Her Majesty the Queen v. Ginakes Brothers Limited, [1977] CTC 18, 77 DTC 5023

Bastin, DJ:—This action is an appeal from the decision of the Tax Review Board delivered February 24, 1976, dismissing the claim by the Minister to assess in the 1970 income tax year as taxable income a gain made by the taxpayer of $33,408 from the sale of land.

The only evidence was that of Perry Ginakes, the secretary-treasurer of the defendant, and the exhibits which he identified. No effort was made to impugn his testimony and as it was consistent with the surrounding circumstances and the exhibits I have no reason not to accept it as true. This witness and his two brothers owned a building on a parcel of land 100’ x 110’ on the south-west corner of McPhillips Street and Jefferson Avenue which in 1968 was in the Municipality of Old Kildonan. They rented this property to the defendant which they owned for use as a drive-in restaurant. They had never speculated in land and apart from their homes this was the only land which they had owned up till then. On the north-west corner of this intersection there was a small house on a parcel of 9 acres of land. In the fall of 1968 they learned that an application had been made to the zoning board to alter the zoning of this parcel to permit the operation of a drive-in restaurant and it was also disclosed to them that this application was being made on behalf of McDonald’s Hamburgers, a large and efficient organization which operated drive-in restaurants at numerous locations in Winnipeg and in other Canadian cities. I accept the statement of Perry Ginakes that a drive-in directly across the street operated by this organization would confront the defendant with ruinous competition. The Ginakes brothers acted at once to defeat the application for a change in zoning by circulating a petition in the neighbourhood and engaging a lawyer to appear for them to argue against the proposed change. The zoning board dismissed the application but the decision was appealed and the date for hearing the appeal was fixed for January 15, 1969.

At this point a friend of the Ginakes brothers, one Andy Petrakos, informed them that the representative of McDonald’s Hamburgers had failed to renew its option and that he knew the owners of the property and could obtain an option for them. They thereupon paid $1,000 for an option in the name of the defendant for 90 days at a price of $100,000. The evidence of Perry Ginakes, which I accept, is that the three brothers had no intention of buying the land in question and obtained the option for the sole purpose of gaining time in their efforts to avoid the threatened competition to their drive-in business. For that reason they never questioned the price although they knew this land had been offered for sale at a price of $50,000 several years before. The hearing of the zoning appeal which was to have been heard on January 15, 1969 was adjourned to April 10, the very day the defendant’s option was due to expire. If the appeal had been heard on the date originally fixed and been denied, the intention of the Ginakes brothers was to let the option lapse. When the appeal was adjourned they made an unsuccessful attempt to obtain an extension of the option. I infer from the evidence that if nothing had occurred prior to April 10, 1969 they would have allowed the option to lapse on that date and if McDonald’s Hamburgers had succeeded in the appeal they would have abandoned the fight. What happened was that a friend of theirs, Ernie Bass, made an offer on behalf of a small group including two experienced developers to join with the defendant in developing the 9 acres in question. This offer was accepted and the defendant agreed to take up the option, turn over the property to a company to be incorporated, Jefferson Estates Limited, at a price of $135,000, take a 15% interest in the company and transfer the property to the new company subject to a restrictive covenant that the land was not to be used for a drive-in restaurant. The evidence convinces me that this development was never contemplated by the Ginakes brothers when they obtained the option in the name of the defendant and was a fortuitous happening. In 1972 the defendant sold its shares in Jefferson Estates Limited at their cost price.

Counsel for the plaintiff based his argument on the decision in Hill-Clark-Francis Limited v MNR, [1961] Ex CR 110; [1960] CTC 303; 60 DTC 1245; [1963] SCR 452; [1963] CTC 337; 63 DTC 1211, which concerned an option to purchase shares in a company. I do not consider that this judgment is of assistance. To ascertain the motives for entering into a transaction all the circumstances must be looked at and a decision based on one set of complicated facts is of no help in making a finding of fact in entirely different circumstances. The fact that a taxpayer sold land shortly after acquiring an option on it and before actually committing himself to buy, may justify the inference that there was an intention to resell at a profit from the outset, provided there is no satisfactory explanation which negatives this conclusion. In this case there is a very convincing explanation. I hold that the taxpayer’s sole purpose in acquiring the option was part of a plan to protect its business by preventing a dangerous competitor from establishing a drive-in restaurant directly across the street from its premises. As stated by Chief Justice Jackett of the Federal Court of Canada who was then the president of the Exchequer Court in Warn- ford Court (Canada) Limited v MNR, [1964] Ex CR 944: [1964] CTC 175; 64 DTC 5103, for the purpose of determining whether a transaction is a capital transaction or an adventure in the nature of trade, the time at which the intention of the purchaser is material is at the time of acquisition. In that case the Court was concerned with the acquisition of title to land. There is no logical reason why the same principle would not apply to the acquisition of the right to buy land. If at the time this right was acquired the sole purpose in the mind of the taxpayer was to protect a capital asset, the transaction would be a capital investment. A subsequent sale at a profit due to unforeseen developments would not affect the nature of the transaction. I hold that the defendant had only one motive in acquiring the option which was to protect its investment from ruinous competition and the fortuitous profit on the resale of the property was a capital gain and not taxable. I dismiss the action with costs.