Kurt Schmid v. Minister of National Revenue, [1979] CTC 2450, 79 DTC 380

The President:—This is the appeal of Kurt Schmid from reassessments dated August 12, 1977, in respect of the 1972 and 1973 taxation years. The issue for the 1972 taxation year was the appellant’s claim of a foreign tax credit in the amount of $815 pursuant to section 126 of the Income Tax Act, SC 1970-71-72, c 63, as amended. The appellant’s total foreign tax credit of $811.86 having already been allowed, the appellant no longer disputes the Minister’s assessment for the 1972 taxation year.

The remaining issue to be decided is whether the amount of $51,500 received by the appellant during the 1973 taxation year is income or on capital account.

Summary of Facts

The appellant, a chemical engineer, arrived in Canada in 1954 from Vienna. From 1955 to 1963 the appellant worked in a chemical plant in the production of plastic materials. In 1963 the appellant started his own small plastic business in his basement and specialized in injection moulding. Two years later his business had grown and the appellant bought industrial land in Richmond Hill. A plant was built by Horst Liebeck for the appellant in which he installed heavier plastic injection moulding machinery and produced aerosol closures and valves, which was known as Premier Plastice Inc. In 1968, the Premier Plastic Inc plant was sold with the business.

The appellant had also built, through Mr Liebeck, another plant on the Richmond Hill property which was leased to The Valve Company of America (VCA). Additions were also built on this plant.

In 1968 the appellant, with a Mr Bohlamann, started a company under the name of “Trillium” for the fabrication of light-weight pleasure trailers. For that purpose, the appellant purchased three and one half acres of land in Markham, Ontario and had a thirty-five thousand square foot plant built by Mr Liebeck. The inventory of trailers on hand ran as high as two hundred to five hundred trailers. In 1971, the appellant’s wife and Mrs Bohlamann purchased an eight acre lot adjacent to the plant for storage of the trailers and for a possible retail outlet for the sale of trailers.

In 1969 the appellant had purchased a farm on Woodbine Avenue for further storage space and as a possible travel trailer park, neither of which was ever realized. The farm is presently used by the appellant for his personal pleasure.

The availability of the subject property, a one hundred and fifty acre farm in the Town of Markham, (hereinafter referred to as the “Boyington farm”) was first discovered in 1972 by the appellant who was seeking further land for the alleged purpose of storing trailers and also as a possible trailer park site. The farm was not far from the appellant’s plant and within six hundred feet of sewage services. Mr Liebeck, with whom the appellant had had business relations, was also interested in the subject property. The appellant had had contact with German manufacturers both in Canada and in Germany and saw the possibility of developing an industrial park on the property. It is alleged that the German manufactures were desirous of diversifying their production and were studying the labour market and the rates and the possibility of establishing themselves in Canada. The appellant was hopeful that some manufacturing of plastic products might be realized in a joint venture with the German manufacturers. Very little evidence was adduced as to any concrete steps taken by the Europeans to manufacture in Canada. However, Mr Hans-Hermann Huning, a lawyer practising in Germany whom the appellant had met there, was also interested in acquiring the Boyington farm.

Mosquito Investments Limited was incorporated to purchase the property on behalf of the appellant, Mr Horst Liebeck and Mr Hans-Hermann Huning on a one-third/one-third/one-third interest. (Tab 2, Documentary Evidence, Exhibit A-2) An agreement of purchase and sale was signed on June 18, 1973. The purchase price was $787,500. A $10,000 deposit was required on the date of signing the agreement and the sum of $277,500 payable on closing, the vendor taking back a first mortgage for the balance (Tab 1, Exhibit A-3). The appellant paid his one-third share of the deposit (Tab 3, Exhibit A-1).

At about this time the appellant took an extended trip to Mexico in a travel trailer in order to study the operations of the various trailer parks—the sites, the services, the costs, etc.

By registered letter dated April 6, 1973, Mr Kassirer of the firm Spencer, Romberg, Kassirer, Barkin & Esbin, acting on behalf of Mr Liebeck, advised the appelant that his share of the balance was $97,475 and unless the amount was received by April 10, 1973, the appellant would be considered as being no longer interested in the project and Mr Liebeck and Mr Huning would complete the transaction without the appellant (Tab 4).

This was the beginning of a series of letters exchanged between Mr Gross of the firm Minden, Gross, Grafstein & Greenstein, who also acted as the appellant’s counsel at the hearing, and the Spencer firm. It appears from the correspondence that the appellant was considered by Messrs Liebeck and Huning as reluctant in paying his share of the purchase price and they were indeed anxious to exclude the appellant from the transaction. It is clear however that the appellant was anxious to continue to participate in the transaction and was prepared to pay his one-third share of the purchase price. The appellant was in fact not allowed to participate in the purchase of the subject property and, pursuant to negotiations, he was paid by Mr Liebeck and Mr Huning an amount of $78,322 in consideration for which the appellant signed a general release for any rights he may have had against Messrs Liebeck and Huning and Mosquito Investments in respect of the Boyington farm property (Tab 13, Exhibit A-5 and Tab 11, Exhibition A-4).

There is no dispute as to quantum, the amount in issue being $51,500— the amount received by the appellant less the expenses incurred.

Findings of Facts

On the basis of the evidence I am satisfied that the appellant had no history of trading in land. Of the properties held by the appellant the only land sold was that on Richmond Hill which was sold with the Premier Plastics Inc business. Nor is there any firm evidence that Mr Liebeck was other than a builder and Mr Huning, a lawyer who practised in Germany. There is no evidence to support the respondent’s allegations that Mosquito Investments Limited was engaged in buying, selling and developing real estate. The evidence is that Mosquito Investments Limited was incorporated for the specific purpose of purchasing the Boyington farm and it is my understanding that the property is still held by Messrs Liebeck and Huning and that Mosquito Investments Limited has not acquired any other property.

The appellant’s declared intention in acquiring the property was to use it as further storage for his trailers, and a possible travel trailer park, as well as an industrial park in which German manufacturers in Germany would establish plants, possibly in a joint venture with the appellant. This declared intention is to some degree supported by his extended trip through the United States to Mexico studying trailer parks. The fact that he did not proceed with a travel trailer park because of gasoline shortages and a slump in the trailer park business after 1973 is credible enough. It is alleged that Mr Huning, a German lawyer living in Germany, had contacts with German manufacturers whom the appellant met on his visit to Germany allegedly with the view of participating with them in a joint venture in Canada. Though not corroborated by any evidence other than verbal and under oath, the allegations are nevertheless plausible.

It is the respondent’s contention that the appellant acquired the property with a primary, or at least a secondary, intention of turning it to account at the first opportunity. Although the onus of proving the Minister’s assessment wrong is on the appellant, there is no evidence whatever of a primary or secondary intention of acquiring the property for resale and the facts before and after the purchase do not tend to that conclusion. The appellant, from all the evidence, had no choice but to sell his interest in the property because he was no longer desired as co-owner of the property. Although the evidence is that he was probably capable of paying his share of the purchase price, the purchase of the Boyington farm was made by Messrs Liebeck and Huning. The fact that the appellant may have had other land on which to store trailers and organize a trailer park does not justify the conclusion that he had intended to participate in the acquisition of the Boyington farm property with a view of selling it at a profit. Although the evidence supporting the possible development of an industrial park is far from conclusive, the facts are that the appellant had not sold any land (except in conjunction with the sale of a business) and more importantly, the Boyington farm was not subsequently sold. In the circumstances, I cannot see on what grounds I could conclude that the appellant’s primary or secondary intention was to acquire the land for resale. In fact, in my opinion and on the basis of the evidence, the appellant has successfully met the exclusive intention test in that at the time of the purchase the appellant’s sole intention was to invest in the Boyington farm property as he had done with his other properties.

The respondent further contends that the appellant had only a minority position in the transaction and that Mr Liebeck’s intention was the dominant intention since he directed the whole transaction and that the appellant as an inactive partner, is deemed to share Mr Liebeck’s intention. This position is valid only if it has been proven that Mr Liebeck’s intention in purchasing the property was for purposes of resale. There is no evidence that Mr Liebeck and/or Mr Huning had that intention and in my view the controlling fact is that the land was not sold.

In determining what the payment of $78,332 ($51,500) was for, it appears clear to me on the basis of the evidence that the amount was not the appellant’s share of the profit realized on the sale of the property, but was in fact a payment for the interest and rights he had in the property which he acquired as an investment, and which owing to a disagreement was paid to him by his co-partner to exclude him from the final closing of the purchase agreement in respect of the Boyington farm property.

For these reasons, I conclude therefore that the amount of $51,500 received by the appellant in the 1973 taxation year for his interest in the purchase of the subject property was not ordinary income, but was on account of capital.

Decision

The appeal is allowed in part and the matter referred back to the Minister of National Revenue for reassessment on the basis that the amount of $51,500 received by the appellant in the 1973 taxation year is in the nature of capital. The appellant’s claim of a foreign tax credit in the amount of $815 in respect of the 1972 taxation year is dismissed.

Appeal allowed.