Issie Feldstein v. Minister of National Revenue, [1969] CTC 435, 69 DTC 5295

SHEPPARD, D. J.:—This appeal is from the re-assessment by the Minister of National Revenue for the taxation year 1962 by adding two items known as the Comox Street Property and the Main Street Property to the appellant’s taxable income. The appellant contends that the items are not taxable income but capital. The two items consisted of monies realized from the Comox Street Property and from the Main Street Property, both in Vancouver, B.C.

1. The Comox Street Property realized the sum of $1,858.82 and the question is whether this sum is taxable income or capital of the appellant. In 1959 the appellant’s wife loaned $5,000 to Emerald Apartments Ltd. against the assignment as security of the Company’s interest as purchaser under an agreement of sale covering the W^ of Lot 12, Comox Street. The Emerald Apartments Ltd. tore down a rentable building on the lot and the vendor, the Toronto General Trust Corporation commenced cancellation procedures and obtained an order for payment of approximately $9,000, or cancellation of the agreement of sale. The appellant paid the sum fixed by the order and took title in the name of his wife’s father in order to protect the interests.

The east half of Lot 12 was only 33’ in width and was too narrow to be suitable for building purposes. To the east and adjoining were Lots A and B of Lot 13 and the three lots made one property suitable for an apartment block. The owner of Lots A and B, Foundation Finance Ltd. had agreed to sell these lots to Emerald Apartments Ltd, under separate Agreements of Sale and the owner as Vendor served notice of exercising power of sale for default upon Emerald Apartments Ltd. as purchaser. Next the appellant and Foundation Finance Ltd. agreed to sell all three lots together and accordingly listed the three lots for sale but the agent was unable to make a sale so that the three lots remained unsold. The appellant then negotiated an agreement with Foundation Finance Ltd. to sell all three lots together and not otherwise and the appellant had the agreement drawn up and signed by his wife, but the Foundation Finance Ltd. refused to sign.

The appellant through Emerald Apartments Ltd. paid the balance owing on Lot B of Lot 13 which immediately adjoins the west half of Lot 12 on the east. Thereby, the appellant controlled the 66' frontage but due to the shape of Lot B of Lot 13 the two lots were an insufficient area for an apartment block. Finally, the appellant bought from Foundation Finance Ltd. Lot A of 13 and he thereby controlled the whole 99' frontage. The appellant then listed the property with Block Brothers and thereby sold to realize a profit to the appellant of $1,858.82, the sum in question. Whether that sum is income or capital depends upon the nature of the appellant’s business.

‘.. Initially the appellant was the proprietor of a Cigarette Lighter Sales business known as The Lighter House, which business. initially made a profit in selling and repairing lighters, but in later years realized no profit. In business the appellant had acquired about 110 mortgages or agreements of sale, some as security for a loan with bonus and interest, others purchased at a discount. Moreover, the appellant had bought and sold four parcels of real estate. He had also advertised himself as a money lender (exhibit R26, R27, R28). He had bought Maloff shares for $1,000 and had re-sold for $16,000. Also he acted as agent for his wife in making investments for her, and in particular arranged this loan for her on the West half of Lot 12.

It is apparent that the appellant took the title of these three lots as one property for the purpose of resale, as together the lots were more readily saleable. The various attempts of the appellant to sell the west half of Lot 12 indicate that was the intended method of realizing in the vent of default. Further selling the property was an incident implied in the business of lending money on the security of property.

In Jack Blustein v. M.N.R., [1963] C.T.C. 326 at 336, Catta- nach, J., stated :

Since I have found that the present appellants were engaged in a scheme of profit making, it follows that the sale of a property under the covenant in the mortgage thereon or the instigation of foreclosure proceedings are incidental remedies and any profit arising therefrom is as much a profit in the business as holding a mortgage to maturity and realizing the discount thereon where no foreclosure proceedings were necessary.

Again, the purchasing of Lots A & B with the view of resale must imply the intention of making a profit therefrom, if the profit is to be realized. Further the listing of the properties initially by the two owners and latterly by the appellant with Block Brothers which resulted in the sale indicates ‘‘an adventure or concern in the nature of trade’’, within Section 139(1)

(e) M.N.R. v. Taylor, [1956] C.T.C. 189. The sum in question is therefore taxable income of the appellant.

2. The Main Street Property was sold by the appellant to realize the sum of $18,640.42. In November 1957 the appellant agreed with Smith, who was experienced in catering, had no money but numerous creditors, but had an opportunity to buy a catering business on Main Street, that the Appellant would advance $10,000 to be used to buy the property and catering business ; Smith was to have a 34 interest in the land and equipment and the plaintiff a 14 interest. Smith assumed that the business would produce from its profits for the two years a share for the appellant of $7,000, and it was further agreed that there would be a mortgage to the appellant, covering the 34 interest of Smith in the amount of $15,000 and interest thereon at 7 7% per annum payable on the expiry of 2 years. The $15,000 was made up as follows: $10,000 to repay the loan, and $7,000 for the appellant’s share of the profits made up of $5,000 of the principal sum plus the interest. The appellant also agreed to lease to Smith the appellant’s 14 interest in the property at $150.00 per quarter or 5% of the gross sales of the business, whichever was the greater.

To keep the transaction from the knowledge of Smith’s creditors the whole of Smith’s 34 interest was taken in the name of his wife and she gave the mortgage to the appellant. All instruments, including deeds and mortgage were registered. Smith then managed the business for a short time but gave the appellant no statement of the condition of the business. Later Smith hired a manageress. In 1959 Smith, without consent of the appellant sold the business to Mrs. Geraldine Lee, and leased to her the property. In July of 1959 the appellant learned of the transaction with Mrs. Lee and thereupon rented to Mrs. Lee at $250 per month. In January 1960 she vacated on notice. For 214 years the building remained empty in spite of the appellant’s efforts to obtain a tenant and being empty the building was damaged and deteriorated. In 1962 the appellant tore down the building and in 1962 sold the property so as to realize a profit of $18.- 640.42, the sum in question.

The appellant and Smith were partners as the appellant was sharing in the net profits which were shared on the basis of the appellant’s share being $7,000 for the first two years; Pooley v. Driver (1876), 5 Ch. D. 458; Green & Beesley (1835), 2 Bing. (N.C.) 108.

Also the appellant’s share was secured by the mortgage in question on Smith’s interest.

The intention of the parties was that this should be a partnership, although kept secret, no doubt because of Smith’s creditors. That intention was testified by Smith and is stated by the appellant in his Notice of Appeal.

The partnership was to continue for a term of two years ; that is until the mortgage matured at which time it was intended that Smith negotiate new terms even to becoming the purchaser if the business were successful. In the result there was a partnership in the catering business between the appellant and Smith for the term of two years. The purpose of that partnership was to sell services and such chattels as food and incidentals to catering, but the partnership was not in the business of buying and selling the business premises on Main Street.

There was nothing to make the premises a current asset, Wat er er v. Wat er er (1873), L.R. 15 Eq. 403, hence the lot and building would be a capital asset of the partnership.

In this instance, because of the partnership and of the agreement betwen Smith and the appellant, the monies advanced by the appellant ceased to be his monies and were converted to the use of the partnership, another business, and being so converted, the monies did provide the capital assets of the partnership, namely the land and building thereon and equipment incidental to the catering business, but without any right of the appellant to realize thereon during the term of the partnership. As between the partners, the appellant was secured by a mortgage upon the 34 interest for the loan of $10,000 and his estimated profits for two years being $7,000.

The partnership could have been terminated no doubt for Smith’s earlier breaches including his selling to Mrs. Lee and had the appellant then determined it, the partnership would continue only for the purpose of winding up. Assuming that the appellant had wound up the partnership and sold the partnership assets, he would be liable to account to Smith for Smith’s share as was attempted in Knox v. Gye (1872), L.R. 5 H.L. 656. Here the appellant relied upon the mortgage to foreclose Smith’s interest which foreclosure terminated all Smith’s rights, including Smith’s right of account. As a result of such foreclosure the Appellant retained the monies here in question, absolutely but only by virtue of the mortgage and its foreclosure. As the monies in question were obtained by reason of the mortgage and its foreclosures, therefore, the monies realized must be deemed to be held in satisfaction of the monies secured and therefore to be held in the same proportions as the monies secured by the mortgage which would be $10,000 for capital as against $7,000 for taxable income or profits. Therefore the sum in question — $18,640.42

It is not necessary to consider the appellant’s position if his business had extended to the investing in a partnership to benefit his business. This is the only occasion so proven and that point can be considered when it arises.

In conclusion the assessment will be referred back to the Minister to be re-assessed in accordance herewith. As to the costs the appellant has failed on one issue (the Comox property) and has been only partly successful on the other issue, but he has succeeded to a degree that is substantial in importance and amount. Therefore, the appellant will recover his costs of the appeal but the respondent will have a set-off of one-half of the respondent’s cost of appeal.