Leo O Lund v. Minister of National Revenue, [1972] CTC 2202, 72 DTC 1213

Roland St-Onge:—This appeal was heard at Vancouver, BC on October 26, 1971 by the Tax Appeal Board as it was then constituted.

In his statement of facts the appellant alleged the following:

1. (a) During 1965, the Appellant together with a group of co-investors, acquired certain lands in the City of North Vancouver, British Columbia, with the sole intention of erecting thereon, a substantial apartment development as a long term revenue producing investment.

(b) In proceeding with this development, these investors made the necessary applications for zoning, had feasibility studies undertaken, prepared architectural plans and drawings for the project and entered into negotiations with various mortgage lenders to obtain the requisite financing.

(c) Despite their best endeavours, all attempts to obtain the requisite financing from mortgage lenders were frustrated.

(d) Subsequently, an unsolicited offer for the subject lands was received by the Appellant and his co-investors, which was considered reasonable and was accordingly accepted.

(e) The Minister of National Revenue has treated the sum of $3,303.08, being the Appellant’s share of the gain realized upon the disposition of the subject lands, as representing taxable income to the Appellant for the 1966 taxation year.

In his Reply to the Notice of Appeal the respondent stated, among other things, that:

(a) the syndicate members or participants in the transaction the taxability of the results of which is in dispute are:

Leo O Lund,	the Appellant, an architect
Bruce W Shaw (now deceased),	a School Board Superintendent of Build
	ings
Philip Goddard,	a real estate salesman
Jan M Rienstra,	Economist and President of the company
	which prepared the feasibility study refer
	red to herein:
	and
Ingmar Lauringson,	an engineer, through his company, Laur-
	ingson Enterprises Ltd, an engineering,
	drafting and land development company.

(b) by training or occupation or both, all of the foregoing but Bruce W Shaw, now deceased, are skilled in and conversant with, matters of real estate and land development;

(c) neither the Appellant, nor the other syndicate members, individually or collectively, commanded the financial resources necessary to ensure the success of the venture;

(d) an application for financing of a 108-suite apartment block, accompanied by a feasibility study prepared by Joseph B Ward & Associates (International) Ltd, consulting economists and engineers, a firm of which the syndicate member Rienstra was president at the time, was turned down by Central! Mortgage and Housing Corporation on or about July 19th, 1965;

(e) that application, which was rejected before the Appellant or the syndicate had executed any agreements for the purchase of the land, the sale of which gave rise to this appeal, is the only recorded effort to obtain financing;

(f) the evidence with respect to further financing efforts and the preparation of further plans and studies is inconclusive;

(g) the sequence of events after the rejection of said application by Central Mortgage and Housing Corporation is as follows:

(i) an agreement for the sale and purchase, for the sum of $80,000.00, of the interest of one Derrick Humphreys in Lots 10 to 13 inclusive of Block 110, District Lot 548, Group 1, New Westminster District, Plan 750, was executed between the said Humphreys, as vendor, and the Appellant, as purchaser, in August, 1965;

(ii) an interim agreement for the sale and purchase, for the sum of $20,000.00 of Lot 9 of Block 110, District Lot 548, Group 1, New Westminster District, Plan 750, was signed by one Fred R Barregar (who had acquired title to the said lot the same day), as vendor, and by the Appellant, as purchaser, on December 14, 1965;

(iii) on February 1st, 1966, an interim agreement for the sale and purchase, for the sum of $130,000.00, of Lots 9 to 13 inclusive, of Block 110, District Lot 548, Group 1, New Westminster District, Plan 750, was signed by the Appellant as owner (vendor), and Pacific Western Builders Ltd, as purchaser;

(iv) at no time did the Appellant or the syndicate or any of its members actually acquire title to any of the land involved; nor was a right to purchase or any other charge in their favour ever registered against any of the titles affected;

(v) Title to the property was transferred from the respective owners thereof directly to the said Pacific Western Builders Ltd:

Lot 9	from Fred R Barregar
Lots 10 & 11	from Derrick Humphreys
Lots 12 & 13	from one Nora Goff.

Also in his Reply to the Notice of Appeal the respondent says that he made (inter alia) the following further assumptions of fact:

(a) the land was sold to Pacific Western Builders Ltd, within eight months of the preparation of the feasibility study hereinbefore referred to; less than four months after the execution of the agreement with Humphreys for the purchase of Lots 10 to 13; and within two months of signing the agreement for Lot 9 with Barregar;

(c) the land is located in an area in which construction of similar projects was being carried out during the period or periods mentioned in subparagraph (a) of paragraph 5;

(d) the alleged offer from Pacific Western Builders was received immediately on its having completed the construction of a substantial apartment block nearby;

(e) the said Pacific Western Builders Ltd, was, at all times relevant to this appeal, a client of the appellant.

Except for the late Mr Shaw, every participant to this transaction testified and the first witness heard was Mr Lund. He stated that he had never bought or sold properties with the exception of his residence. He knew that North Vancouver had an unfortunate history of highrise building, but the location he had in mind on which to build the 108- suite apartment block was in front of a city park, guaranteeing a majestic and unobstructed view, and he considered it a perfect site on which to erect such a building. With this in mind, he contacted one Mr Persesky, who had already built three highrise buildings in that area and who, naturally, was inclined to repeat the same experience. However, the latter did not see fit to build such a substantial structure and was willing to build an apartment block containing only 60 suites. Despite this first obstacle, Mr Lund still persisted in his project and, considering the site too precious on which to build only a 60-suite apartment building, decided to associate with others so that he could pursue his plans. He first met with a real estate agent, Mr Philip Goddard, and they had a feasibility report prepared (at a cost of $1,800) in order to convince prospective members to join the association. They then went to see a lawyer for the purpose of having a document drawn up in connection with the formation of a syndicate.

Mr Goddard was designated to look after the acquisition of the lots and each member was called upon to render services according to his profession or trade. The fees earned therefrom were to increase their equities in the project. The appellant wrote to the municipality to find out if there were any additional costs involved in obtaining adequate water and sewer facilities, and he prepared preliminary sketches for the erecting of the 108-suite apartment building. In order to obtain the necessary finances these plans were shown to Montreal Trust in Vancouver, which company apparently approved the $1 million loan required, but which was later on reduced to $880,000 by the Montreal office. Thereafter the same plans or sketches, along with a statement of prospective rental revenue and building costs (prepared by the appellant), were sent to Central Mortgage and Housing Corporation (CMHC) in an attempt to obtain more money than the $880,000 offered by Montreal Trust. Following this request CMHC demanded a re-design of the building and some other adjustments. Mr Lund tried to comply with their requirements and prepared a new set of plans

— again in respect of a 108-suite apartment building. He explained that CMHC either loaned money directly to a developer or insured a loan effectuated by a finance company. With respect to this latter method the syndicate members had to go through an approved Canadian lender, but because of the tight-money policy in 1965 this loan, apparently, was not available.

The appellant contacted many other finance companies but was unable to obtain a mortgage. In January he asked Standard Life Company (which had financed the aforementioned 60-suite apartment building erected by Mr Persesky) for the necessary finances, but that company had already loaned money in that area and said they could not lend more. Discouraged by this refusal and after discussion with the members of the syndicate, he offered the lots for $130,000 cash to Pacific Western Builders Ltd, which company succeeded in getting a direct loan from a finance company.

Upon cross-examination, he admitted: that everything, including his contacts with the different finance companies, was done verbally; that he refused a first mortgage of $880,000 because he wished to obtain a larger loan in order to avoid a second mortgage; that the lots were at all times registered in the owners’ names and were never transferred to the members of the syndicate; and that the syndicate members first paid $25,000 and then $20,000, which created an equity of $9,000 for each one.

Mr Philip Goddard corroborated Mr Lund’s testimony and stated that his intention, in investing in this project, was to create an income because of the fact that he did not have a pension plan. According to him, the syndicate failed in its project because it was unable to get the necessary finances. He also testified: that the late Mr Shaw had been a builder and a maintenance carpenter; that Mr Shaw, in addition to owning four properties, had owned a parcel of land which he had subdivided and partially sold in lots and consequently was in a position to pay his share in the syndicate.

In his testimony Mr Derrick Humphreys stated that Mr Lund had come to him with plans in his possession and tried to interest him in finding a buyer-builder; that he (Lund) had made numerous efforts to that end, and had finally come with Mr Goddard and bought the lots.

According to the evidence adduced, most of the relevant allegations of the respondent were proven — which is more than enough to dismiss the appeal. As may be seen, there is nothing in the verbal evidence to contradict the respondent’s allegations as to the relevant facts. On the contrary, the evidence indicates that they were not in a financial position to realize such a project and the only money the members were ready to invest was the amount needed to assemble the required lots for the project. Mr Lund’s attitude seems to reveal that he did not really want to realize the erection of an apartment building. He knew about the unfortunate history of such projects in North Vancouver; he even consulted an experienced builder in the area and he did not want to build an apartment block with more than 60 suites. Despite this first difficulty, he persisted in his unrealizable project with people who were able to assemble lots and initiate such a project but who were not financially able to carry out a 108-suite apartment building project. This could be a reason why, in spite of their numerous requests to finance companies and to Central Mortgage and Housing Corporation, they were unable to procure the necessary financing. On the other hand, both Mr Lund and Mr Goddard had some experience in real estate transactions — especially Mr Goddard who was an experienced real estate agent. In the circumstances, they must have contemplated selling the project if they were unable to finance it. Furthermore, his association with the real estate agent is another strike against the appellant with respect to his alleged intention of buying the building lots for investment purposes.

The case of MNR v Pine Ridge Property Ltd, [1971] CTC 752: 71 DTC 5392, was much stronger than the instant case, and in the Federal Court of Canada — Trial Division the gain was ruled to be income.

For all the above reasons the appeal is dismissed.

Appeal dismissed.