Victoria Park Development LTD v. Minister of National Revenue, [1972] CTC 2640, 72 DTC 1523

The Assistant Chairman:—This is an appeal of Victoria Park Development Ltd from a reassessment of the appellant’s 1969 taxation year in which the profit in the amount of $283,439.18 realized by the appellant on the sale of a parcel of land was added to the appellant’s 1969 income as income from a business or from an adventure in the nature of trade in that year.

By his own admission, Mr Frank Quiring, appellant’s president, either in his own name or in the name of companies in which he is the main shareholder is a trader in land and in apartment buildings constructed by him. In 1961 Victoria Park Development Ltd bought 16 acres of land for $32,000. Five years later it sold 8 acres of the 16 acres for $73,000 and paid tax on the income earned in that transaction.

Mr Quiring stated that the company’s intention was to build an imposing highrise apartment building on the remaining 8 acres of land as a revenue-producing investment which he wanted to leave to his family who are all shareholders of Victoria Park Development Ltd. Although the appellant exchanged part of these 8 acres of land with Winnipeg Supplies, retaining land on the creek which was more suitable for the construction of the proposed twin towers apartment building, this was done in order to realize the project and the 8-acre parcel of land was neither offered nor listed for sale.

The financing of the twin tower apartment building proved to be difficult for the appellant and it was decided to build one tower at a time commencing with the first tower to be built on a 2 /2-acre portion of the 8-acre parcel of land earmarked for that purpose.

The land on which the building was to be built was unserviced and the purchase from the Salvation Army of a small parcel of contiguous land, as well as the servicing of the land, had to be completed before the land could be considered ready for the construction of the build- ing. The land was serviced and the small contiguous piece of land used by the appellant for the construction of a road was acquired by the appellant with a view to carrying out its investment project.

The construction of the first tower was estimated at a cost of $2,600,000 and financing was finally arranged through The Canada Life Assurance Company (hereinafter referred to as “Canada Life”) whereby Canada Life would buy the 2 Z> acres of land on which the tower was to be built for $350,000 and then lease it back to the appellant for a period of 99 years at a basic annual rent of $27,125 for a period of 30 years (Exhibit A-4).

The purchase price of the 2 /2 acres for $350,000 was to be paid as follows — $175,000 on conveyance of the clear title to the land and $175,000 when $1,400,000 of material and labour had been expended on the construction of the tower.

Canada Life would then grant the appellant a loan of $2,300,000 at 834% guaranteed by a mortgage, the said mortgage funds to be advanced by Canada Life in accordance with a detailed schedule more particularly set forth in Exhibit A-3.

In that way the appellant would have the $2,600,000 required for the construction of the first tower — the $350,000 received by the appellant for the sale of the land being entirely used to meet part of the building cost. The construction of the building began in 1968 which is now virtually completed and in which there is a bronze commemorative plaque to the appellant’s president.

The question in issue is whether in the circumstances of this case the profit realized on the sale of a parcel of land is a non-taxable gain as Claimed by the appellant, or whether it is income from a business or from an adventure in the nature of trade as claimed by the respondent.

The question therefore arises as to whether the giving up of the title to the 2 /2 acres of land on which the first tower was built is a sale of the property to Canada Life for $350,000 as part of the appellant’s business as a trader, or whether it is an integral part of a financing arrangement between the appellant and Canada Life for the purpose of constructing an apartment building as a revenue-producing investment for the appellant.

The facts indicate that the appellant was able to obtain the $2,600,000 required for the construction of the first tower only by accepting Canada Life’s financing arrangements which included, as an integral and essential part of the loan agreement, the sale of the 21/2 acres of land and its leaseback to the appellant for 99 years.

In my opinion the facts support the contention that the purpose of the appellant in selling this parcel of land was not to realize a profit as part of its activities as a trader, but rather as a means of obtaining the financing necessary for the construction of a revenue-producing apartment building.

Although all the facts of a. given case would have to be scrutinized closely, I think it would be generally admitted that in principle a trader in land and in apartment buildings is not legally and automatically precluded from withdrawing from land generally purchased for purposes of trading certain lots or parcels of land, and constructing thereon an apartment building as a revenue-producing investment. This, in my opinion, is the situation in the present instance.

Judging from the facts of this case, I do not believe that the sale of the 21/2 acres of land to Canada Life is in any way part of the appellant’s business as a trader. I do consider that the sale of that parcel of land to Canada Life was an essential condition of that company’s loan to the appellant and an integral part of the financial arrangements by which the appellant could obtain the necessary capital in order to construct the building as a revenue-producing investment.

In my opinion the case at bar can be distinguished from MNR v All- arco Developments Ltd, [1972] CTC 172; 72 DTC 6154, which was decided by the Supreme Court.

In that case the principal in the process of trading in land found himself in the situation in which 420 of the 503 acres of land owned by him for trading purposes was rezoned by the city for use as park lands.

In an attempt to salvage 420 acres which could not be used for residential purposes, the principal succeeded in arranging with the city for the exchange of part of his land for a 1.23-acre site on Bellamy Hill. This exchange was subject to the principal’s using the land acquired for specific construction purposes.

The intention of the principal in exchanging his land for the Bellamy Hill site was not to invest in a revenue-producing property but to salvage his investment in rezoned lands where residential construction was no longer permissible. Consequently the sale of the Bellamy Hill site to the Great-West Life Assurance Company was directly related and part of the principal’s business as a trader. Though subsequently an integral part of the financing arrangements with Great-West Life Assurance Company for the construction of a hotel and parking complex, the profit realized by the principal in the sale of the land because of his motivation in exchanging lands so as to salvage his investment in rezoned lands, was basically profit derived from his activities as a trader and therefore a trading receipt.

In the present instance the appellant voluntarily withdrew from its trading lands which it owned since 1961 certain parcels of land for the declared purpose of constructing a twin tower apartment building as an investment.

The sale of the land to Canada Life was an essential condition imposed by that company and an integral part of Canada Life’s financial proposition for the appellant’s project of the construction of a revenueproducing apartment building and was not in any way related to the company’s activities as a trader. The profit derived from the sale of the 21/2 acres of land to Canada Life is, in the circumstances, therefore not a trading receipt but a capital accretion.

The question arose as to the fair market value of the 2 /2 acres of land on which the first tower was constructed and it was estimated by the appellant’s president, in cross-examination, to be $36,000. Counsel for the respondent then confronted the witness with an affidavit signed by him and dated August 9, 1968 in which the value of the land was estimated at $350,000 (Exhibit A-4B).

It is my understanding that the fair market value of the 2 /2 acres at $36,000 was the president’s estimate of the land before that parcel of land was serviced, before a necessary road was built on the site, and before any arrangements had been made with Canada Life for the construction of the first tower.

In my opinion there was no intention on the part of the appellant’s president to mislead. It is not unreasonable to assume that the parcel of 21/2 acres of raw land prior to any arrangements for the construction of the apartment building had a fair market value of $36,000. Although no appraisal report of the land was produced, the Memorandum of Lease (Exhibit A-4, pages 12 and 13) indicate that the fair market value of the 2 /2 acres is based on the highest and most valuable use of the land and directly related to the progress of the construction of the building to be erected thereon. The fair market value of the land under these conditions was estimated to be $350,000 which amount Canada Life paid and which the appellant, in fact, received as value for the land.

My conclusion is that the facts in the case herein are distinguished from those of the Allarco case (supra) and that the majority judgment therein is not applicable in the present instance. My decision is that the respondent erred in considering the profit derived from the sale of the 2 /2-acre parcel of land to Canada Life as income from a business or from an adventure in the nature of trade. The sale of that parcel of land was not within the appellant’s activities as a trader but was a necessary condition for the financing of a revenue-producing apartment building for the appellant’s president and his family, and the profit realized constituted a capital gain.

The appeal is therefore allowed.

Appeal allowed.