Van Anrep v. The Queen, 81 DTC 5278, [1981] CTC 358 (FCTD), aff'd 83 DTC 5100, [1983] CTC 84 (FCA)

Grant, DJ:—Mr Erlichman, I am prepared to find in this case that the plaintiff in this matter was probably lured into this purchase by the action of his partner who had been rather successful in his previous attempts and that by reason of that the purchase by him and his partner of the farm was made for the sole purpose of resale at the first opportunity of making a reasonable profit.

If you agree with that do you wish to say anything to the Court?

Mr Erlichman: No, My Lord.

His Lordship: Thank you.

The appellant/plaintiff in this case graduated in law and was called to the Bar in the year 1966. For some six months he practised with a firm in London and then he went to St Catharines to join in partnership with his friend with whom he had gone to school, one Eugene Chorozy.

The latter had been brought up on a farm in the vicinity of St Catharines. His practice had been confined always to real estate and it was the understanding that the plaintiff in this case would attend to litigation while Chorozy would confine his efforts to real estate.

This is borne out by the testimony that Chorozy was not only interested in doing the conveyancing with respect to real estate, but he was very, very active as a trader in buying and selling for a profit. All of his deals have not been gone into, but suffice it to say that in 1965 he purchased property at 366 Thorold Street in the name of a company which he had set up himself for the purpose of rezoning and thereafter building townhouses and reselling when the opportunity presented itself. He, in the period of three years, resold making a profit of $24,000, so that he was a trader in real estate at the time that the plaintiff left his practice of law in London to come down to be with Chorozy.

In 1969 he as well bought 92 acres of land in Niagara Falls for the purpose of a mobile-home site, again with the intention of reselling it as soon as he could realize a profit that was satisfactory to himself. It had cost him $184,000 and in four or five years he resold it at $720,000.

He treated both of these sales, he says, as income in his income tax returns rather than as a capital gain and there can be no doubt that the plaintiff in this case knew of these quick ways of making money from his old friend who he had now joined in the partnership of the firm.

Mr Chorozy was called as a witness by the plaintiff and he acknowledges that he is a developer and a trader in real estate. It wasn't very long until the plaintiff joined with his partner in these ventures. The first purchase by the two of them was a twelve unit apartment building at 32-38 Welland Avenue in the City of St Catharines.

While he gives as a reason for the purchase of this property to set up a source of income for his retirement, in a very short time he had traded his interest in that apartment building to one Mrs Lyttle for her home at 21 Marvin Drive. The reason for so doing, he states, was because of his impending marriage and this was the opportunity of securing a home for himself. In this trade he made a gain of $4,566.

The Minister assessed his income when the income tax returns came to him and, upon objection, the Minister, in my opinion, rather charitably consented to it being treated as a capital gain. Because the Minister had taken the attitude that he did in one case, there is no reason for the Court being bound by the decision that he came to. One cannot be sure that he had the full information in regard to the relationship between the two partners and how that might have affected the situation. However, it has nothing to do with this case, except to show one of the first activities of the plaintiff in regard to dealing in real estate.

The second purchase in which the plaintiff was involved was the purchase of a one-quarter interest in land amounting to 2.41 acres at 351 Geneva Street in St Catharines. This was a purchase which had been set up by Chorozy and other parties and in fact there were three financial persons from Toronto who took part in it and had a share in it as well.

The evidence from the plaintiff was that the purpose in buying it was to develop it and construct a medical and professional building with apartments above. This development never proceeded beyond the planning stage and it is my recollection of the evidence that the frustration that has been spoken of there was the failure to get funds with which to proceed.

In any event, the plaintiff sold his interest in this property to his partner and one Manuel Kimel in the fall of 1972, making a profit of slightly over $2,000 at that time. He treated it as a capital gain and it was so allowed by the Department.

The issue in this case arises out of the purchase and resale of what is known as the Kim Carol Farms in Niagara-On-The Lake. It was a purchase of two farms adjoining. The first farm was purchased in the first instance by the plaintiff’s said partner in March of 1969. That purchase was financed by him from loans at the bank. The price was $165,000, assuming a mortgage for $115,000, so that another $50,000 had to be raised for the purpose of closing the purchase. A mortgage was given to Guaranty Trust for $10,000 against the property with interest at 12% per annum and a second mortgage was given to a person who if I recall her name was Isabelle Jackson, for the sum of $36,500, bearing interest at 10% for a period of three years.

The second farm was purchased in both names, that is both the plaintiff and his said partner and the price for that was $85,000. As against that there was a mortgage placed of $30,000 and a second mortgage for $31,192 which was due in one year and on which they had to pay interest at 15%.

The result of their financing of the purchase of the farms meant that all the money that they put into the buying of these two properties themselves was approximately the sum of $4,500.

The plaintiff said that he would have had difficulty in raising funds to put into the transaction and it was particularly feasible to close the deal with the mortgage loans, because it saved him from having to borrow further money or getting further money and I took from what he said that except that they had been able to raise these mortgages he would not have had the funds himself to have put into the purchase of the property.

Their financial dealings thereafter become somewhat complicated. They were attempting to make mortgages payable at a more distant time than they were. On April 15th they borrowed $31,000, giving a mortgage to Wocco Investments, but they were not successful in getting a long-term mortgage on this occasion because it was only for one year and the rate of interest was 18%. On June 10, 1970 another mortgage was put on for $5,000 to secure a note for money that the partner had to borrow, I think, rather than the plaintiff.

On April 23, 1971, the two partners gave a mortgage for $50,000 to the plaintiff in trust. I believe he said it was in that form because it was one of his own clients who advanced the money and it has been subsequently paid off, but in that case the interest rate was 9.75% and the full principal was to be paid on April 23, 1975, so they really had a four-year term in that case.

Their fiscal year ended at the end of October and in the two years in which they actually had grape crops in 1969 and 1970 they operated at a loss. It was not a substantial amount in view of the value of the property, but in 1971 the conditions were somewhat better.

On February 14, 1972 an offer was brought to them which they accepted immediately, whereby the total farm and the chattels associated therewith was sold for the sum of $425,433. Of this amount, according to the land transfer tax affidavit and the deed, $385,133 was in relation to land and buildings and the chattels were included at a price of $39,720, so that this made a profit, one half of which went to the plaintiff in the sum of $65,315.50. It is that sum which the plaintiff in his income tax returns for the year 1972 treated as a capital gain, carrying out 50% thereof as taxable and which the Minister treated as income and whose decision has been upheld by the Tax Review Board.

I am convinced that the plaintiff’s appeal herein must fail. He has gone to the well with attempts to make a profit on the purchase and sale of real estate too often. I am convinced that the profit that I referred to made in May of 1972 must be treated as income. I am influenced in that decision by the following facts and the evidence before me as follows:

(a) He went into partnership to practise law with Chorozy, knowing that the latter was then a trader and dealer in the sale and purchase of real estate.

(b) He was then lured into this particular farm purchase and other purchases with his partner by the profits that Chorozy had made on the earlier deals which I have referred to.

(c) He had little money to invest in such enterprises and depended almost entirely on the money borrowed from others.

(d) The financing of the various transactions in which he took part raised problems. The interest rates paid in some of these mortgage loans were of such a nature that indicate an intention on the part of one borrowing at such a rate towards purchase and resale rather than holding onto a long-term investment such as the plaintiff says. I have indicated in one case the interest was 18%, although the term is only for one year.

Another matter that I think is very relevant is the fact that the plaintiff in this case had no knowledge whatever as to the growing of grapes. His partner had been raised on a farm which was a fruit farm, probably with some grapes upon it, but had very little experience and knew very little about it and how two men with university educations could have thought that they could have taken over a farm without experience or whatever and held it for the years that the plaintiff says they intended to is rather difficult to understand. This is borne out by the fact that for the first two years they did suffer losses.

It is also difficult to understand if the plaintiff’s intention was with his partner in most cases and with the several partners in the other cases, if his intention was to hold for a long-term period for the purpose of producing income on his retirement, that some provision for his protection and the protection of the others was not made. Even one not knowledgeable in the law and the requirements of containing terms of such arrangements in writing would have known that some arrangement must be made. Apparently the parties, according to the plaintiff, had little discussion about it. He knew what his partner would do. He knew his partner was a trader and as soon as a reasonable profit could be obtained that he would want to sell, and unless his intentions were exactly the same and he hoped to make his profit, he as a reasonable lawyer would have had an agreement prepared whereby he would have had the right to take over his partner’s share in such an event, or some other similar arrangements whereby he could be protected. That is particularly applicable in the case where they bought the property with the three investors from Toronto and which he eventually sold out in a fairly short period of time.

In my opinion the arrangements that existed between these two partners as to this farm all indicate a purchase on both of their parts with the purpose of reselling at a suitable opportunity to make a profit thereon to be realized. When one looks at the actual kind of sale, the evidence of the plaintiff is that he then had his financing arranged satisfactorily in long-term financing so that he wasn’t in a position where he had to sell. The losses were not such that he had to get rid of this property at the time. If his real intention had been to retain it he could readily have done so.

Much has been said about his early purchase of registered retirement savings plans and that this indicated that he was one who was a sound businessman and particularly interested in providing an income for himself upon retirement and there can be no doubt that a registered retirement savings plan which he had for that purpose was a good thing, but he disposed of it. He sold it. He sold it for this other opportunity of a rise in the price of land and a profit that might be made.

Now, there is very little evidence before the Court as to the extent to which there was a rise in the price of land in this period of time in that area, but there is quite sufficient evidence to show that the partner was very knowledgeable in regard to the value and sale price of lands. He knew what land was going for and probably knew what one could reasonably expect and that would be that in a few years a clear profit might be made.

Everything indicates that that was the plaintiff’s purpose in selling his registered retirement savings plan holdings for the purpose of financing his purchases in this land at the time. It is true that when it was all over, after they had made their profit he has gone back into purchasing registered retirement savings plans and except for one other venture in the purchase of land which turned out badly he has been investing in registered retirement savings investment certificates.

The plaintiff stated that at the time that he made the trade for his home he did so because he didn’t have sufficient funds to buy the home and that was a good opportunity for him to acquire one without having to raise more money. My recollection is that he had some doubts about whether he could make a down-payment, but still at the same time the other project which he joined in with his partner and the three real estate investors from Toronto is not to my mind indicative of an intention then to purchase that land and to hold it after it had been developed as an income-producing asset upon his retirement.

The holding of the farm in this case was from December of 1969 to February of 1972, just a little over two years, a rather short period of time in which to have so disposed of it and is indicative to my mind of an intention to sell at the time of its purchase in the first instance.

For all of these circumstances I am convinced that at the time of the purchase of these farms by the plaintiff and his partner that they did so with the intention of reselling the same when the first opportunity arose to make a good profit for themselves and that this was one of the main motivating factors in making the purchase.

The appeal must therefore be dismissed with costs.