Lindev Corporation Limited v. Minister of National Revenue, [1973] CTC 533, 73 DTC 5423

Collier, J (orally):—This is an appeal by the appellant taxpayer against a reassessment by the respondent Minister whereby the respondent added to the taxable income for the year 1969 of a company called Trendline Construction Limited (hereafter “Trendline”) the sum of $91,341. It is not disputed this amount was Trendline’s share of the gain realized on the sale of a parcel of land purchased in 1966 by Trendline and another company Lindev Limited (hereafter “Lindev’’). Trendline, Lindev, and a third company amalgamated in 1970 to form the present appellant.

The appellant takes the position the profit realized was a capital gain. The respondent Minister contends the gain was income.

As has been said many times, the question in cases of this kind is essentially one of fact, and each case depends primarily on its particular facts. I refer to Regal Heights Limited v MNR, [1960] SCR 902; [1960] CTC 384; 60 DTC 1270, per Mr Justice Judson at 907 [390, 1272-3].

It is therefore necessary to review the evidence here. At all material times Mr K S Fowler and Mr S D Vaughan were business associates. Fowler had in the 1950’s and into the early 1960’s been a real estate broker. His experience had been largely in residential property. At one time Vaughan and one Russell Voisard had worked for him or his company. Vaughan eventually became a partner in Fowler’s real estate company. They sold their interests in the early 1960’s and acquired Trendline which had been incorporated in 1959. The shares in Trendline were held by Fowler and Vaughan’s wife. Vaughan, however, was the general manager and ran the day-to-day affairs of that company. Its business was the construction of homes. It built on a contract basis and on a speculative basis.

After Fowler left the real estate brokerage business he moved into the drive-in restuarant business in southern Ontario. This took up a great deal of his time. It involved the building of drive-ins and Trendline at times carried out the construction of some of these buildings.

At some stage after Fowler left the real estate business, he became associated with a Mr Cairns, a lawyer, and a Mr Howe, an engineer and land surveyor. Cairns and Howe were or were getting into the land development business, that is, buying raw land, subdividing it, and selling. Primarily the ventures were confined to residential, non-com- mercial property. Fowler was asked to participate. Lindev was incorporated. At the material times, Cairns or his family held a one- third interest, as did Howe or his family. Fowler held a 25% interest and his associate Vaughan 8 /2%.

I am satisfied the two companies, Trendline and Lindev, both in the practical and legal sense, dealt with each other at arm’s length. The evidence is clear there was an unwritten agreement the two companies would not compete with each other.

Fowler testified he became interested in getting into the motel business in the late 1950’s. His interest had been prompted to some extent by his extensive travels in looking after the drive-in restaurant businesses. He and Vaughan, through Trendline, endeavoured to purchase a motel property in St Catharines known as the Capri Motel, but were unsuccessful because the necessary financing could not be enlisted.

Fowler owned an old house on King Street in St Catharines. His real estate company had carried on business in those premises. Fowler had agreed to sell the property to Trendline. It was felt the site might be suitable for a motel. Fowler felt another motel in St Catharines would be successful.

In his travels Fowler had met a Mr J W Graham who operated the Town House Inn in Kingston. Fowler was impressed with his ability and he and Vaughan, through Trendline, engaged his services for advice as to the feasibility of building a new motel in St Catharines. This was in March of 1966. Graham prepared a feasibility plan. He was enthusiastic. He dismissed the King Street site, but recommended the purchase, if possible, of property on Ontario Street between the Queen Elizabeth Way and downtown St Catharines. Ontario Street was a main artery and had been slowly developing from basically farmland in 1955 to highway commercial over the years. Graham was sufficiently interested that he was asked and agreed to participate in the venture, both financially and from a management point of view. The site recommended by Graham was on a parcel of farm property owned by a family named Robertson. I shall refer to the land as the Robertson property. It and another parcel of farm property across the street were the only available and suitable sites for a motel in that area. The Robertson property was the more desirable. Fowler made inquiries and an approach. From his experience, he had a good idea of the price that would have to be paid. The parcel was considerably larger than what was required for the construction of a 100-unit motel with banquet and dining facilities. Trendline did not have the financial resources to handle the purchase of the whole parcel and because of the unwritten arrangement with Lindev could not develop and sell the land not required for the motel project. With these considerations in mind, Fowler approached his associates in Lindev. Lindev agreed to participate on an equal basis in the purchase. The property was to be divided equally between Trendline and Lindev. The plan was that Lindev would endeavour to develop their portion of the land as a small commercial site plus highrise apartment buildings. This was really the first, or perhaps second, venture of Lindev out of the private residential field of land development into the commercial.

Fowler as trustee for the two companies in early April 1966 purchased the Robertson property for $100,000 payable $20,000 in cash on the closing date (July 1, 1966) and a mortgage back for the balance with interest at 7% with yearly payments of principal of $16,000. As I understand it, Trendline paid the initial payments.

Trendline, through its two principals, then took steps to have sketch plans of the proposed motel prepared and other matters done in order to borrow funds to go ahead. with the project. Mr Graham dropped out of the project in September 1966 for reasons not here relevant.

Voisard read in a trade magazine of the projected motel in St Catharines. He had built and was operating his own motel in Fort Erie. He got in touch with Fowler about the time Graham dropped out and expressed a desire to be involved. An agreement was reached in November of 1966 whereby Voisard undertook to try and find financing for the project. If he was successful he was to get a 1634% interest. After that, he was to direct his services to bringing the motel into operation. If he was successful in that field as well, he was to get a further 1624 %.

I am satisfied on the evidence that Trendline through its principals, and: through Graham and later Voisard, from the date of purchase took definite and serious steps to carry out the plans to build a motel on the property. The stumbling-block was financing. Money was tight, and no lenders were forthcoming. The funds required were in the neighbourhood of one million dollars. -■

At the same time, Lindev was running into problems. Although it was known at the date of purchase that the property was zoned light industrial, it was felt a zoning change to residential could be obtained. It became obvious in late 1966 that was not the case. The Director of Planning of St Catharines was against the development of residential premises on the property. Past experience showed that if the Director of Planning did not approve, council permission probably could not be obtained.

As I see it, the situation that existed in early 1967 was this. Trendline’s plans in respect of the motel were stalled. Financing could not be obtained. Further, the company was financially strained at that time because of other commitments. Lindev realized it could not carry out the intended development of its portion of the property. It was committed to share in the interest and principal payable under the mortgage. It had other financial obligations as well. Lindev’s only alternative was to sell its portion if it could find a buyer.

In early 1967 an unsolicited offer to buy came from one Heaton, a real estate agent. Heaton did not at first disclose his principal. It subsequently became clear, however, that the prospective purchaser was not interested in just Lindev’s portion of the property. The whole of the parcel was required. The principals of Lindev were told this by Fowler. They exerted pressure on him to have Trendline agree to sell its portion along with Lindev’s to the prospective purchaser. Lindev’s argument was they had participated in the purchase of the Robertson property to accommodate Trendline and now they were in the position of not being able to develop their part of the land.

In the circumstances, Trendline agreed. Fowler, as trustee, gave an option to the purchaser (Cambridge Leaseholds Limited) to buy for the sum of $330,000. The formal option dated March 22, 1967 was open for acceptance to June 20, 1967, but could be extended.

Fowler and Cairns testified they felt the purchase would never materialize. Trendline still proceeded with its plans for a motel. Projected financial statements were prepared by auditors in September 1967.

The option to purchase expired. Subsequently, Lindev again raised the question of the sale of the land. Fowler wrote Cambridge Leaseholds Limited in January 1968, asking them if they were still interested. As a result, negotiations were renewed and finally in September 1968 the whole of the parcel was sold to that company for $300,000. Trendline and Lindev each received half the proceeds of the sale. Lindev paid tax on its share.

I have set out the facts, as I find them, at some length. Generally speaking, the evidence adduced on behalf of the appellant was uncontradicted and not seriously shaken in cross-examination.

The respondent contends that while Trendline through its principals may have had the intention to go into the motel business and entered into the purchase of the property in question with that intention, the venture had sufficient uncertainties and was sufficiently speculative, that Trendline also had the intention to dispose of the land at any time it became expedient to do so. The respondent relies in part, I assume, on Fowler’s admission in cross-examination that in the back of his mind, if the project could not be brought to fruition, then the property could always be disposed of. In my view, any prudent businessman would always have this kind of thought in mind. If Mr Fowler had answered any differently or denied the suggestion, I would have been quite unimpressed with the answer. In my opinion, any prudent businessman, whether carrying on his affairs in his personal capacity or through a company, must have at least vaguely in his mind, and therefore, in the corporate mind, the possibility of selling an asset (originally acquired for purposes of long-term investment and the earnings of income) if economic considerations demand it. I exclude from economic considerations, a simple desire and opportunity to make a profit. The mere possibility I have referred to does not, however, make any ultimate profit taxable as income. I refer to what was said by Mr Justice Noël (now Associate Chief Justice) in Racine, Demers and Nolin v MNR, [1965] CTC 150 at 159; 65:DTC 5098 at 5103, and I quote:

In examining this question whether the appellants had, at the time of the purchase, what has sometimes been called a “secondary intention” of reselling the commercial enterprise if circumstances made that desirable, it is important to consider what this idea involves. It 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 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 would have to be based on. inferences flowing from circumstances surrounding the transaction rather than on direct evidence of what the purchaser had in mind.

Similar views were again expressed by Mr Justice Noël in Hazeldean Farm Company Limited v MNR, [1966] CTC 607 at 618; 66 DTC 5397 at 5404.

The possibility of selling or disposing of the newly acquired capital asset at a later date must have been an operating motivation (and I underline those words) at the time of the acquisition. It was certainly an operating motivation in the case of Lindev or its principals. In my view, on the evidence before me, it was not an operating motivation in the case of Trendline or its principals. Fowler and his associate, through Trendline, had endeavoured to move into the motel business by acquiring the Capri property. They were frustrated by inability to obtain financing. The same frustration occurred in regard to the projected motel on the Ontario Street property. In the circumstances, I think it unreasonable to say Trendline should have retained the property for some unknown length of time paying interest and mortgage payments, in the hope the financial climate would improve and eventually some lender would agree to accept the risk. That route leads to economic disaster.

Counsel for the respondent argued that some of the documents filed as exhibits indicated the property for the motel site was not necessarily going to remain in Trendline, but would be transferred to another company to be formed for the purposes of the motel venture. I do not regard the fact that another legal vehicle of some kind might ultimately have been used as persuasive or conclusive one way or the other. The paramount intention to my mind when the property was acquired was that Trendline was to be prime mover; the venture was to be its asset. The documents referred to are laymen’s documents, and any contentions as to what might have happened are merely speculative.

Fowler and Vaughan, even after this unsuccessful venture, did eventually succeed in getting into the motel business in St Catharines. They, and a third partner, built and now operate the Highwayman Motel on another site, opposite the Capri property. They subsequently acquired the Capri Motel and now operate it in conjuction with the Highwayman. It is true this venture was not done through Trendline, presumably because a third person had to be brought into the motel project. It is some evidence however, and I give it some weight, which shows that the two persons who guided the destinies of Trendline, were serious, and, in fact determined to get into that line of business. There was also evidence that in 1969 the two principals dealt, unsuccessfully however, with the Howard Johnson chain, in a further attempt to enter into the motel field.

The decision closest to the facts here is the Regal Heights case, earlier referred to. When one examines the case closely, it can be seen the would-be investors there never really got beyond the promotional stage. Their whole venture was speculative and the attempts to bring the project in that case to fruition were obviously minimal. As I see it, that is not the situation before me. Here very positive -and persistent steps were taken, unfortunately without ultimate success. In my opinion the Regal Heights case is distinguishable on its facts.

I am satisfied that Trendline acquired its interest in the Robertson property with the intention of developing it, building a motel, and op- erating it as a revenue-producing investment, to the exclusion of any intention at the time of acquistion to dispose of the property at a profit.

For these reasons, the appeal is allowed. The assessment is referred back to the respondent with a direction that the sum of $91,341 be deleted from Trendline’s taxable income for the 1969 taxation year.

The appellant is entitled to its costs.