The Suburban Restaurant Brandon Lid v. Her Majesty the Queen, [1973] CTC 289, 73 DTC 5260

Heald, J:—This is an appeal from an assessment for the taxation year ending January 30, 1970, wherein the Minister of National Revenue assessed the plaintiff on the basis that the profit realized by the plaintiff of $12,604.58 on the purchase and sale of certain property situated in the City of Brandon, Manitoba was income from a business or venture in the nature of a trade within the meaning of sections 3, 4 and paragraph (e) of subsection (1) of section 139 of the Income Tax Act, RSC 1952, c 148.

The plaintiff contends, on the other hand, that the transaction giving rise to said profit was a capital transaction, that the said profit was in the nature of a capital gain and should not, therefore, have been added to the plaintiff’s income for the taxation year in question.

In June of 1964 the plaintiff corporation, in partnership with one Stephen Allan Magnacca (hereafter Magnacca), purchased some 3 blocks of property containing a total of 50 lots in what is locally described as the North Hill area of the City of Brandon for a total price of $17,000.

The plaintiff corporation is a Manitoba corporation wholly owned beneficially by Donald Alexander Francis (hereafter Francis).

Francis is 40 years old and has spent all of his life in Brandon. Prior to 1959 he was employed for 2 years with a life insurance company and for 6 years in the sales department of a Brandon newspaper. In 1959 he decided to enter the restaurant business, and for this purpose acquired by lease a building on the westerly outskirts of the City of Brandon at the south-west intersection of 26th Street and Victoria Avenue which he remodelled and opened as a restaurant. The restaurant venture proved to be quite successful. It seems that the location was quite advantageous, being situated on Victoria Avenue which is on Trans-Canada Highway 1A, the city Trans-Canada route entering and leaving Brandon on the westerly side.

This particular location did, however, present a parking problem. The restaurant premises had practically no parking area, the building itself extending almost to the property line. The restaurant was situated on the south side of Victoria Avenue. The Crown owned a 50 foot right-of-way immediately north of and in front of the restaurant which was ideal for restaurant parking. The plaintiff tried to buy or lease said right-of-way for parking. However, since the Manitoba Highways Department contemplated using said right-of-way for a widening of Highway 1A from two lanes to four lanes at some time in the future, they declined to rent or sell same to the plaintiff. They did however permit the plaintiff to use the said 50 foot strip for parking on the understanding that possession would be returned to the Crown if and when required. That situation has continued until the present time. The highway has not yet been widened and the Suburban Restaurant continues to use the said Crown land as a parking lot. The parking lot is small, but is sufficient to permit the parking of approximately 25 cars.

This lack of parking, and the uncertainty of even being able to keep the meagre parking that he had, was a source of concern to Francis during the years after he started the restaurant in 1959. Meanwhile, the restaurant prospered to the point where he was able to purchase the restaurant property. By 1962 his business had expanded and the City of Brandon had expanded to the point where, in his view, a second restaurant venture was indicated. However, he did not have the financial resources to initiate such a venture on his own. In 1962 he was having Magnacca build a new home for him. Magnacca was also a Brandon native in the construction and lumber business. As a result of the house project they became well acquainted. Francis told Magnacca that he would like to start another restaurant in Brandon; that he needed financial help to do so and that, in his opinion, the North Hill area of Brandon on Number 10 Highway (a main arterial highway entering Brandon from the north) would be an excellent location for such a venture. Magnacca advised Francis that he knew the owner of such a property (Mrs Maggie Hammond). Magnacca approached Mrs Hammond, negotiations ensued, an option was taken in November of 1963, and finally in June of 1964 Magnacca and Francis (through the plaintiff, his wholly owned company) purchased subject property for $17,000.

At the time of purchase this land was zoned for agricultural purposes only. However, Francis testified that it was common knowledge in Brandon that the City was making an effort to develop the North Hill area on a commercial basis and it was the understanding of Magnacca and himself that they would likely be able to proceed with the restaurant development there without any particular zoning problems.

When the North Hill property was purchased, title was taken solely in the name of the plaintiff company. Francis’ explanation as to why Magnacca’s name did not appear on the title as the owner of a one- half interest was that Magnacca’s father was Mayor of Brandon at the time, and while no approaches had been made by either of them to City Council to rezone subject property, and while there was absolutely no question of any improper influence or pressure, they both felt that it might present a better public appearance if Magnacca was to remain as a silent partner, in fact, Magnacca was a 50-50 partner with Francis in the purchase of this land. The arrangement between the parties was reduced to an agreement in writing dated June 10, 1964.

The total area purchased was about 3.2 acres. Francis conceded that only about one-fifth of this property was needed for the restaurant. He said that Mrs Hammond would sell only the entire parcel and, because they desired this location, they were forced to take the entire parcel. After acquisition the partners took no steps to immediately develop subject property although on September 30, 1964 Francis did write the City Clerk advising that he was contemplating the construction of an apartment building thereon and inquiring when the City’s master plan for the area would be completed and whether apartments would be permitted under same. He says that during the period from 1964 to 1968 he visited City Hall frequently and had many discussions with officials there. As a result of these interviews, he says he was satisfied that, when the City’s master plan for the area was completed, construction of both the restaurant and apartments would be permitted on subject property.

On January 26, 1968 the City of Brandon, through its City Manager, wrote to the plaintiff as follows:

Re: North Hill Land Assembly Project

To make more land available for housing purposes the City of Brandon, in partnership with Central Mortgage and Housing Corporation, has embarked upon a land assembly and development project in the North Hill area of the City. This project involves the acquisition of all lands in the designated area and the design of a completely new subdivision plan. Then, as parts of the area are serviced with water, sewer, sidewalks, etc, serviced lots will be sold through the local office of Central Mortgage and Housing Corporation to persons intending to build.

It is now necessary that the City take steps to acquire title in the designated area to all of the land which is not already City owned. It is customary in such instances for the municipality to expropriate the land it requires. We have found from experience, however, that most people are willing to sell their property to the city at a mutually agreeable price. For this reason we do not wish to commence expropriation proceedings until all property owners affected by the proposed land assembly project have been given an opportunity to sell their land to the City voluntarily.

The letter then asked for an option to purchase subject property at a price of $20,000. Upon receipt of said letter, Francis held a series of meetings and negotiations with the City Manager and ultimately an agreement was reached on a price of $42,656 for subject property.

It is the plaintiff company’s one-half share of the profit realized on this sale to the City of Brandon that forms the subject matter of this appeal.

At this juncture, it is perhaps useful to deal with the evidence of Mr Frank R Perkins presently Development Co-ordinator employed by the City of Brandon. Mr Perkins has been in the employ of the City since 958. Originally he was the City’s Assistant Planner, later he was Secretary of the Planning Board. He is familiar with subject property. He said that in 1959 there was talk of development of the North Hill area which included subject property; that in 1959 the City put a freeze on development in the North Hill area because of its desire to develop a master plan for the entire area and consequently, the issuance of building permits in the area was suspended pending further direction from the Provincial Planning Service. At about that time a tentative plan of redevelopment was prepared for the entire area. Between 1959 and 1964 the City continued with its intention of opening up the area but nothing much concrete occurred. By 1964 it to open the area for development in the next month or so. The area is now called Kirkcaldy Heights and in a brochure prepared by the Municipal Planning Branch of the Manitoba Government in 1969 it is indicated that the corner of subject property where Francis wished to construct his restaurant is still considered suitable for such a use. The brochure also recommends that the balance of subject property should be developed for high-density residential purposes.

The legal principles to be applied in “trading cases” such as this are well known and I do not propose to extensively restate them here. The Supreme Court case of Regal Heights Ltd v MNR, [1960] SCR 902: [1960] CTC 384; 60 DTC 1270, is certainly one of the leading cases on the subject. The comments of Mr Justice Judson on pages 906 and 907 [of the SCR report] thereof are particularly pertinent to the facts of this case. Noël, J. (now Associate Chief Justice) applied those principles in the case of Racine et al v MNR, [1965] CTC 150; 65 DTC 5098.

At page 5103 he said:

To give to a transaction which involves the acquisition of capital the double character of also being at the same time an adventure in the nature of trade, the purchaser must have in his mind, at the moment of the purchase, the possibility of reselling as an operating motivation for the acquisition; that is to say he must have had in mind that upon a certain type of circumstance arising he had hopes of being able to resell it at a profit instead of using the thing purchased for purposes of capital. Generally speaking, a decision that such a motivation exists will have to be based on inferences flowing from circumstances surrounding the transaction rather than on direct evidence of what the purchaser had in mind.

In this case, only one of the partners to the transaction, Francis, gave direct evidence of what the purchaser had in mind. The other partner, Magnacca, was not called to give evidence at the trial. Francis said that his sole intention at time of purchase was to build a restaurant on subject property and that sometime after the acquisition he conceived the idea of utilizing part of the property for apartment blocks. However, Magnacca must have had a somewhat different intention because on March 20, 1969, after the sale to the City had been finalized, he wrote to his partner Francis as follows:

I notice by our file that we initially optioned the property in Nov of 63. Boy the time sure flies. I bet if we thought we were waiting for 5 /2 years to sell we would have had second thoughts.

From this letter is is clear that Magnacca had an intention, at time of acquisition, to resell at a later date if the opportunity to make a good profit arose. Francis and Magnacca were equal partners in this venture, there was no evidence of disagreement between them, they were good friends, the evidence all points to the fact that they proceeded in harmony throughout, and in pursuit of a common objective. Then, it is clear from the evidence that the actual zoning of subject property at all relevant times was agricultural, that as early as 1959 the City had suspended the issuance of building permits for subject area and that said freezing order was never lifted. Then, too, Francis made no application for rezoning to permit the construction of a restaurant; no application was made for rezoning to permit the construction of an apartment block although a written inquiry was made; only a very preliminary site plan was prepared for the restaurant at a very nominal cost to Francis; likewise a very preliminary proposed apartment development plan was prepared by an employee of Magnacca’s construction company at very little, if any, cost to the partnership. Francis had no idea what the cost of either the restaurant or the apartment block would be. He made no arrangements for financing either building project and he certainly did not have financial resources of his own to handle either project. He had discussions with his accountant and his banker. His banker was prepared to consider the financing of the restaurant once it commenced to operate, that is, he obtained qualified agreement from the bank on financing his operating expenses, but he conceded that he had absolutely no banking commitment on financing the construction.

In my view, the comments of Chief Justice Jackett in Pine Ridge Property Ltd v MNR, [1973] CTC 201, are equally apt in this case. The learned Chief Justice said in that case:

Where the relevant facts as at the time of purchase are considered together with the subsequent events and the affirmations of the appellant’s shareholders, it is not realistic to conclude that the only possibility that motivated the acquisition was the ultimate creation and retention of a very Substantial housing development. Having regard to the problems and delays to be expected by the appellant before it could hope to commence the concrete steps of realization of such a project, such as the creation of detailed plans, the arrangement of permanent financing and the negotiation of contracts, and having regard to the appellant’s lack of financial resources of consequence, one cannot escape the conclusion that, in 1964, the acquisition was a speculation in which, in addition to the hope of an ultimate permanent source of income, the possibility of turning the property to account for profit in any way which might present itself as convenient, or expedient, including resale at some earlier stage, was a major motivating factor.

In the case at bar we have two successful young businessmen, both natives of Brandon. They knew the city well; they knew the city had plans to develop a master plan of subdivision for the North Hill area; they saw it as a promising area for future commercial development, they speculated that the land there would increase substantially in value once the city completed its master plan for the area; the restaurant was an idea for the area, so was the apartment block but they were only ideas and they were a long way from fruition. I am satisfied that this acquisition was just as much a speculation for Francis as it was for Magnacca. I agree that he probably had a hope for future permanent income from The restaurant or the apartment block, but I also think that a major motivating factor at time of acquisition was the possibility of resale at a profit.

I am fortified in this conclusion by the fact that subsequent events would not have prevented him from keeping the property and building the restaurant and apartment block if this were his sole intention.

I referred earlier to the evidence of Mr Perkins to the effect that in most cases the City tried to give the owner back his original land. There was also the evidence that under the new plan a restaurant and high-density housing were recommended for subject property. Thus, it is quite probable that had Francis and Magnacca approached the City for an exchange, such an exchange would have been accom- lished and thus they would have been able to continue with the restaurant and apartment plans.

In summary, I have reached the conclusion that the objective facts and circumstances of this case clearly indicate a trading intention on the part of the plaintiff at time of acquisition of subject property.

Plaintiff’s action is accordingly dismissed with costs.