Thomas B Scott, Morley H Malyon v. Minister of National Revenue, [1980] CTC 2935, 80 DTC 1824

M J Bonner:—These appeals were heard together on common evidence. Each appellant appeals from assessments of income tax for the 1974, 1975 and 1976 taxation years. For 1974 the Minister included in income the gain realized on the sale of land located in the Town of Oakville. The assessments for subsequent years, in so far as in dispute, result from the inclusion of amounts previously allowed as reserves in respect of the gain.

The appellants contended that their gains were not income, but rather were on Capital account. They further contended that the V-Day value of the land was 1.55 million dollars and that, as the result of various deductions available, they realized no taxable capital gain on the disposition.

Both appellants are, and in 1971 were, practising physicians. Dr Malyon is a specialist in internal medicine. Dr Scott is a dermatologist.

The land in question was acquired as the result of an agreement of purchase and sale formed on May 18, 1971, between J George Neufeld, as purchaser, and Gilbert Blechman and Stor-Aid of Canada Limited, as vendor. The agreement called for a cash down payment of $250,000, with the balance of the $574,450 purchase price to be secured by a mortgage back to the vendor bearing interest at 7.5% per annum and payable by semi-annual instalments of $5,500 principal plus accrued interest during a seven year term.

Mr Neufeld, or a company which he controlled, owned a professional building in Toronto in which each of the appellants had offices. The building was managed by Mr Neufeld. Both of the appellants knew Mr Neufeld only as their landlord. After he entered into the agreement to purchase the Oakville land, Mr Neufeld approached the appellants separately and asked them if they might be interested in joining with him in the purchase.

The proposal involved acquisition of the land by the two appellants and a company, Rinefield Investments Limited in which Mr Neufeld was in- terested, and the ultimate erection of rental buildings. The appellants were to put up virtually all of the cash down payment.

At the time both appellants were in their forties and were earning very substantial incomes from the practice of medicine. As self-employed persons they had to make provision for retirement. Both indicated that they looked to the Oakville project as a means of providing such income.

The property in question was approximately 65 acres in area, divided into two parcels. One was about 52 acres, located on the west side of the Sixth Line Road, just north of Upper Middle Road. The other was on the east side of the Sixth Line and was low, wet land. The larger parcel was gently rolling and entirely suitable for development from the standpoint of topography.

The appellants drove out to Oakville with Mr Neufeld to inspect the land. They observed fire hydrants, indicating the presence of water mains on Upper Middle Road. They also saw a townhouse development located on the south side of the Upper Middle Road, not far from the property in which they were interested. They were told that the land was zoned for agricultural use. They were aware, of course, that rezoning was a necessity before any development could take place and that the process would take some time. They were also aware that it would be necessary to invest further monies for roads and other services before anything could be built and the project would become revenue generating. However, as Dr Malyon explained, he was in no rush and it was apparent that, over the years, the appellants’ medical practices would generate further funds for investment in the project.

Neither appellant had either the time or the expertise to carry out the development process. They had no experience at all in dealing in or developing real estate. Development was Mr Neufeld’s task. Both appellants said they trusted Mr Neufeld and had a great deal of confidence in him, that is to say, in his ability to proceed with the development process. I might observe that it seems a little odd that they should have such confidence, based only on Mr Neufeld’s demonstrated ability in the management of a rental property. The management of a professional office building is quite a different operation from the development of raw land. In any event, that is what the appellants said.

The purchase was closed on November 1, 1971. Title was taken in the names of the two appellants and Rinefield Investments Limited. The funds invested by both appellants in the project were the proceeds from the sale of shares which they had held and a minor amount of bank borrowings. In February of 1972 a partnership agreement, Exhibit A-7, was signed.

The agreement recited:

. . . AND WHEREAS the parties hereto are desirous of entering into a partnership agreement concerning the management and sale of the lands and their relationships one with the other . ..

Paragraphs 4 and 9 of the agreement provided:

4. In the event that all or any part of the lands are at any time sold, the parties hereto agree that there shall be allocated to Rinefield’s capital account from the proceeds of such sale, a sum equivalent to $3,288.71 per acre for all or any part of the lands that are sold, and thereafter the parties hereto shall share the profit or pay the losses resulting from such sale in the following percentages:

To Scott	20%
To Malyon	40%
To Rinefield	40%

9. The parties hereto agree that their partnership shall terminate when all of the partnership property has been sold and any security taken on account of any such sale shall have been realized by the partnership.

Dr Malyon said that he envisaged development of the property with townhouses, low rise apartments and a small community shopping centre. During the period between purchase and development the property could, of course, only be farmed and that operation could not begin to meet carrying costs. Although, as mentioned already, it was expected that the two appellants would inject further funds for use in subsidising carrying costs and, as well, in payment of some development costs, it was plain that outside financing would be necessary before building could proceed. Mr Neufeld reported to Dr Malyon that he had contacted two banks regarding financing and that he was favourably received. Apparently the position taken by the banker was that the financing would be available once rezoning was obtained.

In the Spring of 1973 Mr Neufeld advised the appellants that allergies from which he had previously suffered had become worse and that he had hypoglycemia. He stated that he planned to move to British Columbia. This was the first indication to the appellants that Mr Neufeld had any serious health problem. The evidence of Dr Khan, Mr Neufeld’s physician, established that Mr Neufeld did, in fact, suffer from nervous tension and hypolglycemia and that from 1968 to 1972 he became progressively worse.

The appellants both testified that they discussed the changed circumstances and concluded that they had no choice but to sell out. Dr Malyon explained that had Mr Neufeld remained as a participant in the project he would not have sold, but that he did not want to become involved with somebody he did not know. In the result the property was sold pursuant to an agreement formed in November of 1973. Neither appellant was aware of any attempt to sell the property before this time.

Mr Neufeld did not give evidence. It was not suggested he was unable to attend and testify. In a case such as this, having regard to the fact that he was a central if not dominant figure, an unexplained failure to call him cannot help the appellants who, after all, have an onus to discharge.

There was no reference in the partnership agreement to any plan for development of the land by the erection of rental buildings. There was no suggestion in the evidence of any failure on the part of the lawyer who prepared the partnership agreement to so draw the agreement as to accurately reflect what was contemplated.

The partnership financial statements for the year ending February 28, 1973, showed the land as a fixed asset. Financial statements, of course, may or may not reflect reality.

This is a case in which the objective facts, as distinguished from statements of subjective intention, are few. Here the subject matter is raw land, being something which can as readily be used as the stock in trade of a business, as for investment purposes. It was purchased and resold within a relatively short period of time. During that period the efforts said to have been made to develop it were of a nature equally consistent with the carrying on of the business of a land dealer, as with the operations of persons who desire to develop an income producing property on raw land which is unsuitably zoned. The stated objectives of the appellants were not impossi- ble to achieve. Their achievement, however, was far from certain. The evidence given as to value made it quite apparent that at the time of purchase the land lay in the path of development, as shown on the Oakville official plan. That plan designated the land as intended for future urban residential development. Official plans tend to be general. Zoning by-laws implementing them tend to be specific. The plan did not indicate that development of the sort contemplated by the appellants would ultimately be permitted.

I believe that the appellants hoped to develop the property in the manner Stated. Mr Neufeld may have entertained the same hope. However, the partnership agreement makes it evident that all three must, from the outset, have planned resale of the property as an alternative course of action. As I see it, this is a case in which there was indecision between two alternative courses of action, development and resale. The gain realized on the sale is therefore income from a business within the meaning of the Income Tax Act. In light of this finding it is unnecessary to reach any conclusion on the V-Day value issue. The appeals are therefore dismissed.

Appeal dismissed.