The Queen v. Dumas, 80 D.T.C 6398, [1981] CTC 1 (FCTD), rev'd 89 DTC 5004 (FCA)

Dubé, J [TRANSLATION]:—This is an appeal from a decision of the Tax Review Board, allowing the taxpayer’s appeal with respect to assessments by the Minister for the taxation years 1969, 1970, 1971 and 1972.

Defendant is a building contractor residing in the Quebec City area. In 1969, he formed the company known as Villeneuve Construction Limitée (“Villeneuve”), which in 1968 purchased land owned by the Corporation des Frères des Ecoles Chrétiennes du Québec for $1,385,650. On November 6, 1969, defendant sold all his shares in Villeneuve to Mr Raymond Malenfant, another Quebec City businessman, and according to the Minister made a net profit of $199,486.85.

lt must accordingly be determined whether this amount constitutes taxable income, as the Minister contends, or a capital gain as defendant alleges.

Villeneuve was incorporated on December 28, 1961. The letters patent authorize the usual purposes of a construction company, as well as the power to buy or sell land “for investment in addition to properties required to carry on the business”. Defendant himself is a real estate broker, but at the date of the aforesaid transaction had not engaged in this profession.

On several occasions before the said transaction defendant had purchased land for residential building purposes. He was also able to obtain favourable zoning for certain parts of this land, which he thereafter resold at a profit. It appeared from the testimony that defendant is unquestionably an alert, affable and astute businessman.

By a letter dated June 28, 1967 defendant offered to buy the land of the Frères located at the intersection of Henri IV and Quatre-Bourgeois streets in Ste-Foy, for $1 a square foot net, $50,000 of which was payable in cash when the notarial deed was concluded, and the balance in ten years (five of which were interest-free). On July 5, 1967 the Frfes accepted the offer of $1 a square foot. On receiving this acceptance, defendant took the necessary action with the city of Ste-Foy to obtain commercial zoning on the property, providing for the building of a shopping centre with an office building and Single family homes. By-law 1204 of the city granted him at least part of the desired modifications.

However, a disagreement then arose with the Frères over the selling price, as a result of the two parties’ differing interpretations with respect to square feet. Defendant alleged that the sale was for $1 a net square foot (excluding streets to be built on the rezoned land). The Frères, on the other hand, claimed $1 a gross square foot, that is, with reference to the entire area of the land.

At this point defendant retained the services of an Alma attorney, Mr André Blanchet, who on March 15, 1968 brought an action to file title against the Frères. The attorney in due course realized that such proceedings would not produce results for several months, or even years. He therefore advised defendant to pay the price demanded by the Frères. The sale of the land was completed by notarial deed, dated March 17, 1969.

Mr Blanchet had already participated in shopping centre projects in Dolbeau and Alma. He “had a feel” for this type of undertaking. He was well acquainted with defendant, who was married to his cousin and was a friend of long standing. It was accordingly decided that both would devote their entire attention to carrying the project through to completion. The attorney would be given 40 per cent of the Villeneuve shares once the enterprise was completed. Mr Blanchet accordingly moved to Quebec City with his family. A small office was leased and furnished near the land in question.

The two men obtained the services of accounting and architectural firms, which agreed that a part of their fees would be used as participation in the project. Studies, plans and a very elaborate model were prepared.

It was necessary to find a major tenant as a means of attracting other shops and stores. In the circumstances, participation by one of the large department stores (Eaton’s, Simpson’s, Sears, The Bay, and so on) was indispensable: other tenants would then follow suit.

The two men explained to the Court that they envisaged a project amounting to some fifteen million dollars. The model and plans prepared by the architectural firm provided, however, for expenditure of some forty million dollars. Defendant proposed to invest in liquid funds only $150,000, but he saw no difficulty in obtaining the necessary funds from his bankers once a major lease had been signed.

Defendant and his partner described in great detail the unsuccessful approaches made by them to large stores. Eaton’s, on which they had placed their hopes, told them on September 19,1969 that it was postponing for six months its decision to locate in Quebec City.

During this period certain businessmen made attractive offers to defendant for his land, but he refused them all, as he was interested in carrying through his own project. Raymond Malenfant was more persistent. He also wanted to build a shopping centre and a hotel. He contacted Dumas several times, and the latter told him that he did not want to sell because of the legal proceeding involving the Frères.

Once the legal proceeding had been concluded, Malenfant went to see Dumas and the latter finally agreed to sell the land. It was then that Mr Blanchet persuaded defendant that it would be better to sell the Villeneuve shares rather than the land itself. The attorney preferred this method of disposal for tax reasons, and also in order to free Dumas from any future liability toward the Frères, since the balance owing on the purchase of the land had still to be paid. Villeneuve accordingly assigned to defendant all the property of the company, with the exception of the land. Defendant then sold all his shares in Villeneuve to Raymond Malenfant.

Defendant and Mr Blanchet explained to the Court that they had finally given in to Malenfant’s offer because expenses were accumulating as a result of the various approaches made, and also because of increases in real estate taxes on the land resulting from the new zoning. Eaton’s had posponed its decision. The two men anticipated “a hard winter”. They therefore concluded that the best solution was to sell.

However, defendant was not able to explain to the Court why, once his decision had been taken, he sold to Malenfant without contacting the other businessmen who had made much more attractive offers to him.

In his statement of claim dated May 3, 1978 the Minister alleged, in paragraph 5, that he relied on the following presumptions of. fact, from which these subparagraphs may be cited:

(d) Villeneuve Construction Ltée engaged in a purely speculative venture by purchasing a vacant piece of land with a huge area, located in a strategic and very high-growth region of the city of Ste-Foy;

(e) Villeneuve Construction Ltée and its president originally had, and at all times subsequently retained, a secondary or even primary intent to make a profit by the sale of the said land;

(h) Defendant essentially realized a profit on the sale of the sole asset held in inventory by the company of which he was the principal shareholder; the said sale of shares represented only a means of obtaining this end, and so concluding an adventure in the nature of trade;

(i) The purchase by Villeneuve Construction Ltée of the land belonging to the Corporation des Frères des Ecoles Chrétiennes du Québec, and the stripping of all the property of Villeneuve Construction Ltée, except for the land purchased from the Frères des Ecoles Chrétiennes du Québec, as well as the sale by defendant of his shares in Villeneuve Construction Ltée, constituted integral steps in the operation of a business or the carrying out of an adventure in the nature of trade, so that the resulting income was taxable.

The Minister added the following two subparagraphs in his amended statement of claim, dated August 7, 1979:

(e) After 1967, Villeneuve Construction Ltée and its president had every reason to believe, and were firmly convinced, that they could easily resell the said vacant land at a profit at any time;

(f) This assurance that they would be able to realize a profit at any time as an important factor persuading Villeneuve Construction Ltée to purchase the said land, and to engage in a purely speculative venture;

Learned counsel for the defendant argued that this new presumption by the Minister, alleged for the purposes of this appeal to the Federal Court, shifted the burden of proof, and that as his client had established his principal intent to build a shopping centre, it was now incumbent on the Minister to prove the new alternative, namely that defendant’s secondary intent was to resell the land at a profit. He based this allegation on a decision of this Court in Nathaniel C Brewster v The Queen, [1976] CTC 107; 76 DTC 6046, as interpreted by the Tax Review Board in Joseph Friedman v MNR, [1977] CTC 2611; 78 DTC 1020.

This argument cannot be admitted. There is no contradiction between the Minister’s two presumptions. It is quite possible for a taxpayer, at the time he purchases property, to have a principal intent to develop it, but at the same time to consider the serious possibility of reselling it at a profit if the development project does not work out. As he had already alleged that the taxpayer’s principal intent was speculative, the Minister was therefore entitled to plead that if that was not his primary intent, it at least was his secondary intent.

In Hiwako Investments Ltd v The Queen, [1978] CTC 378; 78 DTC 6281, the Federal Court of Appeal raised the question of whether there was an onus on the appellant to establish that it was not prompted by an intent to use the property in an adventure in the nature of trade. This onus “would have to arise from the fact that the assessments were based on an assumption of facts that would support such a conclusion”.

Jackett, CJ refers to an allegation in the Statement of Facts by the defence that, in his assessments, the Minister assumed inter alia that the appellant purchased the property in question “with the intention of reselling the same at a profit”. He doubted whether such an assumption would be sufficient to support the assessments.

However, the learned judge cites subsequently in the defence, under the heading of statutory provisions, two alternative allegations of the Deputy Attorney General, that the appellant had the intent to speculate, or if not to speculate, to resell at a profit if the primary intent did not prove profitable.

The Court held that the appellant established that the purchase of the property was in fact an investment, not a speculation, and that it had therefore rebuted the first onus.

With regard to the second alternative, Jackett CJ did not regard it as a plea that the Minister assumed that a motivating reason for the purchase was the expectation that it would be resold at a profit.

However, the amended statement of claim of plaintiff in the case at bar alleged very specifically that “the Minister of National Revenue relied on the following presumptions of fact”. The allegations follow, as cited above. In particular, in subparagraph (f) the Minister alleged that “this assurance that they would be able to realize a profit at any time was an important factor persuading Villeneuve Construction Ltée to purchase the land and to engage in a purely speculative venture”. If defendant wishes to establish that the Minister did not rely on this presumption, it is up to it to do so. Under subsection 152(8) of the Act, an assessment is deemed to be valid; and of course plaintiff, like any other party, is entitled to amend her pleadings in accordance with the Rules of the Court.

The theory of the alternative intent was established by the Supreme Court of Canada in Regal Heights Limited v MNR, [1960] CTC 384; 60 DTC 1270. According to that theory, even if the controlling intent of the taxpayer at the time of purchase was to invest, and even if such an intent ultimately resulted in a capital transaction, if the Court considers that the taxpayer also had a secondary intent, namely the possibility of reselling the property at a profit in the event that the project did not succeed, then realization of the second possibility constitutes income.

In Regal Heights, a company was established to purchase land for the purpose of building a shopping centre. Approaches were made to large stores to obtain leases, additional land was purchased to facilitate the flow of traffic, and other preliminary steps were taken. When a national chain announced that it intended to build a shopping centre only two miles from the land in question, appellant company sold its land at a profit. The Supreme Court of Canada held that there was no evidence that appellant would build a shopping centre without obtaining a major lease, and no evidence that the company had any assurance at the outset that it would be able to interest a large store: the venture was therefore speculative. These promoters were hopeful of putting their land to one use, but if that hope was not realized they fully expected to dispose of the land at a profit: what counts, therefore, is the nature of the transaction in fact completed, not the preferred transaction.

It must also be concluded from this decision that the taxpayer’s intent is not merely what he states it to be, but also what is to be inferred grom the circumstances surrounding the transaction. In the case at var, the point of departure of defendant’s intent is the moment when he obtained the letter from the Frères accepting his offer to purchase.* [1] At that point, defendant was acting alone, not even assisted by Mr Blanchet.

There is no doubt as to the latter’s intent to devote his full attention to carrying the shopping centre to completion, since he had nothing to gain by the sale of the land. On the other hand, he was not present when the transaction was initiated.

However, it must be inferred that defendant himself would not have undertaken a futile course of action. He knew from personal experience that well Situated and favourably rezoned land could be resold quite quickly at a profit. He had no assurance at the outset that he could secure a major lease as a basis for his undertaking. He knew nonetheless that such a lease was essential to creation of the centre, and he accordingly realized that the project was of an uncertain nature. His first preference undoubtedly drew him towards construction of the centre, but he was perfectly well aware that such a valuable piece of land, once rezoned, would be resold at a profit. In fact, attractive offers were soon forthcoming.

I must adopt here the reasoning of Noel, J in Racine, Demers et Nolin v MNR, [1965] CTC 150; 65 DTC 5098, when a businessman buys a large expanse of land for the avowed purpose of building a shopping centre on it, but at the time of the purchase he makes no arrangement to obtain permanent financing for the project, has no assurance that he can obtain a major tenant, and the land in question is located in the middle of a rapidly developing sector, and the purchaser possesses experience in the realm of real estate allowing him to anticipate the commercial future of such a sector, it follows almost by “irrestible inference” that the purchaser already had the idea, when he made the purchase, that if he did not succeed in creating his centre he would have no difficulty reselling the land at a profit.

In Bead Realties Limited v MNR, [1971] CTC 774; 71 DTC 5453, appellant company had purchased a vacant lot in Ottawa and for three years tried to locate industrial concerns for which it would erect buildings to be let on long-term leases. As it did not succeed in its objective, the company finally accepted an unsolicited offer. My brother Walsh, J held that the profit was a capital gain, because appellant persuaded him that it did not have the secondary intent to resell the property at a profit when the land was purchased. Walsh, J distinguished this case from Regal Heights, cited above. I should cite this passage, at 782, [5457]:

It can perhaps be distinguished from the present case, however, in that it was essential to the development of the shopping centre that a lease be obtained from a large department store. While the company did have some sketches made of a promotional nature and entered into discussions with four department stores, although the evidence indicated that there was only one which might possibly be interested, Judson J found that the venture was entirely speculative and that if it failed the property was a valuable property in any event. While the facts in the present case closely resemble this, the appellant was not dependent on concluding a lease with any one particular lessee or type of lessee but was in an entirely flexible position and able to make such an arrangement with any one of a considerable number of industrial or business firms who might be locating in Ottawa or changing their location. (My emphasis.)

Since the sale to Malenfant resulted in a profit and not a capital gain, it matters little in the circumstances that the said transaction was consummated by the sale of Villeneuve shares, rather than by the sale of the land itself. This sale of shares was in reality only an alternative method of obtaining the desired result. This principle has already been established by Judson, J of the Supreme Court of Canada in Ronald K Fraserv MNR, [1964] CTC 372; 64 DTC 5225. It is true that in Fraser the appellants formed the company for the specific purpose of building their shopping centre and that the shareholders sold their shares two years later, whereas Villeneuve was incorporated some seven years before the transaction in question here. However, this distinction does not destroy the principle, since the letters patent of Villeneuve, it will be remembered, provide for the type of transaction that was eventually carried out.

In the circumstances, teh amended statement of claim of plaintiff must be allowed, the appeal upheld and the notices of reassessment of April 18, 1974, with respect to defendant’s taxation years 1969,1970,1971 and 1972, reinstated, the whole with costs.