Korvette Realties Limited v. Minister of National Revenue, [1974] CTC 2243, 74 DTC 1183

Judge K A Flanigan (orally: June 25, 1974):—This is an appeal by Korvette Realties Limited from a reassessment of the Minister of National Revenue for the 1970 taxation year.

The issue in question is a very narrow one and deals with what in fact was the consideration received by the appellant for the sale of two parcels of land that it had assembled for shopping centre purposes in St Hyacinthe, Quebec.

The appellant treats the total consideration received as the purchase price of the land and claims a reserve for the greater portion under section 85B of the Income Tax Act as it then was.

The Minister, on the other hand, alleges that $35,000 of the total price was not paid for, or in consideration of, the purchase of the land but was paid as a fee by the purchaser, Argo Construction Limited, to the appellant for the efforts that it had put forth in ensuring that the two prime tenants of the shopping centre would be Steinbergs and Zellers.

The only witness called in this case is Mr Sugarman, the president of the appellant company and, I assume, since there was no evidence to the contrary and from the manner in which he gave his evidence, that he is the beneficial owner of the appellant company. His evidence is that the company is in the business of buying and selling land. The general procedure is to find an area that is ripe for a shopping centre, then to make some inquiries as to whether or not prime tenants are available, to check zoning restrictions, check the traffic flow, means of ingress and egress to the subject property, the availability of municipal services and then to sell the property to a corporation, or individual, who is prepared to construct a shopping centre.

The appellant company is interested, primarily, in shopping centres and, I think, for the purpose of deciding this appeal, one can assume that they did nothing but assemble land for shopping centre purposes. The activities that I Have just outlined that the appellant company would undertake were, of course, necessary if they were to receive a profit on the turnover of the real estate. There was no question whatsoever that they were land assemblers and there is no question that the profit made in this transaction was taxable and was known to be taxable by Mr Sugarman at the time of.the transaction. The only question is whether or not the sum of $35,000 must be deducted from the final purchase price in order to arrive at the figure which may be subject to the reserve under section 85B.

The facts, briefly, are that in February 1970, as shown on appellant's Exhibit 1, the appellant entered into an option agreement with Argo Construction Limited to sell some property it had assembled on the outskirts, or at the entrance, of St Hyacinthe, Quebec for the consideration of a sum of $475,000. The option was to be exercised by April 10, 1970, but by appellant’s Exhibit 2, it was subsequently extended over a further period, on the payment of $10,000 by Argo Construction Limited. This sum was to be applied on the purchase price if the deal was completed and, if it was not completed, then the $10,000 would be forfeited.

The transaction was subsequently completed on. June 9, 1970 by the exercise of the option and: a deed. of transfer was ‘executed in July but, to all intents and purposes, the ‘transaction was a fait accompli on June 9, 1970. The difficulty arises out of the fact that on June 9, 1970, when Argo Construction Limited exercised its option, it also set out in a letter to the appellant company that the sum of $35,000 was to be paid as a commission and subsequently reworded to include the terms “for and in consideration of the services rendered to Argo” by the appellant company and these services, of course, could only be the services that I have outlined earlier. .

There were no. written leases entered into, there were no letters of commitment from either of the prime tenants, Zellers or Steinbergs, but the evidence of Mr Sugarman is that Argo Construction Limited was already building two properties for Zellers and they were, therefore, not strangers and there was no reason to believe that Zellers and Steinbergs, having decided in their own corporate entities that this was a good location for their respective businesses, would change their respective minds in this short period of time.

The evidence also indicates that between the granting of the option to Argo Construction Limited and the exercise of the option, Mr Sugarman continued to talk to Zellers and Steinbergs, and negotiated, if you will, to make sure that they did stay interested and not seek, or accept, alternate proposals. The reason for this is obvious because in so far as Mr Sugarman was concerned, the land could not be sold at a profit unless these prime tenants were available and unless the other matters that I have mentioned were resolved favourably to the prospective builder.

Somewhere, or somehow, between the granting of the option by Korvette Realties Limited and the exercise of the option by Argo Construction Limited, the price was altered from $475,000 to $410,000, and on closing the transaction, the price of the land was stipulated in the deed to be $375,000 and, by appellant’s Exhibit 3, $35,000 was to be paid for some service rendered.

I think I should point out that paragraph 10.4 of the original option provided that the appellant would convey all its rights, title and interest in and to the land and to all prospective leases with Zellers or any other persons, or corporations, that might have been negotiated. There was no change in the wording of that option until its exercise and the only change is in the purchase price and the method of payment.

Mr Sugarman says that it made no difference to him how the purchaser worded its letter of June 9, appellant’s Exhibit 3, because he was anxious to cooperate in any way to close the transaction. He could not realize his profit unless he sold the land and, presumably, this is why the price dropped from $475,000 to $410,000 and it corroborates the facts given in evidence today by Mr Sugarman that he would rather take less in any manner that would suit the purchaser than lose the deal. When I say “take less” I mean, of course, take less profit, not to take less than was invested in it. The only thing that was invested in it by the appellant, so far as I have been able to ascertain by the viva voce evidence and the documents, was time. There were no improvements made to the land and there were only the attendances on prospective tenants and municipal authorities, as outlined at the outset of this judgment.

Why then did the appellant leave itself open to this situation by accepting and agreeing to, as is the evidence of Mr Sugarman, the contents of the letter of June 9, 1970 from Argo Construction Limited? I think the answer to that lies in the very words of Mr Sugarman: he wanted to complete the transaction, he did not need the full purchase price at the time, he was interested in using the $10,000 that had been paid with the option, or the extension to the option, and it is my inference from his evidence that he would have agreed to almost any reasonable request to complete the transaction.

I must reiterate the obvious at this point. -I think that when one is dealing with income tax cases, one must look to the substance of the transaction rather than to the form because many documents may be penned in one sense, by the parties to an agreement, with the intention that they be read in another. But, I think, here both the form and the substance substantiate that the appellant was prepared to allow the purchaser to put itself in a position to claim an expense by accepting the sum of $35,000 as a commission, or whatever wording is in appellant’s Exhibit 3, and that the whole form and substance, together, of the transaction, with respect to the purchase price and the payment thereof, was altered on June 9,1970.

I find corroboration for my belief in this result in the fact that the consideration shown in the deed was $375,000 for the land. It is clear to me that, on closing the transaction, the land was sold for that amount and the $35,000 was agreed to by the appellant as a commission, or fee, for services already rendered—call it what you may— but under the circumstances, there is no question whatsoever in my mind that it was income at the time, and not subject to a reserve within the meaning of subparagraph 85B(1)(d)(i), or any other subsection of the Act. Therefore, I find no error, either in fact or in law, in the reassessment of the Minister and the appeal must therefore be dismissed.

Appeal dismissed.