Date: 19991027
Dockets: 96-3381-IT-G; 96-4113-IT-G; 96-4115-IT-G;
96-4116-IT-G; 97-117-IT-G
BETWEEN:
GÉRALD M. HARQUAIL, JEAN-PIERRE HUDON, GEORGE SCANLAN,
DENYSE FRANK GIRARD, BERNARD GIRARD,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for judgment
Garon, A.C.J.T.C.C.
[1] These are appeals brought by five taxpayers[1] from income tax
assessments made by the Minister of National Revenue
(“Minister”) for the taxation years listed
below with respect to each of the aforementioned appellants:
Taxation years Appellants
1990 Gérard M. Harquail
1991
1989 Jean-Pierre Hudon
1990
1989 George Scanlan[2]
1990
1989 Denyse Frank Girard
1990
1989 Bernard Girard
In the assessments for the 1989 taxation year, the Minister
disallowed the deduction that each of the appellants had claimed
in computing taxable income in respect of taxable capital gains
resulting from the disposition of qualified small business
corporation shares, within the meaning of subsection 110.6(1) of
the Income Tax Act (“Act”), on February
24, 1989. That deduction is provided for by subsection 110.6(2.1)
of the Act. The appeals for the 1990 and 1991 taxation years
relate to consequential assessments in relation to the
assessments for the 1989 taxation year.
[2] At the hearing of these appeals, argument was heard on
only one issue: whether or not either Arnaud Properties Limited
(“Arnaud Properties”) or the Hall River Power
Corporation (“Hall River”) carried on a
business during the 24 months immediately preceding the sale of
the shares in question. The Court was informed at the beginning
of the hearing that the other issues raised in the Notices of
Appeal and Replies to the Notices of Appeal were no longer in
dispute.
[3] The appellants Harquail and Girard were the only people
who testified at the hearing of these appeals. The appellant
Harquail was one of the shareholders, managers and directors of
Arnaud Properties from 1973 until the shares were sold to
Développements Hydroméga Inc.
(“Hydroméga”) in February 1989. He
described himself as a businessman, and he was also a lawyer. The
appellant Girard was also a shareholder and director of Arnaud
Properties. At the time when he acquired the shares in issue
here, he was a branch manager of a bank. The directors of Hall
River were the same people as the directors of Arnaud Properties
at the time in question.
[4] The parties agreed, for the purposes of this case, that
Arnaud Properties owned two classes of assets. It directly owned
immovable assets, consisting of land and buildings, and
indirectly, through a wholly-owned subsidiary, Hall River,
owned hydro-electric assets, which included capital assets
consisting of a dam, production equipment and hydro-electric
development rights on the Rivière Ste-Marguerite. The
parties also admitted that the hydro-electric assets owned by
Hall River represented during the period in issue 100% of that
company's assets and 90% or more of the overall assets of
Arnaud Properties.
[5] From 1902 to the late 1960s, Gulf Pulp and Paper Inc.
(“Gulf Pulp”), which was originally known as
the North Shore Power Railway Navigation Company, operated a pulp
mill and owned forest concessions, rights to develop the
hydro-electric potential of the Rivière Ste-Marguerite, a
dam on the river and 1,500 hectares of adjacent land. Its capital
assets are located in Clarke City, Québec; Clarke City is
midway between Port Cartier and Sept-Îles.
[6] In 1969, Gulf Pulp transferred all of its assets to Arnaud
Properties, including hypothecs totalling about $500,000, but
excluding the rights to develop the river's hydro-electric
potential which, because of certain legal requirements, were
transferred to Hall River.
[7] The objects of Arnaud Properties, which was incorporated
in May 1969, are described as follows:
. . .
To carry on the business of an investment company and of a
real estate holding and development company . . . .
The objects of Hall River, which was incorporated by letters
patent in July 1969, are as follows, in part:
a) To produce, generate, manufacture by any means and to
supply, sell and dispose of electricity and electric current for
heat, light and power and for any other purposes for which the
same may be used . . . .
[8] In 1973, the appellants Harquail and Girard and Pierre
Duchesne, a notary, purchased all the shares of the capital stock
of Arnaud Properties. They then developed a business plan for the
company.
[9] At the outset, the plan involved the sale of lots, and
specifically of building lots. The company then began to sell
lots largely for residential construction. Some forty lots were
sold between 1973 and 1975, and a few sales took place after
that, at unspecified times.
[10] In this connection, Arnaud Properties reported profits of
$281, $24,974 and $105,410 for 1973, 1974 and 1975, respectively,
and declared dividends of $29,300 for 1973 and $36,000 for
1975.
[11] Arnaud Properties did nothing other than sell lots; it
did not build on the lots. It believed that it could dispose of
the lots more easily if it supplied electricity to the residents
at a low price. However, it had to have customers to make the
development of “First Falls” profitable. One of the
potential customers was Hydro-Québec. However,
Hydro-Québec had a policy of not purchasing electricity
from independent producers. Arnaud Properties had several other
possible customers, including the Iron Ore Company
(“Iron Ore”), but it did not enter into
agreements with any of them.
[12] Numerous efforts were made at the time and in subsequent
years by Arnaud Properties and Hall River to promote the
development of the hydro-electric potential of the
Rivière Ste-Marguerite.
[13] In October 1978, Hall River commissioned a study to
determine whether it could proceed with developing First Falls.
The purpose of the study was stated as follows by the appellant
Harquail in his testimony[3]:
A. The purpose of the study was to determine the technical and
economic feasibility of bringing the First Falls development from
a standby basis into an active producing basis.
The study was done for $10,000 by Montreal Engineering
Company, Limited. The initial report, entitled “HALL RIVER
POWER CORPORATION ASSESSMENT OF HYDRO POTENTIAL AT FIRST FALLS,
RIVIERE STE.MARGUERITE, P.Q.”, is dated December 1978. It
estimated the cost of the development to be $7,000,000 and
concluded that developing First Falls on the Rivière
Ste-Marguerite was technically feasible, but that it would
not be profitable to do so, given the inefficiency of the
existing generators. Particular mention was made of three
problems: (1) the technology of certain facilities was obsolete;
(2) the falls produced an irregular current; and (3) it was
Hydro-Québec’s policy that any electricity produced
by an independent producer had to be used by the producer for its
own purposes and could not be resold to third parties.
[14] In 1978, Mr. Duchesne, the notary, sold the shares he
held in the capital stock of Arnaud Properties to Charles E.
Couture, Mario Isacco and the appellant Jean-Pierre Hudon. These
three individuals lived in Sept-Îles, and they became
directors of Arnaud Properties.
[15] On November 10, 1979, in the course of a meeting, the
shareholders of Arnaud Properties instructed the appellant
Harquail to examine three options:
1. expropriation of the development site by
Hydro-Québec;
2. sale of rights and property connected with the
hydro-electric project to Iron Ore; and
3. operation as a joint venture with Iron Ore and
Hydro-Québec.
[16] Fifteen thousand dollars was made available to enable the
appellant Harquail to carry out these instructions. The money was
to be used to cover expenses that might be incurred in the course
of his assignment. In addition, the shareholders of Arnaud
Properties agreed to pay the appellant Harquail a fee based on
the scale set out in the minutes of the above-mentioned meeting
of Arnaud Properties on November 10, 1979. That scale took into
account various possibilities, including a joint venture.
[17] The third option would have enabled Arnaud Properties to
circumvent Hydro-Québec’s policy, since the company
could have resold, so to speak, the electricity to one of the
proposed partners: Iron Ore or Hydro-Québec.
[18] In April 1980, the appellant Harquail, in his capacity as
agent of Arnaud Properties, took part in a meeting with
representatives of Iron Ore and Hydro-Québec to discuss
the work and costs associated with this hydro-electric project.
Following a meeting held in June 1980, Hydro-Québec
undertook a study relating to the temporary regulation of the
Rivière Ste-Marguerite, in response to a request by
Hall River and Gulf Power, a subsidiary of Iron Ore. According to
the appellant Harquail, the study recommended that
Hydro-Québec undertake the project. Despite the
study’s conclusions, Hydro-Québec decided not to
pursue the project, and instead to develop the Grande-Baleine
project. The appellant Harquail was supposed to have completed
his assignment on June 30, 1980, but he continued to work on it
after that date.
[19] Since a joint venture operation with Hydro-Québec
was no longer possible, Arnaud Properties turned to Iron Ore,
which had just built a new plant in Sept-Îles.
Representatives of Arnaud Properties and Hall River held
discussions on this subject with representatives of Iron Ore in
1981 and 1982. The appellant Harquail stressed that at that time
Arnaud Properties was examining the matter of the development of
First Falls very carefully.
[20] In 1987, the cost of the project to develop First Falls
was estimated to be $17,000,000, but the appellant Harquail
testified that he had foreseen no problems obtaining the
necessary financing.
[21] The minutes of a meeting of the directors of Arnaud
Properties held on July 2, 1987 indicate, in a paragraph entitled
“DEVELOPMENT OF HYDRO-ELECTRIC POTENTIAL AT FIRST FALLS,
RIVIERE MARGUERITE”, that the appellants Harquail and
Girard were authorized to do the following: “to forthwith
open discussions with all interested parties with a view to
advancing the development as expeditiously as possible”. In
passing, the minutes mention the possibility of Arnaud Properties
selling a lot to the city of Sept-Îles.
[22] A meeting of the directors of Hall River was held on July
2, 1987, as can be seen from the first paragraph of the summary
of a report dated August 4, 1987, which will be discussed
later. The minutes of that meeting indicate that the appellants
Harquail and Girard would be representing Hall River in its
negotiations with Hydro-Québec.
[23] On July 7, 1987, the appellant Harquail, in his capacity
as vice-president of Hall River, sent a letter to a
vice-president of Hydro-Québec. One paragraph of that
letter should be noted:
. . .
It is our understanding that the recently adopted policy of
Hydro-Québec envisages the purchase of power from small
hydro-electric enterprises to a maximum production level of 25
MW. To this end, we respectfully seek a meeting with
representative [sic] of Hydro-Québec at the
earliest possible moment to discuss the procedures and
requirements to enable a comprehensive agreement to be entered
into between Hall River and Hydro-Québec. This would
enable the Company to go forward, in an expeditious manner, with
the planning/development and construction envisaged in a
rehabilitation [sic] the First Falls facility at La Ville
de Sept-Iles Ouest.
[24] On August 4, 1987, the appellant Harquail wrote a
detailed five-page report referred to above for the president and
directors of Hall River concerning the meetings and other
activities that had taken place in July 1987. The report provides
a good idea of the options being considered by Hall River at that
time in terms of pursuing the project to develop the
company’s hydro-electric assets.
[25] On August 20, 1987, Hydro-Québec sent the
appellant Harquail, in his capacity as vice-president of Hall
River, its new “policy for purchasing electricity produced
by small power plants owned by third parties in
Québec” which had been adopted on
February 18, 1987,[4] after a new provincial government came to power.
After lengthy and difficult negotiations, Hydro-Québec
said that it was prepared to purchase electricity at 2.86 cents
per kilowatt/hour, while Hall River wanted to sell electricity at
4.2 cents per kilowatt/hour.
[26] On August 24, 1987, the appellant Harquail, in his
capacity as vice-president of Hall River, wrote to the Minister
of Energy and Resources of Québec to tell it that the
company [TRANSLATION] “is interested in developing a
hydraulic site and is requesting the necessary permits to enter
into an agreement with Hydro-Québec for the purchase of
energy”. The first two paragraphs of the letter are
perfectly clear on this point. They read as follows:
[TRANSLATION]
The Hall River Power Corporation owns the rights to use a dam
and rights to the hydraulic power at First Falls on the
Rivière Ste-Marguerite. That site, which is in the city of
Sept-Iles, 7.5 km. upstream from the mouth of the river, offers a
gross head of 17.4 m. The Corporation wants to install a
hydro-electric power plant there. Preliminary discussions have
been held with Jean-Claude Richard from the office of Jacques
Guevremont, Executive Vice-President, Hydro-Québec.
In accordance with the terms and conditions set out in
Resolution HA-347-54/87 of Hydro-Québec’s board of
directors, dated February 18, 1987 and entitled “policy for
purchasing electricity produced by small power plants owned by
third parties in Quebec” (copy attached), the Hall River
Power Corporation, an independent developer, hereby gives notice
that it is interested in developing a hydraulic site and is
requesting the necessary permits to enter into an agreement with
Hydro-Québec for the purchase of energy.
[27] This letter to the Minister of Energy and Resources of
Québec dated August 24, 1987 was followed by another
letter dated September 14, 1987, also to the Minister of Energy
and Resources of Québec, from the appellant Harquail in
his capacity as vice-president of Hall River. The second letter
also referred to a meeting between the appellant Harquail and a
vice-president of Hydro-Québec, this one held on September
8, 1987. The letter addressed two matters: the first was the
source of Hall River’s rights as owner of the hydraulic
resources at First Falls on the Rivière Ste-Marguerite,
while the second was a suggestion to the Minister that the
production capacity of these hydro-electric resources be
increased.
[28] On the same day, September 14, 1987, the appellant
Harquail, as vice-president of Hall River, sent the
Minister of the Environment of Québec a letter, the body
of which was identical to that of the letter of August 24, 1987
to the Minister of Energy and Resources of Québec. The two
main paragraphs of the earlier letter are set out in paragraph 26
of these reasons for judgment.
[29] On November 13, 1987, the vice-president of SNC Hydro
Inc. (now SNC Lavalin) contacted the industrial commissioner of
the city of Sept-Îles and stated the following:
[TRANSLATION] “In the event . . . that negotiations with
Hydro-Québec resulted in an acceptable rate [for the sale
of electricity], SNC would be in a position to provide financing,
construct the project and operate the project in conjunction with
the Hall River Power Corporation.” [Words in brackets
added.]
[30] On November 27, 1987, following a telephone conversation
with one Jacques Painchaud of the Ministère de
l’Énergie et des Ressources of Québec, the
appellant Girard, on behalf of Hall River, contacted that
government department by letter to complain about the price set
by Hydro-Québec for the sale of electricity, stating that
[TRANSLATION] “this policy has shut the door on our
business”. He said that he did not understand
Hydro-Québec’s attitude, since there [TRANSLATION]
“are very few independent power plants that are able to
produce electricity in Québec”.
[31] On January 13, 1988, the political assistant to the
Minister of Energy and Resources of Québec replied to the
letter of August 24, 1989 from the appellant Harquail by inviting
him to [TRANSLATION] “contact the regional office of the
Ministère de l'Environnement in Sept-Îles”
and obtain a permit from the Régie de
l'électricité et du gaz. The letter also, as
the appellant Harquail pointed out in his testimony, recognized
“prior rights under the original grant to James Clark at
First Falls” and indirectly recognized the rights of Arnaud
Properties and Hall River, to the exclusion of
Hydro-Québec. A letter sent by the office of the Minister
of Energy and Resources of Québec to the appellant Girard
on the same day in reply to Mr. Girard’s letter of
November 27, 1987 suggested that he [TRANSLATION] “contact
the Associate Deputy Minister for Energy . . . to schedule a
meeting to try to find some common ground”. That meeting
was held in Québec on February 29, 1988.
[32] The “Avis de projet” form was sent to the
Ministère de l’Environnement of Québec on
January 22, 1988, by the appellant Harquail acting on behalf of
Hall River. That “Avis de projet” comprised an
application for environmental permits. Paragraph 4 of the
“Avis de projet” sets out the “primary
objectives” as follows:
[TRANSLATION]
- to expand development of the hydro-electric resources of the
Rivière Ste-Marguerite;
- to use the watercourse of and First Falls on the
Rivière Ste-Marguerite for the production of clean, usable
energy.
The “Avis de projet” form includes a table
entitled “Preliminary Project Schedule”. The
appellant Harquail explained it as follows[5]:
A. We had entered into very intensive negotiations with both
the SNC group on general contracting and construction, and
Dominion Bridge, Sulzer who were really going to supply all the
equipment, and they had prepared a project schedule which
envisaged the construction starting at the First Falls in January
of 1988, and being concluded in January of 1990.
[33] In a letter to the Minister of Energy and Resources of
Québec dated January 29, 1988, the appellant Harquail, on
behalf of Hall River, requested that three leases held by Gulf
Power be cancelled, since Iron Ore, [TRANSLATION] “the
owner of Gulf Power”, had informed Hall River [TRANSLATION]
“of its intention not to pursue the development of the
hydro-electric potential of the First and Second Falls,
Rivière Ste-Marguerite”. Hall River also asked that
it be given leases by the Minister's department for eight
lakes specified in the letter.
[34] Hall River wanted to have those leases so that it could
regulate the flow of the watercourse while waiting for the Mile
56 project to be completed by Hydro-Québec.[6]
[35] A study was also conducted in early 1988, at the request
of the appellant Harquail, by a Toronto economist, Percy Macfaney
in which he provided explanations regarding the concept involved
in the theory known as “Marginal or 'Avoided'
costs”. This study was to be used in the discussions that
Hall River representatives were to have with Hydro-Québec.
That study cost approximately $1,500.
[36] On February 22, 1988, the director of environmental
assessment of the Ministère de l'Environnement of
Québec replied to the “Avis de projet”,
stating that in the near future Hall River would receive the
Minister’s directive [TRANSLATION] “indicating the
nature, scope and extent of the environmental impact assessment
statement” that Hall River would have to prepare.
[37] On February 29, 1988, at a meeting with the appellant
Girard, the Associate Deputy Minister for Energy of Québec
explained that there was [TRANSLATION] “a very complicated
process” for changing the price proposed by
Hydro-Québec for supplying electricity.
[38] On July 20, 1988, the Ministère de
l'Environnement of Québec sent the appellant Harquail
of Hall River the “draft directive” concerning the
First Falls project and invited the appellant Harquail to submit
his comments regarding it.
[39] On September 15, 1988, the Minister of Energy and
Resources of Québec replied to the letter from the
appellant Harquail dated January 29, 1988, informing him that
[TRANSLATION] “only the lease-holder may request
cancellation of the leases” and his department was in the
process of preparing [TRANSLATION] “a bill to revise the
Watercourses Act to simplify the process of managing and granting
rights to use the hydraulic resource”.
[40] In a letter dated August 18, 1988 sent by the appellant
Harquail on behalf of Hall River to the president of Lavalin
Hydro Inc., he referred to a most productive meeting they had had
and said that he was sending him certain material described in
Schedule “A” to the document entitled
“Confidentiality Agreement” between Lavalin Hydro
Inc. and Hall River.
[41] On October 19, 1988, the Ministère de
l'Environnement of Québec provided the appellant
Harquail with a revised version of the “draft
directive” and invited Hall River’s [TRANSLATION]
“environmental consultant” to submit comments to the
appropriate branch of that Ministère. The appellant
Harquail acknowledged that Hall River had not retained the
services of an [TRANSLATION] “environmental
consultant”, but stressed that it was making
representations to the cabinet (Government of Québec) to
seek an exemption from the requirement that it conduct an
environmental impact assessment. He thought that this approach
was worthwhile since the facilities were already in place, there
would be no flooding and no people would be required to move.
[42] During the fall of 1988, the appellant Girard was
informed that Hydroméga was interested in developing Hall
River’s hydro-electric assets. He met with representatives
of Hydroméga to discuss strategy and the possibility of
developing the river's hydro-electric potential as a joint
venture. In the course of that meeting, Hydroméga’s
representatives indicated to the appellant Girard that they
wanted to [TRANSLATION] “buy Arnaud”.
[43] An agreement in principle was entered into on October 23,
1988, between Hydroméga and the shareholders of Arnaud
Properties, including all the appellants, except the appellant
Harquail, under which Hydroméga agreed to acquire
[TRANSLATION] “the shares, advances and rights of the
shareholders” of Arnaud Properties for $2,000,000, payable
as set out in paragraph 6(F). Paragraph 6(G), however, stipulates
that Hydroméga:
[TRANSLATION]
G) . . . shall have the option of not acquiring the said
shares, advances and rights if:
i) its studies and analyses do not establish
profitability;
ii) it does not obtain permission to develop SMI from the
appropriate government authorities; and
iii) agreements cannot be entered into with
Hydro-Québec.
Paragraph 12 of that agreement is also of some interest:
[TRANSLATION]
12.. The shareholders inform HMD [Hydroméga] that their
agreement is conditional on Gérald Harquail also agreeing
to sell, and authorizing them to sell. HMD [Hydroméga]
consents to this.
[Words in parentheses added.]
[44] On December 12, 1988, Mr. Richard, a vice-president of
Hydro-Québec, sent the appellant Harquail, in his capacity
as vice-president of Hall River, the directive respecting the
[TRANSLATION] “requirements establishing the terms and
conditions for the purchase of electricity from independent
producers for projects to be incorporated into the primary
Hydro-Québec grid”. This directive was dated
November 1988. The appellant Harquail had continued his
discussions with Hydro-Québec during the period preceding
the establishment of the directive with the intention of
resolving the question of the sale price of electricity.
[45] On February 24, 1989, all the shareholders of Arnaud
Properties sold all their shares in the capital stock of that
company to Hydroméga for a price of $2,000,000.
[46] The appellant Harquail testified that he did not really
want to dispose of his shares, but that he had no choice, given
that he was a minority shareholder and the other shareholders
wanted to sell. At the examination for discovery, Mr. Girard
said that the project [TRANSLATION] “would have taken a lot
of the shareholders’ money”. He estimated the amount
to be $5,000,000. He testified that because of the need to borrow
the money and the very low price offered by Hydro-Québec
for the sale of electricity, the project was [TRANSLATION]
“not feasible”.[7]
[47] The appellants included the capital gains resulting from
that transaction in their income tax returns for the 1989
taxation year. As was mentioned at the beginning of these
reasons, each of the appellants is claiming the deduction for the
disposition of qualified small business corporation shares
provided for in subsection 110.6(2.1) of the Act.
[48] In Hall River’s income tax returns for the 1986,
1987, 1988 and 1989 taxation years, and in the tax returns filed
by Arnaud Properties for the 1989 taxation year, the word
“inactive” was inserted in the space relating to
[TRANSLATION] “major business activities”. Hall
River’s financial statements, which were attached to its
1986 and 1987 income tax returns, indicate that [TRANSLATION]
“the company, which was incorporated under Part I of the
Québec Companies Act, has been inactive for several
years”. The sales contract dated February 24, 1989 mentions
in Articles 3.1.10 and 3.1.13 that the two companies Arnaud
Properties and Hall River had not carried any activity since
December 31, 1988 and had not had any employee for the past five
years.
[49] After the sale on February 24, 1989, Hydroméga
began the hydro-electric development that had been planned by
Arnaud Properties and Hall River. The appellant Harquail
testified that Hydroméga was able to sell electricity at
4.5 cents per kilowatt/hour in 1990 or 1991.
Appellants’ argument
[50] For the appellants, the Court was first referred to the
decision of the Federal Court of Appeal in The Queen v.
Rockmore Investments Ltd., 76 DTC 6156. Counsel for the
appellants clearly stated that it was not the facts in
Rockmore Investments that were important for the purposes
of the case at bar, but rather the principles stated by Chief
Justice Jackett, specifically in the following passage, at p.
6157:
In considering whether there is an "active business"
for the purposes of Part I, the first step is to decide whether
there is a "business" within the meaning of that word.
Section 248 provides that that word, when used in the Income
Tax Act, includes "a profession, calling, trade,
manufacture or undertaking of any kind whatever" and
includes "an adventure or concern in the nature of
trade" but does not include "an office or
employment". Furthermore, the contrast in section
3(a) of the Act between "business" and
"property" as sources of income makes it clear, I
think, that a line must be drawn, for the purposes of the Act,
between mere investment in property (including mortgages) for the
acquisition of income from that property and an activity or
activities that constitute "an adventure or concern in the
nature of trade" or a "trade" in the sense of
those expressions in section 248 (supra). Apart from these
provisions, I know of no special considerations to be taken into
account from a legal point of view in deciding whether an
activity or situation constitutes the carrying on of a business
for the purposes of Part I of the Income Tax Act. Subject
thereto, as I understand it, each problem that arises as to
whether a business is or was being carried on must be solved as a
question of fact having regard to the circumstances of the
particular case.
[51] The next case cited was the decision of the Supreme Court
of Canada in Marconi v. The Queen, 86 DTC 6528. In
Marconi, the Supreme Court confirmed the English case law,
which established the rule that in the case of a corporation
there is a rebuttable presumption that income received from an
activity relating to an object set out in the corporation's
letters patent or articles is income from a business.
[52] The appellants then attempted to demonstrate that when a
corporation undertakes activities with a view to future
operations, it is carrying on a business. In support of that
proposition, counsel for the appellants referred to three
decisions of the Federal Court–Trial Division: E.R.
Squibb & Sons Ltd. v. M.N.R., 73 DTC 5140; Esar et al.
v. The Queen, 74 DTC 6062; and The Queen v. Dorchester
Drummond Corp. Ltd., 79 DTC 5163.
[53] Squibb, supra, dealt with a corporation
that had deducted municipal and school taxes on certain land,
only 16% of which had been used, in computing its income. The
Minister disallowed a deduction for property taxes other than on
the part that had been used, on the ground that the rest of the
land was not used in carrying on a business. Mr. Justice
Cattanach therefore had to determine whether the expenses
relating to property taxes for the unused part of the land had
been incurred in carrying on a business. At page 5142, he
stated:
It is not a condition of the deductibility of a disbursement
or expense that it may have been made in vain. Rather, the
question is whether the expenditure was in the course of the
current operation of the business as part of the policy of the
taxpayer in conducting its operations in a businesslike way.
[54] Counsel for the appellants also drew the Court’s
attention to the following passages from that decision, at pages
5143–44:
Those sales and purchases are consistent with the avowed
purpose of the appellant that it intended to use the entire area
for the business although the use of a portion might be
delayed.
. . .
It is not realistic that the appellant should be considered in
isolation. It was part of a larger overall organization. Its
shares were wholly owned by the parent corporation and the policy
of the whole organization was necessarily that of the appellant.
The pragmatic or practical approach clearly points to the policy
and intention of the parent corporation as relevant to the policy
and intention of the appellant. In fact they were
coincidental.
[55] Cattanach J. concluded that the expenses had been
incurred with a view to future expansion of the corporation's
facilities, and were therefore deductible. He did not
specifically say that owning land was part of the carrying on of
a business, but that is the logical conclusion, given the manner
in which he addressed the question.
[56] The facts in Esar, supra, are a little
closer to the facts of the instant case. Esar also
involved taxpayers who had claimed a deduction for their property
taxes. They had purchased a piece of land with the intention of
erecting a commercial or industrial building on it. Since they
did not have the financial resources at that time to construct
such a building, they rented out a run-down house on the land,
for minimal rent. After a few years, the municipal authorities
determined that the house was unfit for human habitation and
ordered its demolition. The land was then left vacant for several
years. The Minister disallowed the deduction for property taxes
on the land because of the fact that the land had produced no
income for several years and the income that it had produced in
certain years was minimal. Mr. Justice Heald concluded that since
the land had been retained in the reasonable expectation that a
building would be erected on it, the property taxes were
deductible. The Court’s attention was drawn to the
following passage from the judgment, at page 6065:
In view of the foregoing facts, I have concluded that the
plaintiffs have discharged the onus cast upon them of
establishing that subject land was retained in the reasonable
expectation that they would be able to utilize the land for the
construction of a commercial or industrial building which they
would rent out for income. That being so, it follows that the
payment of property taxes was an expenditure on revenue account
and as such was laid out for the purpose of gaining or producing
income within the meaning of section 12(1)(a) of the
Income Tax Act.
[57] Dorchester Drummond, supra, also dealt with a
corporation which wanted to deduct its property taxes. The
taxpayer had acquired a piece of land in downtown Montreal for
the purpose of erecting a building on it. The corporation had
retained architects and plans had been drawn up, but after the
land was acquired the office rental market in Montreal
deteriorated and the corporation decided to wait for the market
to improve. In the meantime, the corporation operated a parking
lot for several years, but the city of Montreal then prohibited
the operation of a parking lot, and the taxpayer was obliged to
stop doing this. The corporation in question had also negotiated
with some other companies with a view to obtaining tenants for
the future building. The negotiations were unsuccessful. The
Court’s attention was drawn to the following paragraphs of
the judgment by Mr. Justice Walsh, in which he set out his
conclusion, at pages 5168–69:
It cannot be contended that the company was not carrying on a
business during the years in question. This was established in
the case of M.R.T. Investments Limited et al. v. The
Queen, 75 DTC 5224 (confirmed in appeal [76 DTC 6158,
F.C.A.]) which dealt with what constituted an "active
business" within the meaning of Section 125 of the new
Income Tax Act. It was held that business activities need
be neither extensive nor profitable in order for the taxpayer to
be considered as carrying on an active business. Gibson, J.
reached the same conclusion in Her Majesty The Queen and
Cadboro Bay Holdings Limited, [77 DTC 5115], 1977 C.T.C. 186;
after carefully reviewing the jurisprudence. Defendant was
therefore undoubtedly carrying on business during the years in
question.
. . .
I have concluded that on the facts of this case the better
view is that the deduction of these taxes should be
permitted.
[58] Counsel for the appellants also commented on the decision
of the Supreme Court of Canada in Ensite Limited v. Her
Majesty The Queen, 86 DTC 6521, in which the issue was the
withdrawal of property that could have a decidedly destabilizing
effect on the operations of the taxpayer in question. The
Court’s attention was drawn to the following passage from
that decision:
. . . The threshold of the test is met when the withdrawal of
the property would “have a decidedly destabilizing effect
on the corporate operations themselves”: March Shipping
Ltd. v. M.N.R., supra, at p. 374. This would
distinguish the investment of profits from trade in order to
achieve some collateral purpose such as the replacement of a
capital asset in the long term (see, for example, Bank Line
Ltd. v. Commissioner of Inland Revenue (1974), 49 T.C. 307
(Scot. Ct. of Session)) from an investment made in order to
fulfil a mandatory condition precedent to trade (see, for
example, Liverpool and London and Globe Insurance Co. v.
Bennett, [1913] A.C. 610 (H.L.) and Owen v. Sassoon
(1951), 32 T.C. 101 (Eng. H.C.J.). Only in the latter case would
the withdrawal of the property from that use significantly affect
the operation of the business. . . .
[59] Counsel for the appellants submitted, relying on
Ensite, that in the case at bar, [TRANSLATION]
“without the hydro-electric assets, there would have been
no business”.
Respondent’s argument
[60] A number of decisions submitted by the respondent
addressed the question of the deductibility of certain expenses
that the taxpayers characterized as “start-up
costs”.
[61] The first decision dealing with that question is
Craddock et al. v. M.N.R., 86 DTC 1014, in which two
taxpayers had purchased a farm with the intention of breeding
cattle. They spent several years improving the soil and
facilities before purchasing any cattle. The taxpayers argued
that they were entitled to deduct the cost of the improvements
together with interest and property taxes. Judge Rip concluded
that the expenses were not deductible because the taxpayers were
not carrying on a business when the expenses were incurred. The
following passages, at page 1016 of the decision, are of
particular interest:
In my view Messrs. Giffen and Craddock were not in the
business of carrying on farming in 1980 and 1981. What they were
doing during those years was preparing the property for use as a
farm at some time in the future. These were not
"start-up" costs of a business because in the years of
the appeal the property could not support a business enterprise.
. . . What the taxpayer is really saying is that his business
operations cannot start until such time as there is sufficient
capital available to support the business. In 1980 and 1981
Messrs. Giffen and Craddock were working to get the property to a
condition which would support what they wanted to do with it. But
they were not yet carrying on a business.
In these appeals Messrs. Giffen and Craddock are in effect
saying that the business they wished to carry on could not start
until the barn was rebuilt, the shed repaired, the house was in a
proper state of repair and the arable land was susceptible of
giving proper crops. In other words capital assets must first be
improved to bring the farm property to a point where a business
may be carried on.
[62] The respondent also referred to Rolland v. M.N.R.,
87 DTC 341, in which the taxpayer planned to carry on the
business of operating a hot air balloon. He had purchased a
balloon and the necessary equipment, and taken lessons. He
decided to get a few years’ experience before carrying
passengers. He deducted the expenses he incurred during those
years. Judge Bonner concluded that they were not deductible since
the taxpayer had not started to carry on a business. The
following passage appears at page 343:
In my view the losses in issue were not, during the years in
question the losses of a business because during that period no
business had yet commenced.
[63] The respondent also cited Bancroft v. M.N.R., 89
DTC 153, in which the taxpayer had spent considerable sums of
money in an attempt to set up a tourist resort. He had purchased
a piece of land that included certain facilities, which he had
then renovated extensively. He then encountered difficulties in
obtaining additional financing and had to abandon the project. In
computing his income, he claimed a deduction for the expenses in
question. Judge Lamarre Proulx concluded that he was not carrying
on a business. At page 155, she stated:
On the evidence that was before me, I can only conclude that
the Appellant's activities do not meet the threshold required
for him to be considered as "carrying on a business".
Put differently the Appellant never passed the stage of capital
expenditure. The walls and foundations were there, but there was
nothing which resembled a tourist resort. There was no kitchen,
no washrooms. The inside was never finished. There had not been
any training of personnel, needless to say no hiring, no
promotion, no advertising. The Appellant, during all the years
under appeal, was quite far from the operational phase of his
plan.
. . .
The Appellant was in the process of creating a business
structure. He never finished creating it. He never commenced his
proposed business of a year-round country retreat. I am of the
view that the evidence disclosed that the Appellant never carried
on a business nor did he commence a business.
[64] Brief mention was made of Hilts et al. v. M.N.R.,
91 DTC 633, the facts of which are similar to those in
Craddock, supra.
[65] Counsel also mentioned Samson et Frères
Ltée v. The Queen, 96 DTC 1559, in which the taxpayer
had deducted certain expenses that it had incurred after a fire
destroyed its business. It had prepared a plan and purchased land
and equipment with the intention of starting a new business.
Judge Dussault concluded that the taxpayer’s business had
ceased to exist and that the activities it had undertaken were
merely preliminary efforts. The following passage appears at
page 1562:
[TRANSLATION]
. . . I find that all the steps taken to purchase lands,
buildings and equipment in various locations were merely
preliminary and intended to bring together the basic elements or
structure of the new business, which structure moreover was never
concretely put into place and always remained at the planning
stage, the materialization of that plan being contingent upon
obtaining outside financing. To the extent that the very
structure of the business the appellant wished to operate was
never put into place, it is hard to see how the expenses relating
to preliminary efforts to establish a business that does not
exist – which efforts did not go beyond the planning stage
– can be claimed to be deductible.
[66] The respondent submitted that as in Samson,
supra, Arnaud Properties had undertaken only preliminary
efforts. In the respondent’s submission,
Arnaud Properties (through its subsidiary) owned
hydro-electric assets and had initiated negotiations, but the
structure of the business was not in place.
[67] The respondent commented briefly on the decisions of Mr.
Justice Rothstein in Heinze v. The Queen, 97 DTC
5219, of Judge Bowman in Goren v. The Queen, 98 DTC 1963,
and of Judge Lamarre in Sidawi et al. v. The Queen, 98 DTC
1775.
[68] Counsel for the respondent concluded that in the case at
bar, the essential and important elements of the business
structure were not in place, which made it impossible to find
that a business was carried on. The efforts that were made were
not, in the respondent’s submission, sufficient to support
the argument that the business existed at the time in
question.
Analysis
[69] The issue in this case — stated in general terms
— is whether the shares of Arnaud Properties, the
disposition of which by the appellants in February 1989 resulted
in capital gains, were qualified small business corporation
shares. The expression “qualified small business
corporation share” is defined in subsection 110.6(1) of the
Act. The relevant portion of that subsection, for the purposes of
this case, is as follows:
110.6(1) For the purposes of this section,
. . .
“qualified small business corporation
share”. — “qualified small business
corporation share” of an individual (other than a trust
that is not a personal trust) at any time (in this definition
referred to as the “determination time”) means a
share of the capital stock of a corporation that,
(a) at the determination time, is a share of the
capital stock of a small business corporation owned by the
individual, the individual’s spouse or a partnership
related to the individual,
(b) throughout the 24 months immediately preceding the
determination time, was not owned by anyone other than the
individual or a person or partnership related to the individual,
and
(c) throughout that part of the 24 months immediately
preceding the determination time while it was owned by the
individual or a person or partnership related to the individual,
was a share of the capital stock of a Canadian-controlled private
corporation more than 50% of the fair market value of the assets
of which was attributable to
assets used in an active business carried on primarily in
Canada by the corporation or by a corporation related to it,
(ii) . . . .[8]
As can be seen, this definition lays down three requirements
that must be met for a share to be considered a “qualified
small business corporation share”.
[70] First, paragraph (a) of the definition requires
that a share owned by, inter alia, an individual be a
share of the capital stock of a “small business
corporation” at the time of disposition of the share. The
expressions “small business corporation” and
“business” are defined in subsection 248(1) of the
Act:
“Small business corporation”. —
“small business corporation” at any particular time
means a particular corporation that is a Canadian-controlled
private corporation all or substantially all of the fair market
value of the assets of which at that time was attributable to
assets that were
(a) used in an active business carried on primarily in
Canada by the particular corporation or by a corporation related
to it,
(b) shares of the capital stock of one or more small
business corporations that were at that time connected with the
particular corporation (within the meaning of subsection 186(4)
on the assumption that such small business corporation was at
that time a “payer corporation” within the meaning of
that subsection) or a bond, debenture, bill note, mortgage,
hypothec or similar obligation issued by such a connected
corporation, or
(c) assets described in paragraphs (a) and
(b),
and, for the purposes of paragraph 39(1)(c), includes a
corporation that was at any time in the 12 months preceding that
time a small business corporation . . . .
“business” includes a profession, calling, trade,
manufacture or undertaking of any kind whatever and, except for
the purposes of paragraph 18(2)(c), section 54.2 and
paragraph 110.6(14)(f), an adventure or concern in the
nature of trade but does not include an office or employment . .
. .
[71] One of the various conditions set out in the definition
of “small business corporation” is that “all or
substantially all of the fair market value of the assets
. . . at that time was attributable to assets”
that were “used in an active business carried on primarily
in Canada by the particular corporation or by a corporation
related to it”.
[72] The second requirement is that the share in question not
be owned by anyone other than the taxpayer in question (or
certain specific persons) throughout the 24 months immediately
preceding the disposition of the share.
[73] The first provision of the third requirement (which
includes a number of alternatives), set out in subparagraph
(c)(i) of the definition of “qualified small
business corporation share”, requires that more than 50% of
the fair market value of the assets of the corporation in
question be used in “an active business carried on
primarily in Canada by the corporation or by a corporation
related to it” throughout the 24 months immediately
preceding the time of disposition of the share. The expression
“active business” is defined in subsection 248(1) of
the Act as follows:
“active business”, in relation to any business
carried on by a taxpayer resident in Canada, means any business
carried on by the taxpayer other than a specified investment
business or a personal services business . . . .
[74] Bearing in mind both (1) the requirement set out in
paragraph (a) of the definition of “qualified small
business corporation share” that the share be a share of a
“small business corporation” together with the
condition set out in paragraph (a) of the definition of
“small business corporation” that the assets be used
“in an active business carried on primarily in Canada by
the particular corporation or by a corporation related to
it”, and (2) the requirement set out in subparagraph
(c)(i) of the definition of the expression
“qualified small business corporation share” that
“throughout that part of the 24 months immediately
preceding” the disposition of a share, a specified
percentage of the assets be “used in an active business
carried on primarily in Canada by the corporation or by a
corporation related to it”, the result is that the assets
of a particular corporation must be used in an active business
that the corporation in question or a corporation related to it
carries on throughout the 24 months immediately preceding the
disposition of a share. This is the only requirement in the
definition of “qualified small business corporation
share” that is in dispute.
[75] The question in issue can be defined even more precisely.
Having regard to the definition of the expression “active
business”, the parties acknowledge that Arnaud Properties
and Hall River were not carrying on a specified investment
business or a personal services business. It follows, then, that
the only question to be decided — reduced to its simplest
expression — is whether Arnaud Properties and Hall River
were carrying on a business during the 24 months immediately
preceding the date on which the shares of the capital stock of
Arnaud Properties were sold: February 24, 1989. The parties
agreed at the hearing that the only point in issue relates to the
question as I have just stated it.
[76] Having regard to the facts of the case at bar and the
nature of the issue, I am of the opinion that the comments of Mr.
Justice Walsh in his decision — affirmed by the Federal
Court of Appeal — in M.R.T. Investments Ltd. et al. v.
The Queen, 75 DTC 5224, are worth examining. The issue in
that case was whether the income concerned was income from an
active business carried on in Canada. It should be noted that at
that time the Act did not define the term “active
business”; the definition of “active business”
that appears in subsection 248(1) of the Act was added by
subsection 66(1) of chapter 5 of the 1979 Statutes of Canada.
However, the issue was very similar to the one before the Court
in the case at bar. At page 5239, Walsh J. stated:
A consideration of the course of conduct over an extended
period of time is relevant in determining the extent of the
activity of a company's business. Certainly, a company could
be incorporated but not actually commence operation on any
extensive scale until some years thereafter. Similarly, a company
that has been active could become dormant or nearly so, merely
holding annual meetings and filing its returns in order to avoid
the forfeiture of its charter. In neither event could it be
considered as carrying on an "active business". Except
for such extreme situations, however, I do not believe that the
question of whether a company is carrying on an active business
or not in any given year should be determined by looking at its
activity in that year alone, or that mortgage lending companies,
such as the present companies, should be considered as being
inactive in any given year merely because they have made
relatively few new loans in that year, although they have made a
substantive number in the immediately preceding or succeeding
years. . . .
[77] The decision of the Federal Court of Appeal in M.N.R.
v. M.P. Drilling Ltd., 76 DTC 6028, is relevant to the case
at bar, although in that case the Federal Court of Appeal had to
consider a different issue: whether or not certain expenses were
capital expenditures and whether they were deductible even though
they did not produce any income. In examining those questions,
Mr. Justice Urie, writing for the Federal Court of Appeal,
thought it necessary to comment on the point at which a taxpayer
begins to carry on a business. The following passages from his
decision, at pages 6031–32, shed some light on this
matter:
As I understand it, it is basic to the Appellant's
submissions that the expenditures incurred by the Respondent in
1964, 1965 and 1966 were for the purpose of creating or acquiring
a business structure. In Appellant Counsel's submission its
activities during those years were preparatory to or for the
initiation of a business and were not outlays made for the
purpose of gaining or producing income from a business. If this
submission were accepted the payments would have been on account
of capital, falling within paragraph (a) of Jackett, C.J.'s
test propounded in the Canada Starch case
(supra).
In my view this argument does not withstand scrutiny in that
it ignores the fact that the business structure per se
came into existence in late September when the Respondent
commenced its business operations by continuing the marketing
negotiations, supply negotiations and technical studies through
its consultants until June of 1964 when it opened its own office
and engaged the services of its first employees, utilizing for
such purposes funds advanced by its principal, Mr. Bawden, or
other companies controlled by him.
. . .
. . . Counsel [for the Minister] took the position that, in
substance, all of the expenditures were for a like purpose, i.e.,
to ascertain the feasibility of going into the business of
purchase and sale of liquified natural gas to certain Pacific rim
countries and this was so whether the work involved in such
studies was carried out by the Respondent's own personnel or
by outside consultants. He argued that none were made as part of
the operation of the profit earning process of an existing
business but were made as part of the formation of the structure
necessary to engage in that process.
In my opinion, that argument is not supported by the evidence
and, in fact, there is evidence which points in the opposite
direction. Not the least important of that kind of evidence was
the fact that negotiations undertaken by the Respondent's
officers had culminated in some expressions of intent by
potential customers to buy the gas and some by producers of the
gas to sell it to the Respondent for the purpose of resale. Quite
clearly then, the Respondent was in fact in business and
was not simply bringing the business into existence. . . .
. . . I cannot agree that because the Respondent had not
generated any revenue, let alone profit, makes it any less
"the process of operation of a profit making
entity".
[78] I must therefore determine whether, having regard to the
evidence, the efforts and activities undertaken by Arnaud
Properties or Hall River during the 24 months immediately
preceding the disposition of the shares on February 24, 1989 were
sufficient to amount to carrying on a business.
[79] To answer this question, it is necessary to examine the
major activities of Arnaud Properties and Hall River during the
24 months immediately preceding February 24, 1989 and even during
the years prior to the period in question, as suggested by Walsh
J. in M.R.T. Investments.
[80] As background, it should be noted that Arnaud Properties
sold some forty lots between 1973 and 1975. It subsequently made
other sales, the times of which were not specified. As appears
from the pleadings, the profits made by Arnaud Properties on the
sales of lots between 1973 and 1975 were included in its income.
It therefore cannot be denied that Arnaud Properties carried on a
business during the three years in question. Of course, Arnaud
Properties could have ceased carrying on its business after that
time.
[81] In 1978, Hall River commissioned a study to determine
whether it would be profitable to develop First Falls on the
Rivière Ste-Marguerite. The preliminary report
completed that year concluded that the operation would not be
profitable.
[82] In November 1979, the shareholders of Arnaud Properties
instructed the appellant Harquail to examine three options. One
option was for Arnaud Properties to develop the hydro-electric
resources at First Falls on the Rivière Ste-Marguerite as
a joint venture with another company. In carrying out his
assignment, the appellant Harquail initiated negotiations with
Hydro-Québec and Iron Ore. Hydro-Québec itself
conducted a study relating to the profitability of the
development in question. Despite the positive conclusion of the
study, Hydro-Québec then decided to give priority to
another project.
[83] During 1981 and 1982, after being informed of
Hydro-Québec’s decision, representatives of Arnaud
Properties and Hall River held discussions with Iron Ore aimed at
pursuing a project to develop First Falls.
[84] In 1987, the estimated cost of the project to develop
First Falls had risen to $17,000,000. The appellant Harquail
testified that obtaining the financing needed for the development
would have caused no problems.
[85] The minutes of a meeting of the shareholders of Arnaud
Properties on July 2, 1987 mention that the appellants
Harquail and Girard were authorized to hold discussions with all
interested parties with a view to developing the river’s
hydro-electric potential as soon as possible.
[86] In light of a new Hydro-Québec policy which
allowed Hydro-Québec to purchase energy from small
hydro-electric enterprises, the appellant Harquail, as
vice-president of Hall River, contacted Hydro-Québec with
the stated objective of entering into an agreement between Hall
River and Hydro-Québec for the sale of energy. As the
appellant Harquail pointed out in his letter to
Hydro-Québec, an agreement of that nature would enable
Hall River to proceed with rehabilitating and redeveloping the
facilities at First Falls.
[87] In November 1987, in response to Hall River’s
approaches, SNC Hydro Inc. told the industrial commissioner of
the city of Sept-Îles that it was prepared to do what was
necessary — including arranging financing — to
proceed, in conjunction with Hall River, with the development of
the hydro-electric facilities at First Falls on the
Rivière Ste-Marguerite if the negotiations with
Hydro-Québec led to an acceptable rate for the sale of
energy.
[88] Three letters dated August and September 1987, from Hall
River to the Ministère de l'Énergie et des
Ressources of Québec and the Minister of the Environment
of Québec, were produced by the appellants. The purpose of
the letters was to have Hall River’s rights in relation to
the right to use a dam and certain hydraulic resources at First
Falls on the Rivière Ste-Marguerite recognized and to
obtain the necessary permits to develop Hall River’s
hydro-electric assets.
[89] In November 1987, the appellant Girard, on behalf of Hall
River, contacted the Ministère de l'Énergie et
des Ressources of Québec and forcefully stated Hall
River’s objections to the price proposed by
Hydro-Québec at that time for the purchase of electricity
produced by independent producers. A few months after that letter
was sent, on February 29, 1988, the appellant Girard met with the
Associate Deputy Minister for Energy of Québec to discuss
the matter. He was then informed that the process relating to
changing the sale price of energy was a complicated one.
[90] In January 1988, the appellant Harquail had sent a letter
to the Ministère de l'Énergie et Ressources of
Québec seeking the cancellation of three leases held by
Gulf Power (a subsidiary of the Iron Ore Company), which Gulf
Power had abandoned, and the preparation of leases in favour of
Hall River for eight lakes referred to in the letter.
[91] At about the same time, a study dealing with a matter
that was likely to be discussed with representatives of
Hydro-Québec was conducted by an economist on instructions
received from the appellant Harquail.
[92] A few days after receiving a letter from the
Ministère de l'Énergie et des Ressources of
Québec dated January 13, 1988 in which he was told that
the government implicitly recognized Hall River’s rights to
the hydro-electric potential of a portion of the Rivière
Ste-Marguerite, the appellant Harquail sent the Minister of
the Environment of Québec a request for environmental
permits to develop the hydro-electric resources of the
Rivière Ste-Marguerite and to use that river’s
watercourse and First Falls.
[93] In the summer of 1988, in early August, as can be seen
from a letter from the appellant Harquail to the President of
Lavalin Hydro Inc. dated August 18, 1988, the representatives of
Hall River and Lavalin Hydro Inc. had a most productive meeting
concerning the project to develop Hall River’s
hydro-electric resources. The meeting resulted in a
confidentiality agreement between Hall River and Lavalin Hydro
Inc.
[94] In July 1988, Hall River received a draft directive from
the Ministère de l'Environnement of Québec
concerning the hydro-electric development of First Falls on the
Rivière Ste-Marguerite, and the Ministère invited
the appellant Harquail to submit comments on the draft directive
upon the conclusion of a consultation with interested government
agencies and departments.
[95] Following those consultations, an amended preliminary
directive was sent to Hall River in October 1988, before the
environmental impact assessment procedure was formally initiated.
Hall River then approached the Government of Québec, at
the cabinet level, seeking to be exempted from conducting an
environmental impact assessment.
[96] Lastly, in the fall of 1988, the appellant Girard, on
behalf of Hall River, met with representatives of
Hydroméga to discuss the possibility of developing the
river’s hydro-electric potential as a joint venture with
that company. At that time, Hydroméga’s
representatives expressed their interest in acquiring the shares
of Arnaud Properties. As mentioned above, those discussions led
to the sale of all the shares of Arnaud Properties to
Hydroméga in February 1989.
[97] At the same time as Hall River’s discussions with
Hydroméga’s representatives in the latter months of
1988, the appellant Harquail was pursuing his discussions with
Hydro-Québec to obtain an acceptable price for the sale of
energy by Hall River. Following those discussions, a
vice-president of Hydro-Québec sent the appellant Harquail
a directive dated November 1988 concerning the terms and
conditions for the purchase of electricity from independent
producers.
[98] What conclusion must be drawn from this examination of
the principal activities and initiatives of the managers of
Arnaud Properties and Hall River?
[99] First, it seems clear from the case law that the fact
that there was no income in a particular year or over a longer
period is not a basis for concluding that a person or a
corporation was not carrying on a business. Second, it is clear
from the numerous efforts and initiatives undertaken by the
managers of the two companies, in particular during 1987 and
1988, that the companies were not inactive during the 24 months
in question and were not simply holding annual meetings and
producing the reports needed to avoid dissolution.
[100] The situation of the two companies in question in this
case seems to me to be different from the situation in
Bancroft (cited by the respondent) in which, as a result
of difficulties the taxpayer had in obtaining additional
financing, he had to abandon the plan for the business he had
intended to carry on. In the present case, there was no
abandonment of the project involving the development of the
hydro-electric ressources in question.
[101] The instant case seems to me to have more in common with
the facts in M.P. Drilling, supra, in which
the Federal Court of Appeal concluded that there was a business.
However, I believe that the situation of the companies in the
case at bar during the 24 months immediately preceding February
24, 1989 did not involve activities relating to the carrying on
of a business at a stage as advanced as in M.P. Drilling.
On this point, I would again quote the following passage from the
judgment in M.P. Drilling, supra:
In my view this argument does not withstand scrutiny in that
it ignores the fact that the business structure per se
came into existence in late September when the Respondent
commenced its business operations by continuing the marketing
negotiations, supply negotiations and technical studies through
its consultants until June of 1964 when it opened its own office
and engaged the services of its first employees, utilizing for
such purposes funds advanced by its principal, Mr. Bawden, or
other companies controlled by him.
[102] The facts mentioned in the passage quoted above contrast
with the facts in the instant case. Here, the managers of the two
companies in question had not succeeded in making satisfactory
arrangements with Hydro-Québec in respect of the sale
price of energy. In fact, Hydroméga was unable to reach an
agreement concerning the sale price of energy until a year or two
later, after it had acquired the shares of Arnaud Properties.
According to the evidence, the directors of Hall River considered
the negotiation of an adequate price for the sale of energy to be
a sine qua non if the project being planned by the
managers of Arnaud Properties and Hall River in 1987 and 1988
were to be profitable. Without an agreement as to the sale price
for energy, Hall River did not intend to proceed with the plan to
develop the hydraulic resources it owned at First Falls on the
Rivière Ste-Marguerite. That is why, despite the
reservations expressed by the appellant Harquail, the managers of
the two companies decided to sell all the shares they owned in
the capital stock of Arnaud Properties.
[103] I therefore conclude that the evidence does not
establish that Arnaud Properties was still operating the business
it had carried on from 1973 to 1975, inclusive, during the 24
months immediately preceding February 24, 1989. For example, it
was not shown that the company had sold any lots throughout the
24 months immediately preceding the sale of the shares of its
capital stock on February 24, 1989. There is no evidence either
that Arnaud Properties would have embarked on a new business
during the 24 months in question. Nor was it established that
Hall River had started to carry on a business consisting of the
sale of electrical energy. Hall River had taken quite a number of
steps preparatory to exploiting the river’s hydro-electric
potential at First Falls, but it had not actually started to
carry on a business of that nature. As a matter of fact, it is
clear from the evidence that the carrying on by Hall River of a
business involving the sale of energy would never have commenced
if no agreement could be reached with Hydro-Québec on an
acceptable price for the sale of energy.
[104] The shares of Arnaud Properties were therefore not
qualified small business corporation shares within the meaning of
subsection 110.6(1) of the Act.
[105] For these reasons, the appeals from the assessments for
the taxation years listed in paragraph [1] of these reasons are
dismissed, with costs.
Signed at Ottawa, Canada, this 27th day of October 1999.
"Alban Garon"
A.C.J.T.C.C.
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