Manru Realty Limited v. Minister of National Revenue, [1972] CTC 501, 72 DTC 6415

Heald, J:—This is an appeal from respondent’s reassessment of the appellant’s income tax returns for the 1965 and 1966 taxation years. The pleadings put in issue the profit derived from three separate real estate transactions:

(a) real property located on Dufferin Street north of Highway 401 in the Municipality of Metropolitan Toronto sold at a profit of $62,686.15;

(b) real property located on Racine Road in Etobicoke, Ontario sold at a profit of $7,718.00;

(c) real property located at 1753 Eglinton Avenue, Toronto sold at a profit of $5,572.33.

At the commencement of the trial, I was informed by counsel for both parties that agreement had been reached to include item (b) and to exclude item (c) from income. Thus, the only item remaining for consideration by the Court is item (a) above.

The appellant has been assessed on the basis that the said sum of $62,686.15 was profit from a “business” within the meaning of sections 3, 4 and paragraph (e) of subsection (1) of section 139 of the Income Tax Act. Appellant contends, on the other hand, that when it acquired subject property it did so with the sole intention of developing the same by the construction of a building thereon and renting the de- veloped real property. Appellant thus submits that the difference between the sale price of the Dufferin Street property and the cost thereof represents an accretion to capital and is not taxable.

The appellant was incorporated in 1950 as a private company under the laws of the Province of Ontario. Appellant was given very wide objects and purposes which included, inter alia-.

(a) To acquire by purchase, lease, exchange concession or otherwise city lots, farm lands, mining or fruit lands, town sites, grazing and timber lands, any description of real estate and real property, or any interest and rights therein, legal or equitable or otherwise howsoever; to take, build upon, hold, own, maintain, work, develop, sell, lease, exchange, improve or otherwise deal in and dispose of such lots, lands, sites, real estate and real property or any interest therein to deal with any portion of the lands and property so acquired, subdividing the same into building lots and generally laying the same out into lots and street and building sites for residential purposes or otherwise, and to construct streets thereon and the necessary sewerage and drainage system, to build upon the same for residential purposes or otherwise, and to supply buildings, so erected with electric light, heat, gas, water or other requisites;

At all revelant times the shares of appellant corporation were held as follows:

At all relevant times, Sam Sorbara was the president and chief executive officer of the appellant corporation. Sam Sorbara is a licensed real estate broker in the City of Toronto and has been in the real estate business in that city for at least 25 years. He described himself as “an industrialist with an interest in developing real estate” and the evidence establishes that he has very extensive real estate interests in the Metro Toronto area.

Neldo L Lorenzetti is a Toronto lawyer but acknowledged in his evidence that he, like Sam Sorbara, was a land trader as well. He has been involved in many real estate transactions. He said he had never sold at a loss and had been taxed personally on every one of his land transactions. He said that Sam Sorbara had been his partner in many real estate transactions, both as an individual and as a fellow shareholder in various corporations. He testified that in their land dealings, Sam Sorbara was the one who found the properties, that he and the other shareholders relied on Sam Sorbara for guidance as to what properties should be purchased and when. So far as the appellant corporation was concerned, as was the case with their other joint ventures, the other director shareholders relied on Sam Sorbara for policy direction and his advice was invariably followed in recognition of his superior experience and knowledge of real estate in the Metro Toronto area. This confidence seems to have been justified because most of their joint ventures were successful and profitable. On or about February 29, 1952 the appellant acquired a number of real estate properties in Metro Toronto from two existing partnerships whose members were substantially the same as the shareholders of appellant. Appellant continued to acquire additional real estate properties so that by February of 1965 a very large part of appellant’s income was rental income from these properties. The cost price of these properties, including land and buildings amounted to approximately $1,400,000.

The subject property is certain raw land having a. frontage on the east side of Dufferin Street north of the Denison Armoury and south of Wilson Avenue in Metro Toronto. The said property lies north of Highway 401 and its legal description is as follows:

(a) Lots 15, 16 and 17,

(b) the lane to the rear of said Lots 15, 16 and 17, and

(c) Lot 90 and parts of Lots 65, 66 and 89,

all according to Registered Plan 3191, Township of North York. The subject property comprises an area of approximately 35,000 square feet.

Subject property was not acquired by the appellant all at the same time. Lots 15, 16 and 17 as described in (a) above were purchased from York Enterprises on or about February 29, 1952. The lane to the rear of said Lots 15, 16 and 17 as set out in (b) above was purchased from the Township of North York in 1961. Lot 90 and parts of Lots 65, 66 and 89 was acquired on February 8, 1955.

The total cost to the appellant of the subject property was in the order of $28,000. In January of 1964 appellant sold subject property to one Arbus and one Shopa for $90,000. It is the profit on this transaction in the sum of $62,686.15 which the respondent seeks to tax as income.

The principles enunciated in the case of Racine, Demers and Nolin v MNR, [1965] CTC 150; 65 DTC 5098, are relevant to the facts in this case. At pages 158-159 [5103] thereof, Noël, J (now Associate Chief Justice) said:

It seems to me that one must ask oneself the question, was the only objective of the appellant, at the time they made their purchase, to add this business to all their other enterprises, or did they acquire the business for the purpose of running it and for the purpose of reselling it at a profit following circumstances which might arise and offers which might be made to them?

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, 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 the 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 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.

In my view, the evidence in this case clearly establishes a trading intention on the part of the appellant at the time of purchase of the subject property. Such intention must be inferred from the following circumstances surrounding this particular transaction:

(a) The objects and purposes of the company include the power to buy, sell, subdivide and dispose of any and all of the company’s properties. In fact, this is what the company did in this case. They not only bought properties, they also sold a total of twelve properties over the years following 1953. By the fiscal year 1965, appellant had made a profit totalling $82,000 on its property sales. The subject property and one other parcel were raw land, all the others had substantial buildings.

Mr Edward Sorbara, the son of Sam Sorbara, who was the general manager of the appellant, gave evidence at the trial. When questioned concerning the reason why appellant sold its 41 suite apartment building at 32 Maynard Street in 1967, five years after acquisition in 1962, he replied that it was sold because they were offered a good price, considerably more than they paid for it so they decided to let it go.

The witness was also questioned concerning the reason for sale of the property at 5220 Yonge Street, sold in 1956. He replied that it became very advantageous to sell it because of the price offered. He said that sometimes you are offered a high price for property because of its specific location and gave the example of hamburger drive-in businesses offering high prices for specific sites. Apparently the appellant made a profit of approximately $49,000 on this sale.

The evidence is consistent with an intention to sell their properties at a profit when the opportunity presented itself. Appellant’s submission is that subject property was purchased with the intention of erecting buildings thereon to be held for investment income. However, the evidence does not support this submission.

In Examination for Discovery No 1 of Sam Sorbara, the following questions and answers appear:

47. Q. So there was no kind of firm intention at all to build anything at the time the property was acquired by the company?

A. Not at that particular minute, no.

Additionally, Neldo L Lorenzetti said that at the time of purchase, appellant had no intention to build stores thereon at that time. He said they would build stores only if the property developed. If it did not develop, they would not build at all. Thus, this evidence is open to the inference that at the time of purchase, appellant had no firm intention to build anything on subject property, they had an open intention at time of purchase. If the area developed, they would build—if it did not develop, they would sell provided a profit opportunity presented itself. The latter, of course, is what in fact occurred.

(b) The principals of the appellant corporation have an extensive history of land trading in the Metro Toronto area. In 1969, the appellant became amalgamated along with five other corporations into a larger corporation known as Sam-Sor Enterprises Incorporated. These five other corporations were similar to the appellant Most of them were in the business of rental real estate but they also subdivided and sold real estate from time to time. Sam Sorbara was the dominant and leading figure in all of these ventures. The shareholders of appellant were also shareholders in most of these other five corporations. Sam Sorbara and N L Lorenzetti were also owners of all the shares in Malton Subdivision Limited, a company owning land adjoining Malton Airport in Toronto. This particular transaction was the subject of a decision of this Court by my brother, Cattanach, J.* [1] In that case, it was conceded that Sam Sobara was a “trader” in land.

(c) The sale of subject property did not result from an unsolicited offer by the purchaser. The evidence is that the property was listed with Sam Sorbara Real Estate Limited (a licensed real estate corporation wholly owned by Sam Sorbara) on an exclusive listing basis and that full commission was paid on the sale by the appellant to said real estate agent.

(d) Subject property was acquired in 1953 as raw land. It remained as raw land until it was sold in 1964. There was no evidence that the appellants took any concrete steps to develop or build on the property. No feasibility studies were made, no building permits were applied for, there was no evidence of any attempt to make financing arrangements, there was no evidence of any zoning inquiries until about a year before the sale, then a vague reference to an oral inquiry by someone connected with the company whose identity was not disclosed. This inquiry was not pursued; there was some suggestion that a building restriction limiting construction to two stories had been imposed in this area but this evidence was too vague and indefinite to have any value. Suffice it to say that many buildings were erected in the area shortly thereafter far in excess of two stories in height. This property was retained by appellant for some eleven years, returning absolutely no return on investment during the entire period.

(e) Subject property was situated in a rapidly expanding area of North York Township. It is situated about three blocks from York- dale Shopping Centre, across Highway 401, a six lane freeway running from East to West through Metro Toronto. Yorkdale was completed in about 1963 or 1964. There was other development in the same general area. This was a suburban area with great potential for future development. Sam Sorbara and his partners with their extensive knowledge of and experience in Toronto real estate knew this very well. They saw subject property as a very attractive speculation and their good judgment was confirmed by the subsequent appreciation in value of the property.

For all of the above reasons, I have concluded that the Minister was correct in taxing appellant’s profit on the Dufferin Street transaction as income resulting from an adventure in the nature of trade.

The appeal is therefore dismissed with costs.

HURON STEEL FABRICATORS (LONDON) LIMITED and