Ivan W Thrasher v. Minister of National Revenue, [1979] CTC 2649, 79 DTC 602

M J Bonner:—This is an appeal from an assessment of income tax for the appellant’s 1973 taxation year. The first issue arises from the inclusion, in computing the appellant’s income for the year, of the sum of $589,247, being the gain realized upon the sale of a parcel of land upon which the appellant had attempted to erect a shopping centre. The appellant contended that the gain was a capital gain and not, as found by the respondent, income from a business.

The shopping centre parcel formed part of a block of land assembled by the appellant in 1965. An appeal from assessments of income tax made on the basis that the gains realized by the appellant in 1968 and 1969 on sales of other parcels forming part of that block was taken to the Federal Court. The appeal was heard and dismissed, [1975] CTC 66; 75 DTC 5029. The Reasons for Judgment of Collier, J, dated January 24, 1975, were introduced at the hearing of this appeal as Exhibit A-1. The parties agreed that those reasons provided an accurate summary of the “background facts” to be weighed together with the other evidence adduced in this appeal. That other evidence consisted of the appellant’s testimony and a book of documents which the parties agreed were sent or received in the ordinary course on their respective dates.

I respectfully adopt the summary of the basic facts contained in the Reasons for Judgment of Collier, J, commencing with the fourth paragraph of the reasons (see [1975] CTC at pp 67 to 70; 75 DTC at pp 5030 to 5032). It should be noted that the land sold by the appellant in 1973 was the parcel of “front lands” on which the appellant tried to develop a shopping centre. They are not the back lands which Collier, J, concluded were intended for development for residential purposes.

The appellant testified that he acquired the lands with a view to the erection thereon of a shopping centre, one of the major tenants in which was to be F W Woolworth Co Ltd (hereinafter called “Woolco”). The real estate business required continuous effort and produced spasmodic flows of income. The appellant’s ultimate objective was, he said, to secure for himself a steady stream of rental income from the planned shopping centre. The thought of resale at a profit did not, he said, cross his mind. He stated, “we were going to build a shopping centre, period”. This evidence of subjective intent was not successfully challenged on cross-examination.

In respect of similar evidence the Courts have stated on numerous occasions that such evidence is not conclusive. (See Hans Reicher v Her Majesty the Queen, [1975] CTC 659 at p 661; 76 DTC 6001 at p 6002, Paul Racine, Amédée Demers and François Nolin v MNR, [1965] CTC 150 at p 160; 65 DTC 5098 at p 5104, and Carribean Properties Limited v Her Majesty the Queen, [1974] CTC 858 at p 865; 74 DTC 6660 at p 6665.) It is necessary, as well, to examine the surrounding circumstances to determine whether, at the time of acquisition of the land, there existed an intention to resell as an operating motive for the acquisition.

The exact date of formation of the three agreements of purchase and sale was not established in evidence. Obviously, the agreements were signed before the dates of the deeds. Prior to the earliest of those dates the appellant had received a strong assurance from Woolco by letter of January 18, 1965, (Tab 5) that it would take a lease of 114,500 square feet. This assurance was further confirmed by a letter of February 22, 1965, stating that the proposal had been approved by the Executive Committee subject to, inter alia,

(a) execution of a lease in standard form, and

(b) commencement of construction not later than the spring of 1965.

Woolco was much more than a strong prospect as a major tenant. It actively encouraged and assisted the appellant in the work of development. It provided suggestions (and possibly directions) as to the tenant mix and provided leads to assist the appellant in securing another major or “anchor” tenant, a food store.

By May 20, 1965, the appellant had received from Dominion Stores Limited, a major food retailer, a letter confirming its intention to enter into a 20-year lease on terms outlined in the letter. Those terms included a “tax escalator clause’’ fixing Dominion with liability to bear the burden of increases in taxes on its space beyond the levels for the first year of the lease. The appellant made active attempts to secure offers to lease from prospective tenants of smaller stores in the proposed centre.

In May of 1965 arrangements were made with a contractor to build the centre. It would appear that the contract was settled and contingent only upon the appellant securing both interim and long-term financing satisfactory to the contractor. On June 29, 1965, a Building and Land Use Permit and an Entrance Permit were issued, each under The Highway Improvement Act. A Building Permit was issued as well by the Township of Sandwich East.

The project ultimately failed to proceed because the appellant could not obtain the necessary financing. The appellant needed mortgage commitments of two types, interim and take out. The appellant, though familiar with real estate business in the sense that he was familiar with commercial and industrial leasing, was apparently not experienced in the financing of projects of this kind. He made numerous contracts with the mortgage brokers but was unable to persuade Woolco to agree to a tax escalator clause, a provision of considerable importance to lenders. It was, I should think, of particular importance in this case because the appellant had virtually no money of his own invested in the project. The appellant confessed that he was “green” in failing to note the omission of the escalator when he first examined the draft Woolco lease. As the project was delayed through the summer and fall of 1965 interest rates escalated, necessitating the renegotiation of leasing rates.

Another financial problem contributing to the demise of the project was the refusal of Mr Hilliker to contribute his share of the first interest payment on the Trader Mortgage.

On October 27, 1965, the appellant wrote to Woolco reporting on interim and take out mortgage commitments then available and that a Building Permit had been secured. He agreed to commence construction within two weeks, provided Woolco would agree to changes in the lease (including increased rent). He offered, if Woolco was not prepared to agree to the changes in the lease, to sell the shopping centre parcel, complete with plans, permits and the fruits of all previous efforts. This offer was apparently engendered by a meeting the day before during which Woolco suggested that the appellant was “a crook”, and as well by financial worries occasioned by the loss of his partner and spiralling interest rates.

While subsequent events in the fall of 1965 and early 1966 are not fully detailed, the appellant did continue his efforts to proceed with the development until May of 1966 when Woolco advised that it had “cancelled the transaction”. By that time the annexation of the land by the City of Windsor had taken place and the City had refused to issue a new Building Permit to replace the lapsed permit previously issued by the Township.

The appellant admitted that the shopping centre parcel was located on a main street with lots of traffic. Clearly, he must have recognized that the land had potential, not only for the proposed shopping centre, but for other commercial development. He admitted too that he had no previous experience in shopping centre development. However, it should be noted that before the land was purchased Woolco had done considerable research and, as a result, it had approved the location and encouraged and assisted the appellant in the development work. The appellant retained real estate consultants who performed a market analysis and recommended the erection of a 228,000 square foot centre.

On all of the evidence I have concluded that the appellant purchased the shopping centre parcel with the exclusive intention of erecting a shopping centre. None of the surrounding circumstances leads me to infer that the possibility of resale of that parcel at a profit had any bearing on the decision to purchase, it is true that in one sense, on a semantic analysis, the appellant could not be said to have intended to proceed when he did not have all factors necessary to the successful completion of the project under absolute control. In particular, the appellant had no absolute assurance of financing. If absolute control were the test, however, decisions such as MNR v Aidershot Shopping Plaza Limited, [1965] CTC 31; 65 DTC 5018, would have opposite results. The respondent’s argument that it could not be said that the land was an investment or capital in the appellant’s hands because the appellant was, when he bought it, not absolutely certain he could successfully erect a shopping centre must therefore fail. The encouragement and support of Woolco before the time of purchase of the land and the efforts made subsequently to bring the project to fruition all support the appellant’s contention. The appellant initially located the land at the behest of Woolco, thinking that Woolco would buy and develop it. It was only after Woolco indicated a desire to locate in a project developed and owned by another that the appellant made the decision to buy.

The offer made in October of 1965 to sell the shopping centre parcel to Woolco does not, I think, indicate that the appellant intended from the outset to turn the land to account for profit. I accept the appellant’s explanation that the offer was engendered by the acrimonious meeting with Woolco and the growing fear that the project was, due to escalating borrowing costs and the default of his partner, slipping from his grasp. In short I am persuaded by the single minded determination shown by the appellant’s efforts to develop the project that his action in acquiring the shopping centre parcel must be viewed as having been taken with the exclusive intention of erecting the shopping centre. The purchase cannot, on the evidence, be regarded as a speculation in raw land.

The appellant’s counsel has indicated that he no longer contests the treatment on assessment of a claim to deduct a loss from farming. No issue was raised as to whether any part of the gain realized on the shopping centre parcel was a taxable capital gain. The appeal is therefore allowed and the assessment is referred back to the respondent for reconsideration and reassessment on the basis that the gain realized by the appellant on the sale of the shopping centre parcel is on capital account.

Appeal allowed.