Mohawk Horning Ltd. v. The Queen, [1986] 2 CTC 89, 86 DTC 6297 (FCA)

Urie, J.:—The judgment appealed from, delivered by the Trial Division, is one of five here under appeal. Those judgments arose from actions taken to appeal reassessments for income tax levied by the respondent against each of the appellants. The actions in the Trial Division were tried together on common evidence and the appeals from each of the judgments rendered therein were heard together in this Court.

Briefly stated the facts are these. One of the appellants, George L. Schneider, is a professional engineer. He held a third mortgage on some 73 acres of agricultural land in the Town of Dundas near McMaster University which he had received in payment of professional fees. In early 1969 he put together a group of investors to purchase the mortgaged lands from the original investors. That group and their respective interests in the land were as follows:—

Of those, in addition to the appellant herein, Maple Park Development Limited, Dekston Limited, George L. Schneider Limited and George L. Schneider personally have appealed the respective Trial Division judgments in their actions. It is unnecessary to set out the shareholdings in each of the corporate appellants other than to say that Mr. Schneider is a shareholder in each so that his interest in the lands in question amounts to approximately 34.5 per cent in all.

While the decision to purchase the lands was made in early 1969, it was not until January 1970 that title thereto was actually acquired. The delay in acquisition has no relevance to the issues in the appeal.

It is not disputed that at the time the purchase was negotiated in January 1969, it was the intention of all of the investors that the lands be developed primarily as a housing subdivision with a small shopping centre and to sell the developed land in parcels or parts as deemed most profitable. Neither is it disputed that from the beginning the group had agreed that George L. Schneider would be the managing director of the project, although it was not until February 1970 that the company which the investors had caused to be incorporated in late 1969 for the purpose of holding title to the lands, Desjardins Estates Limited, entered into a management agreement with Mr. Schneider. The deed whereby that company acquired title is not part of the record.

A shareholders' agreement dated February 19, 1970 between Desjardins Estates Limited (“Desjardins”) and the investors stated in paragraph 1 that:—

The Company will hold the said lands and premises in trust for the following shareholders in the proportions set after their respective names: [Emphasis added.]

Mohawk Horning Limited	2/10
Maple Park Development Limited	2/10
George L. Schneider Limited	1/10
Vincent De Benedictis	1/10
Dekston Limited	1/10
Anthony Di Silvestro	1/10
Dennis F. O’Leary	1/10
George L. Schneider	1/10

Paragraphs 2, 5 and 6 also have some relevance in the issues to be decided. They read as follows:

2. The Company will retain from the annual net earnings and/or profits derived from the said lands and premises the sum of $18,000.00 as its annual remuneration for holding the said property as assets in trust as aforesaid.

5. The Company will hold the annual net earnings and/or profits derived from the said lands and premises in excess of the sum of $18,000.00 in any year, in trust for the shareholders mentioned in paragraph 1 hereof in the proportions set after their respective names.

6. The Shareholders will supply to the Company all monies required by the Company for the purposes of the Company in proportion to their respective common shareholdings in the Company as set out in paragraph 1 hereof. The monies so advanced shall not bear interest and may not be withdrawn by the Shareholders without the consent of the Company. Provided, however, that, if at any time and from time to time any portion of the lands owned by the Company are sold at a profit and Shareholders holding 30% of the issued common shares of the capital stock of the Company so require, such profit shall be distributed pro rata among all the Shareholders.

No power of sale for the disposition of the lands held in trust by the Company provision was included in the agreement nor was there any provision for a vote of the beneficiary of the trust for the disposition of the lands.

The management agreement between Desjardins and Mr. Schneider, also dated February 19, 1970 provided, inter alia, that the appointment as managing director might be terminated on three months' notice and that his remuneration as managing director would be "4% of any profits obtained by the Company . . . and payment of such remuneration shall not fall due until such time as the Company receives payment of the said profits . . .”

Paragraphs 4 and 5 of the agreement set forth the duties of the managing director and reads as follows:—

4. The duties of the Managing Director shall be to:—

(a) Provide office facilities and secretarial staff and prepare reports to the Company.

(b) Negotiate and prepare agreements, documents etc. (except such documents

that are normally prepared by an accountant and/or legal counsel).

(c) Negotiate with the authorities concerned to secure zoning changes, variances to zoning or building by-laws, land title certification and permits or permission of any kind, as required to further the development of the properties owned by the Company.

(d) Make plans for land use, zoning, site and subdivision proposals as required to secure such zoning, variances etc. except for such development plans, analyses and prospectuses as the Company may require to be prepared by a land planning consultant to be engaged by the Company under the guidance of the Managing Director.

(e) Plan the staging and negotiate with the authorities concerned the various phases of subdivision agreements.

(f) Retain and co-ordinate the specialized expertise of the lawyers, surveyors and engineers as required to develop the land.

(g) Negotiate the purchase and sale of lands for the benefit of the Company. All such contracts to be subject to approval by the Company. [Emphasis added.]

5. The Managing Director shall have full authority, subject always to the general or specific instructions of the board of directors, to manage and direct the business and affairs of the Company except such matters and duties as by law must be enacted or performed by the board of directors or by the shareholders in general meeting.

In accordance with the requirements of his management agreement, it is clear from the evidence that Mr. Schneider handled the bulk of the planning work, the approaches to the various levels of government and their officials and, at least in part, in finding possible sources of financing for the project. The nature of the project evolved by early 1969 to the point where it was agreed that it would be a residential development consisting of approximately equal proportions of high-rise apartments, semi-detached buildings and low-density units. Mr. Schneider testified that he envisaged the project as a rental project for a long-term investment rather than a development for resale. He admitted, though, that not all of the investors agreed with his view. They continued with their original view that the project should be for resale either in a developed, undeveloped or partly developed state. He testified that two of the investors through corporations controlled by them, and who were professional builders, supported his concept. The others wished to be more flexible.

In November 1973, an unsolicited offer to purchase the lands for $3.5 million was rejected by the members. A counter offer made later by Desjardins to sell one half of the equity was in turn rejected by the original offeror.

While Mr. Schneider was continuing in his efforts to get the project through the regulatory hurdles, in October 1975, Desjardins was served with a notice of expropriation which eventually led to a sale of the lands for $3 million. In due course, the Minister of National Revenue reassessed the appellant by adding as business income from the sale of land, the sum of $510,542.57. It is from this reassessment that the appellant appealed.

The foregoing recitation of the facts is sufficient to set the stage for consideration of the appellant’s case. One or two preliminary observations before discussion of the issues would be in order.

First, it may be pertinent to observe that the only witness called at trial was Mr. Schneider. No other member of the investing group testified either on his own behalf or as a shareholder of one of the corporate investors. We are, therefore, left with his testimony. It is difficult to say that it is not selfserving to a certain extent. The learned trial judge, Madame Justice Reed, it should be noted, certainly made no adverse findings as to his credibility notwithstanding the self-serving nature of the evidence adduced through him.

Second, the absence of any documentary evidence as to how and upon what terms the property held in trust for the shareholders by Desjardins, might be sold is important in the ultimate decision. The determination of whether the unanimous approval of each of those for whom it was held in trust, a simple majority in numbers of those persons or by a majority vote according to shareholdings of each of the investors was required is not documented in any way.

Those preliminary observations are of vital importance, it seems to me, in the determination of the question which is basic to the success of the appellant's case, namely, whether Mr. Schneider was the dominant member and directing mind of the investing group so that his intention became that of the group. Put another way, the first question is can he be characterized as the directing mind so that his intention in respect of the lands will be imputed to the investing group? A preliminary question must first be addressed. Did Schneider's intention change from the original intention of the group to sell the land in a developed, partly developed or undeveloped state? If this Court can be satisfied that there was a change of intention by Mr. Schneider which, because he was the directing mind, became the attributed intention of the remainder of the investors, the investment was, the appellant argued, of a capital nature, the gain from the sale of which was a Capital gain. If such a change could not be shown and if he were not found to be the directing mind, then the original intention remained and the proceeds of sale would be income from a business and properly taxable under the reassessment.

The errors alleged by counsel for the appellant to have been committed by the trial judge were the following:—

1. She ought to have found that Mr. Schneider was the directing mind of the investor group so that his intention became that of the other individuals in the group.

2. She erred in failing to give the appropriate weight to the evidence that two of the investors who were building contractors always supported Mr. Schneider in his view that the development should be for rental housing and, together, they owned in excess of 60 per cent and that, usually, other members followed his and their lead on most issues.

3. She erred in her appreciation of the legal tests to be applied to the facts of the case and, in the result, applied the wrong test.

4. Alternatively, having found as a fact that Mr. Schneider had changed his intention as to the development of the project from a sale concept to a retention and rental concept, she erred, in imputing the intention of the remainder of the investor group to him.

I will deal with each of the above arguments seriatim.

1) Madame Justice Reed, at pages 2 and 3 of her reasons for judgment dealt with appellant counsel's submissions in this way:—

The basic point in issue is whether this original intention of the consortium changed prior to the expropriation in 1976 so that the land at that time was being held not for the purposes of development and resale but for the purpose of constructing an apartment/townhouse complex to be held and operated by the consortium for its rental income.

It is clear from the documentary evidence and from the viva voce evidence of Mr. Schneider that the original intention of the consortium was to acquire the property, develop it and then sell.

Mr. Schneider gave evidence, which I have no reason to doubt, that at least by February or March 1969 he had become convinced that the most appropriate use of the land was not for subdivision and sale of single family dwellings but for multiple residency apartment/townhouse complexes. This conclusion is reflected in a report he prepared for the town of Dundas in February, 1969. Accordingly, he maintains that he came to the conclusion that the consortium should after building these complexes retain them as investments for the rental income they could produce.

While Mr. Schneider’s intention seems clear one cannot automatically in this case equate his intention with that of the consortium. There were eight shareholders in the consortium; six held a 10% investment; two held a 20% interest each. Mr. Schneider held a 10% interest personally and a 10% interest was held by George L. Schneider Ltd. (Mrs. Schneider represented that company at the meetings of the consortium). In addition, Mr. Schneider held a /2% interest in Maple- park Developments which in turn held a 20% interest in the consortium, and he and his wife were two of the seven shareholders who owned Mohawk Horning; Mohawk Horning held a 20% interest in the Desjardins Estates consortium. It is clear therefore that Mr. Schneider did not control the consortium.

Counsel for the appellant argued that the trial judge did not attempt to ascertain whether Mr. Schneider was the directing mind of the group. Rather, he said, she first made a finding that he did not control it because he owned less than 51 per cent of the shares. Secondly, the trial judge then went on to find that because all of the members of the investing group did not share Mr. Schneider's view as to the direction that should be taken for the project then the consortium could not have his intention attributed to it. This constituted an error in law, in his view.

While there is certainly authority to show that in a proper factual situation a corporation may be held responsible for the tortious or criminal acts of its servants, agents, officers, directors and managers on the basis that they may be said to represent the directing mind of a company and to be in control of what it does, such a finding depends on the facts and circumstances of each case and the inferences to be drawn therefrom.* [1] I have some difficulty in concluding that such a concept has a place in tax law. However, undoubtedly there is jurisprudence to support the view. Kit-Win Holdings (1973) Limited v. Her Majesty the Queen, [1981] C.T.C. 43; 81 D.T.C. 5030, a decision of the Trial Division of this Court, affords an example of a case in which the trial judge found that one member of a syndicate of companies, each controlled by an individual, whose title to land was held by another company, was the directing mind of the syndicate's activities, the remaining members of the syndicate taking only a passive interest therein. It was thus held that the intention of the directing mind became the intention of each member of the syndicate. The trial judge, Cattanach, J., found facts which clearly supported such a finding.

In this case, however, three initial difficulties emerge. First, Reed, J. made no explicit finding that Mr. Schneider was indeed the directing mind of the group. Second, on the facts of this case I am not at all sure that the directing mind concept has any relevance. Third, on the facts, could he have been found to be the directing mind?

As to the first difficulty, the simple answer seems to be that on the facts of this case, such a finding had no relevance. If that is so, no finding with respect to the presence or non-presence of a directing mind is required. That view, of course, leads directly to my second difficulty. Why has it no relevance? The reason follows.

As I read the documentation and the transcript of evidence, Desjardins held the subject lands “in trust for the shareholders" in the proportions stated in the shareholders agreement, supra. Desjardins is the corporate entity with which Mr. Schneider had a management contract. It is thus, contractually, the only “person" of which Mr. Schneider could be said to be the directing mind. There is nothing in the record by way of trust deed or other trust document to indicate the nature of the trust upon which Desjardins held the lands. Neither is there a power of sale provision, a voting provision or any other indication in the shareholders' agreement or any other document in the record as to when and under what conditions the company would have been entitled to sell or otherwise deal with the trust lands. The only reasonable inference to draw from the absence of any specific provisions as to how the sale of trust property is to be accomplished, it seems to me, is that each and every beneficiary of the trust must agree in that capacity as distinct from their respective capacities as shareholders, to the sale or other disposition of the land. If that is so and if by contract the only “person” of which Mr. Schneider could be the directing mind is the company (and that too is so), the concept of a directing mind qua the shareholders of the company in their respective capacities as beneficiaries of the trust, has no relevance. The trial judge was, thus, not required to make a finding as to whether or not Schneider was a directing mind and made no error in not doing so.

As to the third difficulty does the record disclose that, apart from contract, Mr. Schneider was the directing mind of the beneficiaries of the trust? As counsel for the appellant noted, the trial judge did not deal with this aspect of the case presumably for the reasons which I have set out above. After carefully considering the whole of the record I am unable to conclude that he was more than the principal motivating force. I am far from satisfied that the record discloses that he was the directing mind of the group to the extent that his intention with respect to the development became that of the group. On the contrary, the documents, the minutes of meetings and the testimony of Mr. Schneider himself lead inevitably to the conclusion that the investors made their decisions according to their respective views of the proper course of action. Some were in accord with Mr. Schneider's recommendations, some were not. Where he did have exclusive authority was within the parameters of his duties as outlined in the management agreement and in his capacity as a professional engineer for which he was paid for services rendered. On policy matters he was required to, and did in fact, proceed in accordance with the decisions reached at the many meetings held to make such decisions. His position was quite different in that respect from the directing mind, Mr. Campbell, in the Kit-Win case, supra. On that basis alone that case is readily distinguishable.

To summarize my views on the first ground of attack, the learned trial judge did not err, in my opinion, in failing to find that Mr. Schneider was the directing mind for the group. Neither did she err in holding that his changed intention for the development of the property did not become the intention of the remainder of the group. I shall deal with the latter finding in greater detail later herein.

(2 & 3) I turn now to grounds of attack 2 and 3, supra, since I find it difficult to deal with them separately. Essentially, as I see them, they address the question which naturally follows from the disposition of the “directing mind" question, viz., notwithstanding that he was not the directing mind, did the changed intention of Mr. Schneider, on the evidence, become that of the remainder of the group? As noted, the trial judge found as a fact "that at least by February or March 1969 he [Schneider] had become convinced that the most appropriate use of the land was not for subdivision and sale of single family dwellings but for multiple residency apartment/ townhouse complexes" and to “retain them for the rental income they produce". In that view Schneider claimed to have had the support of the two building contractors who were part of the group. The total of the three represented in excess of 60 per cent of the whole project. On those bases, then, the trial judge ought to have concluded that the intention of those three individuals in the group having changed, so the intention of the group as a whole had changed. Madame Justice Reed, at page 3 of her reasons said:* [2]

While Mr. Schneider's intention seems clear one cannot automatically in this case equate his intention with that of the consortium. There were eight shareholders in the consortium; six held a 10% investment; two held a 20% interest each. Mr. Schneider held a 10% interest personally and a 10% interest was held by George L. Schneider Ltd. (Mrs. Schneider represented that company at the meetings of the consortium). In addition, Mr. Schneider held a /2% interest in Maplepark Developments which in turn held a 20% interest in the consortium, and he and his wife were two of the seven shareholders who owned Mohawk Horning; Mohawk Horning held a 20% interest in the Desjardins Estates consortium. It is clear therefore that Mr. Schneider did not control the consortium.

I was referred to the decision of this Court in Kit-Win Holdings (1973) Ltd. v. The Queen, [1982] C.T.C. 43 at 47 where Mr. Justice Cattanach had been able to hold that an individual, even though not the principal shareholder or president of a company was indeed the dominant member and directing mind of the company’s activities. Thus he found that the intentions of this dominant member of the company were synonymous with the intentions of the company. I can find no such identity of intention between the intentions of Mr. Schneider and the intentions of the consortium. A lack of identity of intention appears continually upon reading the minutes of the shareholders’ and directors’ meetings.

Is there then sufficient evidence elsewhere to substantiate the claim that the consortium changed its intention before 1975 when expropriation negotiations commenced? It should be noted that none of the other members of the consortium were Called to give evidence.

With respect to her comment in the first paragraph as to Mr. Schneider's lack of control of the consortium, if she meant that he must have control to equate his intention with that of the consortium, I think she was wrong. If the concept of “directing mind” is applicable then obviously, while control may be a factor, it is not crucial. If, as I have found, that concept is not applicable in this case, then whether Schneider's changed intention has become the intention of the consortium is a question of fact for the Trial Judge to decide. That this is the way she viewed her task is to me abundantly clear from the balance of the quotation and from her detailed review of the evidence which follows it. I treat the impugned sentence not as indicative of Reed, J.’s view of how identity of intention is achieved but rather a summing up of Schneider's percentage position in the consortium vis-à-vis the other members. If that is so she did not, as alleged, thereby apply the wrong test in determining whether identity of intention existed.

Before turning to the evidence the following principles of taxation law in respect of so-called trading cases should be borne in mind. First, whether an acquisition of a capital asset by a taxpayer is on capital account or on income account depends on the intention of the taxpayer with regard to the use of the asset present in the mind of the taxpayer at the time of acquisition!. [3] Second, the issue of what that intention was, is resolved by the fact finder weighing all of the admissible evidence relevant to that issue.! [4] Third, only a clear and unequivocal positive act implementing a change of intention will suffice to change the character of the intention from a trading asset to a Capital asset.* [5]

Were those principles applied by Reed, J. in this case? I do not think it necessary to review the evidence in detail to decide whether the principles were properly applied. As earlier stated, there is no dispute as to the original intention of the group as a whole. It was to acquire the property and to sell it in a developed, undeveloped or partially developed state. Again, as I have already stated, the trial judge found that by February 1969 Mr. Schneider's intention in respect of the use of the property had changed to a mixed residential development to be retained as rental, income producing units — a capital rather than a trading asset.

The next question then is, does the evidence (the viva voce part of which was solely that of Mr. Schneider) enable the inference to be drawn that the remainder of the investors had also changed their intention as to the character the investment would take? That, of necessity, requires the application of the third principle — that derived from the ratio decidendi in the Peachey case — was there a clear, unequivocal positive act evidencing the change?

Reed, J. examined eight or nine pieces of evidence, apparently relied on by the appellant as showing that there was. She found that not one of them disclosed a changed intention on the part of the remainder of the group. She found that, at best, some were neutral in their impact. That is to say, I take it, that none of the evidence could be characterized as disclosing a clear, unequivocal positive act implementing a change of intention without any possible other interpretation which would point to the maintenance of the original intention. I am quite unable to say that she erred in her assessment thereof and I agree that the evidence does not unequivocally support a finding of a changed intention by the group as a whole.

That view applies equally to the 22 pieces of evidence dealt with in detail by counsel for the appellant in the argument before us. At best they are of neutral impact. My impression, not only of that evidence but of the oral and documentary evidence as a whole, is that all of the parties, including Mr. Schneider, carefully left the door open to adopt whichever course of action with respect to what should be done with the property, that appeared appropriate at any time. They left their options open. It is quite evident that Reed, J. felt the same way. That is not to say that I am of the opinion that this Court is entitled to find that the trial judge erred in finding that Mr. Schneider, as opposed to the others, had changed his intention with respect to the property. Having heard his testimony, (tending to be self-serving though it may be), seen the documentary evidence and observed the witnesses, Reed, J. had an advantage not available to us. I cannot say that she made any “palpable and overriding error which affected her assessment of the facts.''t [6] Her finding that Mr. Schneider had changed his mind should not, therefore, be disturbed.

(4) I turn now to the fourth attack on the judgment which is an alternative one. As I understand it, the argument goes this way. If Mr. Schneider is found not to be the directing mind of the consortium and if no identity of intention is found between Mr. Schneider and the remainder of the investors, and Reed, J. having found as a fact that he [Schneider] had changed his original intention, the respondent's assessment should have been made on the basis that his share of the proceeds of sale was from the disposition of a capital asset and was, therefore, taxable as a capital gain and not as income. Since the trial judge dismissed Mr. Schneider's appeal she erred in so doing. Such an argument implies, I think, that she did not err in dismissing the appeals of the other appellants.

I have, of course concluded that Mr. Schneider was not the directing mind, that there was no identity of intention and the trial judge's finding as to change of intention on his part should be upheld. That being so, the question then becomes whether a change of intention by one member of a consortium [Schneider] can be given effect to in the determination of the taxability of his profits or is it the intention of the consortium as a whole which must prevail in such a determination. I am of the opinion that it is the intention of the consortium as a whole that must subsume that of the individuals. I have reached this conclusion for several reasons.

First, the acknowledged intention of the consortium at the time of acquisition was that, in one way or another, the property would be sold. As earlier indicated, that intention remained notwithstanding the fact that Mr. Schneider's personal intention changed.

Second, while undoubtedly Mr. Schneider by virtue of his management contract and his professional duties was the most active participant, his activities came under the ultimate control of all including those who, although not as active as he, retained the right to decide the direction which the project would take. It is the intention of the consortium as a whole which, as I see it, would have prevailed.

Third, cases such as Rothenberg v. M.N.R., [1965] C.T.C. 1; 65 D.T.C. 5001; Ettie Wiss v. M.N.R., [1972] C.T.C. 264; 72 D.T.C. 6231; and Carr v. M.N.R., [1965] C.T.C. 334; 65 D.T.C. 5201, each illustrate the proposition that where there are active participants and passive ones involved in a transaction, the position of the passive ones will be no different from that of the active ones. Noel, J. (as he then was) in M.N.R. v. Lane, [1964] C.T.C. 81 at 91; 64 D.T.C. 5049 at 5054-55, had this to say about the responsibilities of passive partners:

It would appear from this that the syndicate's non-active members were quite content to leave the handling of the syndicate’s activities to the executive committee who had carte blanche to handle the business of the syndicate as they thought best and because of this situation, the passive members here would be in no different position than that of the active members. Indeed, if the transactions are business transactions, any profit derived therefrom from any of the members would be taxable.

A fortiori, when all are to greater or lesser degrees active, (as here) the most active participant's intention (in this case Schneider's) must be enveloped by. that of the consortium as a whole, even if, alone, his purpose would have been different.

Therefore, I have concluded that Mr. Schneider's contention that his intention should govern his taxability in respect of the transaction in issue must fail. His appeal will, accordingly, be dismissed, as will that of this appellant and those of all other appellants. The respondent will be entitled to one set of costs for the five appeals.

Appeal dismissed.