt appears, however, that Fiske was not the only person with whom the plaintiff was having discussions concerning possible disposition of subject property. Commencing on January 30, 1968, the plaintiff had discussions and correspondence with one Ralph Medjuck, a Halifax lawyer who was also a substantial developer of real estate in the Atlantic provinces (his evidence was that in the years 1960 to 1968, he was involved in 14 to 17 million dollars worth of residential apartment construction in the Halifax area).

On February 9, 1968 the plaintiff wrote to Mr Medjuck the following letter (Exhibit 11):

With regard to our conversation two days ago regarding 8.01 acres of land which is designated as Block “C” in the Clayton Park Subdivision, please be advised that there is a present encumbrance on this property and this is to be paid in five equal annual instalments of $18,060.00 each and is payable on the 31st day of December in. the years 1968 to 1972 inclusive. In addition, interest is payable at the rate of eight and one-half percent per annum on the balance of the purchase price outstanding from January 1, 1969, with such interest payments to be made in the years 1969 to 1972 inclusive.

I would undertake to sell this property for an additional $260,000.00 with the purchaser taking over the debt of $90,300.00 outlined above. Further, I would require the transaction to be entered into no later than the 15th of February, 1968, and I would want payment completed by the 15th of February, 1973. Interest would. be at eight and one-half percent per annum payable on the 15th of February from 1969 to 1973, and the only flexibility that I might consider would be when the payments on the principal would be received by me.

This is what I feel I must accomplish in the disposal of this property, and if you feel there is something that may be of interest to you, please advise as early as possible since I have put a temporary hold on my arrangements with the other party mentioned to you during our phone conversation.

Mr Medjuck replied on February 20, 1968 (Exhibit 12) as follows:

I am sorry I was unable to keep our appointment to-day in connection with your land at Clayton Park. Unfortunately I have been completely disabilitated for the past few days with a back injury and my associate, because of this, did not come in from Montreal. We will, however, formalize our agreement with you at the beginning of next week.

I wish to confirm what I said on the telephone that we are prepared to enter into an agreement generally in accordance with the terms as set out in your letter,

As late as March 1968 it seemed that Medjuck was going to purchase the Clayton property from the plaintiff, however CMHC financing was not available and Mr Medjuck testified that without such financing he was not able to handle the transaction. An agreement for sale bearing date March 1, 1968 between the plaintiff as vendor and Medjuck (through one of his companies and Medjuck personally as guarantor) covering subject 8.01 acres; the original of which was initialed by the plaintiff, was sent to Medjuck. The plaintiff agreed that this agreement was in the form of an offer to sell which was communicated to Medjuck. ‘Medjuck, however, did not sign the agreement or purchase the property which was later sold to the Fiske interests.

The plaintiff realized a profit on the Fiske transaction covering the Clayton property of $265,700 which is the profit referred to in issue

(a) above.

On these facts, counsel for the plaintiff submits that all three transactions as particularized in issues (a), (b) and (c) above, are capital transactions and should not have been added to thé plaintiff’s income. The law covering transactions of this kind was well stated by Noël, J (now Associate Chief Justice) in the case of Racine, Demers and Nolin v MNR, [1965] CTC 150; 68 DTC 5098 at 5103-4, when he said:

To give to a transaction which involves the acquisition of capital the double character of also being at the same time an adventure in the nature of trade, the purchaser must have in his mind, at the moment. of purchase, the possibility of reselling as an operating motivation for the acquisition; that is to say that he must have had in mind that upon a certain type of circumstances arising he had hopes of being able to resell it at a profit instead of using the thing purchased for purposes of capital. Generally speaking, a decision that such a motivation exists will have to be based on inferences flowing from circumstances surrounding the transaction rather than on direct evidence of what the purchaser had in mind.

When a man purchases a large expanse of land for the avowed purpose of building on it, for example, a shopping centre and of renting stores to yield an income from rent, but at the moment of the purchase he does not make any arrangement at all to obtain the permanent financing of a considerable amount of money that he must invest or which will be required for the purposes of his project, or any arrangement at all to obtain tenants, and he has not obtained any information at ‘all concerning the question

of learning if the site in question possesses the characteristics necessary and adequate for such a project, or when this plot of land is situated in a sector which is adjacent to another sector which is growing and which is in full expansion on the periphery and where the value of these lands has already begun to rise or where the purchaser possesses experience in the realm of real estate which allows him to anticipate the changes which may arise in real estate values, there arises an almost irresistible inference that this man had the idea when he made the purchase that if he did not succeed in making the necessary arrangements to establish a shopping centre, he would indubitably be able to resell this land at a profit.

Dealing initially with the Clayton property transaction referred to in issue (a) above, it is necessary, at the outset, to determine the “moment of purchase” of this property by the plaintiff. Counsel. for the plaintiff submits that plaintiff acquired this property no later than March 4, 1964, the date of the company minute (Exhibit 4) wherein the company committed 5 acres to the plaintiff. Counsel for the defendant submits, on the other hand, that the date of plaintiff’s acquisition was the date of the agreement for sale, ie, November 8, 1967 (Exhibit

5) whereunder the plaintiff purchased the 8.01 acres of Block “C” (which, it is conceded by both parties, represented a full discharge of the earlier commitment to plaintiff concerning a 5-acre parcel).

In my view, the submission of defendant’s counsel in this regard is correct. In the case of Warnford Court (Canada) Limited v MNR, [1964] 1 Ex CR 944 at 945; [1964] CTC 175 at 176; 64 DTC 5103 at 5104, President Jackett (as he then was) stated:

For the purpose of determining whether a transaction is a transaction in the course of a business or is a venture in the nature of a trade, the time as of which the intention of the purchaser is significant is ordinarily, in my opinion, the time when the purchase agreement becomes legally binding rather than the time when legal title is acquired.

Applying that statement of principle to the facts in this case, I am satisfied that this plaintiff did not have any legally binding agreement of purchase for the 5 acres. Quite apart from the fact that he acquired not 5 acres but 8 acres in 1967, the minute of March 4, 1964 provided no details as to the location of the property and no details as to the price thereof nor any limitation as to time. By no stretch of the imagination can the minute of March 4, 1964 be said to be a legally enforceable document.

What inferences then flow from the circumstances surrounding the execution of the purchase agreement on November 8,1967?

At this point in time, because of his income tax problems, the plaintiff’s financial situation, by his own admission, was difficult indeed. He was facing a potential tax liability of some $320,000 on which he had already paid $140,000. He was clearly aware in the summer and fall months of 1967 that he would have to find substantial amounts of additional cash to satisfy the balance of this liability. He tried to sell his equipment business to his employees and to obtain therefrom a cash down payment of $100,000. However, by November he knew that this transaction was not going to be consummated in the immediate future, if at all. He was well aware of the potential value of Block “C”, that its value was increasing all the time, situated as it was strategically in the midst of a rapidly developing area. He knew he was acquiring it at a very advantageous price (5 acres out of an 8 acre total at cost to the developer). He needed cash quickly. Almost immediately after acquisition, he directed his efforts toward possible sale of Block “C”. On January 30, 1968 he was in touch with Medjuck, a well-known raw land developer. On February 9, 1968 he wrote to Medjuck stating: . . . I would undertake to sell this property . . .” At the same time as he. was negotiating with Medjuck, he was negotiating with Fiske. Plaintiff’s counsel submits that the fact that preliminary architect’s plans were commissioned by the plaintiff, is evidence he intended to develop the property. In my view ali that the evidence establishes in this connection is that probably the plaintiff commissioned the preparation of Exhibit 8, described as “a very preliminary study worksheet” and as a “Contour Plan Sketch” and that the plaintiff paid the architectural firm the sum of $388 for services rendered. Two other architects’ plans were filed in evidence (Exhibits 9 and 10). However, both of these exhibits were prepared in July of 1968, well after the plaintiff had sold Block “C” to the Fiske interests. The evidence, while not too clear on who paid the architects’ bill, tends to indicate that any architectural work commissioned by and paid for by the plaintiff was preliminary indeed.

I am accordingly satisfied on all of the evidence before me that, when the plaintiff acquired Block “C” in November of 1967, he acquired it because he was in dire financial straits, he needed cash in large amounts at an early date and because of his knowledge of the value of subject property he foresaw a real good possibility of early sale at a substantial profit. This was not an isolated transaction for the plaintiff. In 1951 or 1952, he had purchased 1 /4 acres of raw land on Lady Hammond Road in the north-westerly area of Halifax, and sold it in 1956 or 1957 at a profit of some $85,000 without the property being developed in any way. In 1966 the plaintiff acquired ownership of 50% of the issued shares of Hilden Development Ltd (hereafter Hilden) the other 50% of the shares being owned by William J Olie, referred to earlier herein. Hilden acquired about 20 acres of raw land in the Spryfield area of Halifax County. This land was almost immediately subdivided into lots, serviced and sold as serviced lots to builders. The plaintiff, in his evidence, sought to convey the impression that he was merely a passive partner in the operation of Hilden and that. Olie was the active and operating partner. He did concede, however, that he was involved to some extent in the day-to-day operation of Hilden, such as paying a number of bills and accounts on behalf of Hilden. Exhibit 24 also indicates that the plaintiff was active in promoting the sale of the serviced lots owned by Hilden.

Thus, it is clear that the plaintiff, by November of 1967, was well versed in the practice of acquiring raw land in suburban Halifax for resale, either by resale of the same raw land or resale after subdivision and servicing to developers.

I am thus satisfied that the plaintiff had in mind when he purchased Block “C” in November of 1967, the possibility of early resale, as an operating motivation for the acquisition. Said transaction is therefore, in my view, not a capital transaction and the plaintiff was properly reassessed thereon.

Turning now to the Mcintosh property referred to in issues (b) and (c) above. In the partnership agreement of July' 1965 between Olie and the plaintiff (Exhibit 25), paragraph 9 thereof makes it clear that one of the alternatives contemplated by the partners was “disposal of the buildings upon completion”. Paragraph 10 sets out another alternative—ie, keeping the buildings for rent. The plaintiff gave as his reason for selling No 6 McIntosh Street the fact that there were some undesirable tenants therein, he experienced some vandalism and some tenants left the premises without paying the rent, and as a result No 6 McIntosh Street did not represent a good investment for him. However, the plaintiff purchased Nos 2 and 4 McIntosh Street from Oiie on November 28, 1966. Nos 2 and 4 McIntosh Street were identical apartment blocks to No 6 McIntosh Street. He commenced having trouble with the tenants at No 6 McIntosh Street almost immediately after he purchased it in August. By November 28, 1966 he had had almost five months of rather unfortunate experiences with No 6 Mcintosh Street. It seems strange then, if his motivation for acquisition was acquisition for rental income, why he would purchase two additional identical blocks for rental income when his experience had been so unfortunate with the first block. I do not accept the plaintiff’s explanation in this regard. I accordingly find that the acquisition of the McIntosh Street property by the plaintiff was a part of a trading pattern and was purchased for resale.

The Auburn property formed an integral part of the transaction for No 6 McIntosh Street, being accepted in trade as part of the purchase price. The plaintiff only kept the Auburn property for about a year. In my view, the profit thereon is also taxable as a part of the trading pattern established by the plaintiff.

For the foregoing reasons, I have concluded that the Minister’s reassessment for the taxation year 1968 was correct in respect of all the issues raised in this appeal.

Before concluding, I should deal with an objection made at the trial by plaintiff’s counsel to the admissibility of a letter alleged to have been written on February 27, 1969 by the plaintiff to his solicitors, Messrs Kitz, Matheson and Brown (Exhibit 24 under reserve) on the basis of the solicitor-client privilege. At the trial, I reserved for further consideration the question of the admissibility of. this. letter. I have concluded that said objection was well taken. Said. letter is accordingly ruled inadmissible.

For all of the foregoing reasons, the plaintiff’s appeal is dismissed in respect of the 1968 taxation year and the Minister’s reassessment is affirmed.

In respect of the 1969 taxation year, said reassessment is referred back to the Minister for further reassessment on the basis that $5,000 instead of $12,000 should be added to the plaintiff’s 1969 income as interest income received from Laurie Lively.

The defendant is entitled to her costs against the plaintiff.