Cattanach, J:—This is an appeal by the plaintiff from an assessment to income tax made by the Minister of National Revenue for the plaintiff’s 1976 taxation year.
That assessment arose from the gain on the sale of a parcel of land of approximately 123 acres in 1976 for $980,600 by a syndicate in which the plaintiff was a member holding a 12.5% interest. The property had been purchased by the syndicate in 1968 for the sum of $184,500. Thus the gross gain was $796,100. While that was the gross, the net gain was $684,450, the difference of $111,650 being made up of three items, (1) interest expenses until December 31,1971 and carrying charges until the date of sale, $29,261,
(2) interest expenses from January 1, 1972 until the date of sale, $30,270, and (3) selling expenses, $52,119.
There is no dispute between the parties as to the foregoing sums.
Thus, the net income to the syndicate was $684,450 and accordingly the net income to the plaintiff was $85,556.25 as its share of the net income to the syndicate on the sale of the land in 1976.
The Minister, in assessing the plaintiff as he did, included that amount in the plaintiff’s taxable income as being income from its business as such or within the extended meaning of the word “business” as defined in section 248 of the Income Tax Act (identical with the definition in former section 139) to include “an adventure or concern in the nature of trade” so as to fall within section 3, paragraph (a), and so taxable in either event.
In contradiction the contention of the plaintiff is that in joining the syndicate it did so to participate in the development of the land as an industrial park and to realize rental income therefrom.
Simply put the rival contentions are, by the plaintiff, that the land is a capital asset and, on behalf of Her Majesty, that the land is stock in trade or inventory.
Thus the matter has all the attributes of what has become known colloquially as a “trading case”.
As the pleadings initially read there was a further issue predicated upon the resolution of the first issue as described above.
Should the land be found to be a capital asset then the gain on its sale would be a capital gain and by virtue of the introduction of income tax on capital gains in 1971, that gain would be taxable as such.
There was a dispute between the parties in the pleadings as initially drafted as to the amount of the capital gain (if so found to be) subject to tax.
The property was owned prior to December 31,1971 known as “valuation day”. To avoid the iniquity of a vendor of property being subjected to tax on the amount of capital gain that accrued on property prior to valuation day and disposed of after that day, provisions of a transitory nature were made in the Statute. To accomplish this the Statute provides that the capital gain Shall be computed upon the basis of the fair market value as at December 31, 1971 and subject to statutory adjustments. Thus the amount of the capital gain would be computed on the difference between the fair market value as at December 31, 1971 and the sale price on the sale subsequent to that date and not upon the difference between the purchase price prior to December 31, 1971 and the sale price subsequent to that date subject to some other statutory adjustments.
Clearly the advantage to the taxpayer is to establish the highest possible figure to be the fair market value as at December 31,1971 thus resulting in a lesser capital gain and consequent lesser income tax. Conversely it is to the advantage of the tax collector to establish the lowest possible figure to be the fair market value on December 31, 1971 thus resulting in a greater capital gain and consequent greater income tax.
Illustrative thereof in the pleadings as they initially read, the plaintiff alleged that the taxable capital gain to it, if it were found to be a capital gain, would be $10,144.44 whereas it is alleged by the defendant in Her statement of defence in answer to this allegation by the plaintiff, that the capital gain to the plaintiff would have been $60,526.38. The difference between a capital gain of $10,144.44 as alleged by the plaintiff and the gain of $60,526.38 as alleged by the defendant is accounted for by the different fair market values assumed by the contending parties to have prevailed at December 31, 1971 which fair market value would be required to be proven in a similar manner as in an expropriation matter.
However this dispute would not arise if it were found that the gain realized by the plaintiff in the amount of $85,556.25 (or thereabouts) as its share from participation in the syndicate was from its business as such or from an adventure or concern in the nature of trade as contended by the defendant.
That appears to be the basis of the undated notice of assessment indicated as having been mailed to the plaintiff on June 26,1978, possibly accompanied by an explanation of the departures made from the plaintiff’s computation in its income tax return for the taxation year in question as supplemented by many mathematical exercises not done in the departmental material that are confirmatory of this being the basis of the assessment. Further it is accepted to be such by the plaintiff and is, of course, disputed by it.
Therefore whether the question of the amount of the capital gain to be taxed will arise is dependant upon it first being determined that the amount which the Minister added to the plaintiff’s income was not income from the plaintiff’s business per se or within the extended definition of that word.
An appeal is an appeal from the assessment made by the Minister. That assessment was that the amount of $85,556.25 was added to the plaintiff’s taxable income by the Minister as income from its business.
Accordingly when verbal motion was made at trial to amend the pleadings by deleting the references therein to a possible issue as to the amount of a possible taxable capital gain I readily acceded thereto for the reason indicated and, in my view, it was proper for counsel to have so moved.
The obvious relief to be sought, and as the prayer for relief was amended to seek in the event that the amount assessed as income by the Minister is found to be a capital gain, would be the disposition of the appeal contemplated in section 177 of the Act, that is, by referring the assessment back to the Minister for reconsideration and reassessment on the basis that the gain in question was a capital gain.
The issue on the assessment as made is whether the amount added to the plaintiff’s taxable income was income from a business or was it a capital gain. If it is income from a business that may conclude the matter. The assessment is then correctly made. If it is determined that the amount included by the Minister in the plaintiff’s income was a capital gain then the proper course would be to allow the appeal and refer the matter back to the Minister for reassessment on that basis which the Minister had not done previously and accordingly no such amount is under appeal.
These are the reasons for which I agreed with the propriety of the motion made and for which it was granted.
Thus the sole issue to be now resolved is whether the amount added to the plaintiff’s taxable income was income from its business and may be taxed as such or was it a capital gain. If the latter should be found to be the case then the obligation is on the Minister to assess the amount of the gain so taxable as is reflected in the relief sought in the amended pleadings.
There has been no dispute between the parties as to the basic facts giving rise to the assessment by the Minister and this appeal therefrom. The dispute is as to the proper inferences to be drawn from those facts.
The plaintiff is a joint stock company incorporated pursuant to the laws of the Province of Ontario and came into being as a result of amalgamation with two other companies, North Bay Drive-In Theatre Limited and Dufferin Drive-In Theatre Limited. The objects of the resultant amalgamated company are as wide as to encompass any business whatsoever with respect to dealing in any property real, and personal, moveable and immoveable and assets generally.
Abraham Isaac Rosenberg, is the president of and major shareholder in the company. A joint stock company being an artificial person, can only express its intentions through natural persons, that is to say its officer and board of directors. There is no question whatsoever that Mr Rosenberg was the dominant officer of the plaintiff company and that the interests and intentions of the company were identical with those of Mr Rosenberg.
It was contended on behalf of the Minister that the gain realized by the plaintiff was income from its business.
In Anderson Logging Co v The King, [1925] S.C.R. 45; [1917-27] CTC 198; 52 DTC 1209, Duff, J (as he then was) said:
The sole raison d’etre of a public company is to have a business and to carry it on. If the transaction in question belongs to a class of profit-making operations contemplated by the memorandum of association, prima facie, at all events, the profit derived from the business of the company.
The transaction here in question falls within the objects and purposes for which the plaintiff company was incorporated.
However what Duff, J said in the quoted passage was “‘prima facie, at all events” the profit from a transaction within the objects of incorporation is a profit from the business of the company.
But this is a presumption and as such may be rebutted. The question to be determined is in what business did the company actually engage.
Locke, J speaking for the Supreme Court in Sutton Lumber and Trading Co Ltd v MNR, [1953] 2 S.C.R. 77; [1953] CTC 237; 53 DTC 1158, said:
The question to be decided is not as to what business or trade the company might have carried on under its memorandum, but rather what was in truth the business it did engage in. To determine this, it is necessary to examine the facts with care.
Thus the fact that a transaction falls within the objects which a company is authorized by its incorporating instruments to carry on is not conclusive of the business carried on by the company but rather the business of a company is that in which it engaged in in actuality and this is to be determined from the facts. In the absence of contrary facts the presumption implicit in the remarks of Duff, CJ would prevail.
Mr Rosenberg had been active in many aspects of real property and related matters for many years. I formed the impression that these activities were the source of his livelihood and I was provided with a history of his conduct in this field over a period of twenty-eight years, that is from 1944 to 1972 (the taxation year in question). Evidence was also adduced as to subsequent transactions in which Mr Rosenberg engaged through corporate entities of which he was the controlling officer and shareholder.
In 1944 Mr Rosenberg bought vacant land in Kitchener, Ontario (which I believe to have been his home base) upon which he built an office building. This property was sold in 1972 some 28 years after its acquisition at a gain. The building had become run down over the years and was losing money. This might well have been through the instrumentality of a corporate entity (other than the plaintiff) which Mr Rosenberg controlled.
In 1948 Mr Rosenberg acquired a building at 10 Scott Street in Kitchener. It is my recollection of the evidence that Mr Rosenberg carried on an auto parts business at that site. The auto parts business was discontinued, the building was converted into a warehouse and was sold in 1973 at a gain.
In 1955 Mr Rosenberg, in partnership, bought a vacant building at 255 Argyle Ave in Ottawa, Ontario. I believe that building is still owned by him, through an entity known as Existing Enterprises Ltd and has been occupied by tenants.
In 1959 Mr Rosenberg, through a corporate entity, bought property in Guelph, Ontario on which a shopping centre was constructed and operated. Mr Rosenberg bought out the other shareholder in the company. It is my understanding that this property had first been used as a drive-in theatre (in conjunction with Mr Campbell) which was closed down. The property was then transferred to Primary Developments Limited and operated as a shopping centre by that corporation of which Mr Rosenberg was the controller.
In 1960 the first mention is made of the plaintiff herein or perhaps more accurately one of the progenitors of the plaintiff herein which resulted from amalgamation. In any event a corporation featuring the words “Kit-Win” in its corporate name bought two buildings in Windsor, Ontario in 1960. One was an office building built in 1954 and was operated as such by the plaintiff. It was next to a United Church which wished to build a senior citizens’ home. This was in 1977. The building had become run down and naturally the plaintiff, through Mr Rosenberg, was amenable to the solicitations from the United Church. This building was sold. The second building is two storeys. The ground floor was and still is occupied by Woolworth’s retail store and the second floor by offices. This property is still owned by the plaintiff.
In 1961 Mr Rosenberg personally bought a parcel of land on Belmont Street in Kitchener, Ontario. He planned to build town houses. However he abandoned that project because of the proximity of the land to railroad tracks, zoning and other difficulties. He contemplated turning it to use for factories, or a small shopping centre but there was no interest exhibited in space in such projects. He therefore sold the land and realized a gain.
In 1965 he bought five acres of land in Kitchener “to be developed”; by which expansion I understood that buildings would be erected thereon to suit the needs of prospective tenants. The land was subdivided. One building was built to the specifications of a tenant and leased to that tenant with an option to buy. There were two other buildings constructed and leased.
Mr Rosenberg, no doubt through a corporate entity, bought an apartment building at 807 Frederick Street in Kitchener, Ontario which was sold some ten years later.
Again in 1970 Mr Rosenberg through the instrumentality of Primary Developments Ltd became involved in land assembly in the downtown core of Kitchener, Ontario. This was a most ambitious project, far beyond the resources available to Mr Rosenberg and accordingly the land assembled was sold to the actual developer possessed of abundant resources. The result was Kitchener Square, by which the downtown core was revamped and renewed. It is now described as a showplace.
In 1973 Mr Rosenberg attended an auction sale of a vacant industrial building in North Bay, Ontario. He concluded that the building was in fair condition, could be acquired at a low cost, and could be leased. He joined with a rival bidder and together they bought the building. Mr Rosenberg sold his interest to his co-bidder forthwith. It was a good deal for him.
Mr Rosenberg’s business activities did not come to an abrupt end in 1972.
In 1976 he acquired premises in Kitchener, Ontario which were leased to a dealer in well known and widely advertised automobile tires.
In 1977 he acquired still further premises in Kitchener which are rented to an automobile dealership.
These acquisitions were made through the instrumentality of Existing Enterprises Limited.
In 1978 he acquired premises in Waterloo, Ontario, this time through Primary Developments Limited of which he is the sole beneficial shareholder and is the controlling force, which premises are also leased to an automobile dealership.
In 1979 Mr Rosenberg acquired still further premises, again by Existing Enterprises Limited, for use as the site of a business of manufacturing miniwarehouses for which Mr Rosenberg foresaw a demand.
This history was made available to me on behalf of the plaintiff as illustrative of the circumstance that Mr Rosenberg carries on the business of a landlord and on behalf of the Minister that the common theme in Mr Rosenberg’s real estate transactions was that properties were purchased with minimal prior investigation and planning which was done after the purchase. If the property could be utilized to generate rental income well and good but if not and it was sold, then the suggestion was that the latter possibility was present to his mind at the time of acquisition.
It seems to be that the history so recited is susceptible of either of the contentions so advanced.
In my view the test for resolving the distinction between profits that are Subject to income tax as income from a trade and those which are not was best stated in Californian Copper Syndicate (Limited and Reduced) v Harris (1904), 5 TC 159 (and still remains the best expression of that test) by the Lord Justice Clerk when he said at 166:
It is quite a well settled principle in dealing with questions of assessment of income tax, that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit in the sense of Schedule D of the Income Tax Act of 1842 assessable to Income Tax. But, it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable, where what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out of a business. The simplest case is that of a person or association of persons buying and selling lands or securities speculatively, in order to make gain, dealing in such investments as a business, and thereby seeking to make profits. There are many companies which in their very inception are formed for such a purpose, and in these cases it is not doubtful that, where they make a gain by a realisation, the gain they make is liable to be assessed for Income Tax.
What is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts; the question to be determined being—Is the sum of gain that has been made a mere enhancement of value by realising a security, or is it a gain made in an operation of business in carrying out a scheme for profit-making?
I cannot conclusively conclude from the history of Mr Rosenberg’s numerous transactions in real property that he is a trader therein, speculative or otherwise and even if it were possible to so conclude such a conclusion would not preclude a trader from acquiring a capital asset and holding that asset as such. As the Lord Justice Clerk pointed out each transaction must be considered according to its particular facts.
The transaction which gave rise to the disputed assessment herein was participation by the plaintiff in the syndicate (which is identified as the Trafalgar syndicate) which realized a gain on the sale of real estate purchased by it and it is the facts of this transaction upon which the taxability of the gain realized must be considered and determined.
There is no question whatsoever and it has been generally accepted that the initiator and promoter of, and motivating force behind the syndicate, its formation and its concept, was Gerald Alfred Campbell.
Mr Rosenberg testified that when he was approached by Mr Campbell to participate in the syndicate it was represented to him by Mr Campbell that the land on which he held an option to purchase was available for a reasonable purchase price, that it was being operated as a farm by the owner but was zoned as industrial, that it was readily accessible to Highway 401, within 15 miles from the boundaries of Metropolitan Toronto and less from the Toronto International Airport, that there was ready access to property by major roads and from the property to a railway line and siding capable of serving the property but that there was no access to municipal services. This lack would restrict immediate prospective users to those requiring large storage areas. Mr Campbell foresaw and represented to Mr Rosenberg that the site was ideal for development as an industrial park some ten years hence.
This was not the first business association that Mr Rosenberg had had with Mr Campbell.
From 1949 to 1955 Mr Campbell was engaged in the business of building and operating drive-in motion pictures theatres and in that space of time built twenty-five such theatres.
Mr Rosenberg was associated with Mr Campbel in the first five theatres built. Each of these five theatres was built by a separately incorporated company. It was Mr Campbell’s practice to search out desirable locations which he acquired and constructed theatres thereon. Some of these theatres he leased to exhibitors and others he operated himself. For those theatres leased Mr Campbell obtained a management fee. In some instances the theatres were constructed on the instructions of the lessee.
Mr Campbell was possessed of permits from the Province of Ontario to build such theatres.
In the course of his attempts to construct a drive-in theatre in Kitchener on a site selected by him Mr Campbell encountered difficulties with the municipal authorities. He therefore sought and obtained the advice and assistance of Mr Rosenberg to resolve these difficulties. He did so because of Mr Rosenberg’s experience and reputation in the area. The difficulties were resolved.
It was from this initial association that a mutual respect developed between Mr Campbell and Mr Rosenberg which led to Mr Rosenberg’s participation with Mr Campbell in the first five theatres built by Mr Campbell and ultimately to Mr Rosenberg’s participation in the syndicate transaction which gives rise to this appeal.
It was Mr Campbell’s method to dispose of the theatre first built and operating successfully, to supply capital for the construction of further theatres. In the first year he built two theatres, then five more, then eight more, until he had built twenty-five.
Of the five theatres in which he was associated with Mr. Rosenberg, four were leased to the Odeon distribution chain. Two were sold to Odeon before 1960 and the other two were sold to Odeon in 1975. The operation of the remaining theatre, located in Guelph, was abandoned. Mr Rosenberg acquired the property from Mr Campbell which he transferred to Primary Developments Limited and on which a shopping centre was constructed and operated. Prior mention has been made of this transaction.
It will be recalled that the plaintiff resulted from an amalgamation with North Bay Drive-In Theatre Limited and Dufferin Theatre Limited, the businesses of which two companies were sold to Odeon in 1960. I would assume that the proceeds of these sales became liquid assets in the hands of the plaintiff and as such available for further use. My recollection of Mr Rosenberg’s testimony was to the effect that funds were available in the plaintiff and that is why the plaintiff became the participant in the Trafalgar syndicate.
Mr Campbell stopped building drive-in theatres in 1956 after which he built houses on speculation under the National Housing programme. This he did with a number of partners.
In 1962 he devoted his energies to industrial building as a contractor.
He then became a licensed real estate broker and acted as such on behalf of clients in 1967 and 1968.
It was in this capacity that he became aware of the property which was purchased by the Trafalgar syndicate. As previously recited Mr Campbell considered this to be a most desirable property because of its location, zoning and above all because it was inexpensive. The price was $1,500 an acre for the total price of $184,500.
Mr Campbell promptly obtained an option to buy the property and forthwith set about setting up a syndicate to become the purchaser.
Mr Campbell as a broker had been successful in buying about eight properties on behalf of clients but had not, in those years, 1967 to 1968, acted on his own behalf.
In this instance he did. The option was taken by Pro Realty Limited of which Mr Campbell was the sole shareholder.
The participants in the syndicate and member signatories to the syndicate agreement were seven in number and were all persons with whom Mr Campbell had previous dealings, the majority in the theatre business (but not all) and all of which persons had money available and were not adverse to turning a buck.
Pro Realty Limited, which held the option, was a party to the syndicate agreement in which provision was made for this company to be the manager of the syndicate and to be remunerated as such, that is to be reimbursed for expenses incurred and commissions on transactions. The agreement makes specific provision for a commission on sales but no specific provision is made for a commission on fees upon the negotiation of leases.
All participants in the syndicate were joint stock companies and I expect, that as was the case with Mr Rosenberg, the other companies were under the sole control of individuals with whom Mr Campbell had previous dealings. Astral Construction Company Limited, of which Mr Campbell was the controlling shareholder, was a member.
The agreement of sale negotiated with the vendors was advantageous to the syndicate.
As previously indicated, the purchase price was $1,500 an acre for a total of $184,500 adjusted upwards to $184,696.65 as the result of a survey of the acreage. The down payment was $80,000 with a mortgage back to the vendor for the difference of $104,696.65 with interest at the rate of 7% per annum payable quarterly. There were no instalments of principal payable for the first five years.
It is my understanding that the vendor who had operated the land as a farm was permitted to remain on the farm to continue farming operations and to occupy the dwelling and farm buildings in excess of one year which period was specifically mentioned in the agreement for sale, the rent being the payment of the realty taxes.
The sale was closed on September 18, 1968.
The unit price in the syndicate was $10,000. The down payment was $80,000. Accordingly there were eight units taken up. One of the seven signators to the syndicate agreement may have taken two units or Pro Realty Limited may also have become a member as was contemplated as a possibility in the agreement for sale.
I take it that no minicipal realty taxes were paid so long as the vendor remained on the farm and that the only further expenditure the unit holders would be responsible for would be their respective share of the annual interest over the first five years which I would roughly compute to be about $900 and any management expenses incurred by Mr Campbell, or more accurately Pro Realty Limited, which were negligible.
Mr Campbell represented to the prospective participants in the syndicate and Mr Rosenberg so confirmed the representations made to him that the land had great potential as an industrial park some ten years in the future.
He testified that he envisioned the building of an industrial park, that is to say that buildings would be erected or subsequently changed to suit the needs of tenants, most likely by Astral Construction Company Limited owned by Mr Campbell, and income would be generated by the rents therefrom. Mr Rosenberg made no mention of any other possibility.
Mr Rosenberg left the management of the project to Mr Campbell in whom he had absolute confidence. Other than to put up $10,000 initially and to pay his annual assessments for interest and expenses, such as legal fees, that was the extent of his participation in the project. He did not participate in management or negotiations other than to ratify the major decision to sell. Mr Rosenberg was content to leave that to Mr Campbell and I believe the other participants did likewise but there was no direct evidence to that effect.
As I said at the outset the intention of the plaintiff was that of Mr Rosenberg and I would now add that the intention of Mr Rosenberg was that of Mr Campbell.
Mr Campbell was the dominant member and the director of the syndicate’s activities. Mr Rosenberg gave a free hand to Mr Campbell to handle the business of the syndicate as he thought best. Thus Mr Rosenberg was the passive or subservient member to Mr Campbell and it cannot be said, therefore, that his position differs from that of Mr Campbell. If the transaction were to be held to be a business transaction by Mr Campbell it would also be a business transaction by the plaintiff and the income therefrom would be taxable and the converse would be equally so.
Mr Campbell was the innovator of the purchase. It was his concept. It was he who decided to whom invitations should be extended to participate. I do not think that Mr Rosenberg can be heard to say that he supplied funds to purchase an interest in the property but that his purpose differed from that of the initiator of the project with whom he had joined. I have no direct evidence as to the other participants but I assume they did likewise.
Mr Campbell accepted the responsibility for the conduct of the whole project from its inception to its demise. It was his brain child. He was the dominant participant and the others were passive. No doubt Mr Campbell may have had more to gain than the others. If the land purchased should have matured into an industrial park as was envisioned then Pro Realty Limited (owned by Mr Campbell) would receive management fees and like commissions and Astral Construction Company Limited would also enjoy increased construction business. That is as it should be. He was the father of the project and it follows that a greater reward should follow upon his initiative. Mr Rosenberg accepted this as proper and it would seem that the other participants also did.
Mr Campbell discharged the responsibility that he accepted on behalf of the other participants by keeping them constantly informed by written reports as to the progress and status of the project.
It is for these reasons that I have said that the intention of the plaintiff coincides with that of Mr Campbell.
If it was the exclusive intention of Mr Campbell (and so that of Mr Rosenberg and the plaintiff) at the time of the acquisition of the land to build and operate an industrial park thereon profit from the voluntary sale of the land to the Ontario Hydro Commission (or for that matter if the land had been expropriated as was a possibility) would not be profit from a business or an adventure in the nature of trade and so not taxable as income. This does not dispose of the possible question as to a tax on a capital gain.
If this was not plaintiff’s exclusive intention at the time of acquisition there can be no doubt that the acquisition of the land had for its purpose, or one of its possible purpose, the subsequent disposition of the land in whole or in part at a profit and in that event the resultant profits are therefore taxable.
The plaintiff contended that there were no allegations pleaded in the statement of defence that cast an onus on the plaintiff which it is obliged to discharge.
Lord Cairns has said in Partington v Attorney General (1869), LR 4 HL 100 the principle in the interpretation a taxing statute is that if the person sought to be taxed falls within the letter of the law he must be taxed but on the other hand, the Crown seeking to recover the tax must bring the subject within the letter of the law otherwise the subject goes free.
Thus the obligation is on the Crown to plead those facts which bring the taxpayer sought to be made liable precisely within the Statute.
That having been done Duff, J has said in Anderson Logging Company v The King (supra) that the onus is on the taxpayer to show:
(1) that the assessment “ought not to have been made” by establishing facts that
(a) show that the assessment was not authorized by statute or
(b) create a state of doubt
in either event it follows that the liability of the taxpayer must be negatived.
Thus the obligation is on the Minister to plead facts which bring the assessment within the four corners of the taxing provision. The Minister then rests on the assessment.
The onus of proving the assessment to be erroneous in fact is on the taxpayer (see Thorson, P in MNR v Simpsons Ltd, [1953] Ex CR 93; [1953] CTC 203; 53 DTC 1127).
In Johnston v MNR, [1948] S.C.R. 486; [1948] CTC 195; 3 DTC 1182 Rand, J took the view that the proceeding was “an appeal from taxation”. Since taxation was on the basis of “certain facts” and “certain provisions” of law the appellant taxpayer must be taken to be challenging either these facts or the application of the law.
He said at 489 [202, 1183]:
Notwithstanding that it is spoken of in section 63(2) as an action ready for trial or hearing, the proceeding is an appeal from the taxation; and since the taxation is on the basis of certain facts and certain provisions of law either those facts or the application of the law is challenged. Every such fact found or assumed by the assessor or the Minister must then be accepted as it was dealt with by these persons unless questioned by the appellant. If the taxpayer here intended to contest the fact that he supported his wife within the meaning of the Rules mentioned he should have raised that issue in his pleading, and the burden would have rested on him as on any appellant to show that the conclusion below was not warranted. For that purpose he might bring evidence before the Court notwithstanding that it had not been placed before the assessor or the Minister, but the onus was his to demolish the basic fact on which the taxation rested.
This opinion has been interpreted and relied upon as authority for the proposition that a taxpayer has the onus of proof with respect only to the findings or assumptions made by the Minister or his assessors on his behalf at the time that the assessment was made. The Minister’s assessment is based upon the assumptions made by him and the effective manner by which the taxpayer can establish error in the assessment made upon him is “to demolish the basic fact upon which’’ the assessment was made.
If he shows that the facts assessed by the Minister did not exist and even if they did exist those facts do not bring the taxpayer within the operation of the taxing provision relied upon then the assessment must fail.
Mr Justice Rand also made it clear at page 490 that there is a duty to have fully disclosed to the taxpayer the precise findings of fact and rulings of law which have given rise to the controversy. That is one of the few remaining rights accorded to the taxpayer in the legislation the preponderance of which imposes obligations.
In MNR v Pillsbury Holdings Limited, [1965] 1 Ex CR 678; [1964] CTC 294; 64 DTC 5184, in which the Minister specifically set forth the assumptions on which the assessments appealed from were based, this was said at 686 [302, 5188]:
The relevance of this pleading appears from the decision of the Supreme Court of Canada in Johnston v MNR, per Rand J, delivering the judgment of the majority, at p 489:
Every such fact found or assumed by the assessor or the Minister must then be accepted as it was dealt with by these persons unless questioned by the appellant.
This is an acceptance of the principle laid down by Rand, J in the Johnston case (supra) that the onus is upon the taxpayer only with respect to the findings or assumptions made by the Minister or his assessors on his behalf.
The position taken by the Minister was that the waiver of interest payable upon two loans by the borrower who happens to be the majority shareholder of the two lenders in the conferring of a benefit or advantage within paragraph 8(1)(c) of the Income Tax Act, 1952 RSC, c 148. The view was expressed by the Court on page 687 [302, 5188]:
... the mere fact of waiver, even if legally effective to cancel the debt, is not sufficient of itself to bring the transaction within paragraph (c). To come within that paragraph, it must be an arrangement or device whereby a corporation confers a benefit or advantage on a shareholder qua shareholder. The Minister does not allege that he assumed, in making the assessments, that the waiver was an arrangement or device adopted by the corporation to confer a benefit or advantage on the respondent as a shareholder. There was no onus on the respondent to disprove that fact, which is essential to its being taxable, unless the Minister assumed that fact when assessing. It may be that the Minister’s appeal should be dismissed on that ground.
However the appeals were dismissed on other grounds.
There were two rounds of waivers. In the second they were expressed to be settlements negotiated by a borrower with the lender by which a large amount of principal was made in consideration of interest being cancelled. This was a quite ordinary type of transaction between a debtor and creditor and there was no allegation by the Minister that it was a mere subterfuge whereby the lender corporation in conferring a benefit on the borrower qua shareholder. In the absence of any issue having been made by the Minister on that question of fact it could not be so found.
With respect to the first round of waivers the transactions were not attacked either in the notice of appeal or at trial as being a device or arrangement for conferring a benefit on the respondent qua shareholder and in the absence of such attack being made the assessment could not stand.
Bluntly put the Minister failed to make a critical assumption of fact or establish a fact essential to bring the transactions within the operation of the taxing section of the Act.
The quotation from page 686 [302, 5188] continued to outline the manner in which a taxpayer could meet the Minister’s assumptions of fact pleaded by him as follows:
The respondent could have met the Minister’s pleading that, in assessing the respondent, he assumed the facts set out in paragraph 6 of the Notice of Appeal by:
(a) challenging the Minister’s allegation that he did assume those facts,
(b) assuming the onus of showing that one or more of the assumptions was wrong, or
(c) contending that, even if the assumptions were justified, they do not themselves support the assessment.
(The Minister could, of course, as an alternative to relying on the facts he found or assumed in assessing the respondent, have alleged by his Notice of Appeal further or other facts that would support or help in supporting the assessment. If he had alleged such further or other facts, the onus would presumably have been on him to establish them. In any event the Minister did not choose such alternative in this case and relied on the facts that he had assumed at the time of the assessment.)
The respondent did not challenge that the assumptions made by the Minister were made by him nor that those assumptions were wrong. What the respondent did was to put evidence before the Court to show exactly what the facts were and contended that these facts did not support the assessments.
A taxpayer is entitled to know the findings and assumptions upon which the Minister, or his assessors based the assessment when it was made.
When assumptions are pleaded or otherwise determined as in Tobias v The Queen, [1978] CTC 113; 78 DTC 6028, then the onus is on the taxpayer as Rand, J has said “to demolish” the exact assumptions made by the Minister at the time of assessment and no more.
If the Minister has failed to allege as a fact an essential ingredient to the validity of the assessment under the applicable statutory provision there is no onus on the taxpayer to disprove that fact for the assumptions which were made do not of themselves support the assessment.
This was the contention made by counsel for the plaintiff. He contended that, even if the assumptions pleaded as having been relied upon by the Minister in assessing the plaintiff as he did were justified, they do not of themselves support the assessment.
In so contending the plaintiff invoked the language to that effect from Pillsbury Holdings Limited (supra) and he relied heavily upon the decision of Jackett, CJ in Hiwako Investments Limited v The Queen, [1978] CTC 378; 78 DTC 6281.
The issue there was whether a profit made by the appellant on the purchase and sale of a property consisting of some eight separate residential apartments was a profit from a business within the meaning of business as defined to include “an adventure or concern in the nature of trade”.
The question arose as to whether, on the pleadings, there was an onus on the taxpayer, that was not discharged, to establish that he was not motivated in making the purchase by an intention to use the property in an adventure or concern in the nature of trade.
Jackett, CJ said at 382 [6284]:
Such an onus would have to arise from the fact that the assessments were based on an assumption of facts that would support such a conclusion.
He referred in a footnote to MNR v Pillsbury Holdings Limited (supra).
The only relevant assumption of fact in this respect made by the Minister is paragraph 11(d) in Part A of the statement of defence which reads:
11.(d) the Plaintiff purchased the said Flemingdon Park on or about the 30th day of June, 1966, with the intention of re-selling the same at a profit.
Jacket, CJ said of this pleading:
Part A of the statement of defence, which is headed “Statement of Facts”, alleges that, in making the assessments, the Minister of National Revenue assumed inter alia that the appellant purchased the property in question “with the intention of reselling the same at a profit”. I I doubt whether such an assumption would be sufficient to support the assessments. An intention, at the time of purchase, to re-sell at a profit does not in my view, necessarily give the purchased a subsequent sale the character of “an adventure or concern in the nature of trade”. Such an intention accompanies the purchase of “growth” stocks in the course of the modern management of pension trust funds and, I should have thought, does not necessarily stamp such a purchase with a trading character. I do not see why there cannot, similarly, be such an intention in the course of managing a family trust without there being any character of trading involved.
With respect to Part B of the statement of defence the Chief Justice expressed reservations as to whether the allegations in Part A could be properly read in conjunction with Part B so as to constitute an alternative assumption.
He said:
However, it may be, although I doubt it, that it is at least arguable that the allegation in the statement of defence of the assumption of the Minister of National Revenue should be read with certain allegations in Part B of the Statement of Defence, which is entitled “STATUTORY PROVISIONS UPON WHICH DEFENDANT RELIES AND THE REASONS WHICH HE INTENDS TO SUBMIT”, viz;
13. The Deputy Attorney General of Canada states that the Plaintiff purchased the said Flemingdon Park property speculatively and for the purpose of trading and turning the same to account at a profit and the Plaintiff’s conduct amounted to the carrying on of a business in real property.
15. In the alternative the Deputy Attorney General of Canada states that if the Plaintiff purchased the said property with the intention of retaining it as investment property, the Plaintiff also had the alternative intention of selling and turning the same to account at a profit in the event that the primary intention did not prove profitable so that in selling the said property the Plaintiff realized its alternative intention of deriving profit from the said property and thus the said profit was properly included in the Plaintiff’s income as profit from a business within the meaning of paragraph 139(1)(e) of the Income Tax Act.
So read, it might be argued that the statement of defence alleges, in the alternative, that the assessments were based on the assumption
(a) that the appellant purchased the property in question “speculatively and for the purpose of trading and turning the same to account at the profit”, or (b) if the appellant purchased the property with the intention of retaining it as investment property, the appellant also had the alternative intention of selling and turning the same to account at a profit in the event that the primary intention did not prove profitable.
He then dealt with the allegations in Part B on the basis that they might be “assumptions” and said:
With reference to the alternative plea in the statement of defence, if it may be considered as an allegation of an “assumption”, I do not think that it can be taken as a plea that the Minister assumed in making the assessments, that a motivating reason for the purchase of the property was an expectation that it would be sold for a profit (in the event that it did not prove to be a satisfactory profit producing property) of such a nature as to stamp a subsequent sale as a trading transaction. In my view, an intention at the time of acquisition of an investment to sell it in the event that it does not prove profitable does not make the subsequent sale of the investment the completion of an “adventure or concern in the nature of trade”. Had the alleged assumption been that there was an expectation on the part of the purchaser, at the time of purchase, that, in the event that the investment did not prove to be profitable, it could be sold at a profit, and that such expectation was one of the factors that induced him to make the purchase, such assumption, if not disproved, might (I do not say that it would) support the assessments based on “trading” if not disproved. In my view, however, even on the most liberal interpretation of the statement of defence, it cannot be interpreted as alleging such an “assumption”.
In my view, therefore, there was no assumption that was not disproved by the evidence that would support the assessments.
In Part B in the present statement of defence being entitled “The Statutory Provisions on which the Minister relies and the reasons intended to be submitted” paragraphs 7 and 8 are to the identical effect as paragraphs 13 and 15 in the statement of defence in the Hiwako case which appear in the extract of the remarks of the Chief Justice quoted above.
There are minor differences in language to compensate for the different respective circumstances applicable but the allegations made in Part B of the present statement of defence are subject to like reservations as were expressed by Jackett, CJ.
The assumptions which are pleaded as having been made by the Minister as the basis of assessing the plaintiff as he did are much more extensive than and differ substantially from the assumption in the Hiwako case.
In the present pleadings they are set forth in paragraph 5 and run through subparagraphs (a) to (m).
The assumption made in paragraph 5(f) reads:
In making the assessment in respect of the 1976 taxation year of the plaintiff, the Minister of National Revenue acted, inter alia, upon the following assumptions:
(f) that the said syndicate was formed expressly for the purpose of the purchase of the said land and building and the realization of a profit on the sale of the said land and building at the earliest possible opportunity.
Paragraph 5(f) cannot be read in isolation.
In paragraph 5(a) the Minister alleges that he assumed all the facts admitted in the pleadings and they are many.
It is admitted that the Minister included the plaintiff’s gain as “regular business income”, and that the syndicate was promoted and managed by J A Campbell.
For reasons I have expressed the intention of the plaintiff is that of Mr Rosenberg and that of Mr Rosenberg is that of Mr Campbell.
The syndicate has the attributes of and is analogous to a partnership. The existence of a partnership implies the existence of a business. The business for which the syndicate was “formed” is assumed to have been “expressly” for the purchase and sale of the property in question at the earliest possible opportunity. Thus the business was this one isolated transaction for which the syndicate was formed. If this is so and that was the “exclusive” purpose of the syndicate in acquiring this particular property which follows from the use of the word “expressly” in the sense that there was no other purpose, then the profit is from its “business” within the usual meaning of that term.
If this were the “exclusive” purpose of the syndicate and the plaintiff has participated therein then the plaintiff’s gain in the sale of the property is taxable as income in the hands of the plaintiff.
However I am not satisfied that this was the exclusive purpose of the syndicate.
Mr Campbell entertained high hopes that the land might be developed into an industrial park because of its location in zoning proximity to Metropolitan Toronto, access to major highways, and air and rail transportation. He acknowledged that there was no access to municipal services which would limit the prospective users to those requiring large storage areas. That could be a stop-gap against the eventual development of an industrial park some years hence.
But all the land was inexpensive and entailed no outlay of significance to hold it for a considerable time.
In my view this project is closely parallel to the transaction in Regal Heights Limited v MNR, [1960] S.C.R. 902; [1960] CTC 384; 60 DTC 1270.
There the efforts were promotional. They were even more so here. There was no evidence in either the Regal Heights case or here that any prospective tenants exhibited any interest.
In each instance what may be called the primary aim was based upon pious hopes and as such was speculative. If that speculative venture failed in the property was a valuable property as was proven in each instance from the proceeds of the sales made. In such an instance the transaction would be stamped with the character of trade.
However as the Chief Justice has pointed out in the Hiwako case an intention to re-sell at the time of purchase does not necessarily give the purchase and subsequent sale the character of “an adventure or concern in the nature of trade”.
The leading case in Leeming v Jones, [1930] AC 415, when the appellant was a member of a syndicate which acquired an interest in a rubber estate with the view to resale at a profit. There was unanimity in all the courts up to the House of Lords and the emphasis was laid by each on the fact that the profit was by way of accretion to capital and was not a profit of a revenue or income nature, even though the appellant set out to make it.
Leeming v Jones (supra) is more paralleled to the Hiwako case than it is to the present appeal.
There the subject purchase and resale was an active profit producing property. Jackett, CJ said in the Hiwako case:
... it may be difficult to conceive of its having been acquired both in the sense of property to be held for the income arising therefrom and as a speculation in the sense of an undertaking or venture in the nature of trade.
In so remarking the Chief Justice anticipated the decision of the majority of the House of Lords in Simpsons v IRC, [1980] 2 All ER 778.
However the property purchased in this appeal differs from the eight separate residential apartments generating income rental purchased in the Hiwako case.
Here the property purchased was farm land and operated as such by the vendor. They syndicate had no intention of utilizing the property for farming purposes. The property was leased to the vendor on the vendor’s assumption of the realty taxes. The land produced no income other than sufficient discharge taxes—so neligible as to be disregarded.
In order for a purchase of property and subsequent sale thereof to be an adventure in the nature of trade the purchaser must have had present in his mind, at the time of acquisition, the possiblitiy of resale and that possibility must have been a motivating factor which induced the purchase to be made.
At this point my concern is whether this critical assumption has been pleaded as having been made by the Minister.
Paragraph 5(k) of the statement of defence reads:
(k) in the alternative, that if the said syndicate did intend to develop the said land for any purpose, it was always willing to sell the said land and building provided a reasonable profit would be realized on the said sale;
I see nothing reprehensible in the use of the phrase “in the alternative’’ as contemplated by Gibson, J in Brewster v The Queen, [1976] CTC 107; 76 DTC 6046. It is an attempt to bring the assessment into the extended definition of “business” to include an adventure in the nature of trade if the prior assumption that the transaction was business in the ordinary sense should fail and then to bring transaction within the principle of Regal Heights Limited v MNR (supra).
Paragraph 5(k) alleges that the plaintiff “was always willing to sell the land and building provided a reasonable profit could be realized”.
In my view a willingness held at all times to sell a property, whether a capital assesset or an investment, is not sufficient to make a subsequent sale a trading transaction. I should think it to be self-evident that the owners of a property would be willing to sell it if a reasonable profit could be realized. As I read this assumption it is no more than a statement that the plaintiff as the owner of a capital asset had the ever-present willingness to sell that asset if the price was right and that, in my view, does not stamp a transaction so consumated with the characteristics of trading.
As previously mentioned if it was the exclusive purpose of the syndicate at the time of acquisition of the property to utilize the land for an industrial park then the profit from the sale of the property would not be profit from a business or adventure in the nature of trade and so not taxable as income.
The assumption of the Minister recited in paragraph 5(k) of the statement of defence accepts the syndicate (and so the plaintiff) as being within the above concept as the basis of an alternate assumption.
However if, at that time of acquisition, it was not the exclusive purpose of the syndicate to use the property as an industrial park and the syndicate also had in mind the possible subsequent disposition of the property at a profit, at that time, then the profit realized from the sale would be income from an adventure in the nature of trade and taxable as such.
In my view the assumption made by the Minister in the language of paragraph 5(k) is not a sufficiently precise allegation of facts to bring the matter within the latter case.
Thus these critical facts that the syndicate had, at the time of acquisition, the intention of a possible disposition of the property at a profit and that possibility was a motivating factor which induced the purchase, are not alleged in paragraph 5(k) as being assumed by the Minister. That being so there was no onus upon the plaintiff to disprove assumptions not made by the Minister from which it follows that paragraph 5(k) is not an assumption of facts that would support the assessment.
It is for this reason that the appeal is allowed and the assessment is referred back to the Minister for reconsideration and reassessment on the basis that the gain in question was a capital gain. The plaintiff shall be entitled to its taxable costs.
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