James A. Lampard v. Minister of National Revenue, [1986] 1 CTC 2562, 86 DTC 1422

Christie, A.C.J.T.C.:—The appellant appeals from reassessments and confirmation thereof by the respondent regarding his 1977, 1978 and 1979 taxation years.

In limine counsel for the respondent informed the Court that those aspects of the appeal relating to 1977 and 1978 pertaining to shareholder's loans should be allowed.

The issue regarding 1979 is whether the profit made by the appellant on the purchase and subsequent sale of real estate is taxable as a capital gain or business income. The real estate referred to is located on 47th Street in Red Deer, Alberta.

The appellant is an optometrist. He has been a member of that profession for 48 years. After serving in the Canadian Army in World War Il he returned to Red Deer to practise there and still does on a part-time basis.

The appellant and 11 others formed an unincorporated association which he called a syndicate named Red Deer Investments. In the 1950s it built about seven two-bedroom homes over a period of two years which sold for $3,800 each. In the latter part of that decade, the syndicate purchased vacant real estate in Red Deer on which it constructed an office building named the Regal Building. This was followed by the construction in the same period of the Jubilee Building. It had frontage of 50 feet and consisted of one storey below ground level and two above. The appellant retained his interest in the Regal Building for about 15 years and in the Jubilee Building for about 13 or 14 years.

In 1959 he and others constructed another commercial building called the Balmoral Building. In 1970 a group including the appellant became involved in the life insurance business. The Balmoral Building was turned over to the life insurance company and shares were issued to the appellant for his interest in it.

At one time the appellant and his wife, who practised with him, rented premises in Red Deer from the Alberta Motor Association. They occupied space having a frontage of 25 feet. The only other tenant was Imperial Optical. The entire frontage of the property was 75 feet. The 25-foot frontage was offered for sale and it was purchased. Over the next three or four years the other 50 feet were purchased. About 1964, the existing structures on the land were demolished and a new building called the Imperial Block was erected. The foregoing was done by Imperial Block Limited, 50 per cent of the shares of which were owned by Lampard's Ltd. which was incorporated in 1955 to hold and manage assets of the appellant and other members of the Lampard family. An additional structure was added to the land in 1975 called the Advocate Building. Lampard's Ltd. still retains its interest in the Imperial Block and the Advocate Building.

The appellant also purchased a farm with the intention of living on it. The date of the purchase was not specified, but he kept the farm for ten years, when it was sold because he decided not to make the move.

The 47th Street property (“the Property") was purchased by the appellant in November 1975 for $82,000 and sold in 1979 for $169,000 which, with proper deductions, resulted in a profit of $78,213. Not long prior to the acquisition the appellant had renewed the lease for his office space in the Professional Building. He was dissatisfied with the lease he had negotiated primarily for monetary reasons, but also because of what he regarded as inadequate maintenance. This led him to consider securing a property on which to erect his own office building, part of which would be occupied for his business purposes. The remainder would be rented to others including, in particular, persons involved in health care.

An acquaintance of his in the construction business, Mr. Ray Ranger, recommended the purchase of the property. It consisted of three weeded lots. There was an old shack on one lot and an excavation on another where there had been a small building. Prior to the purchase by the appellant, the property had been rezoned for commercial building purposes at the request of the then owners. On September 15, 1975, they applied for a build- ing permit to construct an office building to cost an estimated $360,000. On September 30, 1975, a development permit was issued in respect of this intended construction, but for undisclosed reasons the owners changed their minds and sold to the appellant. After the purchase, he was approached by a real estate firm who wanted to rent the land for the purposes of a public parking lot. The appellant agreed pending development of his plans. His tenant leveled the lot and rented parking stalls. For this the appellant received a modest rent which was absorbed in the payment of municipal taxes on the property. The appellant had plans from previous construction already referred to that were readily adaptable to what he had in mind. He received informal approval of these plans from the city building inspector.

From the appellant’s point of view the most attractive selling point was that the property is located across the street from the southern edge of what he and others firmly believed at that time would be the site of a significant shopping centre development in the "downtown core" of Red Deer. The front page of the September 15, 1976, issue of the Red Deer Ad-Viser was introduced in evidence. It refers to a second adjournment by city council regarding making a decision on approving the scheme. The aldermen were split evenly and the mayor cast the deciding vote. There were plans to double the size of the Hudson's Bay store and triple the size of Eaton's. Other anticipated developments included provision for substantial parking areas. It was the appellant’s expectation that his building would attract members of the medical profession. He regards shopping centres as magnets in relation to buildings offering office space to those involved in health care. He set about finding a "keystone tenant." In some quarters other descriptive language is used in this regard. Such a tenant is one of known significant financial substance who is prepared to make a sufficient commitment to the use of a proposed commercial building that this operates as a very persuasive consideration in securing financing from lending institutions. For example, the keystone tenants regarding the Jubilee Building and the Imperial Block were Ashdown’s Hardware and the Toronto-Dominion Bank. Among the tenants in the Balmoral Block were the Bank of Nova Scotia and Household Finance.

The appellant took part in the search for a keystone tenant. He also enlisted real estate agents for this purpose and, in particular, Mr. William T. Smathers of Sunrise Realty. Their efforts were not successful. Some of the medical people that the appellant hoped would become his tenants did make a move, but it was to a building erected two and a half blocks from the property by an entrepreneur from Calgary.

Late in 1977 or early 1978 city council decided to approve the establishment of a shopping centre at Bower Mall at the south end of the city and a considerable distance from the property. This effectively terminated the anticipated development in the downtown area for a similar purpose. The existence of both shopping centres was not commercially feasible. While matters dragged on for some time after the city council's decision that, in the final analysis, was the precipitating element leading to the sale of the property.

In November 1978 Smathers informed the appellant that he thought he could sell the property. A salesman in his office had discovered a potential buyer. The property had not been advertised nor apparently had the offer been solicited. At Smathers' request the appellant set the selling price. In this regard the latter said:

I picked it high enough so that if it was accepted, it was a deal that you couldn’t forego, or shouldn’t forego.

This case turns on the appellant’s intention at the time he contracted to buy the property. The essence of his evidence is that his intention in making the acquisition was to create for himself a long term revenue-producing asset of the kind described. In Leonard Reeves Incorporated v. M.N.R., [1985] 2 C.T.C. 2054; 85 D.T.C. 419, I enumerated at 2058-59 (D.T.C. 421-22) a number of matters applicable to determining the relevant intention of a taxpayer at the time of purchase in cases of this nature. They need not all be reiterated here, but included were such things as the direct evidence of an appellant regarding his intention; his history of trading in real estate; whether the property was advertised for sale and whether the offer to purchase was solicited. While these matters are all relevant, none are of themselves necessarily conclusive. Generally speaking intention is inferred by considering and weighing a number of material facts placed in evidence. In Hall v. The Queen, [1986] 1 C.T.C. 399 at 405 (86 D.T.C. 6208 at 6213) Mr. Justice Collier of the Federal Court — Trial Division, recently reminded us that:

But all these cases involving capital gain versus income, or adventure in the nature of trade, must depend on their own particular facts. This was pointed out by Judson, J. in Regal Heights Limited v. M.N.R., [1960] S.C.R. 902 at 907; [1960] C.T.C. 384 at 390. I refer also to the comment of Kerwin, C.J. in McIntosh v. M.N.R., [1958] S.C.R. 119 at 121; [1958] C.T.C. 18 at 20:

It is impossible to lay down a test that will meet the multifarious circumstances that may arise in all fields of human endeavour. . . . it is a question of fact in each case . . . .

See also Regina Shoppers Mall Limited v. The Queen, [1986] 1 C.T.C. 261; 86 D.T.C. 6091 per Pinard, J. at 263 (D.T.C. 6093).

I accept the appellant’s assertion regarding his intention when he purchased the property and the reasons given for it. Furthermore I do not consider the acquisition as having been significantly speculative in nature. If it had been this could signal the existence of a secondary intention at the time of acquisition to sell the property if the primary purpose was not realized: De Salaberry Realties Limited v. The Queen, [1976] C.T.C. 656; 76 D.T.C. 6408 per Le Dain, J. delivering the judgment of the Federal Court of Appeal at 660 (D.T.C. 6412). The appellant regarded the risk of the downtown development not going forward as minimal, a point of view that was shared by others. He rejected the suggestion by counsel for the respondent that the purchase was “a stab in the dark." He said that describing the acquisition as a gamble was unfair. The appellant was thoroughly familiar with the development of Red Deer. He had observed at first hand its growth from a population of 3,000 to 50,000. As previously mentioned, Hudson's Bay and Eaton's were located on the site where the downtown development was expected to occur. Retail outlets of this kind are regarded as foundation stones in the development of shopping plazas.

In the course of his argument, counsel for the respondent expressly declared that he was relying on secondary intention alone to succeed. The origin and nature of this concept or doctrine is discussed in conjunction with reference to leading cases pertaining to it in jordan v. M.N.R., [1985] 2 C.T.C. 2131 at 2135-37; 85 D.T.C. 482 at 485-87. Suffice it to say that if at the time of purchasing the property the appellant had in addition to the primary intention of developing and retaining it as a rental income-producing asset a secondary intention, which was effective in inducing the acquisition, to sell the property at a profit should the primary purpose be unsuccessful the profit on the sale would be taxable as business income. I am satisfied that the evidence refutes the existence of such a secondary intention. Quite understandably counsel for the respondent accentuated the appellant’s history in trading in real estate. This however does not in my view, when regarded in the context of the other evidence as it must be, preclude the purchase and sale being something other than a transaction the profit from which is taxable as business income.

The appeal is allowed and the matter is referred back to the respondent for reconsideration and reassessment on the basis that:

(a) the amount of $37,636.36 in 1977 and the amount of $12,056.39 in 1978 represented as shareholder's loans are not to be included in computing the appellant’s income for those years under subsection 15(2) of the Income Tax Act; and

(b) the profit made by the appellant on the sale of the property in 1979 is a capital gain and taxable as such.

The appellant is entitled to party and party costs.

Appeal allowed.