Hans Reicher and John W Bradstock v. Minister of National Revenue, [1974] CTC 2131

The Chairman (orally: December 11, 1973):—This is an appeal by Hans Reicher against a reassessment of the Minister of National Revenue for the taxation year 1969. It is agreed that the evidence in this case will apply equally to the appeal of John W Bradstock, which is Appeal No 73-462 in the Board’s records.

This is a trading case. It is a question of whether or not the profit made on the sale of a piece of property on which a building had been constructed by the appellants and another is income as claimed by the respondent or is a realization of a capital asset as claimed by the appellants. I should say at the outset that Exhibit A-1 contains some 64 sub-documents which give, in chronological order, a very clear insight into the factual circumstances that existed during the interval between the purchase and the sale of the land in question.

Certain companies have been mentioned. Some were incorporated to be the mortgagors to Great West Life, others that have been mentioned have no connection whatsoever with the transaction, and for the purposes of my judgment I completely disregard the limited companies, because there is an agreement of trust indicating that the true ownership of the subject property (being Lot 89, Plan 7607, for the Township of North York in the County of York) rests two-thirds with Reicher and Bradstock and one-third with an architect by the name of D Ross King who was closely associated with them in this venture.

In 1955 they purchased this property for the sum of $67,000 and it consisted eventually of Lots 88 and 89. The amount that they were to pay was, I believe, 10% down on the execution of the agreement and, over a period of time, they were to make payments somewhere in the neighbourhood of $16,000 plus interest until the purchase price was fully paid. If they did not complete the purchase price payments, then their money would be forfeited and the land would never be transferred to them pursuant to the original agreement. In February of 1967 they did, however, obtain and register a deed to the property.

in January of that year, perhaps in anticipation of the completion of the transaction, the three men entered into a partnership agreement in the usual terms—a very short agreement—indicating that two-thirds of the property was owned by the appellants in these two cases and one-third by Mr King. One of the clauses in the partnership agreement provided that, if any one or more of the partners wanted to dispose of his interest in the land, he must first offer his interest to the other two and, if they were not able or prepared to take up his interest, it could then be offered to third parties.

The evidence further indicates that about early May 1968 construction was started on Lot 89 and was completed in about 3 months. The evidence of Mr Reicher is that almost from the time that the shovel entered the ground people were inquiring as to whether or not the property was for sale.

Their evidence is that, after considering the cost of several moves which had been occasioned by a continuing need for newer premises and greater space, they had been led to the conclusion that they should build a building designed to meet their own needs and those of Mr King, who is, as I have said, an architect. This is what they have said they intended to do.

The appellants are professional engineers and had worked with Mr King on several previous occasions. Bradstock and Reicher have been together since 1956, a year after Mr Bradstock came to this country from New Zealand. They had Mr King draw up plans for the interior of the building, which plans are shown in great detail not only in Exhibit A-1 but also in Exhibit A-6, which is an enlarged picture or diagram of the floor space. The scheme was to house Reicher and King on the second floor of the building and to rent the lower quarters on such a basis that, as their own need for further space occurred, leases would be expiring on at least part of the lower premises, and thus they could gradually take over the whole building, if needed.

The building, as I have said, was completed in August or October of 1968 and the parties had the good fortune to “mortgage out”, that is, they were able to construct the building on the site within the $275,000 first mortgage they had obtained from Great West Life. They moved into the premises and the further aspect of their scheme—and I do not use that term in any derogatory sense—was fulfilled when they also rented the first floor, as they had anticipated.

By the early fall of 1968 they had accomplished what they had set out to do. All three partners have taken the witness box and said that this is a beautiful spot for an office, overlooking as it does the Don Valley, and it is situated either close to or convenient to the residences of all of them. According to Mr Bradstock, it was never thought of from a commercial aspect but merely as a good place to have an office.

As has been said in many trading cases, the least that one can expect appellants to do is take the witness box and express their intention to build a revenue-producing capital asset and to deny the existence of any secondary intention to turn the property to account at a profit at the first opportunity. This has been done in this case. It has also been said in many cases, as was said in effect in the case of Racine et al v MNR, [1965] CTC 150; 65 DTC 5098, cited by counsel for the respondent and decided by Associate Chief Justice Noël when he was a judge of the Exchequer Court of Canada, that one must listen to the evidence and appraise it. However, one must really look at the surrounding circumstances in order to try and arrive as nearly as possible at the true intent of the parties at the time the purchase was entered into.

The evidence in this case is that in 1968 Mr Reicher was in financial difficulties for one reason or another. At the same time, the evidence is that these three gentlemen purchased Lot 90 adjacent to their building for $60,000, using no money of their own but borrowing $30,000 cash from the bank and giving back a first mortgage for $30,000. Mr Reicher’s explanation, which was corroborated by Mr Bradstock, is that this created a better position for them with the bank and was a sound move on their part. At the same time, both Mr Bradstock and Mr Reicher testified that land was not moving in the area at that particular time because the bridge had not yet been completed across the Ravine and there was still a traffic problem.

They were cross-examined at some length as to why they did not dispose of Lots 88 and/or 90 to alleviate Mr Reicher’s situation, and, in general, the answer was that because of the depressed value of the land in the area the amount realized would not have been enough to meet his needs: this notwithstanding the fact that it was evident, I think, to men of the intelligence of these appellants, that the area was going to develop to a very substantial degree in the immediate future—and 1! think this is borne out by the fact that they had no difficulty whatsoever in selling the property at a profit very shortly afterwards.

When Mr Reicher’s financial difficulty arose, he went to his partners, as he was bound to do under their agreement, and offered them his share. Neither partner was in a position to buy it. This being only a year and a half after they signed the agreement, I think ! am entitled to draw from the evidence the inference that, at the time that clause was written into the partnership agreement, it was evident to all who signed that they would not be able to take up any share of any partner if asked to do so in the very near future. This is again borne out by the fact that in late 1968, when they purchased Lot 90, they did not have a cent of their own to put into it. What they did immediately after turning Mr Reicher down with regard to taking over his interest in the property, was go to Gladstone Realty—that may not be the correct full name of the organization—and offer to sell the property to them. After a very short period of negotiation, a contract was entered into, consisting of an offer to purchase and to sell the property for twice the amount of the mortgage on the property, namely, $550,000.

Part of the transaction was a leaseback of the entire property on a net basis by the individuals. This then doubled the rental situation for Reicher, Bradstock and King over the amount of the mortgage payments they were making, but this must be calculated downward in the light of the rent being received for the downstairs area. This was a property that was built “custom-fashion” to suit the needs of these individuals, who were not only prepared to sign a 25-year lease but also to handle the property and who easily and readily, apparently, leased the downstairs part of the property. In the circumstances, it seems to me that they could easily have solved the financial problems of one or all of them by refinancing the building, or finding capital in other ways than by rushing posthaste to sell it, as they did.

This clearly, at least to my mind, leaves only one impression and one inference to be drawn from all the evidence, and that is that there was a profit motive and that they intended to turn the property to account at the earliest opportunity, provided they could retain suitable premises for themselves in the said building for a long period of time.

In most cases I pay little attention to the period of time that a property is owned by the appellants. In this case, a period of some 9 months is all that it took for the partners to dispose of the property after they had moved in and after they had rented the lower floor. I therefore cannot come to any conclusion other than that the appellants were engaged in a venture in the nature of trade as defined in CTC R E Anderson et al v MNR (TRB) 2135

section 139 of the Income Tax Act. If I were pushed to it, this is one of the few cases where I could find on the evidence, and by drawing inferences from that evidence, the unmistakable existence of a secondary intention to turn the property to account as described in the well-known case of Regal Heights Ltd v MNR, [1960] Ex CR 194; [1960] SCR 902; [1960] CTC 46, 384; 60 DTC 1041, 1270.

For these reasons, the appeals must be dismissed.

Appeals dismissed.