Heald, J:—This is an appeal from a reassessment for the taxation year 1967 by which the respondent added to the income of the appellant the sum of $76,846.62 described in the form T7 W-C accompanying said reassessment as “profit on sale of land and buildings”.
In 1938, Mr. Nathan Goodman, the eldest of five brothers, started a scrap metal business in Toronto, an important part of which was the salvage of used automotive parts. In 1942 he began to import used automotive parts from the United States for resale in the Canadian market. In 1945 he was joined in the business by his brother Carl and in 1951 and 1952 by his brothers Milton, Irving and Samuel. During and after World War Il, the emphasis shifted from scrap metal to rebuilding of automotive parts. Up until 1951, the businesses of the brothers were operated from three small warehouses on Palmerston Avenue in Toronto. At that time, a property was purchased on McCaul Street and their operations moved to that location. Beginning in 1951, the Goodman brothers’ partnership was carried on under the names Aimco Automotive Parts Company (“Aimco”) and Amalgamated Iron and Metal Company (“Amalgamated”).
In 1953, the Aimco branch of the brothers’ partnership commenced the manufacture of unlined brake shoes while the Amalgamated branch continued in the scrap metal and used automotive parts business.
By 1959, the brothers’ businesses had expanded to the point where they were operating on four different premises within Metro Toronto, one of the premises being about three miles distant from the others. The brake shoe manufacturing branch of the business was prospering and expanding in spectacular fashion. By 1959, the sales volume for both businesses had risen to a figure in the order of two and one-half to three million dollars annually. A major problem was created by the fact that one business was three miles away from the others. Irving Greenberg, in his evidence, estimated that their costs were increased by 5% to 7% because of the rehandling necessitated by not having all of their locations close together. Because of the phenomenal growth, they were again short of space by 1959. The brothers thus concluded that they would have to find a new and larger location to encompass their various branches and that it was not in their best interests to relocate in Metro Toronto. They considered that it was “too expensive for a manufacturer to be downtown”.
Accordingly the brothers decided that they should look for property in the general area of Dixie Road, lying immediately to the west of Metro Toronto in what is now Mississauga. Irving Goodman was in charge of finding the new property. He testified that it was a frustrating experience because, for their purposes, M-5 zoning was necessary which zoning permitted the operation of a scrap yard. He finally located a 50-acre parcel on Dixie Road just west of Metro Toronto. He had looked in other outlying areas such as North York but they were not satisfactory because, upon investigation, he ascertained that they would not be able to obtain satisfactory zoning. He said “We were looking for zoning”.
The 50-acre parcel, which he located, was unserviced farm land in an area where there were only one or two industrial buildings within a five-mile area.
On June 2, 1959, acting on behalf of himself and his brothers, he made an offer to purchase said 50-acre parcel from one Robert Thomas Jefferson, a farmer, for $102,500. The farmer accepted the offer and the deal was completed. The deal involved a cash payment of $35,000 with the balance payable over five years, interest at 6%. A number of conditions were attached to the offer to purchase. Two of these conditions were as follows:
(2) That the lands will be zoned by the Township of Toronto prior to closing as M-5 industrial.
(8) The purchaser shall have the right to a partial discharge of 12.5 acre parcels upon payment of $2,000.00 per acre on account of the principal of the said mortgage, provided that such parcel to be discharged shall run the whole depth of the farm and provided further, that the parcel upon which the buildings are erected shall not be discharged until the mortgage is paid in full.
Irving Goodman testified that at about the same time as they were acquiring this land, he and his brothers were discussing estate planning with their lawyer and accountant. It was decided that this land would be developed to create income for their estates and that their wives would finally own the property through a corporation. This corporation would build and lease to Aimco and to anyone else interested. Accordingly, in September of 1959, Irving took title to the Jefferson property as a grantee to uses with a first mortgage back to Jefferson to secure the unpaid balance of purchase price. In taking title in his own name, Irving Goodman said that he was acting as trustee for himself and his brothers. The appellant was incorporated by Ontario Letters Patent dated October 2, 1959 with the following objects:
TO acquire by purchase, lease, exchange, concession or otherwise and to own, operate, maintain, rent, lease, mortgage or otherwise charge or encumber lands and premises being,
and there follows a description of the 50-acre parcel purchased from Jefferson and that portion of the downtown property previously owned by the brothers and used in their business at 319 Dufferin Street and
. . . to build upon, develop and improve the said lands and premises or any part thereof and to turn the same to account as may seem expedient, and, in particular, by constructing, re-constructing, altering, improving, decorating, furnishing and maintaining the building or buildings built or to be built on the said lands and any appurtenances thereto and by operating and conducting the said building or buildings on the said lands as stores and/or offices and/or warehouses and/or factories and/or other quarters with appurtenances thereto and by leasing or renting the said building or buildings or the said lands and appurtenances thereto in whole or in part and to fit up and furnish the same and to carry on the business of an owner and operator of the said building or buildings thereon generally;
Irving Goodman testified that he got the zoning changed to M-5 Industrial before the closing date of the Jefferson transaction in September of 1959. At the time of closing, the land was unserviced, it had no power. Right after closing, he made the necessary Hydro arrangements by posting a $50,000 bond with Hydro which guaranteed they would be using heavy industrial wattage (3,000 KW). In November of 1959, the appellant corporation acquired title to the Jefferson property on Dixie Road. Title was taken first by Irving Goodman, it was then transferred to the name of himself and his brothers, and then to appellant corporation. The reason for transferring to himself and his brothers was, according to Irving Goodman, so that they would all be liable on the mortgage covenant. The original purchase price ($102,500) was the price shown on the subsequent conveyances to the brothers and to the appellant.
The five shareholders of the appellant corporation are the wives of four of the Goodman brothers (all except Samuel who is not married) and Sidney Friedland, the husband of the Goodman sister and thus the brother-in-law of the Goodman brothers.
In November of 1959, appellant commenced surveys and soil tests in preparation for the construction of a manufacturing plant. Preliminary plans and specifications were completed within six weeks of the closing of the Jefferson land transaction in September. Construction on the Original building began in December. This building had 40,000 square feet and was designed to have 10% of the space for offices and engineering and the balance to be used by Aimco for its brake shoe manufacturing operation. The building was completed in 1961 and occupied by Aimco. An addition to this building (24,000 square feet) to be used as a warehouse was commenced in August of 1961. Construction of a second building, also leased to Aimco, was commenced in the spring of 1963. This was an even larger building containing some 80,000 square feet of space and was to be used as a warehouse and for manufacturing purposes. From and after the date of occupation in June of 1961, appellant received rental from Amalgamated for the storage area at the rate of $500 per month and rental from Aimco at the rate of $1,000 per month. The Aimco rent was increased to $2,500 per month on January 1, 1962 after completion of the warehouse addition to the first building and was further increased to $3,000 per month in 1963. After completion of the second building in 1964, the rent to Aimco was increased to $4,300 per month pursuant to a lease dated December 1964 for a 20 year term. This lease also required the lessees to pay all taxes and insurance.
Torduff thus owned the two buildings which it erected and rented out and the 50-acre parcel of land in Toronto township on which the buildings were situated plus the Dufferin Street property in downtown Toronto. By 1965, Torduff’s rental revenue from its properties amounted to about $120,000 and was approximately the same for 1966. Its net income before income taxes was in the order of $32,000 for each year. Its balance sheet for 1966 shows that the buildings on the said Toronto township property were erected at a cost of approximately $600,000. The company was prospering from its rental income and was very easily carrying the Jefferson mortgage payments while, at the same time, the equity of its shareholders was being substantially enhanced each year.
Irving Goodman says that he and his brothers were quite pleased with the operation of Torduff; that it was accomplishing its original intent and purpose which was to erect and lease buildings and to provide investment income. He was most positive that there was never any intention to sell Torduff’s property. He says they had unsolicited offers to purchase from time to time but they never entertained any thought of sale. Neither he nor his brothers nor their wives had any dealings in real estate other than the purchase of their own homes. Other than their own homes and the Torduff industrial properties, none of them had any other interest in real estate.
Meanwhile, the business of the Goodman brothers was continuing to prosper and expand. In 1965, total sales were five million, by 1967 they had risen to eight and one-half million. By 1965, the businesses were being operated by a corporation named Aimco industries Limited and owned by the five brothers. By 1967, Aimco was very profitable but was becoming very short of cash. Its growth rate exceeded its cash flow. This frequently happens with rapidly growing businesses. The company needed more money for inventories; increased sales meant increased accounts receivable. By 1967, the company had reached the position where it was “at the end of the line” so far as conventional short term financing was concerned. The bank had gone as far as it would go in its financing. The company tried the insurance companies and the Industrial Development Bank without success.
A friend of the Goodmans, one Mandell, a director with F H Deacon & Co, a Toronto brokerage firm, suggested that they “go public” thereby raising by public subscription the monies needed to continue the company’s expansion and growth. Thus, in the fall of 1967, an underwriting deal was consummated through said Deacon & Co, as a result of which a two million dollar debenture offering was made to the public. In the course of the underwriting negotiations, Deacon & Co insisted that Aimco Industries Limited become the owners of the 12-acre portion on which the buildings occupied by them were situated. In the words of Irving Goodman, the underwriters “didn’t like the idea that our wives were the landlords”. Mr Marvin Mandell, the vice-president and a director of Deacon & Co and the officer who put the underwriting deal together, said that when his company found out that Aimco did not own the buildings and land, they became concerned about “conflict of interest” possibilities; that there would always be the possibility of future earnings being siphoned off by substantially increased rents; that because of their obligation to protect potential investors, they concluded that they would not market the securities unless Aimco were to own the land and buildings. His evidence was quite positive that the Goodmans and their lawyers were advised that the underwriting deal would not go through unless the land and buildings were first sold to Aimco.
Irving Goodman testified that he, his brothers and their wives were not very happy about this turn of events because Torduff was proving to be a sound and a profitable investment. However, they had no realistic choice. The entire future of their businesses was at stake, the cash infusion made possible by the debenture issue, was essential to their future and so they agreed to sell both buildings and the 12-acre parcel on which they were situated to Aimco for $660,000 which was the figure arrived at through an independent appraisal. It is the profit on this sale from Torduff to Aimco in 1967 which the Minister seeks to tax as profit from a business and which is the subject matter of this appeal.
After the sale of the 12-acre parcel to Aimco in 1967, Torduff continued to own the remaining 38 acres. In December of 1969, a further 10 acres was sold to Ralph Milrod Metal Products Limited, a wholly owned subsidiary of Aimco. Milrod manufactured original equipment parts for car manufacturers. Aimco manufactured automotive parts for the aftermarket. The two businesses were closely related and it made economic sense for them to be operated from adjoining properties, hence it made sense to relocate Milrod from its premises a distance away to the property adjoining Milrod. The original intention was, as in the case of Aimco, to have Torduff build Milrod’s premises and rent to them. However, Milrod expected to obtain a federal grant from a federal board known as The Automotive Assistance Board. It was a condition of this loan that Milrod own the property upon which the premises were situated and this circumstance is given as the reason for the sale to Milrod. Milrod has erected a very large manufacturing building having an area of 70,000 square feet on these premises which it is occupying.
The remaining 28 acres are being jointly developed by the appellant and one Murray Menkes, a Toronto developer, under an agreement dated April 2, 1971 (Exhibit R-7). The purpose of this agreement is “to enter into a Joint Venture for the purpose of developing the property and holding same for investment purposes” (Exhibit R-7; page 8 thereof). The intention is to develop a commercial and industrial plaza having an area of approximately 100,000 square feet in the first instance.
The Court must consider the true nature of the transaction in question which is to be determined from the taxpayer’s course of conduct viewed in the light of all the circumstances.* [1]
In this case, appellant’s objects have some relevance; they indicate no intention other than investment; they are restricted to building on the 50-acre parcel on Dixie Road and on the parcel downtown on Dufferin Street and to operating and leasing said buildings as stores, offices, warehouses or factories. The evidence clearly establishes that the Dixie Road property was acquired because of the rapid expansion of the Goodman businesses and the urgent need for additional space. It was made a condition of the purchase that Industrial M-5 zoning be obtained which would permit relocation of the Goodman businesses there and this re-zoning was obtained before the purchase agreement was consummated. I accept Irving Goodman’s evidence that they rejected other outlying areas because they could not obtain the proper type of industrial re-zoning in such areas. If their purpose had been speculative, I think they perhaps might have purchased in other potential growth areas. Counsel for the respondent asks me to infer a trading intention from the fact that the 50-acre parcel was a much larger parcel than was needed for expansion of the Goodman businesses. On the other hand, Irving Goodman’s evidence was that Jefferson was selling the whole parcel at a total price; that this 50-acre parcel was all the land he owned; that the price was within their range of ability and that he assumed the businesses could expand to the point where the whole parcel could be used. As a matter of fact, subsequent events are completely consistent with an investment intention as opposed to a trading intention. 22 acres of the total houses three very large industrial buildings — one with 64,000 square feet, one with 84,000 square feet and one with 70,000 square feet — all being used by the various Goodman businesses. The remaining 28 acres are now in the process of being developed by the appellant and a partner (who is a knowledgeable developer in Toronto) as a shopping centre plaza and is being held for investment purposes. Then, I attach some significance to the fact that after purchase of the 50-acre parcel in 1959, appellant immediately took steps to build for investment thereon — preliminary plans were immediately prepared, surveys and soil tests were taken at once and construction on the first building began in 1959. No sooner was the original building completed in 1961 than a warehouse addition was commenced. Construction was begun on a second building in 1963. Upon completion, these buildings were leased to the Goodman businesses. The strong evidence of Irving Goodman as to an investment intention only is substantiated by the appellant’s course of conduct throughout.
It is my further view that the reasons for subject sale in 1967 to Aimco are fully explained in the evidence of Irving Goodman and Marvin Mandell which evidence I accept and that this sale does not in any way indicate a trading intention.
Counsel for the respondent is, in effect, asking me to infer that in sale in 1967 was corroborative of a secondary “intention”, ie a trading intention at time of purchase in 1959. Respondent’s counsel also refers to the following objects in appellant’s character: “to build upon, develop and improve the said lands and premises or any part thereof and to turn the same to account as may seem expedient. . (italics mine).
Counsel for the respondent is, in effect, asking me to infer that in 1959, when subject property was acquired, the appellant had a secondary intention to sell same at a profit at some time in the future. I am satisfied on all the evidence before me of appellant’s course of conduct that there was no such secondary intention. Appellant kept the entire parcel for some eight years during which time substantial buildings were erected, long term leases were entered into and substantial rental income was derived therefrom. The circumstances which arose in 1967 (Aimco’s shortage of cash and the need for public financing) could not possibly have been foreseen some eight years earlier.
As Noël, J (now the Associate Chief Justice of this Court) said in Racine, Demers and Nolin v MNR, 65 DTC 5098 at 5103:
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. . . .
Learned counsel for the respondent conceded that his position would be weak indeed if the only intention to be considered was the intention of Aimco. However, he submits that the appellant had a different intention, that is to say, it did not only have an investment intention. I do not agree with this submission. In my view, appellant’s intention is clear from its course of conduct which completely excludes a secondary intention. I am satisfied on the evidence that the intention of the Goodman brothers was the intention of the wives.
A case involving similar facts was decided by my brother Gibson, J in favour of the taxpayer. This was the case of Cohen v MNR, [1970] CTC 386 at 388, 389; 70 DTC 6244 at 6246. It is interesting to note that there, as here, the site purchased was larger than was needed for the purposes of the new factory; there, as here, the objects in the charter were restricted to the acquisition of the land and the construction of a factory on it; there, as here, the wives of the principals of the business were the shareholders in the building company. The relevant portion of the judgment of Gibson, J is as follows:
Considering the whole of the evidence, the decision of fact I make in this case, is that GMG Building Corporation Limited was not in the business of buying and selling land and did not purchase the subject land for resale at a profit.
The sale of the first parcel of this land to Craig of approximately one half of the purchased parcel, was a sale of the part that was excess to GMG Building Corporation Limited’s requirements and constituted a recouping of part of the capital cost of the acquisition of this asset and therefore was not part of a transaction that should be characterized as an adventure in the nature of trade.
As to the remaining part, in my view at all material times, there was a bona fide intention on the part of GMG Building Corporation Limited through these three men and, through them, their wives, to build a shoe factory on the site and to cause GMG Building Corporation Limited to rent it to Alpha Shoe Manufacturing Co Limited. The most critical fact in this case which caused this intention to be changed was the suicide of Walter Weihs. This caused the whole programme to be changed for the other two men.
In the case at bar, I am likewise satisfied, on the evidence, that at all relevant times, the appellant’s sole intention was an investment intention and not a trading one.
The appeal is therefore allowed with costs and the appellant’s assessment for the 1967 taxation year is referred back to the respondent for reassessment not inconsistent with these reasons.