Hummel Corp. of Quebec Ltd. v. The Queen, 79 DTC 5426, [1979] CTC 483 (FCTD)

Walsh, J:—These two actions which are appeals from income tax assessments of appellant Hummel Corporation of Quebec Limited for the years ending December 31, 1970, 1971 and 1972 respectively and Hummel Estate Corporation of Canada Limited for the same years were joined for hearing on common proof, the two appellants belonging to the same parties and the legal issues involved being identical. In the case of the Quebec corporation although the 1972 tax year was referred to in the appeal there was a nil assessment for that year so there is no issue respecting it. The 1970 and 1971 taxation years are of course governed by the provisions of the old Income Tax Act* [1] while the 1972 assessment is governed by the provisions of the new Act.f [2] The issue in both cases is whether profits arising from the expropriation of portions of appellants’ properties could be treated as capital gains or income arising from an adventure in the nature of trade. A second issue arose respecting the failure of appellants to include in their income tax returns interest received on the deferred payments made in the years in question of portions of the expropriation price. Appellants concede that this interest should have been included so this is no longer an issue.

At the opening of the hearing appellant Hummel Corporation of Quebec Limited amended paragraph 9 of its appeal so as to replace the words “Le prix’’ at the commencement of the paragraph by the words “La moitié du prix”.

It is appellants’ contention that the properties expropriated were purchased in 1961 as an investment and for protection against inflation and that as a result any profit realized from the disposal thereof should be treated as capital gain. They were treated as a long term placement, never offered for sale and except for the expropriated portions appellants still own them. They were purchased and paid for in cash and the two companies were founded by Ludwig Hummel, a German citizen who was 72 years of age at the time and allegedly wished to protect the future of his daughter and grandsons, having on three occasions lost considerable fortunes as the result of the First and Second World Wars. He considered Canada as a stable country free of disturbances suitable for a safe long term investment. The companies were formed by him to hold the property and indulged in no commercial operations whatsoever at any time. Appellants seek setting aside the decision of the Minister of National Revenue maintaining the assessment after notices of opposition, and reimbursement of the income tax paid as a result thereof in interest, penalties and costs. Defendant for its part admits that appellant Hummel Corporation of Quebec Limited acquired parcels of land forming part of Lots 2372 and 2373 in the Parish of St-Sauveur in the Canton of Little River, Quebec, in 1961 and in the same year appellant Hummel Estate Corporation of Canada Limited acquired portions of Lot 2379-1 in the same parish. It is contended however that these purchases were made in the hope of and expectation that this land would increase in value so that a profit would be realized when it was sold in part or as a whole. While it is admitted that the property purchased by Hummel Estate Corporation of Canada Limited was paid for in cash it is pointed out that the other purchase was made on the basis of a payment of $143,856.60 upon signing of the deed of sale and the balance of $141,323.49 in five equal annual payments commencing one year after the date of the sale. It is contended that at the time of the purchases in 1961 the land in question was situated in a speculative area where development was clearly foreseeable being situated on the site of a projected industrial park. In 1969 the Quebec Government expropriated from Hummel Corporation of Quebec Limited 587,063 square feet of an original value of $55,008 for a price of $278,860 with interest and costs so that the profit on this sale was $223,852. At the same time the Quebec Governmemt expropriated 377,434 square feet of the property of Hummel Estate Corporation of Canada Limited having an original value of $37,479 for $161,146 plus interest and costs resulting in a profit of $123,667. Payments of the amounts realized by the expropriation were made to Hummel Corporation of Quebec Limited yielding a profit of $56,992.72 in 1970 and $124,305 in 1971 in addition to which interest in the amount of $9,835 was received by that appellant in 1970, which latter amount is no longer in dispute. Payments made to Hummel Estate Corporation of Cananda Limited yielded profits of $36,068.54 in 1970, $53,063 in 1971, and $9,234 in 1972 in addition to which amounts of $4,840 were received as interest in 1970 and $11,390 in 1972 which latter amounts are again now admitted by appellants. Appellants’ notices of appeal were amended so as to give these corrected figures.

It is of course only for the 1972 taxation year that capital gains would be taxable and even for that year they would only be taxable for 50% rather than for the full amount if the sums received resulted from an adventure in the nature of trade. Both companies were given powers in their letters patent to invest in moveable or immoveable property and to change, alter or realize upon any such investment. Both companies in their income tax returns indicated the nature of their business as “real estate’’ and never carried on any other business whatsoever. Respondent further alleges that Mr Ludwig Hummel founder of the appellant companies had through other companies also acquired, for purposes of commerce, immoveable property nearby in an area which he knew was speculative and was subject to be sold at a relatively early date. Respondent relies on sections 3 and 4, paragraph 6(1 )(b), sections 85B and 139 of the former Income Tax Act, RSC 1952, c 148 as amended for the 1970 and 1971 taxation years and on section 3, subsection 9(1), section 12, paragraph 12(1)(c) and subsection 248(1) of the new Income Tax Act, RSC 1970-71-72, c 63 as amended for the 1972 taxation year. There is no significant difference involved with respect to the issues in the present action save for the institution of capital gains tax in 1972.

Appellants called only one witness Eva Ricker Hummel the daughter of Ludwig Hummel who now resides in Switzerland and whose age and health would not permit him to testify in person. Although any evidence she gave as to his intentions would be heresay she is fully familiar with her father’s business activities personally, still lives with him together with her two sons ages 14 and 12 and her mother and is an officer of both companies and was also in a position to testify as to her father’s business background and experience and had considerable knowledge as to the acquisition of the properties in question.

She testified that she shares in both appellant companies now belong to Citadel Investment Company a Bermuda company which is a holding company for the two companies in Canada and in turn Field Nominees of Bermuda a trust company holds the share of Citadel Investment Company for the Hummel family in trust. She stated that her father is an entrepreneur. Without too much basic education he was apprenticed at age 13 to work in a gold and silver refinery. He learned French, worked in Paris for a while, learned English and went to London where after a period of unemployment he commenced working at an import-export company. He had a facility for languages and also learned Spanish and Italian and established a business in Madrid, importing German medical supplies to Spain. In World War I he was called up by Germany and fought in Russia being wounded there and at the end of the war found that his Spanish business had been expropriated as a result of the Versailles Treaty. He lost everything he had invested in it and was obliged to return to Prussia where his family owned some property. He bought a small watch factory which he expanded to a business worth $1,500,000 by World War II when he was forced to convert it to wartime uses making anti aircraft guidance systems. It was bombed during the war and totally destroyed but he had concealed some of the machinery in the Black Forest. Whatever German currency he had became worthless and his wife’s assets in East Germany were confiscated and she was unable to even return to visit relatives there.

He came to New York where he met a Mr Armand Viau who was the Industrial Commissioner of Quebec who suggested to him that he establish a watch making business there. He visited Quebec with him and established a factory which at first just made the cases, the movements being imported. His health was deteriorating and towards the end of 1958 he sold his business to Timex Watch Company for a very substantial sum of money involving several million dollars. He decided to re-invest a portion of it in land in Canada looking upon it, according to the witness, as a sort of life insurance for herself and her children. He discussed this with Mr Viau. It was possible to foresee development in the direction of the Quebec airport and he found some farmers who would sell and took options on their property. He left the country at the end of 1959 but left his affairs in the hands of a prominent Quebec attorney. There was some problem with the title to the land which required the passing of a private bill in the Quebec Legislature to clarify it before the actual deed could be signed and meanwhile the money was left in trust with his attorney who told him that it was advisable to incorporate companies to hold the land and put the shares of these companies in a Bermuda holding company because of the effect of Succession Duty Acts. He was not familiar with Canadian law himself and never even saw the charters of the companies, relying entirely on his adviser. He had never dealt in real estate himself the only properties he ever bought being for his factory. The income tax returns of the two appellant companies were prepared by the companies’ auditor and signed by the officers of the Bermuda holding company, Mr Hummel not being personally interested in this.

The properties were never subdivided and no attempts were ever made to sell. Any revenue obtained in the first few years from cutting of hay on the land was insignificant. When an industrial park was established by the City of Quebec near the subject property a small portion of the corner of this land was required to complete the land assembly. According to the witness her father objected to this and asked her to try to get Mr Viau to block it. Perhaps 10% of their land was taken in this way by means of an exchange thereby they got land outside the industrial park area. Their properties had no direct access to the industrial park. The subsequent expropriations were for the construction of super highways in the area and there was also a forced sale of land to the Canadian National Railway.

Mr Armand Viau who by 1959 was president of his own company, Industrial Development Company Registered acted as agent for Mr Hummel in acquiring the options to purchase the property. He may well have been in a position to foresee the development for the city of Quebec towards the airport. The witness insisted however that her father merely foresaw that was the only direction in which Quebec could develop because of the location of the rivers to the south and east and that her father did not buy this land in question in anticipation of the development of an industrial park. However during examination for discovery her father had stated he neither bought nor sold land quickly and in any event Mr Viau had told him he could not have done so because this would cut into his industrial park.

The income tax returns of both companies show that the annual losses after deduction of the very slight rental income were not capitalized but were carried forward from year to year as operating losses.

In argument appellants contend that the indicia are all in favour of this being a capital gain transaction. The lands in question were farms and were owned by appellants for seven years with no attempt to subdivide them, develop or sell them. The only previous transaction with respect to the subject properties was the exchange of a small portion which the city needed to complete its industrial park and appellants were forced to dispose of. The profits from dispositions now being taxed arose out of expropriation and not from a voluntary sale and appellants’ motive in buying the properties was to seek a safe and stable investment for the future, not to earn income from the use of the properties or from the sale or any portions of them at a profit. Dealing in real estate is not his normal business and if title of the properties was taken in the name of corporations formed for this purpose, this was on the advice of his legal representative and not with the intent of having those corporations deal with the properties in any way as a commercial enterprise. Moreover the sums invested in these properties represented only a small portion of Mr Hummel’s personal assets.

Appellants rely primarily on three cases. The first of these is the leading British case of Commissioners of Inland Revenue v Fraser (1942), 24 TC 498. The decision in this case is not necessarily helpful to appellants however and in fact is also relied on by respondents. Appellants rely on the statement at 502 where it is stated:

. . . It is in general more easy to hold that a single transaction entered into by an individual in the line of his own trade (although not part and parcel of his ordinary business) is an adventure in the nature of trade than to hold that a transaction entered into by an individual outside the line of his own trade or occupation is an adventure in the nature of trade. But what is a good deal more important is the nature of the transaction with reference to the commodity dealt in. The individual who enters into a purchase of an article or commodity may have in view the resale of it at a profit, and yet it may be that that is not the only purpose for which he purchased the article or the commodity, nor the only purpose to which he might turn it if favourable opportunity of sale does not occur. In some of the cases the purchase of a picture has been given as an illustration. An amateur may purchase a picture with a view to its resale at a profit, and yet he may recognise at the time or afterwards that the possession of the picture will give him anesthetic enjoyment if he is ultimately, or at his chosen time, to realise it at a profit. A man may purchase stocks and shares with a view to selling them at an early date at a profit, but, if he does so, he is purchasing something which is itself an investment, a potential source of revenue to him while he holds it. A man may purchase land with a view to realising it at a profit, but it also may yield him an income while he continues to hold it. If he continues to hold it, there may be also a certain pride of possession.

That case dealt with the purchase of a large quantity of whisky greatly in excess of what could be used by the respondent himself which could only be disposed of profitably by the process of realization, so although it was outside respondent’s regular business it was held to be an adventure in the nature of trade. While land on the other hand is capable of being a source of revenue or even of furnishing some pride of possession to the owner and his family it cannot be said that this was in Mr Hummel’s mind when he acquired it. He had no intention of living on it and did nothing to obtain any revenue from the ownership of it. (Although I refer to Mr Hummel although he took no active part in the management of the appellant companies, but relied entirely on his legal and financial advisers, I believe that the intentions of the appellant companies must be equated with his own intentions. Corporations may not have any intentions as such, but in the case of corporations such as those involved in the present appeals, whose entire assets were acquired by funds provided by Mr Hummel and who were held, although somewhat remotely by him and which were created to carry out his intentions, it is clear that it is intentions to which we must look in determining the reasons for the land purchases).

The second case on which appellant rely is that of MNR v Muzly Lawee and Naima E Lawee, [1972] CTC 359; 72 DTC 6342, which bears some resemblance on the facts to the present appeal in that the taxpayers and their husbands came to Canada following religious persecution in the Middle East, were all wealthy and had a broad spectrum of investments. The wives bought some land adjacent to land being subdivided by the husbands and after holding for some nine years sold the land to a development company controlled by their children. The Court found that this was a capital gains transaction.

After referring to the quotation which I have made from the Fraser case (supra) Cattanach, J stated at 367 [6349]:

. it is readily apparent the fact that a person intends from the first to make a profit does not determine the question whether a particular transaction is an adventure in the nature of trade rather than an investment. It is inherent in every investment that the subject matter thereof will be sold and it is characteristic of a “good” investment that the subject matter will be sold at an enhancement value.

At 368 he refers to the case of Leeming v Jones, 15 TC 333, in which Lawrence, LJ stated at 354:

... It seems to me that in the case of an isolated transaction of purchase and resale of property there is really no middle course open. It is either an adventure in the nature of trade, or else it is simply a case of sale and resale of property .. .

At 374 he stated:

In the circumstances peculiar to the respondents herein land is a legitimate subject matter of investment. The respondents had not engaged in an ordinary line of trade of dealing in real estate. They were persons of wealth who sought investment of that wealth.

The activities displayed by the respondents were not those ordinarily displayed by a person speculating in real estate. The land was held for a long period of time before its sale.

The other cases relied on by appellants are the cases of MNR v Valclair Investment Co Ltd, [1964] CTC 22; 64 DTC 5014, and its companion case MNR v Cosmos, [1964] CTC 34; 64 DTC 5020. In these cases companies which normally invested in stocks and bonds each made a Single real estate transaction. In the case of Va/c/air the land was held for 20 years before being resold. In the case of Cosmos part of it was resold after being held for five years aS a result of an unsolicited offer, the other part was still retained at the date of the trial some 10 years later. There had been no advertising, no Subdivision, no promotion of land for sale nor was it listed for sale. The land had been virtually unproductive in revenue. In rendering judgment in the Valclair case Kearney, J stated at 31 [5019]:

In the present instance the purchaser anticipated that it would be some years before development would take place in the locality of the property and its financial position was such that it could easily afford to bide its time.

The purchase of land is one of the oldest types of long-term investment, and, Since diversification of investments was one of the Company’s main objects insofar as the facts are concerned, in my opinion practically the only risk that it ran was the duration of such waiting period. I am of the opinion that the elements of Speculation and risk were negligible in the transaction in issue and did not amount to nor can it be regarded as an undertaking or an adventure in the nature of trade within the meaning of the Act.

As appellants contend it is inherent in every investment that it will eventually be sold and the fact that it was sold at a profit does not necessarily make its acquisition an adventure in the nature of trade.

Appellants might also be able to place some reliance on the case of Irrigation Industries Ltd v MNR, [1962] CTC 215; 62 DTC 1131, in which at 224 [1134] Martland, J after examining the British jurisprudence refers with approval to the decision of the House of Lords in Leeming v Jones, [1930] AC 415 in which Lord Buckmaster made a general statement of principle at 420 Stating:

.. . an accretion to capital does not become income merely because the original capital was invested in the hope and expectation that it would rise in value; if it does so rise, its realization does not make it income.

Respondent relies on a number of well known cases including the leading British case of Californian Copper Syndicate v Harris (1904), 5 TC 159 in which at 165-6 Lord Justice Clerk set out the basic principle:

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 realize 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 profit. There are many companies which in their very inception are formed for such a purpose, and in these caese 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?

Reference was also made to the leading Canadian case of MNR v James A Taylor, [1956] CTC 189; 56 DTC 1125, in which Thorson, P set out what have come to be known as the “badges of trade.’’ At 210 [1137] he sets out several principles as follows:

The first of these is that the singleness or isolation of a transaction cannot be a test of whether it was an adventure in the nature of trade . . .

. . . a transaction may be an adventure in the nature of trade even although nothing was done to the subject matter of the transaction to make it saleable . ..

Likewise, the fact that a transaction Is totally different in nature from any of the other activities of the taxpayer and that he has never entered upon a transaction of that kind before or since does not, of itself, take it out of the category of being an adventure in the nature of trade. What has to be determined is the true nature of the transaction and that if it is in the nature of trade, the profits from it are subject to tax even if it is wholly unconnected with any of the ordinary activities of the person who entered upon it and he has never entered upon such a transaction before or since.

And a transaction may be an adventure in the nature of trade although the person entering upon it did so without any intention to sell its subject matter at a profit. The intention to sell the purchased property at a profit is not of itself a test of whether the profit is subject to tax for the intention to make a profit may be just as much the purpose of an investment transaction as of a trading one. Such intention may well be an important factor in determining that a transaction was an adventure in the nature of trade but its presence is not an essential prerequisite to such a determination and its absence does not negative the idea of an adventure in the nature of trade.

At 212 [1138] he states:

Consequently, the respondent in the present case cannot escape liability merely by showing that his transaction was a single or isolated one, that it was not necessary to set up any organization or perform any operation on its subject matter to carry it into effect, that it was different from and unconnected with his ordinary activities and he had never entered into such a transaction before or since and that he purchased the lead without any intention of making a profit on its sale to the Company.

Considerable reliance was placed by respondent on the case of Program Properties Ltd v Her Majesty The Queen, [1978] CTC 320; 78 DTC 6215, confirmed in appeal which reviewed much of the jurisprudence including the Lawee case and the Valclair Investment and Cosmos cases and the case of Birmount Holdings Ltd v The Queen, [1977] CTC 34; 77 DTC 5031, in this Court as well as the British cases of Irrigation Industries Limited and Learning v Jones. In the Birmount Holdings Limited case Sweet, DJ stated at 46 [5039]:

Here, the evidence does not disclose any asset of the plaintiff except the realty out of which the assessment arose and possibly some increment from it. The funds with which the realty was acquired were not generated by the business of the plaintiff. They were supplied by Mr Mentzelopoulos and were so supplied only for the purchase of the realty.

and again:

In my opinion, the result is that the plaintiff did more than just engage in an adventure in the nature of trade. It carried on business in and with the land. In doing so, it performed the very business function anticipated by the wording of its letters patent.

In some respect the facts in the Program Properties case were more favourable to the taxpayer than in the present. Members of the Lawson family who had a controlling interest in the corporation which was incorporated to purchase the land in question in a developing area in the vicinity of Ottawa were not speculators in real estate and the property was allegedly acquired to hold as a hedge against inflation, as in the present case. However a certain amount of income was derived from the property by the operation of a stable thereon which yielded revenue from the breeding of horses. Mr and Mrs Lawson were thinking of living in a house on the property, and there was some thought of opening a restaurant in an old house on it, together with the possibility of selling antiques. In the present case there was no intention of making personal use of the property or of Operating any business on it. The Lawson family had a number of knowledgeable business associates who also held shares in the company, however, and it was the conclusion of the Court that while the Lawsons might conceivably have purchased the property with a view of acquiring a type of life style they desired, the interest of the other investors was in the profit to be derived therefrom as a result of the increasing value of the property, which had been bought at a very favourable price. At 331 [6223] the judgment states:

In the present case the plaintiff had no other business than the ownership of the Subject property and it was in fact incorporated in order to acquire such ownership. The sale, while it was an isolated transaction, was not outside the normal course of the company’s business, but in fact involved the disposal of the company’s only asset. Although the sale was unsolicited, the company was not obliged to sell at that time although it was propitious to do so in view of developments.

The facts in the present case are substantially similar, except for the fact that the profits arose out of expropriations so that appellants were in fact obliged to sell and that the entire assets of the companies were not disposed of since the only asset in each case a block of undeveloped land. However I do not think this latter distinction is significant.

If the facts in the Lawee case relied on by appellants are somewhat Similar to those in the present action, the same can be said for the facts in the Birmount case (supra) which was decided in favour of the Minister. A foreign investor acquired only a single parcel of land. He was an able business man and could envisage the development of the area in the future. He was advised to form a corporation to hold the property. In rendering the Birmount judgment Sweet, DJ also made the point that however far flung or diversified Mr Mentzelopoulos’ assets may have been it is not he who had been assessed but rather the plaintiff corporation and that the activities of the corporation in connection with realty constituted carrying on business. This decision was upheld in appeal, [1978] CTC 358; 78 DTC 6254.

In the case of Her Majesty the Queen v Erwin Schmigelski, [1976] CTC 397; 76 DTC 6226, Cattanach, J stated in reference to the quotation to which I have referred from the Fraser case (supra):

From the foregoing extract it is evident that two elements of an investment in land are that the property is a source of income while held and that while held confers a pride of possession in the like manner that a picture purchased for ultimate resale gives the purchaser aesthetic enjoyment during the interval.

In the present instance the land produced no revenue and, in my view, the defendant did not exhibit any pride of possession nor did he experience any aesthetic enjoyment from its possession as would have been the case of a parcel of land which is a promontory into a lake to which resort could be had for picnics, swimming and like recreation. Here the land was flat, as adjacent to the city and possessed of none of those attributes and was not used by the defendant for any such purpose.

That is precisely the situation here.

In the case of Albrumac Oils Ltd v Her Majesty The Queen, [1977] CTC 29; 77 DTC 5041, Decary, J stated at 32 [5043]:

. . . In the hands of the plaintiff company this land never had prospects of yielding a reasonable return on the investment except by sale at an enhanced price and it thus resembled the cases of the large quantities of toilet paper and whisky which were purchased and later sold in the cases of Ruthledge v CIR, [(1924) 14 TC 490] and Fraser v CIR, [(1942) 24 TC 498] respectively.

While Mr Hummel may well have bought the land to provide security for his daughter and grandchildren it is evident that the only way in which it could contribute any funds for their use would be as a result of its sale, as he had no intention of developing it as an income producing property.

Perhaps the most significant case of all those to which I was referred is that of Hummel Estate Corporation of Canada Limited v Le Sous-Ministre du Revenue de la Province de Québec, No 200-19-000027-74, a judgment of the Provincial Court dated March 22, 1976, deciding that for purposes of provincial income tax the profit realized as a result of the forced sale of portions of the property in question was income from a commercial operation. While I am not basing my decision on it since I understand it is under appeal, and in any event the decision of the Provincial Court judge is in no way binding on this Court, it would nevertheless be regrettable if a transaction which was found to be of a commercial or income producing nature for provincial income tax purposes was found to be a capital gain transaction for federal income tax based on the same facts, unless there was a substantial difference in the law which does not appear to be the case. This judgment of Judge Georges Chassé goes very thoroughly into relevant jurisprudence and its conclusions are well motivated. Although it does not deal with the identical expropriation before the Court in the present action it deals with the profit on a sale of part of the subject property to Labbatt Breweries under threat of expropriation.

Finally respondent argues that there is substantial significance in the manner in which the financial statements of the two appellant companies are prepared in that the annual losses in holding the properties in question were never capitalized but merely carried forward from year to year increasing the balance of the deficit. While I do not attach too much significance to this judgment decision of the well-known firm of auditors acting for the appellants, these financial statements had of course to be approved by the directors, and the fact that this approval may well have been done by Bermuda directors and not by Mr Hummel for his daughter does not affect in any way the legal responsibility of appellant companies for the contents of these statements which, as respondents contend may provide some further indication that the companies considered the holding of the properties as part of their business operations and not merely as an investment.

As in the case in so many actions of this sort the situation is somewhat evenly balanced with both appellants and respondent being able to find support in the jurisprudence for their interpretation of the facts. I have reached the conclusion however after careful examination of the facts in this case that the profits resulting from the expropriations of part of appellants’ properties which have been taxed herein are a normal consequence of the only business operation of the companies, namely the holding of real estate in a speculative and rapidly developing area for eventual sale at some appropriate time at a profit. Both appeals will therefore be dismissed with costs.