Malton Indoor Health Spa Limited v. Minister of National Revenue, [1972] CTC 551, 72 DTC 6489

Gibson, J:—The issue in this appeal requires the determination of the character of the receipt obtained by the appellant in its taxation year 1968 arising out of the sale in 1968 of a parcel of vacant land which it had acquired on incorporation in the year 1957.

The parcel of land is located on Dixie Road in the then Township of Toronto, about two miles north-west of the then Malton Airport and about the centre of three municipalities, namely, the Municipality of Metropolitan Toronto, the Town of Brampton and the Town of Mississauga.

The property was purchased in 1954 originally by Eleanor Stanton as trustee. The funds for the purchase were provided in equal shares by the husbands of five wives who are common shareholders of the appellant company. The husbands are four doctors and one real estate agent and broker.

The evidence was that Eleanor Stanton purchased the property as trustee for herself and the other wives and that after incorporation of the appellant company in 1957 title was transferred to it by the wives. Evidence was also given that the property in fact was purchased in trust for the husbands who caused it to be sold to the company in return for the issuance to the husbands of preference shares which were subsequently redeemed in 1960, the common shares of the company being issued to the wives. The latter is the situation that the records of the company indicate is the state of affairs at the present time.

The property was purchased for $32,711, $10,000 being paid in cash, the vendor taking back a mortgage for $22,711 at 5% per annum.

The mortgage provided that the mortgagors had the privilege ‘to ask for and obtain the partial discharge or partial discharges from time to time of any ten-acre or larger size lot of the said lands having parallel boundaries running from the Third Line to the south-western limit of said lands upon payment to the mortgagee of the balance due on each acre embraced in such partial discharge or discharges”. The mortgage also provided that the mortgagor had the privilege of “paying off the whole or any part of the principal sum herein secured at any time or times without notice or bonus”.

The appellant sold the property as of September 30, 1968 to a company by the name of Bradco Holdings Limited for $539,400. The state- ment of adjustments reads as follows:

The mortgage back received by the appellant in the sum of $494,400 provided for repayment as follows: $45,000 principal due March 31, 1969; $15,000 principal due September 30, 1969; $15,000 principal due half-yearly March 31 and September 30 thereafter, plus interest at seven per cent; the balance due September 30, 1978.

It was provided in the said mortgage that “the purchaser [had] the privilege of paying all or any amount of the principal sum at any time without notice or bonus and the purchaser [had] a further privilege of obtaining partial discharge of any acre or acres upon payment of $4,500 per acre plus accrued interest, to be given only upon payment covering a minimum of three acres”. It was further provided that “such discharges shall be obtained only by equal width to frontage to the full depth of the property and shall be continuous from south to north or north to south from the boundaries of the property”. It was further provided that the mortgagee “agrees to execute all agreements necessary for servicing the division of land and certification of title as may be required by the purchaser at cost of the purchaser and as mortgagees only and to reduce the lands required for roadway, such lands not to exceed an area of ten per cent of the total lands contained in the said mortgage in any plan to be registered and to sign usual documents and releases to effect rezoning approval and a plan of subdivision when required by the mortgagor”.

The four doctors and the insurance agent and broker who caused these lands to be purchased in 1954 alleged that the purchase was an investment for the purpose of enabling the appellant to establish and carry on the business of a convalescent home and health spa on these lands.

After the purchase in 1954 the lands were rented to a farmer for approximately the amount of the municipal taxes payable on the lands and that such was the only source of revenue until the lands were sold in 1968. Funds to pay the interest and principal on the mortgage given back at the time of purchase were provided by the doctor husbands and the husband real estate broker and agent.

One of the doctors, Dr John Goldberg, at this trial gave evidence as to the intention of the appellant. He stated that at the time of purchase it was known that the land was zoned for agricultural use only and that there were no sewer and water services available, the closest being about two miles away. He stated when the services came to the property that he and the other principals could “formulate serious plans”.

He stated that they did not know what they could do on that site; that he and one of the other principals about once a year from 1954 till about 1958 or 1959 had gone to the relevant township office to inquire about the availability of water and sewer facilities to the subject lands and received the impression that they should wait and see. He admitted that they made no inquiries of the Department of Health of the Government of Ontario or any other outside authority as to whether or not they would be permitted to establish the alleged proposed convalescent home or hospital facility on this site, neither at the time of purchase nor at the time of the incorporation of the company nor at any time prior to the sale in 1968. He admitted that they made no formal application for rezoning, that they made no inquiries as to the cost of the said proposed project or any inquiries as to the financing or no attempt to get financing. He stated that somewhere from 1958 to 1960 the real estate broker principal of the group put a for sale sign on the premises and that they let the property lie idle because no one was pressing any of the principals for money. He also admitted that no site plan was ever drawn for the property and no preparations of any type were done for the said project.

In summary, he said that the principals had made no plans for the redevelopment of the property and the only thing they did from time to time, as indicated, was go down to the relevant township offices to Inquire about the probability of sewer and water services coming and being available to service the property.

Mr Irving Drutz, the real estate broker-agent principal of the appellant, stated that the principals figured that if they waited long enough something would happen to the property, that is, services would come to the property. He said the principals kept discussing the possibility of starting their said project but it never got to a serious stage; that “we were just waiting to see what would happen”. He said that they thought that over the period of years perhaps the sewer and water services would come to the property and then the principals could start something in earnest. He admitted that the agreement (Exhibit 19) was in force at the time the property was sold in 1968. This agreement (Exhibit 19) provided by paragraphs 11 and 13 as follows:

11. If at any time after the date hereof, any one of the parties shall be desirous of retiring, she may give the other parties notice of her desire by prepaid registered post addressed to their place of residence. The price to be paid for the said shares of the retiring party, under the provisions of this indenture, shall be the net value of such shares after providing for the debts and liabilities.

The net value of the shares to be determined by offering the property for sale, and upon receipt of the highest bona fide offer within one (1) month after the property is put up for sale, then that sum shall be the value of the property. However, if a bona fide offer cannot be obtained within one

(1) month then a reputable land appraiser shall be retained and paid for by the party desiring to retire and his evaluation of the market value shall be the value of the property. The sum of money ascertained to be the value of the share or shares of the party wishing to retire less the liabilities for such shares shall be offered to the remaining parties to be paid to the retiring party by the balance of the parties in equal shares, within thirty (30) days of the ascertainment of the net value of the shares. If the other parties shall not within thirty (30) days accept such offer then the retiring partner shall be at liberty to sell her shares and interest to any other person at the time or a higher price, but shall not sell it to any other person at a less price unless and until it shall have been offered to the other parties at such less price, and that such last mentioned offer shall not have been accepted within (7) days thereafter.

13. If a bona fide offer is at any time hereafter submitted to the Company to purchase property held by the Company a special general meeting of the shareholders of the Company shall forthwith be convened in accordance with the by-laws of the Company and such offer shall be submitted to the shareholders for their consideration. If twenty-four (24) votes at such meeting are in favour of accepting such offer, such offer shall be accepted by the Company, otherwise it shall be refused.

Across the road from the subject property in 1957 a company by the name of Malton Outdoor Health and Recreations Limited also acquired a parcel of vacant land somewhat similar to the subject land. The letters patent of this corporation are dated September 12, 1957 and the company return (Exhibit 12), according to the Controller of Records, Companies Branch, Province of Ontario, indicates that the business of such corporation is to be the treatment of sick persons. The directors of the said company are the wives of three of the doctors, except Dr Goldberg, who caused the appellant company to be incorporated. In other words, the same shareholders of this corporation were the shareholders of the appellant, with the exception of the wife of Dr John Goldberg and the wife of Mr Irving Drutz. Both Dr Goldberg and Mr Drutz in evidence on cross-examination stated they knew nothing about this company Malton Outdoor Health and Recreations Limited except that nothing had transpired on the lands owned by this latter company either.

Counsel for the appellant submitted that the whole course of conduct in respect of these lands was not consistent with a trading adventure or an adventure in the nature of trade for two reasons: (1) the land was acquired solely to be used as a capital asset and when this purpose was frustrated by undue delay the land was disposed of; and

(2) in the alternative if the Court concludes that the evidence indicates an alternative intention to resell the land at a profit if the project could not be gone ahead with, such an intention does not imply the conduct of a business or adventure in the nature of trade.

Counsel submitted that:

The asset in question was a capital asset which the Appellant intended to use in the carrying on of its business: Californian Copper Syndicate v Harris (1904), 5 TC 159; Bel Dor Holdings Limited v MNR, 69 DTC 5217; [1969] CTC 309 (Ex. Ct.); Cohen, Liquidator of GMC Building Corp Limited v MNR, 70 DTC 6244; [1970] CTC 386 (Ex. Ct.); Cragg v MNR, 52 DTC 1004; [1951] CTC 322 (Ex. Ct.); Irrigation Industries Ltd v MNR, [1962] SCR 346; 62 DTC 1131; [1962] CTC 215 at 223; Shuckett v MNR, 70 DTC 6213; [1970] CTC 284 (Ex. Ct.).

Even if the Appellant could be considered as having purchased the lands with the expectation of reselling them at a profit (which is actually contrary to the evidence), this intention would not, of itself, be sufficient to stamp an isolated transaction as an adventure in the nature of trade.

Leeming v Jones (1930), 15 TC 333 (HL); Cosmos Inc v MNR, 61 DTC 721 (TAB); 28 Tax ABC 193; aff’d 64 DTC 5020; [1964] CTC 34 (Ex. Ct.); Val- clair Investment Co Ltd v MNR, 61 DTC 728 (TAB); 28 Tax ABC 204, aff’d 64 DTC 5014: [1964] CTC 22 (Ex. Ct.); MNR v Lawee, 72 DTC 6342 (FCC); [1972] CTC 359.

Counsel for the Minister submitted that as of 1958 when the appellant acquired this property that it intended to sell it; that there was no frustration because the appellant never did anything to get the project started; that the appellant failed to show, as it was incumbent upon the appellant to show the Court, that they bought the property for a specific purpose; and that instead, the evidence indicates that the appellant cannot seriously say that it was going to put this project into effect.

Counsel for the Minister also said the subject land was not rezoned, contrary to Dr Goldberg’s evidence; instead it is still zoned agricultural to this day.

In considering the whole of the evidence of what transpired in this matter, the factual situation is that the property acquired was in a strategic area for growth and that nothing was done in organizing the acquisition of this property except to choose its location and to provide a simple and possible mechanics to resell this property in whole or in part by the terms of the mortgage back on purchase, and by the agreement among the principals of the appellant; that nothing was done to mature the property for the avowed project or otherwise except to let time pass; that none of the principals had any adequate knowledge or capacity, entrepreneurial or financial, to organize and implement the alleged project and no person was hired who had any of such capacities or knowledge; and that no steps were taken to organize and implement the alleged project, at any time before the disposal of the property.

On these facts it is impossible to conclude that this property “was a capital asset which the appellant intended to use in the carrying on of its business” as submitted by counsel for the appellant.

But on these facts also, when considered in relation to such authorities cited above as Cosmos Inc v MNR (supra), Valclair Investment Co Ltd v MNR (supra); and MNR v Lawee (supra), it is with some hesitation that I find that such property was inventory of an adventure in the nature of trade, and that the facts are sufficient “to stamp [this] isolated transaction as an adventure in the nature of trade”.

The appellant’s submissions above are therefore not accepted but, that is not the end of the matter because the parties have agreed that in such an event the assessment should be referred back to the Minister to allow a mortgage reserve of $429,181.18 pursuant to paragraph 85B(1)(d) of the Act, which will result in a finding that the taxable income for the taxation year 1968 of the appellant is $39,064.10.

Accordingly, the assessment is so referred back for such purposes; and the appeal is otherwise dismissed with costs.