Thrasher v. R., [1975] C.T.C. 66, 75 D.T.C. 5029

Collier, J:

1 The plaintiff taxpayer appeals a reassessment of income tax by the Minister of National Revenue dated April 16, 1971. The Minister included in the plaintiff's taxable income for his 1968 taxation year the sum of $74,849 and for his 1969 taxation year the sum of $102,933. The sums are the gains or increments realized on the sale in those years of portions of certain lands, the whole of which had been originally purchased in 1965. The original purchases com prised approximately 225 acres in total. The lands were in the Township of Sandwich East, about 3 miles from the limits of the City of Windsor, Ontario. In 1968 two small pieces were sold for $52,000 and $45,000 each, and a third parcel of about 118 acres was sold for $308,526. In 1969 a further 81 acres (roughly) was sold for $210,938. The balance remaining of the original acreage, approximately 27 acres, was sold in 1973 for a large sum, realizing another substantial increment. Liability, if any, for tax on the 1973 gain is not before me in this case.

2 The plaintiff takes the position the amounts realized were capital gains. The defendant contends they were income.

3 As has been said many times, the question in actions of this kind is essentially one of fact, and each case depends primarily on its particular facts. I refer to Regal Heights Ltd v Minister of National Revenue, [1960] S.C.R. 902, per Judson, J at 907;[1960] C.T.C. 384 at 390, 60 D.T.C. 1270 at 1273.

4 I must, of necessity, review the evidence here. The plaintiff has been in the real estate business in the Windsor area since 1951. He was, at all material times, the principal shareholder of the company, Ivan W Thrasher Realty Limited, through which he carried on his occupation.

5 In 1964, the F W Woolworth Company Limited (more familiarly known, and referred to here, as “Woolco”) requested the plaintiff to find a site, in the Windsor area, for a shopping centre in which Woolco would be the main commercial establishment (a department store). The plaintiff investigated three or four locations. Woolco indicated prime interest in a site fronting on Tecumseh Road in the Township of Sandwich East. At that time there were apparently only two shopping centres in the Windsor area. One was a relatively small centre built in the 1950's in the City of Windsor proper. The other was in the Township of Sandwich West, some 7 or 8 miles from the Tecumseh Road site.

6 Woolco merely wanted to rent in the proposed centre. The plaintiff was asked if he would be interested in developing it, and renting space to Woolco as the prime tenant. The plaintiff decided to undertake the project. He had no prior experience in shopping centre development. He says this was his first venture into a real estate transaction on his own account. He felt he could not handle the proposal on his own. He went into partnership[FN1: <p>There do not seem to have been any formal written partnership documents.</p>] with a friend, William J Hilliker. He was an architect.

7 Woolco stipulated the shopping centre area should be at least 25 acres in size and have a minimum of 1,000 foot frontage on Tecumseh Road. In January of 1965 its real estate department advised it was recommending to the Woolco executive committee the “leasing of a Woolco department store in a shopping centre to be developed by you on the south side of Tecumseh Blvd. between Jefferson Blvd. and Lauzon Road, Windsor, Ontario” (Exhibit 5).[FN2: <p>The “you” appears to have been the plaintiff. On the samedate, a letter to Woolco was signed “Ivan Thrasher of Ivan W. ThrasherRealty Limited” (Exhibit 6).</p>] The exhibit is a letter addressed to the plaintiff (or perhaps his real estate company).

8 On February 22, 1965 Woolco formally advised it had decided to operate a department store in the projected shopping centre. A number of conditions were set out (Exhibit 7). Construction of the centre was to start not later than the spring of 1965. Exhibit 7 was superseded by another letter of commitment dated May 14, 1965 (Exhibit 15). In the latter it was stipulated by Woolco that construction was to start not later than 90 days from May 14. The Woolco commitment was to be null and void if construction had not started within that time limit.

9 In the meantime, the plaintiff had been endeavouring to purchase the property required for the site. He had, as well, engaged W B Hardman and Associates Ltd of Calgary to make a feasibility study. The earliest report of that company (Exhibit 8) is dated March 30, 1965. It is described as “Report No. 5”. I assume there were earlier reports.

10 The plaintiff entered into lengthy negotiations with three sets of owners of farming lands in the township. Two adjoining parcels fronted on Tecumseh Road. They each had a frontage of 500 to 600 feet, and a depth of about 7,000 feet. Each farm was approximately 100 acres. These were the St Louis family properties. The key portion of the farms was the frontage on Tecumseh Road. That was the area which had been selected as the site. The third required portion of land was roughly 25 acres in size. For convenience, I will describe one of the St Louis family properties as the “James St Louis farm”, and the other as the “Mary St Louis farm”. The third parcel was owned by the LaPorte family. The plaintiff endeavoured to buy from the three families only the acreage immediately fronting on Tecumseh Road. These were referred to at trial as the “front” lands. The major non-fronting acreage was referred to as the “back lands”. The plaintiff was unsuccessful in his negotiations. The owners insisted on selling the whole of their properties, or none at all.

11 In order of date, the deeds of purchase, and the agreed sale prices, were as follows:

Mary St Louis              -- April 5, 1965      -- $165,750
 LaPorte                    -- May  20, 1965      -- $ 35,000
 James St Louis             -- June  1, 1965      -- $150,000

12 The transactions were ultimately paid in cash, except in respect of the James St Louis farm. He agreed to take $100,000 in cash and a first mortgage for $50,000 with interest at 10%. The mortgage is dated May 29, 1965. It provided for interest payments on July 1, August 1, and September 1, 1965. The principal was to be paid on the latter date.[FN3: <p>The payment date on this mortgage was extended several times.</p>] Mr St Louis had stipulated he required a replacement residence in the immediate vicinity (his house was to be demolished). It was agreed a house would be built by November 30, 1965. The cost was $16,800, to be paid for by the plaintiff and his partner, or a company which they controlled. For reasons which will be explained later, the plaintiff alone ultimately expended the amount in question.

13 The total price of the three properties was therefore $350,750. Of that sum $50,000 was represented by a mortgage payable in three months' time. The cost of the house was additional.

14 The plaintiff and his partner had, I suspect, little independent means with which to pay for the land, far less to build the centre on it. By mortgage dated May 22, 1965 they borrowed $300,000 from Traders Realty Limited. The interest was 10%, payable quarterly with the first instalment due September 1, 1965. The principal sum was to be paid on May 31, 1967.[FN4: <p>Extensions of time were, as well, eventually obtained in respect of thismortgage.</p>]

15 The plaintiff had been, prior to the land acquisition, in consultation with financial institutions, mostly in the United States, endeavouring to obtain money for the construction and development of the centre. He continued those endeavours. Hilliker, the architect, continued preparing plans of the centre as well as plans of the particular portions which it was expected would be leased to Woolco and other major tenants such as Dominion Stores Ltd. The necessary construction permits from the township were obtained effective June 29, 1965. The plaintiff had negotiated with various prospective tenants but, as of the date of purchase of the various farm lands, no binding leases nor binding commitments for leases had been secured. There were certainly tentative promises. It was reasonable, in my view, to assume binding commitments could be obtained, on which the multi-million dollar financing of the project could be negotiated.

16 On legal advice, the plaintiff and his partner incorporated, in early May of 1965, two companies. Their names are Motor City Mall Limited (the name of the shopping centre was to be Motor City Mall) and Can-Ultra Holdings Limited. As I understand it, the latter company was to be the holding company and the former the operating company. It was intended that Can-Ultra should, among other things, hold the “back lands”. For practical and tax purposes this action proceeded on the basis that the parcels of land in question were purchased by the plaintiff and his partner. Ultimately Hilliker withdrew from the venture. The sales which allegedly give rise to the income tax liability were, it is agreed, made on the plaintiff's account alone.

17 Motor City Mall never came into being. No development by the plaintiff, shopping centre or otherwise, ever took place on these lands.

18 The first setback experienced by the plaintiff was in September of 1965. The first interest payment on the Traders Realty mortgage fell due at that time. Hilliker refused to participate in that payment. He withdrew from the whole project. The plaintiff, by methods and amounts which it is not necessary to recount, eventually purchased his whole interest in the venture.

19 The plaintiff's problems compounded all at approximately the same time. They continued into 1966 and through into 1969. The interest rate on funds to finance the development increased in 1965 and the following year. Sources of financial supply became limited. The plaintiff attributes these misfortunes to the collapse of Atlantic Acceptance Corporation in the summer of 1965. There is no satisfactory evidence that the Atlantic Acceptance Corporation default was the precipitating cause of a drying up of development funds and increased interest rates. Ithink the cause of the down-turn is irrelevant. I accept as cold fact that problems arose in obtaining financial assistance, and that this contributed to the demise of the shopping centre scheme.

20 The plaintiff had been advised by the persons from whom he was seeking development funds that the leases to be signed by tenants in the centre must contain tax escalation clauses. Woolco, the major tenant, refused to agree to any such term. Woolco submitted a signed lease to the plaintiff without a clause to that effect. The plaintiff refused to accept it, for the reason given above. Because of the impasse, construction did not commence. On May 17, 1966 Woolco formally withdrew its commitment (Exhibit 42). The other major problem which the plaintiff encountered was the annexing in January of 1966 by the City of Windsor of the Township of East Sandwich. The construction permits which had been granted by the township were no longer effective, or lapsed. The plaintiff could not, or certainly encountered difficulty thereafter in trying to, obtain from the City of Windsor permits allowing the type of development proposed.

21 From September of 1965 and running into 1968, the plaintiff was, he testified, having to meet interest and other payments of $100 a day. He borrowed money from various sources. He sold his house. Eventually, he says, he was forced to sell portions of the lands, in order to meet his liabilities. The parcels sold in 1968 and 1969 were the back lands. The area of approximately 27 acres, sold in 1973, was the site picked for the proposed shopping centre itself. As counsel put it, the sales of the back lands were made to protect or preserve the front lands for a shopping centre site.

22 I have completed my summary of the basic facts. The evidence before the Court consisted of a large number of documentary exhibits put in, for the most part, by agreement of counsel. The only oral testimony given was by the plaintiff himself.

23 It is contended the plaintiff's intention from the outset was to purchase and hold this whole area of approximately 225 acres for investment purposes; the plaintiff, it is said, when he purchased these farm lands had no speculative intent or “secondary intention” in respect of the whole or any part of them. His only intent, at all times, it is urged, was to develop the area as a shopping centre and earn revenue from the operation of it. The plaintiff submits, and I accept, he had no choice but to purchase the excess acreage or back lands as part of the project.

24 It is then argued that the sale of the back lands was brought about, not by any original speculative or secondary intent to, at some time, when reasonable opportunity arose, sell those lands and realize a profit, but by the adversities and frustrations which took place; he was forced to sell the back lands in order to retain the Tecumseh Road footage.

25 In brief, the plaintiff says the purchase and disposition of the whole of the approximately 225 acres (including the 27 acres disposed of in 1973) cannot be classed as an adventure in the nature of trade and therefore income. Considerable emphasis was placed on the plaintiff's activities from 1964 on trying to develop the shopping centre site, and his attempts from 1965 to 1968 to preserve the key 27 acres. All those facts, it is urged, destroy any inference of a secondary intent to realize his investment in the lands if for some reason the shopping centre could not be brought into existence.[FN5: <p>As to what is meant by the so-called “doctrine of secondaryintent”, I adopt the explanation advanced by Noël, J (now ACJ) in<em>Racine et al</em>v<em>Minister of National Revenue</em>, [1965] 2 Ex. C.R. 338, [1965] C.T.C. 150, 65 D.T.C. 5098, and<em>Hazeldean Farm Company Ltd</em>v<em>Minister of National Revenue</em>, [1967] 1 Ex. C.R. 245, [1966] C.T.C. 607, 66 D.T.C. 5397.</p>] Counsel submitted the Regal Heights case was distinguishable. Reliance was placed on Sterling Paper Mills Inc v Minister of National Revenue, [1960] Ex. C.R. 401, [1960] C.T.C. 215, 60 D.T.C. 1171; MNR v Aldershot Shopping Plaza Ltd, [1965] 2 Ex. C.R. 96, [1965] C.T.C. 31, 65 D.T.C. 5018, Champoux v Minister of National Revenue, [1970] C.T.C. 603, 71 D.T.C. 5001, and The Queen v Metropolitan Properties Ltd, [1974] C.T.C. 527, 74 D.T.C. 6434. Most of those cases involved, in some aspect at least, the sale of land in excess of or unwanted for the particular taxpayer's capital requirements. In the Aldershot case, Cattanach, J said at page 105 [38, 5022]:

If the land was capital in the hands of the respondent then the surplus over its requirements would also be capital

26 Here I do not find it is necessary to decide whether the 25 or 27 acres actually required for the shopping centre site should be classified as “capital in the hands of the plaintiff”. That point may well have to be decided in future litigation as a result of assessments which may or may not be made in respect of the 1973 sale.

27 I am only concerned with the sales, in 1968 and 1969, of the back lands. I have already outlined the submissions made. I go back to the evidence. As usual in cases of this kind, the facts are all-important. The plaintiff, in his oral testimony, endeavoured to make no real distinction between those back lands and the shopping centre acres, as to his original and ultimate intentions. In respect of the whole, he said there was never any purpose or intent to use or dispose of the back lands other than as part of the shopping centre or as an adjunct to it. Other than the leasing of them to someone who wanted to farm, they, he continued, had no other value. I think his words were to this effect: “I had no idea they had any value other than letting someone farm.”[FN6: <p>I am not purporting to quote exactly.</p>] The back lands were in fact leased for farming purposes from November 1, 1965 to November 1, 1966 at $18 an acre or a total of $3,466 per year (Exhibit 41). I observe this lease was entered into after the plaintiff's financial problems arose.[FN7: <p>The written lease is dated April 21, 1966.</p>]

28 I do not accept the plaintiff's evidence that he had no idea the back lands had any value other than for farming purposes. Nor do I accept that he had no other intention in respect of those lands, other than renting them for farm activities. The plaintiff had been in the real estate business for many years. I think it obvious he knew or must have known that agricultural lands can often be converted, at profit, into residential subdivisions. He had observed from his experience that shopping centres developed in outlying areas eventually tended to attract more residential development.

29 The documentary evidence in this case is at odds with the plaintiff's oral testimony. In all the circumstances, I conclude the documentary evidence reflects the true state of the plaintiff's intentions (at the outset and throughout) in respect of the back lands. I refer first to Exhibit 12 (dated April 6, 1965), a report dated by the consultants, W B Hardman and Associates Ltd. At pages 9 and 10 of the exhibit, the shopping centre site is described as containing approximately 27 acres. This sentence then appears:

The developers of the commercial complex own an additional one hundred and seventy-five acres in back of the site and intend developing this for residential purposes.

30 The intention there set out by the consultants is confirmed by the plaintiff himself in a letter dated June 14, 1967 (Exhibit 50):

We have been the owners of this property for approximately two years having acquired it for the primary purpose of developing the Tecumseh Rd. frontage for shopping centre purposes and the remainder of the land for Residential use.

Our client owns 225 acres which he acquired in 1965 for commercial development on Tecumseh Road, and the remainder residential development.

31 I have little difficulty in finding, and I so hold, the plaintiff at all times had a speculative intent in respect of the back lands. He did not intend to hold them for revenue purposes but to dispose of them, probably for residential housing, whenever a suitable opportunity be came available. The fact that the sales in question were not made for purposes of residential housing is, to my mind, (in this case) immaterial.

32 The plaintiff has therefore not met the onus of showing the reassessments in question are wrong. I go further. On the plaintiff's evidence it has been established, to my mind, the reassessments were correct. The plaintiff's action is therefore dismissed, with costs.