Heald, J:—This is an appeal from respondent’s income tax assessment of the appellant for the 1966 taxation year. What is involved is the sum of $17,862.85 realized by the appellant as profit on the sale of real property owned equally by the appellant and his sister, Mrs Ettie Wiss. Mrs Wiss also appealed her 1966 income tax assessment and the two appeals were heard together by agreement of counsel. The appellant and Mrs Wiss have been assessed on the basis that the sum of $35,725.70 ($17,862.85 each) was profit from a “business” within the meaning of sections 3, 4 and subparagraph (e) of subsection (1) of section 139 of the Income Tax Act. Appellant contends, on the other hand, that the subject property was purchased as an investment, was held and used as such and that the gain resulting from the sale thereof is a capital gain and not income.
The subject property is situated at the corner of Emerson Avenue and 8th Street in the City of Saskatoon, Saskatchewan and is described as Lot 4 and the most northerly 25 feet of Lot 5, Block 285, Plan 61S 17721. Said Lot 4 was created in 1961 by the re-plotting of Lots 3 to 10 inclusive, Block 24, Plan G 108 which had been purchased in March of 1965 by H B M Holdings Ltd. H B M Holdings Ltd was a family holding company (“H” for Henry Lehrer, the father of the appellant herein and his sister Ettie Wiss; “B” for Bernard Lehrer, the appellant herein and “M” for Morris, the husband of said Ettie Wiss). The cost price to said H B M Holdings Ltd for the land alone was $12,000. The property was originally called the Dairy Bar and was Operated as a drive-in ice cream parlor. The total price paid for the land, a small buiding and the equipment was the sum of $17,500. Said H B M Holdings Ltd sold the said Lots 3 to 10 inclusive, Block 24, to the appellant Bernard Lehrer and his sister Ettie Wiss in June of 1958 and the affidavit of true consideration for this conveyance is shown at $17,500, the same price paid for the land, building and equipment by H B M Holdings Ltd.
As above stated, said Lots 3 to 10 inclusive were re-plotted in 1961 and became Lot 4, Block 285, Plan 61S 17721. Also in 1961, appellant and Mrs Wiss purchased from the City of Saskatoon the most northerly 25 feet of Lot 5, Block 285, at a cost of $750. After this acquisition, subject property had a frontage of 219.9 feet on 8th Street and 140.2 feet on Emerson Avenue.
H B M Holdings Ltd purchased said Lots 3 to 10 inclusive from one Thomas C McGregor who had operated it as an ice cream drive-in business. H B M Holdings Ltd operated it in like fashion in 1956 and 1957. In 1956 it was operated by one Schwick on a lease-profit-sharing arrangement; in 1957 by one Sugarman, also on a lease basis. In 1956, the gross rental was $1,150, the expenses were $1,150 and the net revenue to H B M Holdings Lid, the owner, was nil (Exhibit A-8). In 1957, the gross rental was $770, the evidence of expenses was incomplete but I would infer from the expense vouchers that were filed that there would be very little, if any, net revenue to the owner from said property in 1957, In 1958, the property was leased to Square Deal Service Station Ltd for use in selling trailers to the public. The gross rental in 1958 was $1,887.50. Again, the evidence as to expenses was unsatisfactory and incomplete but, as in 1957, I think it a reasonable inference that the net revenue to the owner would be quite modest indeed.
The Square Deal lease had been negotiated between the appellant, representing H B M Holdings Ltd, and one Boitson representing Square Deal. Later on, in 1958, said Boitson, representing himself and one Dietrich, approached the appellant for a long-term lease on subject property for the purpose of erecting and operating thereon an A & W Drive-In Restaurant. As a result of ensuing negotiations, the appellant Bernard Lehrer and his sister, Ettie Wiss (by now the owners of subject property), by a lease dated October 16, 1958, leased subject property to said Boitson and Dietrich for a period of 10 years for use as an A & W Drive-In Restaurant. The annual rental was $4,750. Said lease contained, inter alia, a clause entitling the lessees “to erect any buildings they may require on the said land for the purpose of operating the said A & W Root Beer Drive-In and associated businesses . .. but such buildings shall become part of the freehold and be the property of the Lessors on the expiration of the term hereof. .. .”
Said lease also gave an option to purchase any time during the currency of the lease for $47,500.
The lessees constructed a building on subject property and opened their A & W Drive-In business in May of 1959. The cost of said building was in the order of $18,000. Lessees continued to operate said business until May of 1963 when a new lease was entered into between the appellant Bernard Lehrer and his sister, Ettie Wiss, as lessors and Prairie Business Enterprises Ltd, which Saskatchewan corporation was now operating said A & W Drive-In business. This new lease was for a period of 20 years from January 16, 1963. It provided for an annual rental of 5% of lessee’s gross annual sales with a “floor proviso” that the annual rental would not, in any event, be less than $3,190. Said lease contained the same clause as the earlier lease concerning Lessees’ right to erect buildings which became part of the freehold and the property of the lessors on the expiration of the lease. There was also an option to purchase up to October 15, 1968 (the same date as in the earlier option) for basically the same price as before (adjusted upward slightly to cover the additional 25 feet acquired from the City in 1961). This lease also provided that the tenant was to pay the property tax whereas the earlier lease required the owners to pay same.
Pursuant to the terms of said option, the lessee exercised its option to purchase towards the end of 1966 for the option price of $48,900. It is the profit on this sale that the respondent seeks to tax.
The appellant is 50 years of age, was born in Saskatoon, has lived there most of his life except for a period of service in the armed forces. Upon his discharge from the Air Force in 1946 he returned to Saskatoon and entered the family business, Lehrer’s Department Store where he was employed as assistant manager. He says that he was also part owner. He and his father acquired a 25% interest each in the Big T Motel on 8th Street in 1954 which interests were sold in 1958 due to a difference of opinion with the other shareholders. Also, in 1954, the family sold its department store business resulting in a fairly large sum of money being available for other enterprises. Extensive evidence of such other enterprises was adduced at the trial and may be summarized as follows:
PROPERTY No 1 — Corner of Grosvenor Avenue and 8th Street; 161.4 foot frontage on 8th Street by 124 foot depth; acquired by appellant’s parents, partly in 1954, partly in 1956, transferred to H B M Holdings Ltd in 1958 and then to appellant and Mrs Wiss in 1960; sold in 1964 to Pacific Petroleums at a profit in the order of $32,000.
PROPERTY No 2 — Not a purchase or sale but introduced in evidence because it adjoins Property No 1 and appellant and Mrs Wiss tried unsuccessfully to purchase it from the City. They bid $50,000 but the City sold the property to the highest bidder ($61,100). This property was two lots, one on each side of Property No 1.
PROPERTY No 3 — Corner of Louise Avenue and 8th Street; 113.9 foot frontage on 8th Street by 190 foot depth; acquired by H B M Holdings Ltd in 1956, transferred to appellant and Mrs Wiss in 1956, sold in 1959 to North Star Oil at a profit in the order of $16,000.
PROPERTY No 4 — This property is the subject matter of this appeal — located at the corner of Emerson Avenue and 8th Street with a frontage of 219.9 feet on 8th Street and 140.2 feet on Emerson Avenue; acquired by H B M Holdings Ltd in 1956, sold to appellant and Mrs Wiss in 1958, leased with option to purchase in 1958, the option being exercised in 1966 at a profit amounting to approximately $35,000.
PROPERTY No 5 — situated on 8th Street East between Argyle Avenue and Arlington Avenue — 471 foot frontage on 8th Street by 450 foot depth. This property is the Holiday House Motel first acquired in 1958 and at all relevant times owned and operated by the appellant and Mrs Wiss. This motel was expanded from 12 units to 80 units and a motor hotel building constructed complete with dining and beverage rooms. That expansion has continued until the present time, the present investment in this complex amounting to approximately $1 million. Appellant describes himself as a hotel and mote! operator, he has his office in the Holiday House building, he considers the operation of said complex a full-time job and spends most of his working day in his office there.
PROPERTY No 6 — This property adjoins the Holiday House Motel, has a frontage on 8th Street of 153.3 feet by a depth of 450 feet; acquired in 1963 and still owned by appellant and Mrs Wiss. A building was constructed and is being leased to the Fiesta Drive-In.
PROPERTY No 7 — This is the Colonial Motel property and covers the 1300 block on 8th Street between Wiggins Avenue and Ewart Avenue; acquired by appellant and Mrs Wiss in 1960 and still owned and operated by them.
PROPERTY No 8 — Corner of Walpole Avenue and 8th Street — 130.5 foot frontage on 8th Street by 120 foot depth. This property was purchased by appellant alone in 1959 and sold in 1965 at a profit of approximately $15,000.
PROPERTY No 9 — Unlike the previous eight properties, this and succeeding properties are not situated on 8th Street. This property is situated immediately north of the Saskatoon Airport on the West side of Idylwyld Drive and contains 29 acres; and was purchased in 1959 by the appellant and two other individuals. This land is still held and has been unproductive since acquisition. In 1966, the Saskatchewan Department of Highways expropriated 16.20 acres for roadway purposes so that about 13 acres still remain.
PROPERTY No 10 — This property is situated at the corner of Idylwyld Drive and 46th Street, has a frontage of 400 feet on Idylwyld Drive by a depth of 599 feet and contains about 5.5 acres. This property was purchased in 1959, and sold in 1966 by the appellant and Mrs Wiss at a profit of $30,000.
PROPERTY No 11 — Corner of Idylwyld Drive and 33rd Street; acquired by H B M Holdings in 1959 and the Skybird Motel constructed thereon. Said motel was sold by appellant and Mrs Wiss in 1965 at a profit of $65,000.
PROPERTY No 12 — This property is an apartment block in downtown Saskatoon at the corner of 1st Avenue and 23rd Street generally known as The Hunt Block. Said property was purchased in 1957 and sold in 1958 by the appellant and Mrs Wiss at a profit of $36,500.
PROPERTY No 13 — This property is known as Massey Place, being a quarter section of land legally described as NW-31-36-5-W3rd. The appellant acquired a one-third interest therein in 1960. The land was sold in 1961 by the appellant and his partners, one Churchill and one Shectman at a profit.
PROPERTY No 14 — This property is the South Half of Section 15-36-5-W3rd and is on the southerly boundary of the City of Saskatoon bounded by Clarence Avenue on the West and by Preston Avenue on the East. I refrain from giving the details of this transaction because the only evidence before me was to the effect that appellant at no time had any beneficial interest in this property. Accordingly I attach no significance to this transaction.
The legal principles to be applied in “trading cases” are well known and need not be extensively restated here. The Supreme Court decision of Regal Heights Ltd v MNR, [1960] SCR 902; [1960] CTC 46; 60 DTC 1270, represents an application of those principles.
A thoughtful analysis of these principles is contained in the judgment of Noël, J (now the Associate Chief Justice of this Court) in the case of Racine, Demers and Nolin v MNR, 65 DTC 5098: [1965] CTC 150, where he says at page 5103 [pp 158, 159] thereof:
It seems to me that one must ask oneself the question, was the only objective of the appellant, at the time they made their purchase, to add this business to all their other enterprises, or did they acquire the business for the purpose of running it and for the purpose of reselling it at a profit following circumstances which might arise and offers which might be made to them?
In examining this question whether the appellants had, at the time of the purchase, what has sometimes been called a “secondary intention” of reselling the commercial enterprise if circumstances made that desirable, it is important to consider what this idea involves. 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.
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.
In the case at bar, what did the appellant have in his mind at the moment of purchase? What inferences flow from the circumstances surrounding the transaction in question?
8th Street East is an arterial entrance to the City of Saskatoon from the entire southern and eastern parts of Saskatchewan including the cities of Yorkton and Regina and during the 1950’s and 1960’s was the main such entrance. Appellant’s evidence was that from 1954 on, the entire area on both sides of 8th Street was in a state of flux. it had been residential property, it was being re-designated by the City as highway commercial; the residential homes were being gradually moved out; the City was re-plotting, making the lots deeper and thus more desirable for highway commercial ventures. His evidence was that while 8th Street was not zoned commercial, the City as early as 1954 had adopted a “spot” re-zoning policy and there was no difficulty then or later in obtaining a re-zoning to commercial. He says they were still re-zoning lots on 8th Street as commercial as late as 1964 so that the greater portion of 8th Street now contains commercial establishments. Appellant admits that, over the years, he has purchased a good deal of property on 8th Street, that he thought of it “as an excellent place to go into business” both for himself and for anybody else, for that matter.
The appellant let real estate agents in Saskatoon and in other Western Canadian cities know that he was in the market for real estate. He particularly notified one and possibly two Saskatoon real estate firms that he was in the market for 8th Street property. However, where he parts company with the Minister’s assessors is his contention that he was interested in investment properties and that he bought subject property as an investment.
When he purchased subject property, it had a small drive-in ice cream business on it. Appellant carried on this business for two years with very little profit, then rented the property for a trailer sales business, then he was contacted by the A & W people.
In my view, appellant, as an experienced and sophisticated businessman, bought this land because it was a good “buy” and because it was in the “path” of Saskatoon’s commercial development. I do not think that subject property was “dedicated” at the time of acquisition to any particular use. The improvements on it at that time were minimal. I think it was capable of ending up either as a venture in the nature of trade or as a revenue producing investment.
The facts in the case at bar are similar to the case of Edgeley Farms v MNR, 68 DTC 5174; [1968] CTC 240 (Jackett, P); 69 DTC 5228; [1969] CTC 313 (Supreme Court of Canada, Judson, J). In that case, appellant was incorporated in 1959 to acquire 350 acres of land. Appellant farmed the land for a short time and then leased it for 25 years. The lease contained an option clause entitling lessee to purchase all or part of the property. Part of the land was sold at a profit in 1962 under the option clause. In 1963 another part of the land was expropriated resulting in a profit. The Minister sought to tax both profits on the basis that they were income from a business.
President Jackett allowed the taxpayer’s appeal. It was his view that the land was not dedicated at the time of acquisition to any particular use. If the acquisition had been followed merely by the 1962 sale, he states he would have held that the profit was profit from a business. The learned President held that by entering into the lease, the appellant had committed itself to holding the land as income-producing land for 25 years. The learned President’s view was not changed by the presence in the lease of the option clause.
On appeal to the Supreme Court of Canada, the learned President’s decision was reversed and the transaction in question was held to be a trading transaction. At page 5229 [p 313] Judson, J, in delivering the judgment of the Court, said:
The ratio of the judgment under appeal is that the company had committed itself to holding the land as income producing land for 25 years and that the option clause in no way constituted a dedication of the land to a trading operation. Here, I think, there is error.
When the company gave this lease and option its earlier indecision was resolved. This is not the “bare land leasing proposal” referred to in the quoted reasons for judgment. The option, in my opinion, is all important. It was the method which the company adopted in putting through its real estate transactions.
I said earlier that President Jackett’s view of the lease was not changed by the presence in the lease of the option clause. However, at page 5175 [243] of his judgment, the learned President has this to say:
The situation would have been different if the lease had been a mere device for dictating the terms of a land disposition operation. This might have been the case if the lease had been only part of a larger agreement between the appellant and the lessee. It might well have been a fair inference if the rent were so high in relation to the option price as to constitute a strong incentive for the lessee to exercise its option rights. Other circumstances, if they had existed, might have given rise to the same conclusion.
In my view, in the case at bar, there are other circumstances which lead me to conclude that this transaction has to be considered a trading transaction.
First of all, in the first A & W lease option agreement entered into in 1958, the rental for the 10-year period was $47,500, the option price was $47,500, that is to say, the option price dictated the yearly rental. I think it is clear that the A & W people were prepared to pay that rent in order to obtain the option. The evidence was that in the negotiations leading to the lease, the lessees insisted on the option. Then there was the provision in the lease allowing the lessee to erect all necessary buildings for the operation of their A & W business, and that said buildings were to become part of the freehold and the property of the lessors on expiration of the lease. The evidence was that the A & W building erected cost in the order of $18,000. This provision was, of course, a very strong incentive for the lessee to exercise its option rights. I am firmly of the opinion, after looking at all of the circumstances, that, in this case, the lease was a mere device for dictating the terms of a land disposition operation.
learned counsel for the appellant concedes that appellant is a “trader” in respect of some of the transactions above listed, but says that appellant was not a “trader” prior to 1959 and after 1959, was only a “trader” in respect of “bare land” sales. With deference, this submission is not, in my view, supported by the facts. Property No 1 was acquired by appellant’s family, through appellant’s directions and control in 1954 and 1956 and sold in 1964. This transaction was taxed as a trading transaction. This appellant appealed the assessment to the Tax Appeal Board which appeal was dismissed (70 DTC 1174; [1970] Tax ABC 241).
Property No 2 adjoins Property No 1 on both sides and Is significant because appellant as early as 1956, tried to acquire same from the City. Property No 3 was acquired by appellant and Mrs Wiss in 1956, sold in 1959 at a profit. The evidence is that appellant and Mrs Wiss paid income tax on the profit arising from this sale as a trading profit.
These three transactions clearly establish the appellant and Mrs Wiss as “traders” as early as 1956.
I am also unable to accept counsel’s argument that appellant’s trading transactions should be restricted to “bare land transactions”.
Most of appellant’s land transactions were in two general areas of the City of Saskatoon. The first eight listed were on 8th Street, the south-eastern arterial entrance to the City. The remainder (excepting the Hunt Block, an apartment building in downtown Saskatoon which was treated by the Minister’s assessors as a Capital gain transaction) were at or near the northerly entrance to the City, on or near Idylwyld Drive — also an arterial entrance to the City from the northern parts of Saskatchewan and particularly from the Cities of North Battleford and Prince Albert.
I think the appellant and Mrs Wiss bought these parcels for their strategic locations and not because they did or did not have an exist- ing business on them. They were in the motel business but they were also in the land trading business at least as early as 1956. I think that the fact that subject property had on it at time of purchase a small drive-in ice cream business was incidental and played no part whatsoever in appellant’s decision to buy it. Appellant was and is a shrewd and successful businessman. I am sure he did not buy this ice-cream business for its potential return on investment. He bought the land for its location and, as I said earlier, his intention at time of purchase was “open”.
Learned counsel for the appellant submitted an alternative argument based on the decision of the Tax Appeal Board in Pinehill Investments Ltd v MNR, [1967] Tax ABC 233; 67 DTC 204. In that case, appellant company was incorporated in 1954 to acquire, at a cost of about $145,000, land for the purpose of constructing warehouses as an investment. In 1958, under threat of expropriation, the company sold a small part of the property to a school board at a profit, said profit being treated by the Minister as capital gain. Around the beginning of 1959, it was decided that it was impossible to develop the property as originally planned and that the land should be liquidated. During the next year or so, the property was re-zoned as residential on the company’s application, but negotiations for the sale of the property proved unfruitful. In 1961, however, the company entered into an agreement to sell its land for a total purchase price of about $790,000 on the understanding that the company would subdivide the property and procure the necessary services for the lots, and that the purchaser would take up and pay for a stipulated number of lots each year.
The Tax Appeal Board held the profit on the 1961 sale was income subject to tax because whatever the original intention might have been, a time arrived when it entered into and engaged in a business activity for the purpose of making a profit by disposing of its land. However, in determining the profit subject to tax, the Tax Appeal Board held that the value of the land sold had to be fixed as of the time the land became inventory and that this change occurred at the outset of 1959.
Applying the rationale of the Pinehill case (supra) to the facts here, counsel for the appellant submits alternatively, that if this is held to be a trading transaction, that it became so only in October of 1958 when the first A & W Lease Option Agreement was executed, that, therefore any gain would be the difference in value between October 1958 and 1966 when the option was exercised and the sale made. Counsel concludes by suggesting, on the authority of the Pinehill case (supra), that if I find subject transaction a trading transaction, that I should direct that the assessment be returned to the Minister with directions that appellant’s return be re-assessed on the basis of the difference between the value of the subject property on October 16, 1958 and the option price of $48,900.
The Pinehill case (supra) is quite different from this case on the facts. There, the original intention was to build warehouses for investment. Five years later this intention was clearly and unmistakeably changed to a trading intention.
In the case at bar, the intention at acquisition was “open” or equivocal or flexible. At the Tax Appeal Board hearing on Property No 1, the appellant and his counsel agreed that appellant really wears two hats — one when he is operating his large motel business and the other when he is carrying on as a land trader.
At this trial he said his business was “motel development”. However, looking at all of the evidence, I am satisfied that the earlier “two hat” description is the more accurate. When he tried to purchase Property No 2 from the City, he stated the purpose of acquisition was for a service station, supermarket and stores. In October of 1959, appellant wrote to the Planning and Real Estate Department of Dominion Stores offering them Property No 1 for the purposes of constructing a supermarket. At the trial of this action, he denied that it was his intention to build a motel on subject property. His activities were certainly not restricted to the motel business nor were they restricted to investment properties.
In Pinehill (supra), the intention at time of purchase was clearly and solely investment. In the case at bar, at time of purchase, appellant intended either to utilize subject property as an investment or to re-sell it at a profit.
I have therefore concluded that subject assessment was proper and that the appeal must be dismissed with costs.