Roy Mack Power v. Minister of National Revenue, [1974] CTC 2230

Judge Flanigan (orally: June 20, 1974):—This is an appeal by Roy M Power against a reassessment by the Minister of National Revenue for the 1969 taxation year.

At the opening of the hearing it was pointed out that in the Minister’s reply reference had been made to the 1968 taxation year; but it was clearly understood that the 1969 taxation year was the year in question, and the reply was amended accordingly with the consent of both parties.

This is a trading case and one of the more difficult trading cases with which I have been confronted. There has been a great deal of evidence supplied by the appellant, Mr Power, who spent five hours in the witness-box yesterday, and a considerable amount of evidence was given today by Mr Herrington, an architect who gave evidence on behalf of the appellant. There have also been fifty exhibits filed, all but two of which were filed yesterday and which I had an opportunity to peruse at the close of the sittings yesterday. The documents that have been filed, as counsel for the appellant aptly pointed out when filing some of them, really do no more than confirm dates pertaining to the evidence given viva voce by Mr Power.

There are a great many detours in this case before one arrives at the end of the road. This resulted perhaps in a prolongation of the evidence in order that the Board might more clearly understand what took place. It is now my problem to try to place that evidence in its proper perspective, to accept the evidence that I see fit to accept, and to draw inferences on the basis of the evidence given that are reasonable under the circumstances.

In order to try and have some semblance of order in these reasons for judgment I propose to deal firstly with the subject property and its surrounding area. The property is situated in south central Halifax, in the Province of Nova Scotia, and in particular fronts Spring Garden Road. The immediate area is bounded on the west by Summer Street, on the north by Spring Garden Road, on the east by Tower Road, and on the south by University Avenue.

Directly across from the subject property are the public gardens of the City of Halifax. According to my recollection of the evidence, these gardens are opposite the Lord Nelson Hotel. The west half of the block facing on Spring Garden Road was owned by the ladies of the Sacred Heart, and is shown on appellant’s Exhibit 1 as the Sacred Heart Convent. This institution also at one time in years past operated a school to the rear of the subject property, or at least the yard of the school was to the rear.

Appellant’s Exhibit 1 is dissected (if I may use that term) by College Street running from Summer Street on the west to Tower Road on the east. At the north-east corner of Summer Street and University Avenue we have the Nova Scotia Rehabilitation Centre, and this is the proposed site of a rehabilitation hospital, a project which the Nova Scotia Rehabilitation Council had at the material time, and I believe still has, failed to bring to fruition because of lack of funds.

Next to the Rehabilitation Centre lands and fronting on University Avenue and Tower Road is All Saints Cathedral, which does not enter into this transaction in any way. My recollection, though it may not be absolutely correct, is that the land on College Street behind or in front of All Saints Cathedral was owned by the Anglican diocese of Nova Scotia or Halifax, whatever its proper name might be. In any event, as I have said this property does not really enter into the transaction.

On the south-east corner of College and Summer streets and just north of and adjacent to the Rehabilitation Centre lands is a piece of land owned by the ladies of the Sacred Heart which has been referred to in the pleadings and throughout the evidence as “the Paradise lands”. It was vacant property and it, together with the Rehabilitation lands, formed what was known locally as Anderson Square which at one time had been an RCAF base. For what purpose the RCAF used it is not clear, nor is it material to this case.

The evidence further indicates—and I am referring now to appellant’s Exhibit 1—that the north-east quarter of the area shown on that exhibit contains properties of a residential nature which are very old and which were occupied by the same families for generations. The appellant himself lived in his mother’s property, which is shown as property “A” on the exhibit. This was a property which was purchased from the ladies of the Sacred Heart by the appellant’s father, Mr R R Power, in 1946.

Prior to that time, the Power family residence had been further down Spring Garden Road and, for a while, the family resided in an apartment across from the park for a couple of years prior to the purchase in 1946 of the 5766 Spring Garden Road property where the appellant’s mother still resides.

So it is safe to say that the appellant’s entire lifetime up to the material time was spent in this area. Across from Summer Street to the west was a Salvation Army Hospital, one of the Grace Hospitals with which we are all familiar. This was sited on the west side of Summer Street, and behind it and generally surrounding it were the medical and science complexes of Dalhousie University.

There is no question on the evidence that this area was a prime area in the City of Halifax. The location of the subject properties was one of the finest, if not the finest, locations for an apartment building in the City of Halifax because it overlooked the public gardens. The only other site that might rival it would be one on the water.

According to the evidence, Halifax, like all major cities in Canada, was undergoing a building revolution between 1950 and 1970. Dal- housie University was growing by leaps and bounds, and it was not until 1970 that the citizens took steps to constrain the development within certain bounds. Mr Herrington gave evidence that he had grown up in Halifax, had known this area, you might say, for all of his life, and said that it was obvious to him that this was an area that was going to expand, an area that fitted the description I have just given of the attractiveness of the subject property.

Between June and December of 1966—although the actual deed of transfer of the last piece of property may have been registered in January of 1967—the appellant acquired first the property marked “B” on appellant’s Exhibit 1, and then those marked “C” and “D”. Being an only child, the appellant felt—and I think the evidence substantiates this—that eventually he would become the owner of property “A” which was owned by his mother.

His mother at the material time was quite an elderly lady. Indeed, the area in question appears to be noted for the longevity of its residents because his mother is still living, apparently in good health at the age of 93, and she is still residing in the same house, as I have already said.

The property to the east of the subject property and to the rear of property “B” was owned by a Mrs Murray, who when approached by the appellant requested what he felt was an outlandish price for her property and he did not pursue the matter. I think she was asking as much as $108,000 for the two pieces marked “E” and “F” and came down to $100,000, but this was far beyond the appellant’s reach and, I infer from his evidence, was beyond the property’s worth. The appellant said that Mrs Murray had other real estate holdings in the City and was a very astute business person.

The manner in which the appellant acquired the three properties makes very interesting listening, but I think it will suffice to say for the purpose of these reasons that he acquired them through the long-time acquaintance of his own family with other families and the association that his family had with the ladies of the Sacred Heart.

The property to the east of the Murray property was eventually purchased by other developers and does not enter into my decision in this transaction except to the extent that one developer, Mr Med- juck, tried to join with the appellant in some scheme of development which I shall refer to later.

That generally is a brief summary of the detailed evidence given as to the area in question, and I think I can say that in the mid-1960’s, and certainly earlier, it was an area of rapid growth, an area of prime development for apartment buildings overlooking the park, and an area that certainly would not escape the eye of any developer who was building in the City of Halifax.

I come now to the appellant himself. As I have said, the appellant gave evidence for some five hours yesterday and I had an opportunity to observe him in the witness-box and consider the manner in which he answered questions put to him. There is no hesitation in my mind in saying that I consider him to be a most honourable man, a man who gave his evidence to the best of his recollection as he related the facts some eight years after the event. I have no doubt whatsoever in my mind that he believes beyond doubt in the declaration of intention that he has presented to me.

As has been said by me and others in this type of case, where one must apply a subjective test, the least that one can expect of an appellant is that he take the witness-box, declare his intention, and subject himself to cross-examination. If he is not prepared to do that, and if his declared intention is not the obvious—that is, that he purchased the property in question solely as a pension scheme or as a means of assuring a continuous flow of income in his later, non-productive years—one would expect that the case would not reach this stage. The appellant in this case has done that. In answer to a question from me he has stated that at the time of purchase he had no intention whatsoever of doing anything other than develop the property as a revenue-producing enterprise, and that the thought of resale or of recouping his money had never entered his mind. I will comment further on that statement at a later time because it plays an important part in my final decision in this case.

Mr Power worked for his father in a manufacturer’s agency business prior to his father’s death in, I think, 1948 or 1949, at which time the appellant incorporated R R Power Limited to carry on the manufacturer’s agency business which dealt in industrial products for institutions as opposed to small commercial or private dwelling products. He is primarily the sales representative as well as the head of the firm, and has had no experience in dealing in raw land or real estate transactions other than the construction of an office building, I think in 1951, for his own business, which he added to in later years for the revenue-producing potential that it offered.

The appellant had a summer cottage, but the conclusion I draw from his testimony is that he continued to live in a self-contained separate apartment or flat within the property that was owned by his mother. He is a man who devoted from 1950 on, a considerable period of time to community affairs, and was actively engaged in the March of Dimes movement, which is one of, I think, 32 agencies which make up the Nova Scotia Rehabilitation Council. He subsequently rose to become director of the March of Dimes and their appointee on the Rehabilitation Council, serving for many years up until May of 1966, I think it was, at which time he resigned because he felt, as his lawyer felt, that he might be running close to a point of conflict of interest between his own dealings and the dealings of the Rehabilitation Council.

During his period of service to the community on the Rehabilitation Council he became privy to a great deal of information pertaining to the needs of the medical fraternity of the City of Halifax. He travelled across Canada and some parts of the United States to see how other rehabilitation hospitals and convalescent homes were operated in order to formulate guidelines for the Rehabilitation Council along which they might proceed. He was accompanied, of course, by repre- sentatives of the medical staff and others, each with his own particular talent to contribute to what was needed.

It became evident that the building that they had hoped to build for some $3 million to $4 million if government grants were available— and by “they” I am referring to the Rehabilitation Council—would cost them some $12 million or $13 million, considerably more than they had anticipated, and thus it could not be proceeded with in the foreseeable future. The appellant also pointed out quite clearly that the Rehabilitation Centre itself had no operating funds and had to obtain any funds that it needed for its operation or construction from grants from other sources.

Although the appellant was not involved to any great extent in the real estate field, I find as a fact that he had considerable knowledge, acquired over his years with the Rehabilitation Council, as to the needs of the area in question, as to the amount and extent of the preparation necessary for the construction of institutional buildings, and of the type of financing that was necessary for such construction. I also find as a fact that he had considerable opportunity to formulate in his own mind the obvious future development that lay ahead for this particular area.

I will now deal with the financial position of the appellant at the time he acquired the subject property. In 1966 he was operating his business and drawing a modest salary from it of about $8,000. He did not own any property in his own name, had little, if any, securities but had some equity, I presume, in the limited company of which he was president. He purchased the three properties in question for $114,000 and mortgaged them, in addition to his mother’s property, for $106,000, leaving him with a net equity in this property of $8,000.

According to the evidence of Mr Herrington, his experience led him to the conclusion on an eyeball assessment that the land was worth at least $200,000, and in his view there was ample value there to get any project that the appellant had in mind off the ground by using this land as his contribution to the financing of any development.

The appellant says that he believed he could obtain enough revenue from the buildings he had purchased to carry the taxes and mortgage payments and any minor maintenance and repairs that might have been necessary. However, he found after the purchase, having made no inspection of the premises before purchase other than an exterior appraisal, that at least one of the buildings he could not in good conscience rent, and another was usable only by some planners who were doing some work for the University. In short, he found that the revenue was not sufficient to carry the mortgages on these three properties as well as the fourth property which had also been mortgaged.

The appellant had no real estate advice as to the rentability or income-producing potential of these properties for the holding period which he anticipated to be about a year and a half before demolition and construction of what he considered to be his future development. He said he did not plan any major repairs because it was his plan to demolish the building. However, time dragged on and his payments on the mortgages fell into default and writs of foreclosure were issued. It thus became necessary for him to borrow on collateral security from the Royal Bank the sum of approximately $3,500, I think it was, to meet the arrears.

Eventually the mortgages to Canada Permanent, who had the mortgages on the subject property, fell again into arrears, and for the second time writs of foreclosure were issued. This time the Bank of Montreal produced some money as did a credit company which loaned him some interim financing on a 14% interest basis. The interest on the Canada Permanent mortgages at the material time was 8%.

As time progressed the Royal Bank pressed him for payment of sums of $300 or $400, being the arrears of interest on the demand notes for which they had taken collateral security, and this placed the appellant in dire financial straits. It is perfectly clear to me that the appellant was not in any financial position to buy and carry these properties for any length of time because of his lack of financial depth.

The appellant had struck up a friendship with Mr Herrington, and this carried on right through until the property was finally disposed of and which resulted in the reassessment that is before me. All his discussions with Mr Herrington were conducted on a friendly, informal basis, with the appellant approaching Mr Herrington with idea after idea and Mr Herrington giving the appellant rough figures off the top of his head really, based on his experience and in one case a calculation based on the by-laws of the City.

Nothing ever came of these discussions. In the words of Mr Herrington, he discussed these proposals with the appellant in 1963 and heard nothing from him until 1966. At that time he informed Mr Herrington that he had these four properties and wanted to know what he could build on them. At that time there had been a change in the R3 highrise or multiple family dwelling by-law. In about 1964 or 1965 there was a change in the zoning by-law covering R3 which placed angle and density restrictions on R3 developments. Prior to 1964 one could build as high as one wished provided one complied with the set back regulations.

When the city planners decided to place some restrictions on the R3 developments there was much debate and objection from developers who wanted to retain the R3 unlimited control zoning with no parking demands. Subsequently the by-law was amended, though on the evidence before me it was not before 1965, and parking facilities became an integral part of construction of new buildings, space being required to be left between buildings, with a density factor in the area of 2.5.

According to Mr Herrington’s calculations, this meant that the appellant could only get 167 Z> persons into the space that he owned. According to Mr Herrington, the rule of thumb at that time was $2,000 per unit; and even with a unit cost of $1,000, only 114 units could be built and he never considered that a viable proposition.

Mr Herrington therefore suggested that the appellant try to acquire more land, specifically from Mrs Murray, who was, I think he said, his brother-in-law’s mother-in-law. However, Mr Herrington said he heard nothing more. Subsequently the appellant approached him in connection with the Paradise lands. He advised him that this was a much better piece of property consisting, I think, of about an acre of land. It required a zoning change to allow commercial parking operations as opposed to institutional parking, and this is what the appellant proposed to Mr Herrington in his visit to him. Although no application was ever made for a zoning change, it is clear on the evidence that Mr Herrington believed that there would be no difficulty, and in looking at appellant’s exhibit No 49, a study by the City of Halifax with respect to parking, it appears they would have been more than anxious to grant any zone change required.

If I may break off the history of this matter for a moment, the appellant approached the ladies of the Sacred Heart with whom he had had a close association over the years and obtained from them an option to purchase the Paradise lands by way of a swap (to use the term used in the evidence) of the four properties on Spring Garden Road plus $40,000 for the Paradise lands. This required a change in an 1886 Act which had placed a restrictive covenant on the land when it was conveyed by the City to the ladies of the Sacred Heart for use for educational purposes only, or something to that effect.

Consequently an application was made. Without any difficulty but with great haste, shortly before the Legislature convened, a bill was prepared and presented, and subsequently passed, disposing of this restrictive covenant. It has been pointed out by counsel for the appellant that this was a positive act to take some steps to bring his investment theory to fruition. But in looking at appellant’s Exhibit 19, a letter from his solicitor to the City Clerk requesting this amending Act, the request was based primarily on the premise that parking in the Anderson Square area would be provided. Unquestionably this was the dominant problem faced by the City at that time, and I suspect that that was the reason for the extremely high degree of cooperation received by the appellant’s solicitor in having the Act amended.

It is also relevant to note that in the option agreement with the Ladies of the Sacred Heart on December 29, 1966 there is the provision that the appellant might assign all his right, title and interest in that option at any time; this is evidenced by appellant’s Exhibit 17. The option had a provision for a six months’ extension, and the evidence indicates that it was extended.

I could go on at great length to recite the various plans that were made for a parking garage beneath ground with a convalescent or rehabilitation home and offices on the floors above. Three or four such schemes—and I do not use the word “schemes” in any derogatory sense—were mentioned to Mr Herrington by the appellant, none of which ever proceeded, so far as Herrington knew, beyond the discussion stage. I shall cease my concern with the Paradise lands at this point simply by saying that the appellant never exercised the option to purchase or to swap; that he never had the $40,000 required to complete the swap; that on his own evidence he never had means of obtaining the money; and that when he finally sold his property, ironically through development consultants, a firm organized by Mr Herrington who was then being paid by the university and who obviously knew that it was the appellant who owned the lands, the appellant insisted on selling the Spring Garden Road properties and leaving the negotiations or the carrying out of the rights under the option to the University.

Mr Herrington was perhaps placed in an embarrassing position by giving evidence in this matter, but I find him to be a most credible witness. He pointed out that from beginning to end he never billed the appellant or received any payment for services rendered. Appellant’s Exhibit 50 is a plan of a parking lay-out hurriedly requested by the appellant on part of the Anderson Square property to cool out someone who was contemplating building a parking garage further to the south. Mr Herrington was quick to point out that his firm or his name did not appear on this plan because there was no payment involved; it was done for a friend on an informal basis, and this existed throughout. I suspect that Mr Herrington may have had many friends and informal requests such as this which led him to the formation of development consultants.

What, then, is there in the evidence to substantiate the avowed intention of the appellant in 1966 to develop this property as revenueproducing property for his later years? He did not do a feasibility study or have one done before he purchased the property, but I find this to be a neutral factor because, as I have said earlier, he was so familiar with the area that it was not necessary. I am certain that the only thing that a feasibility study would have done is to provide him with a pro forma or projected balance sheet which might have shown the viability of the project from an economics point of view. He had no preliminary sketches prepared with which to approach institutional lenders to acquire funds or to acquire letters of intent or unofficial indications of interest.

The appellant said in evidence that after he had built his company’s building the Sun Life Assurance Company, being aware where he lived, indicated to him that they would be interested in talking to him should he ever plan anything on that location. According to his evidence, he never approached any institutional lender or individual lender on any formal basis, and had no more than casual discussions with any person who might be in a position to finance what he might eventually decide to build. Neither is there any evidence that he ever approached the City for their concurrence in any plan that he had.

I find as a fact that he never had any concrete plan for the property in question. He had some hazy dream, as he called it, of what might go on the property in question, but it was only after Mr Herrington had told him after the purchase of the property that he did not have enough land that he realised that he had to find more land if he was to proceed. He did not have any assets, as I have said, even to cover the payments on the mortgages used to purchase the property. He at no time had more than an $8,000 cash interest in it, plus the interest he was forced to pay on loans which his financial position required that he obtain. I believe he also had to pledge his company’s building at one stage, or some company asset. In addition, he had to pledge his summer residence.

Notwithstanding his lack of financial depth, he was very firm in his answer to me, which he repeated, that he never at any time considered the possibility of having to sell these properties to bail himself out (if I may use a colloquial expression) should he not be able to raise the financing required to proceed. I find this is a most unusual answer considering all the circumstances. I cannot conceive of a man risking all of his future without considering the feasibility of getting out should things go badly.

As a businessman he was obviously successful. True, he was out of his field, but nevertheless ordinary commonsense would dictate that one consider the possibility of salvaging one’s investment at the time of purchase. At the time of purchase, according to Mr Herrington, or at least by the time of the completion of the purchase, the property was worth about twice what the appellant had paid for it. So I think Mr Power is not being quite honest with himself when he says that he never gave any thought to the possibility of having to sell should he not be able to proceed.

Further, I asked him whether it was a fact that he had done nothing from the time of purchase until the time of sale except to remove the covenant that I have referred to and to attend to some unexpected minor or immediate maintenance repairs to the property in question, and he answered that that was correct. In other words, within a period of three or three and a half years he sold the property at a profit of some $165,000, I think it was, to Dalhousie University through Mr Herrington, who was acting as Dalhousie’s agent, a purchaser who, it would be obvious to the appellant, was looking for properly in this area in the years immediately after the purchase of these properties.

There are also some disturbing comments in letters written to and by Mr Power. As far back as 1968 there is a letter to him from a Dr Epstein, a dentist who, along with his brother, was involved in real estate developments. The contents of this letter lead me to the inference that there had been some discussion about the availability of this property.

Then in 1967 he wrote to Mr Medjuck saying that he had acquired 24,000 square feet on Spring Garden Road, that he was presently formulating a development scheme involving these lands, and “should you have any interest in acquiring this property, I would suggest you make your interest known to me no later than the end of February. Development arrangements are progressing rapidly and any propositions would have to be of considerable substance to influence a change in this planning”.

The contents of that letter are not correct because there was no formal planning or developing scheme on those lands at that particular time. The appellant explains that letter by saying that Medjuck was in a business that he, the appellant, as a manufacturer’s agent, sold products to, and that he wrote this letter as a means of diplomatically putting off Medjuck without losing his business. Yet in answer to questions put to him concerning that letter, he said that if Medjuck had come back with a cash offer of any substance it would have been refused. I find that difficult to balance with any diplomatic approach intended in the letter, appellant’s Exhibit 21.

It seems to me that, having made that suggestion to Medjuck, the flat refusal of a substantial offer would have been much more damaging to his business than no letter or communication at all. He said that many people approached him and that he always turned them down; but I think he said that no one ever approached him with any money, only with the idea of his contributing the land and participating in its development.

To me, this would be an approach that should have endeared itself to the appellant if he was serious in wishing to proceed with some development. Certainly he did not have the funds himself to do so, and he never made any enquiries to find out if funds were available.

I could, as I say, go on at great length to deal with all the exhibits, but on all of the evidence I come to the same conclusion regardless of whether I take the primary intention approach or the secondary intention approach. Here was a man knowledgeable in the area involved, without sufficient funds to warrant the investment that he was entering into, without having made any enquiries as to where funds could be obtained to develop his dream and fully aware that everything around this area was expanding, particularly Dalhousie University, which turned out to be the ultimate purchaser.

I find that in February of 1969 he wrote a letter, which I think is appellant’s Exhibit 39, in which he offered the land to the University for $425,000. I infer that it was as a result of that letter that Development Consultants Limited, and in particular Mr Herrington, were brought into the transaction and the sale was finally consummated.

Further, I find on all the evidence that this transaction was purely a speculative adventure on the part of the appellant; that it was an adventure in the nature of a trade. It has often been said—and the law is quite clear on this—that a trader under the proper set of circumstances can make a capital gain. I think the law is just as clear that a single transaction such as we are faced with here can clearly establish that it was an adventure in the nature of a trade within the meaning and provisions of section 139 of the Act as it was then applied, and I so find. The appeal must therefore be dismissed and the reassessment is upheld.

Appeal dismissed.