Rickron Realty Inc v. Minister of National Revenue, [1973] CTC 355, 73 DTC 5287

Heald, J:—This is an appeal from the decision of the Tax Appeal Board upholding respondent’s income tax assessments of the appellant for the taxation years 1961 and 1963. The only issue in the appeal is whether certain profits realized by the appellant from the sale of certain property in the City of Montreal was income from a business or venture in the nature of trade within the meaning of sections 3, 4 and paragraph (e) of subsection (1) of section 139 of the Income Tax Act, RSC 1952, c 148 or whether the transaction giving rise to said profit was a Capital transaction with the resultant profit being considered a capital gain and therefore not properly added to income.

The appellant is a Quebec corporation, incorporated in September 1957. At all relevant times, appellant’s controlling shareholder was Abe Rosenberg of Montreal, who described himself as a fur merchant. The objects of the company as contained in the Letters Patent empowered it:

. . . to buy, sell, exchange, lease, develop, improve, and in all ways deal and invest in real estate and immoveable property, and to negotiate for the purchase, sale, exchange, or lease of real estate and immoveable property, and generally to carry on the business of real estate agents in all its branches.

It was also empowered to buy, sell and generally deal in bonds, mortgages, debentures, notes and stocks of every nature and kind.

Abe Rosenberg testified at the hearing before the Tax Appeal Board and also at the hearing before me. At the beginning of the trial before me, counsel for the parties agreed that the evidence before the Tax Appeal Board should be accepted as evidence before me subject to the right of either party to adduce such additional proof as he might wish.

Mr Rosenberg, aged 65 at date of trial, has been a fur merchant for well over forty years. A number of years ago his fur business declined and he said he found it necessary to diversify his investments which he accomplished by investing in real property. In 1949 he acquired a property on Concord Street which he still owns. This property had two old houses on it. He converted one so that it could be used for his fur business. He converted the upstairs for two apartments for rental income. The other house was demolished and the balance of the property was converted to a parking lot. It is still operated as a parking lot by a lessee from Mr Rosenberg. Over the ensuing years, Mr Rosenberg acquired other parking lot properties in the downtown Montreal area. Some were operated by him, others were leased out to other parking lot operators. Mr Rosenberg derives substantial revenues from these properties.

Abe Rosenberg testified that in about May of 1959, his brother who had a business on Craig Street West in downtown Montreal approached him concerning the possible purchase of a property known as 646 to 652 Craig Street West which was situated across the street from the brother’s business. This property contained about 7,500 square feet, there were old buildings on the property which were in very poor condition, there were some tenants in said buildings paying very low rentals. Abe Rosenberg made an offer to purchase the property for $60,000. He says the original intention was that he and his brother would buy the property as partners. However, in the ensuing months, his brother was unable to raise his share of the money and he advised Abe Rosenberg that he would not be able to proceed. He also indicated that he felt he should have a profit of $5,000 if his place as a partner in the new venture was taken by someone else. Abe Rosenberg advised his brother that he “would try and get you a buyer” who would pay him the $5,000 profit he was asking for. Abe Rosenberg then approached a friend, Darby Strohl and asked him if he was prepared to come in with him on the purchase. Strohl agreed and also agreed to pay Abe Rosenberg’s brother the profit he was asking. However, Strohl did not have the $30,000 required for his half interest at the moment but Abe Rosenberg agreed to advance to him the said $30,000 for his half share. This was accomplished by Abe Rosenberg borrowing the said money from the bank and lending it to Strohl. Strohl agreed to pay Abe Rosenberg 10% per annum interest on said loan. Abe Rosenberg gave as his reasons for taking Strohl in as a partner: “I thought it over and I said 10% is a better return, why gamble with the whole thing myself, so I can have him as a partner and I will get 10% on my money.” In the result, said property was purchased for $60,000 on August 14, 1959, the deed being registered in the name of this appellant and Darstro Realties Corporation (a corporation owned and controlled by Darby Strohl) as equal co-owners.

In the spring of 1960 the existing buildings on said property were demolished. For a couple of months in 1960 the partners (Rosenberg and Strohl) operated a parking lot on subject property. Then, effective September 1, 1960, they leased the premises to one Louis Saffron, a parking lot operator. The term of the lease was for one year, the annual rental to be $7,800 payable at the rate of $650 per month. The lease contained a provision for renewal for a further period of one year at a monthly rental of $700. The owners were required to pay the property and school taxes and any special assessments for permanent improvements, the tenant agreeing to pay the business taxes.

The lease also contained a clause permitting termination on 90 days’ notice in the event of sale of the property.

In January of 1961, the partners sold subject property for $150,000. Part of the purchase price was paid in 1961, the balance in 1963, hence the reason for the involvement of those two taxation years in this appeal.

Abe Rosenberg’s evidence is that an individual (who later turned out to be a real estate agent) asked him whether he wanted to sell subject property. This individual told him that he had someone Interested in buying subject property for the purpose of erecting a high- rise garage which seemed a good idea because of the proximity to the Railway Exchange Building. Rosenberg says he told this person that he had no intention to sell. Apparently the agent persisted and said “Name me a price”. Then Rosenberg said “how about a hundred and fifty thousand dollars”. His explanation of this was “I figured I asked him a crazy price” on the basis that such a high figure would discourage the agent. However, the agent was not discouraged. He asked for and received from Rosenberg a 30-day option on the premises, the option was exercised and the sale completed. The partners paid a commission of $4,750 to the agent.

The legal principles applicable to a case of this kind were concisely stated by Noel, J (now Associate Chief Justice) in Racine et al v MNR, [1965] CTC 150 at 159; 65 DTC 5098 at 5103, as follows:

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 he must have had in mind that upon a certain type of circumstance 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.

Chief Justice Jackett, in the case of Pine Ridge Property Ltd v MNR, [1973] CTC 201, applied the same principles when he said.

Where the relevant facts as at the time of purchase are considered together with the subsequent events and the affirmations of the appellant’s shareholders, it is not realistic to conclude that the only possibility that motivated the acquisition was the ultimate creation and retention of a very substantial housing development. Having regard to the problems and delays to be expected by the appellant before it could hope to commence the con- crete steps of realization of such a project, such as the creation of detailed plans, the arrangement of permanent financing and the negotiation of contracts, and having regard to the appellant’s lack of financial resources of consequence, one cannot escape the conclusion that, in 1964, the acquisition was a speculation in which, in addition to the hope of an ultimate permanent source of income, the possibility of turning the property to account for profit in any way which might present itself as convenient, or expedient, including resale at some earlier stage, was a major motivating factor.

What then are the inferences to be drawn from the circumstances surrounding this transaction and indeed, what do the partners themselves say about the transaction?

Abe Rosenberg said that the sole intention at the time of acquisition of subject property was to develop it as a parking lot operation in much the same manner as other parking lot operations which he had owned over a lengthy period of years. However, when being cross- examined as to the reason for the insertion of the 90-day termination clause in the event of sale in the lease to Saffron of subject property, he gave his reason: “I want to be free — for development or something” (italics mine). To me this is a clear indication that he certainly had a sale in mind as a possibility at the time he leased to Saffron. On several occasions in his evidence he referred to the purchase of subject property as a gamble. He also said that everybody who owns real estate would sell if the opportunity arose and the price was satisfactory. I am satisfied from Abe Rosenberg’s own evidence, quite apart from the objective circumstances surrounding this transaction, that, while he certainly had a parking lot in mind, this was not the only thing he had in mind. I think this acquisition was a speculation and that Abe Rosenberg also had in mind, at the time of acquisition, the possibility of resale at a. profit and that this was a major motivating factor in his decision to acquire subject property.

Turning now to the objective facts and circumstances surrounding this transaction, there are a number of such circumstances which, taken together, impel me to the conclusion that subject transaction must be considered a trading transaction. First of all, there is the appellant’s charter. The charter gives to the appellant the power to buy and sell, and deal in real estate, it says nothing about the business of operating parking lots. I would not consider the company’s objects, by themselves, to be conclusive, but when taken together with the other circumstances hereinafter referred to, I consider that the real estate objectives and power of the company as contained in its charter, cannot be ignored entirely. Then, it is also a fact that in the late 1950’s Abe Rosenberg was involved in the purchase and sale of raw land in the St Hubert area. Again, this circumstance by itself has very little significance. However, it does tend to suggest that while Mr Rosenberg was, without doubt, a parking lot operator, he might at the same time consider a real estate speculation if the profit potential appeared interesting. Then, there is the fact that, in this case, Abe Rosenberg associated himself with Mr Darby Strohl, an acknowledged trader and dealer in real estate. Subject property was in an area of downtown Montreal that was enjoying a great boom in the construction of high-rise commercial buildings. This property was in an area where Place Ville Marie and the CIL Building were going up. Certainly, it can be reasonably inferred from the evidence. that Strohl knew the potentiality of subject property. He was so anxious “to get in on the deal” that he agreed to pay Abe Rosenberg’s brother $5,000 to take his place. He also agreed to pay 10% interest to Abe Rosenberg for the $30,000 which Abe Rosenberg borrowed for him from the bank. Then, there is the fact that, operated as a parking lot, this property at the rentals received, would return very little net income. Once the property and school taxes were deducted from the gross rental, the net return was small indeed when related to an investment of $60,000. As a. matter of fact, for Strohl, who was paying $3,000 per year interest on his one-half equity in the property, the parking lot lease to Saffron represented a net loss for every year it was in existence. Abe Rosenberg, in his evidence, tried to say that Strohl had given him a free hand in dealing with the property, that he could do anything he wanted with it including a parking lot. However, Strohl, in his evidence before me, denied that he gave a free hand to anyone. He was an equal partner with Abe Rosenberg in this enterprise. I am satisfied from the evidence that the parking lot venture was simply a stop-gap, simply a temporary use, productive of enough income to pay the taxes, etc, until someone would come along and, realizing the true potential of this property, situated as it was in the centre of Montreal’s booming skyscraper development, offer them a handsome profit on their investment. Rosenberg and Strohl were equal partners in this venture. there was no evidence of disagreement between them, the evidence all points to the fact that they proceeded in harmony throughout, and in pursuit of a common objective. Subsequent events confirmed their business acumen in acquiring this property. After holding the property only some 16 months, they sold it at a price of $150,000 realizing a profit of some $90,000.

I think the 90-day termination clause in the Saffron lease is also another circumstance indicative of a trading intention. It shows that these partners certainly had sale in contemplation. Learned counsel for the appellant urges me to attach no significance to this fact because apparently Abe Rosenberg inserted this clause in all of his leases covering all of his parking lot operations. However, his other parking lot operations are not before the Court. I agree that the existence of this clause in the lease is not decisive per se, but it is one added fact in a series of facts which point unmistakably to a trading transaction.

The evidence concerning the payment of commission and the approach of the real estate salesman is in the same category — it is an added circumstance pointing unmistakably to a trading intention. Despite Abe Rosenberg’s avowed intention of not wishing to sell, in response to the agent’s invitation to quote a price, he did quote a price, and the property was sold at that figure. It is true that this evidence is some 16 months after acquisition but it does form part of the whole course of conduct of the owners and is corroborative of the speculative or trading intention at time of purchase.

I have accordingly concluded that the respondent’s treatment of the subject transaction was proper and the appeal is therefore dismissed with costs.