Her Majesty the Queen v. Stefan Jachimowicz, [1977] CTC 162, 77 DTC 5148

Collier, J (orally):—For the 1972 taxation year the Minister of National Revenue added to the defendant’s income for tax purposes an amount of $176,185.91. The Minister characterized it as a “gain realized upon disposal of Cole Harbour land’’ and as a gain from a venture in the nature of trade. The defendant successfully appealed the assessment to the Tax Review Board. The Board held the amount in question to be a capital gain. The Minister then brought this action !n this Court to have his assessment restored.

As always in cases of this kind, the question is essentially one of fact; each case must depend on its particular facts: Regal Heights Limited v MNR, [1960] SCR 902, per Judson, J at 907; [1960] CTC 384 at 390; 60 DTC 1270 at 1273; MNR v Foreign Power Securities Corp Ltd, [1967] SCR 295, per Cartwright, J at 297; [1967] CTC 116 at 117; 67 DTC 5084; Irrigation Industries Limited v MNR, [1962] SCR 346, per Cartwright, J, dissenting, at 360; [1962] CTC 215 at 230; 62 DTC 1131 at 1138.

In the defence filed in this Court, the defendant set out in detail the material facts on which he relied and his conclusions. As far as I can ascertain, the defence is, for practical purposes, almost identical to the taxpayer’s Notice of Appeal to the Tax Review Board. Mr St-Onge, QC, the Member who heard that appeal said this [at p 2311]: “At the hearing, the appellant corroborated the main allegations of his Notice of Appeal . . . .” The presiding Member then went on to outline the facts in evidence before him. To my mind, from reading his reasons, the essential facts and testimony before the Board were substantially the same as the essential facts and testimony before me. I do not think the evidence of Mr Gough and Mr Robb, who were called in this Court on behalf of the plaintiff, impugned or detracted from the defendant’s corroboration of the matters set out in his defence filed here. Mr St-Onge said at page 2316:

After having given careful attention to all the evidence, the preponderance of that evidence points to the conclusion that the appellant acquired the Cole Harbour property with the intention of erecting thereon low-density housing units to be held for rental income and that he had no secondary intention to sell at a profit.

On the evidence before me I have come to the same result.

This action is not a true appeal. It is a trial where evidence is heard again. The findings of fact by the Tax Review Board are not binding on this Court. I have some satisfaction in recording, however, that on what appears to be substantially the same evidence the Member of the Board and I had little difficulty in concluding, on this essentially factual issue, that the Minister’s assessment was wrong. I do not think the evidence of Robb made any material difference to the ultimate question.

Because this is a new trial, it is desirable to set out my findings and my reasons. At the outset I say this. The chief witness was the defendant. He obviously has a heavy personal stake and a keen interest in succeeding in his attack on the assessment. I have kept that in mind. I found him to be a candid, honest witness. I accept his testimony as to his reasons for acquiring the property in question, and as to what he intended to do with it. In my opinion, his subjective testimony is not inconsistent in any material way with some of the so-called “subdivision plans’’ relied on by the plaintiff.

The defendant was born in 1918 in Poland. He served with the Polish Navy in the Second World War. He was captured and imprisoned. He escaped. He then served with the Royal Navy until 1948. He and his wife came to Canada. He first tried to start a career on the executive side of the hotel business. He then joined the Canadian Navy. He served for approximately four years. He decided his future there, and a pension, were not too promising.

Almost by accident he, in 1956, got into the construction business. Between 1956 and 1958 he built on three properties, which he rented and was constructing his fourth. In 1958 he took legal advice.

He was advised to incorporate a company to handle the construction business and to keep what was termed his “personal estate’’ separate and apart. One of the reasons for the advice was, of course, the keeping of any personal assets untouchable, in the event of financial problems or disaster with the corporate entity and construction business.

The evidence satisfies me the defendant scrupulously followed that course of segregation from 1958 to 1971 and 1972, the period relevant to this litigation. He apparently still follows that practice.

He was and is the president and majority shareholder of the company, S Jachimowicz Limited. The three properties earlier mentioned were transferred to it after its incorporation. The company then over the years acquired other land and built on it. At first the developments were for sale purposes only.

In 1966 or 1967 it commenced renting developed premises as well. It is common ground the company has always been a trader in real estate and has paid income tax on that basis.

The defendant over the years acquired a number of properties in his own name. Some are residential and some are commercial. He has rented them. Aside from drawing director’s fees twice from the company, to a total amount of $3,500, the defendant has lived on the rental income from his properties.

In 1964 the company negotiated for the purchase of 55 acres, essentially vacant, in the Cole Harbour area on the outskirts of Dartmouth. The transaction was completed in early 1965. The property was bought and paid for by the company. This was referred to as the Settle property. The company intended to develop, subdivide, build on the lots, and sell.

In August 1965 the defendant acquired, from one Charles Bissett, an 81-acre property. It was further from the outskirts of Dartmouth. The intervening property was owned by others. The company tried subsequently to buy some, if not all, the intervening land. The defendant paid $5,000 down for the Charles Bissett property and $5,000 annual instalments for three years, a total of $20,000. He used his own money, which in turn had originated from his rental income. He did not pay interest on the outstanding balance to Bissett. Nothing turns on that. Bissett lived in a house on the property and farmed a portion of it. He was allowed to stay rent-free and was promised he would have a lot for his house when the defendant decided to develop.

The defendant said he purchased the property with one single purpose and that he has never deviated from that. I accept his evidence on the point, as did Mr St-Onge. The defendant intended to subdivide into lots of some size, build various types of units on them, and then rent. The tenants he had in mind were middle-aged or retired. It was to be a semi-country, self-contained community-style project.

The defendant had no pension schemes of any kind. He had concluded the properties he already owned and from which he had obtained income would not be sufficient for his future needs. This large development of the Bissett property was to be added to his portfolio of real estate investment to provide adequate retirement income. At that time, he intended to retire at age 55. On that schedule he intended to start developing the Bissett property in the early seventies, so he could carry out his planned retirement in 1973.

I digress at this point to say that I find this scheme of his to be quite consistent with the defendant’s overall pattern of building up a separate personal estate. I accept his testimony to the effect that this 81-acre project was completely divorced from the commercial aspects the company had in mind for the Settle property.

A surveyor, Mr Robb, prepared some plans after the Bissett purchase which indicate some rudimentary subdivision plan of the Bissett property. Robb made some changes in those plans and eventually incorporated the Bissett plans into later plans showing development of the Settle and other properties as well. The plaintiff relies on all of those documents as indicating an ambivalent intention on the part of the defendant. It is said an inference ought to be drawn that there was always an alternative or secondary intention (call it what you will) that the defendant would follow the same route as the company and other developers in the Cole Harbour area proposal—subdivision and sale.

I do not agree. The defendant, I find, always intended to develop his property in such a way as would accord with overall municipal planning for the area, but at the same time he always intended that whatever was developed on his land would be for rental purposes only.

I now complete the history. The company in 1970 acquired another 38 acres adjoining a portion of the Settle property. This was described as the Turner property. The company proposed to develop it similarly to the Settle property. A site concept plan was submitted to the appropriate planning board covering various properties in the Cole Harbour area. The concept plan included the company’s properties and the respondent’s. Again, I am unable to draw any inferences from the submission of that concept plan that the defendant had an alternative intention to a retirement investment scheme.

It is true the defendant had never, up to 1971, made a separate and formal submission in respect of his property. It is true he had not made financing arrangements. It is true he had not indicated to the planning authority that, for his part, there was not going to be any sale of developed properties. The defendant’s explanation is, to me, both understandable and acceptable.

In his scheme it was too early for those things. Financial arrangements and final commitment to a binding scheme of development were premature. The general nature of his future development scheme was, however, there. It had been in his mind for some time. It is illustrated by Exhibit 10-A.

The fact that he did not indicate to any planning authorities that he proposed to retain ownership of any subdivided lots on his property is, to me, immaterial. As Mr Gough indicated in his evidence, they were only concerned with overall planning, not with who actually owned what.

The final chronological fact was the expropriation, by the Nova Scotia Housing Commission, of all the Cole Harbour properties in 1971. The defendant, his company and others were paid compensation. It is that total gain the Minister seeks to bring into the defendant’s income.

I adopt, as part of my reasons, the following portions of the reasons of the Tax Review Board [p 2312]:

As to the Bisset property held by the appellant personally, his intention was to build 150 duplexes for rental purposes on 30 acres and keep the balance of the land for horse riding and walking. Each lessee would be allowed A of an acre for gardening. There were a brook and a fall and his intention was to build a pond for swimming and prepare a nice environment for retired people.

I interject at this point that the evidence before me was not precisely that, but the overall scheme was essentially the same. I carry on with the quote:

He stated under oath that, with respect to the Bisset property, his intention has always been the same, that it has never changed and that he had no other intention;

And at page 2315:

All the elements of proof adduced in this case show that the appellant’s sole intention with respect to his Cole Harbour property was to erect low- density housing units upon it to be held for rental income.

The fact that the appellant kept that land in his name at the time of acquisition (1965) indicates that his intention, at that time, was not to consider this land as stock-in-trade in his company but as a personal investment.

Furthermore, the usual badges of trade are not present in the case at bar. The appellant never listed the land for sale nor otherwise attempted to sell it; he held this property for some six years and did not sell it but was deprived thereof by expropriation; he did not deduct but capitalized all the carrying charges during the said period of six years.

(I do not recall any evidence about capitalizing carrying charges that was adduced before me, but otherwise I adopt the statement of the Tax Review Board Member.)

It is well known in jurisprudence that even a trader in land can hold property for investment. The appellant herein has indicated this intention from the beginning by establishing a careful separation between his properties and those of his company and his course of conduct" during the holding period did not betray his original intention. On the contrary, he always refused to sell, and when he was expropriated, he used the proceeds of expropriation to acquire more land to pursue his purposes.

The Crown’s action therefore fails and is dismissed.

At the conclusion of argument I stated the action would be dismissed. Then I invited submissions as to costs. I had in mind this might be a proper case in which to award the defendant costs to be taxed against the Crown on a solicitor-client basis. This case was an appeal by the Minister on what is fundamentally a pure question of fact. The factual findings had been made in favour of the taxpayer by the Board. In my opinion those findings were warranted and justified. The Minister chose to appeal. There were no new material facts adduced before me. The individual taxpayer in this case, and the Canadian taxpayers as a group, have been put to considerable expense by that administrative or policy decision (I know not which) to appeal.

After consideration, however, I have decided to make only the usual order for costs in this case. I suggest, however, that it is quite possible the Court may consider making “solicitor-client” type orders in future cases, where appeals by the Crown from the Board are essentially forlorn or devoid of merit. The defendant will recover his costs taxable on a party and party basis.