Centre Square Developments Limited v. Minister of National Revenue, [1980] CTC 2775, 80 DTC 1669

The Chairman:—This is the appeal of Centre Square Developments Limited, a company of Oshawa, Ontario, from an income tax assessment in respect of the 1973 and 1974 taxation years.

The Issue

Whether the profit realized by the appellant company in the amount of $956, 222, from the disposition of certain properties consisting of 196 acres known as part of lots two and three, concession four, situated five miles from the city of Oshawa, was a capital gain or income from the appellant’s business.

The appellant company was incorporated on May 12, 1965 by letters patent to buy, sell real estate, to develop and deal in lands generally, (Exhibit A-1). The company’s sole beneficial owner is Mr Lloyd Bolahood, an astute businessman, whose extensive background in real estate is undisputed. The appellant upon its incorporation, purchased, subdivided other lands, installed services, sold lots, owned rental properties in ensuing years and treated the profits as income.

In March of 1964, Mr Bolahood had purchased the subject property for $85,000 allegedly for the purpose of constructing a home for his wife and three children. The closing date of the transaction was December 31,1964, (Exhibit A-2). Mr Bolahood’s evidence was that the construction was delayed because Mrs Bolahood changed her mind and no longer wished to live two or three miles from the school her children attended.

In March of 1966, Mr Bolahood sold the subject property to the appellant for $110,000, the alleged purpose of the transaction was not to sell the property, but to ease his personal cash flow. The property was not put up for sale and Mr Bolahood testified that he had refused several offers of purchase.

In June of 1971, lot twenty-one of concession six in the township of Scugog was purchased by the appellant as trustee for Mr Bolahood, the transaction closed on January 31, 1972 and Mr Bolahood’s residence was subsequently built thereon.

In 1973, the appellant’s company sold the subject property by accepting an unsolicited offer of $1,125,936, realizing a gross profit of $956,222 which was treated by the appellant as a capital gain.

In reassessing the appellant, the Minister of National Revenue added to the appellant’s income the amount of $956,222, which he treated as income from a business (other than an active business), within the meaning of section 39 and subsection 248(1) of the Income Tax Act, SC 1970-71-72, c 63, as amended. The appellant having taken back a mortgage, a portion of which was outstanding in 1973, a reserve of $806,527 pursuant to paragraph 20(1)(n) of the Income Tax Act, SC 1970-71-72, c 63, as amended was allowed.

Facts

Mr Bolahood’s evidence is that he had been looking at farms such as the subject property for some years with the intention of constructing a comfortable home and operating the farm. He visited the property with an architect as to the setting for the house. In 1965, he listed and sold his then residence situated at 250 Woodlea Crescent, the closing date of which was July, 1965. (Exhibit A-3).

Although there was a residence on the farm, Mr Bolahood did not move there because of Mrs Bolahood’s concern for her children’s transportation to the school they attended in Oshawa. The farm was therefore rented. In June of 1965, Mr Bolahood purchased a residence at 612 Dundee Street, Oshawa, Ontario, where he resided until his wife no longer objected to moving from town. Mrs Bolahood confirmed Mr Bolahood’s testimony and Stated that she and her husband were interested in the subject property, and the sale of the farm was never discussed before or after the transfer of the property to the appellant because they wanted to live there.

The price of $110,000 received by Mr Bolahood in transferring the property on concession four in Oshawa to the appellant, was slightly lower than the market value appraisal, (Exhibits A-5, A-6 and A-7), and it is alleged that the property was eventually to be returned to Mr Bolahood at the same price.

It is Mr Bolahood’s contention that when he purchased the 159 acres it was still a rural area where the majority of the surrounding properties were farmers. After transfer of the property, it was carried on the appellant’s books and appears in the financial statements as a special asset in 1966 and 1967 item and allegedly did not form part of the corporation’s sale inventory, (Exhibits A-8 and A-9). Mr Bolahood testified that the property was never listed for sale and that he had refused verbal offers of purchase from two real estate brokers.

In the appellant’s 1968 financial statement, the farm property was included in its land inventory, although Mr Bolahood claims there was no change in his intention of not selling the property. The rental income from the farm property was admitted by Mr Bolahood as having been considerably less than the expenses, and the carrying costs of the farm in the amount of some $20,000 were deducted from the appellant’s other income. The appellant nevertheless submits that the property was not purchased for resale and the profit derived from its sale under unexpected circumstances, was a Capital gain.

The respondent’s position is that we are dealing here with the appellant’s intention in acquiring the land as distinct from that of Mr Bolahood, even though he may have been the sole beneficial shareholder of the company. The respondent contends that the appellant acquired the land for the pur- pose of earning income, either by acquiring valuable farmland which could conceivably be developed at some later date; by reselling the land at a profit which Mr Bolahood had purchased for $85,000 and sold to the appellant at $110,000 some fifteen months later, which was $5,000 to $7,000 lower than the appraisal fair market value of the property; or to earn income by deducting from its other income the carrying costs of the property. The respondent concludes that the $956,222 realized from the disposition of the subject property, is income from the appellant’s business.

Finding of Facts

Although Mr Bolahood was the sole beneficial owner of the appellant, a distinction must nevertheless be made between Mr Bolahood’s intention in acquiring the land and the motive and purpose of the appellant’s acquisition of the land some months later. If indeed it was Mr Bolahood’s sole intention of acquiring 15 acres of land to build a residence and operate the farm which in my opinion is far from being established, it was not the appellant’s purpose in acquiring the property.

Mr Bolahood was admitted to have been unusually well versed in real estate and evidently was a very astute businessman. I can accept that Mr Bolahood’s intention may have been to purchase the farm for residential purposes, but his knowledge of the value of a large block of land five miles from the centre of Oshawa must have given rise to the thought at the time of acquisition, that if he does not build on the farm there will eventually be a demand for the land. Indeed it is Mr Bolahood’s evidence that several offers to purchase were subsequently made, which he refused. Fifteen months later Mr Bolahood sold the property to the appellant and realized a profit of $25,000. The appraisal market value of the land would have permitted him to realized an even greater profit.

I am not particularly impressed with the reasons given by Mr and Mrs Bolahood for not moving to the farm after its purchase, because the problem of transporting the children to school evidently existed prior to the purchase. Nor am I convinced that the only reason the farm was transferred to the appellant, was because Mr Bolahood needed to ease his cash flow. Be that as it may, Mr Bolahood as owner and manager of the appellant’s corporation, acquired the land for reasons quite different from that of building a residence and in my opinion, it is that intention which is pertinent to the determination of this appeal. Although the appellant may have listed the farmland as an item separate from its inventory in 1966 and 1967, (Exhibits A-8 and A-9), and Mr Bolahood stated that the land was not for sale, there was as counsel for the respondent pointed out no written notification on the books of the company that the farmland was not for sale, but was a distinct capital asset to be returned to Mr Bolahood at some future time at the purchase price. In 1967 and 1968, according to the appellant’s financial statement (Exhibit A-10), the farmland was included in the appellant’s inventory.

More importantly the subject property at all times between 1966 and 1972, which alleged to have been a capital asset, was in fact treated as inventory and the carrying costs were deducted from the appellant’s income for each year and not capitalized.

Mr Bolahood’s expertise in real estate and the fact that the appellant’s business was exclusively in real estate, cannot be ignored. The appellant’s objects of incorporation was land development and sale, and there was no indication for third parties either by written notification or in its accounting treatment, that the farm was to be treated in any way different from the rest of the appellant’s inventory.

Conclusion

Whatever Mr Bolahod’s purpose may have been in acquiring the subject property, the appellant’s subsequent acquisition of it was to earn income by deducting the carrying charges of the land; reselling it to Mr Bolahood or failing that to sell at a profit very valuable farmland close to Oshawa, which had a potential for development and for which offers to purchase by real estate brokers had been refused.

How Mr Bolahood came to learn of the availability of the Scugog property and the fact that he changed his mind about building a residence on the subject property, is not material to the appellant’s appeal. The intention of Mr Bolahood at the time he acquired the land has, in my view, no real bearing on the reasons or the purpose for which the appellant, a land development and sale company, came into possession of it.

I hold therefore that the profit realized from the sale of part of lots two and three, concession four, in the then township of Oshawa, was income from the appellant’s business.

The appeal must therefore be dismissed.

Appeal dismissed.