John W Gall v. Minister of National Revenue, [1979] CTC 2778, 79 DTC 658

Guy Tremblay:—This case was heard at Toronto, Ontario, on June 25, 1979.

1. Point at Issue

The problem is whether the appellant is correct in considering the profit of $34,580.93 made in 1974 on a real property, as capital gain. The respondent’s contention is that the profit is income. The appellant was associated with two other persons who were in the real estate business.

2. Burden of Proof

The burden is on the appellant to show that the respondent’s assessment is incorrect. This burden of proof results especially from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in fl W S Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

3. The Facts

3.01 Since 1965, the appellant has been a merchant carrying on a smoke shop business at the Milton Plaza in Milton, Ontario.

3.02 Since 1965, the relationship between the appellant and landlord has not been very good. As rent he had to pay 6% of gross sales. He had no protection in the Plaza. At every renewal there were long discussions. In the first five years he had to pay in rent close to $100,000. In 1969, his intent was to buy a piece of land and build his own store on it.

3.03 In the summer of 1970, the appellant’s brother, Wesley Gall (a lawyer practicing in Burlington, Ontario) informed him that he had the opportunity to buy a five-acre piece of land located on Woodview Road in Burlington. It was a nice place to build a plaza.

A third person would be associated with them, Mr Edward Kotulak, who in fact was the son-in-law of the landlord of the piece of land, Mrs Helena Olexa.

3.04 The appellant agreed to become an associate and on August 28, 1970, the three gentlemen bought the said piece of land for $80,000, half of this being paid at that date. The appellant said he paid his part with the money he had in the bank. He had worked 14 hours a day for many years and had some cash in the bank. The contract was filed as exhibit R-1.

3.05 The “Woodview Road Property” was located 15 miles from Milton Plaza where the appellant had his store. The appellant admitted he never made figures to compute his return on his future investment.

3.06 On that exhibit R-1 the vendor was Helena Olexa. The name of the purchaser appearing was Master Finance Corporation of Canada Limited controlled by Wesley Gall. The business of the corporation was real estate development.

3.07 The legal but non-official contract filed as exhibit R-1 was followed by an official contract (in pursuance of the Conveyances Act) passed on April 15, 1971, filed as exhibit R-2. The vendor was Edward Kotulak in trust (representative for his mother-in-law, Helena Olexa) and the purchaser, the following three persons: Myway Investments Limited (corporation controlled by Wesley Gall), the appellant and Edward Kotulak.

3.08 At the time of the purchase the land was designated “TCH” which meant the land was designated commercial (C), subject to certain requirements of the municipality being satisfied before they would remove the “T” designation (transitional). The co-owners made application to remove the “T” and the municipality removed the “T”.

3.09 The appellant said that in June 1971 the municipality expropriated 1.85 acres of the purchased property. No document was filed by the appellant concerning that expropriation. It seems that the final step of that expropriation was in May 1973 when the co-owners received the sum of $23,700 as indemnity.

3.10 In the fall of 1973 the co-owners received an unsolicited tender for the 3.15 acres in the amount of $457,800. The two co-owners informed the appellant that they were no more interested to build a plaza but that they were ready to accept the tender. The appellant said he had no choice but to accept the tender.

3.11 In cross-examination, the appellant explained that they never prepared the plan to build a plaza.

According to him the delay to obtain the removal of the “T” and the delay to obtain the settlement of the expropriation were important reasons to cancel their project to build the plaza.

3.12 Another reason given by the appellant to cancel the project was inflation. Their purpose was to invest half a million dollars. With the inflation it would have cost more than that.

In 1975 a plaza was built by the new owner. It cost approximately one million dollars. No evidence was given relating to the demand of financing by the appellant and his associates.

3.13 According to the appellant, the “Woodview Road Property” is the only real estate he has bought and resold in his life.

4. Law—Precedent Cases—Comments

4.1 Law

The appropriate sections of the new Income Tax Act will be quoted later if necessary.

4.2 Precedent Cases

The precedent cases cited by the parties are:

1. T Barnett v MNR, [1957] CTC 355; 57 DTC 369;

2. Essex House Ltd v MNR, [1961] CTC 270; 61 DTC 1135;

3. MNR v Nathan Strauss, [1960] CTC 86; 60 DTC 1060;

4. Regal Heights Limited v MNR, [1960] CTC 384; 60 DTC 1270;

5. Paul Racine et al v MNR, [1965] CTC 150; 65 DTC 5098;

6. MNR v Aidershot Shopping Plaza, [1965] CTC 31; 65 DTC 5018;

7. Bernard Lehrer v MNR, [1972] CTC 255; 72 DTC 6224;

8. Ettie Wiss v MNR, [1972] CTC 264; 72 DTC 6231;

9. Morev Investments Limited et al v MNR, [1972] CTC 513; 72 DTC 6421;

10. Morev Investments Limited et al v MNR, [1973] CTC 429; 72 DTC 5353;

11. Her Majesty the Queen v Douglas Lloyd Anderson et al, [1973] CTC 606; 73 DTC 5444;

12. Robert D Tate et al v Her Majesty the Queen, [1974] CTC 731; 74 DTC 6559;

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

The appellant has referred the Board to two articles:

1. Capital Gains v Income by the well-known Ronald Robertson;

2. Paradise Regained: The Decline and Fall of the Secondary Intention Theory in Determining Capital Gains, by Martin H Freedman (Manitoba Law School Journal, Vol 1, 1962, page 97).

4.3 Comments

4.3.1 Different Tests

Counsels in their submissions have enumerated and interpreted on the basis of the evidence adduced the different tests: 1) intention; 2) subject matter of the transaction; 3) frequency; 4) regular business of the taxpayer;

5) time; 6) method of and reason for disposal; 7) source of the funds used for the purchase.

4.3.2 Tests not in Dispute and in Favour of the Appellant

According to the evidence, it is clear that the test of the frequency of transactions (see paragraph 3.13 of the Facts), the regular business of the taxpayer (see paragraph 3.01), the subject matter of the transaction (real estate—subject of investment), the funds used for the purchase (see paragraph 3.04) are in favour of the appellant.

4.3.3 Test of Time

In the Board’s opinion, the period of time (3 years) during which the appellant and his associates held the subject property is not in favour nor against the appellant.

4.3.4 Test of Intention

According to the appellant’s testimony, his intention was clear: he wished to purchase a piece of land to build a plaza in which he would have his own store.

The Board, however, is surprised that the appellant and his co-owners had not asked an architect to make some design of the plaza. It was not in evidence that important stores, banks, etc., were approached to obtain letters showing their interest to rent an area in the future plaza, neither his intention to calculate the return of his future investment. It seems to the Board that the intention of doing something requires some actual action to prove the seriousness of the intention. In the present case, the appellant was the silent partner waiting to see what his associates would do. His intention seems assimilated in those of his associates.

4.3.5 Reasons for Disposal

The main reasons given by the appellant to stop the project and dispose of the property are described in paragraphs 3.10, 3.11 and 3.12 of the Facts (decision of co-owners, delays, inflation).

The main reason seems to be inflation. The intention of the three associates in 1970 was to invest half a million dollars in the plaza. In 1975, a plaza was built on the same land for one million dollars.

The evidence is to the effect that the associates had not even made designs. How could they know it would cost half a million dollars and not $700,000? No evidence was given that in 1972 or 1973 they asked for financing. How could they know it was not possible to have financing? With inflation, the cost of rent per square foot in a plaza also increased.

Once again, it seems that the appellant, the silent partner, dutifully accepted the decision of the two others. According to the evidence given, both were in the business of real estate.

In the case of Ettie Wiss v MNR cited above, Heald, J says concerning Silent partner:

She (the appellant) described herself as the silent partner in these transactions and agreed that Bernard Lehrer was the active and dominant partner. It has been decided in a number of cases that a non-active or silent partner who is quite content to leave the handling of the business to another partner is in no different position than that of the active partner (see MNR v Lane, 1964 CTC 81, 64 DTC 5049); Carr v MNR, 1965 CTC 334, 65 DTC 5201.

In the case of Lane cited in the above quotation, Judge Noël says at 91 [5054]:

It would appear from this that the Syndicate’s non-active members were quite content to leave the handling of the Syndicate’s activities to the executive committee who had carte blanche to handle the business of the Syndicate as they thought best and because of this situation, the passive members here would be in no different position than that of the active members. Indeed, if the transactions are business transactions, any profit derived therefrom from any of the members would be taxable.

It is the Board’s opinion that this passage applies to the appellant in the present case.

From another point of view, if the appellant is right in his contention that the profit is a capital [gain], he has not given the best evidence to reverse the burden. Why did his co-owners not come as witnesses? Maybe the facts given by them would have finally been in favour of the appellant.

5. Conclusion

The appeal is dismissed in accordance with the above reasons for judgment.

Appeal dismissed.