Her Majesty the Queen v. Stanfold Investment Corporation, [1974] CTC 19, 74 DTC 6035

Walsh, J:—This case turns on the question of whether the net profit realized by the defendant amounting to $75,987.85 resulting from the purchase by it on January 15, 1959, of vacant land known as original lots 635 and 636 on the official plan and book of reference of the Parish of St-Martin in the Province of Quebec for a price of $188,900, and the sale on June 20, 1966 of the said vacant land to the City of Laval for a price of $310,786.20, constituted a capital gain or resulted from an adventure in the nature of trade. The defendant filed its income tax return for its 1966 taxation year declaring a loss in the amount of $6,011.14 and was so assessed by the Minister of National Revenue, but on January 25, 1971 a reassessment was made so as to include in defendant’s income the profit realized on the sale of the land in question. This was objected to by the defendant and on June 28, 1971 the Minister confirmed the reassessment. An appeal was made on August 24, 1971 and on February 15, 1973 the Tax Review Board allowed the appeal, finding the profit realized from the sale of the land to be in the nature of a capital gain. Plaintiff now appeals this decision in the present declaration.

Defendant corporation, while incorporated in 1958 as an investment company, also had the power to purchase and sell real estate. Its two principals, Saul Kaplan and Joseph Berman, have been both speculators and investors in real estate. They operated some business enterprises in common including the defendant corporation but also have their own separate business interests. It is defendant’s contention that when the property in question was bought on January 5, 1959 for cash it was with a view to long term retention and industrial development. It never offered the land for sale, never solicited any purchase, never subdivided it, nor were there any badges of trade in connection with the holding of the land for seven years. It was unable to develop the property, however, by reason of delays in providing the services for it although at the time of purchase it had been assured that they would be installed at an early date. Finally, the property was sold to the City of Laval under pressure and with the alternative of its being expropriated.

Franklin Marcus, a real estate agent, testified that the property is bounded to the west by the Laurentian Autoroute, to the south by what was at the time of the purchase an existing residential development, to the east by a railway track of the Canadian Pacific Railway Company and to the north by the Chemin St-Elzear, an existing road. It was within the municipal limits of St-Elzear and not yet serviced although services were available nearby. The City of Laval, of which it eventually formed a part, had not yet come into existence and the various municipalities in the area were discussing and studying plans for area development. The subject property, together with lots 618 to 622 inclusive, 624, 633 and 642 would, he felt, be an ideal addition to an existing industrial park which he had already sold to the Town of St-Martin. He was trying to promote a development of the aforementioned properties into an industrial park by the Canadian Pacific Railway Company; he also approached the then Mayor, J N Lavoie, to see whether the city would expropriate if the CPR agreed to develop the property. As a result of a change in management in the CPR when he thought he had its assurance with respect to the development it was indicated to him that it would take another six months to decide so he then approached the city authorities of Laval to see if they would develop it themselves. They were interested but had to await an election which took place in November 1965. Within three weeks thereafter he was authorized to attempt to obtain options on the properties in question for the city. He engaged extra staff and working under conditions of great secrecy and pressure obtained all the necessary options within seven days. When he had about 70% of the options he approached the defendant and while at first Messrs Kaplan and Berman were reluctant to sell the subject property, he indicated to them that if they refused it could be expropriated by the city, so in due course they agreed to accept the offer he made. He had known Mr Berman since about 1959 in connection with other property which Mr Berman owned some three miles away which was being developed by Mr. Berman. He had also sold an area south of this to the builders of the autoroute, the property being about 2,000 feet from the subject property, and a company known as Elite Development Company had commenced the construction of residential homes on it but unfortunately it went bankrupt which contributed to the holding up of servicing of all the land in the area. While the city’s intention to take over the subject property and nearby lots was not public knowledge at the time, he offered all the owners what he considered to be the fair market value in obtaining their options, the prices finally averaging out to about $5,400 per arpent. Although he was acting for the municipality, it was defendant as vendor who paid his commission in accordance with the usual custom of the trade at the rate of 5%. Since the sale was made 10% for cash and the balance of 90% in bonds of the City of Laval, he took his 5% commission on the same basis.

Mr Kaplan testified that a company owned by him known as Fairville Development Inc., owned 50% of the shares of defendant, the other 50% being owned by Jay-El-Jay Investment Inc, a company owned by the Berman family. Before the present land purchase defendant company had bought some land in Ste-Genevieve for development on one occasion but when soil borings established that the water table was too high they decided to sell it as soon as possible. The company had also bought some other land in the City of St-Laurent adjoining the airport there which was expropriated very soon after to enlarge the airport. It had also bought land in Montreal at the corner of Seaforth Avenue and Côte des Neiges on which they had planned to build an 18 storey building. Contracts had been let and the excavation actually started when a tragedy took place in the Berman family when Mr Berman lost his son and grandchildren in an aircraft accident as a result of which he had no desire to proceed with the project so the property was sold together with the plans and all the work that had been done on it. The fourth and only other land operation of the company was in connection with the St-Martin property. When they bought it he had verbal assurances from the municipal authorities of St-Elzear, in which it was located, that they planned to run an industrial boulevard through the property and zone it for industrial purposes and that services would be available within two years. Thereafter he kept being put off and could not get any definite answers as to when services would be constructed because of the merger talks of the municipalities to form what eventually became the City of Laval. The intention was to construct industrial buildings on the property and rent them to various tenants and he and his associate had the resources to do this. Through his company, Fairville Development Inc, he receives $17,000 annual income from rental property constructed in Maisonneuve in the City of Montreal and about $55,000 a year income from rental property constructed in the City of LaSalle. He has also sold real estate before, both bare land as well as buildings. Neither he nor Mr Berman had any doubt that the services would eventually come to the property at the time they acquired it as they were already located just on the other side of the railway tracks. They never considered the possibility of selling even if the services did not come nor did they consider the possibility that they might suffer a loss on the resale of the property in this case. He stated that they made no actual plans for the development of the property since there was no point in doing so until they actually had the services and knew the exact location of the projected streets. They bought the property considering that it would be a good investment.

Mr Harold Margolese, CA, the company’s auditor who was also auditor of Jay-El-Jay Investment Inc, testified that defendant had bought land in St-Laurent in 1958 for $358,000. Part of this was expropriated in April 1959 for $316,598 and in September of that year the balance was sold for $81,113 and the company paid tax on the profit so realized despite the frustration of their investment intentions resulting from the expropriation, since they had held the property for less than a year. In May 1959 the Ste-Genevieve property was bought for $140,000 and sold in August 1962 for $182,000 and again the profit was treated as being taxable. The property known as the Study Property at the corner of Seaforth and Côte des Neiges was bought in May 1959 for $54,000 and in October 1961 development on it was started and the excavation was finished. When it was decided to sell it as a result of the tragedy in the Berman family, there was a profit of $19,138 which was declared as capital gain and after close examination this was accepted by the Minister, the sale having been necessitated by unforeseen developments after defendant’s intentions to develop same were apparent as a result of the commencement of work on it. The only other property the company ever owned was the subject property bought in May 1959 for $188,900. Carrying charges on all properties were deducted from year to year and not capitalized. He considered that the profit obtained when this property was sold in June 1966 for $310,786 was capital gain. Mr Berman himself had never personally bought or sold vacant land although some corporations which he controlled had sold vacant land and declared the profits on same as taxable income. Mr Berman had also built homes for sale in conjunction with Mr Kaplan through another corporation and declared the profits on these as taxable income.

The only other evidence submitted consisted of the financial statements of defendant from June 30, 1959 until March 31, 1969, the deed of sale dated June 21, 1966 from defendant to the City of Laval, and a letter dated December 17, 1965 from Mr Margolese to the Department of National Revenue, Taxation Division, and its letter to him of January 7, 1966, all of which were produced by consent, together with an option agreement given by defendant to Deauville Realties Ltd., dated October 19, 1965 for the purchase of the subject property. The letters referred to are those dealing with the recognition of the profit on the sale of the Study Land as being a non-taxable capital gain. Defendant company therefore, on its three previous land transactions before that concerning the subject property had one recognized as being a profit in the nature of a capital gain and conceded that the profit realized on two of them was properly included in taxable income.

The question of whether the profit realized on the purchase and subsequent sale of real estate constitutes a capital gain or results from an adventure in the nature of trade is always a difficult one, and while the jurisprudence has established certain principles which are well- known, each case must of necessity depend on its own facts. Little significance can be attributed to the charter powers of a corporation. As Judson, J stated in Regal Heights Ltd v MNR, [1960] SCR 902 at 907; [1960] CTC 384 at 390; 60 DTC 1270 at 1272:

Throughout the existence of the appellant company, its interest and intentions were identical with those of the promoters of this scheme. One of the objects stated in the memorandum of association of the company was

“To construct and operate apartment houses, blocks, shopping centres and to otherwise carry on any business which may be conveniently carried on in a shopping centre.”

Nothing turns upon such a statement in such a document. The question to be determined is not what business or trade the company might have carried on but rather what business, if any, it did in fact engage in.

In the present case defendant had engaged in three other real estate dealings, two of which have been conceded to have resulted in a trading profit, the third having been treated as resulting in a capital gain. Similarly, the shareholders and directors of the company had, through other companies, dealt in real estate as an investment but not to the exclusion of any purchases of sales of bare land. Defendant contends that its sole purpose in purchasing the property in question was to develop it in connection with an industrial park which was supposed to be located in the area. It would build industrial buildings on the property and rent same to tenants. There is nothing to indicate that this was not a reasonable project at the time the land was purchased. Interviews with the municipal authorities had satisfied Mr Kaplan that the land was to be zoned for industrial use and would soon be serviced and it was extremely well located for this purpose in a rapidly growing area. It paid cash for it in 1959 and did not sell it until 1966 (October 1965 if the date of the option it agreed to is taken into consideration). It had ample means at its disposal to develop the property. It made no attempt to sell it and when it was sold it was not only as the result of an unsolicited offer but under threat of expropriation if the offer was not accepted. There is nothing in any of this to indicate that the property was purchased for any other reason than as an investment.

On the other side of the picture it was contended, however, that defendant must have been aware that this property was a good buy, being in an area where it could hardly fail to increase in value with the passage of time, that it did nothing by way of preparing plans, even of a tentative nature, for use when services to the property became available, and that in the past although the company had always had the exprès- sed intention of developing land which it had acquired, it had always, for one reason or another, been frustrated in carrying out its intentions but had nevertheless succeeded in selling the land at a profit. Defendant’s explanation as to the reasons for these sales is, I think, credible, as is its explanation of the political problems in Laval which delayed the development of the subject property by it, and its explanation that no development plans could be prepared until the location of roads and services could be determined. Its final sale of the property frustrated its intentions of developing same but it appears to have had little choice in the matter since the City of Laval had decided to acquire the property to establish an industrial park of its own.

With regard to the frustrated intentions of defendant, this case resembles those of Elgin Cooper Realties Ltd v MNR, [1969] CTC 426; 69 DTC 5276, and Point Pleasant Investments Limited v MNR, [1968] Tax ABC 1227; 69 DTC 43, and also Bead Realties Limited v MNR, [1971] CTC 774; 71 DTC 5453, although defendant’s position may not be quite as strong as those of the taxpayers in those cases in that in the Elgin Cooper Realties case the apartment house, designed to yield revenue as an investment, had already been built when the owner felt obliged to sell it as a result of difficulties resulting from its construction, and in the Bead Realties case considerable efforts had been made to design industrial buildings and find a tenant for them on the property before the intention was frustrated as the result of the forced departure from the city of the person primarily responsible for carrying out the project for the company. In the present case, however, as already stated, the explanation given for the failure to make any actual progress towards the development of the property is a reasonable one.

If plaintiff is to succeed in the present case it must be on the doctrine of secondary intent, but I do not believe that at the time of the purchase defendant had any secondary intention of selling the property at a profit in the event of its intent of developing same as a revenue-producing commercial property being frustrated. The leading case on the doctrine of secondary intent is that of Regal Heights Ltd (supra). In that case Judson, J stated at pages 905-6 [388-9, 1272]:

There is no doubt that the primary aim of the partners in the acquisition of these properties, and the learned trial judge so found, was the establishment of a shopping centre but he also found that their intention was to sell at a profit if they were unable to carry out their primary aim. It is the second finding which the appellant attacks as a basis for the taxation of the profit as income. The Minister, on the other hand, submits that this finding is just as strong and valid as the first finding and that the promoters had this secondary intention from the beginning.

There is nothing in the proof made in the present case that indicates any such alternate intention on the part of the purchasers. Neither was there any problem with respect to the financing of the project nor any counter-proposal by defendant to sell same as in the case of Bel-Conn Limited v MNR, [1969] CTC 1; 69 DTC 5026, nor any financial difficulties as in the case of Bay ridge Estates Limited v MNR, [1959] CTC 158; 59 DTC 1098, nor can it be compared with the findings in the recent case of Manru Realty Limited v MNR, [1972] CTC 501; 72 DTC 6415, in which the property was not sold as the result of an unsolicited offer but was listed for sale, and in which the finding of fact with respect to the taxpayer’s intentions is set out at page 505 [6418] as follows:

Thus, this evidence is open to the inference that at the time of purchase, appellant had no firm intention to build anything on subject property, they had an open intention at time of purchase. If the area developed, they would build—if it did not develop, they would sell provided a profit opportunity presented itself. The latter, of course, is what in fact occurred.

The question of intent is dealt with by the Supreme Court in the case of Irrigation Industries Limited v MNR, [1962] SCR 346; [1962] CTC 215; 62 DTC 1131, in which Martland, J refers with approval to a general statement of the principle by Lord Buckmaster in Leeming v Jones, [1930] AC 415 at 420, where the latter stated:

... an accretion to capital does not become income merely because the Original capital was invested in the hope and expectation that it would rise in value; if it does so rise, its realization does not make it income.

Martland, J also refers to the statement of Rowlatt, J at an earlier stage in the same case when, in referring it back to the Commissioners, he said:

I do not indicate which way it ought to be, but I commend the Commissioners to consider what took place in the nature of organizing the speculation, maturing the property, and disposing of the property, and when they have considered all that, to say whether they think it was an adventure in the nature of trade or not.

In the present case defendant did nothing whatsoever in connection with maturing or disposing of the property with a view to sale of same.

The doctrine of secondary intention is well-expressed by Noël, J, as he then was, in the case of Paul Racine, Amédée Demers and François Nolin v MNR, [1965] CTC 150; 65 DTC 5098, in which he states at page 5103:

It is not, in fact, sufficient to find merely that if a purchaser had stopped to think at the moment of the purchase, he would be obliged to admit that if at the conclusion of the purchase an attractive offer were made to him he would resell it, for every person buying a house for his family, a painting for his house, machinery for his business or a building for his factory would be obliged to admit, if this person were honest and if the transaction were not based exclusively on a sentimental attachment, that if he were offered a sufficiently high price a moment after the purchase, he would resell. Thus, it appears that the fact alone that a person buying a property with the aim of using it as capital could be induced to resell it if a sufficiently high price were offered to him, is not sufficient to change an acquisition of capital into an adventure in the nature of trade. In fact, this is not what must be understood by a “secondary intention” if one wants to utilize this term.

The jurisprudence has even gone so far as to hold that the mere fact that a property is acquired for the purpose of selling it at a profit (which the evidence does not disclose in the present case) does not of itself make the profit from such sale taxable as an adventure in the nature of trade if nothing has been done to advance or foster the sale of it. See MNR v Valclair Investment Company Limited, [1964] CTC 22; 64 DTC 5014, and MNR v Cosmos Inc, [1964] CTC 34; 64 DTC 5020, in which Kearney, J compared the purchase of land for future sale at a profit with the purchase of growth stocks paying no dividends but being capable of doing so, and considered that the holding of it was not an undertaking or adventure and that it lacked the badges of trade, the speculation or risk being negligible as land is capable of producing an annual yield even though it has not actually been used productively. These cases of Kearney, J carried the findings of the Supreme Court in the Irrigation Industries case (supra), which was concerned with an investment in stock by a company outside the nature of its regular business, a step further, but it is not necessary to go as far as Kearney, J does in order to decide the present case. The mere fact that it was general knowledge at the time of the purchase that the area in question, which eventually became part of the City of Laval, was developing rapidly and that a person buying land there would most likely find that it would increase in value, is not sufficient, in my view, to indicate that this was the secondary intention of defendant at the time the purchase was made. On the contrary, the evidence discloses that the sole intention was that the defendant would develop the property itself as a revenue-producing investment and the mere fact that defendant no doubt realized that there was little, if any, risk of loss and on the other hand a reasonable expectation of profit even if its intention was frustrated and it was forced to sell the land, is not in my view sufficient to establish that this was a secondary intention of defendant at the time of the purchase. Knowledge and intention are not synonymous.

I therefore dismiss the appeal with costs and refer the reassessment back to the Minister to be dealt with accordingly.