Safari Investments Ltd. v. Minister of National Revenue, [1975] C.T.C. 2001, 75 D.T.C. 4

The Assistant Chairman:

1 This is the appeal of Safari Investments Ltd from an income tax assessment in respect of the 1971 taxation year.

2 In objecting to an assessment of September 13, 1973, the appellant referred to, and objected particularly to, the Minister's notice of assessment dated March 12, 1973, whereby the Department of National Revenue included in its income an amount of $37,277 claimed by it as settlement for damages—($40,000 damages minus $2,723 legal fees and disbursements). The amount of $37,277 is considered by the Minister as being income from a business or from a venture in the nature of trade.

3 The issue to be determined by the Board, of course, is whether the $37,277 is taxable income or non-taxable damages for loss of potential income.

4 The appellant company was represented at the hearing by Mr Ernest W Kitzul, its president and principal shareholder. From his testimony, the company was to buy land, develop it, build commercial and residential properties to hold for purposes of investment and to sell them occasionally (Exhibit A-1). Although not directly involved in this appeal, but necessary in obtaining an accurate understanding of the transactions that gave rise to it, Mr Kitzul and his wife were also the principal shareholders of Marathon Homes Construction Ltd engaged in the building of properties and Paramount Realty Ltd which was a brokerage firm buying and selling properties for third parties. The three companies, which were all operated from one office at 1410 11th Avenue, SW, Calgary, reflected to a large extent the objects for which the appellant company was incorporated, ie, in general, the purchase and development of land, the construction of buildings, the holding of properties and the sale of properties.

5 On May 18, 1971 the appellant company's offer to purchase a piece of property containing some 3.23 acres of land at McLeod Trail and 94th Avenue SE for $170,000 was accepted by A & W Drive-In (Forest Lawn) Ltd (hereinafter referred to as “A & W”) (Exhibit A-2). Mr Kitzul stated that the company had for the past two years sought to invest in a motel operation and that the proposed land seemed appropriate for a motel, a restaurant and a bar, and still had sufficient room for expansion. The terms of the agreement were subject to three conditions: (a) suitable financing for the motel; (b) development permit; (c) necessary subdivision approval. The cut-off date of the agreement was July 31, 1971, but with a provision to extend the period of the offer to purchase by paying $1,000 a month. The cut-off date was, in fact, extended three times.

6 In the meantime Walker, Newby & Associates Ltd, consulting engineers and land surveyors, prepared a tentative subdivision plan and an application for approval of the plan was prepared. Apparently no approval of this plan was ever received by the appellant company. However no evidence was produced as to the efforts made by the appellant company to have the plan approved, nor was there any indication that the city had refused to approve the plan.

7 On October 19, 1971 the appellant company forwarded another $1,000 to A & W for a further extension of its offer to purchase but this amount was not accepted by A & W (Exhibit A-5).

8 Also on October 19, 1974 Trojan Industrial Properties Limited (hereinafter referred to as “Trojan”) made an offer to purchase the land at McLeod Trail and 94th Avenue SE from the appellant company for $250,000—which offer was accepted by the appellant company (Exhibit A-6).

9 On October 28, 1971 the appellant company forwarded to A & W a cheque for $39,500, being the balance of the down-payment on the purchase of the McLeod Trail property which was not accepted by A & W (Exhibit A-7).

• (1) that the entire consideration of $170,000 payable to Trojan be paid to A & W;

• (2) any consideration in excess of $170,000 was to be placed in an interest-bearing trust pending the determination of what A & W and the appellant company would receive.

11 The appellant company's solicitors, by letter dated November 1, 1971, refused the terms of A & W's solicitors as formulated in the letter of October 29, 1971 (Exhibit A-8) and a lawsuit was threatened if the transfer of documents were not made without delay (Exhibit A-10).

12 By letter of November 5, 1971 the appellant company's cheque for $1,000 dated October 19, 1971 and the cheque for $39,500 dated October 28, 1971 were returned and notice given that action for damages would be taken if the caveat were not immediately withdrawn.

13 No legal action was, in fact, taken by either party, but after negotiations between the parties, and after the appellant company had been advised by its solicitors that its legal position was doubtful, an agreement was entered into between A & W, Trojan and the appellant company. As a result, the appellant company received $40,000 from A & W after all the interim payments had been adjusted by the parties, the appellant company withdrew the caveat and A & W and the appellant company executed a mutual release relative to their May 18, 1971 agreement.

14 Although the series of events and the circumstances under which the payment of $40,000 was eventually paid to the appellant company may appear to be complex, the issue in this appeal is nevertheless relatively simple.

15 It seems to me to be somewhat difficult to hold, in the circumstances, that the payment was settlement for damages when, as I see it, the matter was not brought before the courts by the appellant company only because of the lack of valid legal grounds to do so. Can the appellant company now consider the payment of $40,000 as settlement for damages for the loss of something to which it had little or no legal rights? In my view, the appellant company never did own the McLeod Trail property and the option to purchase was kept alive for three months by the indemnity payment of $1,000. The vendor refused the fourth indemnity payment and refused the appellant's down-payment as was his right. The offer to purchase was no longer valid. What damages can the appellant company claim? How, in relation to the alleged damages, was the figure of $40,000 arrived at?

16 I cannot see, in the circumstances of this appeal, how the granting of damages could be justified. I do see, however, facts which militate in favour of considering the appellant's receipt for $40,000 as income.

17 The appellant company's alleged intention, according to Mr Kitzul, was to build a motel complex on the McLeod Trail property. Although the stated intention may be a factor to be taken into account in determining the issue, it is not only difficult to really know what Mr Kitzul's intention was some years previous to the declaration of intention, but it is, in my view, necessary that the stated intention be credible in the light of the facts. Here we have a company whose president and principal shareholder is personally and actually involved in the development of land, the construction of commercial and residential properties and in the buying and selling of properties albeit through three different companies—two of which are not involved in this appeal. His knowledge of these markets was extensive in all these fields. Assuming that it was the intention of the appellant company to build and operate a motel complex (I say “assuming” because the appellant company, though it may have had a subdivision plan prepared never did have, nor was there produced, any plan for the construction of a motel), the appellant company within months of signing the agreement to purchase the McLeod Trail property from A & W received an offer from Trojan to sell that property which it accepted on the same day without even owning the land on which the alleged motel was to be built. I cannot believe that this agreement was signed by the appellant company without any negotiations having taken place some weeks or months before between Trojan and the appellant company.

18 Either the appellant company never did intend to build a motel on the property or, if it did have that intention, it was quickly changed when the appellant saw the opportunity of realizing a quick profit of $80,000. In the first alternative, if it were not the intention to build a motel, then it is reasonable to suppose that the appellant would probably have sold it through its real estate company and would have realized income. In the second alternative, if the appellant really had the intention of building a motel complex on that site, it is a fact that it changed its intention and, not without some difficulty, entered into a venture in the nature of trade by attempting to sell the land to a third party at a quick and an attractive profit. Because of A & W's interest in the property, the appellant company could not, by itself, effectuate the sale to Trojan. It is also a fact of this appeal that the profit from the transaction was, in the circumstances, by agreement between the parties, divided evenly between A & W and the appellant company.

19 I hold, therefore, that the amount of $37,277 was properly included in the appellant's 1971 income as being income from a venture in the nature of trade.

20 The appeal is therefore dismissed.