Staltari v. R. - TCC: Land donated to City of Ottawa was held on capital account

 Staltari v. R. - TCC:  Land donated to City of Ottawa was held on capital account New Window

Staltari v. The Queen (May 13, 2015 – 2015 TCC 123, Owen J.).

Précis:  The appellant had a long history in the real estate business.  He acquired a large parcel of undeveloped land from his father in 2000. Some years later in 2009 he donated the land to the City of Ottawa.  He treated the donation as one of ecologically sensitive land, resulting in no deemed gain on the gift.  CRA assessed on the basis that he held the property as inventory or an adventure in the nature of trade and must include an income gain on the gift.  The Court agreed with the appellant that he did not hold the land in the course of a business or as an adventure in the nature of trade.  Accordingly the gain on the disposition was on capital account.  The appeal was allowed with costs.

Decision:  The land in question had originally been purchased by the appellant’s father:

[18]        The vacant land (the “Land”) that was donated by Mr. Staltari to the City of Ottawa in 2009 consisted of 19.59 hectares located at 6851 Flewellyn Road, Ottawa, Ontario. The Land had been purchased by Mr. Staltari’s father in 1983 and was owned jointly by his father and mother. Mr. Staltari testified that nobody really knew why his father purchased the land other than because he wanted to own a piece of land. From time to time, his father and his father’s friends would hunt on the Land, but other than that his father did nothing with it.

[19]        Mr. Staltari testified that around 2000, his father, who was 72 and retired at the time, approached him about purchasing the Land. Mr. Staltari stated that his father wanted some extra cash but was not willing to simply accept a gift from Mr. Staltari. The sale of the Land to Mr. Staltari allowed his father to provide something in return for the cash.

[20]        To the best of Mr. Staltari’s recollection, the price of $70,000 was determined by his reviewing comparable properties in the area on MLS. He suggested in cross-examination that the magnitude of the purchase was such that it did not warrant more involved research regarding the price. At the insistence of his mother, the purchase price was to be paid over time, accordingly, an initial payment of $6,000 and thereafter annual payments of $8,000 were made. In 2002, Mr. Staltari paid two instalments of $8,000 because his father needed extra money that year.

[Footnote omitted]

He took minimal steps to develop the land:

[22]        Mr. Staltari testified that he did nothing with the Land until early 2003. He stated that he was advised by a lawyer friend at a cocktail party in late 2002 or early 2003 that the City of Ottawa was about to implement a freeze on estate lot development; she advised him that to protect himself he needed to make two applications to the City – one to rezone the Land and another to subdivide the Land. Mr. Staltari stated that he was advised that these applications had to be made prior to a council meeting that was to be held in April 2003.

[24]        Mr. Staltari engaged a consultant, who filed the applications on his behalf on April 16, 2003. He also engaged other people to test the soil, to confirm the availability of well water by drilling test wells and to perform a watershed study, all of which was required in support of the applications.

[25]        A copy of the two applications entered into evidence by the Respondent in cross-examination indicates that the applications were submitted with a Preliminary Tree Planting and Conservation Plan and an Environmental Impact Study and that a Hydrogeology Study and Terrain Analysis “will be provided”.

[26]        Mr. Staltari also hired a contractor to build a gravel road on the Land at a cost of $104,719 plus tax. Mr. Staltari explained that the road was necessary because the truck of the person who was hired to drill the test wells had become stuck in the peat moss on the site. According to Mr. Staltari, the road was necessary to free the truck and complete the test wells. In cross-examination, he stated that the road was built from Flewellyn Road to the location of the truck approximately three-quarters of the way to the north side of the property. He also stated that the road was not suitable for a subdivision because it did not extend all the way to the north end of the property and it did not end in a roundabout.

[27]        Mr. Staltari testified that the City of Ottawa raised a concern that the Land was close to environmentally sensitive land and commissioned a wetland study. This left the rezoning and subdivision applications in limbo. To move matters along, Mr. Staltari requested that he be informed of the City’s position on the applications and the City said the applications would not be approved. Mr. Staltari then appealed to the Ontario Municipal Board [“OMB”] in order to preclude the Land being designated environmentally sensitive wetlands.

[Footnotes omitted]

The taxpayer’s OMB appeals were commenced in 2005 and were still pending in 2009 when he decided to gift the land to the City of Ottawa:

[30]        Mr. Staltari approached the City and the City agreed to accept the donation. The Land was appraised at $1,935,000 and was donated to the City in 2009. The City issued an official charitable donation receipt to Mr. Staltari for the appraised value of $1,935,000. The Minister of the Environment certified the Land as ecologically sensitive land and also certified the fair market value of the Land as being $1,935,000.

[31]        Mr. Staltari used $875,000 of the ecological gift receipt amount to claim a non-refundable income tax credit for his 2009 taxation year under subsection 118.1(3) of the ITA. The Respondent does not contest the eligibility of the gift of $1,935,000 for inclusion in Mr. Staltari’s “total ecological gifts” and “total gifts”, as defined in subsection 118.1(1) of the ITA, for 2009.

[32]        Mr. Staltari testified that his reasons for choosing to donate the Land to the City of Ottawa were as follows.

What was going through my mind at that time after I explored the donation, I had wetlands hanging over my head. I had the OMB appeal that I could continue with, and I had this donation option in front of me.

To not do the donation and not do the appeal, okay, meant in my mind then and now, by the way, but even then was I was going to end up with environmentally sensitive land and I could do nothing. So that was not an option I was going to do.

So then the option was do I continue with the appeal, protect my future rights, or I had this donation receipt, which was very    financially was very attractive because I had a large gain with the building I sold and I could use a good chunk of that gain that year. 

So I said financially, this makes the most sense, okay? So I took the gift and then dropped the appeal.

[33]        In re-examination, Mr. Staltari stated that the purpose of the application relating to a plan of subdivision was to secure approval of such a plan of subdivision and nothing more. He stated that no discussions were held regarding the construction of homes, and no steps were taken in furtherance of the construction of homes, on the Land.

^Footnote omitted

While the provisions of the Income Tax Act permitted the appellant a tax credit for the deduction of the gift of ecologically sensitive property he was still required to bring the gain into income unless it was held as capital property in which case the gain was deemed to be nil.

The Crown`s basic position was that the appellant had been a real estate specialist all of his professional life and the land in question was held as part of a business or as an adventure in the nature of trade:

[47]        Counsel for the Respondent argued that the Land was inventory because Mr. Staltari was a real estate specialist who often sold properties for others and occasionally for himself. The Land was acquired by Mr. Staltari as part of a business scheme, as evidenced by the fact that Mr. Staltari held real estate through several corporations and the Land was held in much the same fashion. Mr. Staltari had built properties in the past (the row of four townhouses and his own home) and had a current scheme involving the construction and sale of condominiums at 174 Glebe Avenue in Ottawa.

After an extensive review of the jurisprudence the Court held that there was no evidence that the appellant held the land in question in the course of a business:

[78]        Turning to the Respondent’s first position, namely, that Mr. Staltari acquired, owned and disposed of the Land in connection with a business conducted by him as a sole proprietor, there is simply no evidence to support that proposition. In order to find that Mr. Staltari was conducting a business and that the Land was acquired, owned and disposed of in connection with that business, there would need to be evidence tying Mr. Staltari to at least some of the typical indicia of a business, such as a business plan or strategy, a marketing plan, financial records, an office, furniture, office supplies, a telephone listing, an e-mail address, a computer, stationery, business cards, one or more employees, actual or prospective customers, advertising, marketing, a website, banking arrangements, solicitations of business, business-related documents, etc.

[79]        In this case there is no evidence that in 2000, when he acquired the Land, Mr. Staltari was personally conducting a business to which the purchase of the Land could be connected in some fashion. Contrary to the assertion of the Respondent, the mere fact that bare legal title to the Land was put in the name of a corporation does not establish the existence of a business conducted by Mr. Staltari. The steps taken from 2003 forward to subdivide and rezone the Land do not in and of themselves establish the existence of a business in the ordinary sense of that word (i.e., without regard to the inclusion of an adventure or concern in the nature of trade).

Similarly the Court held that there was no evidence that the land was held in the course of an adventure in the nature of trade:

[89]        In light of the circumstances that gave rise to the steps taken by Mr. Staltari in 2003, the actions taken do not contradict Mr. Staltari’s assertion that he had no particular primary intention with respect to the Land when he purchased it in 2000. Quite the contrary, the circumstances surrounding his ownership of the Land changed unexpectedly and Mr. Staltari took steps to address the new circumstances. Any prudent individual could be expected to take steps to preserve the value of an asset if he or she was advised of pending changes that would adversely affect that value.

[90]        As well, the timing of these actions accords with Mr. Staltari’s version of events: he was advised of the change in the City of Ottawa’s policy regarding estate lot development and he acted quickly to meet the deadlines imposed by the City. There was no evidence that he would have taken these actions if he had not become aware of the change in policy. Also, the fact that he was not aware of the estate lot issue sooner only serves to reinforce my conclusion that he did not approach the purchase (or ownership to that point in time) of the Land in a manner consistent with a primary profit objective.

[91]        Once Mr. Staltari embarked on this new course of action of rezoning and subdividing the Land, he pursued that course until what he considered to be a better option was presented to him, at which time he abandoned the rezoning and subdivision process entirely. Apart from the applications, he did not take steps to actually develop the Land. Nor did he seek out a purchaser for the Land. In the end, he donated the Land to the City of Ottawa for no consideration in order to obtain the favourable income tax consequences associated with the donation of ecologically sensitive land to a qualified donee. The ITA created a fiction that Mr. Staltari had received fair market value proceeds of disposition for the Land, but in fact he received nothing for the gift.

[92]        In summary, I find as a fact that Mr. Staltari did not have a primary intention to profit from a disposition of the Land when he acquired the Land from his parents in 2000. Rather, he purchased the Land to help out his parents, without any particular objective in mind. As for a secondary intention, his subsequent actions do suggest that he believed that the Land had development potential and that he wanted to protect that potential and the value that resulted from it. Whether this anticipated potential was an operating motivation in the purchase of the Land in 2000 is unclear. In any event, for the reasons that follow, I find that any secondary intention that he may have had with respect to the Land was not carried out and that the adventure or concern was not “in the nature of trade”. 

As a result the appeal was allowed with costs.

TAGS:  Income Tax Act, Tax Litigation, Capital Gain Versus Income, Donations