Normac Investments Limited v. Minister of National Revenue, [1969] CTC 468, 69 DTC 5326

Kerr, J.:—This is an appeal from the appellant’s income tax assessment under Part I of the Income Tax Act for its 1967 taxation year, which ended on July 31, 1967. The issue is whether a profit of $371,969.27 realized by the appellant on the sale of certain lands and buildings to The Manufacturers Life Insurance Company was income from a business within the meaning of Sections 3, 4 and 139(1) (e) of the Act.

The property consisted of 15.01 acres of land in the Township of North York, Ontario, on which at the time of the sale were 154 maisonette (town house) units, constructed in 1962, and 2 apartment towers, containing 212 suites, constructed in 1964. The appellant acquired its interest in the property in 1961. The sale to Manufacturers Life was in October, 1966.

At all pertinent times the property was owned and developed by a 2-partner partnership, in which the appellant was one partner and held a 50 per cent interest. The appellant contends that, as such partner, it intended that the partnership would exist solely for the purposes of construction and investment and that at all times it intended to retain the property as an income producing investment, but was forced to consent to its sale in circumstances in which the other partner had negotiated the sale to Manfacturers Life. The respondent says that the acquisition of the property and its subsequent sale constituted an adventure in the nature of trade within the meaning of Section 139(1) (e) of the Income Tax Act and that the profit on the sale was income from a business of the appellant within the meaning of Sections 3 and 4 of the Act.

The appellant was incorporated as a private company on July 5, 1961, by letters patent under the laws of the Province of Ontario to, inter alia, acquire, operate, develop, rent and sell real property and acquire, construction, operate and sell buildings of all kinds. The incorporators were Joseph Godfrey, his brother Nathan, and Mrs. Lyle Cappe, wife of David Cappe. These men and their wives were associated together in several business enterprises.

Joseph Godfrey gave evidence for the appellant respecting the partnership, the incorporation of the appellant and the acquisition, development and sale of the subject property. He described himself as a builder-developer in the Toronto area for the past 16 years. He was manager of the appellant and made business decisions and had authority to act for the company, subject, of course, to control by the directors. For the purposes of this appeal, it is not disputed that the plans and intentions of the appellant were those that Godfrey had for the appellant, and I take such to be the case. Godfrey also had an interest in several other companies which were engaged in developing real estate and constructing and selling houses in the Toronto area.

Godfrey’s interest in the subject property originated in April, 1961, when he met his landlord, Mark Tanz, who asked him if he knew of anyone who would be interested in going into partnership with him, Tanz, to develop the subject land, which was then owned by a company owned by Tanz. At that time Godfrey was president of a construction firm, Godfrey and Cappe, which was at the end of a construction stage, and he told Tanz that he was interested. They discussed the matter and agreed in principle and immediately, that day or the next day, entered into the following agreements:

(a) an agreement, dated April 14, 1961, Exhibit 2, between Jaton Investments Limited (a company owned and controlled by Tanz), as vendor, and Skylark Construction Company Limited (also owned and controlled by Tanz) and Joseph Godfrey, as trustee for a company to be designated or incorporated, as purchasers, for the sale by the vendor to the purchasers of the subject land for $480,000.

(b) A partnership agreement, Exhibit 3, dated April 14, 1961, which, after referring to the agreement next above mentioned, provides that the said Skylark Construction Company Limited and Godfrey, as trustee for a company to be designated or incorporated, mutually covenant and agree to be partners ‘‘in the business of construction, land speculation and investment’’, subject to the terms expressed in the agreement. Those terms included para. (4), which required Skylark to advance $30,000 and Godfrey to advance $90,000 for the project; profits and losses to be shared equally by the partners. The name of the partnership was first ‘‘Donway Homes” and later “Donway Terrace Developments”.

The appellant was incorporated soon afterwards to take over the interest held by Godfrey, as trustee, and thereupon it assumed that interest and became an equal partner with Skylark. Subsequently, in December, 1962, Skylark assigned its interest to Perpetual Investments Limited, another company owned and controlled by Tanz. The appellant consented thereto, and thereafter the appellant and Perpetual carried on the partnership. See agreement, Exhibit 4. Perpetual later became Toronto Housing Company Limited.

After the acquisition of the subject land the partnership proceeded to construct thereon 154 maisonette units, a type of what is commonly called town houses. Construction was completed in 1962 at a cost of $1,539,452. The property was called ‘‘ Cloisters on the Don’’. In 1963 the partnership commenced construction of 2 apartment towers, containing 212 suites. Construction was completed in 1964 at a cost of $2,425,000.

The total cost of construction was $3,964,452. Adding the price of $480,000 at which the land was bought from Jaton Investments, the total cost of the property to the partnership was $4,444,452.

The partnership borrowed the following amounts from Montreal Trust Company and Capital Funds, a subsidiary of I.A.C., on 1st and 2nd 10-year mortgages, with rights of acceleration of payment.

The appellant’s cash equity in the property was the $90,000 advanced under the partnership agreement. This money was borrowed from Donhill Construction Company, one of the companies in which Godfrey held an interest.

Architects James Murray and Henry Fliess were engaged by the partnership in May, 1961. Fliess gave evidence. He said they had meetings with Godfrey and Tanz, who told them that they wanted a town house development with outstanding, imaginative buildings having a long term value. Several schemes and ideas were presented. A plan suggested by Fliess was accepted. It involved an English village and town square concept, with amenities such as walkways, Exhibits 9 and 10; stonework, Exhibits 8 and 12; cedar log retaining walls, Exhibits 11 and 12; mature trees, Exhibit 7 ; pergola, Exhibit 9 ; curved and stepped-down houses with terraces, Exhibits 6 and 12; 2 swimming pools with a fountain effect; a 2-storey lobby, with green marble walls and terrazzo floor in the apartment towers; and extensive landscaping by landscaping architects. The maisonettes were intended for family occupancy, the apartments for an upper income class of tenants. The project received much publicity, attracted frequent tours and was the object of great interest on the part of planners. Its location was excellent, near the planned Don Valley Parkway. Fliess said that the attractiveness and high quality of the property were apparent from the outset. He was proud of it.

Godfrey supervised construction and sub-let contracts. No general contract was awarded. He and Tanz discussed problems as they arose. Improvements were made and faults were corrected as required, both before and after occupancy by tenants, such as replacement of dead trees and shrubbery, construction of a swale to take care of a possible recurrence of a flood which had occurred, conversion from oil to gas heating, and in increase of surface parking for tenants by adding 80 parking spaces, making in all 1.6 spaces for each unit.

Martin Pluch, a witness described as a property manager, was engaged by Tanz for the partnership in July, 1963, with responsibility for renting the units. He said that the rental policy was to find long-term tenants with social and financial standing. The standard lease was for 2 years. An incentive of an reduction of $3 per month in rent was given for longer leases. There was no shortage of tenants—in fact, there was a waiting list. At the time of the sale to Manufacturers Life, about half of the leases were up for renewal. Pluch prepared cash flow statements, Exhibits 14 and 15, in the summer of 1966 at the request of Tanz. They were prepared on the basis of anticipated rent increases. They show an anticipated cash flow, before allowance for financing costs, income taxes and depreciation, of $429,217, $440,430 and $495,070 for the years 1966, 1967 and 1968, respectively. Godfrey said he thought the prospects looked good, although the appellant had reported a loss every year, his explanation of which was that the project was in its initial years, there were expenses for construction and repairs which had not been anticipated, and financing was being paid off.

Gordon Bacque, associate treasurer of Manufacturers Life, testified that his responsibility with that company was the investment of its funds in income producing real estate and that he acted for the company in the purchase of the subject property in October, 1966. He was familiar with it, having become interested in it first in 1964, when he considered that it would be a good revenue producing development. At that time he approached Tanz and told him that Manufacturers Life would be interested in purchasing the property if it ever were for sale. No formal offer was made at that time and nothing came of his approach. About the middle of October, 1966, Tanz called him and asked if Manufacturers Life was still interested in purchasing the property. Bacque regarded the property as a quality development. The ensuing sale was negotiated entirely by Tanz, who said that he had control of the situation. Serious negotiations with Tanz, whom he regarded as a skilful negotiator, led to a formal offer and agreement of purchase and sale, Exhibit 16, which was accepted and signed on October 20. The sale was closed unusually quickly, by the end of October, at the request of Tanz. The purchase price was $5,200,000, allocated $5,060,000 to lands and building and $140,000 to goods and chattels. The appellant’s share of the resulting profit was $371,969.27. The amounts of the sale price and profit and income tax are not in dispute. The assessability of the tax is in dispute.

Reverting now to Godfrey’s evidence. He said that he had no knowledge that Tanz was negotiating with Manufacturers Life until Tanz told him that he had reached an advanced stage in the negotiations. He was taken by surprise. He did not want to sell his dream project. But he knew that Tanz was then in need of money. He called his lawyer and asked whether he could stop the sale. The advice he received was that Tanz could dissolve the partnership and that it would be advisable for Godfrey to sell if the price was good. He also phoned Cappe to find out if Cappe would come in with him to buy out Tanz, but Cappe would not do so. He said that he was upset by the suddenness of the proposed sale and disruption of his plans for the property and that he was dominated by Tanz at this stage. So he went along with Tanz’s wishes and agreed to the sale. Thereupon, the appellant company had no further function and he gave instructions to have it wound up and it is now in the process of winding up.

Going back to the acquisition of the property and the inception of the partnership, Godfrey said that at that time he knew that Tanz was involved in real estate development and had a good reputation as a businessman, that he was ‘‘a bit of a wheeler-dealer’’, primarily a real estate manipulator and involved on and off with different partners, but a man of wealth going up and up. Godfrey himself had an interest in several real estate and construction companies in the Toronto area. He was knowledgeable in real estate and had constructed and sold houses and made profits therefrom. He insisted that he intended to keep the subject property as a revenue producing investment and never had any intention to sell it. When questioned in cross- examination in that respect he said that the thought of selling it never crossed his mind, never occurred to him, and neither did the tremendous accretion in the value of the property occur to him, and he had never even considered the possibility of selling it.

Although the business of the partnership, as set forth in the partnership agreement, is said to be ‘‘the business of construe- tion, land speculation and investment’’, Godfrey said that Tanz took these words out of another agreement and put them in the partnership agreement and, although he, Godfrey, signed the agreement, the subject property was the only object of the partnership and his only intention as a partner was to develop in and construction a building complex on it as a revenue earning investment.

Counsel for the respondent objected to this evidence as varying or contradicting the written agreement. I am not rejecting Godfrey’s evidence in this respect, in the circumstances and having regard to the issue between the appellant and the respondent, for I think that he may give evidence as to his intentions with respect to the partnership and the property. The weight to be given to the evidence is something else.

An incidental payment made by the partnership was the payment of $52,000 to Bloor-Bathurst Investments Limited pursuant to an agreement, Exhibit 17, which states that the payment is in consideration of Bloor-Bathurst introducing Manufacturers Life and assisting in the negotiations for the sale of the property. Bloor-Bathurst is owned 50% by Godfrey through one of his companies and 50% by Tanz. Godfrey still holds shares of that company in trust for Tanz. He said that Tanz wanted the payment as a finder’s fee. He didn’t approve of the payment, but went along with Tanz’s wishes and made it.

Tanz was not called as a witness.

The question for determination is whether the profit realized by the appellant from the sale of the property was income from a ‘‘business’’ within the meaning of that word in Section 3 of the Income Tax Act, as extended by Section 139(1)(e), which includes a ‘‘trade, manufacture or undertaking of any kind whatsoever’’ and ‘‘an adventure or concern in the nature of trade ’ ’.

A like question was expressed by Thurlow, J. in Sensibar Dredging Corporation Ltd. et al. v. M.N.R., [1967] C.T.C. 298 at 307, as follows :

The question with respect to the nature of the gain for the purposes of the Income Tax Act is whether the gain was profit from a “business” within the meaning of that term which, as defined in the Act, includes “a trade, manufacture or undertaking of any kind whatsoever” and “an adventure or concern in the nature of trade’’. This issue is frequently stated as being whether profit realized from a transaction was income or a capital gain but while this may be a convenient way of posing it the relevant question for the purpose of the act is whether the profit arose from a business as defined in it. If so the profit is taxable as income whether or not by some standards it might be regarded as a capital gain. On the other hand if the profit is not profit from a business—and is not otherwise income—it matters not what name may aptly characterize it. The test to be applied for determining the question as propounded in Californian Copper Syndicate v. Harris (1904), 5 T.C. 159, and as since applied in cases arising under the Income Tax Act is whether the gain in question was “a gain made in an operation of business in carrying out a scheme for profit making”.

As often stated, the question is one of fact. In eases of this kind the facts are not infrequently fairly evenly balanced, and it seems to me probable that on the facts in this appeal different persons might reach different conclusions.

The subject matter is real property which by its nature was capable of being acquired and held as a revenue producing investment, or acquired, held and sold in the course of a "business”, an adventure in the nature of trade. What we must seek to determine on the facts in evidence and probable inferences is the real character of the appellant’s operation and involvement in the acquisition and sale of the property.

I am satisfied that the appellant and Tanz formed their partnership with an intention to develop the land and construct rent producing houses and apartment buildings on it. They constructed the buildings, first the town houses in 1962 and later the apartment towers in 1963-64. I am also satisfied that the buildings were of high quality and had attractive amenities not usually found at that time in apartment and housing projects in that area. They incurred extra cost in that respect. They also sought long-term tenants, with a standard lease of 2 years and an inducement of reduced rent for longer leases. They engaged a project manager in 1963 to find desired tenants. They later increased the parking facilities, and converted heating from oil to gas. Tanz rejected an approach by Manufacturers Life to purchase the property in 1964. They did not seek buyers until Tanz decided to sell in October 1966. The appellant company’s only activity was the subject project, and, following sale of the property, instructions were given to have the company wound up. The cash flow from the property, although not sufficient in its early years to provide a profit, was expected to be profitable in later years. Manufacturers Life bought the property for revenue producing purposes. These are considerations that to some extent support the appellant’s contention that its interest in the property was acquired and held as an investment for rental revenue purposes. However, although these are valid considerations, there is the other side of the coin to be considered also.

When the partnership was entered into, Godfrey and Tanz were extremely knowledgeable in the real property field in the Toronto area. Godfrey, with his near relatives, was active through various construction companies in developing real estate and building and selling houses. Tanz had been more than a little successful financially in his real estate development activities and was, according to Godfrey’s evidence, a man of wealth and going up and up when the partnership was formed. They obviously knew the real estate development business and the profits being realized in it. They were themselves in it in a fairly large way. I cannot help but infer that when Tanz proposed a partnership Godfrey jumped at the chance of going in with him, for the suggestion was no sooner made than accepted.

The activities of Godfrey and Tanz in the real estate field do not necessarily lead to a conclusion that the acquisition and development of the subject property was, on the part of the appellant, an adventure in the nature of trade and not an investment for rent earning purposes—but such activities should not be overlooked and left out in piecing together the mosaic which makes the full picture of the undertaking.

The location of the property was such that its future prospects, as bare land or as a developed housing and apartment complex, were excellent, from the point of view of earning income or of realizing a profit upon sale. The very attractiveness of the completed complex would enhance its value and sale- ability. The partners took pains and spent. money for amenities which would add to the attractiveness of the property for the present and long-term future, but, good businessmen as they were, they no doubt expected to get a return on any money so spent, in rent when rented or on sale if sold.

The appellant’s cash equity in the property was relatively small, $90,000, and it was money borrowed from one of the Godfrey family construction companies.

The property was mortgaged. to the hilt. The appellant company reported a loss each year, and its only profit was on the sale.

I will say that to me Godfrey appeared for the most part to be sincere and truthful in giving his evidence. I think that he was somewhat reluctant to sell at the time the property was sold. But I find it difficult to believe his insistence that the thought of selling the property never crossed his mind and that he had never even considered the possibility of selling it. He went into the partnership quickly with Tanz who was, according to Godfrey, involved in housing developments on and off with differ- ent partners. The appellant did not have a controlling interest in the partnership. Surely, Godfrey could not have been oblivious to the possibility that Tanz might at any time want to take a profit by sale of the property and could force a dissolution of the partnership, and to the possibility that with accelerating property values it would be to the advantage of the partnership to sell at a good profit. Despite his stated desire to retain the property longer, he acceded to Tanz’s wishes, with little dispute or argument. He also acceded to Tanz’s wishes in paying a commission of $52,000 to Bloor-Bathurst Investments, which they jointly owned. I am disposed to think that from the start Tanz was the dominant partner and that Godfrey was content to go along with that situation. The court did not have the advantage of any evidence that Tanz might have given if called as a witness.

In Western Leaseholds Limited v. M.N.R., [1960] S.C.R. 10; [1959] C.T.C. 531, the Supreme Court of Canada said, per Locke, J. at pp. 21-22 [p. 542]:

. . . In Anderson Logging Company v. The King ([1925] S.C.R. 45 at 56; [1917-27] C.T.C. 198 at 207), Duff, J., as he then was, said that if the transaction in question belongs to a class of profitmaking operations contemplated by the Memorandum of Association, prima facie at all events the profit derived from it is a profit derived from the business of the company. That presumption may, of course, be negatived by the evidence as was done in the case of Sutton Lumber & Trading Company v. M.N.R., [1953] 2 S.C.R. 77; [1953] C.T.C. 237.

In the present case, the declared objects of the appellant in its letters patent included the acquisition, development and sale of real estate ; and the sale concerned belongs to a class of profitmaking operations embraced in those declared objects; and in the partnership agreement the partnership business was said to be ‘the business of construction, land speculation and investment”. However, that is not of important significance in the determination of this appeal, for the question is not what powers the appellant had, but rather what it actually did, not what business or trade it might have carried on, but rather what business, if any, it did engage in. Sutton Lumber and Trading Co. Ltd. v. M.N.R., [1953] 2 S.C.R. 77 at 83; [1953] C.T.C. 237 at 244; Regal Heights Ltd. v. M.N.R., [1960] S.C.R. 902 at 907 ; [1960] C.T.C. 384 at 390.

The onus is on the appellant to show that it acquired its interest in the property for revenue-producing purposes and that the sale was not a sale in the course of the operation of a business for profit. For the appellant to escape taxation on its gain from the operation it has to show that it is to be characterized as an investment.* [1]

Considering the entire situation as objectively and realistically as I am able to, I think that a substantial element of speculation on the appellant’s part was involved in entering into the partnership and acquiring the property and that the circumstances do not clearly stamp the operation with the character of an investment. I think that the appellant entered into the partnership and acquired its interest in the property with an intention to initially develop it into a housing project and rent it for a time, but with an overall intention to turn the property to account in some profitable way or ways, including sale if and when a sale would be opportune. The way or ways would depend largely on Tanz’s desires and decisions from time to time for he was the dominant person in the relationship; he told Manufacturers Life that he controlled the situation, and he apparently did.

The circumstances as a whole lead me to conclude that it was part of the appellant’s intention, and one of its purposes, to develop the property and have it for a time for rental revenue, but that, with prospective construction of the Don Valley Parkway and development of the area and consequential accelerated property values, the probability of a profitable sale was also envisaged at and from the outset, and one of the purposes of the partnership and of its acquisition of the property was to take advantage of the opportunity to make a profit by sale at an appropriate time. I think that the balance of probability is to that effect and as it has not been shown to my satisfaction that the assessment made by the Minister was not warranted, my determination is to dismiss the appeal.

The appeal is, therefore, dismissed with costs.