John D. Wright v. Her Majesty the Queen, [1993] 2 CTC 2847, 93 DTC 1196

Sarchuk, T.C.C.J.:—This is an appeal by John D. Wright (“Wright”) from an assessment of tax made by the Minister of National Revenue (the"Minister") with respect to Wright's 1987 taxation year. In issue is the Minister's inclusion of the profit realized from the sale of 480 Talbot Street, London, Ontario in Wright's income in accordance with the provisions of section 3 and subsection 9(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). Wright appeals on the basis that the proceeds received from the sale were a Capital gain.

At all relevant times Wright, a lawyer, carried on his practice in London, primarily in the field of real estate law. In 1971 he purchased 480 Talbot for $33,000. It was formerly a single family residential property, which, as was the case with many other similar properties in this sector of London, had been converted to commercial use. It was a convenient location for his practice and, he says, was also intended to serve as a retirement investment. On August 11, 1976 Wright incorporated Wrison Holdings Ltd. ("Wrison") to manage his practice. In 1978 Mr. Alf Mamo ("Mamo"), a lawyer practicing primarily in matrimonial law agreed to rent the upper floor. They shared certain common services but did not carry on the practice of law in partnership.

In 1980 Mamo realized he required more office space and expansion of the premises was considered by Mamo and Wright. Since the renovations would primarily benefit Mamo, it was agreed that he would purchase a 50 per cent interest in 480 Talbot from Wright. This was done on December 30, 1980. Concurrently Wright transferred his one-half interest in the property to Wrison. Mamo and Wright continued their separate practices at this location until the property was sold to Old Oak Investments Inc. (“Old Oak”) on May 28, 1987. Six months earlier Wright had repurchased Wrison's interest in 480 Talbot.

The following sequence of events culminated in the disposition of the property in issue. In December 1985 Mamo received a telephone call from a real estate agent with a client interested in purchasing 480 Talbot and was prepared to pay the going rate. Mamo told him he had no intention of selling and as far as he knew neither did Wright. The agent sought a meeting but Mamo put him off. On December 12,1985 Mamo wrote to the agent stating:

John Wright and I are not eager to sell but we are prepared to listen to what you have to say on behalf of your client. However, we are extremely busy at this time and suggest we be in touch around the second week of January 1986.

[Exhibit A-3.]

In January or February 1986 Mamo received a call from Daryl Scott. The nature of the conversation led him to conclude that it was a follow-up to the earlier call from the real estate agent. Shortly thereafter, on February 11, 1986, Scott wrote to Mamo and Wright on behalf of Old Oak (Exhibit A-4). In this letter he made reference to his conversation with Mamo, confirmed Old Oak's interest in purchasing 480 Talbot and added that Old Oak had recently purchased adjoining properties to the east, to the north and to the south. In the letter Scott confirms that Mamo indicated no interest in selling at that time and adds "If your situation changes, we would be very appreciative if you would contact us".

On November 21, 1986 Wrison transferred its 50 per cent interest in 480 Talbot to Wright. The consideration was $75,000.

In the late fall of 1986 Mamo began to consider a possible merger of his practice with that of another lawyer. If that occurred more space would be required and some thought was given to moving. He recognized that he would continue to bear his 50 per cent expenses until he was able to find another tenant. No decision was taken at that time. Wright was not aware of these discussions.

On January 29, 1987 Scott and a real estate agent, George Georgopoulos, met with Mamo and Wright at the latter's office. They presented an offer for 480 Talbot in the amount of $250,000. The offer was considered to be too low and was swiftly rejected. At approximately that same period of time Mamo had pretty well made up his mind” to merge and to move. Wright was advised and inquiries were made regarding tenants to occupy Mamo's space without much success.

On February 16, 1987 an agreement of purchase and sale was presented to Mamo and Wright by Georgopoulos. The price offered was $350,000. Mamo and Wright discussed the offer and countered at $450,000. The counter-offer was rejected. Mamo continued with his plans to complete the merger and to move. On May 5, 1987 a further offer was submitted by Old Oak in the amount of $425,000. Mamo and Wright countered at $435,000 and an agreement was struck. The transaction was completed on May 28, 1987.

In his return of income Wright reported proceeds of disposition of $217,400, an adjusted cost base of $75,000' [1] and a capital gain of $142,500. The taxable capital gain reported was $71,250 in respect of which he claimed a capital gain deduction of $50,000.

The Minister reassessed on the basis that the profit realized by Wright was income from an adventure or concern in the nature of trade which was properly included in his income in calculating his taxable income for the 1987 taxation year.

Appellant's position

The reacquisition of 480 Talbot was not for speculative purposes; Wright was unaware of any “land assembly" in the area and the property was never listed for sale. The offer to purchase by Old Oak was unsolicited and unexpected. There was also a sound business reason which precluded him from readily rejecting it, being an oral arrangement between Mamo and Wright to the effect that any offers to purchase would require the party who did not wish to sell to match the offer presented. Wright asserted that the price offered by Old Oak was such that he could not match it. This fact coupled with the departure of Mamo made disposition of the property the only logical conclusion.

Furthermore, the transfer of 480 Talbot was for a specific purpose. In the fall of 1986 Wright accompanied three others on a fishing trip. Each of his comparisons was employed in one facet or another in the construction industry. They spoke of doing occasional jobs on their own time which, Wright asserts, turned the discussion towards the possible establishment of a part-time construction and renovation business. Since he had storage facilities available, could provide accounting, phone reception and office services he proposed that his corporation, Wrison, be used to carry on such a business. And so it was agreed. It then became necessary for Wrison to divest itself of its interest in 480 Talbot. Accordingly it was transferred to Wright. He maintains that in November 1986 when this occurred he was totally unaware of any of the activities of Old Oak in that area.

Conclusion

On these facts I must determine whether the gain made by the appellant was in the nature of business income or was capital. The nub of the issue is Wright's motive for the reacquisition of 480 Talbot from Wrison in November 1986.

The direct evidence of a person who has an interest in the outcome of an appeal regarding the intention behind a transaction or a series of transactions is not determinative of the existence of the stated intention. Generally speaking the intention is to be ascertained from the entire course of conduct and relevant circumstances and the inferences flowing therefrom: Gairdner Securities Ltd, v. M.N.R., [1952] C.T.C. 371, 52 D.T.C. 1171 (Exch. Ct.) per Cameron, J. at page 381 (D.T.C. 1175), and Racine, Demers and Nolin v. M.N.R., [1965] C.T.C. 150, 65 D.T.C. 5098 (Exch. Ct.) per Noël, J. at page 158 (D.T.C. 5103) (Leonard Reeves Inc. v. M.N.R., [1985] 2 C.T.C. 2054, 85 D.T.C. 419 (T.C.C.), at page 2058 (D.T.C. 422), per Christie, A.C.J.T.C.).

The reasons advanced by Wright for the reacquisition of 480 Talbot are not persuasive. I find it improbable that immediately following a casual fishing trip conversation and before anything else was done to determine whether the conversation was even taken seriously by the others, Wright moved to reacquire 480 Talbot. It must be remembered that he initially became acquainted with one of his fishing companions, Paul Goldie-Ryder, in September or October of 1986 and met the other two for the first time during the fishing trip. While this proposed business arrangement did take place (some two years later), I do not believe for one moment that it was a factor in Wright's reacquisition of 480 Talbot.

His assertion that Wrison would be the logical vehicle for this business because it would spare his "co-venturers" the cost of incorporating a new company is equally specious. It is a fact, as Wright conceded, that by transferring the property to himself he triggered tax on the capital gain of some $20,000 for Wrison, not to forget the cost of registration of the deed and the provincial land transfer tax. Wright's generosity is remarkable, considering the alternative cost of $1,000 which he said was needed to incorporate a new company.

As to his assertions that the reacquisition was not for speculative purposes and that he was unaware of the interest of purchasers in the neighbourhood in which 480 Talbot was located the following facts must be considered.

Mamo related to Wright the gist of his conversation with the agent in December 1985 including his rejection of the offer. While Mamo does not recall specifically mentioning his subsequent letter to the agent, it was written following his discussion with Wright. For his part, Wright maintains he had no knowledge of that telephone call, no knowledge of the Mamo letter and had no discussions whatsoever with Mamo concerning this offer.

The land assembly by Old Oak was not a secret. In January 1986 when Mamo received the telephone call from Daryl Scott on behalf of Old Oak that fact was clearly made known to him. It was restated in the letter from Scott to Mamo and Wright dated February 11, 1986. Indeed Mamo testified that in 1986 it was common knowledge that Old Oak was buying property in that block, presumably for development. Mamo does not recall speaking to Wright regarding the Scott telephone call nor does he recall discussing the Scott letter. He assumed, however, that since it was addressed to Wright as well he was aware of it. Wright maintains he never saw this letter. He recalls only that Mamo mentioned some further interest in the property and the approximate price with no specific reference to any letter.

Mr. Mamo rejected the January 1987 Old Oak offer for $250,000 because of his impression that the property was worth more. He said there was not very much space available close to the Court House, and he was influenced by his knowledge that a property acquisition was taking place in the immediate area. Mamo and Wright practised law in the same building. They were joint owners of 480 Talbot. I am satisfied that they had at the very least some discussion with respect to the two previous approaches and with respect to the offer itself. Nonetheless Wright maintains that he was absolutely shocked when he discovered, after the fact, that the neighbouring property had been purchased by Old Oak in December 1985; that the three other adjoining properties were acquired by it in 1986 and that indeed three-quarters of the block on which 480 Talbot was located had been acquired by them. He was, if one is to believe him, not even aware of any rumours of such activity.

Mr. Wright is a lawyer who carried on a practice limited to real estate law for many years at that location. His testimony as a whole demonstrated an astute approach to business matters and a keen eye for detail as shown by his description of the character of the neighbourhood. Nonetheless he maintains that he was oblivious to the potential for commercial development in the area. His assertions are not persuasive, and in my view are inconsistent with his out of hand rejection of the initial Old Oak offer on the basis that "We considered it so totally ridiculous that the meeting only lasted 10 to 15 minutes”.

His testimony regarding the activities of Old Oak is also inconsistent with comments made in a letter to Revenue Canada, Taxation. He wrote:

I note that a comment was made by your department that you could not understand why a property valued in November 1986 for $150,000 would attain a price of $435,000 for closing in May 27, 1987. The answer to this question is quite simple for the following reasons:

(a) By May 1986 redevelopment of the area was extremely well known since 480 Talbot was the last property purchased. (Exhibit R-1). . . .”

[Emphasis added.]

I note only that this knowledge predates his reacquisition of 480 Talbot.

There was another motive for the reacquisition of the property. By virtue of subsection 110.6(3) of the Act he was entitled to a capital gains deduction which was not available to Wrison. Considering his testimony as a whole I am satisfied that he was aware of that potential benefit when he reacquired 480 Talbot in November 1986. Such an inference is logical given his testimony that the primary reason for the incorporation of Wrison was to obtain certain tax advantages available to management companies and that the 1980 sale of 50 per cent of 480 Talbot to Wrison was to obtain further tax relief if possible.

As to Wright's contention that the offer from Old Oak and Mamo's desire to sell placed him in a position of either matching the offer or going along with the sale, I must note that this was not a relevant consideration at the time Wright reacquired the property from Wrison in 1986. He was not privy to Mamo's early discussions regarding merger and a possible move and was not aware of that fact until the latter part of January 1987.

I do not disregard Wright's testimony that he originally purchased the property as an investment with a view to his ultimate retirement or that he had never personally been involved in trading in land. Furthermore, on the evidence before me, it is not improper to categorize the approaches made by Old Oak as unsolicited. However, the fact that the property was not advertised for sale or that the offer was unsolicited does not per se alter the primary intention of Wright at the time of his reacquisition of the property. They are simply matters which are to be weighed together with the other evidence. In the light of the particular circumstances in this case they are of marginal probative value.

The issue must be determined by a consideration of all relevant evidence both direct and circumstantial. In cases such as this, facts, that is what hap- pened and when it happened, often speak louder than words and are an excellent indicator of what Wright really intended. My evaluation of the whole of the evidence leads me to the view that the purchase of 480 Talbot in November 1986 was not the fortuitous result of his fishing camp discussions. Rather it was the result of a considered appreciation of the circumstances, including knowledge of the activities of Old Oak with respect to property in that area, the value of his property, as well as the tax advantages to be derived from personal as opposed to corporate ownership in the event of a sale. I flatly reject as patent nonsense that he would permit Wrison to incur a sizable capital gains tax simply to accommodate three newly found fishing friends in some marginally considered business. The reacquisition of 480 Talbot was part of an undertaking or venture in the nature of trade the object of which was to resell at a profit and to direct the profits therefrom into his hands as opposed to Wrison's for the sole purpose of minimizing the amount subject to capital gains tax.

The appeal is dismissed.

Appeal dismissed.