Pierce Investment Corp v. Minister of National Revenue, [1974] CTC 825, 74 DTC 6608

Walsh, J:—This is an appeal from a decision of the Tax Appeal Board dated December 8, 1970 with respect to income tax assessments for appellant’s 1965 taxation year.

Appellant is a real estate company and claims its primary purpose is the acquisition and development of revenue-bearing real estate, although its corporate powers give it the right to deal therewith, as is customary. In 1962 it acquired a vacant lot on McGill College Avenue on the east side between St Catherine Street and what was then Burnside (now deMaisonneuve Boulevard) in the City of Montreal which was then operated as a parking lot, with the intention of building a highrise revenue-producing office building thereon. The purchase price of the property, which only had a frontage of 23.48 feet on McGill College Avenue and an average depth of 97.05 feet, was $42,500. Efforts were made subsequently to acquire neighbouring property but the owners of same refused to sell. In due course appellant’s architect reported on November 18, 1964 that he was unable to design a plan for the lot as, due to a recent change in the building by-laws of the City of Montreal, they would be unable to obtain a building permit for lack of parking facilities required by the City. His letter stated in part:

Since 1963, it is impossible to use an elevator for access to garage in a basement, also, the parking of cars must have free access and egress since early 1964.

At about the same time, appellant learned that the T Eaton Company Ltd proposed a large scale development of this area of the city which would encompass appellant’s property and, upon being approached by representatives of the developers and being threatened with expropriation (which the City of Montreal did not have the power to do) unless an amicable agreement were reached for the sale of same, appellant sold the property on May 13, 1965 for $375,000, thus realizing a net gain of $312,723.23 after commission and fees, which gain was taxed as an income gain. Appellant contends that it was a capital gain and thus exempt from taxation under the Income Tax Act in force at that time.

Israel Shragie, secretary-treasurer and owner of 50% of the shares of appellant, the other 50% being owned by his brother Abe Shragie, the president, testified that appellant was incorporated by his sister Sarah Shragie on May 29, 1962 under the name of Benka Investment Corporation, its name being changed by supplementary letters patent dated September 19, 1962. A brother, Eli Shragie, who had been administering her properties, had died in April 1962. This brother also had a real estate investment company known as Elias Investment Corporation of which Israel and Abe had been directors, although inactive. They were executors of his estate and carried on and bought their sister Sarah’s shares in appellant corporation from her for $100,000. The company owned and operated a revenue-producing property at the corner of Pierce and St Catherine Streets in Montreal and still owns the property which now has a city valuation of $600,000. They were introduced to the McGill College Avenue property by a real estate agent, Louis Lavut, who had known their deceased brother Eli. According to Israel Shragie’s evidence, they realized that the property was near the Place Ville Marie, that the widening of McGill College Avenue on the west side was projected so that properties on that side had been homologated as far north as Sherbrooke and that on the east side zoning would alter the front of the buildings which would have to be set back and have a minimum height of 100 feet between St Catherine and Burnside. The deed of. purchase from Samuel Andrews, which is dated December 28, 1962, provides that he should also turn over plans that he had on hand. Plans dated August 19, 1960 were produced as exhibits as well as a quotation from Franki of Canada Limited to Mr Andrews, dated September 12, 1960, for excavating the property. Mr Andrews’ plans were to construct a tavern on the ground floor of the building as he already had a tavern licence and was being forced to vacate the premises he was occupying on Peel Street and wished to relocate on McGill College Avenue. Mr Andrews had obtained a building permit but this was revoked on December 15, 1960.

By-law No 2576 of the City of Montreal, approved on September 25, 1960, had provided in article 11 that all building permits issued since August 1, 1960 for buildings not in conformity with the provisions of the by-law would be revoked. This by-law limited the type of businesses which could be established in the buildings abutting on McGill College Avenue and did not include taverns and, moreover, required that premises located on the ground floor of the buildings used for purposes other than residences should be at least 25 feet in width and that parking spaces should be provided inside the buildings with exits and entrances other than by way of McGill College Avenue. While the precise ground for revoking Mr Andrews’ permit does not appear in the notice of revocation, it is evident that his plans would not comply with the by-law in several respects. Mr Shragie testified that this would not have prevented appellant from constructing a building there, however, as their idea was that the ground floor would not be occupied by business premises but would only be used as access to the upper floors. They intended to use a hydraulic elevator for access to the basement parking areas.

Parking by-law 2241, as amended by by-law 2283 in effect in 1962, provided that parking space must be provided in every new building containing a floor area of 6,000 square feet or more, to the extent of one such parking space for each 1,000 square feet or fraction over 500 square feet and that each parking space should be accessible to the street directly or through a lane or a private driveway leading to a public road. While the letter of the architect, Mr Grenier, had referred to changes in the building by-laws, which does not seem to have been the case, he may have had in mind changes in policy by the city in enforcing them as the use of elevators giving access to basement parking had apparently been permitted in other buildings and there is some doubt as to whether the requirement that the parking space should be accessible to the street directly or through a lane or a private driveway leading to a public road prohibited the use of elevators. In any event, he was of the view and had advised appellant that there was no use drawing plans for their building as a permit could not be obtained. Aside from consulting the architect in the summer of 1964, the only steps which appellant had taken towards constructing a revenue-producing building on the property was to have a survey made by a Quebec land surveyor between October 16 and 29, 1964, which survey establishes the homologated lines according to by-law 2576 (supra).

Israel Shragie testified further that after acquiring the property at the end of 1962 they did not immediately begin plans to develop it because they were fully occupied as executors of their brother’s estate and by the subsequent death of another brother who was one of the heirs and executors of Eli’s will. Meanwhile the vacant lot was being used for parking and the revenue was sufficient to defray the taxes on same. He was confident of being able to obtain a permit for the building they proposed which would be about twelve storeys high despite the narrowness of the property as he was personally aware of a building constructed on Mountain Street above deMaisonneuve Boulevard in 1961 or 1962, by Mr Brummer on an equally narrow property, by using hydraulic elevators as access to the parking. Before Mr Grenier’s letter they had approached the CNR who owned the adjacent property but they were not interested in selling. They were approached by potential buyers for their property but did not wish to sell as they were still hopeful of developing it themselves. In the latter part of 1964 they were approached by a real estate agent representing Mr Reisman, a developer, who threatened that the City would expropriate the property if they refused to sell. Apparently they put some credence in this because at the time they had been informed that the Department of Municipal Affairs was considering a Bill which would empower a municipality to expropriate with prior possession any property or part of a property which might form part of an area which private parties wished to develop for their own profit and benefit and to deliver the said property so expropriated to the developer. Mr Abe Shragie, on behalf of Elias Investment Corporation, wrote a letter dated December 22, 1964 to the Property Owners League of Montreal respecting this and objecting to the Bill which was eventually never passed. Although ‘they sold the property on May 13, 1965 to Marlia Investments Ltd for $375,000, they only received $35,000 at the time with $15,000 payable on June 13, $55,000 to be paid on May 13, 1966 and subsequent annual payments of $22,500 on May 13 each year with interest at 6% until May 13, 1977. The development project of the purchaser fell through so they had difficulty collecting their payments and it is only recently that construction has started on the property in question.

He testified that the company has never bought or sold raw land and that the extensive list of properties disposed of in 1962, 1963 and 1964 by Elias Investment Corporation and Israel Shragie and Abe Shragie personally were for the most part of winding up the estate of Eli which contained a large number of rather poor properties which Eli had devoted his time to administering which neither of them had the time to undertake so they disposed of most of them, merely keeping superior properties. Nevertheless, the schedule of properties acquired and disposed of indicates beyond the slightest doubt that they were very familiar with purchases and sales of real estate and property prices during the relevant period. Also, it must be noted that not all of the properties disposed of were poor properties, one on Graham Boulevard in the Town of Mount Royal acquired in 1958 and disposed of in 1963 being a large and substantial apartment house. He stated that the political climate in Quebec at the time had something to do with these sales.

He testified that when they approached Mr Grenier^ the architect, who was referred to them by Mr Lavut in the summer of 1964, they knew nothing at that time of the T Eaton Company project. Their discussions with the CNR about buying the adjacent property led to their being told by that company that it was its intention to take its time and see what was going to develop. The actual resolution calling for the sale to Marlia was passed on March 8, 1965, and the witness stated that there might have been four or five months of negotiating before the deed of sale in May. They did not consult their attorney about the alleged expropriation threat because they were convinced of the validity of it when they read in the news that the City of Montreal was seeking expropriation powers for land assembly purposes in connection with major developments. When they sold the property the offer was submitted to them through Mr Lavut, a family friend, who had sold them the property in the first place and they paid his commission on the sale but they had not retained him to try to find a buyer for them. He had been active in planning the proposed development with them. Abe Shragie corroborated his brother’s evidence.

Louis Lavut testified that he had been a contractor for 15 years and had been engaged in the real estate business for 50 years and was at the time of these transactions the owner of City Realties. He foresaw no problem in building an office building on such a narrow property in this area. He referred to a building which he had built for the Underwood Typewriter Company on Beaver Hall Hill where the lot was only 18 feet wide. He had helped Andrews in connection with his proposals to relocate his liquor licence in a building on McGill College Avenue and the necessary soil tests had been made by Franki in 1960 and the building permit obtained, only to be cancelled soon after. Eventually, Mr Andrews was reimbursed some $21,000 by the City of Montreal for the expenses to which he had been put. When Mr Andrews decided to sell he approached the T Eaton Company and they rejected the property saying they were not interested in it. He then approached other purchasers and finally Mr Shragie. The building he suggested he would build would be about 12 storeys high, with about 2,000 feet floor. area on each floor. He estimated that the total cost would be about $400,000 and the income with one tenant on each floor would be about $140,000. He said he was not the least bit concerned about being prevented from obtaining a building permit because of parking regulations. He expressed the opinion that nobody would buy a property of that size for speculation in 1962. He had not heard of Mr Reisman’s project at the time and he only approached the CNR after appellant had bought the property from Andrews.

Peter Shapiro, CA, the auditor of appellant and the other family companies, testified that Elias Investments had had a net return from their properties before depreciation in 1961 of $74,300, in 1962 $51,700, in 1963 $23,700 and in 1964 $1,240 when it still owned buildings that had cost $260,000. In the interval a number of the properties had been sold. There was some profit on most of the sales, however, as most of the properties had been bought many years previously, and these profits were all treated as capital gains and accepted by the Minister of National Revenue as such. One property at the corner of Hutchison and Sherbrooke Streets had been expropriated and the profit treated as income, and this could not be contested as the notice of objection was made too late.

Robert Chatillon, civil engineer employed by the City of Montreal since 1967, stated that he, however, was familiar with earlier building by-laws. The parking by-law has been looked after by the Department of Permits and Inspection since 1960 and before that there might have been tolerances. He knows that the Brummer building has an elevator but this would be against the regulations now although there may have been a tolerance at that time.

As always in cases of this type, the determination of what were the real intentions of the purchasers at the time they acquired the property and whether they had, at that time, a secondary intention in the event that their primary intention could not be carried out, is a difficult one. There is no doubt, however, that the intentions of appellant cannot be differentiated from the intentions of the Shragie brothers nor can they disassociate their own real estate experience and that of the other family real estate companies from that of appellant. As Judson, J stated in Regal Heights Ltd v MNR, [1960] SCR 902 at 907; [1960] CTC 384 at 390; 60 DTC 1270 at 1272-3:

Throughout the existence of the appellant company, its interest and intentions were identical with those of the promoters of this scheme. One of the objects stated in the memorandum of association of the company was

“To construct and operate apartment houses, blocks, shopping centres and to otherwise carry on any business which may be conveniently carried on in a shopping centre.”

Nothing turns upon such a statement in such a document. The question to be determined is not what business or trade the company might have carried on but rather what business, if any, it did in fact engage in.

I am also of the view, as has been expressed in other cases, that while the evidence of the witnesses is helpful in endeavouring to determine their intentions, their actual conduct and the steps they took to carry out these intentions gives a much better indication of what they actually were. Without intending to cast any aspersions on the credibility of the witnesses in the present case it is nevertheless evident that in any case where a distinction must be made between a transaction which constitutes an adventure in the nature of trade and one which leads to a capital gain, one must expect the witnesses to insist that their intentions were solely to make an investment and that the idea of reselling the property at a profit had never occurred to them even as a secondary intention at the time of making the original investment, but was merely forced on them subsequently by some event beyond their control. If they were not in a position to testify to this effect they would have little or no ground for appealing against the assessment.

The leading case on the doctrine of secondary intention is that of Regal Heights (supra) in which Judson, J stated at pages 905-6 [388-9, 1272]:

There is no doubt that the primary aim of the partners in the acquisition of these properties, and the learned trial judge so found, was the establishment of a shopping centre but he also found that their intention was to sell at a profit if they were unable to carry out their primary aim. It is the second finding which the appellant attacks as a basis for the taxation of the profit as income. The Minister, on the other hand, submits that this finding is just as strong and valid as the first finding and that the promoters had this secondary intention from the beginning.

Another case which deals with secondary intention is that of Paul Racine, Amédée Demers and François Nolin v MNR, [1965] CTC 150; 65 DTC 5098, in which Noël, J, as he then was, states at page 5103:

lt is not, in fact, sufficient to find merely that if a purchaser had stopped to think at the moment of the purchase, he would be obliged to admit that if at the conclusion of the purchase an attractive offer were made to him he would resell it, for every person buying a house for his family, a painting for his house, machinery for his business or a building for his factory would be obliged to admit, if this person were honest and if the transaction were not based exclusively on a sentimental attachment, that if he were offered a sufficiently high price a moment after the purchase, he would resell. Thus, it appears that the fact alone that a person buying a property with the aim of using it as capital could be induced to resell it if a sufficiently high price were offered to him, is not sufficient to change an acquisition of capital into an adventure in the nature of trade. In fact, this is not what must be understood by a “secondary intention” if one wants to utilize this term.

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 the 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.

In the case of Irrigation Industries Limited v MNR, [1962] SCR 346; [1962] CTC 215; 62 DTC 1131, Martland, J referred with approval to a statement of the principle by Lord Buckmaster in Learning v Jones, [1930] AC 415 at 420, where he stated:

. . . an accretion to capital does not become income merely because the original capital was invested in the hope and expectation that it would rise in value; if it does so rise, its realization does not make it income.

He also referred to the statement of Rowland, J at an earlier stage in the same case ([1930] 1 KB 279 at 284) when, in referring it back to the Commissioners, he stated:

I do not indicate which way it ought to be, but I commend the Commissioners to consider what took place in the nature of organizing the speculation, maturing the property, and disposing of the property, and when they have considered all that, to say whether they think it was an adventure in the nature of trade or not.

In the present case it must be said that appellant apparently did nothing in connection with maturing or disposing of the property with a view to the sale of same, but rather eventually accepted an unsolicited offer and then only allegedly under some duress. In the case of Her Majesty the Queen v Stanfold Investment Corporation, [1974] CTC 19; 74 DTC 6035, I had occasion to state at page 26 [6040]:

The mere fact that it was general knowledge at the time of the purchase that the area in question, which eventually became part of the City of Laval, was developing rapidly and that a person buying land there would most likely find that it would increase in value, is not sufficient, in my view, to indicate that this was the secondary intention of defendant at the time the purchase was made. On the contrary, the evidence discloses that the sole intention was that the defendant would develop the property itself as a revenue-producing investment and the mere fact that defendant no doubt realized that there was little, if any, risk of loss and on the other hand a reasonable expectation of profit even if its intention was frustrated and it was forced to sell the land, is not in my view sufficient to establish that this was a secondary intention of defendant at the time of the purchase. Knowledge and intention are not synonymous.

While the facts in the present case resemble to a considerable extent those in the Stanfold Investment case (supra) the defendants in that case had verbal assurances from the municipal authorities that they planned to run an industrial boulevard through the property and that services would be available within two years. The development of the services kept being put off because of planning of a merger of the municipality in which the property was located with another municipality to form the City of Laval. No actual plans were made for the development of the property since this could not be done until the exact location of the services and projected streets was made known. Defendant’s project appeared to be a reasonable and feasible one and it kept the property for seven years before it was sold under threat of expropriation. In the present case, on the other hand, during the two years it had the property appellant did nothing but have a survey made to determine where the homologated property lines would be by virtue of By-law No 2576 which was in effect at the time the purchase was made, which survey was not done until the autumn of 1964, and make inquiries from an architect as to the feasibility of the building which they proposed to build on the property, which inquiries they initiated in the summer of 1964. The architect’s reply on November 18 quickly extinguished, or in any event should have extinguished, any hopes they might have had of building on the property. It must be pointed out, however, that his letter merely stated that it has been impossible to use an elevator for access to a basement garage since 1963 so that when they bought the property this possibility might still have existed. I cannot agree with Mr Lavut’s excessive optimism that this problem was of no consequence and could readily be overcome. Appellant knew when it bought the property that Mr Andrews’ permit had been cancelled but did not trouble to inquire from the City its reason for this. In both the Elgin Cooper Realties Limited v MNR, [1969] CTC 426; 69 DTC 5276, and Bead Realties Limited v MNR, [1971] CTC 774; 71 DTC 5453, cases, in which it was held that the sales were not made in the course of an adventure in the nature of trade, the appellants had actually proceeded with their plans before their intentions were frustrated. In the former case the apartment building had been erected to operate it as an investment but was sold as a result of difficulties and faults encountered during the course of construction which resulted in a change in the original intention. In the latter case, frequent and substantial efforts had been made to interest tenants in long-term leases in buildings which appellant proposed to construct according to their specifications and the sale was eventually made only when the associate who had been most active in this was forced to leave town and could not continue with his efforts.

In the Supreme Court case of Vaughan Construction Company Limited v MNR, [1971] SCR 55; [1970] CTC 350; 70 DTC 6268, the appellant, on receiving certain property by exchange, undertook in a covenant with the. city to construct a building or buildings on the property, of first class type, as soon as practical after first submitting general plans for approval. In rendering the judgment of the Court Chief Justice Laskin stated at page 59 [353, 6270]:

Notwithstanding these undertakings, the appellant made no move to subdivide the property, did not develop any building plans, did not employ any architect or seek out a builder or contractor, did not seek out any prospective occupant for a building on the property, and did not try to arrange any financing of possible buildings, its own assets being inadequate.

(This last does not apply to appellant in the present case which apparently would have had no problem with the financing.)

At page 60 [353, 6270] he states:

Some one or more of such steps would have been more consonant with an avowed Investment purpose than the mere assertion thereof; and the five month period which elapsed before expropriation loomed was. ample time within which to give some objective indication of the alleged purpose.

Again at page 60 [353, 6270] he states:

In view of the foregoing, and having regard to the onus on the appellant, there is no ground, despite some assertions of Investment intention by Vaughan, upon which to impugn the conclusion of taxability reached by Thurlow, J. It is perhaps superfluous to add that the taxability of a gain is not affected merely because the gain arises upon a forced taking of land.

It is significant that in that case only five months had elapsed between the acquisition of the land and the expropriation.

The comments of Cattanach, J in the case of Bestpipe Limited and Press-Seal Corporation of Canada, Limited v MNR, [1970] CTC 310; 70 DTC 6226, are applicable to the facts of the present action. At page 320 [6232] he states:

If it were the exclusive intention of the appellants to use the Scarborough land at the time of its acquisition as the site for the construction of a plant for the manufacture of concrete pipe and such other products as plans for diversification might dictate, then the profit from the sale of part of the Bestpipe land in 1963 and the sale of the balance of the land owned by Bestpipe and the whole of the land owned by Press-Seal in 1964 would not be taxable.

However, if that were not the appellants’ exclusive intention at the time of the acquisition of the land but the appellants also had in mind at that time the possibility of turning the land to account for profit in any practical way that might arise including the sale of it, should it not be feasible to proceed with the construction of a manufacturing plant, then the profits from the subsequent disposition of the land are properly taxable.

Referring to the argument of counsel for the Minister that while the acquisition of the land as a site for the erection of appellants’ plant might well have been their intention but that it was not their sole intention, he states at page 321 [6232]:

In support of that contention he pointed out that what were called plans by the directors were no more than hopes and contemplations, that no detailed cost estimates were obtained, no enquiries were made of the municipal authority as to the possibility of the agricultural land being zoned as industrial, nor was a building permit obtained or applied for.

And again on the same page:

He argued that since the land was in Metropolitan Toronto with a rapidly expanding development the principals must have been aware of that development and that the land was highly speculative for that purpose at the time of its purchase ...

Finally, at page 323 [6234], the learned judge concludes:

It is inconceivable to me that business men of the experience possessed by the officers and directors of the appellants would not have contemplated the sale of the land if their more ambitious plans for the use of that land could not be realized in whole or in part, nor do I think that they were oblivious of the fact that the land was situate in a developing area with the likelihood of an increase in price.

Many of the facts in that case resemble the present one. I do not doubt that appellant’s intention when it acquired the property in question was to build a revenue-producing office building on it nor that it had some justification for believing at the end of 1962, before the by-laws were more strictly enforced, that this was possible. Nevertheless, this intention was a fairly vague one and not too well defined. Encouraged by the excessive enthusiasm of Mr Lavut, the agent and friend, that despite the cancellation of Mr Andrews’ building permit, there would be no problem in obtaining the necessary permit for the type of building it proposed, it made very limited enquiries before buying and did not even attempt to find out the reasons for the cancellation of Mr Andrews’ permit. It hoped to use his plans with necessary modifications on the ground floor level. It also made some inquiries through Mr Lavut about the possibility of purchasing the adjacent land from the CNR which would have permitted it to build a larger building or, in any event, have overcome any difficulties which might result from the width of the property and permitted access to a basement garage by ramp. This was done after the purchase, however. The attempts after purchase to acquire additional land so as to overcome building problems merely indicate a continuing intent to attempt to build on the property, but this does not of itself exclude the existence of secondary intent to eventually sell at a profit if this could not be done. Meanwhile, the parking lot rental carried the expenses.

Messrs Israel and Abe Shragie, the principal officers of appellant, were busily occupied from 1962 to 1964 in the winding up of the estate of their brother Eli, so allowed two years to pass during which they did little to advance their primary intention. This was then frustrated when the report from Mr Grenier indicated that they could not build their proposed building on the property. At about the same time they received an offer from developers to purchase the property at a very substantial increase in price. Although they had done nothing to seek this sale and claim they were still hoping to build on it, they must have realized by this time that they had little hope of being able to do so. The offer was submitted to them by Mr Lavut who had been active in advising them throughout, not only with respect to the purchase of the property but also with respect to the proposed development of same for investment purposes and, whether their acceptance of the offer resulted from a threat of expropriation or not, it was a handsome offer resulting in a very great profit to them.

Although speculative land sales may not have been taking place to any great extent in the area in 1962 as witnessed by Mr Andrews’ efforts to sell the property for some time, including the approach to the T Eaton Company who refused it before appellant finally purchased it, appellant’s officers were nevertheless well aware of the desirability of the location and that it was only a matter of time before it was bound to go up in value. Israel Shragie did not deny that he was aware that the future on McGill College Avenue was good at the time he bought the property in view of the City’s project at that time to widen it into a boulevard running north from Central Station to the gates of the University. Although the Shragie family group had both personally and through various corporations owned extensive properties rented for investment purposes, they had also made a great many sales in 1962 and were entirely familiar with real estate transactions and market prices generally. I adopt the previously quoted words of Cattanach, J in the Bestpipe Limited case (supra) :

It is inconceivable to me that business men of the experience possessed by the officers and directors of the appellants. would not have contemplated the sale of the land if their more ambitious plans for the use of that land could not be realized in whole or in part, nor do I! think that they were oblivious of the fact that the land was situate in a developing area with the likelihood of an increase in price.

I therefore have come to the conclusion on the facts in this case that the appeal should be dismissed with costs.