Date: 19990119
Dockets: 96-23-IT-G; 96-25-IT-G
BETWEEN:
THE ESTATE OF HARRY GOLDENBURG, MORRIS GOLDENBERG
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for judgment
Mogan, J.T.C.C.
[1] The appeals of Morris Goldenberg v. The Queen (Court file 96-25(IT)G) and The Estate of the late Harry Goldenburg v. The Queen (Court file 96-23(IT)G) were heard together on common evidence. Each appeal is from an income tax assessment for the 1990 taxation year. Harry Goldenburg died after the commencement of his appeal but his appeal was continued by the executors of his estate. For convenience, I shall refer to the two individual taxpayer Appellants as "Morris" and "Harry," respectively. Although the surnames are spelled differently, Morris and Harry are related. Morris is Harry's nephew. Morris' father Louis and Harry are brothers. Again for convenience, I shall refer to Morris' father as "Louis".
[2] Morris and Harry participated in the ownership of certain land in London, Ontario. When the land was sold in 1990, they reported their respective portions of the gain as a capital gain. The Minister of National Revenue assessed tax against Morris and Harry on the basis that the gain was income and not capital. They have appealed from the Minister's assessments. The only issue is whether the character of the gain from the sale of the land was income or capital. In Harry's Notice of Appeal, there was a second issue concerning a 1985 loss which he was claiming to carry forward but, at the hearing, counsel for the Appellants stated that he was abandoning that claim.
[3] The subject land (owned by Morris, Harry and a third party) comprising approximately five acres was not developed and it adjoined certain other lands which were not developed. This appeal is concerned with an attempt to bring together the undeveloped lands in a manner which the City of London would find acceptable for rezoning and development. The subject land is located between Pond Mills Road and Latimer Avenue east of Scenic Drive. In the same location was a parcel of approximately four acres owned by Gold Prop Investments Ltd. ("Gold Prop"). The subject land and the Gold Prop land were separated by a street allowance owned by the City of London. Exhibit A-1 is a survey of the relevant lands showing their location with respect to each other in good detail. On Exhibit A-1, the subject land is outlined in pink; the Gold Prop land is outlined in blue; and lands owned by the City of London are outlined in yellow.
[4] Gold Prop is a corporation the shares of which are owned 50% by Harry and 50% by a holding company (552408 Ontario Limited) controlled by Louis, brother of Harry and father of Morris. Actually, the voting preference shares of 552408 were held by Louis and gave him control but the equity shares of 552408 were held by the children of Louis who included Morris. The four acres owned by Gold Prop had been purchased in 1977 and were held for about 13 years until the sale transactions described below. Gold Prop had not been able to develop its four acres because (i) the lands in the area were zoned for residential development; (ii) the adjoining land owners were unable to agree on how the consolidated lands in the area should be developed; and (iii) the City of London needed such agreement in order to control access to Pond Mills Road, a major collector road.
[5] At the beginning of 1987, the subject land was owned by Central Mortgage and Housing Corporation ("CMHC"). Sometime in 1987, Charles Gallagher informed Harry that the CMHC land was for sale. Mr. Gallagher had extensive experience in land development and construction. Upon discussing the matter with Harry, Mr. Gallagher saw the possible acquisition of the subject land as an opportunity to put together a concept on behalf of all adjoining land owners and to approach the City with the concept in the hope that orderly development of all adjoining lands would be permitted. Harry and Louis and Morris agreed to participate with Mr. Gallagher in the acquisition of the subject land. The original idea was that Mr. Gallagher would have a 50% interest and that Harry, Louis and Morris would each have a 1/6 interest. Before the transaction was put in place, Louis dropped out and transferred his 1/6 interest to his son Morris.
[6] In August 1987, Morris entered into an agreement to purchase the subject land from CMHC at a price of $210,000. The purchase transaction was completed in January 1988 when title was taken in the name of Morris alone. Exhibit R-1 is a two-page agreement between Morris and 739679 Ontario Limited ("739679") dated September 30, 1987. The agreement was drafted by Gallagher. 739679 is a corporation owned by Gallagher although he did not sign Exhibit R-1 on behalf of 739679. According to Exhibit R-1, all profits are to be divided equally between 739679 and Morris but Morris explained that he had a side agreement with Harry under which he and Harry agreed that the 50% allocated to Morris in Exhibit R-1 would in fact be allocated 2/6 to Morris and 1/6 to Harry.
[7] Exhibit R-1 required Morris to provide all funds for the purchase of the subject land. According to Morris, he borrowed $200,000 from the Canadian Imperial Bank of Commerce ("CIBC") and borrowed the remaining $10,000 from Louis who also guaranteed the CIBC loan. Immediately after the purchase, Gallagher and Morris started to meet with adjoining land owners to see if an agreement could be reached with respect to the density of residential development to be permitted on the various parcels of land. Also, they met with the Director of Planning for the City to see if certain lands designed as "road allowances" could be purchased from the City or exchanged for other lands to permit a reconfiguration of the subject land and the Gold Prop land.
[8] Exhibit A-2 is a memorandum dated August 2, 1988 from the Director of Planning to the City of London Planning Committee recommending certain changes to the zoning and street use of the subject land and Gold Prop land. It is apparent from the memorandum that the submissions by Gallagher and Morris were made with respect to both the subject land (approximately five acres) and the Gold Prop land (approximately four acres). Exhibit A-3 is a notice of the passing of a zoning by-law by the City on September 19, 1988 to permit a change in the use of the subject land and the Gold Prop land. The concept plan drawn by Gallagher (Exhibit A-4) and the memorandum (Exhibit A-2) indicate that most of the traffic from the proposed apartment buildings (on the Gold Prop land) and townhouses (on the subject land) would exit by Street A to Scenic Drive and a lesser amount of traffic would exit to Kimberly Avenue.
[9] There was obviously a great deal of activity in the months following the purchase of the subject land in January 1988. Mr. Gallagher described some of his negotiations with an adjoining landowner named May Koziol. Either Morris alone or Morris together with Gold Prop agreed to purchase certain lands from the City for a total consideration of $123,000. It was never explained whether the owners of the subject land were responsible for the payment of this entire amount to the City or whether there was some contribution from Gold Prop. Certain lands were exchanged with Ailsa Meadows, another adjoining owner. On Exhibit A-1, the all green corner was acquired from Ailsa Meadows in exchange for the pink triangle (Part 17) hatched in green. By late 1989, negotiations with the adjoining land owners and the City were concluded to the point where all necessary agreements had been signed even if title to the exchanged lands had not been transferred.
[10] In Morris' Notice of Appeal, the following allegations of fact appear as paragraphs 4 and 5:
4. It was the Appellant's hope (as well as that of his uncle) that the access problems of the Gold Prop land could be solved by developing the same in conjunction with the subject land. It was the intention of all parties involved to develop the subject land and the Gold Prop land for multi-family residential use (both as townhouses and apartment buildings) and to hold the same (as rental properties) for long-term investment purposes. In addition, the Appellant expected that an income stream could be created for himself, as property manager for the joint development.
5. Although the Appellant had limited experience in real estate development, his father and uncle had considerable experience and offered the Appellant the opportunity to assume primary responsibility for the joint development of the subject land as a means of gaining such experience (with their guidance and support).
Similar allegations of fact appear in Harry's Notice of Appeal. The Appellants rely on these allegations of long-term investment purposes plus certain evidence to support their claims that they realized a capital gain upon the disposition of the subject land. The conduct of Morris and Harry after their purchase of the subject land was not consistent with their alleged intention.
[11] Exhibit R-1 is the two-page agreement between Morris and Gallagher's company (739679). This agreement is important because it is the basis on which Morris purchased in his own name all of the subject land and held title to such land as agent for or in trust for Gallagher (50%), Harry (16 2/3%) and himself (33 1/3%). Because the agreement is important and short, I will set it out in its entirety. It is dated September 30, 1987 just one month after Morris signed the agreement to purchase the subject land for $210,000 and four months before the purchase transaction closed in January 1988. In Exhibit R-1, Morris is referred to as "Goldenberg" and Gallagher's numbered company is referred to as "739679". The following is the entire content of Exhibit R-1:
WHEREAS Goldenberg and 739679 are desirous of entering into a joint venture agreement with respect to the purchase and development of lands known as Pond Mills, Blocks K & P (the "Lands");
NOW THEREFORE in consideration of the mutual covenants hereinafter set out and the sum of ONE DOLLAR ($1.00) paid by each of the parties to the other party, the receipt and sufficiency of which is hereby acknowledged, the Parties hereto hereby agree as follows:
1. GOLDENBERG RESPONSIBILITIES
Goldenberg shall
(a) supply all cash or mortgage funding required to purchase the lands and any interest or fees required which shall be returned to Goldenberg from the sale of the Land;
(b) all profits shall be divided equally between 739679 and Goldenberg – 50% each;
(c) reimburse 739679 in the sum of $2,500 for preparation of all development plans on completion of the sale transaction;
(d) co-operate fully with 739679 in the development and sale of the Lands;
2. 739679 RESPONSIBILITIES
739679 shall
(a) prepare all development plans required to develop the Lands;
(b) have the first right to sell the semi-detached lots and the Townhouse site at the agreed upon selling price;
(c) co-operate fully with Goldenberg in the development and sale of the Lands;
3. ROADS
Goldenberg and 739679 agree that the full cost of the road from Cleveland Avenue to Latimer Avenue will be borne by the proposed development;
Goldenberg and 739679 further agree that the full cost of the new road from Scenic Drive to the proposed development shall be shared equally by both parties.
Gold Prop Investments Ltd. agrees that the cost of the new road from Scenic Drive will be shared equally – 50% by Gold Prop Investments Ltd. and 50% (shared equally) by Goldenberg and 739679.
4. LEGAL FEES
All legal fees directly related to the cost of the development of the Townhouse site and semi-detached lots to Draft Plan Approval will be shared equally by the parties hereto.
5. Goldenberg and 739679 agree that each party will work diligently for the good of the development project and will consult each with the other during such development.
[12] In my opinion, Exhibit R-1 is fatal to the Appellants' claim. It was drafted by Gallagher in an amateurish fashion. It speaks only of "sale of land" and "profits". It does not indicate in any way that the parties will be together as co-owners of land and rental dwellings for long-term investment purposes. It does indicate that the parties are thinking of the "sale of land" and sharing of profits without any reference to sale of buildings or any provision for the construction and financing of buildings. The following specific references to the terms of Exhibit R-1 are indications that Morris and Harry and Gallagher were thinking only of selling land and sharing profits:
Para. 1(a) refers to "purchase the Lands" and "sale of Land";
1(b) refers only to division of "profits" although it is under the heading "Goldenberg Responsibilities";
1(c) refers to "sale transaction";
1(d) refers to "sale of Lands";
Para. 2(b) refers to "sell the semi-detached lots and the Townhouse site at the agreed upon selling price" implying that the parties had agreed upon a selling price even before proceeding with the development (i.e. rezoning);
2(c) refers to "sale of the Lands";
Paras. 3(a), (b) and (c) refer to the cost of roads but there is no mention of the cost of any buildings;
Para. 4 refers to costs of developing only "Townhouse site and semi-detached lots to Draft Plan Approval" implying that there will be no construction costs to share equally.
[13] Exhibit R-1 not only implies that the subject land was being rezoned for quick sale but the conduct of the Appellants and Gallagher support that implication. In April 1988, just three months after acquiring title, Morris sold to Talje Development Limited for $150,000 all of the land on the southwest side of Kimberly Avenue which is hatched in pink on Exhibit A-1. In other words, the Appellants and Gallagher had recovered about 75% of their cost ($210,000) within three months of closing the purchase. Morris stated that the $150,000 proceeds of sale to Talje was used to pay down the CIBC loan.
[14] Exhibit A-9 is the agreement in which Morris sold to MacKenzie Malo Housing Development Services Limited ("Mackenzie Malo") the remainder of the subject land for $945,000. It is difficult to tell whether that agreement was signed by both parties on October 31 or November 1, 1989. In any event, the Appellants and Gallagher had either actually sold (to Talje in May 1988) or agreed to sell (to MacKenzie Malo in November 1989) all of the subject land which they had owned for not more than 22 months. This was indeed a quick resale of land which had increased significantly in value as a direct consequence of the efforts by Morris and Gallagher to negotiate with adjoining land owners and the City for new housing densities, new street locations and new zoning. The efforts of Morris and Gallagher were rewarded.
[15] Exhibit A-10 is the agreement in which Gold Prop sold to MacKenzie Malo the land which had been held since 1977 (outlined in blue on Exhibit A-1) subject to minor land exchanges with the City. The sale price was $1,089,000. Like Exhibit A-9, it is difficult to tell whether the agreement was executed by both parties on October 31 or November 1, 1989. Morris made it clear in his evidence that the sales of the Gold Prop land and the subject land to the same purchaser (MacKenzie Malo) were simultaneous events and each sale was conditional upon the other being completed.
[16] There is no evidence as to whether Gold Prop reported the sale of its land (held about 12 years) as a capital gain or otherwise but it is alleged in paragraph 5 of Morris' Notice of Appeal that his father and uncle (Louis and Harry, the founders of Gold Prop) had considerable experience in real estate development. That allegation was admitted. Also, in his oral testimony, Morris described a number of situations in which Gold Prop had acquired and then sold land and buildings.
[17] Exhibit A-11 is a hand-written calculation by Morris showing the gain on sale and what he called "Partners' Distribution". Exhibit A-11 shows a gross selling price of $1,095,000 which I assume is the total of $150,000 from the sale to Talje plus the $945,000 from the sale to MacKenzie Malo. Land costs of $346,616 and selling costs of $35,879 left net proceeds of $712,505 which were distributed as follows:
739679 (Gallagher's company) $356,252
Harry 118,750
Morris 237,503
$712,505
The above distribution is consistent with the terms of Exhibit R-1 in which Gallagher's company was to receive 50% of the "profits". It is also consistent with the side agreement between Morris and Harry in which Harry was to receive 1/6 and Morris was to receive 2/6.
[18] Mr. Gallagher's company (739679) reported its distributed amount as consulting fees and not as proceeds of disposition. In his oral testimony as a witness for the Appellants, Mr. Gallagher did not think of himself as a 50% owner of any land but as a 50% partner with Morris in a "joint venture", the precise words used in Exhibit R-1 which Mr. Gallagher drafted. It is difficult for me to conclude that Morris and Harry had a long-term investment purpose when their 50% partner was not even thinking in terms of investment or ownership but only in terms of a short-term joint venture.
[19] As stated in paragraph 9 above, the Appellants and Gallagher agreed to purchase certain street allowances and other land from the City for $123,000 to facilitate the rezoning and new streets. That transaction did not close until April 1990, simultaneously with the sale of the subject land to MacKenzie Malo. Morris explained that they did not need to borrow any additional purchase monies because they were able to pay the City out of the proceeds from the sale to MacKenzie Malo. Harry and Mr. Gallagher had no capital invested in this transaction. Morris borrowed $200,000 from the CIBC and $10,000 from his father. If Morris and Harry are claiming to be investors who realized a capital gain, they had none of their own capital invested in the transaction.
[20] The Appellants and Gallagher did not at any time instruct an architect or other qualified person to design any kind of building to be constructed on the subject land. Morris acknowledged in cross-examination (Transcript pages 72-78) that the Appellants and Gallagher had not attempted to determine the cost of any rental buildings which they could have built, and Morris and Harry had not thought through the idea of who would manage such buildings.
[21] The basic facts are not complicated. Morris, on behalf of himself, Harry and Mr. Gallagher, signed an agreement to purchase the subject land in August 1987. The purchase transaction closed in January 1988. A small portion of the subject land was sold to Talje in May 1988. On November 1, 1989, Morris signed an agreement to sell the remainder of the subject land. The sale transaction closed in April 1990. Only 32 months passed from the first agreement (August 1987) to the final sale (April 1990) and the owners (Morris, Harry and Mr. Gallagher) realized a gain of almost 3½ times the original cost without constructing any building on the subject land.
[22] The issue is capital gain or income. There is an abundance of jurisprudence on this issue. The dominant test is the intention of the taxpayer at the time of acquisition. See Racine et al. v. M.N.R., 65 DTC 5098. Exhibit R-1 is strong evidence of an intention to sell at the time of acquisition. That intention is confirmed by the conduct of Morris, Harry and Mr. Gallagher in the following 27 months to November 1, 1989, and by the absence of any steps taken to construct even one building.
[23] I find that the joint venture between the Appellants and Gallagher was based only on the concept of rezoning and reselling the subject land. The appeals are dismissed with costs.
Signed at Ottawa, Canada, this 19th day of January, 1999.
"M.A. Mogan"
J.T.C.C.