Kensington Land Developments Ltd. v. The Queen, 79 DTC 5283, [1979] CTC 367 (FCA)

Heald, J:—This is an appeal from a judgment of the Trial Division wherein the appellant’s appeal from the reassessment for its 1967 taxation year was dismissed.

The sole issue in this appeal is whether the sum of $41,831.18 realized by the appellant on the sale by it of a shopping centre situated in Edmonton, was income from a business within the meaning of sections 3, 4 and paragraph (e) of subsection (1) of section 139 of the Income Tax Act, RSC 1952, c 148, or was a Capital gain.

The learned trial judge has related, in some detail, the relevant facts surrounding this transaction and it is not necessary, in my view, to repeat them. After stating the facts, he made the following findings (AB pp 85-87):

The Plaintiff, through Hartwig, decided to sell the shopping centre. The reason, according to Hartwig, was the low rate of return and the cost of maintaining the ranch. I am convinced there were other reasons as well. Hartwig through his companies was venturing into other projects. Money was needed for them; if the financing and carrying out of those activities required the sale of the Plaintiff’s shopping centre, then sale there would be.

In November of 1966 the Plaintiff listed the shopping centre for sale. It was ultimately sold in the latter part of 1967.

Hartwig’s activities after the sale are, to a limited extent, relevant. He and the family moved to the ranch in 1968. He, and his companies, however, continued in the building business. In 1971 the family moved to Victoria where they presently reside. The Hartwig companies have, since 1971, expanded and increased the volume of their building activities.

The practice of the Hartwig companies since 1967 has been to construct or develop properties of various kinds. Where it has been expedient to hold them as investment, that has been done. Where it has been expedient to sell in order to raise or replenish funds for other projects, that has been done.

In my view, that practice was Hartwig’s pattern of business conduct and intended conduct going right back to the early 1960’s. In those early years, however, (compared to later years), not too many opportunities to follow that pattern arose. After scrutinizing all the facts and circumstances disclosed at trial. I am convinced the various commercial properties built by Hartwig, or by companies which he controlled or in which he had an interest, (including the Plaintiff company’s property) were held for revenue or income purposes, only until such time as it was expedient in the overall Hartwig plan to turn them to account.

Mr Hartwig candidly agreed this has now been his general pattern for many years. When money is required for new projects, and financing through the usual channels is not available, then an asset or assets are sold. To my mind that pattern was part of the corporate intention, and a motivating purpose of the Plaintiff, when the land here was bought and the shopping centre constructed.

Mr Hartwig testified he always looked, then and now, on the various projects as “investments”. He said that, with the exception of one or two projects such as a subdivision in Victoria, there was never any initial intention to sell. He added that, when financial requirements in the sense I have earlier described arose, then he did not hesitate to sell .. . but only at a profit.

To my mind, that consistent pattern stamps the Plaintiff’s purchase of land, construction of the centre and its sale in 1967 as the carrying on of a business as that term is used in the “old” Income Tax Act.

The gain is therefore taxable as income.

The main argument advanced by counsel for the appellant was that the learned trial judge erred in fact and in law in imputing to Hans Hartwig (it being agreed by counsel for both parties at the hearing before us that the intention of Hartwig was, at all relevant times, the intention of the appellant), a trading intention at the time of acquisition of the subject property. The appellant contended that subject property had been acquired in the period 1959-1961 and at that time, there was no evidence of any trading intention on the part of Hartwig but that, in about the year 1965 or so, the appellant’s intentions and course of conduct changed drastically, Hartwig conceding in his evidence that thereafter the appellant was a trader.

It was the appellant’s submission that since the only evidence as to its intention at time of acquisition (1959-1961) was the evidence of Hartwig and since the learned trial judge had found Hartwig to be ‘‘a candid witness”, that the learned trial judge erred in holding that the appellant’s trading pattern had commenced in the early 1960’s but should have held, rather, on the evidence, that the early pattern was one of investment which changed to trading in the years 1965 to 1967 and that this was the effect of the evidence given by Hartwig. Appellant’s counsel also pointed to a factual error made by the learned trial judge (AB p 84) where he said that Brent Holdings Ltd (another one of the companies in which Hartwig held substantial interests) constructed the Empire Shopping Centre in Edmonton in 1961 or shortly thereafter whereas, in fact that centre was constructed in 1965 (a date which both counsel agree was established in evidence). It was counsel’s argument that, seemingly, the learned trial judge had relied on the Empire Part Shopping Centre transaction as evidence of a pre 1965 trading intention whereas, in fact, that transaction was post 1965 and therefore a transaction occurring after Hartwig, on his own admission, had become a trader. Thus, in the submission of counsel, the main basis for the finding by the learned trial judge of a pre 1965 trading pattern would disappear based on the factual error which he made.

I am not able to accept this submission. I agree that since the learned trial judge mentioned the Empire Park Shopping Centre transaction as being pre 1965, it may possibly have been a factor in his reaching the conclusion that appellant’s trading pattern began in the early 1960’s, but my review of the evidence persuades me that there was other evidence entitling the learned trial judge to reach this conclusion quite apart from the Empire Park transaction. There was the incorporation in September of 1959, of both the appellant and Diversified Holdings Ltd. Diversified was a holding company for the Hartwig family and its objects were wide enough to encompass trading activities. There was the incorporation of two other Hartwig companies, one, Brent, in 1961, and the other, Wigmar, in 1962, both also having objects wide enough to permit activities as traders. All three of these companies were involved in numerous Hartwig developments over the years. Subject shopping centre was the second of four such developments with which Hartwig has been concerned during the relevant period. The first such venture began in 1957 when Hartwig acquired land on which a shopping centre was to be built.

Furthermore, there is the evidence of Mr Hartwig on pages 60 and 61 of the transcript. I read that evidence as indicating that in Mr Hartwig’s various building ventures, he did not ever build with the sole intention of selling but that if he needed money for other and, larger developments, he was prepared to sell provided he made a profit. He also answered in a similar vein on page 65 of the transcript when, being queried as to his “plan of operation’’ or “game plan”.

When the totality of this evidence is taken into consideration, it is, in my view, a sufficient basis for the learned trial judge to conclude, as he did, that Hartwig’s pattern of business conduct went back at least to the early 1960’s when subject property was acquired. This Court has held that in cases of this kind, it is necessary to look at the relevant facts at the time of purchase, to look also at subsequent events as well as statements by the taxpayer, and on the basis of all of this evidence, to consider whether or not the only possibility motivating the acquisition was the untimate creation and retention of a substantial capital investment.* [1]

Looking at all of the evidence on this basis, I am satisfied that the learned trial judge was justified in concluding that, at time of acquisition, the appellant had in mind, as a major motivating factor, the possiblity of resale at a profit.

It is accordingly my view that this Court would have no basis for setting aside the decision of the learned trial judge.

I would accordingly dismiss the appeal with costs.