Simodale Investments Limited v. Minister of National Revenue, [1973] CTC 742, 73 DTC 5549

Sheppard, DJ:—The issue is whether the profit realized by the plaintiff on the resale of property was a capital gain on an investment as the plaintiff contends, or was business income as the Minister of National Revenue contends.

The property from which the profit was derived consists of Lots A and B, Plan 2589 at 1100 Wharf Street in Victoria, BC. It overlooks the inner harbour, comprises approximately 125,000 square feet or about 3 acres, and had thereon two warehouses. Part of the property was used as a parking lot and the waterfront was used as a wharfage for tugs and barges. This property was owned by the Spencer Estate and had been offered for sale for a long time by the agents Ker and Stephenson Ltd of Victoria.

By agreement of January 19, 1966 (Exhibit P2) and by a formal agreement of April 27, 1966 (Exhibit P3) Lemery, Davis, Morrison and Siddall bought the property for $290,000 on deferred payments. Sometime prior to July 22, 1966 (Exhibit P4) the four purchasers transferred the property to the company for equal shares issued to each of the four purchasers. This transfer to the plaintiff was for the purpose of the shareholders arranging their estates and nothing turns upon that transfer.

Three of the original purchasers, namely Lemery, Davis and Siddall, testified that the purchase was for the purpose of developing the property for use as a site for a hotel, also for apartments, shopping centre and marina; and that the purchase was without any thought of a resale.

Lemery testified that he knew that it was waterfront property, centrally located in the city and had been listed by the Spencer Estate for some time. Accordingly, he testified that he thought of developing the property, not of reselling it, and invited the others to join in forming a group to make the purchase.

The other three purchasers were Morrison, a hotel man and an interior decorator who understood design for a hotel, Siddall, an architect, and Davis a local manager of a small loan company in Victoria who was knowledgeable about Victoria property. Lemery’s idea was to get a mortgage on the property for sufficient money to build and furnish ‘a hotel but he thought that the mortgagee would probably require a lease to some hotel company capable of supplying continuous management. After the purchase of the property Lemery had drawings made showing the spaces to be available for hotels and for the stores. Davis arranged for the parking and rented two warehouses during one summer. Later these warehouses were torn down and the whole of the property being black-topped was used for parking. Essentially the plan was to get a lease from a hotel company and thereupon to apply to a mortgagee for sufficient funds to build and furnish the hotel.

Davis testified that he was the local manager of J H Whittome and Company Ltd, a loan company in Victoria. He joined the group in purchasing as the property was centrally located and was, he thought, suitable as a site for a hotel, for residential apartments, for retail stores and for office space. He joined in the purchase with the idea of supplementing his future pension from Whittome with the development of the property as a source of rental income. Also the property might provide some business for the Whittome company. Accordingly he prepared figures of the estimated revenue to be derived from the property (Exhibit P24). He thought that the property could carry itself from the revenue which it could produce by using half of the property for parking and other parts for wharfage and warehousing. However, such revenue would not cover the instalments of the purchase price as they became due. In fact, the property produced $40,000 a year gross revenue and $34,000 net before taxes. The interest on the purchase amounted to $15,000 and that would be reduced as the capital was paid off.

Davis thought that Western International Hotels Ltd which operated a chain of hotels would lease and Robert Simpson Ltd would finance, that is, advance on a mortgage, the amount required for a hotel and a department store. Himmelman of the hotel company recommended Maschal, a San Francisco man, to come to interview them as to the feasibility but Maschal suggested that feasibility could only be determined after a lease and mortgage were negotiated.

Siddall also testified that he had joined for the purposes of developing the property and future income. He had no thought of resale, that the Spencer Estate had offered the property for sale for a long time and he was interested in returns derived from the property which would produce an income to him after payment of the purchase price and the mortgage. Siddall prepared two rough sketches of the property with buildings outlined thereon (Exhibits P21, P22). He prepared no detailed plans because that would depend upon the requirements of the lessee and could cost hundreds of thousands of dollars. Siddall testified the hotel to be constructed on the site was central to the plan.

As to the financing and development of the property, before the purchase, Lemery went to the manager of the Empress Hotel in Victoria and learned from the manager that the hotel company had no plan to expand its operations. After the purchase of the property there were interviews with Western International Hotels Ltd, Ramada Inn and the Hyatt House, all of which operated chains of hotels. A mortgage was sought from Robert Simpson Ltd, CP Hotels, North American Life Assurance Co, Standard Life Assurance Co (Exhibit P14) Bentall, of the Dominion Construction Co Ltd and Block Bros Ltd. This development of the property was unsuccessful. There was no acceptance of a lease by Western International Hotels Ltd, the primary hotel company or by anyone else. The original plan of the owners to develop the property was to obtain a lease from some operator and then apply for a mortgage. Since there was no lease, there was no hope of a mortgage:

(1) The plan of the Western International Hotels was to take only 25% interest in a hotel property and the balance of 75% was to be financed by local people. (2) The Western International Hotels Ltd became interested in the Convention Centre for Victoria which was centred around the Empress Hotel, and the Western Company was not interested in having two hotels in the one city. (3) Money became tight. It was hard to obtain any advance of money on a mortgage.

Lemery testified that the Convention Centre planned around the Empress Hotel was a bombshell to his property and he tried to encourage the City to relocate the Convention Centre, or at least to interest it in his property but without success.

The next development was the Morrison letter of January 10, 1968. Morrison who was one of the four shareholders wrote to the others suggesting their meeting in Victoria on June 21, 1968 to discuss the property. He wrote that they had promoted “various schemes for potential buyers” and “I think the time has now come to decide where we are going” and thereafter he set out four plans for dealing with the property. At that time Siddall had medical expenses of $2,000 per month and had no further money to invest in the property. Davis financially could not put up more money to purchase the Morrison interest and because of his previous experience he was adverse to becoming a minority shareholder. The four had been unable to get any hotel company to take a lease or to obtain any advance by way of mortgage. In the result all agreed to sell their shares in the company to Lemery and that resulted in the agreement of June 21, 1968 (Exhibit D3) whereby Etoile Company sold the Morrison shares to Lemery and the agreement of July 2, 1968 whereby Davis and Siddall with their wives (Exhibit D2) sold their shares to Lemery. Both agreements did provide for resale as one of the possibilities and for an increase in the price, depending on resale price (Exhibits D3 and D2).

The agreement of June 21, 1968 between Etoile Investments Ltd (as the seller of the Morrison shares) and Lemery as purchaser (Exhibit D3) in clause 2 provides in part: “A further $5000 in case upon either the sale by the company of the company’s land or the company effecting some change in the use of the company’s land from its present use as a parking lot.”

The agreement of July 2, 1968 between Davis, Siddall and their wives as sellers of the Davis and Siddall shares and Lemery as purchaser (Exhibit D2) in clause 3 provides in part: “The sum of $10,000 referred to in paragraph 2(b) hereafter shall become due and payable either (a) upon a bona fide sale of the lands and premises presently owned by the company and described as lots A and B. Victoria City, plan 7589 being effected by the Company at a net price in excess of $290,000” . . . or “(b) Upon the purchaser selling, assigning or otherwise disposing of his shares in the capital stock of the company so that as a consequence control of the company is no longer vested in the purchaser” or “(c) upon the company entering upon any development which would have the effect of changing the present use of the company’s lands which present use is for surface parking lot purposes” . . .

By letter of September 26, 1968 (Exhibit P17) Calvert a real estate salesman of Block Bros Ltd wrote to Lemery about the property, adding “which I understand you would consider selling”. Calvert has testified that he had no such knowledge but Lemery did agree to meet with Calvert and Reid in which meeting the plaintiff company through Lemery agreed to sell the property for $650,000. The sale took place by agreement of October 16, 1968 (Exhibit D5).

Upon review of the above facts, the appeal of the plaintiff from the Minister’s assessment must be dismissed for the following reasons:

(1) The sale of the shares by three of the shareholders namely Morrison, Davis and Siddall was important in that thereafter and for the first time Lemery became the sole shareholder (though he no doubt sold a minority interest to members of his family). However, on the evidence Lemery remained in a position for the first time to force his intentions on the plaintiff company so as to make his plan the plan of the company. Lemery did intend to sell the property as that intention is stated in the agreements for the purchase of the Morrison shares (Exhibit D3) and of the Davis and Siddall shares (Exhibit D2) when he first obtained control of the plaintiff company.

Hence at the time of Lemery’s first acquiring control of the lands so as to enable him to compel the company to sell, he, Lemery, announced the sale as one of the possible disposals of the property.

(2) Lemery ‘acquired control of the plaintiff company and of the property on July 2, 1968 (Exhibit DZ). Shortly thereafter, on October 16, 1968, the plaintiff company resold the property.

(3) Although Lemery testified that he did not have in mind the resale of the property at a profit as one alternative, the plans for development were quite tenuous and uncertain. Moreover, in the agreements whereby he acquired control it was stated resale was a possibility and such sale took place about three months thereafter and only approximately two and a half years after the original purchase. On the evidence, Lemery appeared to be an experienced and successful investor and Davis had extensive knowledge about local real estate. From these facts one must infer that from the outset Lemery intended first of all to develop the land, as he testified. However, it would also seem to be clear that Lemery was prepared from the outset to sell the land if the development plans fell through. Therefore, he may be regarded as having a profit motive from the beginning as an alternative or secondary intention. Hence the conclusion in the case at bar follows that of Regal Heights Ltd v MNR, [1960] SCR 902; [1960] CTC 384; 60 DTC 1270, wherein the facts were that the promoters bought property intending to build thereon a department store that failed and the company then sold at a profit which was held to be taxable income, and where Judson, J stated for the majority at page 907 [389-90, 1272-3]:

. There is no evidence that these promoters had any assurance when they entered upon this venture that they could interest any such department store. Their venture was entirely speculative. If it failed, the property was a valuable property, as is proved from the proceeds of the sales that they made. There is ample evidence to support the finding of the learned trial judge that this was an undertaking or venture in the nature of trade, a speculation in vacant land. These promoters were hopeful of putting the land to one use but that hope was not realized. They then sold at a substantial profit and that profit, in my opinion, is income and subject to taxation.

.. They failed to promote a shopping centre and they then disposed of their speculative property at a profit. This was a venture in the nature of trade and the profit from it is taxable within the meaning of Sections 3, 4 and 139(1)(e) of the Income Tax Act. These cases must all depend on their particular facts and there is no analogy between the sale of long-held bona fide capital assets, as in the Sutton Lumber case, and the realization of a profit from this speculative venture in the nature of trade.

The onus is on the plaintiff (R W S Johnston v MNR, [1948] SCR 486; [1948] CTC 195; 3 DTC 1182, per Rand, J at 489 [202] and Kellock, J at 490, 492 [205]) and as the plaintiff has not proved any error in the judgment, the appeal is therefore dismissed with costs payable by the plaintiff to the defendant.