CATTANACH, J.:—This is an appeal against the income tax assessment of Twenty Spadina Road Limited, hereinafter called the Company, for the taxation year 1958 whereby the respondent added to the declared taxable income of the Company a sum of $70,156.49 realized as profit on the sale of real estate on the ground that the said sum was income from a business carried on by the Company within the meaning of Sections 3, 4 and 139 (1) (e) of the Income Tax Act, R.S.C. 1952, c. 148.
In the fall of 1955 four friends, who were also business associates, discussed the acquisition of property municipally described as 20 Spadina Road, in the City of Toronto and the erection of a small office building on the site since the area in question was becoming a commercial centre. The participants each had some specialized knowledge and experience in the real estate and construction fields or in related endeavours. They were Samuel Lyons, an insurance agent, Martin Mendelow and James Key wan, architects, and Harry Silverman who had real estate interests. Mr. Silverman induced Timothy Silverton, a building contractor, to join the group. Each member of the group was to have a 20% interest, although the interest of Mr. Silverman was subsequently taken in the names of two of his sons-in-law, Mr. Shapiro and Mr. Weinstein, and Mr. Silverton’s interest was taken in the name of a relative, Mr. Campbell. However, Mr. Silverman and Mr. Silverton undertook to assume personal liability in any additional requisite financing. Each member of the group put up $4,000 making a total of $20,000.
The architects, Mr. Mendelow and Mr. Keywan, inspected the site, checked the relevant municipal by-laws and decided the site was suitable for the plans of the group. There was a large old house on the site which had been converted from residential to commercial use which building would be demolished to make way for the new structure.
On November 7, 1955 an offer to purchase was made to Mrs. Marion Winkler, the owner of the property, for $86,000 which was accepted by her. The offer was made by Mr. Mendelow on behalf of a company to be formed.
Twenty Spadina Road Limited, was incorporated under the Ontario Corporations Act by letters patent dated February 22, 1956 for the following objects:
To acquire the lands municipally known as 20 Spadina Road in the said City of Toronto, and to construct thereon a building or buildings and to retain the same for investment purposes.”
The authorized capital was $40,000 divided into 3600 non-voting redeemable preference shares of the par value of $10 each and 4000 common shares of the par value of $1 each of which $20,000 in treasury shares were issued to Lyons, Mendelow, Keywan and Campbell to the extent of $4,000 each and $2,000 each to Shapiro and Weinstein.
The letters patent also contained a clause in the following terms:
And it is hereby ordained and declared that if the Company should sell its title, right and interest in fee simple to the whole of the lands and premises now municipally designated as 20 Spadina Road, in the said City of Toronto, then the Company shall surrender the Letters Patent herein granted to the Lieutenant-Governor or shall take proceedings to change its name to some dissimilar name.’’
By deed dated January 28, 1956 the land was transferred by Mrs. Winkler to the Company and Mrs. Winkler received $27,500 in cash, the company assumed an existing mortgage for $8,000 and Mrs. Winkler was given a mortgage to secure the unpaid balance of the purchase price in the amount of $50,500 payable on September 30, 1957 with interest at 6%. The mortgage also contained a clause giving the Company the right to demolish and make excavations.
Plans were drawn for a five storey office building with a total floor area of 25,510 sq. ft. of which 20,590 sq. ft. was rentable with parking space for 20 automobiles. The estimated cost of the building was $400,000 inclusive of the land, or an approximate cost of $20 per sq. ft. of rentable space. A projected statement of income and expenditures indicated a gross income from rentals of approximately $84,760 less conjectured and foreseeable expenses of $53,770, yielding an estimated net annual income of $30,990.
At this point the financing of the project became of paramount importance. The key to successful fulfilment of the project was an adequate first mortgage. Discussions were held with Murray & Company, Limited, mortgage brokers, and verbal assurance was received that a minimum mortgage of $250,000 was available from the North American Life Assurance Company if the building were leased to the extent of 60% of satisfactory tenants. The leasing of the premises to the above extent was a condition precedent to a formal mortgage commitment.
Meanwhile interim financing was required. The contributions for capital stock in the company was $20,000. A further $20,000 was loaned to the company by its shareholders and from individual sources. Discussions were held with the branch manager of the Company’s bank which led to the expectation of a loan of $100,000 which together with the $40,000 in the Company’s treasury and the first mortgage of $250,000 would total $390,000 an amount adequate to finance the completion of the building at an estimated cost of $400,000 inclusive of the outlay for the land.
Real estate agents were engaged for the rental of space who expressed the opinion that the possibility of renting to reliable tenants would be greatly enhanced if the building were under construction and accordingly construction was begun during March, 1957.
Negotiations were entered into with a firm of chartered accountants to lease one and a half floors on the basis that the firm members would become shareholders of the Company. A factor considered was the excellent bank credit of the accounting firm. However, the arrangement broke down over a penalty clause as to completion of the building by a specific date which the firm of chartered accountants insisted upon and which the Company considered unacceptable.
By letter dated April 5, 1957, the bank advised the Company that the application for a loan of $100,000 had been declined by the head office of the bank. It was therein explained that the bank required a virtually self-liquidating programme and stated no firm mortgage had been arranged nor was one immediately in sight. The bank’s officers foresaw considerable difficulty in the Company meeting immediate trade payments and therefore recommended the sale of the building forthwith.
As witnessed by an indenture dated April 3, 1957 and recorded in the Registry Office for the Registry Division of Toronto on April 8, 1957, a sum of $100,000 was borrowed by the Company from Marion F. Hull, secured by mortgage and guaranteed by Silverman, Silverton, Lyons, Mendelow and Keywan, the principal sum being due and payable in April 5, 1958 with interest at 18%.
On May 24, 1957 an offer to lease the fifth floor and part of the first floor at a rental of $4 per sq. ft. was signed by the United Steel Workers of America. Later an additional offer to lease covering the second and third floors also at $4 per sq. ft. was signed by K.C.S. Data Control Limited on August 27, 1957. By virtue of these two offers to lease 60% of the property was leased to satisfactory tenants.
However, construction was proceeding and bills were accumulating. The amount of $100,000 borrowed from Marion F. Hull was not sufficient to meet the accumulating bills and a further $100,000 was required.
Rosenberg, Smith, Walsh and Kroll, a firm of solicitors in Toronto were approached for the purpose of raising a further $100,000. The solicitors acted on behalf of two incorporated companies, Naomal Limited and Kopel Investments Limited.
Naomal Limited advanced to the Company the sum of $100,000 secured by a mortgage dated June 20, 1957, for a term ending June 21, 1958 with interest at 12% per annum and with Lyons, Silverman, Silverton, Mendel-ow and Keywan as guarantors.
An agreement between Kopel Investments Limited and the Company was executed on June 17, 1957. The document is entitled, ‘‘ Agreement of Purchase and Sale’’. Kopel Investments Limited, called the ‘‘purchaser’’, agreed to purchase the property known as 20 Spadina Road for $525,000 and to assume a first mortgage for $325,000 with interest at 7% amortized over 20 years in equal blended monthly instalments of principal and interest.
The Company, on its part, undertook that the building would be fully completed and that before completion the building would be fully rented. It was also provided that the offer was conditional upon the advancement of $100,000 to the Company which was the amount secured by the mortgage to Naomal Limited dated June 20, 1957.
If the conditions imposed by this agreement upon the Company were not fulfilled, provision was made for waiver at the discretion of Kopel Investments Limited.
The agreement also contained a provision in the following terms :
“The Parties hereto agree that the Naomal mortgage will provide that at any time either party may give ninety days’ notice and such mortgage will become due at the end of the ninety-day period.
In the event that notice is given by the Vendor then the Purchaser shall have until the expiration of the ninety day notice period to exercise its option to either purchase the property or not to purchase the property.
In the event that such notice is given by Naomal Limited then the Purchaser shall have fifteen days from the date that the balance owing to Naomal Limited together with interest is paid to exercise its option to purchase the property or not to purchase the property; provided that the Vendor be entitled to repay the money to Naomal Limited at any time after notice demanding repayment has been received from Naomal.”
On September 4, 1957, Mr. Rosenberg, solicitor for Kopel Investments Limited wrote a letter to the solicitors for the Company, requesting a draft deed in favour of his client pointing out that the agreement of June 17,1957 called for the assumption of a first mortgage in the amount of $325,000 which had not been registered as of that date and that the building had not been completed. Confirmation was requested that such would be done before closing.
On September 6, 1957 the solicitors for the Company replied to the letter of September 4, 1957 stating that a draft deed had not been forwarded because the requirements of the offer to purchase dated June 17, 1957 had not been fully met, that no mortgage commitment had been obtained but negotiations were continuing and advice as to the outcome was expected shortly.
On September 24, 1957 the solicitors for the Company wrote a letter to Naomal Limited giving notice that the Company proposed to pay off the mortgage to Naomal Limited on or before December 23, 1957, such notice being the ninety days’ notice provided for in the agreement between Kopel Investments Limited and the Company dated June 17, 1957.
Simultaneously another letter also dated September 24, 1957 was written by the solicitors for the Company to Kopel Investments Limited advising that notice of the Company’s intention to pay off the mortgage had been given to Naomal Limited and referred to the right of Kopel Investments Limited to purchase or not to purchase the property within such period of ninety days under the agreement between the parties dated June 17, 1957.
On receipt of the letter dated September 24, 1957, Kopel Investments Limited began proceedings in the Supreme Court of Ontario for specific performance of the agreement dated June 17, 1957, and filed a lis pendens against the property on September 27, 1957.
Meanwhile negotiations for a first mortgage loan were being continued by the Company and verbal assurance was given that a loan would be forthcoming.
A written application for mortgage loan in the amount of $275,000 was made to North American Life Assurance Company by the Company, the document being dated October 15, 1957. It was previously understood from negotiations on behalf of the Company by Murray & Company Limited, mortgage brokers, that no commitment would be given until after November 1,1957.
By letter dated November 12, 1957 North American Life Assurance Company advised the Company that a mortgage loan of $275,000 had been approved. However, the completion of this mortgage required the elimination of encumbrances registered on the title to the property by Naomal Limited and Kopel Investments Limited, including the certificate of lis pendens registered by the latter.
As a result of negotiations between the Company and Kopel Investments Limited a further agreement dated December 10, 1957 was entered into between these parties whereby the Company gave Kopel Investments Limited an option to purchase the property for $500,000 which option was exercised immediately. The sale was closed on February 29, 1958, as a consequence of which the Company realized the sum of $70,156.49 in excess of the cost of acquiring the land and erecting the office building thereon.
The Company then went into voluntary liquidation on March 91, 1958 and appointed Samuel Lyons as Liquidator which accounts for the present appeal being brought in the name of the Liquidator.
By assessment dated March 18, 1957 the respondent added to the declared taxable income of the Company the aforesaid sum of $70,156.49. On June 1, 1959 the appellant filed a notice of objection to this assessment and on January 28, 1960 the respondent notified the Company that he confirmed the assessment.
It is from this assessment that an appeal has been brought to this Court.
The relevant provisions of the Income Tax Act are:
Section 3. ‘ The income of a taxpayer for a taxation year for the purposes of this Part is his income for the year from all sources inside or outside Canada and, without restricting the generality of the foregoing, includes income for the year from all
(a) businesses,
(b) property, and
(c) offices and employments.”
Section 4. ‘Subject to the other provisions of this Part, income for a taxation year from a business or property is the profit therefrom for the year.”
Section 139. (1) ‘‘In this Act,
(e) ‘business’ includes a profession, calling, trade, manufacture or undertaking of any kind whatsoever and includes an adventure or concern in the nature of trade but does not include an office or employment ; ’ ’
The issue in this appeal is whether the profit realized from the sale of the property by the Company to Kopel Investments Limited was income from a business within the meaning of Sections 3, 4 and 139(1) (e) of the Act.
Counsel for the appellant referred to the facts and urged that they indicated an intention on the part of the Company, its shareholders and directors, to establish a long term investment designed, at some future time, to provide the shareholders with a substantial dividend income from rental receipts from the building. He pointed out that none of the promoters of the Company required an immediate income from the building as each had his own business and resources and all were content that any profits from the building should be used for the retirement of the Company’s financing commitments. He further argued that such intention was borne out by the Company’s course of conduct throughout and that its ultimate purpose was thwarted by the difficulties encountered in financing and the action begun by Kopel Investments Limited for specific performance of the agreement dated June 17, 1957.
It was strongly urged by counsel for the Minister that the transactions did not support the submission that a long term investment was really intended. The first submission was that the Company’s course of conduct indicated a speculative building project by the purchase of property, the erection of a building on it, securing tenants and when this was done, the sale at a profit. The second contention was that there was present throughout an alternative intention on the part of the Company to realize a profit on the resale of the property if the avowed plan of retaining it as an investment proved incapable of fulfilment because of difficulties in financing.
The test to be applied in determining an issue such as this is stated by the Lord Justice Clerk in the well-known case of Californian Copper Syndicate (Limited and Reduced) v. Harris (1904), 5 T.C. 159 at page 165 as follows:
‘It is quite a well settled principle in dealing with questions of assessment of Income Tax, that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit in the sense of Schedule D of the Income Tax Act of 1842 assessable to Income Tax. But it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable, where what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business. The simplest case is that of a person or association of persons buying and selling lands or securities speculatively, in order to make gain, dealing in such investments as a business, and thereby seeking to make profits. There are many companies which in their very inception are formed for such a purpose, and in these cases it is not doubtful that, where they make a gain by a realisation, the gain they make is liable to be assessed for Income Tax.
What is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts; the question to be determined being—Is the sum of gain that has been made a mere enhancement of value by realising a security, or is it a gain made in an operation of a business in carrying out a scheme for profit making?”
The question on which side of the line an item of profit or gain falls is therefore one of fact to be answered in the light of all the surrounding circumstances.
The facts are not in dispute. The only question is the deduction which should be drawn from them.
On the evidence I am satisfied that the plan to demolish the existing building and to erect an office building on the site was within the realm of possibility despite the remarkably small amount of equity capital available and that the property was purchased for that purpose with the intent to realize profits through letting office space to tenants. I do not regard the situation as one in which it should be inferred that group purchased the land and the Company built the office building upon it as a speculation looking to resale or that it was intended to turn the property to account by any method whatsoever as might be expedient although as events turned out this is what the Company found it necessary to do.
The promotors who later became the shareholders and directors of the Company had indicated their willingness to wait for a financial return and that the rental income should meanwhile be devoted to retiring the financing commitments. Throughout the existence of the Company its interests and intentions were identical with those of the promotors of the project.
However, the expected loan from the bank did not materialize and the bank advised the Company to dispose of the building forthwith. The Company, disregarding this advice, persisted in the attempt to fulfil the project. Other short term loans were arranged and the Company entered into the agreement of June 17, 1957 with Kopel Investments Limited. By virtue of this arrangement the Company was advanced $100,000 by Naomal Limited secured by mortgage. The agreement dated June 17,1957 between the Company and Kopel Investments Limited was an agreement of purchase and sale.
Counsel for the appellant urged that the proper interpretation of this agreement was not what it appeared to be on its face but that it was merely intended to provide additional security to Naomal Limited for its mortgage loan so that in the event of default Naomal Limited would have recourse to the agreement rather than being obliged to undertake foreclosure proceedings. I cannot agree with such submission and would conclude that the agreement was actually what it purported to be, that is an agreement for purchase and sale and that all subsequent actions by the Company were consistent with the performance by it of the conditions of the agreement. The commencement of an action for specific performance and the registration of a lis pendens by Kopel Investments Limited were also consistent with such interpretation regardless of the interpretation placed upon the agreement by Mr. Lyons and other officers of the Company which coincided with counsel’s submission. The proceedings begun by Kopel Investments Limited for specific performance of the agreement dated June 17, 1957 were settled by the subsequent agreement between the same parties dated December 10, 1957 whereby the Company gave Kopel Investments Limited an option to purchase the property for $500,000 which option was exercised forthwith and the sale closed on February 29, 1958. The lesser price of $500,000 in the subsequent agreement of December 10, 1957 was occasioned by the Company obtaining a first mortgage in a lesser amount than contemplated in the agreement of June 17, 1957.
Therefore I find the Company agreed to sell the property on June 17, 1957 but that such fact does not vary the circumstance that what the Company sought to create was a capital asset. The project was begun with a minimum equity capital, but there was the distinct probability that it would be brought to a successful conclusion and there was a reasonable expectation that financing could be obtained. However, such financing became increasingly more difficult and expensive to obtain and resulted first in the agreement to sell the property to Kopel Investments Limited and a subsequent renegotiation of the agreement for sale at a lesser price which sale to Kopel Investments Limited was eventually closed on February 29, 1958, the Company being unable to extricate itself otherwise from the complexity of its commitments.
The cumulative effect of the foregoing facts leads me to the conclusion that the Company was not engaged in an adventure or concern in the nature of trade and that the profit made by the Company on the sale of the office building was not income within the meaning of Sections 3, 4 and 139(1) (e) of the Act.
The appeal against the assessment is therefore allowed with costs.
Judgment accordingly.