Sobier,
T.C.C.J.:—The
appellant
appeals
from
the
assessment
by
the
respondent
with
respect
to
the
appellants
1984
taxation
year
whereby
the
respondent
included
as
ordinary
income
the
amount
of
$156,853
being
the
appellant's
share
of
profit
earned
from
the
sale
of
Highbury
Plaza
in
London,
Ontario.
The
appellant
claimed
the
amount
as
a
capital
gain
while
the
respondent
maintained
that
the
gain
was
income
from
a
business,
an
adventure
in
the
nature
of
trade
or
from
a
profit
making
undertaking
or
concern.
The
Appellant
The
appellant
is
experienced
in
retail
real
estate
having
originally
been
employed
by
the
Burger
King
chain
of
restaurants.
His
duties
were
to
locate,
acquire
and
open
restaurants
on
behalf
of
his
employer.
He
acquired
extensive
knowledge
in
packaging
sites
for
retail
operations.
In
1981,
the
appellant
began
to
work
as
an
employee
for
Mr.
Morris
Fischtein
an
apparently
successful
builder,
real
estate
developer
and
trust
company
owner.
Mr.
Schillaci
was
employed
on
a
salary
and
bonus
basis.
The
appellant
was
also
at
the
time
a
licensed
real
estate
broker
and
owned
a
brokerage
firm
known
as
Norwest.
Mr.
Schillaci’s
first
project
for
Mr.
Fischtein
involved
developing
a
retail
complex
on
the
site
of
an
old
paint
factory
in
the
Leslie
Street
and
Lakeshore
Boulevard
area
of
Toronto.
The
appellant
was
instrumental
in
obtaining
Loblaws
and
Burger
King
as
tenants
as
well
as
a
pharmacy
and
a
doughnut
shop.
According
to
the
appellant,
this
was
a
successful
venture.
His
second
venture
involved
Highbury
Plaza,
a
strip
plaza
in
London,
Ontario
which
is
the
subject
matter
of
this
appeal.
I
will
deal
with
this
venture
separately.
Morris
Fischtein
Mr.
Fischtein
was
an
apparently
successful
businessman
involved
in
real
estate.
In
1981,
it
was
estimated
that
Mr.
Fischtein
had
a
net
worth
of
$12,000,000
to
$15,000,000
which
included
a
home
valued
at
approximately
$2,000,000
as
well
as
investments
in
rental
apartments
and
retail
plazas
all
located
in
the
suburbs
of
Toronto.
In
addition,
Mr.
Fischtein
built
homes
and
condominiums
for
sale.
In
the
late
1970s
and
early
1980s,
Mr.
Fischtein,
with
11
other
investors,
became
involved
in
a
photo
finishing
business
known
as"Fotomat"
carried
on
by
LBI
Images
Inc.
Fotomat
operated
approximately
100
free
standing
kiosks
in
parking
lots
as
well
as
about
50
full
service
photo
finishing
stores.
Mr.
Fischtein
guaranteed
loans
made
to
LBI
Images
Inc.
by
its
bankers.
Also
in
the
1980s,
Mr.
Fischtein
ventured
from
the
suburbs
into
the
City
of
Toronto
proper.
He
acquired
various
properties
for
redevelopment
as
investments.
These
included
properties
at:
Yonge
and
Wellesley
Streets;
Bloor
and
Bellair
Streets;
Avenue
Road
and
Bloor
Street;
and
Bay
Street
and
Davenport
Road,
all
in
the
downtown
or
mid-town
area
of
Toronto.
Mr.
Fischtein's
responsibility
was
in
obtaining
financing
for
the
projects
although
he
stated
he
was
also
involved
in
dealing
with
municipal
officials.
In
1977,
Mr.
Fischtein
started
a
trust
company
capitalized
with
$1.5
million
of
his
and
his
family's
money.
He
continues
to
this
day
to
be
involved
with
the
trust
company
as
its
president.
In
1983,
Mr.
Fischtein
began
experiencing
severe
financial
set-backs.
His
creditors,
mostly
Canadian
banks,
began
to
demand
repayment
of
loans
made
to
finance
the
various
real
estate
projects
in
Toronto
as
well
as
Fotomat.
As
a
result,
the
Fotomat
operation
was
put
into
receivership
and
lenders
called
upon
Mr.
Fischtein
to
honour
guarantees
made
by
him
in
order
to
satisfy
deficiencies.
His
home,
together
with
the
Yonge
and
Wellesley;
Bloor
and
Bellair;
Avenue
Road
and
Bloor;
Davenport
Road
and
Bay
Street
projects
were
sold
under
powers
of
sale.
His
net
worth
plummeted
to
a
negative
amount
and
even
with
family
help,
he
was
forced
to
sell
assets
to
cover
his
liabilities.
Highbury
Plaza
While
still
employed
by
Burger
King,
Mr.
Schillaci
became
familiar
with
a
proposed
project
to
be
known
as
Highbury
Plaza,
a
strip
plaza
in
London,
Ontario.
The
appellant
gave
evidence
of
the
nature
of
the
property
prior
to
development,
the
area
in
which
it
was
located
and
other
relevant
facts.
It
was
his
evidence
that
he
became
aware
of
the
project
from
one
Tracy
Christie
who
operated
a
numbered
company
using
a
business
style
of
Beta
Developments
(“Beta”).
Mr.
Christie
presented
the
opportunity
to
the
appellant
as
a
proposed
site
for
a
Burger
King
restaurant.
At
that
time
Burger
King
was
not
interested
in
the
site
because
it
believed
it
had
found
a
better
site
and
located
there.
When
he
began
to
work
for
Mr.
Fischtein,
the
appellant
introduced
Mr.
Fischtein
to
the
Highbury
Project
and
to
the
fact
that
neither
the
owner
nor
Mr.
Christie
was
in
a
position
to
develop
the
project.
However,
Mr.
Christie
had
been
in
contact
with
the
owners
of
Swiss
Chalet
and
Harvey's
restaurants
and
interested
them
in
becoming
tenants
in
the
proposed
plaza.
By
the
time
Mr.
Fischtein
and
the
appellant
were
prepared
to
purchase
the
property,
most
of
the
predevelopment
work
had
been
completed
and
the
two
restaurant
chains
had
signed
letters
of
intent
and/or
offers
to
lease.
These
two
tenants
represented
60
per
cent
of
the
rentable
area
of
the
plaza.
With
those
tenants
in
place,
other
tenants
were
prepared
to
rent
because
of
the
traffic
which
would
be
generated
by
the
presence
of
Swiss
Chalet
and
Harvey's.
In
addition,
with
large
nationally
recognized
and
credit-worthy
tenants,
financing
the
project
would
not
present
a
problem.
All
of
the
leases
which
were
negotiated
were
of
the
net-net"
type—the
landlord
being
responsible
only
for
its
financing
costs.
The
tenants
were
responsible
for
all
other
costs
and
expenses
involved
with
the
plaza
in
addition
to
their
own
businesses.
The
vehicle
chosen
to
be
the
owner
of
the
plaza
was
a
limited
partnership
known
as
Highbury
Plaza
Ltd
Partnership
(the
“Limited
Partnership”).
The
General
Partner
was
a
corporation
50
per
cent
owned
by
Mr.
Fischtein,
but
according
to
the
evidence
it
was
the
shell
corporation
whose
interest
in
the
Limited
Partnership
was
limited
to
Viooth
of
one
per
cent.
Mr.
Fischtein
was
to
be
entitled
to
a
73.46
per
cent
interest
in
the
Limited
Partnership,
Mr.
Schillaci
to
a
24.49
per
cent
interest
and
the
Limited
Partnership's
accountant,
Mr.
Gerald
Lipson
held
the
remaining
interest.
Neither
Mr.
Lipson
nor
the
appellant
paid
for
their
respective
interests.
An
agreement
of
purchase
and
sale
was
entered
into
on
the
Limited
Partnership's
behalf
with
the
owners
of
the
property
on
May
5,
1981,
which
agreement
was
conditional
upon
various
matters
which
included
the
purchaser
being
satisfied
that
all
requirements
of
the
City
of
London
had
been
complied
with
or
that
the
purchaser
was
satisfied
that
they
would
be
complied
with
and
that
offers
to
lease
were
in
place
leasing
at
least
10,000
square
feet
of
the
proposed
20,000
square
feet
of
the
development.
Closing
was
slated
for
August
31,
1981.
However,
a
condition
leading
to
the
availability
of
financing
imposed
by
the
Mercantile
Bank
of
Canada
(the"Mercantile")
was
that
a
development
agreement
be
entered
into
with
the
City
of
London.
Even
though
Messrs.
Schillaci
and
Fischtein
were
completely
satisfied
that
the
development
would
eventually
proceed
as
planned,
the
closing
was
postponed
and
finally
closed
on
September
25,
1981
before
the
development
agreement
was
entered
into.
All
the
other
conditions
were
met.
The
purchaser
was
satisfied
as
to
the
conditions
being
fulfilled
even
though
the
Mercantile’s
condition
was
not
met,
and
the
closing
went
ahead
with
the
vendor
taking
back
a
mortgage
forthe
balance
of
the
purchase
price
which
was
to
be
held
by
the
vendor
until
such
time
as
Mercantile
made
funds
available
to
the
Limited
Partnership.
The
purchase
price
for
the
property
was
$725,000.
Mr.
Fischtein
provided
$150,000
cash
plus
closing
costs
and
as
stated,
the
vendor
took
back
a
first
mortgage
in
the
amount
of
$575,000.
In
the
meantime,
two
matters
required
attention.
First,
in
order
for
the
Limited
Partnership,
and
consequently
the
limited
partners,
to
take
advantage
of
the
write-off
for
tax
purposes
of
certain
soft
costs
related
to
the
project,
the
footings
for
the
project
had
to
be
completed
by
November
30,
1981.
This
was
done.
Secondly,
construction
financing
had
to
be
committed.
In
this
latter
regard,
an
appraisal
was
commissioned
for
use
by
proposed
lenders
which
appraisal
was
completed
in
early
October,
1981.
On
the
advice
of
Mr.
Lipson,
the
long-time
accountant
for
Mr.
Fischtein
and
his
family,
the
project
was
structured
as
a
limited
partnership
in
order
to
permit
the
flow-through
of
the
project's
so-called
soft
costs
directly
to
the
limited
partners
personally.
This
allowed
a
deduction
of
the
soft
costs
from
other
income
in
calculating
a
limited
partner's
personal
income
for
the
taxation
year.
It
was
pointed
out
that
if
the
project
were
to
be
sold
by
the
limited
partnership,
the
soft
costs
would
be
recaptured
or
added
back
into
the
income
of
the
limited
partners
in
the
year
of
sale.
Early
in
1982,
the
development
agreement
was
entered
into
with
the
City
of
London
and
Mercantile
advanced
funds
to
pay
off
the
mortgage
given
back
to
the
vendor
and
to
construct
the
project.
These
funds
were
provided
under
a
loan
agreement
between
the
general
partner
on
behalf
of
the
limited
partnership
and
Mercantile,
dated
as
of
February
15,
1982.
The
loan
was
guaranteed
by
Mr.
Fischtein.
In
February
or
March
of
1983,
the
construction
loan
was
replaced
by
a
line
of
credit
from
Mercantile.
This
loan
was
also
a
short-term
loan
which
was
intended
to
be
replaced
by
a
term
mortgage
once
the
limited
partners
determined
that
long-term
interest
rates
had
dropped
sufficiently.
At
this
time,
interest
rates
were
dropping
and
it
was
the
belief
of
the
limited
partners,
especially
Mr.
Fischtein,
that
rates
would
drop
even
lower.
As
well,
Mercantile
did
not
appear
to
be
pressing
for
repayment
of
the
short-term
financing.
In
the
summer
of
1982,
the
building
was
completed
to
the
point
where
the
tenants
took
possession
and
completed
their
respective
areas,
and
by
October
1,
1982,
both
Swiss
Chalet
and
Harvey's
were
in
operation
and
paying
rent.
In
addition
to
the
difficulties
Mr.
Fischtein
was
experiencing,
the
project
appeared
to
have
experienced
some
difficulties
in
1983.
These
were
occasioned
by
Beta,
the
builder,
demanding
additional
moneys.
Up
to
this
point,
any
additional
funding
was
expected
to
be
provided
by
Mr.
Fischtein
writing
a
cheque.
Mr.
Schillaci
expected
Mr.
Fischtein
to
supply
the
funds
but
as
was
stated
above,
Mr.
Fischtein’s
financial
position
did
not
permit
any
additional
cash
infusion
by
him.
In
addition,
the
appellant
had
no
available
funds
to
assist
in
the
financing
and
Mr.
Lipson
had
such
a
small
interest
that
he
did
not
wish
to
invest
any
funds.
Seeing
the
reality
of
the
situation,
the
builder
took
a
second
mortgage
for
$385,000.
Mr.
Fischtein's
assets
were
being
liquidated
by
his
creditors.
Since
under
the
Limited
Partnership
agreement,
the
affirmative
vote
of
66?/3
per
cent
in
interest
in
the
Limited
Partnership
was
required
in
order
to
sell
the
Limited
Partnership's
assets,
it
was
obvious
that
Mr.
Fischtein
alone
had
the
power
to
sell
the
plaza.
Since
his
creditors
did
not
have
security
on
the
project,
Mr.
Fischtein
was
in
a
position
to
sell
that
asset
in
an
orderly
manner.
With
Mr.
Schillaci’s
tacit
agreement
and
without
Mr.
Lipson's
knowledge,
the
plaza
was
sold
to
the
River
Realty
Development
(1976)
Inc.
for
$2,375,000
cash.
The
offer
was
dated
May
14,
1984,
was
accepted
May
16,
1984
and
closed
on
May
31,
1984.
According
to
the
respondent's
calculation,
this
resulted
in
a
gain
or
profit
of
$640,429
of
which
the
appellant's
share
was
$156,853.
The
Issue
The
issue
is
whether
the
project
was
a
business
or
an
adventure
in
the
nature
of
trade
resulting
in
an
ordinary
income
treatment
of
the
profit
on
the
sale,
or
whether
the
project
was
held
as
a
capital
asset
and
the
profits
treated
as
capital
gains.
It
is
the
appellant's
position
that,
in
the
colourful
words
of
Mr.
Fischtein,
the
project
was
a“
no-brainer".
The
appellant
contends
that
almost
everything
was
in
place
when
[the]
limited
partnership
purchased
the
property.
The
City
of
London
was
only
too
happy
to
see
the
project
completed
since
it
removed
what
was
otherwise
an
eyesore
from
the
area.
The
tenants
were
in
place.
Financing
was
all
but
certain.
The
costs
of
operation
had
been
dealt
with
by
reason
of
"net-net"
feature
of
the
leases.
With
rent
established,
it
was
then
possible
to
determine
the
profitability
once
financing
costs
could
be
determined.
According
to
the
evidence,
the
project
had
a
positive
cash
flow
position
almost
from
the
beginning.
The
project
was
self-financing
even
to
the
point
that
the
tenants
were
required
to
pay
for
the
owner's
costs
for
managing
the
plaza.
The
evidence
of
the
appellant,
Mr.
Fischtein
and
Mr.
Lipson,
was
that
this
was
a
golden
opportunity
to
acquire
and
own
anincome
producing
property
with
very
little
investment.
According
to
Mr.
Schillaci,
this
was
a
long-term
project
which
would
provide
income
for
his
children’s
future.
Mr.
Fischtein
expressed
the
opinion
that
he
was
willing
to
put
up
the
initial
$150,000
since
he
felt
the
project
could
not
fail.
Mr.
Fischtein
readily
admitted
that
he
built
condominiums
and
houses,
which
by
their
very
nature,
are
for
the
purpose
of
sale.
But
he
also
maintained
that
he
built
properties
of
an
income
producing
nature
and
held
them
for
investment
and
that
the
interest
in
the
plaza
was
such
an
investment.
The
evidence
of
Mr.
Fischtein's
intention
with
respect
to
the
property
was
corroborated
by
the
appellant
and
Mr.
Lipson.
In
addition,
Mr.
Schillaci’s
evidence
leads
to
the
conclusion
that
he
had
no
intention
of
selling
the
project
for
a
quick
profit.
After
all,
according
to
him,
what
else
was
there
to
do
after
the
plaza
was
completed
other
than
collect
rents,
pay
financing
charges
and
distribute
the
profits?
The
project
made
sense
to
the
investors
since
if
they
held
it,
they
would
benefit
from
the
write-off
of
the
soft
costs,
the
rental
stream
and
profit
down
the
line
on
any
sale.
According
to
Mr.
Schillaci,
unsolicited
offers
had
been
made
to
purchase
the
agreement
of
purchase
and
sale
as
well
as
other
offers
to
purchase
the
project
and
all
were
rejected.
There
was
ample
evidence
before
me
that
the
original
intention
of
the
three
limited
partners
was
to
hold
the
property
for
investment
purposes
and
not
with
a
view
to
resale.
I
make
this
finding
notwithstanding
the
contents
of
two
letters.
The
first,
dated
July
19,
1983,
written
by
Beta,
to
the
General
Partner,
mentions
“our
hopes
of
a
comparatively
quick
sale
of
the
property".
Taken
alone,
this
might
be
of
significance.
However,
the
tone
of
the
letter
is
that
Beta's
bankers
were
pressing
Beta
and
that
Beta
was
in
need
of
cash.
A
sale
of
the
property
under
these
circumstances
would
be
to
Beta's
benefit.
In
addition,
there
was
mention
of
a
sale
in
Mercantile's
commitment
letter
of
March
14,
1983.
This
concerned
a
demand
loan
replacing
the
demand
construction
loan
facility
which
expired
on
December
31,
1982.
Under
the
heading
"Repayment"
in
the
commitment
of
March
14,
1983,
it
states
"that
the
loan
will
be
repaid
from
the
proceeds
of
sale
in
full
not
later
than
April
30,
1984."
Mr.
Fischtein
explained
that
in
such
cases
of
interim
financing,
construction
loans,
etc.,
done
on
a
short-term
basis,
such
clauses
are
inserted
to
ensure
that
if
there
were
a
sale
prior
to
an
expiry
date
that
the
loan
would
be
repaid
and
the
proceeds
not
held
by
the
mortgagor
and
to
ensure
that
the
loans
are
to
be
categorized
as
short
term.
Since
the
primary
intention
of
the
appellant
and
the
other
investors
was
not
with
a
view
to
selling
the
property
in
such
a
fashion
as
would
cause
the
gain
to
be
profits
for
income
account,it
still
must
be
determined
whether
the
doctrine
of
secondary
intention
is
applicable.
In
Racine,
Demers
and
Nolin
v.
M.N.R,
[1965]
C.T.C.
150,
65
D.T.C.
5098
[Ex.Ct.],
Noël
J.
stated
at
page
159
(D.T.C.
5103):
In
examining
this
question
whether
the
appellants
had,
at
the
time
of
the
purchase,
what
has
sometimes
been
called
a
**secondary
intention”
of
reselling
the
commercial
enterprise
if
circumstances
made
that
desirable,
it
is
important
to
consider
what
this
idea
involves.
It
is
not,
in
fact,
sufficient
to
find
merely
that
if
a
purchaser
had
stopped
to
think
at
the
moment
of
the
purchase,
he
would
be
obliged
to
admit
that
if
at
the
conclusion
of
the
purchase
an
attractive
offer
were
made
to
him
he
would
resell
it,
for
every
person
buying
a
house
for
his
family,
a
painting
for
his
house,
machinery
for
his
business
or
a
building
for
his
factory
would
be
obliged
to
admit,
if
this
person
were
honest
and
if
the
transaction
were
not
based
exclusively
on
a
sentimental
attachment,
that
if
he
were
offered
a
sufficiently
high
price
a
moment
after
the
purchase,
he
would
resell.
Thus,
it
appears
that
the
fact
alone
that
a
person
buying
a
property
with
the
aim
of
using
it
as
capital
could
be
induced
to
resell
it
if
a
sufficiently
high
price
were
offered
to
him,
is
not
sufficient
to
change
an
acquisition
of
capital
into
an
adventure
in
the
nature
of
trade.
In
fact,
this
is
not
what
must
be
understood
by
a
"secondary
intention”
if
one
wants
to
utilize
this
term.
To
give
to
a
transaction
which
involves
the
acquisition
of
capital
the
double
character
of
also
being
at
the
same
time
an
adventure
in
the
nature
of
trade,
the
purchaser
must
have
in
his
mind,
at
the
moment
of
the
purchase,
the
possibility
of
reselling
as
an
operating
motivation
for
the
acquisition;
that
is
to
say
that
he
must
have
had
in
mind
that
upon
a
certain
type
of
circumstances
arising
he
had
hopes
of
being
able
to
resell
it
at
a
profit
instead
of
using
the
thing
purchased
for
purposes
of
capital.
Generally
speaking,
a
decision
that
such
a
motivation
exists
will
have
to
be
based
on
inferences
flowing
from
circumstances
surrounding
the
transaction
rather
than
on
direct
evidence
of
what
the
purchaser
had
in
mind.
[Translation]
I
find
no
evidence
to
indicate
that
at
the
time
of
the
purchase,
the
appellant
and
his
partners
had
any
operating
motivation
to
sell
the
project
upon
the
happening
of
any
circumstances.
The
evidence
does
support
the
opposite
and
that
the
only
reason
for
selling
was
in
order
for
Mr.
Fischtein
to
raise
money
to
pay
off
his
other
debts.
It
is
interesting
to
note
that
immediately
following
the
passage
from
Racine
quoted
above,
Mr.
Justice
Noël
went
on
to
use
an
hypothetical
example
when
he
said:
When
a
man
purchases
a
large
expanse
of
land
for
the
avowed
purpose
of
building
on
it,
for
example,
a
shopping
centre
and
of
renting
stores
to
yield
an
income
from
rent,
but
at
the
moment
of
the
purchase
he
does
not
make
any
arrangement
at
all
to
obtain
the
permanent
financing
of
a
considerable
amount
of
money
that
he
must
invest
or
which
will
be
required
for
the
purposes
of
his
project,
or
any
arrangement
at
all
to
obtain
tenants,
and
he
has
not
obtained
any
information
at
all
concerning
the
question
of
learning
if
the
site
in
question
possesses
the
characteristics
necessary
and
adequate
for
such
a
project,
or
when
this
plot
of
land
is
situated
in
a
sector
which
is
adjacent
to
another
sector
which
is
growing
and
which
is
in
full
expansion
on
the
periphery
and
where
the
value
of
these
lands
has
already
begun
to
rise
or
where
the
purchaser
possesses
experience
in
the
realm
of
real
estate
which
allows
him
to
anticipate
the
changes
which
may
arise
in
real
estate
values,
there
arises
an
almost
irresistible
inference
that
this
man
had
the
idea
when
he
made
the
purchase
that
if
he
did
not
succeed
in
making
the
necessary
arrangements
to
establish
a
shopping
centre,
he
would
indubitably
be
able
to
resell
this
land
at
a
profit.
[Translation]
By
August
31,
1981,
two
tenants
were
in
place
and
the
others
were
being
lined
up;
the
planning
and
zoning
were
approved;
a
site
plan
was
approved
and
the
traffic
had
been
studied
and
approved.
All
that
remained
was
the
development
agreement
and
permanent
financing.
Well
prior
to
the
sale,
the
development
agreement
was
in
place
and
the
plaza
was
tenanted
and
rents
were
coming
in.
Interim
financing
was
in
place
awaiting
permanent
financing.
There
were
no
loose
ends
to
be
tied
up.
For
all
of
the
above
reasons,
the
appeal
is
allowed,
with
costs,
and
the
matter
referred
back
to
the
respondent
for
reconsideration
and
reassessment
on
the
basis
that,
the
amount
of
$156,853,
being
the
appellants
share
of
profit
earned
from
the
sale
of
the
Highbury
Plaza,
was
a
capital
gain.
Appeal
allowed.
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