Agri Holdings Limited v. Minister of National Revenue, [1980] CTC 2908

John B Goetz:—This is an appeal by the appellant with respect to its 1973 taxation year. It has been agreed by counsel that all evidence adduced in this appeal will apply to the appeals of: Wilstan Construction Limited, Ruland Realty Limited, Manzon Realty Limited, King’s Cove Investments Limited, William Sorokolit Realty Limited, Frank Lon Properties Limited, Ren Lon Properties Limited, Lar Lon Properties Limited and Mamor Realty Limited and that the findings with respect to this appeal will be binding on all the appellants aforesaid. In assessing the appellants, the respondent relied, inter alia, upon sections 3, 4 and 248 of the Income Tax Act, SC 1970-71-72, c 63, as amended.

Issue

The issue to be determined in this appeal is whether the disposition of the appellant’s interest in a property known as “St Joseph” was on account of profit or revenue or whether it was on account of capital. The property in question (hereinafter referred to as “St Joseph property”) consisted of nine buildings located between St Joseph and Wellesley Streets, Yonge Street and Bay Street. In January of 1969, Stanley Collini, Joseph A Peters and Lawrence Longo purchased the St Joseph property from M Rawlinson Limited. They incorporated a company known as St Joseph Street Investments Limited to be the owner in trust of the land of the St Joseph property. The persons listed below, and in the proportions listed opposite their respective names, were the shareholders of St Joseph Street Investments Limited:

The companies involved in this appeal are:

Agri Holdings Limited (Emilio Gambin)

Ruland Realty Limited (Rudy Bratty)

Wilstan Construction Limited (Stan Collini)

Lar Lon Properties Limited (Lawrence Longo)

Ren Lon Properties Limited (Lawrence Longo)

Frank Lon Properties Limited (Lawrence Longo)

Mamor Realty Limited (Mel Morrasutti)

Manzon Realty Limited (Lou Manzon)

King’s Cove Investments Limited (Joseph Chiappetta)

William Sorokolit Realty Limited (William Sorokolit).

Emilio Gambin, Rudy Bratty and Joseph Chiappetta were all partners in the practice of law. The shareholders of the various companies were well acquainted with one another and had done business for many years. It is quite apparent from the evidence that the companies had a combined expertise in all facets of dealing with real estate; namely, acquisition of land, subdividing it and developing and reselling at a profit; construction of different buildings, different size buildings; and the acquisition of income producing real estate as long-term investments, particularly in apartment blocks.

On January 2, 1969, Chiappetta drew a syndicate agreement which was to be signed by Ren Lon Properties Limited, Frank Lon Properties Limited, Lar Lon Properties Limited, Wilstan Construction Limited, Peters Wiles Limited, William Sorokolit Realty Limited, King’s Cove Investments Limited and St Joseph Street Investments Limited. The only parties that signed were Peters Wiles Limited, William Sorokolit Realty Limited, King’s Cove Investments Limited and St Joseph Street Investments Limited. The reason given by Lawrence Longo and Stanley Collini, hereinbefore referred to, for not signing was that the syndicate agreement contained the proviso that Peters Wiles Limited would have exclusive listing of St Joseph Street property for a period of ten years.

Collini, Peters and Longo acquired the property from M Rawlinson Limited, for the sum of $947,342 with a $25,000 down payment, $125,000 in cash on the closing date and the assumption by the purchasers of existing mortgages and encumbrances on the title.

The officers of St Joseph Street Investments Limited were: President, Joseph A Peters; Vice-President, Lawrence Longo: Secretary, Stanley Collini; and Treasurer, Joseph A Chiappetta. As of March 25, 1970, the following were the shareholders in St Joseph Street Investments Limited:

According to the corporations’ documents, all the other companies involved in this appeal had one basic facet in common, namely, dealing in real estate. Title to the St Joseph Street property from M Rawlinson Limited, passed to Tenderry Acres Limited and conveyed to St Joseph Street Investments Limited, which company was incorporated on January 28, 1969, as trustee and nominee for the appellants.

The property in question consisted of old brick buildings and warehouses with rough floors, etc generally as one might say, in run down condition, requiring extensive renovations, alterations and repairs before a major portion of it could be leased out to tenants.

The avowed intention of all the appellants was that the property was acquired as a long-term investment, whereby if the properties were upgraded and repaired to fit in with current building and fire regulations that the profit obtained from lease revenues would make it a viable operation. Although the buildings were purportedly sound, they were described as being in “decrepit” condition.

Mr Chiappetta gave the most lengthy evidence and the other witnesses asked that his evidence apply to them. Apparently, according to Chiappetta, it was the intention of the syndicate to construct a 41-storey apartment hotel and a mall with various boutiques. A land use and feasibility report for St Joseph Street Investments was prepared by Mancunian Consultants. This report is undated. Mr William Sorokolit who appears to be a strong moving force in this whole enterprise stated that the Mancunian report was probably prepared prior to 1970. Attached to this report was what was known as the Yorkville Plan which indicated the use to which real estate in the area in question could be put, subject to various zoning restrictions. According to Mr Chiappetta, Peters Wiles Limited sold its 20% interest to a corporation known as Kanvest AG. The sale was made by Joseph A Peters in the latter part of 1971. Apparently, Joseph Peters had negotiated the sale of seven properties plus his 20% interest in St Joseph Street Investments Limited, and asked Mr Chiappetta to draft an offer which was taken to Switzerland where it was signed by Kanvest AG.

On September 26,1969, the committee of adjustment wrote Mr Chiappet- ta’s law firm. The zoning permits for the use of certain portions of the St. Joseph property as a private club would be granted only if such private club had the use of 30 motor vehicles parking spaces to be maintained in perpetuity to the use of the subject premises as a private club.

In June 1971 Peter Sorokolit, President of Villa Theatres & Enterprises, Limited sought permission from the Committee of Adjustment of the City of Toronto to convert a portion of the building on the east side of St. Nicholas Street to a cinema/theatre “having 34 parking spaces available”. On October 21, 1971, Villa Theatres & Enterprises Limited were advised by the committee of adjustment that their application had been refused. It was approved on May 31, 1972 with certain restrictions.

On January 1, 1972, a second syndicate agreement was drawn which was signed by Lawrence Longo, William Sorokolit, Joseph A Chiappetta and Stanley Col I in i. The space provided for Joseph A Peters to sign on behalf of Kanvest AG remained unsigned. The parties to this agreement were listed in Schedule “A” thereof being:

On June 24, 1971 an application was made to the Toronto Committee on Buildings and Development, filed by Mr Chiappetta, to permit, with respect to the St Joseph property, an increase in gross floor area from 7 times lot area to 12 times lot area and transfer density. This application was refused. St Joseph Street Investments Limited appealed the decision of the committee of adjustment of the City of Toronto to the Ontario Municipal Board. Since the appellant had failed to prosecute the appeal in accordance with the Board’s directions, the appeal was dismissed.

This does not seem to have been pursued and possibly related to the expressed intention of the appellants to construct an apartment-hotel on the St. Joseph property. A preliminary sketch of a 41-storey apartment-hotel was filed.

A fire occurred in March 1971 in one of the buildings but the building was not completely demolished but required approximately $100,000 to repair and refurbish. Tenants moved out until the repairs were completed. Building permits relating to other repairs and alterations were filed. Total renovations up to November 28, 1972, amounted to $198,994, $97,500 being included in that figure as proceeds from the fire insurance policy. A good number of tenants made their own alterations at their own expense, because of the short-term lease which they had. An explanation for the short-term one-year basic lease was suggested as attracting tenants at good rates.

Financial statements of earnings of St. Joseph Street Investments Limited indicated as follows: for the period from January 29,1969 to July 31, 1969, total rental income was $26,408; against this were expenses of $95,268 which basically involved mortgage interest, property taxes, depreciation, management fees, legal and audit, rental commissions, repairs and maintenance in the amount of $1,356, hydro and water, fuel, insurance, telephone, licences, miscellaneous, leaving a loss for the period of $68,758.

The statement of earnings for the year ended July 31, 1970, indicated total rental income of $86,866. Against this were expenses of $185,852, again reflecting carrying cost, taxes, depreciation, management fees, legal and audit and rental commissions. The total expended on repairs and maintenance was $3,947, leaving a net loss for that period of $98,986.

The statement of earnings for the year ended July 31, 1971, showed that the rentals increased to $93,472 balanced against expenses of $193,346, which included for repairs and maintenance $5,363, leaving a net loss for the year on this operation of $99,874.

The statement of earnings for the year ended July 31,1972, indicated that rentals had modestly climbed to $125,486, with expenses of $210,156, including repairs and maintenance of $11,689, leaving a loss for that year of $84,670.

St Joseph Street Investments Limited held regular weekly meetings relating to renovations, leasing, etc. Attending these meetings were Mr Longo, Mr Collini, Mr Sorokolit, Mr Peters and Mr Chiappetta. Mr Chiappetta says that Peters indicated that he would be representing Kanvest AG. All the other partners expressed unhappiness that Peters had sold out before the members of the syndicate had first chance to buy his 20% interest. He nevertheless continued to attend all meetings. One of his responsibilities was to obtain tenants for the property. A Mr Kleeb and Peters attended the meetings on behalf of Kanvest AG but Mr Chiappetta claimed that this allegedly slowed down the process of management and that they had to get instructions from Switzerland.

The first mortgage on the property of $550,000, according to the terms thereof, became due and payable at the end of June 1972. In light of the maturing of the first mortgage to Rawlinson (subsequently the name was changed to Warren Moving & Storage Ltd) members of the syndicate sought out new mortgages in April 1972, but because of the short leases and the high vacancy rate, several mortgage companies were not interested in loaning money to them. They arranged with the Toronto-Dominion Bank to obtain a first mortgage on condition that personal guarantees were provided. Kanvest refused to provide a guarantee but the Bank would still advance the money so long as Longo, Collini, Sorokolit and Chiappetta signed as guarantors. Mr Chiappetta said that these gentlemen met and ;‘we weren’t going to give him (Kanvest) a free ride”.

At this time the buildings on the St Joseph Street property were 40% vacant. They inquired of Peters whether Kanvest would sell, but were told that Kanvest liked the investment. An unsolicited offer was made to the syndicate on April 11, 1972, to purchase all of the land for $1,504,143. This was refused. On May 31,1972 Mr. Chiappetta wrote the Toronto-Dominion Bank indicating that the syndicate had agreed to sign the loan of $500,000. However, he felt that an amount of $600,000 was not unreasonable. To this letter the Toronto-Dominion Bank replied on June 29,1972, indicating that it held unlimited personal guarantees of all the principals including Mr. Peters and in view of the substantial increase, new guarantees would have to be taken. The letter further said:

With reference to Mr Peters’ guarantee, in view of the sale of his companies interest to Kanvest AG, we had written to you on April 26/72 requesting the written approval of the remaining guarantors, to the withdrawal of his guarantee. We now understand that you wish it to remain.

It is our understanding too that the guarantee of the Kanvest AG principal is not available so that insofar as guarantees are concerned the new credit will be based on that of Messrs Longo, Sorokolit, Collini and Chiappetta, with Mr Peter’s retained as above.

Chiappetta states that he wired Kanvest AG requesting guarantee but received no reply. On April 5, 1972 Rawlinson (now Warren Moving & Storage Ltd) wrote Mr Chiappetta’s law firm, saying in part:

We note that the present first mortgagee is prepared to extend the term of the first mortgage, which expires in June of 1972, but that you feel that a new mortgage can be placed at lower interest rates.

(Emphasis mine).

Apparently an offer to purchase the St Joseph property reached the syndicate prior to July 1972. On July 3, 1972 Kanvest AG wrote the St Joseph Street Investments Limited, c/o Mr Chiappetta’s law firm, stating:

Since the other beneficial owners of the above property are intent on forcing the sale of the above property, KANVEST AG does hereby authorize you to sell the above property for a price of $60 per square foot, all cash on closing, August 31, 1972.

On July 13, 1972, Chiappetta wrote Kanvest AG stating that they wanted a guarantee of the first mortgage on the St Joseph property, which mortgage would be $555,500. Apparently, Mr Peters, who was still active in the syndicate, indicated that Kanvest would not have their Dr Dober personally guarantee the new mortgage.

Throughout all the evidence of the appellant’s witnesses it was indicated that after Peters had sold to Kanvest AG there was dissatisfaction and a general view that Kanvest AG should not get a “free ride”. It was suggested that their intention to retain the St Joseph property as a long-term investment was thereby prejudiced and that their intentions were frustrated by the attitude of Kanvest AG.

On August 14,1972 the shareholders of the St Joseph Street Investments Limited received a legal opinion advising them whether they could sell the property without the inclusion of Kanvest AG’s consent. Part of the letter stated:

All parties except Kanvest and Peters wish to sell. Peters has indicated that he can probably secure Kanvest’s consent if a commission is paid to him on the sale. (Emphasis mine).

They were advised that it was unlikely that a Court would hold that it would be necessary to get the consent of all the beneficiaries of the trust agreement with St Joseph Street Investments Limited. It was also advised that Peters Wiles Limited had nothing to do with the procurement of the offer which was being considered and therefore could not ask for a commission.

The solicitor advising them on their ability to sell the properties suggested that they get an appraisal. Apparently, this was obtained on september 14, 1972 from Bosley Associates, Ontario Land Economists. This report, among other things, indicated that “during the last decade or so a considerable amount of new construction has taken place in the areas to the east and west of Yonge Street where many high rise apartment buildings have been erected.” Bosley also advised them of the interim supplementary report made in March 1968 by the City of Toronto Planning Board, called the plan for Yorkville, indicating a restriction of commercial use of the property.

On September 19,1972 what was described as an unsolicited offer to purchase, in trust, was made by Stephen Harry Aarons, to purchase all of the land for the sum of $2,382,286.50. This was accepted by St Joseph Street Investments Limited on September 19, 1972.

The respondent filed as Exhibit R-5 foolscap sheets dated February 15, 1972 with scribblings in writing by Mr Chiappetta. This paper indicated that as of January 31, 1972 there were tax and penalties in arrears in the amount of $41,146 with the notation: “Can we get a tax rebate for vacant buildings”. “Get cost of plans for hotel & apartment. Then decide to whether to . . Further, an exhibit was filed by the respondent, dated May 2, 1972, which clearly indicates some form of analysis of sale of the property for $1,941,000 with a $600,000 reserve, tax being payable on $400,000. In reexamination by Mr Bowman, Mr Chiappetta said these were scribblings and “musings” on his part. Mr Chiappetta’s musings of May 2, 1972 indicated that the purchase price would be rated at $35 per square foot. This is interesting in light of the minutes of the meeting of the Board of Directors of St Joseph Street Investments Limited which was attended by Sorokolit, Collin, Peters, Longo and Chiappetta, whereby Mr Longo queried how the appraiser of the Metropolitan Trust arrived at a figure of $35 per square foot. It was at this meeting that Mr Collini asked Mr Sorokolit if Stephen Aarons was still interested in purchasing properties from the company on behalf of his clients. Mr Sorokolit indicated that he could produce an offer to the company from Stephen Aarons in the amount of $2,383,825.50 representing $45 per square foot less a commission equal to 5% of the price. Collini then moved that the property be sold to Aarons. Mr Peters, although attending the meeting, (and apparently having attended all meetings throughout all of these events) abstained from voting. It is also interesting to note that as a director, Joseph A Peters, signed a waiver of notice of the Directors Meeting held on Monday, September 18, 1972 for Kanvest AG. Mr Aaron’s offer was dated and accepted September 19, 1972.

Findings

The appellant’s collective expertise in dealing in real estate was indeed impressive and sophisticated but this fact in itself is not conclusive that they were dealing in an adventure in the nature of trade.

Having said that, one must consider all the facts and the course of conduct of the appellants from the time of acquisition of the property in 1969 to the time of sale to Aarons in September 1972.

The claimed purpose in acquiring this land, which was in an expanding area of downtown Toronto, was for a long-term investment, the construction of mall shops, boutiques and a 41-storey apartment-hotel.

In face of this acclaimed purpose what did they do? They made minimal capital investment in an asset from which, under the circumstances, a minimum of income could be realized. See Sam Grossman v MNR, [1979] CTC 2132; 79 DTC 141.

The St Joseph property consisted mainly of all very old run-down warehouse buildings, but none the less were of sound structure. The appellants say they acquired this property as a long-term investment with the basic view of developing a unique shopping mall and a 41-storey apartment hotel which was to be its major investment. This would necessitate, as they well knew, a rezoning of a portion of the property from “seven (7) times lot area, to twelve (12) times lot area”. Application for this rezoning was made on June 24,1971—which application was refused and not followed through the full course of appeal and the appeal was abandoned.

They spoke of obtaining adjacent property for the purpose of joining ina joint venture but no serious steps were taken in this direction.

This syndicate agreement dated January 2,1969 (referred to in the statement of facts) was drawn for the purpose of setting out the rights and obligations, one to the other, of the parties to the St Joseph venture. This document was signed by Peters Wiles Limited, William Sorokolit Realty Limited, King’s Cove Investments Limited and St Joseph Street Investments Limited. Ren Lon Properties Limited, Lar Lon Properties Limited, Frank Lon Properties Limited and Wilstan Construction Limited refused to sign because the agreement contained a term that: “In consideration of Peters Wiles Limited negotiating the purchase of the property . . . and being instrumental in the formation of this joint venture ... agree to grant to Peters Wiles Limited the exclusive and irrevocable selling rights for the lands . . Clause 7(e) of the agreement reads as follows:

7. Save as herein expressly provided, no Owner shall:

(e) assign, transfer, pledge, hypothecate or otherwise deal in any manner whatsoever with its interest in the joint venture.

Clause 14(e) reads in part as follows:

14.(e) Notwithstanding anything heretofore or hereinafter written, in the event that either Peters Wiles Limited or William Sorokolit Realty Limited (hereinafter called the Offeror) shall receive a bona fide offer to sell its interest in the joint venture, which it is prepared to accept, it shall sent a copy of such offer to the other (hereinafter called the Offeree) by prepaid registered post to the last known address of the Offeree. The Offeree shall have a period of ten days from the date of mailing such copy of the Offer referred to above, to decide whether it wishes to purchase the share of the Offeror, on the same terms and at the same price as those contained in the offer to purchase.

Joseph Peters never considered this provision and as a matter of fact had Chiappetta draw up an offer to sell to Kanvest AG his 20% interest. In that these men were not only business associates but friends of long standing, the least Chiappetta could have done was to put his fellow members of the syndicate on warning of Peters Wiles’ intention. After all, most of the appellants (excepting Sorokolit) relied on Chiappetta, even to the point of acknowledging his evidence would bind them.

Frustration

The appellants claim that their whole venture was frustrated by Peters Wiles Limited selling its 20% interest to Kanvest AG in August 1971 and that they were extremely angry and disappointed in his clandestine sale. Yet, what is so Surprising to me is that in spite of Joseph Peters’ actions, he attended regular weekly meetings with other members of the syndicate; was given authority with Sorokolit to seek out tenants, and commit the syndicate to alterations and at the time of the eventual sale of the property to Aarons, had the temerity to blandly state that he could get Kanvest AG’s consent to the sale to Aarons is he got a commission on that part of the Sale.

Zoning

Earning Picture: The earning picture of the project was dismal. The injection of capital to upgrade the property was equally dismal and of comparative little consequence having due regard to the value of the land in fee simple (exclusive of buildings). The appellants were all quite financially responsible and their failure to invest more capital and at a much faster pace seems to belie their avowed intention to make the venture a viable long-term investment. To me there was minimal investment by the syndicate in renovations. The letter from Coopers & Lybrand, Chartered Accountants, to Mr J A Chiappetta, dated January 17, 1975 reads as follows:

Dear Mr Chiappetta:

At your request, we have examined the St Joseph Company working paper files for the period January 29, 1969 to November 28, 1972 for the amount that was expended on repairs, maintenance and renovations of the St Joseph Company properties during that period. We do not have complete detail as to the makeup of these expenses, but the appropriate breakdown would appear as follows:

	Repairs and
	Maintenance	Renovations
	$	$
January 29, 1969—July 31, 1969	1,356
Year ended July 31, 1970	3,947	45,326
Year ended July 31, 1971	5,363	47,798
Year ended July 31, 1972	11,689	91,478
August 31, 1972 to November 28, 1972	1,459	14,392
	23,814	198,994

The $198,994 of renovations does not include the fire insurance proceeds of $97,500 accrued for in the 1971 year-end. Therefore a portion of the renovations applies to replacement after the fire.

The document known as ‘‘A Land Use and Feasibility Report for the St. Joseph Company” and prepared by Mancunian Consultants, had attached to it the Yorkville Plan (1968) disclosing, among other things, that the commercial coverage on that part of the site east of St Nicholas Street had been reduced from 7x to 5x coverage, although vague reference in the Plan suggests that up to 7x could be achieved with bonuses. A rather enlightening passage in the report is on page 4 thereof:

Several of the land use proposals contemplated in the Plan for Yorkville have already become fact either in terms of physical construction, or announced plans by various development companies including the Manufacturers Life complex and the Cadillac office building project at Bay and Bloor Streets; the apartment hotel and office project at the northeast corner of Bloor and Yonge Streets; and the extension of the Provincial Government office complex east of Bay and south of Wellesley Streets, extending to Yonge Street. Thus, these projects and others in this general area, will have a pronounced effect on the potential use of the subject lands, which will be to their long term advantage, as the general area will experience an overdue influx of investment and overall improvement in character.

While the subject lands form the basis of an excellent land assembly scheme with considerable redevelopment potential, it would be necessary to consider acquiring additional properties, first to round out the initial purchase and secondly, to provide for possible independent use of parts of the site, should any redevelopment scheme not include the total assembled area in a comprehensive proposal.

So far as timing, unless the St Joseph’s Company has any immediate prospects for redevelopment, the land can only appreciate in value, and on the basis of the price paid for the lands, additional lands could be acquired as and when they became available, depending on decision as to the type and scale of the redevelopment contemplated after a detailed appraisal of market conditions and a decision as to the highest and best re-use of the property. While such acquisition could be expensive on an individual basis, when included in the overall assembly, the average per square foot cost should be considerably lower than any other potential comparable assembly in this general area of the city.

The appellants when considering sale of the St Joseph property were advised by their solicitor to obtain an independent appraisal. They obtained such appraisal from Bosley Associates, Ontario Land Economists, on September 14, 1972, The letter of appraisal reads as follows:

William Sorokolit Realty Limited

401 Bay Street (Suite 2603)

PO Box 68, The Simpson Tower

Toronto 103, Ontario.

Att Mr William Sorokolit, President

RE: No’s 610-618 Yonge Street

No’s 5-19 St Joseph Street

No’s 9-29 St Nicholas Street

and No’s 16-20 Phipps Street, Toronto

Dear Sirs:

In accordance with your instructions, we have inspected the above properties and made certain investigations and studies for the purpose of expressing to you our opinion as to their value.

Attached is our report giving a description of the properties and other pertinent data gathered during our investigations which have assisted us in arriving at our conclusion.

In our opinion, the market value of the fee simple interest in the properties, as of this date, is about $2,440,000.

We trust this information will be sufficient for your purposes but, if there is anything further we can do, please do not hesitate to let us know.

The following excerpts from material attached to the above letter are quite interesting:

NEIGHBOURHOOD

The subject ownership lies on the west side of Yonge Street, a short distance north of Wellesley Street, in the mid-town area of the City of Toronto. In the main, this area is built up with blocks of older two- and three-storey commercial structures fronting on Yonge Street and mainly residential accommodation along the side streets. Interspersed amongst the retail stores on Yonge Street are a number of office buildings and other non-retail buildings such as theatres. During the last decade or so, a considerable amount of new construction has taken place in the areas to the east and west of Yonge Street, where many highrise apartment buildings have been erected. The Yonge Street corridor itself, from about College Street in the south to about Bloor Street in the north, has undergone a transition during the past years and has now become an area of ‘mod’ and specialty shops. A considerable amount of retail space in the vicinity of the subject property is given over to this use and many of the buildings on the street have been facelifted and renovated.

The immediate neighbourhood comprises retail stores on Yonge Street with residential or commercial accommodation above. Opposite, on the north side of St Joseph Street from Yonge Street towards Bay Street, are rooming houses and some older apartment buildings. To the west, on the south side of St Joseph Street, lies a car dealership; and to the south, along the north side of Wellesley Street, are some stores, rooming houses, a Firestone Store, and the Sutton Place Hotel. The Queen’s Park complex lies a short distance to the south west; and the Wellesley Street Subway Station is within easy walking distance to the southeast.

VALUE OF THE IMPROVEMENTS—continued

According to the statement supplied to us, the gross income for the month of August 1972 from the ownership was $16,511.12 for the 101,902 sq ft of space rented. This amount equates to a yearly rent of $198,133.44. The projected gross income for the end of this year through rental increase as leases expire is $20,025.71 per month or $240,308.52 per annum. From the anticipated gross income of about $240,000 we have deducted an allowance for normal operating expenses and arrived at a net income before depreciation and debt service of about $150,000 per annum. The estimate of net rental revenue is equivalent to a 6.15% per annum return on our site value estimate of $2,440,000 and, in our opinion, represents an insufficient return on the land value and leaves no surplus of revenue attributable to the improvements on the land. We have concluded, therefore, that the presence of the buildings add little, if anything, to the value of the property as if vacant.

CONCLUSION

After a careful consideration of the characteristics of the property and the evidence of value available to us, it is our opinion that the market value of the fee simple interest in the 55,734 sq ft of land with the improvements thereon, as at this date, is about $2,440,000. (Emphasis mine).

Chiappetta admitted it was a “very favourable growing location” and that there was no down side risk.

The plans for a 41-storey apartment-hotel and a feasibility study therefore were considered long after the purchase. If indeed they really intended to construct such a building, even in a joint venture, they knew they were faced with zoning restrictions from the time of purchase. Their efforts to get a re-zoning order were perfuntory and almost a sham. They could not say they were frustrated in this area of their operations. See Regal Heights Ltd v MNR, [1960] CTC 384; 60 DTC 1270.

If their primary intention was a long-term investment encompassing the investment of capital in mall shops and a hotel, it was only frustrated through their own efforts or lack thereof.

The frustration they say hindered them by the intervention of Kanvest AG acquiring Peters Wiles Limited’s 20% interest in the venture also has a hollow ring. Joseph Peters (Peters Wiles Limited) was active from beginning to end and his presence at all business meetings in his capacity as rental agent—his audacity to suggest he could get Kanvest AG to agree to the Aarons purchase if he, Joseph Peters, received a commission on that portion of the sale is to me amazing. Joseph Peters, in my view, after selling his 20% interest to Kanvest AG acted for Kanvest AG and advised that group throughout.

The unsolicited offer to purchase by Aarons which was made through William Sorokolit Realty Limited is an interesting fact in itself.

Having regard to the whole sequence of events, the expertise and knowledge of the appellants as it relates thereto, and even if I accept the appellant’s claim that their primary intention in acquiring the property was for a long-term investment purpose, it seems to me that the long-term investment aspect of their joint venture falls far short of being just that, but rather lends weight to a secondary intention, which is manifest from all the facts of this case, namely, the acquisition and holding of a property, rapidly increasing in value, for the firm purpose of turning it to profit.

See also:

MNR v James A Taylor, [1956] CTC 189; 56 DTC 1125;

Paul Racine, Amédée Demers and François Nolin v MNR, [1965] CTC 150; 65 DTC 5098;

William Slater, Sam Ross, David Ross, Betty Slater, Ida Ross, Helen Ross and Gerald Ross v MNR, [1966] CTC 150; 65 DTC 5047;

Her Majesty the Queen v Douglas Lloyd Anderson and Jean Emily Beck- ingham, and, Joyce E McDonald and David C McDonald v Her Majesty the Queen, [1973] CTC 606; 73 DTC 5444;

Irwin A Blackstone v Her Majesty the Queen, [1974] CTC 842; 74 DTC 6020;

David C McDonald v Her Majesty the Queen, [1974] CTC 836, 838; 74 DTC 6644;

Carribean Properties Limited v Her Majesty the Queen, [1974] CTC 858; 74 DTC 6660;

James J Horvath v MNR, [1977] CTC 2429; 77 DTC 302.

Decision

For the above reasons, the appeal is dismissed.

Appeal dismissed.