Northside Shopping LTD v. Minister of National Revenue, [1972] CTC 2450, 72 DTC 1386

A J Frost:—This is an income tax appeal in respect of the appellant’s 1967 taxation year. Upon notice of objection duly signed and filed, the Minister of National Revenue reconsidered the assessment and confirmed it on the ground that the taxpayer’s income had been properly determined in accordance with the provisions of sections 3, 4 and paragraph 139(1)(e) of the Income Tax Act. This appeal was heard at Vancouver, BC, on May 18, 1971 by the Tax Appeal Board as it was then constituted.

Northside Shopping Ltd was incorporated on March 25, 1964 and immediately acquired a shopping centre for $100,000. The shopping centre was operated for a period of three years, during which time two new stores were constructed and considerable alterations made to the property.

Mr Ralph Schaff, a carpenter, was the principal shareholder of the appellant company. He invested most of his life savings in the new venture and added $67,000 worth of improvements during the three- year period he held the property. Acting on behalf of the appellant, he did not thoroughly investigate the purchase, relying mainly on projected figures of income. He testified: “I was looking for an income to make life a little easier”,—and acquired the shopping centre for the purpose of earning income. As things turned out, he made a miscalculation. His problems were more than he could cope with, so he decided to rid himself of the property and, to improve its physical state with a view to sale, he operated it as best he could and finally sold it, managing to break even on the deal. Mr Schaff ignoring the capital and income elements, the appellant company’s net loss amounted to $1,105.97.

The appellant company claimed to have realized a substantial capital gain on the sale of the shopping centre and to have suffered a terminal loss on the disposable assets. The respondent contended that the appellant was not entitled to a terminal loss and that portion of the selling price allocated to the land was too high.

The questions before the Board are: Did the appellant acquire the shopping centre with a view to operating it on an income basis; and was the allocation of the proceeds between land and buildings reasonable under the circumstances?

At first blush, this case appears to be a trading case. The appellant company bought a shopping centre and then immediately tried to sell it, but for three years was unsuccessful in doing so. Mr Schaff was a carpenter, who had had some dealings in land, but the ownership of a shopping centre was a new experience for him. He lacked capital to finance the needed improvements, and management was not to his liking. He was glad to get out and free himself of this headache.

The appellant, in its 1967 return, claimed a terminal loss of $28,- 105.97 on depreciable assets and a capital gain of $27,000 on the land. The impact of losses claimed had the following results in respect of the profit for the year ended March 31, 1967:

The appellant allocated the proceeds of sale of the shopping centre between depreciable and non-depreciable assets as follows:

Mr Schaff appeared to be an unsophisticated businessman who bought a shopping centre which he thought he could handle as an investment. The fact that he could not finance and manage the centre became apparent to him almost immediately, so he endeavoured to make the best of a bad bargain. The Board cannot find any justification however for the allocation made by the appellant in respect of the land and buildings at date of sale. What little evidence was adduced indicated that things were rather quiet in Port Coquitlam, BC in the years under review. A great deal of the construction was new. Furthermore, the appellant company failed to prove that the land went up in value while the buildings went down.

I allow the appeal in part on the basis that the land did not change appreciably in price during the relevant period and that the amount to be allocated to this asset at time of sale is the cost price of the land. The shopping centre, in my opinion, was an investment and the appellant is entitled to a terminal loss of $1,105.97.

Appeal allowed in part.

DELTANNE CONSTRUCTION LTD (now Deltan Realty Limited), Appellant,

and

MINISTER OF NATIONAL REVENUE, Respondent.

Tax Review Board (Maurice Boisvert, QC), June 6, 1972.

Real estate transaction—Profit from sale of rented maisonettes.

The appellant was in the construction business and in 1963 built 148 maisonette suites for rent. In 1965, the suites were sold to Ontario Housing Corporation at a profit of $545,767. The appellant contended that it had two separate operations: the construction of houses for sale and the construction of rental properties for investment, that the suites were constructed for investment purposes, and that the proceeds of their sale was not income. The Minister treated the profits as taxable income from a business on the grounds that the suites were constructed with a view to trading, that the profit was used to discharge a bank loan and that all the appellant’s shareholders were in the real estate business.

HELD:

The business of the appellant was treated as a sole entity from an accounting point of view and the suites were built in anticipation of their sale at a profit. Appeal dismissed.

Stuart Thom, QC for the Appellant.

P A Vita for the Respondent.

Maurice Boisvert:—This is an appeal from a reassessment dated January 6, 1969 in respect of income for the taxation year 1965.

The appeal was heard at Toronto, Ontario, in September 1971 by the Tax Appeal Board as it was then constituted.

During the above-mentioned taxation year the appellant corporation was involved in the construction and selling of houses, apartments and office buildings, and also in dealing in lands. It reported a net profit of $684,139.18 from its construction business and a net profit of $129,898.81 from rental operations. During the taxation year 1965, the appellant sold 50 lots which were in fact houses (duplexes) built on lots purchased from one of its directors.

The respondent took the view that the profits realized ($545,767.83) were profits from the business and therefore taxable under section 4 of the Income Tax Act (RSC 1952, c 148) then in force, which states:

4. Subject to the other provisions of this Part, income from a taxation year from a business or property is the profit therefrom for the year.

Taking into consideration the above enactment, the assessor issued an assessment based upon the following calculation:

(h) the net profit of the sale of the said Maisonettes was used by the Appellant to discharge a demand loan of $540,000.00 owed by it to its bankers;

(i) the Appellant acquired the land and constructed the said Maisonettes thereon with a view to trading, developing or otherwise turning them to account at a profit, in the course of carrying on its business, in pursuance of its objects;

(j) the Appellant since its inception has carried on the business of construction and sale of residential houses and the sub-division and sale of building lots;

(k) prior to 1964, the Appellant did not own any properties other than the said Maisonettes from which it earned rental income;

(l) all of the Appellant’s shareholders are either in the Real Estate or Construction business, or have a history of Real Estate transactions.

The appellant was incorporated as a private company pursuant to The Corporations Act of the Province of Ontario by letters patent dated January 20, 1961. Its objects were “to carry on in all its branches, the business and dealing in structures of every nature and kind whatsoever, including, but without in any way limiting the generality of the foregoing, houses, living accommodation, school and buildings of every kind”.

At the time of the sale of the maisonettes in 1965, the shareholders of the appellant were: Angelo DelZotto with a 40% interest; York Steel Construction Limited with a 40% interest; and Lou Fruitman with a 20% interest.

In his opening remarks at the hearing, counsel for the appellant said:

The Company is a construction company and was at all relevant times of the tax appeal a construction Company. It built houses, single and duplex houses I understand and sold them. It also built a number of multiple housing structures. It was a construction Company. Some of its construction was built as inventory and some of it was built as an investment to hold.

The evidence shows that what was built as a so-called investment was built from profits made by the company from its general operations or from borrowed money.

For the taxation year 1965, the appellant reported a net loss of $50,022.93 which was added to losses carried forward as follows:

It is evident that from 1963 to 1966 the appellant was not making profits to be invested in real estate for rentals. No one can invest if there is no capital to be invested. Moreover, the appellant sold two buildings which it claimed were built as an investment. If we look at the balance sheet for the year involved it will be seen that the total liabilities of the appellant were in the amount of $13,119,446.76. Said balance sheet also shows that only $100 was invested in the capital stock of the appellant by the shareholders of the companies who were also shareholders of the appellant corporation. It may be seen also that during 1965 the appellant drew a net income of $684,139.18 from sales of houses; $45,366.69 from sales of land; and $129,898.81 from rentals.

On the other hand amongst the expenditures claimed were two amounts which need to be noted. In the first place an amount of $180,026.54 for supervision and commissions and in the second place an amount of $9,085.94 for advertising and promotion, were charged against the total income of $870,998.35. If we examine the financial statements of the rental operations, we can see that the income was in the amount of $882,187.02 and the appellant figured out as expenses, a sum of $25,740.28 for advertising and $6,642.29 for salesmen’s salaries and commissions. I am not naive enough to think that for renting apartments and houses, no advertising is necessary and no agents are required. Since rental properties were part of the appellant’s inventories and since some of the properties were sold, I have reached the conclusion that the appellant’s business must be taken as a whole and not as two separate entities. In support of my view I refer to the statements annexed to the statement of operations which read as follows:

FINANCIAL EXPENSES

Mortgage insurance fees	$49,091.33
Mortgage legal fees	29,507.41
Mortgage interest on land	7,805.40
Mortgage interest on advances	5,082.21	$91,486.35
BUILDER’S FEES		$12,400.00
STATEMENT OF LAND SALES
FOR THE YEAR ENDED DECEMBER 31, 1965
SALES (50 lots)		$402,500.00
COST OF SALES
Land	$361,500.00
Legal fees	5,633.31	367,133,31
GROSS PROFIT		$ 35,366.69
Add: Sundry income		10,000.00
NET PROFIT		$ 45,366.69
STATEMENT OF RENTAL OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1965
RENTAL OPERATIONS		$882,187.02
EXPENSES
Mortgage interest — mortgages	$305,048.42
Realty taxes	183,694.05
Heating, hydro and water	100,096.70
Repairs and maintenance	52,557.35
Advertising	25,740.28
Superintendents	22,911.47
Mortgage interest — land	16,402.65
Office wages	15,857.12
Insurance	10,602.50
Salesmen’s salaries and commissions	6,642.29
General and office	5,336.42
Legal	4,362.40
Health club and sundry	3,036.56	752,288.21
NET PROFIT		$129,898.81

after that only investment projects? A. No, it was something that was going on . . .

Q. Continuously? A. One operation, a continuing operation.

Q. From 1961 . . . I presume 1961 was when Deltanne was incorporated? A. Yes.

Q. From 1961 to 1970 at any time you sort of altered between investment properties and properties for resale? A. Could have altered?

Q. Yes, in your construction efforts you could have erected this one for investment and another one for resale? A. I never had a housing development going on at the same time as an investment project.

Q. Depending on market conditions? A. Not the market; yes, depending on the market.

In his examination-in-chief, Mr David Duncan, a chartered accountant, testified as follows:

Q. It was a continual revolving operation? A. Certainly.

Q. So, in a particular time you couldn’t say these funds were there to be invested? A. No, it is not meant to represent an actual cash fund.

Q. Would you consider that this whole series of schedules from an accounting point of view would be an acceptable form of statement? A. It is not designed to be an acceptable form of statement from an accounting point of view.

Q. It merely reflects the thinking or the philosophy of the company? A. Yes.

Q. Now, Mr Duncan, you said that you have been involved in one capacity and another with Deltanne probably since its inception? A. Yes.

For 1966 the income tax return does not identify the properties as being held as investments. All we know is that the net income from rental operations amounted to $217,985.33.

For 1967 the income tax return does not identify the properties as being held as investments. The net profit went down from $217,985.33 in 1966 to $44,230.00.

In 1969 the financial statement shows that the net operating profit was reduced from $360,322 in 1968 to $199,085 in 1969. It shows also that a profit of $541,695 was made on sale of investment property.

In 1970 the financial statement shows that there was a cash deficiency amounting to $1,816,332. The firm of chartered accountants which prepared the financial statement supporting the income tax return of the appellant, stated that subsequent to December 31, 1970 the appellant “entered into a contract with Ontario Housing Corporation to sell land and to construct three hundred and eighty-four housing units thereon for a price of $5,740,800”. As at December 1970 cost of land and related carrying costs amounted to $1,406,644.

From these statements it is manifest that the appellant company was operating as a whole. Prior to 1965 it had disposed of some rental properties and from 1965 to 1970 it did the same thing. An index of schedules (Exhibit A-13) shows the legend of properties and projects:

(N)(O) 467 Roncesvalles and 54

	Raglan	— 32 suites
(P)	34-42 Maitland Ave	— 52 suites
(Q)	5320-24 Yonge Street	— Stores with office space and
		apartments on second floor
(R)	Lawrence and Susan	—225 suites — Lawrence Ave East
	Apartments	at Susan
(S)	Islington Avenue	— 28 houses

Schedule #1 attached to the above-mentioned Exhibit A-13 gives a summary of operations—sales of serviced lots and construction and sale of residential housing—and we can see the net proceeds on operations and the total proceeds available for investment. In the mind of the witness who produced the Exhibit, the appellant was operating only one business and the distribution of its assets does not change the whole structure of the business. Moreover what is called investment in properties is in fact the use of borrowed money from banks, individuals like the shareholders of the appellant, insurance companies, etc. In 1965, the total assets recorded were in the amount of $14,147,140 against liabilities amounting to $13,119,446.

The test that the appellant was trying to establish is not new. In The Law of Income Tax, Surtax and Profits Tax, (1962 ed), Wheatcroft, at page 1205, No. 1-422, wrote:

There is also a further type of case where a person is admittedly carrying on a trade of dealing in land or other property but contends that some particular item of property was acquired as an investment and so is outside the ambit of its trade or has been taken out of its trade and retained as an investment.

The above comment is exactly what is contended in the present appeal.

In James Hobson & Sons, Ltd v Newall (HM Inspector of Taxes), 37 TC 609, Harman, J said at page 615:

This is another of these cases about builders. There seems of recent years to have been a series of them. The question is always the same, whether houses owned by people carrying on or having carried on the trade of builder and realised by them are part of their trading assets, so that the profits are part of their trade, or whether they are something different, a so-called investment, that being a word of rather vague import but mean- ing something in which money is locked up so as to be outside the trading activities of the company.

At page 617, the learned Judge added:

I came to the conclusion that was an ordinary trading activity of that company. There was another reason it is true, that the company there had no power to make investments except of surplus assets. In this case the memorandum would entitle the Company to buy houses as an investment, but I do not think it would entitle it to build houses as an investment. It entitled the Company to build houses in order to turn them to account, and that is what it did. It would be a misuse of language to suggest that, simply because it did not intend to sell houses when it built them, therefore they were any different from any other houses which the Company built. They were all treated in the same way in the accounts, and although this is not decisive it is a straw in the wind. They show what the intention of the Company was. These were part of the stock-in-trade of the Company, and no less its stock-in-trade because it was not intended to turn them to account by selling them. A lot of other cases have been cited to me, but they are really only illustrations of the same sort of idea; and so far as these two categories of houses are concerned I cannot see myself how the Commissioners could have come to any other conclusion than the one they did.

Reference is had to Granville Building Co Ltd v Oxby (HM Inspector of Taxes), 35 TC 245, in which the above-named learned Judge said at page 250:

This is a trading company and not a private individual. It is carrying on a builder’s business, and there is no doubt that it was in the course of that business that these houses were built. Further, it was the Company’s choice that they were exploited in the way that they were. One of its objects was to turn to account the houses which it built. It turned these houses to account, by letting them. The Company is not an investment company which could make investments of this sort which were not part of its trading assets. On the facts as stated the Company had no right to build these houses except upon the footing that they were exercising the powers which their memorandum gave them. Consequently it seems to me that the Commissioners were right in the view which they took.

Reference is also had to J & C Oliver v Farnsworth (HM Inspector of Taxes), 37 TC 51; and to Punjat Co-Operative Bank Re Armitsar v Income Tax Commissioner Lahore, [1940] AC 1055.

For the sake of the argument, let’s assume that from a general point of view the appellant was right. The transaction with respect to the building and selling of the 50 maisonettes cannot be distinguished from the building and selling of the other 180 houses which took place during the 1965 taxation year.

Mr. Angelo DelZotto said in his testimony:

Q. What other kind of operation did DelZotto Enterprises Limited engage in? A. We built a lot of semi-detached houses and single family houses. We did a lot of general contracting for Ontario Housing and Metro Housing, senior citizens. We have done land developing. We have covered pretty well every aspect of the construction field.

Q. When you speak of Ontario Housing, would you elaborate on what Ontario Housing is? A. The Ontario Housing Corporation came into the field around the middle of 1965; that was the advent of OHC. They came into the field to provide subsidized housing for those that so required it.

Q. How did the Ontario Housing Corporation go about fulfilling its functions? What policy did it follow? A. They would go out on proposal calls.

Q. You will have to tell the Board what that means? A. What the Ontario Housing Corporation would do is if they require so many three-bedroom apartments, so many two-bedroom apartments, or so many town house type of developments, they would advertise in the paper and specify and outline their requirements. Myself as a developer of property would go out and either buy a piece of land or utilize a piece of land that was already in my portfolio to come up with an offer price.

Q. You would build the structure for them? A. Yes.

Q. Which would be owned by OHC? A. Yes.

Q. And from then on they would rent them out? A. As they saw fit. They would be built for them and they would become the owners.

Q. This was an activity in which DelZotto Enterprises Limited was engaged? A. Yes. They became very active in the mid sixties.

Q. How many structures have you built, has DelZotto Enterprises built for OHC? A. Ho, a great many, you know, considering the joint ventures.

The appellant as well as Angelo DelZotto Limited were associated with other individuals and corporations engaged in and dealing in all kinds of real estate. Their directors were also involved in multiple land and building transactions. Mr Angelo DelZotto said in his testimony that his company was just a general construction business of which he was the sole shareholder. He also said that Angelo DelZotto Limited built mostly housing and that he personally built an apartment on Hampton Road which was eventually sold. As a witness, he also stated that he is a member of a family of builders with large experience and ability. In 1969 all the members of the DelZotto family decided to merge their business and incorporated DelZotto Enterprises Ltd which comprises J DelZotto and Sons Limited, Angelo DelZotto Limited, Leo DelZotto Limited and Elvio DelZotto Limited. It is to be noted that in the early fifties, J DelZotto and Sons Limited built ten eleven-suite buildings on Russell Road. Two were sold and the others were kept by DelZotto Enterprises Ltd.

It is considered by the jurisprudence that from such connections there is an inference of involvement, and not only the intention but also the conduct of the taxpayer is to be considered. If one acts as a dealer he cannot deny that he is one.

Mr Angelo DelZotto testified that Mr Tannebaum was controlling York Steel, one of the appellant’s shareholders, and said that:

Mr Tannebaum had fantastic land holdings and that was one of the reasons I could see myself forming a large corporation with Mr Tannebaum to take advantage of his land bank. With my background and my know-how in the construction field and knowing he had these land holdings, I felt, I knew I could build houses on these different lots and generate profits.

He also said that Mr Lou Fruitman was representing Mr Tannebaum in the appellant company.

It would be incredible to think that with their experience in land and building, the directors of the appellant were not aware of the activity of Metropolitan Housing, which was in the market to purchase homes for the purpose of housing people of the City of Toronto. It would be more surprising to think that they were not aware of the legislation creating Ontario Housing Corporation which intended, with the co- operation of Central Mortgage & Housing Corporation, to buy and build houses for the purposes of accommodating a certain class of the community of Toronto. Being so, they knew already that there was an easy market for what they were building and that market was used to dispose of the maisonettes and of Lawrence and Susan Apartments, at a large profit.

Mr Angelo DelZotto said in his testimony that there never were formal meetings of the appellant company and that no records were kept of the discussions with Mr Tannebaum and Mr Fruitman.

From 1963 to 1970 inclusive, the appellant reported losses. Sales of so-called investment properties from 1961 to 1970 inclusive, appear as follows in the appellant’s income tax return: for 1961 there were no sales and none were reported; for 1962 same as for 1961; for 1963 the following were reported as fixed assets:

In the statement attached to the income tax return, items (1) and (3) do not figure in what was supposed to have been built for rental. Therefore, the proceeds of the dispositions are to be found in the sales amounting to $1,362,247.10 as shown in the statement of house sales.

For 1964, the income tax return shows that amongst the assets, there were three so-called rental properties: Lawrence Terrace Apartments; Sheppard Gardens Maisonettes; and Finch Industrial Plaza. It is to be noted that the Islington Avenue property had been disposed of. The sale price is again to be found in the statement of house sales as amounting to $356,860.

The 1965 income tax return shows that the appellant was supposed to hold as rentals the following properties: Lawrence Terrace Apartments; Claxton Gates Apartments; Bere Regis Apartments; Lawrence and Culford; Finch Industrial Plaza; 2246 Keele Street, 2417 Keele Street; and 5320-22-24 Yonge Street. The Sheppard Gardens Maisonettes had been sold and a capital gain was claimed. The evidence adduced proved that out of 18 projects and properties from 1961 to 1970, at least six properties were built and sold. The six properties were rental properties. With respect to the Sheppard Gardens Maisonettes, Mr DelZotto had this to say in his testimony:

Q. What is this schedule Mr DelZotto? A. This was something I had worked out at the time when I was in negotiations with the Ontario Housing. When I discussed the over-all situation I had anticipated a sale to Ontario Housing Corporation. This indicates the return on the investment that we had at Shep- pard Avenue. It speaks for itself. It shows a percentage of return on the investment before principal repayments of 11 per cent, and after principal repayments it works out to something like 5.28 per cent which was not considered a good investment. In other words, I could take that same investment and grow it into a much better investment in other areas, get three times that form of return.

Q. We were talking about the maisonettes on Sheppard Avenue, the housing project there. Did you have public housing tenants among your tenants in that project? A. Yes; I think there were ten tenants there from the Toronto Housing Authority accepted as tenants.

Q. Were there features of your maisonettes which were attractive to the Ontario Housing Corporation? A. The town house facility seems to lend itself to the family type of accommodation and that is really what the Housing Corporation were looking for, to facilitate families.

Q. The type of apartment that you had at Sheppard was the kind of apartment which the Housing Corporation was looking for? A. I do not understand your question?

Q. Were you both finding tenants in the same general classes of the population? A. When I first built this complex I was going into the open market, but with the advent of the Ontario Housing Corporation I could foresee because of the insight I had into the scope of the OHC that I was going to eventually find myself in a competitive position with OHC because they were looking to absorb all these existing units for family type accommodations and as a result Sheppard Gardens would be in the same field and competing to all intents and purposes.

Q. Did you have any contact with the Ontario Housing Corporation? A. Yes. I was approached by Mr Robert Sutters who was a director of Ontario Housing. He had approached me, I forget just when, but it was after the completion of Sheppard Avenue, and asked me if I would contemplate offering any units to the Ontario Housing Corporation if he went out to a proposal call.

Q. What do you mean by a proposal call, Mr DelZotto; what is the significance of that phrase? A. OHC would advertise in the papers specifically for a special type of unit and if you had this type of unit you could come forward and offer those units to OHC.

Q. What was your contact with Mr Sutters? A. Mr Sutters had approached me to see if I had any such units that I would consider offering to the Corporation. When I came in contact with Mr Sutters he sort of enlightened me on the philosophy behind OHC and just what they were contemplating doing in the future. This sort of broadened my mind in that I could see that OHC was going to move into the field in a very large way because they were looking for these units.

Q. What was your reaction to Mr Sutter’s approach to you? A. I became, with regard to the town houses, I became deeply concerned because I could see myself being in a position where in essence I would be competitive with OHC because even though when I built them there was a void in the market, here was OHC coming in and -I could see that they were out to facilitate the void. I could see myself in a position where I would be in difficulty in years to come.

Q. When did this situation arising from the introduction of OHC into the market develop, in what years? A. When was OHC started?

Q. When did it start, when did you begin to have this feeling that you would have difficulty? A. After I met the director, Mr Sutters.

Q. It was not anything that was in your mind before you projected the maisonettes? A. No. I was not even aware of OHC at the time; I do not think it existed.

Q. Your original concept, your original purpose of constructing the maisonette project was what? A. As an investment project.

Later on in his testimony, Mr DelZotto added:

It was a beautiful project. I built it for less than the mortgage and when you build for less than the mortgage, you have a beautiful situation. At the same time I am a businessman and when an opportunity arises, and being aware of all the problems that existed and being dubious about the future I assessed my situation on the return of what I thought I should get in the market place and what I could do with my investment as compared with the immediate investment and being more secure in my position, it was just a business decision, that is all.

After due consideration of the evidence and the strong argument of counsel for the appellant, I came to the conclusion that a wise and bright presentation does not always represent the law. In an appeal of this nature, there are matters to be examined such as: (a) iteration;

(b) development; (c) selling organization; (d) specialized knowledge; (e) accounts; and (f) special circumstances. All these matters were found through the evidence. There was iteration by those involved directly and indirectly in the business in which the appellant was deeply engaged. Developments were made with the anticipation that sales could be realized with profit and that resulted in some sales. The appellant had an extensive selling and renting organization. As far as specialized knowledge is concerned, Mr Angelo DelZotto praised emphatically his knowledge in the business of dealing in real estate. From the accounting point of view, the business was treated as a sole entity by the bookkeepers and by the auditors. If we look at the way the maisonettes were dealt with, one must take into consideration the fact that the land on which they were built was purchased from a shareholder and a director of the appellant. Moreover, on account of his numerous activities in the appellant’s business, Angelo DelZotto knew, or is deemed to have known, that some of the crown corporations were to be the purchasers.

For the above reasons, the appeal is dismissed.

Appeal dismissed.