Klausen Holdings Limited v. Minister of National Revenue, [1980] CTC 2505, 80 DTC 1450

D E Taylor:—This is an appeal heard in the City of Toronto, Ontario, on April 16, 1980 against an income tax assessment for the year 1975 in which the Minister of National Revenue taxed a gain of $33,941.25 from a sale of land as on income rather than on capital account. In assessing, the respondent relied, inter alia, upon sections 3, 4, 9 and 248 of the Income Tax Act, SC 1970-71-72, c 63 as amended.

History

Klausen Holdings Limited (the “Company”) was originally incorporated in January 1973 under the name of Klausen-Madden Holdings Limited, with two equal shareholders, a Mr Madden and a Mr Henning Klausen. The land in question, part of Lot 1 Concession 1 Parcel B of the then Township of Albion in the Province of Ontario, was acquired by the appellant under an agreement dated May 21, 1973, at a cost of $64,500. It was sold for an amount of $105,000 by virtue of an agreement dated December 12, 1973, with the sale to be completed by February 28, 1974.

Contentions

For the appellant:

—The property was purchased solely for the purpose of establishing a Chrysler dealership on it and the company had no use for it after its failure to obtain such a dealership.

— There was no intention of purchasing or retaining the said property for any other purpose than a Chrysler dealership.

For the respondent:

—At the time of the acquisition of the lands the respondent submits that the lands were purchased speculatively, with the intention of trading and turning the same to account at a profit whenever a favourable opportunity to do so would present itself.

—The gain was income from an adventure in the nature of trade, or a business, within the meaning of sections 3, 4, 9 and 248 of the Income Tax Act.

Evidence

Mr Henning Klausen, President of the appellant company, gave evidence that Madden had approached him in 1972 with regard to establishment of an automobile dealership. Both Klausen and Madden had a lengthy history of association with each other as salesmen in the automobile industry, and were both employed at that time in such endeavours. Klausen’s responsibilities were of a more senior nature than those of Madden, and Madden was still employed by a Chrysler dealer in the eastern area of Metropolitan Toronto, while Klausen had changed from Chrysler to General Motors but not until March of 1972. According to Klausen, basic contact was made with Chrysler and quiet efforts proceeded during the early months of 1973 to locate a suitable site—not only from a physical viewpoint, but also such that it would not encroach on the territory of other Chrysler dealers. During this time Klausen lived in the western area of Metro Toronto, and one criterion was that the location be near his home. Madden was to relocate to that area once the project was under way. A contact was made with the Township Council on March 5, 1973 (Exhibit A-2) regarding rezoning of the subject property from agricultural to commercial, and the reaction was generally favourable. The purchase then took place.

Limited evidence and documentation (Exhibits A-3, A-4, A-5 and A-6) were introduced by Klausen to show that efforts had proceeded toward arranging financing, securing the dealership and determining construction plans. The estimated costs increased beyond those which could be borne by Madden as a 50% participant, and he requested that Klausen buy him out. Klausen did so in July of 1973, paying Madden $19,000 for his original investment of $20,000 in the company. Klausen had no further plans for the property and did not wish to continue the dealership program on his own or with any other partner. Between March 1973 and July 1973, Madden had in fact sold his home on the eastern edge of Toronto, and moved to the general western area near where the subject property was located. After July, he moved back again to his original residential area. Klausen listedthe property for sale, and accepted the first offer which came along for it, the gain at issue arising. He had never before or since purchased and sold real property with profits as the result, and to his personal knowledge, neither had Madden. At the outset of the project he had been confident that Mad den would be able to provide his 50% share of necessary capital, and he could not foresee any difficulty from that viewpoint. The idea seemed good—a dealership in the area was needed—Madden was a young energetic man with practical experience and he himself (Klausen) had broad management experience in the industry in addition to the business of already selling cars. As of now (1980), there are several operating automobile dealerships around the general area of the subject property.

Argument

Counsel for the appellant pointed out that the only physical evidence available to the Board (the exhibits filed) supported the testimony of Klausen that the only possible purpose for the purchase was to establish an automobile dealership. Madden’s move from one side of Toronto to the opposite side to further the project, and then his move back again once he decided not to continue it, should be accepted as support for the assertion of the appellant. Reference was made to S & S Properties Ltd v MNR, [1977] CTC 2267; 77 DTC 190, and Ronald Francis Theres Maclsaac v MNR, [1974] CTC 576; 74 DTC 6380.

The position of counsel for the respondent was that while the appellant might have entertained the hope of establishing a dealership, nothing concrete had developed, nor had specific action been taken such as soil tests, rezoning, financing, etc, which could have translated this hope into an intention or a reasonable expectation. The gain had been made on vacant land and as such, the onus upon the appellant to refute the assumptions of the Minister was substantial. Further, there could be no claim of “frustration” because nothing had proceeded far enough that anything could be frustrated. The appellant could not have had an exclusive investment intention because the subsequent action did not support this view.

Findings

I would make reference to the following decisions which portray the difficulties which must be overcome by an appellant to sustain a position that a gain is on capital rather than on income account:

Elmer D Bassani v MNR, [1979] CTC 2311; 77 DTC 208;

Sam Grossman v MNR, [1979] CTC 2132; 79 DTC 141;

Regin Properties Limited v MNR, [1979] CTC 2149; 79 DTC 156.

Reference is also made to certain decisions in which it has been made clear that the conditions referred to above are not insurmountable when the facts of the matter are portrayed in perspective:

Harold Brown v MNR, [1980] CTC 2259; 80 DTC 1235;

Mary Wladyka and William Wladyka v MNR, [1980] CTC 2408; 80 DTC 1374.

In the instant case, the Minister has asserted that the appellant had no investment intention and, by deduction therefore, must have had a trading intention. The facts, however, all support the conclusion that, at a minimum, the prospect of establishing an automobile dealership existed in the minds of Klausen and Madden, and there is no evidence that any prospect other than use in a business way was ever considered by the two shareholders. As I would read the information available to the Board, Madden was the initiating force and his withdrawal, for whatever reason, left Klausen with neither interest nor prospects of continuing the project. It was simply a venture too great for him to entertain without the direct participation of some partner with whom he was completely compatible and familiar. This is a specific situation in which the oral testimony provided by Klausen is corroborated by the physical evidence made available to the Board, and the Minister has provided no evidence to support his own assertions. The conditions whereby the Board may accept such oral testimony are fully met in this case and are consistent with the following cases:

P Litvinchuk v MNR, [1979] CTC 3141; 79 DTC 899;

John J Neder v MNR, [1980] CTC 2031; 80 DTC 1040;

J Vincent Toolsie v MNR, [1980] CTC 2239; 80 DTC 1209.

There is not the slightest indication of anything but a business reason that could have included the participants Klausen and Madden into the venture. The Minister’s effort to discern evidence of a secondary intention was not effective in my opinion.

Decision

The appeal is allowed and the matter referred back to the respondent for reconsideration and reassessment accordingly.

Appeal allowed.