Gerald Reinders v. Minister of National Revenue, [1980] CTC 2798, 80 DTC 1687

John B Goetz:—This is an appeal by the appellant with respect to his assessment for the 1974 taxation year. The only issue involved in this appeal is whether the profit realized by the appellant on the sale of certain real estate owned by him was on income or on capital account. The respondent relied, inter alia, on section 3, subsections 9(1) and 248(1) of the Income Tax Act, SC 1970-71-72, c 63, as amended.

Facts

The appellant has been an electrical contractor for 13 years, having incorporated his own electrical contracting firm in 1968. He also incorporated a company known as Reinders Corporate Development Canada in 1969 and he is a 90% shareholder. He said that in 1971 he incorporated Reinders’ Watts Development Limited, a company in which he sold pre-built homes. He states that his intention in the early part of 1974 was to acquire rental real estate as a good long-term investment, with the intention of constructing fourplex homes as being the ideal investment. On February 14,1974, he acquired property in the Municipality of Richmond, British Columbia, described as: Lot 47 of Fractional Section 23, Block 5 North, Range 6 West, Plan 8212 New Westminster District. On April 8, 1974, he filed an Application to Deposit Plan of Subdivision under the Land Registry Act with regard to the property and in April of 1974 the property was then subdivided into Lots 322, 323 and 324 of Fractional Section 23, Block 5 North, Range 6 West, Plan 45953 New Westminster District. Lot 324 had a house already erected on it, which house the appellant knew he could not use. He purchased the property by investing $15,000 of his own funds and borrowing the balance from the bank, secured by demand notes. The purchase price for the property acquired by him was $64,900. The loan was totally paid back on May 10, 1974, to the lender, the Royal Bank of Canada.

On February 21, 1974, he entered into an interim sale agreement for the sale of Lot 324 which was actually transferred to the vendors on April 1, 1974. He knew at the time of purchasing Lot 47, Fractional Section 23, that the land was zoned for duplex construction and not for fourplex. He did not attempt to have the property rezoned for fourplex home construction between the time that he purchased the property and the sale of Lot 324. He stated: “I never intended to keep 324 because it had a house on it”; and said that it was the only way he could buy the whole of the property that he subdivided. The purchase price paid by the purchaser for Lot 324 was $44,000.

On April 24,1974, he entered into an interim agreement for the sale of Lot 322 for the price of $38,000. The property was actually transferred on May 7, 1975. The purchaser of Lot 322 constructed a duplex home on the property. The appellant states that he was frustrated in his intention to construct fourplexes on two of the lots by virtue of pending legislation by the British Columbia Government setting up rental controls. He filed with the Board & set of headlines taken from the Richmond Review on dates between March 15, 1974, to December 12, 1975.

The appellant felt that there was a strong possibility that real estate would drop in value. It was not until September of 1974 that he applied to the Municipality of Richmond for permission to build a legal fourplex, which permission was denied. His frustrations consisted of the fact that he wanted to be involved in fourplex building and not duplex building. In filing his Summary of Disposition of Capital Property Schedule with his 1974 income tax return, he set forth a real estate net gain of $11,654.31 and wrote on that form, “Profit, not Cap Gain!’’. He stated that as he computed his own income tax return he felt that he made the profit so quickly after the purchase of the Richmond property that it was indeed profit and not a capital gain. He was subsequently advised by his accountants that he could argue this point, hence this appeal.

Findings

The Board must consider all the relevant facts as of the time of purchase, together with subsequent events and the avowed intention of the appellant that he acquired the property for the purpose of constructing fourplex buildings on the land acquired. The avowed intention must be consistent with the objective facts since the two interim agreements for sale of Lots 322 and 324 were executed in February and April of 1974, all prior to any indication that there was going to be any rental controls. The headlines filed by the appellant were all subsequent to the relevant events in this appeal. Further, if the frustration expressed by the appellant with respect to prospective rent controls bears any weight, it is the usual practice that new accommodation is not usually affected by rental restrictions. To say the least, the appellant had at least a secondary intention to sell the property. A dealer in real estate may have to buy land unwanted by him in conjunction with the acquisition of other land that he wishes to acquire title to, but it seems to me that the intention and the course of conduct of the appellant in selling Lots 322 and 324 within three months of the purchase of the original property belie his avowed intention to construct fourplexes thereon. He knew at the time of the purchase of the original property that the land was zoned for duplex construction only and in this regard he did not attempt to ascertain whether he could construct a fourplex on the remaining lots until September of 1974, long after the event of the original two sales of land. There is no evidence to indicate that at the time of sale of Lots 322 and 324, the appellant was frustrated in any way.

Such course of conduct clearly indicates the intention to sell the lots in question was with him from the time of the acquisition of the property in the first instance. Even if the appellant honestly felt that he could get the Municipality of Richmond to rezone the lots for the construction of fourplexes, he had a secondary intention, at the time of acquiring the property, of selling it at a profit, if indeed he could not obtain a rezoning order from the Municipality. His whole course of conduct during the time in question fails to support the stated intention of having acquired the properties as an investment of rental properties, but rather just the opposite. See the following cases:

Her Majesty the Queen v Schmigelski, [1976] CTC 397; 76 DTC 6226;

Danchak v MNR, [1978] CTC 3049; 78 DTC 1770;

N Cohen v Her Majesty the Queen, [1978] CTC 63; 78 DTC 6099;

Birmount Holdings v Her Majesty the Queen, [1978] CTC 358; 78 DTC 6254;

Friedman v MNR, [1977] CTC 2611; 78 DTC 1020;

McKinney et al v MNR, [1978] CTC 2675; 78 DTC 1490;

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

Decision

I therefore find that the sale of the subdivided lots was a sale of a trading asset and the purchase and sale were done in the course of Carrying on a business, being an adventure in the nature of trade, the lots being acquired and dealt with as part of a speculative venture entered into by the appellant. I therefore dismiss the appeal.

Appeal dismissed.