Jamie E. Wright v. Minister of National Revenue, [1990] 1 CTC 2477, 90 DTC 1265

Christie, A.C.J.T.C.:— The years under appeal are 1982, 1983 and 1984. The manner in which the appeal in respect of 1982 is dealt with will determine the disposition of the appeal in respect of 1983 and 1984. The issue is whether the profit realized on the sale of real estate in 1982 is a capital gain or business income. Reserves were deducted in 1983 and 1984 in respect of proceeds due on the sale.

The appellant is a urologist who practices in Vancouver. He is on the staff of the Vancouver General Hospital and is associated with the Department of Surgery at the Medical School, University of British Columbia. He was approached by a former patient, Mr. Geoffrey Hobbs, a realtor, with a proposal to invest in an industrial park in the Municipality of Langley, British Columbia. At the initial meeting he was told of a syndicate being organized to develop some vacant property in the park; that it was to be a long-term investment exceeding 10 years and that financial responsibilities would be incurred over a long period. The appellant informed Hobbs that he was at the commencement of his period of optimum earnings as a surgeon which he expected to last 10 to 15 years; that he wished to know what his obligations would be so that he could plan accordingly and that he did not want to be involved in a short-term investment because he was looking for something useful for later years and retirement. Further he was not interested in anything that required his participation in its execution. Hobbs outlined an eight or nine year payment schedule. The appellant expected that the property would be subdivided and serviced and he would then have the opportunity of constructing warehousing on a portion of it which he would own over the long term.

After this meeting the appellant visited the industrial park in Langley in which the property was located. The park was a developing warehouse and distribution centre. Across the street from the property the British Columbia Michelin Tire Distribution Centre was being completed. The property fronted on the Fraser River and was less than one half a block from railroad tracks.

The appellant subsequently decided to invest in the property. He did this "on faith in that he (Hobbs) was going to run this investment syndicate." By indenture of trust made January 14, 1978, between Geoffrey Hobbs as Trustee and Clock Holdings Ltd. ("Clock"), Hoblee Developments Ltd. ("Hoblee"), Geoff Hobbs and Associates Ltd. (“Geoff”), Medici Management Ltd. ("Medici"), Jamie Wright ("Wright") and Bontebok Holdings Ltd. ("Bontebok") collectively called "the Beneficiaries”, a number of things were agreed to, only the following of which need be particularly noted for present purposes. [1]

1. The Trustee was to take title to the property upon trust for the sole use and benefit of the Beneficiaries.

2. The interest of each beneficiary in the property was: Clock 18.75%, Hoblee 6.25%, Geoff 12.5%, Medici 12.5%, Wright 12.5% and Bontebok 37.5%.

4. The Trustee was not to deal with the property except as authorized by the Beneficiaries or by the agreement.

5. The Trustee was directed and authorized to proceed to improve and develop the property and to charge each Beneficiary with his or its proportionate share.

6. The Trustee, with the written consent of the Beneficiaries who beneficially owned 70% or more of the property (originally this was 60% but was changed to 70% at the insistence of Bontebok), was empowered and authorized to transfer and deal in and with the property for all purposes.

9. The agreement and the trust it created terminated on the occasion of any one of four events, the third of which was: "Upon completion of the total sale of all of the lands and disbursement to the Beneficiaries of all proceeds therefrom along with a full and complete accounting from the Trustee."

10. All Beneficiaries agreed to make their proportionate share of the interest and principal payments required under the agreement of sale and purchase with Kanaka Creek Holdings Ltd.

11. The Trustee or any company owned or controlled by him was not to be deprived of any proper fee or commission for work done as a realtor merely because he acted as trustee under the agreement.

13. Each party would make, do and execute all such further acts and deeds in order to assure giving effect to the intentions of the agreement.

When the appellant entered into the agreement, apart from Hobbs, he had not met any of the individuals associated with the corporate parties thereto.

On February 14, 1978, an agreement for the sale of the property (hereinafter "Kanaka Creek") which consisted of 53.7 acres was made between Kanaka Creek Holdings Ltd. and Geoffrey Hobbs in Trust. The price was $1,300,000. Two hundred thousand dollars was payable on execution of the agreement and instalments of $25,000 each were payable on the 15th days of February, May, August and November for each year commencing on the 15th day of February 1981 until the 15th day of February 1986 when the whole of the principal balance of the purchase price and interest became due and payable in full. Interest at 9 /2 per cent per annum calculated yearly was payable from February 15, 1978.

Commencing in 1978 the appellant made payments to the trustee from time to time as required and he received periodic reports from him If there were meetings of the syndicate, he did not attend any. Some of these reports are in evidence and they include one dated February 21, 1979, which shows that Hobbs is actively engaged in the sale of real estate.

Paragraphs 8 to 12 read:

8. We recently sold a 13 acre site on 200 which will be combined with additional property provided by Dominion for the establishment of a major national company of a facility in excess of 200,000 sq. ft.

9. A 20 acre parcel on 201st is currently under option to a major party and every indication is that this will be exercised.

10. A 12 acre parcel is under option by a large truck and trailer manufacturing firm on Telegraph Trail.

11. A 10 acre site is under negotiation by a major oil company on property fronting the Fraser River.

12. We have at least 20 or 30 proposals out and active negotiations on several other parcels in the 1 to 5 acre range.

There is also an undated memorandum to the members of the syndicate that reads:

We currently are negotiating with three major parties on the waterfront acreage of this subdivision and should any one of these negotiations be successful we will be in touch with you toward proceeding with phase I of the subdivision as attached.

The municipality has asked us to phase the subdivision which we have done per attached plan and we and our engineers are in constant communication with the municipality towards finalization of these plans.

Meanwhile, prices have escalated very rapidly in the Port Kells, Northwest Langley area, as the inventory is taken off the market and shortages in other areas occur, and the realization from this subdivision will be significantly higher than our Original projections.

We will report to you as to further progress.

The document attached to the memorandum is a subdivision plan marked Phase I depicting the two waterfront lots that are part of Kanaka Creek and they are emphasized by shading.

The appellant and the others in the syndicate signed a document from Hobbs dated November 19, 1981, that reads:

On behalf of the group, we have now completed all the subdivision requirements in respect of the property. This has taken several years of work and coordination with the Municipality and Hunter Laird who have completed the engineering and design drawings as required.

We have now negotiated a sale of the two waterfront lots to S & R Sawmills Ltd. but as trustee, I require your authority to sign the documents of sale on the following basis:

Purchase Price:	$3,000,000.00
Down Payment:	$1,000,000.00 payable on the completion date February 1,
	1982

Agreement for Sale: Payable as follows:

$1,000,000.00 February 1, 1983

$ 500,000.00 February 1, 1984

$ 500,000.00 October 1, 1984

Interest on the above agreement is to be calculated at the rate of prime + /2 payable monthly.

Our commission in respect of this transaction is 5% of the gross selling price. On the basis of the above, we anticipate no problems in bank financing the agreement for sale so that all the shareholders would largely obtain their investment proceeds at this point in time.

We are committed on the basis of the subdivision to construct the road within 12 months of registration of the said subdivision. To facilitate the sale at this point in time, we are only going to register a plan showing the two waterfront lots and the balance as the remainder. When we decide to proceed with Phase two and three, we will prepare the necessary prospectus.

As trustee I require your authority to sign the purchase agreement on the basis of the above and your authority to sign the 215 Agreement as well as the necessary subdivision plans.

We are also at this point in time trying to determine whether on the basis of an investment property, spreading the tax over the term of the agreement is possible and also the spread of partial release payments as required under our existing agreement.

Please acknowledge your agreement on the above by signing the duplicate of this letter.

When the appellant first learned of the proposed sale described in the document of November 19, 1981, he was very unhappy and expressed his displeasure to Hobbs. Hobbs pointed out that beneficiaries owning over 70 per cent of Kanaka Creek had approved the sale. The appellant's objections were noted but there was nothing further he, the appellant, could do about it. He was not aware of the possible sale of the waterfront lots until after it was for practical purposes a done thing. He said Hobbs was in a large way in the business of buying, selling and developing industrial land and acting for other parties in that regard. There was also placed in evidence by the appellant copy of a letter dated March 7, 1985, that he sent to Revenue Canada concerning Kanaka Creek. After describing himself as "a passive investor with a one-eighth interest," he went on: “I am not involved in the market place in the buying or selling of property or actively involved in any way in the development of the property since I have neither the time, information, or expertise to do so.” In cross-examination counsel for the respondent asked these questions and received this reply: “Q. And he (Hobbs) was really the dominant force? He was managing it, he was the trustee, he was writing letters about negotiations. He was the dominant force in this thing? A. Yes."

The waterfront lots consisted of 21.8 acres of the 53.7 acres that comprised Kanaka Creek. This sale to S & R Sawmills Ltd. was concluded on February 2, 1982. In reassessing the respondent added $41,885 to the appellant's income for each of the years under review which is 50 per cent of the amount he realized in those years as his share of what was realized on the sale of the waterfront lots to S & R Sawmills Ltd.

At the time of trial the appellant still held his 12.5 per cent interest in the balance of Kanaka Creek.

I have some difficulty with the appellant's evidence that he had no prior knowledge of the intended sale of the waterfront lots to S & R Sawmills Ltd. The updated memorandum referred to shows that negotiations were under way with "three major parties" for the sale of those lots. This evidence about lack of knowledge, however, even if accepted can only serve to bolster the appellants evidence about his intention and expectation of long-term investment when Kanaka Creek was acquired. But that intention does not govern the disposition of this appeal. It is the intention of Hobbs at the time of acquisition that is decisive because the appellant's own evidence, oral and in writing, establishes that he played the role of a passive investor regarding the acquisition of Kanaka Creek and the events leading up to and including the sale of a portion of it to S & R Sawmills Ltd. Also Hobbs played the active and dominant role in that regard and, as a matter of law, it flows from a combination of this and the appellant’s passivity that his intention at the time Kanaka Creek was acquired is attributable to the appellant. It is also manifest that, at the time relevant to this appeal, Hobbs was a very active trader in real estate and in the absence of evidence to the contrary, of which there is none in this case, it can be inferred that a motivating intention on his part at the time of the acquisition was to sell all or part of Kanaka Creek when what was regarded as an opportune time arose. It will be recalled that in the trust deed of January 14, 1978, his right to real estate commissions was expressly stipulated. The commission on the sale of the waterfront lots was $150,000.

In Len Sardo v. The Queen, [1988] 2 C.T.C. 290; 88 D.T.C. 6464 (F.C.T.D.), the appellant and eight others purchased real estate, a portion of which was sold and the gain from the sale gave rise to a dispute between the appellant and the taxing authorities about whether it was a capital gain or business income.

On an appeal to this Court by Len Sardo and another appellant it was held that the gain was business income because the intentions of one Milton Hewak were ascribable to the appellants and the former's intention at the time the real estate was acquired was to dispose of all or part of it when an acceptable opportunity arose. This was sustained on a further appeal to the Federal Court-Trial Division. In his reasons for judgment, Mr. Justice Collier said at page 290 (D.T.C. 6464): "The leader, and person who 'ran' the operation, was Milton Hewak, a real estate agent." He was also described as the active or dominant person. Hewak informed those with an interest in the property of their share of annual taxes, and other matters, as they arose. His Lordship said at page 292 (D.T.C. 6465-66):

The law, in the circumstances here, was, in my view, accurately stated by Associate Chief Judge Christie of the Tax Court, in the reasons he gave in this case (pp. 5-6):

The onus is on the appellants to show that the reassessments are in error. Where the onus lies has been settled by numerous authorities binding on this Court. It is sufficient to refer to two judgments of the Supreme Court of Canada in this regard: Anderson Long Company v. The King, [1925] S.C.R. 45 and Johnston v. M.N.R., 3 DTC 1182.

If, at the time of the acquisition of the property, the motivating intention of the appellants, or the motivating intention attributable to them by law, was to retain the property for the purpose of selling it at a profit at an opportune time, the profit realized on the sale would not be a capital gain but business income and taxable as such.

In Leonard Reeves Incorporated v. M.N.R., 85 DTC 419, a number of propositions or guidelines are stated at pages 421 and 422. These are relevant for ascertaining relevant intentions regarding ‘trading cases’ like those now before me. For present purposes, it is sufficient to repeat this from Leonard Reeves Incorporated:

‘If the appellant entered into a partnership or a syndicate or some other arrangement with others for the purpose of dealing in land and played a passive role leaving it to another to be the active or dominant member, that member's intentions are attributable to the appellant: M.N.R. v. Lane, 64 DTC 5049 per Noël, J. at 5051 and Wiss v. M.N.R., 72 D.T.C. 6231 per Heald, J. at pages 6231-2."

From the foregoing it can be said that if a person other than the appellants was dominant and authoritative regarding the intention motivating the acquisition of the property, that intention is attributable to the appellants even though their intentions may not have been in harmony. Also, in determining the intention of the dominant and authoritative person, his history of trading i n real estate is germane to the determination of his relevant intention: Vaughan Construction Company Limited v. MNR, 70 DTC 6268 at 6270 and Slater et al. v. M.N.R., 66 DTC 5047 at 5050.

On the facts, I have, as well come to the same result as the Tax Court. I agree with the conclusions there reached.

My conclusion regarding the appeal at hand is that a motivating intention of Hobbs at the time Kanaka Creek was acquired was to sell all or part of it when what was regarded as an opportune time arose. This intention is attributable to the appellant. It follows that the appeal cannot succeed.

This appeal is dismissed.

Appeal dismissed.