Hillsdale Shopping Centre Ltd. v. The Queen, 81 DTC 5261, [1981] CTC 322 (FCA)

Urie, J:—The appellant appeals from the judgment of the Trial Division upholding the reassessment of the Minister whereby part of the proceeds arising from the expropriation of property in which the taxpayer had the equitable interest was assessed as profits from a business within the extended definition of business set out in paragraph 139(1 )(e) of the Income Tax Act, RSC 1952, c 148 (the Act) as it read in 1963 and 1965. This paragraph extends the meaning of business to include income from a business or a venture in the nature of a trade.

The appellant is a joint stock company which was incorporated, pursuant to the laws of Saskatchewan, on May 2, 1956, having the following objects:

(a) To acquire land and any other property in the Sourth-Eastern Section of the City of Regina, in the Province of Saskatchewan, or elsewhere in the City of Regina, for the purpose of a Community Shopping Centre or Centres:

(b) To develop a community shopping centre or centres in the City of Regina and for that purpose to construct, build, improve, lease, rent, control, develop and manage all and every kind of building, structure, shop, store, office premises, plant, service station and any other business or other premises of all or any kind which may be considered conducive or incidental to the development or benefit of any such shopping centre.

By a special provision in the document of incorporation it was provided that the incidental powers set out in clause (q) of section 30 of the Saskatchewan Companies Act were expressly excluded:

(q) To sell, improve, manage, develop, exchange, lease, dispose of, turn to account, or otherwise deal with all or any part of the property and rights of the company.

The share capital of this company was owned equally by Frederick W Hill and his wife. Events both antecedent and subsequent to the incorporation of the appellant are relevant to the determination of the issues in this appeal.

The judgment under appeal sets out a very detailed account of the activities in connection with the development of the real estate in the area south of Wascana Lake adjacent to the City of Regina. For the purpose of this appeal it is not necessary to repeat all that is contained in the judgment. I refer only to the events which appear to have significance in the détermina-

tion of the issues of this appeal. Viz: was there before the learned trial judge evidence which, if believed by him would support the finding made by him and the inferences drawn by him. An appellate court is not called upon to retry the case, reassess the weight of the evidence or redetermine the credibility of the witnesses. Its concern is to decide whether there is evidence which, if believed, would support the findings of the Trial Court regardless of the apparent weight of conflicting evidence.

Frederick W Hill (Hill), the principal actor, graduated from the University of Saskatchewan in 1941 and joined his father’s company in 1946 after having obtained a master’s degree in business administration at Harvard, subsequent to wartime services with the RCAF and the United States Air force. His duty with his father’s company initially related to the management of its insurance department and management of a fidelity assurance bond business. In 1950 Hill formed a surety company named Western Surety Company which today is wholly owned by him. In 1935 Hill incorporated McCallum Hill and Co Ltd, to purchase the operating assets of his father’s company. The business of that company was begun in 1903 by Hill’s father in a partnership known as McCallum Hill which was incorporated in 1953. In 1953 Hill, as above stated, purchased the assets owned by the 1935 company from the estates of the then deceased original partners and incorporated a new company under the name of McCallum Hill and Co Ltd to continue the business of the former company. The shares of McCallum Hill and Co Ltd (hereinafter referred to as McCallum Hill) have, since incorporation been held 99% by Hill and 1% by his wife.

Since 1953 McCallum Hill has been engaged in land development in the area of Regina south of Wascana Lake. Having concluded the subdivision of an area known as Block “A”, in 1955 McCallum Hill secured from one Kramer an option on 457.71 acres, the obvious purpose of which was for development, largely residential. It was consistent with the development of the land controlled by McCallum Hill that a community shopping centre should be included and Hill made the decision that such development should afford a long-term commercial investment from which he and his wife would receive income.

The appropriate street pattern for the land to be developed depended upon the building of a new bridge to carry Broad Street traffic over Wascana Creek, replacing an existing structure which was narrow with difficult approaches. A City Report in 1955 recommended the rebuilding of the bridge at a location 1000 feet east of its old location and the site selected for the location of the proposed shopping centre was a block of some 20 acres, known as Block “J” bounded by Broad Street (as relocated) on the west — Hillsdale on the east — 21st Avenue on the north — 25th Avenue on the south. In due course an application was made for rezoning to permit the intended use. In November 1956 rezoning was granted. At the same time rezoning was granted to Principal Investments Limited with respect to a site owned by it slightly to the west.

Prior to April 1956 Principal Investments Limited, a developer with unique experience in the development of shopping centres, indicated its intention to develop a shopping centre in the general area of the Kramer lands. Because of the threat of competition from Principal Investments Limited, Hill approached Bennett, a principal shareholder of Principal Investments Limited, suggesting the possibility of a partnership or joint venture. Bennett suggested to Hill that Hill sell his site to Principal Investments Limited. Hill reluctantly agreed provided that his company be retained as manager of the shopping centre. Later in April, Bennett decided against the sale and put an end to all negotiations with Hill. Early in May 1956, the muncipality approved a zoning change which permitted the use for shopping centre purposes Block “J” and, as well, the Principal Investment Limited site.

On May 2, 1956 the appellant was incorporated with Hill and his wife each holding 50% of the issued shares. On May 8, 1956, McCallum Hill transferred to the appellant its interest in the 20-acre portion designated as Block “J”. The purpose of the acquisition by the Appellant was said by Hill to be that the lands be retained as a long-term commercial revenue-producing investment after the sale of the residential portion of the 457.31 acres.

In the course of development, McCallum Hill retained the services of a firm of consultants, Mayer, Whittlesey and Glass, whose report was made in April 1958. The report recommended that any shopping centre in the project should be located on Block “M” land lying to the east of the re-aligned Broad Street and that Block “J”, the former proposed site of the shopping centre, should be designated for office and institutional use. In September 1958 McCallum Hill through its solicitors urged the city to adopt the Whittlesey plan for the new street pattern.

While Hill claims that he did not immediately change his own views with regard to the location of the shopping centre, in late 1958 discussion began relating to an exchange of Blocks “H”, “J“ and “K” for an equivalent area of land in the Dominion Experimental Farm which was being abandoned as such. The discussions were inspired by the hope that the Saskatchewan Power Corporation, an agency of the Provincial Government, would build its head office in Block “H” and utilize Block “J” to conform to the institutional use rather than as a shopping centre site and the land sought in exchange therefore could be used for residential development. While these discussions did not culminate in a deal, the fact that they took place at all shows Hill’s indecision as to the use of Block “J”.

In December 1958 or January 1959 McCallum Hill entered into an agreement with the Dominion Stores for a lease of a site in a shopping centre in which the description of both lots “J” and “M” were alternatively included. Ultimately, the shopping centre was erected on Block “M” not by the appellant but by another company incorporated by Hill or McCallum Hill.

On August 28, 1959 the City planning commission recommended the adoption of a development plan identifying Block “J” for institutional and office use and Parcel “M” as a shopping centre.

In April, 1962 the Wascana Centre Act was passed for the purpose of developing the Wascana Centre, pursuant to which Act Blocks “H”, “J”, “K” and “L” were expropriated on September 18, 1962 so that all lands from the Original Kramer parcel north of 23rd Avenue, with the exception of Block “M” were expropriated. In filing its income tax returns McCallum Hill reported the compensation received by it in respect of Blocks “H”, “K”, and “L” as income. On the other hand, the appellant treated as capital the proceeds of compensation received by it in respect of its equitable interest under its agreement of purchase relating to the 20 acres of Block “J” referred to earlier herein. The respondent assessed the appellant by adding to its income the sums of $95,460.51 and $51,643.04 in the 1963 and 1965 taxa- tion years respectively from the sums of $175,500 and $58,000 awarded to the appellant for the expropriation on the basis that these sums constituted profit from a business within the definition of that term in the Income Tax Act extended by paragraph 139(1 )(e) to include an adventure or concern in the nature of trade. The Trial Division dismissed appeals against the assessment and it is from that dismissal that the appellant appeals.

The learned trial judge in his reasons for judgment made the following finding:

While I am convinced that Mr Hill was at this time firm in his resolve to construct a shopping centre that conviction does not determine the matter because I am not convinced that Mr Hill had formed the firm resolve to construct the shopping centre in Block J.

The trial judge further held that in acquiring Block “J” one of the purposes, or one of the possible purposes, of the acquisition had been the subsequent disposition of the site at a profit. He went on to say that even if it had been Hill’s exclusive purpose to create a shopping centre on Block “J” (which was contrary to the finding he had already made) Hill’s dealing with the property from 1958 to 1962 constituted having taken the property into inventory for resale as part of a business.

The following grounds of appeal were advanced by the appellant:

(i) the learned trial judge erred in that he based his decision on his finding that the taxpayer had a secondary purpose in the acquisition of parcel “J” to turn it to account by sale if its use as a capital asset proved impracticable and that this finding stemmed from his conclusion that he was not satisfied, on the balance of probabilities, that the appellant entered into its agreement to acquire Block “J” for the purpose of building a shopping centre therein to produce a rental income to the exclusion of any purpose of subsequent disposition at a profit; and that he erred in holding that even if there had been an exclusive intention at the time of acquisition it was superseded by a decision to deal with the Block “J” later as stock in trade;

(ii) that the learned trial judge erred in his statement of the applicable law in that the recognition of a real possibility of an alternative use did not detract from the appellant’s principal intention in owning the land unless that possibility was a motivating reason for the acquisition;

(iii) that the learned trial judge erred in placing on the appellant the onus of disproving an assumption of the Minister with respect to a second purpose for the purchase of Block “J”;

(iv) that he erred in finding that the appellant had any purpose other than the construction of a shopping centre for the purpose of producing rental income at the time of acquisition;

(v) that he misinterpreted those portions of the Whittlesey Report (Exhibit 87) relating to the uses recommended for Block “J” and accordingly drew incorrect inferences as to the likely use to be made of the 20 acres thereafter;

(vi) that he erred in invoking an alternative ground for liability for taxation in dealing with a change of intention during the period 1958 to 1962.

As was stated by the learned trial judge the question as to whether the activity of the taxpayer amounted to a business or an adventure in the nature of trade is one of fact. It must be resolved according to what the trier of facts finds to have been the intention with which the property was acquired to be arrived at by inferences to be drawn from the attendant circumstances. In the view I take, although the appellant came into existence only on May 2, 1956, certain of the events which took place prior to and subsequent to that date and which I have earlier related are important circumstances to be taken into consideration in determining intention at the time of acquisition.

In perusing the evidence great difficulty is encountered in distinguishing whether any particular act is to be attributed to McCallum Hill, Hill or the appellant. The judgment under appeal correctly summarizes the relationship of McCallum Hill and Co Limited, the appellant and Hill as follows:

Throughout the active existence of the appellant company (the taxpayer) its interests and intentions were identical with McCallum Hill and the interests and intention of McCallum Hill with respect to the shopping centre project coincided with those of Mr Hill.

While the restricted nature of the corporate powers of the taxpayer may have precluded it from lawfully engaging in any on-going activity with respect to Block “J” other than that of a shopping centre, it is a fact but it is not a critical one in determining liability for tax*. [1] The question to be decided is not as to what business the company might have carried on according to its charter, but rather what business it did carry on. That necessitates a careful review of the facts. The following are relevant facts arising from the incorporation which should be borne in mind:—

(a) that the appellant’s incorporation was one step in the general development scheme by McCallum Hill, and a shopping centre, conveniently located, was a feature favourable to the sale of residential units;

(b) that the person who caused the incorporation of the appellant was the major shareholder of McCallum Hill:

(c) that the appellant, on incorporation, became endowed with all the advantages that had accrued from the activities of Hill and McCallum Hill prior to its incorporation;

(d) that as an incorporated company, without in any way violating the restrictions in its corporate powers, it could bring about its own winding up, the distribution of its assets amongst its shareholders and the surrender of its charter.

Assuming that the appellant, in May of 1955, had the intention of building and owning a shopping centre, the determination of whether there was a firm resolve to do so on Block “J” has had to be made in the light of the following facts, inter alia;

(a) the use of Block “J” appears to have been viewed as part of the overall development being carried on by McCallum Hill in the area;

(b) in discussions with Bennett of Principal Investments its willingness to enter into a joint agreement with Principal Investments had been conveyed to Bennett;

(c) it had conveyed to Principal Investments its willingness to purchase its shopping centre site;

(d) it had been willing, at one time to consider selling Block “J” to Principal Investments Limited for the development thereon of a shopping centre by that company;

(e) it had offered to exchange Block “J”, inter alia, for Government land not usable as a shopping centre;

(f) the document it had tendered to Dominion Stores Limited, a prospective principal tenant, in the latter part of 1958 contained, as alternatives, descriptions of both Block “J” and Block “M”;

(g) it abandoned Block “J” as a site for a shopping centre before expropriation and developed a shopping centre on Block “M” by another company;

(h) McCallum Hill made use of an amended plan on which Blocks “J” and “H” were designated for institutional or office use.

From the foregoing summary of relevant facts it can thus be seen that the finding of the learned trial judge, that in May 1956 there had been no firm resolve to build a shopping centre on Block “J” is amply supported by the evidence although in so finding he may have had to consider and weigh evidence to the contrary. Therefore, there cannot be said to be reversible error. In fact it can be said, I believe, that it is the only reasonable inference to be drawn from those facts. That being so the possiblity of turning over the land at a profit cannot be excluded as a motivating factor in the appellant’s acquisition of it.

Appellant’s counsel next submitted that the appellant’s situation was that of every investor who enters into a purchase with a recognition that he may dispose of his property under certain future conditions — something less than (in fact, something of essentially different character from) an intention to sell if his project becomes frustrated. Counsel said that the trial judge failed to appreciate the jurisprudence reflecting recognition of this principle. Having in mind the antecedent events, the business commitment of McCallum Hill as well as its and Hill’s conduct with respect to the property, the intention behind the acquisition of the property by the appellant in this case is, in my Opinion, indistinguishable from that of the purchasers of the property in Regal Heights Limited v MNR, [1960] SCR 902; [1960] CTC 384, 60 DTC 1270. That being so, the principle enunciated therein is wholly applicable in this case and the profit derived from the transaction is taxable as having been derived from an adventure in the nature of trade, unless one of the other grounds of attack, which which I will now deal, is successful.

It was next said that the learned trial judge had erred in proceeding on the basis that the onus of disproving that the Minister’s assumption that some part of the proceeds of the expropriation were taxable, lay upon the taxpayer.

If a taxpayer, after considering a reassessment made by the Minister, the Minister’s reply to the taxpayer’s objections, and the Minister’s pleadings in the appeal, has not been made aware of the basis upon which he is sought to be taxed, the onus of proving the taxpayer’s liability in a proceeding similar to this one would lie upon the Minister. This defect may be due to a number of reasons such as a lack of clarity on the part of the Minister in expounding the alleged basis of the taxability which could include an attempt by the Minister to attach liability on one of two or more alternative bases thus failing to make clear to the taxpayer the assumption upon which he relies.

In all other cases the onus is on the taxpayer to disprove the Minister’s allegation of liability on the assumptions propounded. In the instant case, throughout the whole proceedings the appellant was made well aware that the Minister assessed part of the proceeds of the expropriation as profit from a business contrary to the allegation of the taxpayer so that this ground of attack is without merit.

Counsel for the appellant next alleged that there was error in finding that the taxpayer, in acquiring Block “J” had any purpose other than acquiring the land for capital investment. As I have already said, there was evidence upon which such a finding could be made and accordingly the finding did not constitute a reversible error.

Counsel for the appellant further submitted that the learned trial judge misinterpreted certain portions of the Whittlesey Report (exhibit 87) and accordingly drew incorrect conclusions as to the likely use to be made of Block “J” by the appellant thereafter. Particular objection was taken to the statement that the Whittlesey Report “effectively destroyed Block “J” as a site of the proposed shopping centre and also recommended that Block “J” should revert to McCallum Hill’s stock in trade”. Counsel said that the government, business and multiple family residential use proposed for Block “J” would not necessarily result in it becoming stock in trade.

The report, considered objectively and ignoring the fact that it was commissioned by McCallum Hill, recommended a different road pattern, purported to demonstrate the superiority of Block “M” for the location for the proposed shopping centre and applied to Block “J” the designation of institutional and office use. Even granting that the support of the plan by McCallum Hill before the Municipal Council was limited to its approval of the street pattern, there is no evidence of any active steps taken to attempt to have these recommendations altered and a shopping centre was ultimately built on the other site by another corporation caused to be created by McCallum Hill. For these reasons I do not consider that the statement quoted is a misinterpretation of the effect of the report. Block “J”, which before the report had been the favoured site for a shopping centre, because of the report was abandoned for such a purpose in favour of Block “M”. In the light of the events, the shopping centre construction on Block “J” was effectively frustrated and on account of McCallum Hill’s interest in the overall development of the area the only logical conclusion was that McCallum Hill would reincorporate Block “J” into its general scheme for the development of the whole of the lands. In any event, if the learned trial judge did misconstrue the report, I fail to see that, in arriving at his conclusion as to taxability he was adversely influenced by the interpretation he placed upon the report and its results.

Counsel for the appellant also alleged that it was error on the part of the learned trial judge to apply an alternative ground for holding the profits arising from the expropriation of Block “J” to be liable for taxation as profits from a business. There having been a finding that it was not the appellant’s exclusive intention at the time of the acquisition of Block “J” to use it as a site for a shopping centre to produce rental income, the learned trial judge proceeded to consider the effect, in law, if the circumstances relating to Block “J” had been different, prefacing his conclusion by the following words:—

Assuming that the exclusive intention of the appellant at the time of the acquisition of Block “J” was to use it as the site of a shopping centre for producing rental income and therefore as a capital asset, which for the reasons expressed I have found as a fact not to have been the case but rather that the appellant also had as a purpose the turning of Block “J” to account by sale of its use as a capital asset proved impractical as it did, even then the fact that there was no intention of profitmaking by resale at the time of acquisition does not necessarily prove that a profit resulting from sale or expropriation is not assessable to income tax.

Assuming this hypothetical situation had been the actual one and, having in mind that Hill acknowledged that by the spring of 1960 he had completely abandoned any plans to use Block “J” as a shopping centre, the learned trial judge expressed his opinion to be that the probable intention to abandon Block “J” had been present as early as 1958, and that between 1959 and 1962 when the expropriation took place the appellant had dealt with Block “J” in the same manner as it would have dealt with real estate held as stock in trade.

I am of the opinion that the appellant’s contention does not impair the conclusion of the learned trial judge. Having found that during the entire period 1956 to 1962 the appellant, with respect to Block “J” had been engaged in business within the extended definition of that term, it was unnecessary for the learned trial judge to consider the possiblity of the business commencing at a later date. His statement of a hypothetical case did not detract from his earlier finding. Doubtless, had the appellant convinced this court that the first conclusion had been unsupportable by the evidence, this court might have been called upon to consider as a real situation the hypothetical one outlined by the learned trial judge. Since I have concluded that his earlier conclusion is unassailable this court is not, as I see it, called upon to consider the situation hypothetically considered by him.

Second, since his conclusion was that the part of the proceeds of the expropriation constituted a profit from a business there was no alternative finding as to the basic amount of liability. The difference between the real situation as found by the learned trial judge and the hypothetical one did not in any way affect the fact of the liability for tax. The difference would only result in a variation in the quantum of tax payable, ie, the proft from the business on which tax would be payable would either be the difference between the compensation awarded for the expropriation of Block “J” and the purchase price at the time of acquisition in 1956 or the difference between the award and the value of Block “J” when it became inventory of a trader in real estate.

The Minister’s reassessment and the subsequent proceedings were, and were conceived by both parties to be directed to determining whether the appellant had made a profit from a business which became subject to tax under the Act. The quantum of a tax payable is a question ancillary to the question of liability: it will be resolved not by virtue of the liability but by virtue of the amount established by the evidence as to the value of the property at the inception of the business attracting tax. It was not an issue which the trial judge was obliged to consider.

For the foregoing reasons it is my opinion that the appellant has failed to establish any error on the part of the learned trial judge which would justify this court interfering with the judgment under appeal.

I would dismiss the appeal with costs.