Jic Developments Limited v. Minister of National Revenue, [1978] CTC 2992

The Chairman:—This is the appeal of JIC Developments Limited from an assessment in respect of the 1974 taxation year whereby the Minister of National Revenue added to the appellant’s income an amount of $170,780 as its share of the gain made from the sale of a property Situated at 1501 Burnhamthorpe Road, Mississauga, Ontario. In objecting to and appealing from the assessment the appellant contends that the said profit is in the nature of a gain on capital.

Facts:

The appellant company was caused to be incorporated on January 15, 1969, (Exhibit A-1). The beneficial shareholders were John Prince, 20 years old; Irwin Prince, 15 years old and Cathy Prince, 13 years old, children of Samuel Prince who for some 25 years was managing his own pharmacy, dealing more particularly in the manufacturing of retail and wholesale pharmaceutical products and known as Hilary Pharmacy.

Mr Samuel Prince was also the beneficial shareholder of Caprine Investments Limited, incorporated in 1960 which dealt with real estate transactions. Among some of Caprine Investments’ transactions was a small shopping center in Victoria Park. The stores were built by Caprine Investments for the purpose of gaining rental income but were subsequently sold. From the sale price another shopping center known as Cedarbrae was purchased as an investment income. This shopping center was also sold because Kresge, which was its largest tenant, had decided to move. In the early 1960’s Caprine Investments purchased yet another shopping center in Richmond Hill and still holds a share in that investment. Mr Prince, through Caprine Investments, invested $2,000 in Tonkin Road Developments which purchased land in 1967 and then resold in 1968. Caprine or Mr Prince was inactive in that corporation. Mr Prince was also a shareholder in Dinow Investments Limited which purchased land in 1967 and sold it because it was impossible to obtain a commercial zoning for the property.

On December 9, 1968, Caprine Investments Limited entered a purchase and sale agreement for the purchase of 12.264 acres of land at 1501 Burnhamthorpe Road, Mississauga, Ontario, at a price of $376,000, the subject property, (Exhibit A-2). Mr Prince explained that the offer to purchase was made out by Caprine because JIC Developments Limited, which he intended to be the owner of the land, was in the process of being incorporated. However, on the closing date of the transaction, JIC Developments Limited appeared on the deed as the purchaser grantee, (Exhibit A-3). The $90,000 in cash provided for in the deed as part of the purchase price was loaned to the appellant company by Caprine Investments and Mrs Dora Prince, wife of Mr sam Prince.

Prior to making the offer to purchase and in seeking investment potential for the children, Mr Prince believed that the property would be suitable for highrise apartment buildings and approached the Mississauga Planning Board who allegedly confirmed that their plan for future land use would permit high density residential constructions and gave him a copy of East Dixie Secondary Plan, (Exhibit A-4). In this plan the construction of a school was envisaged but not on the subject property.

Shortly after the purchase, Thomas H Won and Associates was retained as consulting engineers and planners for the subject property, (Exhibit A-5). A survey plan of the land, a plot plan and an Official site plan relative to an application for rezoning were drawn, (Exhibits A-6a, A-6b, A-6c). On September 29, 1969, a cheque for $125 was made out to the Town of Mississauga in respect of the application for rezoning of the property, (attached to Exhibit A-6c).

A circular letter dated November 20, 1969, was received by JIC Developments Limited which read:

November 20, 1969

FIRST CLASS MAIL

Dear Sir or Madam:

The Planning Board has recently completed a study of the Hickory and Rockwood Neighbourhoods of the North Dixie Community, which are bounded by Cawthra Road, Burnhamthorpe Road, the Etobicoke Creek and on the north by the proposed alignment of Highway 403 west of Dixie Road and the Hydro right-of-way east of Dixie Road. These boundaries are shown on the attached sketch.

Before submitting its recommendations to the Town Council, the Mississauga Planning Board would like all interested property owners in the area to view the proposals, and for this purpose a display of texts and maps will be held in the Council Chamber, Municipal Offices, 100 Dundas Street West, Mississauga. You are invited to attend this display during the following times:

2:00 p.m. to 4:00 p.m. — December 1 to December 5, inclusive

December 9 to December 12, inclusive

7:00 p.m. to 9:00 p.m. — December 1, 2, 10 and 11

Members of the Planning Board staff will be present at all times to explain the proposals and answer questions. It would be appreciated if residents living west of Dixie Road would visit the display during the week starting December 1 and residents east of Dixie Road during the week starting December 9. If you are unable to attend during this period the proposals will be available for viewing at the Planning Board office after completion of the display until January 1, 1970.

If you have any comments to make after visiting the display, please submit them in writing to the Planning Board prior to January 9, 1970.

Yours very truly,

(signed) H Petschar

DB:el H Petschar,

Attach. Commissioner of Planning

A letter dated December 29, 1969, signed by Mr Won the consulting engineer retained by the appellant to Mr Petschar of the Mississauga Planning Board was filed as Exhibit A-7b. The letter reads as follows:

December 29, 1969

Mr H Petschar,

Planning Director,

Municipal Building,

Town of Mississauga,

Cooksville.

Dear Sir: Re: Dixie and Burnhamthorpe Road:

Neighbourhood Study Plan

We have viewed the recently completed Dixie and Burnhamthorpe Road Neighbourhood Study Plan on display at the Council Chambers in the Municipal Building and would submit this letter in the form of an objection where it concerns my Clients 12 acre parcel of land, which is located on the north side of Burnhamthorpe Road and east of the Dixie Line. We offer the following as the main points of contention.

1. Your Study Plan would indicate a Separate and Public School Site to be located almost entirely on my Clients land. The percentage of land which will be removed for potential residential development purpose would be well over 50%.

2. The north-south 86 feet in width, access road off Burnhamthorpe lies entirely on my Client’s land, thus removing additional land for potential residential development.

3. The proposed alignment of the east-west 86 feet in width Rathburn Road further removes land for potential residential development.

4. This proposed alignment of Rathburn Road would also create difficulties for development of a high rise apartment block as the routing cuts off to large a segment of land from the northerly limits of my Clients Land, thus creating problem of siting for a high rise apartment tower on the divided block of apartment land remaining.

We estimate that out of a total of 12 acres of high and medium density land which we have prepare and submitted a proposed scheme for high and medium density apartment development and which plan was submitted several months ago to your Planning Department, we have remaining for development purpose a net acreage of less than 45%.

We would therefore request that we may be given the opportunity of appearing before your. Planning Board at their earliest convenience to voice our formal objections and at the same time to endeavour to arrive at a more agreeable solution to the planning of my Clients Site for its future development.

May we therefore submit this letter at this time which will serve to advise your Department of our objection to the. Neighbourhood Study Plan where it relates to my Clients land.

We would greatly appreciate if you will inform me of the date of your first Planning Board Meeting where we may be invited to appear as a deputation.

Yours very truly,

(signed) per Thomas H Won Thomas H Won,

Consulting Engineers. Copy to Mr S Prince,

344 Bathurst Street,

Toronto, Ontario.

The appellant company, in 1970, proceeded to engage the services of O’Marra and O’Marra, Barristers and Solicitors, to represent JIC Developments Limited in its objections to amendments proposed to the Planning Board’s original study. Legal services to the appellant in respect. of the subject property were rendered during the period September 1970, to February 1973, (Exhibit A-8).

The owners of land affected by the proposed official plan. amendment, including the appellant company, retained the services of Mr John Montague a consultant engineer and a meeting was held on May 4, 1971, the minutes thereof were introduced as Exhibit A-9.

The minutes indicate that the high cost of land to the County School Board for school sites prompted the municipality and the school board to seek from the group of owners, represented by Mr Montague, some financial arrangement by which land could be purchased for future school sites at less cost before any decision on the official plan be made and any development permitted. Although some proposals were made by the group of owners none ever materialized. The appellant company, in December of 1971, indicated through its solicitors that it was withdrawing from the group, (Exhibit A-8). The reasons given were that the appellant company was one of the group owning the least land and would have had to allot 5 of its 12 acres for school sites at a price of $30,000 which was the cost of the land to the appellant.

On July 29, 1971, the evidence would indicate, (p 3, Exhibit A-8), that the appellant indicated his willingness to remain in the group if the price of the land conveyed to the school boards was $45,000 per acre. No agreement was reached either between the appellant and the group of owners or between the latter and the municipality and school boards.

In January 1973, the appellant, through its solicitors, made a further proposition by withdrawing its original application and submitting a new application whereby JIC Deveolpments Limited would convey two acres of park land without consideration and two acres of school land less than market value if the remaining land would be rezoned for the construction of townhouses. This offer was not accepted, all the developments in North Dixie Community having been suspended pending the relocation of Highway #403, (p 6, Exhibit A-8).

The land was sold in September 1973, allegedly as the result of a Casual discussion between Mr Prince and a Mr Gonda at a health club during which Mr Prince spoke of the problems he was having with his property. Mr Prince admits knowing that Mr Gonda was in real estate but did not ask that his property be listed for sale. Subsequently Mr Gonda advised Mr Prince that he was leaving for Europe and that he had a customer there. Three days later he telephoned Mr Prince with an offer to purchase and a verbal agreement for the sale of the property was reached. A formal offer to purchase the property for $725,000 was signed on July 16, 1973, (Exhibit A-11). Attached to Exhibit A-11 is a formal commission agreement addressed to Arthur Weisz Real Estate which was signed by Mr Prince after Mr Gonda had reached an agreement by telephone and after Mr Gonda’s return from Europe.

It is the respondent’s contention that although the appellant may have had the intention of building highrise apartments on the subject land he also had, at the time of purchase, an alternate intention of selling the property at a profit if the highrise did not materialize.

Paragraph 8, subparagraphs j and k of the respondent’s reply read:

8. In assessing tax the Minister of National Revenue relied upon the following assumptions of fact:

j) at all times Sam Prince and Caprine Investments Limited acquired and dealt with the Property as a speculator with a view to dealing in, trading in, or otherwise turning the Property to account for a profit;

k) the Appellant, through Sam Prince and Caprine Investments Limited acquired the Property and held its interest in the Property with a view to dealing in, trading in, or otherwise turning the Property to account for a profit;

Counsel for the respondent contends that the appellant, if he is to be successful in his appeal, has the onus of establishing that his only intention in acquiring the land was to construct and to operate high- rise apartments as a rental income investment. Counsel for the respondent seemed to suggest that the possibility of the existence of a secondary intention in the mind of the appellant at the time of purchase would destroy the appellant’s case and would be sufficient grounds for the Board to dismiss the appeal.

In order to support the position that the appellant’s share of the gain realized on the disposition of the subject land was income, counsel for the respondent raised several points. The first point being that the appellant’s whole course of conduct confirmed thai the transactions were an adventure in the nature of trade. To establish that point counsel for the appellant referred to Mr Prince, the beneficial shareholder of Caprine Investments Limited, the father of the shareholders of the appellant company and the manager of the latter company. Reference was then made to the purchase by Caprine Investments Limited of three shopping centers, two of which were sold within a relatively short time and one which is still held by Caprine. The evidence is that the first shopping center was sold because it wasn’t commercially viable and the second was sold because Kresge, which was the largest tenant in the shopping center, decided to move out although its lease was to run for another six years. The loss of Kresge made the shopping center less attractive economically and it was sold. On the first sale a small loss was incurred by Caprine and on the second a small profit was made. The third shopping center is still held by Caprine Investments.

On the basis of the evidence I cannot bring myself to conclude that Caprine or Mr Prince were trading in shopping centers. In 1967, Mr Prince, through Caprine Investments Limited, also invested $2,000 in Tonkin Road Developments Limited which purchased land and sold it in 1968. Mr Prince was also a shareholder in Dinow Investments Limited which also purchased land for commercial purposes and sold it because the proper rezoning could not be obtained. Here again the evidence, in my view, is not sufficient to classify Mr Prince as a trader in land because the number of transactions are very limited and Mr Prince was passive in both these transactions.

Mr Prince’s whole course of conduct is not, in my opinion, that of a trader and even if his conduct were so interpreted, it does not automatically rule out all possibility that the purchase of land by the appellant company, directed by Mr Prince, was for the purpose of a longterm investment. Mr Prince testified that Caprine Investments Limited provided income for himself and Mrs Prince and that JIC Developments Limited, the appellant company, was incorporated for the pur- pose of providing rental income from the apartment buildings to his children who were the shareholders of the company.

Although Mr Prince may have had some knowledge in real estate and as I see it from his evidence a limited knowledge, he was not in the business of trading in land.

The question then arises as to whether the appellant, JIC Developments Limited’s only transaction conducted by Mr Prince was an adventure in the nature of trade. Counsel for the respondent contends that the appellant’s purchase of the subject property was speculative in that the land was not zoned for highrise apartment buildings which the appellant, through Mr Prince, claimed ‘was its only intention.

The evidence is clear that at the time of the purchase the land was not zoned for high density construction. However, Mr Prince’s uncontradicted evidence that he had been informed that the Mississauga Planning Board would, in its new plan, permit the construction of high density residential construction on the appellant’s land and on surrounding lands was corroborated by the East Dixie Secondary Plan, indicating the future use of land in the area of the appellant’s property, (Exhibit A-4).

The appellant purchased the land in December 1968. On March 14, 1969, Mr T H Won, a consulting engineer of Thomas H Won and Associates, retained by Mr Prince, wrote to Mr Petschar, Chief Planner of the Mississauga Planning Board asking to be advised of a proposed meeting to be held by the Planning Board on the subject of the North Dixie Planning area in which the appellant’s land was situated, (Exhibit A-5).

A circular letter was received by Mr Prince from the Commissioner of Planning informing him of the date the proposed meeting was to be held, (Exhibit A-7a).

In the meantime, the problem of the high cost of land for school sites in the area of the subject property was raised by the Planning Board and Mr Won objected to a proposal which would require the appellant to give up almost one half of his land for roads and school Sites at cost price, (Exhibit A-7b).*i

The numerous efforts made by the law firm of O’Marra and O’Marra from September 2, 1970, to January 1973, indicated in the firms account, (Exhibit A-8), all tend toward solving the school problem in a way that would permit the appellant to proceed with his highrise project.

The fact that several larger developers who owned adjoining lands collectively hired the services of a Mr J Montague another engineering consultant to find a solution to the school problem indicate to me that all the owners of the land in East Dixie had received assurance from the Municipality of Mississauga that the area would be properly re- zoned for these purposes. On the basis of the evidence, the zoning of the land was never the issue and had the school site problem not arisen, the rezoning of the land would most likely have taken place as planned and as indicated on the East Dixie Secondary Plan, (Exhibit A-4).

The subsequent decision of the Province of Ontario to relocate Highway #403 which would affect East Dixie made of the area a holding zone and plans for developing the area were suspended.

Under the circumstances of this appeal can the purchase by the appellant of the subject property be considered as speculation? I do not believe so. The situation here is not the purchase of land where there is no assurance or indication from the proper authorities that the property could or would be rezoned. The appellant, as indeed the other developers in the area had been given, in my view, sufficient assurances by the Township of Mississauga that East Dixie would be rezoned to permit the construction of his project. Furthermore, the appellant did not purchase the land for some indefinite project; the evidence is abundant that the appellant’s intention and indeed his consistent efforts were to build highrise apartment buildings. In my opinion, these facts do not support the proposition that the appellant’s purchase was speculative and that he was engaged in an adventure in the nature of trade.

Counsel for the respondent also contends that the facts that the appellant company had no finance and that finance had not yet been arranged for the project; that although drawings were made of the project no details of the overall cost had been made; that there were provisions in the agreement to purchase and the sales contract permitting the appellant to subdivide the land and to obtain partial discharge of the mortgage were all indicative of an alternative intention in purchasing the land.

These factors under other circumstances might well establish the existence of a secondary intention. However, in the instant appeal although the appellant did not have any finance of its own, Caprine, whose principal shareholder was Mr Prince and his wife, advanced $90,000 as part of the money for the purchase of the land and subsequently paid the carrying costs of the land for the appellant company whose shareholders were Mr and Mrs Prince’s children. I am satisfied that the appellant company, from that source, could have obtained the finance and the bank credit necessary to realize the profit. I do not believe that anything turns on the agreement, (Exhibit R-1) whereby Caprine, in assuming the carrying charges of the subject land, would share the extent of 25% of profits made by the appellant company and share in the same proportion any loss suffered. In this agreement Exhibit R-1, however, contains the following sentence.

Should a loss however be suffered—as a result of this sale—Caprine Investments will participate in the loss—in the same proporation as it would [sic] have participated in the Profits. (italics mine)

This, by itself, might well be indicative of the existence of an alternative intent to sell the land.

The author of this agreement between JIC Developments and Caprine Investments, Mr Tessis, a chartered accountant, in examinationin-chief, explained that phrase as follows on pages 131 and 132 of the transcript:

Q Let us go back. You have said “should a loss however be suffered—as a result of this sale—’’ and words to the effect that Caprine will participate in that loss. What did you mean when you wrote your document with the phrase “as a result of this sale’’?

A When I wrote this document “as a result of this sale” was the wrong term.

Q You said it so it was the right term. What did you mean?

A It meant the transaction between the two companies.

As for the absence of a detailed cost of the project is concerned, Mr Prince testified that he did not intend to build all of the apartment buildings at one time and that he could arrive at the approximate cost of a proposed building based on the current cost per unit. Mr Won, the engineering consultant, filed an application with the Mississauga Planning Board and included a plot plan of the project and a cheque for $125 on September 29, 1969. Shortly afterwards, the school sites’ problem arose with which Mr Won was seized and to which reference has already been made. Under the circumstances would it be realistic for the appellant at that time to go to the expense of preparing complete working plans; making a detailed cost of the whole project and to applying to a bank for the necessary financing? Does the absence of a detailed cost of the project clearly establish the existence of an alternative intention on the part of the appellant to sell the land? I do not believe so.

Nor, in my view, do the provisions in the offer to purchase in respect of a possible subdivision of the subject property and the partial discharge of the mortgage by themselves establish a secondary intent. It is difficult for the Board to see how the appellant could obtain finance for the construction of any building unless the portion of land on which it was to be bulit was free of mortgage.

Counsel for the respondent introduced in evidence a letter dated November 18, 1971, from Mr Jack Wallis, a Real Estate Broker, to Mr Prince which reads:

November 18, 1971

Mr Sam Prince,

158 Shelborne Ave,

Toronto, Ontario

Dear Mr Prince: Re: 1501 Burnhamthorpe Road

Further to our recent conversation in your office, regarding your property known as 1501 Burnhamthorpe Road, Mississauga, and containing a house, barn, outbuildings and about 12 acres of land.

There is a large Shopping Plaza planned on the lands adjacent to the north west boundary of your property, this will intend to enhance the value of your property.

I am quite confident that I can find you a buyer for your property at the present time between $60,000 and $65,000 per acre. This would be increased by 20-30% if the plan you submitted to Planning Board of Mississauga is approved. I

I will be very pleased to list this property for sale, either on an exclusive listing, or on a co-op listing. Please advise me when you are ready to sell this property.

Yours very truly,

(signed) Jack Wallis

Jack Wallis,

Real Estate Broker.

The inference which the respondent draws from that letter is that the appellant was actively seeking to sell the property as early as November 18, 1971. Although the subject property was obviously discussed at the meeting referred to in the above letter, there is no indication whatever that Mr Prince initiated the discussion, that he listed the property for sale or that he even wished to do so.

Although Mr Prince had some trouble in remembering that he had telephoned Mr Wallis at the request of his solicitor in order to obtain some clarification and some confirmation as to what took place at the meeting between Mr Wallis and himself in November of 1971, he did remember receiving a letter from Mr Wallis in August 1976. This letter reads:

August 3, 1976

JIC Developments Ltd,

158 Shelborne Ave,

Toronto, Ontario

Dear Mr Prince: Re: 1501 Burnhamthorpe Road

Further to our telephone conversation regarding the above property.

In my letter to you dated November 18, 1971 giving the value of the property at that time, I mentioned that I would list the property for sale if you decided to sell. At no time did you ask me to list the property for sale.

I do recall attending a meeting with you at the Mississauga Township offices on Dundas Street West, Cooksville, this meeting covered the development of your land and adjacent land. Any action trying to find a purchaser was initiated by me.

Yours very truly,

(signed) Jack Wallis

Jack Wallis,

Real Estate Broker.

Here again, it is difficult indeed to relate the above correspondence with an alternative intention of the appellant of acquiring the land for resale.

The land was finally sold through a Mr Gonda of Arthur Weisz Real Estate Limited on July 7, 1973, under circumstances which I do not consider to be truly pertinent to the issue. At the time of the disposition of the land by the appellant since the whole East Dixie area was a holding zone pending the decision of the Provincial Government as to the relocation of Highway #403, and the appellant therefore was unable to carry out his project and Mr Prince was unwilling to continue paying the carrying charges on the property.

The facts in this appeal are admittedly not clear cut and the evidence was, at times, unclear. However, although Mr Prince was not a particularly good witness I have no reason to regard him as other than a credible witness. In my opinion, the balance of probabilities is that the appellant’s sole intention in acquiring the subject property was as a long-term investment highrise apartment buildings and townhouses. I do not believe, as suggested by counsel for the respondent, that in principle the mere possibility of the existence of an alternative intention in the mind of Mr Prince is sufficient to destroy the appellant’s contention that investment was his sole intention at the time of acquisition. Nor do I believe that the appellant must assume the extra burden of proving that that possibility did not exist. The attempt to prove such a negative would render the already difficult task of determining what was the taxpayer’s intention, utterly impossible. I believe that case law has established clearly that there can be, under certain circumstances, the latent possibility of reselling something which was not acquired for the purpose of resale and which does not affect the vendor’s tax position.

The vendor’s tax position is changed and he becomes subjected to the rules governing secondary or alternative intentions only when the sale of the object can be clearly shown to have been a motivating factor at the time of its acquisition. In the instant appeal there is no clear evidence that the resale of the subject property was a motivating factor in its acquisition.

I find, therefore, that the subject property was not acquired speculatively with a view of turning the property to account; that the appellant was not engaged in an adventure in the nature of trade; that the property was acquired as a long-term investment and the share of the profits realized by the appellant from the proceeds of disposition are in the nature of an accretion of capital.

The appeal is therefore allowed and the matter referred back to the Minister for reassessment.

Appeal allowed.