Irene Ungar v. Minister of National Revenue, [1989] 2 CTC 2088, 89 DTC 349

Mogan, T.C.J.:—The appellant is one of 26 persons who formed a joint venture in 1969 to purchase 138.563 acres of land in Chinquacousy Township, just east of Brampton in the Province of Ontario. The percentage participation in the joint venture was distributed among the 26 members as follows:

The appellant held a 2 per cent interest in the joint venture for which she subscribed $5,720 in the summer of 1969. The 138.563 acres of land were purchased at a cost of $8,300 per acre making an aggregate purchase price of $1,150,073. The purchase was financed in the following approximate amounts:

At the time of closing, the land was leased at a monthly rental of $125 or $1,500 per annum. There was produced in evidence as Exhibit R-4 a 13-page joint venture agreement signed by more than two-thirds of the members of the joint venture (but not signed by the appellant) setting out the terms on which the land was held. Certain provisions of the joint venture agreement are worth summarizing:

— the joint venture is referred to as "the Syndicate";

— the members of the Syndicate are referred to as "the Owners";

— Gdynia Developments Limited ("Gdynia") is referred to as "the Trustee" and Gdynia holds title to the land for the account of the Owners;

— the first recital states that the Owners have agreed to form the Syndicate for the purchase and development of the land;

— George Jellaczyc Real Estate Limited is referred to as "the Agent";

— George Jellaczyc is a real estate broker and is a five per cent member of the Syndicate;

— the third recital states that the Owners have agreed to grant unto the Agent an exclusive right to sell the land;

— paragraph 2 states that the purpose of the Syndicate is to purchase, develop, retain as an investment and/or sell the land;

— paragraph 3: the Owners grant to the Agent an exclusive right to sell the land for ten years at a five per cent commission; the commission is to be shared if an offer to purchase is submitted from an independent real estate broker; and the Agent is to manage the Syndicate and develop the whole or any part of the land for investment and/or resale purposes.

There was also produced in evidence as Exhibit R-5, a four-page management agreement among Gdynia (as "Owner"), Ruland Realty Limited ("Ru- land") and Rudolph Peter Bratty under which Gdynia employs Ruland as manager to obtain a rezoning of the land from designated industrial to residential. There is a further provision that if Ruland is successful in rezoning at least one-half of the lands to residential, Gdynia will pay to Ruland ten per cent of the net profits earned by Gdynia from the sale of the residential lands using an assumed cost of $25,000 per acre "notwithstanding the actual cost thereof". In 1975 Gdynia had a proposed plan of subdivision prepared for 96 of the 138 acres.

On June 29, 1979, Gdynia (on behalf of the Syndicate) sold the land (reduced to 133.0003 acres) for total proceeds of $6,435,217 based on a price of $48,384 per acre. At the time of sale, the land was leased for a yearly rent of $1,250 and the house on the land was leased for $125 per month. From the proceeds of sale, a five per cent commission of $321,760 was paid to George Jellaczyc; and a management fee estimated at $142,500 was paid to Ruland indicating that part of the land had been rezoned as “residential”.

Upon the sale of the land in 1979 (133.003 acres from the original 138.563 acres which were purchased in 1969) the gross profit was approximately $40,000 per acre and each member of the Syndicate realized his or her percentage interest in the aggregate gain. The only issue in this appeal is whether the appellant's share of the gain is a capital gain or income from a business venture. Because the proceeds of sale were payable only in part in 1979 with the remainder payable in subsequent years, the appellant reported the sale as a capital gain in 1979 but claimed a reserve with respect to those amounts which were payable in subsequent years. The years under appeal herein are 1979, 1980, 1981 and 1982.

In my opinion, the gain realized by the appellant in 1979 when the land was sold was not a capital gain. Her statements as to what she thought or hoped in 1969 when the land was purchased are not supported by any of the documents or any other objective evidence. She said that if the land were rezoned “residential”, she would hope to be allocated one of the units as a place to live. There was nothing in the joint venture agreement to indicate that the land would ever be distributed in specie among the members. Indeed, the ten-year listing granted to George Jellaczyc promised a five per cent commission on the selling price; and the ten per cent of profits promised to Ruland in the management agreement also anticipated a sale.

The persons running the joint venture took active steps to increase the value of the land so that it would be more saleable. They offered a ten per cent profit participation to Ruland if more than one-half of the land could be rezoned “residential” and they prepared a plan of subdivision for 96 acres. It is interesting to note that Jellaczyc, a real estate broker and five per cent member of the joint venture, was granted an exclusive ten-year listing of the property immediately after the purchase in 1969; and the property was sold just as the ten-year period was about to expire.

The development and sale of the land are two of the purposes of the joint venture as set out in the joint venture agreement of June 1969. Counsel for the appellant noted that the appellant did not sign the joint venture agreement and asked the Court to conclude that she was not aware of its existence. I cannot draw that conclusion for the following reasons:

— she was a two per cent member of the joint venture named in the agreement and in the lawyer's reporting letter which referred to the agreement;

— she subscribed her two per cent quota of $5,720 to participate in the purchase of the land;

— she participated in further financial contributions to carry the property;

— she attended a number of meetings of the joint venture;

— she participated in the proceeds of sale.

— the lawyer's letter reporting on the sale stated that all members attended the meeting which voted unanimously to effect the sale;

In my view, the appellant's failure to sign the joint venture agreement (along with a few others) is only an indication that the bigger participants who really operated the joint venture were content to proceed without the signatures of some of the smaller participants. Even if the appellant was not aware of the joint venture agreement and was a passive participant, her intention with respect to the purchase and sale of the land must be enveloped by that of the joint venture. In Mohawk Horning Limited et al. v. The Queen, [1986] 2 C.T.C. 89; 86 D.T.C. 6297, Urie, J., delivering judgment for the Federal Court of Appeal, stated at page 98 (D.T.C. 6304):

. . . where there are active participants and passive ones involved in a transaction, the position of the passive ones will be no different from that of the active ones. Noël, J. (as he then was) in M.N.R. v. Lane, [1964] C.T.C. 81 at 91; 64 D.T.C. 5049 at 5054-55, had this to say about the responsibilities of passive partners:

It would appear from this that the syndicate's non-active members were quite content to leave the handling of the syndicate's activities to the executive committee who had carte blanche to handle the business of the syndicate as they thought best and because of this situation, the passive members here would be in no different position than that of the active members. Indeed, if the transactions are business transactions, any profit derived therefrom from any of the members would be taxable.

A fortiori, when all are to greater or lesser degrees active, (as here) the most active participant's intention (in this case Schneider's) must be enveloped by that of the consortium as a whole, even if, alone, his purpose would have been different.

And finally, there was nothing about this land in 1969 which would commend it as a reasonable capital investment to the appellant. The cost was $1,150,073 but the rent was only $1,500 per year. More than 73 per cent of the cost was financed by mortgages which had to be maintained. There was no annual yield on the amount which the appellant contributed to the joint venture in 1969. Indeed, there was a continuing obligation to maintain the substantial mortgages. The only foreseeable method of recovering the amounts contributed to the joint venture was through the sale of the land.

If the land had been distributed in specie among members of the joint venture, it is difficult to imagine the appellant moving out to a new homesite east of Brampton. Her interesting biography which came out in evidence indicates that she is a very urban person involved in many community activities and an active participant in the Toronto Polish community. When this appeal was heard in May 1989, she was still living in the house in Toronto which she and her husband had purchased in 1956.

I believe the appellant when she states that she does not have enough confidence in her business judgment to purchase property on her own; and she wanted the security of joining with others to acquire some property. Those facts, however, do not give an investment character to the transaction under review. When this land was purchased in 1969, the collective intention of the joint venture was to increase the value of the land by rezoning or development and then offer it for sale probably within ten years. The intention was fulfilled and a gain was realized. The gain was not on capital account but was income from an adventure in the nature of trade. The appeal is dismissed.

Appeal dismissed.