KERR, J.:—This is an appeal from the income tax assessment of the appellant company, hereinafter sometimes called ‘‘Bel- Conn”, for its taxation year 1962. The sole issue in the appeal is whether the profit made by the company from the sale of its one-half interest in certain real estate, lots 21 to 28, inclusive, situated at 4th Avenue S.W., in Calgary, was income or a capital gain.
Bel-Conn was incorporated as a private company under the laws of Alberta in May 1951. The objects for which it was incorporated, as shown in Exhibit A, include the purchase, development, lease and sale of real estate and real property.
Abraham J. Conn, called as a witness on behalf of Bel-Conn, testified that he is president and active manager of the company and owns one-third of its shares. The only other shareholders are his mother-in-law and his sister-in-law. He lived for 25 years in Medicine Hat, where he and his relatives owned an older home, a store, an apartment building and five other business properties, which he managed. He moved to Calgary about fifteen years ago and since then sold the house and one of the business properties in Medicine Hat but has retained the other properties. He sold none of them while living in Medicine Hat. For the first year or two after coming to Calgary he helped his sister-in-law in a store business and then commenced to acquire real estate with the object of constructing buildings for rental income. Operating as active manager of Minton Apartments Limited he personally became active in the construction business and bought a number of older homes, demolished them and constructed apartment buildings, nine in number, on the land, none of which has been subsequently sold.
Since its incorporation in 1951 Bel-Conn has purchased and developed in Calgary its own commercial building, with stores and offices, and two large apartment buildings, the Americana and the Westerner. These apartment buildings were constructed in 1962. Bel-Conn also purchased the Great West Saddlery property in 1958, with the intention of building on the land, and held it until recently when it sold the property to the City of Calgary. The company has never sold any of the property which it at any time owned in Calgary, except the Great West Saddlery property and the 4th Avenue property which is the subject matter of this appeal.
Bel-Conn’s dealings in connection with the 4th Avenue property began when one Samuel Katchen approached Conn in October 1959 with a proposal that they become partners and erect a building on certain lots then owned by Katchen at the corner of 4th Avenue and 5th Street which had a frontage of 75 feet on 4th Avenue and were known municipally as 604 4th Avenue S.W. Conn was favourably disposed to the proposal and Bel-Conn thereupon purchased from Katchen a one-half interest in the property for $30,000. Soon afterwards, still in 1959, Bel-Conn and Katchen jointly purchased nearby lots, known as 618 4th Avenue, from one Webber for $50,000, of which Bel-Conn paid $25,000, and subsequently, in August 1960, they jointly purchased the intervening Stewart property, 608 4th Avenue, for $50,000, of which Bel-Conn paid $25,000. By reason of those three purchases Bel-Conn and Katchen jointly owned all the lots Nos. 21 to 28, inclusive, known as 604 to 618 4th Avenue, at the corner of 4th Avenue and 5th Street, with 200 foot frontage on 4th Avenue, and each party owned an undivided one-half interest in the whole parcel of land. For its one-half interest Bel-Conn paid a total of $80,000, plus some incidental sums. An agreement dated October 30, 1959 (Exhibit 1) between Katchen and Bel- Conn recites that each is the owner of an undivided one-half interest in the land therein described, namely, the west half of Lot 25, and the whole of Lots 26, 27 and 28, aforesaid, and that they may acquire other properties in which they have joint interests; and the agreement provides that they will pay equally all expenses in connection with the operation of such properties and that should either party desire to sell his interest he or it, as the case may be, will first offer the said interest to the other party and the other party shall have one month within which to purchase that interest, and should any dispute arise between the parties respecting the management or operation of the property, or the price or terms upon which it is to be sold, or the development of the property, the dispute shall be referred to an arbitrator.
According to Conn, as I remember his testimony, the intention and sole purpose of Bel-Conn when it purchased a one-half interest in the Katchen property was to construct a motor hotel on it. (For the purposes of this appeal, the appellant’s intentions and purposes are considered to be those of Mr. Conn, the president, spokesman and active manager of the appellant company. ) To that end a firm of architects, L. EK. Baker and Associates, prepared preliminary plans dated May 1960 (Exhibit 2) for the proposed motor hotel. The first plans were for a hotel on the Katchen land with its 75 foot frontage on 4th Avenue. Another plan, also dated May 1960, shows a plot plan related to the use of the entire 200 foot frontage on 4th Avenue; another plan, one of the sheets in Exhibit 5, also shows use of the whole 200 foot frontage, with the motel situated more or less in the centre of the frontage. The first plans were for the original Katchen property, the later modified plans were for that property and the Webber and Stewart properties. The plans showed floors, suites, car park, swimming pool and other details, as shown in Exhibits 2 and 5. They were plans of a preliminary nature, pending financing. Baker prepared cost estimates of $733,750 for the building and land, exclusive of the Stewart lots, and $790,752 for the building and the Katchen, Stewart and Webber lots, with certain differences in the building itself. Baker’s bill (Exhibit 7) of $1,081.57 dated February 5, 1962 was paid out of rental income from old homes which were on the lots.
Conn told of efforts to raise money for the construction of the proposed motor hotel. He went to Toronto in 1960 to seek mortgage money. He approached two insurance companies, Manufacturers Life and Canada Life but they were either not interested or proposed terms unsatisfactory to Conn. He had a meeting with Murray & Company Limited in Toronto and that company agreed to try to arrange a loan. In October of 1960 a representative of the company visited Calgary to appraise the property. Exhibit 9 is a letter from Bel-Conn to Murray & Company dated December 8, 1960, which refers to that visit and inquires whether the company is still interested in a loan or has dropped the idea. Negotiations between Bel-Conn and Murray & Company continued into 1961, as shown by a letter from Conn to Murray & Company dated April 17, 1961 (Exhibit 11), in which there is also reference to a conversation between Murray & Company and Mrs. Sara Belsberg, one of the shareholders of Bel-Conn, on her recent trip to Toronto.
Conn said that by February 1961 Katchen was impatient with the slow progress being made and through Melton Real Estate was in touch with Chatered Investments Limited (hereinafter called “Chartered”), an Edmonton-based company. Exhibit 12 is a letter dated February 13, 1961 from Chartered to Messrs. Helman, Fleming and Neve, for attention of Mr. Fleming, who was solicitor for Bel-Conn and Katchen in this connection, in which Chartered proposed, inter alia, that Bel-Conn, Katchen and Chartered form a new company, that 50% of the company would be held by Chartered, that the 4th Avenue property be placed in the new company at $240,000 and that a 125-suite apartment building be constructed on the land at a cost not exceeding $1,240,000, with Chartered providing a mortgage and having management control (an apartment building of that size was built on the land after it was sold). This letter was considered at a meeting in Mr. Fleming’s office on February 15, 1961 and among those in attendance were Fleming, Conn, Katchen, J. L. Harris, president of Chartered, and M. Melton of Melton Real Estate. The proposal was discussed at considerable length, as shown by Exhibit 13, a memorandum respecting the meeting. There were subsequent meetings also and Chartered’s proposal was under active consideration. However, Conn said that by November 1961 he was sick of Chartered’s proposal ; he had taken it to his accountant who raised questions respecting it and made an analysis of the financial possibilities of the project (Exhibits E and F), and advised Conn against it; he had never been a partner with anyone other than his own relatives and he felt obliged to protect them on this occasion; he thought that it would not be wise for Bel-Conn to have only a one-quarter interest in the apartment project; and he was not satisfied with its financial prospects. Dealings with Chartered came to a conclusion early in 1962. In a letter dated January 2, 1962 (Exhibit G), Chartered wrote as follows to Katchen and Bel-Conn :
We have now completed preparations to proceed with the construction of a 125-suite apartment on your property on the North- West corner of 4th Avenue and 5th Street South West.
We are ready to proceed on the original basis whereby
1) a company is formed in which we each own 50% of the shares.
2) You place the land in the company at $240,000.00 to be secured by a company note plus our perusual* [1] notes for one-half the amount.
83) Chartered Investments obtains mortgage financing and advances
to the new company whatever funds are necessary to complete the building over and above the first mortgage of $925,000.00.
In the event that you no longer wish to proceed with this arrangement we are prepared to purchase your land for $50,000.00 cash with the balance to be secured by a second mortgage to be repaid at $1,000.00 per month from the term of completion with the balance to be paid three years from completion in a lump sum.
In view of the present uncertainty of your position we do not think in advisable to proceed with building permits until we have reached a firm agreement on the procedure from this point.
Bel-Conn and Katchen sent a joint reply dated January 16, 1962 (Exhibit H) stating that rather than enter into the company undertaking with Chartered they would prefer to sell the land to Chartered; and they offered to sell it on certain terms, including a total purchase price of $240,000, $80,000 to be paid on transfer of title and the balance to be paid at the rate of $3,333.33 per month commencing on March 1, 1963 with interest at 6%. This led to a sale of the property by Bel-Conn and Katchen to Paris Investments Limited, a new company formed by Chartered, for $240,000 under an agreement dated February 1, 1962 (Exhibit 14). Bel-Conn’s share of the selling price was one-half, $120,000. Bel-Conn and Katchen paid a commission to Melton Real Estate.
In his testimony Conn was insistent that the purpose of Bel- Conn’s venture with Katchen was to build and operate a motor hotel, that it was Chartered that proposed construction of an apartment building rather than a motor hotel, and that the decision to sell the property was made only after Conn decided that Chartered’s proposal would not be good for Bel-Conn.
Conn said that he had known Katchen for some years but that the acquaintanceship was social, he did not know him well and did not know the type of business he was engaged in or his financial situation.
Bel-Conn paid for its share of the 4th Avenue property with money borrowed from the bank for that purpose. No efforts to obtain mortgage money to finance the construction of the proposed motor hotel were made until after Bel-Conn purchased an interest in the Katchen property. They did not expect to obtain one hundred per cent financing, likely not more than sixty to sixty-five per cent. There were houses on the several lots of land and they were rented and paid their way during the time that Bel-Conn and Katchen owned the property.
The hearing of this appeal was commenced before Mr. Justice Cattanach on November 17, 1968 and on that date Mr. Katchen gave evidence. At the hearing before me his evidence was read into the record and received as part thereof by order of the Court and agreement of the parties. As to his occupation in 1959, Katchen said:
I was a speculator. I mean, I wasn’t a real estate operator. I was a trader. I still am. I am still an investor and I trade in real estate.
He said that in 1958 or early 1959 he acquired certain lots on 4th Avenue with the intention to develop the property and, if he could not develop it, to sell it. He approached Conn with a proposal to build an apartment hotel on the land following which Bel Conn purchased a one-half interest in that property, and later he and Bel-Conn together bought the Webber and Stewart properties. I quote his testimony in that respect from the transcript of the hearing, as follows:
DIRECT EXAMINATION BY MR. HYNES:
Q. Mr. Katchen, did you late in 1958 or early in 1959, acquire certain property in Calgary? A. Yes.
Q. Could you describe the property, please? A. Property on 4th Avenue West, north-west corner, King property.
Mr. Hynes: Do you object if I lead the witness on the lot number?
Mr. Laycraft: No, proceed.
Mr. Hynes:
Q. Would that be the west half of lot 25, all of lots 26, 27 and 28, block 14, plan Al, Calgary? A. I believe so, yes.
THE COURT: Would you mind repeating that?
Mr. Hynes: The west half of lot 25, all of lot 26—
Mr. Laycraft: You are not correct, sir.
Mr. Hynes: My lord, I am in error in the lot numbers. My learned friend here has a map, a sketch of the property and I believe the corner property first acquired by Mr. Katchen is Lots 21, 22 and 23 in block 14? A. Yes, the first one.
Q. Is that correct, Mr. Katchen? A. I believe so. I haven’t got the lot numbers but—75 feet—
Q. Was it a 75 feet— A. 75 feet on the corner.
Q. Could you tell the court what you had in mind for the property when you bought it? A. I had in mind to develop it, but my first intentions were to develop it. If I couldn’t develop it, I would sell it.
THE COURT: First intention was to develop.
Mr. Hynes: Was to develop it. If he couldn’t develop it, he was to sell it. If he couldn’t develop it, his intention was to sell it.
THE COURT: First intention to develop. If he couldn’t develop, he was to sell it.
Mr. Hynes: That’s right.
Q. Did you later acquire more property in the vicinit ? A. Yes, I did, sir.
Q. Would this be the west half of lot 25, all of lots 26, 27 and 28 in block 14? A. Yes sir. It is the Webber property, the Webber property.
Q. What had you in mind for that property? A. Well, I had the same thing in mind. I hadn’t sold the other. I was planning on developing it.
Q. How did you become associated with Bel-Conn Limited?
A. Mr. Conn, Mr. Conn and I have been old friends. I have known him for a long time, and I knew he was in the business and I approached him on a proposition and I sold him the—I sold him a half interest in the King property, which was the first property, and we went—we joined in on the other property to—with the intent to develop the property.
Q. After joining together with Bel-Conn Limited on this— A. Yes.
Q. —transaction, did you later acquire further property? A. Yes, we did, sir.
Q. Would that be the east half of lot 25 and all of lot 24? A. Yes sir.
Q. In block 14? A. Yes sir. That’s the Stewart property.
Q. Now, how did you acquire that? Together? A. Together, yes sir.
Q. What had you in mind for this assembled group of properties? A. We were—we were going to develop it. We had in mind to develop it.
Q. How were you planning on developing it? A. Well, we had in mind an apartment-hotel, and we had plans, plans drawn up. We made a feasibility study and we put a lot of work into it, and then we were—we were approached through Melton’s with Charter, Charter Investments, came down and made us a proposition which the evidence—I mean, will prove out that, and after considerable discussions and meetings and plans and feasibility studies, also management, who was going to manage it, we—or I came to the conclusion, I didn’t want any part of it so I decided to sell. I thought the best thing for us to do was to sell.
The proposition referred to by Katchen was the previously mentioned proposal by Chartered Investments for sale of the property to a new company in which Chartered would have a fifty per cent interest and Bel-Conn and Katchen would have the other fifty per cent. He was not dissatisfied with the feature of a twenty-five per cent interest in the new company, but the feasibility study and Conn’s reaction to it prompted him to sell. He said that he and Conn were old friends, he knew Conn as a developer and operator of apartments, and approached him in order to use Conn’s knowledge in that respect in connection with the development of the 4th Avenue land.
A well-qualified Calgary real estate agent, Aubrey Edwards, was called as an expert witness. He testified that in 1959 the property concerned was in a downtown area of Calgary that had a speculative character, and that there was fairly heavy land speculation in that area; the property was at that time a good site for a motor hotel and since then the large Regency Towers apartment building has been built on it and the Caravan Motor Hotel has been built only about one block away.
The appellant’s contention is that it entered into the agreement with Katchen and acquired the one-half interest in the 4th Avenue property as a capital investment for the purpose of earning income and not for speculative purposes or with the intention that its interest would be sold; that its entire business activity has been the purchase and development of real property so as to yield rental income and it is not and never has been a trader in real property; that the opportunity to sell its interest arose during the course of its usual practice in developing the property, and the gain realized by it upon the sale of the property was a fortuitous gain upon realization of a capital asset and was not income within the meaning of Sections 3, 4 and 139(1) (e) of the Income Tax Act. It was submitted on behalf of the appellant that no emphasis should be placed upon the fact that Katchen had traded in real estate, for the status of trader is not a contagion transmitted to all with whom the trader becomes associated; that the appellant company is a private company owned by close relatives and its past history of no real estate sales and of steady and continuous real estate development and the history of the project in question establish the transaction as capital in nature: and the gain derived as a capital gain.
The respondent contends that the profit realized by the appellant from the sale of its interest constituted part of its income since it was a profit from a- business or an adventure in the nature of trade within the: meaning of the said sections of the Income Tax Act.
The evidence establishes, in my opinion, that when Bel-Conn first bought an undivided one-half interest in thé Katchen lots and then proceeded to purchase jointly w Katchen the remainder of the 4th Avenue property, and for some time thereafter, there was a definite intention on'the part of both of ‘them, if they could make the necessary arrangements for financing, to construct a motor hotel on the land and operate it as a revenueproducing property. However, there was a: very ‘real problem: of how and where to obtain the necessary money to build: Bel-Conn borrowed from the bank the money to buy .its one-half: interest in the lots, a sum in the order of :$80;000, but it was necessary to seek elsewhere the much greater. sum, upwards, of ten ‘times as much according to the. architect’s estimate, required for the complete project. Katchen was a speculator and a trader in real estate. Conn was knowledgeable and experienced: in the real estate field, for he had bought: and developed properties. Both were experienced businessmen. To me it seems to be unrealistic to think that they ‘were not well aware of the problem of financing when they began their venture or hat:the sale of the property for profit was not also contemplated: by them as at least one of the alternative ways in which the: property: could be turned to account for profit if the motor hotel project were not proceeded with by reason of lack. of, financés or even of à decision of one of them to sell or a dispute between them.;,
Katchen testified that he and Conn were old friends, he had known Conn for a long time and knew’ him as a successful operator of apartments. Conn professed to have known Katchen only socially, not well, and did not know the type of business interest he was in or that he was a trader in real estate. But he was willing to join with him in a major venture. I think that Conn was understating his knowledge of Katchen ‘and of Katchen’s business as a trader in real estate. However, the fact that Katchen was a trader in real estate does not necessarily lead to a conclusion that the acquisition of the 4th Avenue property was, on the part of either of them, in the nature of a trading venture and not a capital investment. Neither does Conn’s and Bel-Conn’s activity in developing and operating apartments and other buildings for rental revenue necessarily lead to a conclusion that this particular venture was, on Bel- Conn’s part, an activity of that kind.
I do not regard as significant in the determination of this appeal the fact that the objects for which Bel-Conn was incorporated include the purchase and sale of real estate. The question is not what powers the company had, but what it actually did, and whether the profit which resulted to it from the sale of the 4th Avenue property was a capital gain or was a profit derived from an adventure or concern in the nature of trade and was therefore income from a business within the meaning of Sections 3, 4 and 139(1) (e) of the Income Tax Act.
There is not doubt that at the time Bel-Conn acquired an interest in the property concerned it was a good site for a motor hotel and also that it was in an area of Calgary which had a speculative character and in which there was fairly heavy speculation in land.
The problem of obtaining the money necessary for the motor hotel project was not investigated before Katchen and Bel-Conn joined in the venture. Granted that the development of the motor hotel project would be a major undertaking which could not be quickly arranged, and granted also that there was some rental revenue coming from the several old homes on the property, nevertheless it seems to me that their efforts to obtain financing for their motor hotel project were pressed with something less than vigour and expedition. If their sole or governing intention was to construct a motor hotel as a revenue-producing asset, I would think that they would have shown more activity than they did to achieve that objective. If, on the other hand, they had in mind the alternative of a sale at a profit, there would be less incentive to expedite the hotel project. Dealing with Murray & Company continued intermittently into 1961. Katchen and Bel-Conn also gave serious consideration during a period of about a year, from February 1961 to January 1962 to a proposal of Chartered Investments for a sale of the property to a proposed new company, in which Katchen and Bel-Conn would have a one-half interest, and the construction of an apartment building on the site. This proposed sale of the property was obviously considered by Katchen and Bel-Conn during most of that lengthy period as an alternative to the motor hotel project. They eventually made a counter proposal to Chartered Investments for an outright sale of the property, which was accepted.
Certain efforts and activities of Katchen and Conn, e.g., the preparation of preliminary plans by an architect, and Conn’s trip to Toronto to seek financing, lend support to their contention that when they joined in the venture their objective was to build and operate a motor hotel on the property; and that the purchase of the property was an investment; also, after the sale of the property, Bel-Conn constructed and operated two other apartment buildings in Calgary and used the profit from the sale of the 4th Avenue property in doing so. I am satisfied that they had the objective of a motor hotel as a preferred objective, but, in my opinion, the evidence as to the circumstances and the whole course of the appellant’s conduct points to a conclusion, and I so find, that the appellant purchased an interest in the 4th Avenue property with the overall intention of turning it to account for profit, preferably by constructing and operating a motor hotel if the money necessary to finance such a project could conveniently be borrowed, but, if that money could not be obtained, by turning the property to account in some other acceptable way, including sale. Having regard to the nature and courses of the venture; the knowledge, experience and business activities of Katchen and Conn; the location of the property in a downtown area of Calgary in which there was fairly heavy land speculation; the magnitude of the probable cost of the proposed motor hotel; the known impossibility of building it without large borrowings ; the lack of prior investigation in respect of the possibility of obtaining the money to build; Bel-Conn’s borrowing from the bank to buy an interest in the property; the somewhat limited extent of the activities and efforts of the partners to proceed with the motor hotel project; their negotiations with Chartered Investments during a later period of about a year on a proposal that involved a sale of the property, and their counter offer of an outright sale at a substantial profit, which was accepted; I cannot but conclude that when Bel-Conn purchased an interest in the property it was with a preferred intention of building a motor hotel, if moneys necessary therefor could be obtained, and with a secondary intention of selling the property at a profit if it were not possible to carry out the preferred intention or if an election were made not to do so.
The result, in my view, is that the sale by the appellant of its interest in the property was a sale in the course of an adventure by it in the nature of trade and the profit resulting to it therefrom is income from a business within the meaning of Sections 3, 4 and 139(1) (e) of the Income Tax Act and is taxable.
The appeal is, therefore, dismissed with costs.
* Probably a typographical error for “personal”, a as the letter was signed by Charles A. Allard and J. L. Harris.