WALSH, J.:—This is an appeal from a Judgment of the Tax Appeal Board dated May 29, 1969, dismissing appellant’s appeal from a notice of re-assessment in respect of his income tax for the 1964 taxation year adding $8,559.88 to his income representing a profit realized by the taxpayer on the sale in that year of certain real property belonging to him.
The circumstances of the transaction are as follows. Appellant, a practising barrister and solicitor in Winnipeg, who, at about the time the property in question was acquired in 1955 had a number of clients who were builders and whom he frequently assisted in arranging their financing and who himself dealt in real estate from time to time in the Winnipeg area, heard through one of his brothers-in-law that a Mr. Edward A. Hebditch who had a lease-option agreement with Steep Rock Iron Mines Limited in connection with a bunkhouse which he operated in Atikokan, Ontario, was seeking capital to convert it into a hotel. The appellant at this time controlled and operated the Adanac Hotel in Fort William which was managed for him by the brother-in-law in question, and he also had a half-interest in a hotel in Winnipeg and another in Kenora which was subsequently sold. It was suggested to him by his brother-in-law that the hotel operation in Atikokan might help the operation of his hotel in Fort William which was the nearest large city to Atikokan, some 140 miles distant. He entered into communication with Mr. Hebditch who wanted him to pay for remodelling the bunkhouse and for enlarging same and building a beverage room so that it would qualify for a liquor licence under the requirements of Ontario law. He was unwilling to advance the money as a Straight loan but finally an agreement was reached in 1955 whereby he and Hebditch would form a company under the name Rockton Hotel Limited in which they would each have equal share holdings for the operation of the hotel business. Each in person or through nominees received 15 preference shares of a par value of $100 each and 100 common shares of a par value of $50 each. The $6,500 worth of stock received by Hebditch represented his equity in the lease-option agreement he held with Steep Rock Iron Mines Limited to buy the property for $65,000, and when on August 17, 1956 Steep Rock Iron Mines Limited sold lots 204 and 205 on which the bunkhouse had been built to the hotel company they took a mortgage on the property for $58,500, being the balance of price. Appellant for his part in addition to paying for his shares put up the necessary funds for the construction and remodelling work to turn the rough bunkhouse into an acceptable hotel complete with beverage room, and on August 23, 1956 a mortgage was taken on the property in his favour for $78,000 to cover these expenses.
Before entering into the deal, however, appellant had recognized the necessity of acquiring from Steep Rock Iron Mines Limited not only lots 204 and 205 on which the bunkhouse was located but also the adjacent lots 206 and 207 to provide parking and access from the outside to the beverage room which was to be built. Hebditch, in his negotiations with Steep Rock Iron Mines Limited had apparently not fully appreciated the importance of the ownership of these adjacent lots, and would have been satisfied to acquire only one-half of lot 206 on which the entrance porch to the beverage room was eventually constructed. We find in a letter dated May 25, 1955 from him to Mr. Edmon- stone of Steep Rock Iron Mines Limited (page 13, Book of Documents, Exhibit A-1) the following:
5. As further consideration for this transaction, please confirm that you will sell to me either two lots adjoining said property for $4,000.00, or one-half of a lot for $1,250.00, said lots to be paid for in cash when the deed to the adjoining land is delivered, the adjustment date for said lots to be when the deed is delivered. Provided that you agree to sell me one-half of a lot, then it is agreed that I am to have the first option to purchase the rest of your land at the same price as another buyer.
Apparently when Hebditch communicated the contents of this letter to appellant he was not at all satisfied but insisted that the two lots be acquired. He produced as Exhibit A-4 a letter written by him on June 20, 1955, to Mr. Hebditch, reading as follows:
After receiving your letter I was pretty angry about the backing out of the two lots, so I telephoned Mr. Fotheringham. He assured me that you can buy both lots for $5,000.00 at any time within the next two months. I told Mr. Fotheringham that there is no use in building a Hotel if there is no parking space, and if they are not interested in making a deal in the two lots now, that I would forget about the whole deal.
As between you and I, I want it distinctly understood that I will sell one-half lot to the corporation and keep the other lot and one-half for myself, unless you are able to put in your one- half share for the lots.
Will you please therefore, sign the Agreement, but send them a letter with it and keep a copy, and in the letter, say as follows:
“I enclose herewith Agreement in duplicate duly completed by myself on the following conditions:
1. That you will forthwith execute and let me have a copy.
2. That you will sell me or my nominee the two next adjoining lots to the Hotel for the sum of $5,000.00 if paid within sixty days from the date hereof, in which event, paragraph 2 of the said agreement will not apply.”
In due course, as Mr. Hebditch was unwilling or unable to put up his one-half share for the purchase of these lots they were bought by appellant by transfer registered August 26, 1955. Subsequently, and apparently after the construction work had been completed, appellant sold the south half of lot 206 to the hotel company by transfer registered August 23, 1956, for $2,250. It would appear that he made a profit of $1,000 on this sale but this was not taxed as such and the matter is not in issue before me. (It might be noted in passing, however, that when Hebditch was thinking of buying only this one-half from Steep Rock Iron Mines Limited the asking price for it was $1,250 although the entire two lots were to e purchased at that time for $4,000. )
Appellant then retained ownership of the north half of lot 206 and the entire lot 207 which were used as a parking lot for the hotel. Subsequently, in 1959, the hotel acquired the north half of lot 209 and all of lots 210, 211 and 212 from the local branch of the Canadian Legion for a price of $20,000 to be used for additional parking. It was unable to acquire lots 208 and the south portion of lot 209 for they were owned by a vendor who did not wish to sell them, so there was a gap in the parking space which the hotel could provide for its patrons. The appellant charged no rental to the hotel company for the use of north half of lot 206 and of lot 207 but on the other hand the hotel paid the taxes on same and as the lots were somewhat swampy, paid for crushed stone to fill them in and level them off for parking. Eventually somewhat the same steps had to be taken in connection with the north half of lot 209 and lots 210, 211 and 212.
For some years the hotel operation was quite profitable, but in the last two or three years just before it was sold in 1964 it became less so. The appellant testified that he was somewhat dissatisfied with the way in which Mr. Hebditch was managing the affairs of the hotel and the nature of business which it was attracting. For its year ending March 31, 1961, net profit was $8,698.69. For the year ending March 31, 1962, however, the net loss. after deducting capital cost allowance was $8,452.43, and for the year ending 1963 the net loss was $7,686.68. For the year ending March 31, 1964, there was a net loss on operations of $11,325.72, although a net profit of $16,949.32 was shown in financial statements for the year due to the adding back of recaptured capital cost allowance following the sale (Financial Statements, pages 106 to 124, Book of Documents, Exhibit A-1).
In due course it was decided to sell the hotel business which was eventually done through a real estate agent in Winnipeg who was paid a commission for this. Since it was necessary to sell the lot and one-half he owned at the same time that the hotel property was sold, the vendors were forced to break down the purchase price. After a discussion with Hebditch this was done in the manner indicated in the minutes of a directors’ meeting of Rockton Hotel Limited on April 10, 1964 (page 165, Book of Documents, Exhibit A-1). The sale price of $237,500 broken down into $10,000 for chattels and equipment, $35,000 for goodwill, $8,500 to be paid to the Liquor Licence Board for the transfer of licence, $5,000 for the agent’s commission, $20,000 for the north half of lot 209 and lots 210, 211 and 212, $11,000 for the north half of lot 206 and lot 207 (appellant’s property ) and $25,000 for lots 204, 205 and the south half of lot 206. Although the figure is not shown in the minute, this would leave the sum of $123,000 for the building.
In order to complete the agreement with the purchaser, appellant sold his property, the north half of lot 206 and lot 207 to Rockton Hotel Limited for $11,000 by transfer registered April 15, 1964, although he did not receive payment for this in cash. Instead, his original mortgage was cancelled and a new mortgage in his favour for the sum of $90,170 was registered on the same day, representing the amount now due to him plus the $11,000 due for the sale of his property. On April 23, 1964, the sale by the hotel company of all its assets including the property just acquired from appellant to the ultimate purchasers Harry Franchuk et al. was registered.
The statement of the hotel company for the year ending March 31, 1964, reflecting the sale with all adjustments taking effect as of that date shows a capital gain on disposal of land of $19,129. Since it made no capital gain from the resale of lots bought from the Canadian Legion or those bought from appellant, the portion of the sale price in each case being the same as the cost of acquisition, the entire capital gain of the hotel company was made on the sale of the two and one-half lots on which the building was constructed to which $25,000 fo the sale price is attributed. Similarly, appellant made his capital gain (or taxable income as respondent contends) of $8,559.88 on the sale by him to the hotel company of his one and one-half lots for $11,000. It can readily be seen that in each case approximately 34 of the selling price represented capital gain (or taxable income as the case may be) and appellant did not make a greater profit on the sale of his one and one-half lots than did the hotel company on the sale of its two and one-half lots. There is therefore no indication that the division of the sale price was arranged in such a way as to allot an unreasonable portion of the mark-up in value to appellant to the detriment of the hotel company, nor does it indicate that he took advantage of the strategic location of this land and the necessity of the use of it in the hotel operation to obtain a price for it in excess of the value of the other land owned by the hotel company.
It is evident that had lots 206 and 207 been acquired directly by the hotel company from Steep Rock Iron Mines Limited there would have been no tax claimed on the eventual resale of them along with the rest of the hotel property and assets eight years later. The question we must determine is whether appellant himself turned it into an adventure in the nature of trade when he acquired these two lots in his own name, eventually selling half of one of them which the hotel immediately required to the hotel company, aud allowing the hotel to use without charge the remaining lot and one-half until he eventually disposed of the same at the same time the hotel company disposed of its property and assets at a substantial profit. We must look into his intention at the time of acquiring these lots and the reason why he held them in his own name. He testified that he considered this as a form of additional security for his substantial advances to the hotel company where he put up all the money for the additions and the renovations receiving a mortgage for $78,000 in addition to his shares in the company. These lots 206 and 207 were not subject to the original lease-option agreement between Steep Rock Iron Mines Limited and Hebditch, but appellant considered the ownership of them as essential to the operation of the hotel business as parking space was badly needed and access from the outside to the hotel’s beverage room would be by way of these lots. It appears probable that Steep Rock Iron Mines Limited was only prepared to sell them for cash and that had they been bought by the hotel company the appellant himself would have had to put up the necessary funds for the hotel to purchase same, increasing the mortgage in his favour from $78,000 to $83,000 which was moreover a second mortgage, that in favour of Steep Rock Iron Mines Limited for the balance of the price due on the sale of lots 204 and 205 in the amount of $58,500 taking precedence over it. Apparently at the time of acquisition, appellant was willing enough to acquire ownership of these ‘lots jointly with Mr. Hebditch as appears from his letter of June 20, 1955 (Exhibit A-4), which letter was not in evidence before the Tax Appeal Board. It is not clear from that letter whether appellant is suggesting that he and Hebditch should personally retain joint ownership of the remaining lot and one-half after the one-half lot which the hotel required for the construction of its entrance to the beverage room was sold to it, or whether in the event that Hebditch was able to put up one half of the purchase price of the lots they would then be purchased in the name of the hotel corporation, but it does appear from the letter that appellant at the time had no thought of acquiring these lots himself with the idea that by doing so he would have the hotel corporation at his mercy and could eventually force it to buy them from him at a greatly inflated price. Certainly the use of these lots, which he permitted, was of considerable importance to the operation of the hotel’s business. On the other hand the lots themselves would have no value for sale to any third party separate and apart from the hotel, and as this would have put the hotel to some extent at the mercy of the third party I am satisfied that appellant, having a half-interest in the hotel business, certainly had no such thought in mind.
While the production of this letter does on the one hand weaken appellant’s argument that he retained ownership of these lots in his own name as additional security for his loans to the hotel, as it now appears that he had not thought of this at the time, but had been willing to have Hebditch acquire a half-interest in same, on the other hand the letter shows that he was not thinking in terms of making a gain for himself alone at some future time on the resale of these lots. While it is true that he did make a profit of $1,000 on the sale of the southern part of lot 206 to the hotel this is not the profit which is in issue before us.
Some inference might perhaps be drawn from the fact that appellant derived no revenues from his ownership of the lot and one-half which he retained in the 8 years while they were used by the hotel company. On the other hand during this period taxes on same were, according to his evidence, paid by the hotel company and grading and filling operations were carried out on these lots at the expense of the hotel company to make them suitable for use as parking lots. His investment in same after selling the south part of lot 206 to the hotel company for $2,250 amounted to $2,750 and any rental which he might have charged would presumably not have been very substantial and might well have amounted to no more than the expenses incurred in connection with the use of these lots by the hotel company, so I do not attribute too much significance to the fact that he did not personally derive any direct revenue from his ownership of these lots during the period of 8 years. As a 50% shareholder of the hotel company, he had a substantial interest in its profits, to which the use of these lots contributed.
Appellant was assessed tax on certain real estate dealings by him in Winnipeg during the period from 1953 to 1957 by judgment of Jackett, P.* [1] The circumstances of that case were that appellant who frequently acted for builders between 1946 and 1951, assisting them in acquiring building lots and advancing down payments for them, had to acquire ownership of these lots in 1951 when some of his clients had financial difficulties and assigned him their rights in return for the discharge of their debts. He then made further outlays to complete the purchase and by paying taxes and interest. Eventually, between 1953 and 1957, he sold these lots and in total realized a profit over and above what they had cost him. It was held that, although he had been forced to acquire them to protect his loans, the appellant’s background in real estate transactions as well as the evidence as a whole indicated one of the reasons motivating the acquisition of the lots was the hope and expectation of reselling them at a profit; in any event, the appellant had not discharged the onus of showing that such was not one of his reasons. The learned President in rendering judgment stated :
Having regard to his background in real estate transactions and to his vague and evasive way of answering many of the questions put to him on cross-examination, as well as my conviction, having regard to the evidence as a whole, that the appellant recognized in the situation that faced his builder-clients a very favourable opportunity to acquire properties that, having regard to his experience, he must have known would almost certainly become more valuable with the passage of time, I am of opinion that one of the reasons that moved the appellant to acquire these lots in 1951 was a hope and expectation that he could resell them at a profit. In any event, I am not persuaded by the evidence that the appellant has discharged the onus of showing that such was not one of such reasons.
The situation in the present case appears to be quite different however. The lots in question were not acquired with a view to resale and would not have been resold by appellant except as part and parcel of the sale of the hotel assets. While he was undoubtedly aware of their importance to the hotel business he himself had a 50% interest in this business and dedicated the property to this use. The hotel business was actively operated for 8 years and appellant shared in the operating profits and eventual profits on disposal of same and there is no indication that, when the hotel property and other assets were sold and his lots were disposed of at the same time, he benefited by more than a fair share of the profits in the attribution of $11,000 of the sale price to him for these lots.
Appellant’s attorney conceded during argument that had appellant had no interest in the hotel company, but on learning that a hotel was to be built on certain property, had acquired in his own name these lots immediately adjacent to it which he foresaw that the hotel would require for parking purposes, this would be taxable as an adventure in the nature of trade as it would be clear that his purpose in buying them had been to eventually sell them to the hotel, which would need them badly, at a. profit. In the present circumstances, however, he had a 50% ownership in the hotel business himself and an interest in acquiring the lots for the hotel’s use. I am prepared to accept his statement that it was because he was putting up the money himself to buy them that he retained the ownership in his own name to give him additional security. Certainly if he had acquired them with the intention of eventually making a profit on disposal of same it would have been generous of him to have invited Hebditch to put up half the purchase price for a half interest in the lots himself, as he did in his letter of June 20, 1955 before buying them.
In the leading case of Irrigation Industries Limited v. M.N.R., [1962] S.C.R. 346; [1962] C.T.C. 215, Martland, J. refers with approval to a general statement of principle by Lord Buckmaster in Leeming v. Jones, [1930] A.C. 415 at 420, where he stated “an accretion to capital does not become income merely because the original capital was invested in the hope and expectation that it would rise in value; if it does so rise, its realization does not make it income.’’ He also refers to the statement of Row- latt, J. at an earlier stage in the same case when in referring it back to the Commissioners he said ‘‘I do not indicate which way it ought to be, but I commend the Commissioners to consider what took place in the nature of organizing the speculation, maturing the property, and disposing of the property, and when they have considered all that, to say whether they think it was an adventure in the nature of trade or not. ’ ’ In the present case, it would appear that appellant did nothing in connection with the maturing or disposing of the property itself, merely dealing with same at all times as part and parcel of the hotel business.
In the case of Paul Racine, Amédée Demers and Francois Folin v. M.N.R., [1965] D.T.C. 5098; [1965] C.T.C. 150, where the three appellants purchased the assets of a bankrupt company, forming a new company to acquire most of the assets but retaining the real estate in their personal names, and after operating and improving the business for a few months sold both the real estate and the shares in the new company at a profit. Noël, J. held that these were capital gains from the realization of an investment, and that the transaction was essentially the purchase of a business and its subsequent resale at a profit. At page 5100, Noel, J. states:
I am of the opinion that, for the purposes of taxation, this manner of proceeding can not affect the character of the transaction. In effect, from the point of view of taxation, this transac- tion would be exactly the same if the appellants had simply purchased everything in their own name.
In commenting on the doctrine of secondary intention he states at page 9103:
. . . 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.
Save for the south part of lot 206 which the hotel company immediately required to build on, it is evident that there was no immediate prospect of any sale of the remaining half of lot 206 and of lot 207 to the hotel company by appellant at the time he acquired them. The property owned by the hotel company was very heavily mortgaged both to Steep Rock Iron Mines Limited and to appellant himself, with payments due on these mortgages and it was unlikely that in the immediately foreseeable future the hotel company would be in a position to purchase the remainder of these lots from him. In fact if the hotel company had had the eash to do so it is likely that these lots would have been bought in its name in the first instance. It would appear therefore that the primary consideration of appellant was to acquire the property for use by the hotel in its business, and not with a view to resale of same at a profit by him.
A somewhat similar situation was dealt with by Jackett, P. in Wolf Von Richthofen v. M.N.R., [1968] C.T.C. 544 at 546, where he states:
Putting the matter another way, where a person carries on business as a trader in real estate and some other business at the same time, if he buys a parcel of land for re-sale at a profit and does so re-sell it, the resulting profit is a profit from his trading business even though he found a use for the land in his other business during the period that he owned it; but, on the other hand, a profit that he makes upon the sale of land acquired for the sole purpose of being used, and that has in fact been used, as part of the capital assets of the other business is not, as such, a profit from his business as a trader in real estate, and the length of the period between purchase and sale of a parcel of land by such a person is not relevant except in so far as it is some indication as to whether the land was inventory of the trading business or a capital asset of the other business.
Applying this to the facts of our present case even if it is conceded (as was the finding in the earlier case of the present appellant (supra) [1965] C.T.C. 196) that the appellant was at the time of acquiring the property in question a trader in real estate, he was also a hotel operator at the same time, and the lots in question were I believe acquired for the sole purpose of being used by the hotel and were in fact so used as part of the capital assets of its business. After being so used for 8 years they were sold by appellant at a profit at the same time as the hotel business and assets were sold.
I have reached the conclusion, therefore, that the profit realized by appellant from the sale in 1964 of the northern portion of lot 206 and of lot 207 to Rockton Hotel Limited was a capital gain. I therefore maintain his appeal with costs and refer the re-assessment of his 1964 income tax back to the Minister to delete therefrom the sum of $8,559.88 being the profit realized on this sale.
*Ben Arthur Shuckett v. M.N.R., [1965] C.T.C. 196.