Mastino Development Ltd. v. R., [1975] C.T.C. 529, 75 D.T.C. 5353

Heald, J:

1 The plaintiff, a private Ontario corporation incorporated in 1956, with head office at Toronto, appeals from an income tax reassessment for its 1969 taxation year under which the plaintiff's liability for income tax was increased by some $14,006.32 including interest. The plaintiff agrees that if a certain real estate transaction was an adventure in the nature of trade, then said reassessment is correct in amount. The plaintiff pleads however that the real estate in question was optioned for purchase for the purpose solely of constructing a manufacturing complex for an associated company, DHI Limited, with the balance of the property to be used as a farm and residence for the principal owner of the companies, Mastino Della Scala, and that the real estate in question was not optioned for purchase with any contemplation of resale.

2 The plaintiff further pleads that said option to purchase was exercised with a view of permitting recovery of option monies; that the optioner treated the agreement at an end, sought to retain the option moneys and commenced action for damages and for payment by Mastino Della Scala, the principal of both the plaintiff and DHI Limited, on a $25,000 cheque, which was negotiated following the exercise of the option; and that the litigation was settled, a term of said settlement being the acquisition by the plaintiff of subject property.

3 The defendant, on the other hand, denies the aforementioned facts pleaded by the plaintiff and alleges that the profit realized by the plaintiff on the purchase and sale of subject property was income from a business or venture in the nature of a trade and, by virtue of sections 3 and 4 and paragraph 139(1)(e) of the Income Tax Act, was part of the plaintiff's income for its 1969 taxation year.

• (a) DHI Limited, the sales and distribution arm of the business;

• (b) Caprin Limited, the manufacturing arm; and

• (c) the plaintiff company, a holding company.

5 Originally the business was operated from rented premises in Scarborough. However, by 1959 Mr Della Scala knew that he would be required to vacate said rented premises and began to look for land upon which he could build a new plant. On November 23, 1959 the plaintiff company executed an option to purchase 159 acres in Pickering Township, described as being part of Lot 17 in the Third Range of the Broken Front Concession, in the Township of Pickering, in the County of Ontario (hereafter referred to as the Pickering property) from Frank and John O'Sullivan, the owners thereof. At that time, said property was mostly under cultivation and was being operated as a mixed farm, having rotation crops of alfalfa, hay and corn. The original option to purchase of November 23, 1959 (Exhibit 2A) was for a period of 365 days. The plaintiff company paid $5,000 for said option. Said option contained provision for a further renewal for an additional 365 days upon payment of an additional $5,000. The total purchase price was $208,000, payable $25,000 on the exercise of the option, a further $34,000 on sale completion, with the balance of approximately $144,000 (after giving credit for the $5,000 option money) to be secured by way of a first mortgage back to the vendors. Said first mortgage was to be amortized over ten years with interest at 6% and was to contain a partial discharge clause permitting partial discharge of the mortgage upon payment at the rate of $1,310 per acre for that portion of the land being discharged. There was also to be a provision in the mortgage specifying the manner in which subdivision was to take place and providing further that any subdivision should cover not less than 100 lots at a time.

6 Mr Della Scala testified that on November 23, 1959, when he executed said option on behalf of the plaintiff company, his intention was to erect his window manufacturing plant on subject property, to live there himself and to farm the balance of the property not required for the new plant.

7 In the ensuing year after November 23, 1959, Mr Della Scala became involved in a proposal that he establish his new factory at Brampton rather than at Pickering. However, the Brampton arrangements had not been completed by November 23, 1960, so Mr Della Scala decided to renew the option on the Pickering property for another year and did so by making the additional $5,000 payment provided for in Exhibit 2A and referred to supra. He said that he renewed the option to assure himself of a place to build his plant if the Brampton arrangements fell through.

8 Sometime in the spring of 1961, Mr Della Scala completed his Brampton arrangements with the result that he no longer needed the Pickering property, the final decision having been taken to locate the new plant in Brampton.

9 Notwithstanding his change in plans, Mr Della Scala decided to exercise the option on the Pickering property and instructed his solicitor, Mr Bernard Burton, to so advise the real estate agents acting for the vendors.

10 Mr Burton so advised said agents by letter dated November 21, 1961 (Exhibit 3). In that letter, Mr Burton stated that it was his understanding that the plaintiff company had paid the necessary $25,000 cash payment to Mr Goverde, an employee of said real estate agency. Actually, Mr Della Scala had delivered his own personal cheque for $25,000 to Mr Goverde in November of 1960 when the option was renewed.

11 Mr Della Scala gave as his reason for exercising the option on the Pickering property, notwithstanding he no longer required it for his plant, that at the time of or prior to his decision to exercise the option, he was advised by his solicitor, Mr Burton, that this was the best course for him to follow in order to recoup the $10,000 in option moneys already paid by him. On the other hand, Mr Burton, in his evidence on cross-examination, said that Mr Della Scala did not indicate to him the reason for exercising the option at the time he was instructed to write Exhibit 3. Mr Burton said that sometime after writing the option acceptance letter of November 21, 1961, he was instructed by Mr Della Scala to attempt to get out of the Pickering property transaction by rescission which would result in the return to Mr Della Scala of the $10,000 in option moneys plus his own personal $25,000 cheque in the hands of the real estate agent. Pursuant to said instructions, Mr Burton made title searches, discovered that, in his view, there were some questionable facets to the vendors' title to subject property since the title seemed to be basically one derived from long term possession. On the basis of this information, Mr Burton took the position, on behalf of Mr Della Scala and the plaintiff company, with the vendors that since the vendors could not convey good title, that the purchasers were entitled to the return of the $10,000 option moneys paid along with Mr Della Scala's personal cheque for $25,000. The vendors did not agree with this position. Litigation ensued, the vendors issuing a writ against Mr Della Scala, the plaintiff company and the real estate agent on July 11, 1962 in the Supreme Court of Ontario.

12 In that action, the vendors alleged that Mr Della Scala's $25,000 cheque hereinbefore referred to, was dishonoured at the bank, and asked for payment of the said $25,000. There was no claim for specific performance but rather the vendors asked for a declaration that the option agreement was at an end. This plaintiff defended the Ontario action pleading lack of proper title in the vendors and counterclaiming for the return of the $10,000 option moneys paid by it. Mr Della Scala also filed a statement of defence on the basis of the inability of the vendors to provide proper title.

13 Mr Burton testified that he advised Mr Della Scala that they would have “a fighting chance of success” in the Ontario Supreme Court action but that, in his view, “the odds were against them” because, in his (Burton's) experience, many titles to land in Ontario had been held to be valid through long term declarations of possession. As a result, Mr Burton was instructed by Mr Della Scala to enter into negotiations with the vendors' solicitor looking to a possible settlement of the action. The action was settled in March or April of 1963 on the basis that the vendors waive all interest on the mortgage (the principal amount of which was to be $192,000) up to and including April 28, 1967, and on the further basis that the mortgage interest rate be reduced from 6% (the rate fixed in the option) to 5%. Mr Burton said that he recommended this settlement to Mr Della Scala firstly because of his lack of confidence in the success of their defence to the action and secondly because of the substantial saving in dollars resulting from the interest waiver and the interest rate reduction above referred to. Thus, the plaintiff company acquired title to the Pickering property and the Ontario Supreme Court action was discontinued.

14 Mr Della Scala had the Pickering property appraised by a Toronto appraisal firm in 1962. This firm appraised the market value of subject property as of December 6, 1962, at $158,000, with a footnote to the effect that if a buyer could be found who particularly desired the land for his own industrial use in a few years' time, he might well be prepared to pay $237,000 for the property.

15 Mr Della Scala testified that after acquisition of the property in November of 1961, with the intention of getting back his money, he asked the agent Goverde to find a buyer. However, efforts to sell the property failed until 1969 or 1970 when the property was sold for approximately $400,000. Since the original purchase price was $208,000 the profit on the transaction was substantial, and the income tax claimed to be payable thereon forms the subject matter of this appeal.

16 In determining whether subject transaction was a capital or trading transaction, the evidence at trial of the real estate agent William Goverde becomes important. Mr Goverde testified that in 1959 the real estate agency by which he was employed had received a listing for the sale of subject property from the O'Sullivan brothers, the owners thereof. He said further that he provided Mr Della Scala with a brochure (Exhibit 8) concerning subject property. Exhibit 8 describes subject property as an industrial site for sale, located in the heart of the industrial zone midway between Metro Toronto and Oshawa, being approximately four miles from the perimeter of Metro Toronto. Said brochure goes on to relate that there were a large number of medium sized industries in the Town of Ajax, two miles to the east and that General Tire had purchased a large tract of land immediately to the west of subject property for the erection of a modern tire producing factory. Mr Goverde went on to explain that subject property is located adjacent to the property on which is now located the Ontario Hydro nuclear power station. He also said that in 1959, Ontario Hydro was optioning land in that vicinity. From 1960 on, subject property and the adjoining area has been zoned industrial. Mr Goverde also said that in November of 1960 Mr Della Scala advised him of his negotiations for a plant in Brampton and asked him his opinion as to the chances of reselling the Pickering property. Mr Goverde testified that he advised Mr Della Scala that the chances of sale were good because Ontario Hydro was purchasing property in the area at that time and expressed his belief that it was on his recommendation that Mr Della Scala decided to renew the option and to pay the second $5,000 in option moneys. He related further that he and his firm, from that time forward made rather extensive efforts to sell the Pickering property for Mr Della Scala, and, to that end, he went to Europe in May or June of 1961 where he endeavoured, without success, to interest prospective buyers. Mr Goverde said further that the market in the immediate vicinity of subject property “went flat” due to zoning confusion and uncertainty and remained inactive until 1967 or 1968 when the trunk line within the Dufferin Creek area was proceeded with.

17 Mr Goverde also testified that, in March of 1960, on his recommendation, Mr Della Scala tried to option the 150 acres abutting subject property from its owner, offering said owner $5,000 for a one year option. Said option also contained a partial discharge of mortgage clause at the rate of $1,200 per acre. The option was, however, not agreed to by the owner. Mr Goverde said the reason he made this recommendation to Mr Della Scala was that in his view, the proposed rezoning would be easier to obtain from the proper authority if Mr Della Scala controlled an entire block of land which this option, if agreed to, would have accomplished. Apparently Mr Goverde and Mr Della Scala tried to persuade the abutting owner to join with them in a joint application for rezoning but the abutting owner was not interested in doing so.

18 One of the unique features of the facts here present is the various points in time at which it can at least be argued that the plaintiff's intention is relevant to a determination of the issue herein.

19 The first relevant point in time is November 23, 1959, the date when the first option was taken; the second point in time is November 23, 1960 when the option was extended; the third point in time is November 23, 1961 when the option was exercised and the fourth point in time is in March or April of 1963 when the Ontario Supreme Court action was settled and the agreement for sale modified to conform to the Minutes of Settlement thereof.

20 I have no difficulty in dealing with the first two points in time referred to supra, that is, the two option dates. The situation in the case at bar is similar to that dealt with by Thurlow, J in the case of Hill-Clark-Francis Limited v. MNR[FN1: <p>[1961] Ex. C.R. 110, [1960] C.T.C. 303, 60 D.T.C. 1245—affirmed on appeal,[1963] S.C.R. 452, [1963] C.T.C. 337, 63 D.T.C. 1211.</p>] where the intention, at the time of purchase on exercise of the option, was very much different than it was at time the option was given.

21 In the case at bar, even taking Mr Della Scala's evidence at trial at face value as to his intention on November 23, 1959 (and as to this, I have considerable doubt, having regard to all of the objective evidence), the situation had changed considerably by November 23, 1960, since, by that date it was, in his own words “90% sure” that he would locate at Brampton and not at Pickering. However, by November 23, 1961, the date the option was exercised, the intention of Mr Della Scala (and of necessity, the intention of the plaintiff, since it is not contested that the intention of Mr Della Scala is the intention of the plaintiff) had completely changed. By this time, the Brampton arrangements were completed, there was no longer any intention whatsoever to locate the plant at Pickering or to reside and farm there.

22 Even prior to November 23, 1961, efforts to resell the Pickering property were being made, even to the extent of sending Mr Goverde to Europe in the spring of 1961 to find a buyer. I am satisfied that Mr Della Scala renewed the option in 1960 and purchased the property in 1961, acting on Mr Goverde's recommendation that chances of sale were good because of the activity of Ontario Hydro in the area. Mr Della Scala's stated reason at trial for exercising the option, ie that he was acting on the advice of his solicitor, Mr Burton, was not persuasive, particularly in view of Mr Burton's evidence that Mr Della Scala had not indicated to him his reasons for instructing acceptance of the option. The evidence is thus overwhelming that, as of November 23, 1961, the plaintiff's sole intention in acquiring subject property, was for purposes of resale.

23 The plaintiff's counsel, however, urged upon me that the determining point in time was in March or April of 1963 upon settlement of the Ontario Supreme Court action. His submission was to the effect that plaintiff's intention at that time in acquiring the property was to “cut hs losses”; to recoup the $10,000 option money paid and remove Mr Della Scala's personal exposure on the dishonoured $25,000 cheque. In support of this submission, counsel observed that both parties to the Ontario Supreme Court action, in their pleadings, treated the agreement of November 23, 1961 as being at an end since the vendors were not asking for specific performance and were suing only on the dishonoured $25,000 cheque and since the purchaser (this plaintiff) and Mr Della Scala were defending on the basis of the vendors' defective title. Plaintiff's counsel also submitted that, in order for subject transaction to be considered a trading transaction, it was necessary to find an intention in this plaintiff to resell at a profit, and that on the facts here present no such intention had been established.

24 A number of cases were cited to me by counsel but the two decisions which I consider to be most applicable to the case at bar are the Taylor case[FN2: <p><em>MNR</em>v<em>James A Taylor</em>, [1956] C.T.C. 189, 56 D.T.C. 1125.</p>] and the McDonald case.[FN3: <p><em>David C McDonald</em>v<em>The Queen</em>, [1974] C.T.C. 836, 74 D.T.C. 6644 (FCA).</p>]

25 The Taylor case (supra) is, of course, a landmark decision of President Thorson, on the meaning of the term “adventure or concern in the nature of trade” as it appears in the Income Tax Act with which we are here concerned. In that decision, the Court applied a number of tests, some positive and some negative to determine when a transaction, which is not in itself a trade or business, can be held to be “an adventure or concern in the nature of trade”.

26 Taking an overall view of subject transaction and considering all of the relevant facts at time of purchase together with the subsequent events, I consider that it is not realistic to conclude that the only possibility that motivated the acquisition was the ultimate creation and retention of a capital investment. From early in the year 1961 onward, plaintiff's sole intention was to sell the property. The plaintiff had not made the necessary financing arrangements either in 1960 or 1961 as evidenced by the fact that the cash payment of $25,000 called for on the taking up of the option in 1961 was not paid (ie Mr Della Scala's dishonoured cheque). Plaintiff's whole course of conduct from beginning to end illustrates that he wanted to keep control of this property for speculative purposes with as little of his own money invested as possible (for example, see Exhibit 11—an offer to the vendors that they extend plaintiff's option and forgo the $25,000 cash payment on a profit sharing basis if the land were sold at a profit and see also Exhibit 12—an agreement between the plaintiff and its solicitor, Mr Burton, providing for payment of Mr Burton's fees on the basis of a percentage of the profits on resale). The mortgage back to the vendors as well as the lease of the subject property back to vendors both provided for partial discharges in contemplation of subdivision. The mortgage also specifically provided for the manner in which subdivision would take place. It is also significant that the revenue being produced to the plaintiff through the lease back to the vendors was the relatively small figure of $1,000 annually.

27 The editorial note to the Taylor case (supra) concludes with this paragraph:

Perhaps the most important feature of this decision is the conclusion of the Court that absence of intention to resell for a profit is no defence. Other factors may enter to overcome such an argument. It is clear that the basic test remains the same. An item is either acquired as an investment or it is not. If it is not, any gain is taxable. The question of which it is falls to be determined by all the facts: course of conduct, nature of the item, probabilities of it producing revenue without the need to be turned over and the similarity to a trading transaction. ... ([1956] C.T.C. 190)

28 I agree with this view of the basic test and on the facts in this case, I am satisfied that the Pickering property was not acquired as an investment.

29 There remains for consideration the possible effect of the events of March or April 1963, culminating in the settlement of the Ontario Supreme Court action and the acquisition of subject property by the plaintiff on a somewhat different basis from that stipulated in the original agreement for sale. In my view, the McDonald case (supra) is an answer to the plaintiff's submissions in this connection. The headnote in that case reads inter alia as follows:

Since the taxpayer's intention from the very beginning was to sell at a profit, the characterization of the transaction as a speculative venture was fixed, and this was in no way changed simply because the taxpayer intended to retain his interest in the land for a substantially longer period of time than in fact he did. (74 DTC 6644)

30 In my view, subject transaction was a speculative venture from beginning to end, with the plaintiff being rewarded handsomely some seven years later for his patience. The badges of a trading transaction, as set out in the Taylor case (supra), are all present in the case at bar. It follows that in my view the plaintiff's appeal must be dismissed with costs.