Sharon Mills Developments Ltd. v. The Queen, 83 DTC 5420, [1983] CTC 384 (FCTD)

Strayer, J:—On June 24, 1981 the Minister of National Revenue issued a notice of reassessment of the plaintiff’s income tax for the 1976 taxation year. The plaintiff had reported a taxable capital gain in the amount of $431,513 with respect to the sale by it of the Markham Shopping Centre. The Minister’s reassessment treated the profits on the sale of the shopping centre as business income. It therefore assessed the business income in respect to this sale at $863.026 and fixed the additional federal tax owing at $376,743.46. The plaintiff appealed against this reassessment pursuant to section 172 of the Income Tax Act, its main contention being that the profit on the sale of the Markham Shopping Centre was a capital gain and not business income.

The salient facts are as follows. Mr Thomas N Shea entered the real estate business in 1953. In 1956 he incorporated the plaintiff company, Sharon Mills Developments Limited, in which he owns all of the issued shares. The company was first established as a vehicle for him to invest in a housing development. Thereafter until 1972 when the Markham Shopping Centre was purchased by the plaintiff, it was mainly used as a legal entity to hold real property — mainly building lots and houses — to facilitate the operations of Thos N Shea Ltd, Mr Shea’s real estate brokerage firm which will be discussed below. The plaintiff company also became the owner of premises used by various branches of the brokerage firm as offices. Since 1972 the plaintiff has not been engaged in buying or selling houses or land to assist the real estate firm although it has sold one or two office premises used by the firm where a change in premises was required.

The real estate firm, Thos N Shea Ltd was incorporated in 1959. Mr Shea has been the major, or sole, shareholder of this company since its incorporation. Over the years the company has engaged in sales of land for housing, agricultural lands, and houses. It has expanded very considerably and is now almost entirely engaged in the sale of residential premises. It did try to establish a commercial real estate business in 1969. This operation suffered losses and was terminated within a year or so of its commencement. Since that time the company has not handled commercial real estate with a few minor exceptions.

It appears that in the earlier years these two companies’ affairs were somewhat casually intermingled. In 1968, about the time that Mr Robert Davies joined the business, a clear separation was made between the two companies with the plaintiff company becoming the owner of property utilized by the brokerage company for offices. Proper leasing arrangements and accounting were established between the two companies. This was in part to reflect Mr Shea’s entitlement to the benefits of ownership of such property, and to thereby facilitate financial participation in the brokerage firm by Mr Davies and by Mr Robert Shea, Mr Thomas Shea’s brother.

On December 4, 1972 an agreement of purchase and sale was executed whereby the plaintiff purchased the Markham Shopping Centre for $1,000,000. The closing date was February 28, 1973. Subsequently a five per cent interest in the shopping centre was assigned by the plaintiff to Thos N Shea Investment Corporation Limited, which is an investment vehicle for funds to provide for the retirement of employees of Thos N Shea Ltd.

Sometime prior to the closing of this purchase by the plaintiff of the shopping centre, it received an unsigned form which would have, if completed, given an option to H B Management Limited to purchase the shopping centre. The consideration suggested in the form for this option was $150,000. The plaintiff did not respond to this proposal.

On July 18, 1973 The Wing Hang Corporation Limited signed an offer to purchase the shopping centre from the plaintiff for $1,300,000. Mr Davies, who was, apparently, a chief financial officer of both the brokerage company and the plaintiff company did examine this offer and considered the possibility of it being acceptable with changes required by the plaintiff. On July 25, 1973 Mr Shea signed “an offer-back” with a number of changes and proposing a sale price of $1,400,000. The plaintiff heard nothing further from the Wing Hang Corporation.

In the spring or early summer of 1975 at a luncheon meeting which included Mr Davies, Mr Bill Jackson of the brokerage firm, and Mr Thomas Shea, there was a discussion as to how funds might be obtained to incorporate a trust company, a subject which had been under discussion for some time. Mr Davies suggested to Mr Shea that the only way this could be done was to sell the shopping centre. This possibility was subsequently pursued and an agreement for sale was signed on August 26, 1975, selling the shopping centre for $2,100,000. This sale transaction was closed on November 4, 1975. The net cash proceeds were, directly and indirectly, invested in the Family Trust Corporation of which Mr Shea remains the. principal shareholder. The real estate brokerage business has been merged with the trust company which now carries on that business.

The plaintiff, of course, takes the position that it bought the shopping centre as a long-term investment and not with a view to resale at a profit. The resale occurred due to a change in circumstances and the profits which ensued should be treated as capital gains. The defendant takes the view that the plaintiff was in the business of speculation in real property and that any profit made on the resale of the shopping centre, being a result of such speculation, should be treated as business income.

I have come to the conclusion that the profit on the sale of the Markham Shopping Centre by the plaintiff should be treated as a capital gain. Both Mr Robert Davies and Mr Thomas Shea testified before me, and they were both quite emphatic, that the intent at the time of purchase of the shopping centre was that it should be held as a long term investment by the plaintiff. No evidence was produced by the defendant to contradict these statements. I found Mr Davies and Mr Shea to be credible witnesses and their respective recollections of the events were quite consistent. I might also add that Mr Davies, a chartered accountant, is no longer associated with the Shea companies.

Quite apart from this evidence of intent, the objective facts are quite consistent with the position taken by the plaintiff. The plaintiff carefully considered, before purchase, the potential return on the investment. It had good reason to think that the shopping centre had a strong potential as an investment, including the fact that it had four “triple A” tenants, these being a particularly attractive category of tenants. It felt that the operation of the shopping centre, and its profitability, could be improved through local ownership and management, the previous ownership being absentee. Moreover, the plaintiff was attracted by the prospect of using a substantial amount of the second floor space for offices for itself and for its associated companies. Suitable space in Markham was not readily available otherwise and the plaintiff was attracted by the possibility of designing and finishing office space of a high quality according to its own preferences.

I further find that the activities of the plaintiff subsequent to the purchase were equally consistent with the purchase being for investment purposes. After the purchase the plaintiff undertook extensive renovations particularly in the area to be used by it and its associated companies. During the period in which it owned the shopping centre it spent in the order of $190,000 on renovations, some of that being paid by Thos N Shea Ltd as a tenant.

The failure by the plaintiff to consider seriously the possibility of making a quick profit of $150,000, by giving an option to purchase the shopping centre to H B Management prior to the closing date of purchase, also reinforces the view that the plaintiff was not primarily concerned with resale for profit. More ambiguous is the fact that it seems to have given more extensive consideration to the offer to purchase from Wing Hang Corporation in July, 1973, less than 6 months after it had become owner of the shopping centre. In this case it actually went to the trouble of having an “offer-back” prepared, which was signed by Mr Shea. Mr Davies and Mr Shea both testified that this was done by Mr Shea very reluctantly and on the advice of Mr Davies who felt that if the shopping centre really could be sold for 1.4 million dollars this profit of $400,000 minus their expenditures in the meantime would be of such a magnitude that the possibility should not be ignored. They obviously felt that a price of $1.4 million was above market value. So apparently did the Wing Hang Corporation Limited as they did not agree to purchase at that price. The plaintiff did not pursue the matter or try to find an acceptable compromise price. The conduct of the plaintiff in this situation does not seem to be that of a company eager to take a quick profit through resale.

Counsel for the defendant sought to show, in cross-examination and in argument, that the purchase and resale of the shopping centre was part of a plan to obtain a large amount of cash through speculation in order to establish the trust company. It is true that the sale of the shopping centre did make possible the establishment of the trust company. However, in my view the evidence adequately indicates that this was not the original intention when the shopping centre was procured. It appears from the evidence of Mr Davies and Mr Shea, that at least since 1968 they had been discussing the idea of establishing some kind of financial institution, these discussions later involving various professional advisers and officials of the Ministry of Consumer and Commercial Relations of the province of Ontario. The idea evolved slowly. At first there were thought to be at least two possibilities, either a trust company or a savings and loan company. They eventually decided it should be a trust company because a trust company can carry on a real estate business. It became clear only gradually that it might be possible to obtain a charter for a new trust company but that to do so would require at least one million dollars in capital unencumbered. It is reasonably clear that as late as December, 1974 no decision had been taken as to how such capital might be obtained. It was the evidence of Mr Davies and Mr Thomas Shea that it was only at the luncheon meeting in the spring or early summer of 1975, as described above, that the solution was first suggested of selling the shopping centre to raise the necessary capital. I am therefore unable to see in the evidence that was put before me any facts from which I can reasonably draw the conclusion that the plaintiff company, or its principal shareholder, should be assumed to have bought the shopping centre with the clear intent of raising a million dollars through speculation in order to provide the necessary capital for the establishment of a trust company.

It is also part of the defence in this case that the plaintiff company knew when it bought the shopping centre that it could be resold easily at a good profit and that this was a major motivating factor in the purchase of the property. It is apparent that the plaintiff was a prudent buyer. Its officers sought advice from a shopping centre consultant and from engineers. It assessed carefully the nature of the tenants and the terms of the leases. It came to believe (and this was subsequently confirmed) that the assessment on the property was too high and that a reduction could be obtained. None of this, it seems to me, is necessarily evidence that the plaintiff intended from the outset to resell the shopping centre at a large profit at an early opportunity. It is quite consistent with an intention to purchase for the purposes of investment that the purchaser should have in mind the potential value of the property for resale purposes. That would, after all, be relevant to its value for mortgage purposes. Also, a wise investor would certainly not want to contemplate the possibility of a large capital loss should he some day decide to change investments or be forced to do so. See, in this connection, the decision of the Federal Court of Appeal in Hiwako Investments Limited v The Queen, [1978] CTC 378; 78 DTC 6281.

I must take into account also the nature of the plaintiff's business apart from these particular transactions. The evidence indicated that since 1968 the plaintiff company had separated its affairs from those of the real estate brokerage. While it had bought and sold real estate to facilitate the brokerage business (for example, buying houses where the brokerage business had guaranteed the sale of customers’ houses) this kind of business did not continue past 1971. The company was not during this period otherwise engaged in buying or selling commercial property apart from the transactions required to change certain business premises rented to the brokerage firm for its offices. The Shea companies had not been engaged in commercial real estate business generally except for the period in 1969-70 when the brokerage firm unsuccessfully experimented with this type of business. It seems clear that, whatever view one may take of the shopping centre transaction, the plaintiff was not at the time of these events engaged in speculation in commercial real estate. While this does not, of itself establish the nature of the shopping centre transaction, it does at least suggest that one cannot draw an inference from the nature of the plaintiff's other business that this was an act of speculation rather than investment.

Finally, it is well established that where there are valid business income reasons for selling property which the taxpayer contends was bought for investment purposes, such reasons provide an answer to the inference that the property was really acquired for speculative purposes. See, for example, Dorwin Shopping Center Ltd v MNR, [1963] CTC 411; 63 DTC 1258; Sikler et al v The Queen [1973] CTC 736; 73 DTC 5553; T K Sales Ltd v MNR, [1973] CTC 340; 73 DTC 5284. In the present case, according to the only evidence placed before me, the main reason for the plaintiff’s decision to sell the shopping centre in 1975 was the need of its principal shareholder, Mr Shea, to obtain the necessary cash to establish the trust company. This decision, however, was reinforced by other factors which had become apparent during the preceding few months. The town council in Markham had approved the construction of a new shopping centre which, it was thought, would create serious competition for the existing Markham shopping centre. Further, Dominion Stores, one of the principal “triple A” tenants of the Markham Shopping Centre, had advised the plaintiff’s representatives that it needed more space. They had studied various possibilities for providing this space but had concluded that this was not going to be possible. There was then also a concern that they would lose this tenant. These factors, which did not exist in 1972 when the shopping centre was bought, led Mr Shea and Mr Davies to conclude that the shopping centre was no longer as good an investment as it was when they purchased it. This reinforced their view that a better long-term investment vehicle for Mr Shea and the plaintiff would be a trust company.

Having come to the conclusion that the purchase and sale of the Markham Shopping Centre by the plaintiff was a capital transaction giving rise to a capital gain and not business income, it is unnecessary for me to deal with the alternative contention put forward by the plaintiff that if the profit realized on the resale should be held to be an income gain, that it was “income from a non-active business and therefore constituted ‘Canadian investment income’ as defined in subsection 129(4) of the Income Tax Act, SC 1970-71- 72 as amended (the “Act”) as it read in respect to the 1976 taxation year”.

ORDER

It is hereby ordered that this appeal be allowed with costs, that the reassessment, as set out in the notice to the plaintiff from Revenue Canada of June 24, 1981, be vacated and that the preceding assessment or reassessment be restored as it was prior to that notice.