Weldon v. The Queen, 80 DTC 6224, [1980] CTC 301 (FCTD)

The Associate Chief Justice:—These actions arise out of the same circumstances and are appeals from a reassessment of the Minister of National Revenue in 1974 pursuant to the Income Tax Act, RSC 1970-71-72, c 63. In conformity with order of March 19, 1980, they were heard together and this judgment applies to both.

There is no substantial disagreement about the events which gave rise to these disputes which I summarize as follows: The plaintiff Weldon has been a solicitor since 1955 and has been engaged in a practice which occupies him extensively with real estate. He has been active in municipal politics having served two three-year aldermanic terms and has also served as Chairman of the Assessment Appeals Court, all of which has brought him to a level of exceptional knowledge and skill in regard to realty in the greater Halifax area. He has endeavoured to turn this expertise to his financial advantage through a number of property development schemes all along the same basic pattern involving incorporation of a development company with shares issued in return for the necessary components, ie, land, legal services, surveys, construction, etc. Similarly, the plaintiff Robb, a professional surveyor for over twenty years, has always been active in land development schemes on behalf of clients as well as in his own right, a number of which have been in partnership with his co-plaintiff Weldon. The history of the project in dispute, Oknah Realty Limited, is typical of their experience. In November of 1970, it came to the attention of the plaintiff Weldon that a Dr Francis Hanko was prepared to agree to participate ina development scheme for a piece of property, part of which he owned and part of which was under option to him and in due course the plaintiff Weldon incorporated Oknah Realty Limited in which he and Dr Hanko were equal shareholders with one share each to their wives. Before approval could be attempted for any subdivision scheme, surveys were necessary and as he had done in other similar ventures, the plaintiff Weldon invited the co-plaintiff Robb to participate as a shareholder in return for the necessary surveys. Both plaintiffs felt that properties in the area were ready for development especially since the necessary services were present on an adjacent strip of land known as the Texaco Right-of-way. They were aware of an intended airport location and anticipated possible expropriation. They also realized the value of lake frontage which had previously been inaccessible due to title difficulties and Weldon devised a program of tax sales through which they were able to assemble all the necessary land and establish a proper title to it. Subsequent events have proven the accuracy of their assessments in that all the surrounding area has been developed and the airport has been constructed. Their own efforts to secure approval however, with a few minor exceptions, were unsuccessful in that they were consistently refused permission to connect to the services referred to earlier. The plaintiffs contend and it is not contradicted that their lack of success was attributable in no small way to their individual political profiles, which although different, have been quite prominent.

This was the situation in 1974 when a real estate agent inquired of Robb whether the entire property would be for sale and within a very short space of time, produced an offer from one Nino Rossi to purchase all of the land in Oknah Realty Limited for $200,000 (Exhibit 1-2S). There was considerable disagreement between the shareholders about the reaction to the offer but in any event a counter-offer was sent by way of letter over the signature of the plaintiff Weldon (Exhibit 1-2R) to sell all of the land in Oknah Realty Limited to Rossi for $260,000. After extensive negotiations, agreement was reached to sell half the shares of Oknah Realty Limited to Rossi and his associates for $125,000. Both plaintiffs state without contradiction, that Rossi was a well established professional builder and developer with the expertise and the money to move the project forward and of particular importance, in their opinion, one whose political profile was sufficient to counter-act their own which, as stated earlier, they believed had been substantially responsible for their negative results. It must also be noted that in the final transaction which gives rise to this dispute. the original shareholders in Oknah Realty Limited retained control of the company through two stipulations, the right of first refusal on any subsequent sale of shares by Rossi and the protection of their majority position as directors. Finally, the undisputed evidence indicates that shareholdings created by the transaction in issue remain substantially unchanged today and that efforts to secure approvals have continued albeit without great success including a recent contention by the company that a small portion of the Oknah Realty land lies in an area for which approval is compellable.

The co-plaintiffs included their profits from this transaction in their 1974 tax returns as capital gains, and in due course, the Minister re-assessed it as income, which re-assessments are under appeal in these actions.

Counsel for the Crown contends that both plaintiffs were actively engaged in the business of real estate development so that this transaction was a gain from a venture in the nature of trade, or, in the alternative, that Oknah Realty Limited was incorporated by the plaintiffs for the purpose of acquisition of land for re-sale at a profit so that the land was a trading asset and the share structure and ultimate sale of shares were merely an alternative method by which the plaintiffs held land and sold it at a profit and that in either event, the gain was properly taxable as income within the provisions of the Income Tax Act, sections 3, 9 and subsection 248(1). The plaintiffs, on the other hand, contend that they were not traders in real estate but rather that their main source of income was from their professional practice and that their acquisition of shares in this and other real estate companies was solely as an investment, and in any case, that this transaction was not a sale of land which is the trading asset of the company but a bona fide sale of shares so that in either case the gain is taxable not as income but as a capital gain in accordance with the Income Tax Act, sections 3, 39 and 40 and subsection 248(1).

The question of whether these plaintiffs are engaged in the business of trading in real estate gives me no difficulty. For many years prior to 1974, both had been involved in land development, initially as a secondary interest to their professional practice and in any case, in the early years without income or profit. By 1974 however, both had extended their involvement to a sufficient number of projects, each under a separate incorporation and of gradually increasing magnitude that I would have had some difficulty in accepting their contention at that time, that their activities in real estate remained at the level of investor rather than that of active en- trepeneur. Were I left in any doubt on this question on the basis of their activities prior to 1974, then the transaction which is in dispute here removes any doubt from my mind, for upon their own description, it brought them into association with a professional builder and developer in the hope of proceeding to approval and sale of the Oknah land, upon terms in which the entire operation was retained under their control and direction and in so doing, the plaintiffs, in my opinion, established themselves as active participants in the business of real estate development.

The problem, of course, does not end there for even in such capacity, their transactions may be either in the nature of income or capital gains and indeed we begin from the premise that acquisition and disposition of shares is prima facie a capital transaction. See Jackett, CJ in Atwater Western Corporation v MNR, [1970] CTC 472; 70 DTC 6312:

The arrangement whereby the appellant and the two other companies each agreed to put part of what was necessary for a proposed business into a company to be formed and to take shares in that company to represent their respective interests in it and the proposed business is a typical example of how a new business is launched. Prima facie, subscribing for shares in such a company is a capital transaction.

On the other hand, there may be circumstances which will lead to the conclusion that a transaction is essentially one for personal profit and that the character of the profit is not really altered merely by the use of a corporate vehicle. This was the situation which give rise to the decision of the Exchequer Court in 1963 in Ronald K Fraser v MNR, confirmed in 1964 by the Supreme Court of Canada, [1964] CTC 372; 64 DTC 5224, establishing a line of reasoning which has been followed on several occasions since. See MNR v C H Lane, [1964] Ex CR 866; [1964] CTC 81; 64 DTC 5049; DeToro v MNR, [1965] CTC 321; 65 DTC 5194; Slater et al v MNR, [1966] Ex CR 387; [1966] CTC 53; 66 DTC 5047; Siebens v MNR, [1971] CTC 557; 71 DTC 5310, and Burgess et al v MNR, [1973] CTC 58; 73 DTC 5040.

Counsel for the Crown contends that since this transaction began with an offer to purchase all assets (land) of Oknah Realty Limited for $200,000, which was met with a counter-offer to sell all the land for $260,000, that the intention was to dispose of all of the land at about $250,000 and further that this evaluation formed the basis for the ultimate transaction with was to sell half the shares for $125,000 and that therefore all of the conditions exist to follow the line of reasoning in the Fraser case and those cited above. In the Fraser case, Fraser and associates were originally approached by Dominion Stores Limited, so that the incorporation of Aidershot Realty Limited and the acquisition and development of the land was done as for a client. In fact the relationship went further, in that one of the officers of Dominion Stores was an original partner in the venture but had to withdraw because of the obvious conflict of interest. It can scarcely be Surprising therefore that when the ultimate acquisition by Dominion Stores was accomplished through a purchase of shares rather than assets, it was held that circumstances existed which justified the setting aside of the corporate structure.

Similarly, in the other decisions referred to, the final transaction involved the purchase of the entire undertaking of the company and therefore effectively terminated active participation by the vendors, and although not conclusive in itself, this certainly has proven to be a very persuasive circumstance in bringing the Court to the conclusion that the sale of the shares was nothing more than an alternate mechanism for the sale of assets. I do not, of course, suggest that the corporate vehicle must be cast aside in every case where all shares are sold and examples to the contrary are abundant. See S & S Properties Ltd v Her Majesty the Queen, [1978] CTC 412; 78 DTC 6294, Hans Reicher v Her Majesty the Queen, [1975] CTC 659; 76 DTC 6001, and MNR v Joichi G Kato et al, [1969] CTC 492; 69 DTC 5308. Similarly, while the partial sale of shares is capable of either interpretation, it has generally been a circumstance which the Courts have accepted as an indication of a capital transaction especially where either or both vendor and purchaser continue active operations of the company. See Part 2 of Cattanach J’s Judgment in Blok-Andersen v MNR, [1972] CTC 338; 72 DTC 6309.

In the case before us, the incorporation was entirely normal for a land development scheme and was not done with a specific purchaser and certainly not the purchaser Rossi in mind although, as is entirely usual in schemes of this sort, all or any part would, I am sure, be for sale at any time for the right price. When the offer to purchase arrived, the plaintiffs disagreed on whether to accept or reject it and ultimately took an entirely different course by bringing in the proposed purchaser as a partner in the venture through the sale of half their shares. Had the original transaction proceeded to a conclusion whether through the purchase of all assets or all shares, we certainly would have been much closer to the line of reasoning in the Fraser and subsequent decisions cited above, but it did not. I cannot overlook the fact that the shareholdings created by this transaction remain substantially unaltered and that the company continues to press for approval of the subdivision plans and in due course for the sale of the lands, which of course remain as trading assets of the company. I note also that while the purchaser Rossi remains a substantial shareholder, the plaintiffs retain their majority position as shareholders and directors and thus continue to exercise control over the ongoing activities of Oknah Realty Limited. Having regard to all of these circumstances, I find that the intention of this transaction was entirely consistent with one of the usual purposes for which corporate shares are sold, that is, the addition of new associates in the hope of improvement in the continuing operations of the company and I cannot find circumstances which justify the conclusion that this was other than the sale of a capital asset.

There will be judgment in favour of the plaintiffs, with costs, and the matter will be referred back to the Minister for reassessment of the 1974 income of the plaintiffs on the basis that the profit of the plaintiffs from their sale of shares in Oknah Realty Limited was a gain from the sale of a capital asset.