Fernando v. R., [1997] 3 C.T.C. 2850, 97 D.T.C. 1376

Bowie T.C.J.:

1 These four appeals, which were heard together on common evidence, arise out of the purchase and subsequent resale of a parcel of land of 40 acres in Halton Hills, in the province of Ontario. The purchase was made by a group of six people, or at least so it appears from the deed of purchase, for the purpose of building family homes. For reasons that I will come to in a moment, that intention failed, and the land was sold some eight years later at a substantial profit.

2 There are two issues before the Court. The first one is whether the purchase and subsequent resale has the character of an adventure in the nature of trade, with the gain on the resale being accordingly on income account. The second is whether the wives of the six purchasers named in the deed of purchase had a beneficial interest in the land, in which case they are entitled to share in the profits, and the profits attributable to their husbands are accordingly diminished. I should say four wives, rather than six, because there are only four of the purchasers before the Court. I have no idea what the facts may be with respect to the two members of the group who do not have appeals before me, and everything I say with respect to the group is limited to the four Appellants before me and to the wives of those four Appellants.

3 The Minister's assessment is supported on the basis that the husbands purchased these properties with a secondary intention that if they were unable to pursue their stated original intention of building residences on the 40 acres, and knowing that land values were rising rapidly in the area, they had in mind, as a secondary intention motivating the purchase, resale of the land at a profit.

4 The facts giving rise to the appeals begin in 1981, when Edward Cooray decided that he would like to buy a house in which to raise his young family. He explored houses available in the market and came to the conclusion he was unable to afford them. As a last resort, he went with his wife to look at prefabricated houses, which could be bought and transported to be erected on a vacant lot. They found one which was attractive to them and would fulfill their needs, and were told by the salesperson that it would require about $30,000 to buy it and a one-half acre lot to put it on.

5 In a conversation with an acquaintance at work soon after he mentioned this. His acquaintance, who along with his wife was in the real estate sales business, told him some days later of the availability of a 40-acre parcel of land at Halton Hills. This land is located near the intersection of Highways 7 and 10 outside Metropolitan Toronto, and within reasonably close driving distance of where Mr. Edward Cooray was working at that time. He, however, was looking for one-half acre of land, and expected to pay something like $30,000 for it. While he was attracted by the proposition, he had neither the need for the 40 acres of land, nor the $99,000 required to purchase it. He did, however, finding this to be an attractive prospect, consult with his brother, his wife's cousin, and with a close family friend, all of whom had immigrated to Canada at about the same time, and who formed, according to their evidence, a closely knit family group. All of them, or almost all of them, were raising young families, and to all of them the idea of being able to build houses in the country was an attractive one.

6 I heard evidence from the four Appellants and the wives of each of them. I found their evidence to be consistent; they were all forthright and believable in their evidence, and I accept what they had to say without reservation. Each husband and wife discussed the proposition that Edward was putting forward and they ultimately all decided to participate in it. After some negotiation, the property was purchased. The total adjusted cost base was $99,309.

7 It was Edward's desire, and the others agreed to it, that he should be able to build a house right away. None of these people had any degree of sophistication with respect to legal or planning matters. All had achieved some degree of education, they all have worked hard since coming to Canada and have had considerable success, but they knew very little about the purchase of real estate, or about regulation of the use of land and the legal matters associated therewith.

8 They were assured by the real estate agent with whom they were dealing that it would be possible to build one house first on the 40-acre parcel and, having built that, apply to the town of Halton Hills for permission to sever it, and subsequently build another house on the remaining lands, with a subsequent application to sever that. Their intention was they would continue doing so until they had six houses. It is important to note that there was sufficient road frontage to enable six houses to be built while observing the frontage requirements in the area. What they did not know at the time of purchase was that the municipal government had in mind a hamlet study, and the prospect of having lands that were zoned as agricultural rezoned or subdivided, pending the hamlet study, was at least improbable, if not impossible. In entering into the purchase, they retained a lawyer by the name of Mr. Janjua, and their instructions to Mr. Janjua were that they wished to build houses on this land and that the purchase was to be made by the six persons whose names appear on the deed, and by the wives of those six people. As to the first matter, Mr. Janjua did confirm by letter with the town of Halton Hills that one single family house could be built. He did not pursue inquiries further, and neither did the Appellants, as to the viability of proceeding after that to obtain severance and build a second house and so on. Mr. Janjua, who is no longer practising law and has left this country, told them it would be difficult to take title in the names of twelve people, and that it was not necessary for the wives to be registered on title in any event, because their interests would be protected under the laws of Ontario. For that reason, title was taken only in the names of the six husbands.

9 Shortly after the closing of the purchase Edward's plans to build the first house started to unravel. His first difficulty was that his employment situation became somewhat tenuous as the company for which he worked made a major reduction in its number of employees and, as he had feared, he was subsequently laid off. He found another job not long thereafter, and while he returned to work, he felt that his position in his new place of employment, at least initially, was not sufficiently secure that he could immediately raise the necessary funds and proceed with building a house. In addition, his new job involved shift work, which required that for periods of time he worked the midnight shift, and his wife was reluctant to stay alone with the children in a house in a remote area in the country while he worked a midnight shift. A possible solution was to attempt to sponsor the immigration of a nanny to live in their house and help to look after the children, but this did not occur for reasons relating to her inability to secure immigration status. As a result, Edward concluded he could not build a house in the immediate future, and he ceded his right to build the first house to his brother Gamini.

10 Gamini then explored the possibility of building, and he obtained estimates of the cost of erecting a building and putting in services and so on, and discovered that in addition to the equity in the house that he and his family were living in, he would require approximately another $80,000 or $85,000. To obtain this, he went to the bank to arrange for a mortgage and was surprised to learn from the bank that while they would advance him the loan, because the 40-acre parcel of land was not severed but was held by the six husbands, with the interests of six wives at least potentially involved, the bank would require all twelve of them to sign a mortgage. The bank manager went on to advise him that all twelve of them would be owners of any house he erected on the undivided parcel of land.

11 This created a very great obstacle, not only to Gamini Cooray building, but to any of the Appellants building on the parcel as it existed without severance. They did, to the best of their ability, make overtures to the town of Halton Hills to see what could be done about obtaining severance, but were advised that they would make no progress pending the town's hamlet study. At a chance meeting one of the brothers was advised by an employee of the planning department that if they wished to pursue the idea of dividing the land, they could only hope to do so by getting some professional help. As a result they consulted with three different companies, all in one way or another involved in the business of planning, and they got proposals from each of them. When they saw these proposals they realized that they were completely out of their depth in this project to divide the lands into 15 or 16 lots, which they wished to do in order to provide building lots for themselves, to have lands for recreational use, and to have building lots which they would pass on in due course to their children. However, this was going to entail a good deal more expense than they, as average working people, were able to undertake.

12 It is, I think, not totally insignificant that at this stage they did not turn, as others might have, to pursuing the possibility of a severance that would involve both their family ambitions and some lots for commercial sale. This phase of the story, I think, ends at the point where Mr. Fernando and his wife went to consult their lawyer and were told by her that they were at risk of being involved in a project that would be completely beyond their capabilities, and that they would be best served by selling the land and abandoning their aspirations to create a family compound on estate lots in the country.

13 The group did in fact follow that advice, and the property was sold for a net sale price of $1,005,074 in 1989. The Minister bases his case for a secondary intention on two things. The first is that the land, being near Metropolitan Toronto, was in a speculative area where prices were rising rapidly, and secondly that an agreement signed by the six male members of the group in November 1981, at the time of the purchase, makes reference in three of its paragraphs to the possibility of utilization of the property for “development, sale, or subdivision”. This reference in the agreement, says the Minister, shows that at the time of the purchase there was a secondary intention that some form of development, sale or other commercial use of the property might be made. In the case of Racine v. Minister of National Revenue[FN1: <p>(1965), 65 D.T.C. 5098 (Can. Ex. Ct.).</p>] , Mr. Justice Noel, as he then was, 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 that he must have had in mind that upon a certain type of circumstances 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.

14 Mr. Ghan argued forcefully that I should draw such an inference, based on the fact that prices were known to be rising in the location of this land at the time it was bought, and on the basis of the paragraphs to which I referred earlier in the agreement of November 17, 1981. In order to draw such inferences I would have to reject the very forthright evidence given by the witnesses who appeared before me at trial, and I am not prepared to do this. While the paragraphs in the agreement of November 17 could possibly lead to such an inference, I am satisfied by the Appellants' explanations with respect to that document. The evidence was that the lawyer, Mr. Janjua, was instructed to prepare a document that would give protection to the interests of these individuals, and specifically it was of concern to Edward Cooray that his right to build the first house would be protected in such a document. In the middle of the document the following paragraph appears:

The subject premises purchased by the tenants in common comprise of a vacant parcel of land and, in the event a building permit is available, the first choice to build and construct shall be given to Edward R. Cooray for such type of premises and in such location as all the parties hereto agree.

15 Insofar as the rising prices are concerned, I am satisfied from the evidence of the Appellants and their wives that this formed no motivating element in their decision to enter into this purchase. Their motivation was singular; it was to provide themselves, and the next generation of their families, with land on which to build houses, and to have some land on which they could indulge in recreation.

16 I cannot, I think, express my view of the evidence in this case in any words more appropriate than those used in a different, but similar, case by Judge Rip of this Court[FN3: <p><em>Natale v. Minister of National Revenue</em>(1984), 84 D.T.C. 1439 (T.C.C.)at 1442.</p>] :

...There was no evidence the appellant and the other owners had a possibility of reselling at a profit as an operating motive for the acquisition, nor was there evidence that the possibility of reselling at a profit was a secondary intent in their minds at the time of acquisition. That five hard working taxpayers purchased farmland for a modest sum and sold it much later for a very large profit is not in itself a badge of trade. In my view the appellant and his four associates purchased the property for the reasons they professed in testimony before this Court. The profits on the sale of the property were on account of capital.

17 I turn now to the question whether the profit on the sale is properly divided six ways, as is the view taken by the Minister in these assessments, or whether it should be divided twelve ways. The four Appellants and their wives gave consistent evidence on the issue, and I accept it. It was the intention of all of them that the husbands and wives would be equal owners of the six tenancies in common, and I am satisfied they would all have been named in the deed as purchasers, but for the inexplicable advice given to them by Mr. Janjua that it was difficult to put twelve names on a deed, and in any event unnecessary.

18 The evidence showed that these four Appellants and their wives all worked hard and continuously since immigrating to Canada; that they opened joint bank accounts soon after arriving here, and that they contributed their earnings to those joint accounts. In each case the earnings of the husbands were somewhat greater than the earnings of the wives, but that in my view is not a matter of significance. It is clear that the deposit of their earnings in the joint accounts, and the fact that they satisfied both their joint family needs and their individual needs out of those accounts, leads inevitably to the inference that it was their intent to share equally in the proceeds of their efforts, and in the balances from time to time in those accounts.

19 I am satisfied, too, from their evidence that each of the four couples had a common intention as between husband and wife that the ownership of their one-sixth part of the 40-acre parcel would be shared equally between them. In each case the contributions to the down payment and to the subsequent mortgage payments on the land were made from those joint accounts.

20 It is clear from the judgment of the Supreme Court of Canada in Rathwell v. Rathwell, [1978] 2 S.C.R. 436 (S.C.C.), that there is, with respect to each of the four Appellants and their wives, a resulting trust in favour of the wives for a one-half share of the interests held by their husbands. The four appeals are allowed. The assessments will be referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the gain on the sale of the 40-acre parcel of land was on capital account and not income, and that one-twelfth only of that gain is attributable to each of these Appellants. The Appellants are entitled to their costs.