Glacier Realties Ltd. v. The Queen, 80 DTC 6243, [1980] CTC 308 (FCTD)

Addy, J:—This income tax appeal relates to the income tax assessments of the plaintiff for the 1975 and 1976 taxation years. More specifically, it involves the issue of whether a profit of $557,539, realized on the parcel of land purchased in 1966 for $164,697 and resold in 1977 for $747,779, is to be considered as a Capital gain or as revenue in the hands of the taxpayer.

The plaintiff was incorporated in Ontario in 1966. Its shares were held as follows:

It alleges that the land was purchased as an investment in anticipation that the surrounding municipalities would expand to a point where the land would be able to be developed and that the purchase was made on the advice of counsel and of the principals of Urbandale Realty Corporation Limited (hereinafter referred to as “Urbandale”) which had purchased land in the adjacent area. The principals of the taxpayer and of this last- mentioned corporation were related either by blood or by marriage.

The facts are fairly straightforward. In 1965, one of the principals of Urbandale, one Herbert Nadolny, a brother-in-law of Jack Aaron, informed the latter, who had formerly been employed by Urbandale for some ten years, that, in addition to Urbandale, two large well-known developers, namely Campeau Construction and Minto Construction, had acquired large tracts of land in the general vicinity of the area in question for future development. He also informed him that Urbandale felt that it had enough lands in that area at the moment but that it would probably be wise for Mr Aaron to consider the purchase as a family investment of the Breedyk Farm, consisting of some 250 acres, available at the time for $650 per acre.

After discussion with the eventual shareholders which were members of three families including the Nadolnys, it was decided to purchase the Breedyk Farm.

The lands were in fact purchased through Mr Aaron in trust for the plaintiff taxpayer which had not yet been incorporated. Upon incorporation they were transferred to the taxpayer. It engaged in no other business nor did it, at any time, hold any other assets. It was brought into existence and continued as such for the sole purpose of holding the lands in issue. The main reason why the shareholders decided to have the lands held by a corporation rather by themselves personally was to benefit from the advantages of limited liability.

The purchase price of $164,697 for the farm was payable as follows: $25,120 on closing in March 1966 with remainder repayable at $2,500 per year without interest until the end of March, 1981 when the balance became due. The vendor was entitled to continue in occupation of the farm, free of rent or of any charge whatsoever. The taxes and insurance on the buildings were paid by the purchaser.

The plaintiff company never held any formal meetings nor any meeting whatsoever for that matter. The minutes were prepared by the company solicitor and circulated among the shareholders and directors for signature. Mr Aaron generally communicated with the shareholders through the above-mentioned Doctor Harold Joseph Sachs. When the yearly payment of $2,500 of capital became due Mr Aaron would with the assistance of Dr Sachs, collect from the shareholders the required amount to meet the payment on capital, the taxes, the insurance and a small charge for accounting. The amount collected would be proportionate to their shareholdings and the cheques would be issued to cover these expenditures yearly. The amount so expended would be charged to the capital cost of the land. Nothing really turns on this as there would of course have been no purpose in charging any expenditures to current expenses as there was no revenue whatsoever produced against which they could be set off.

Mr Aaron testified that in 1970, that is about four years after the purchase, he first became aware of the possibility of a general plan for the development of the South Grove area where the plaintiff’s lands were situated. Plans were subsequently proposed from time to time by Campeau Construction and Minto Construction for the development of the area. By November of 1974, nothing had yet been approved and the plaintiff decided to accept an offer which Urbandale had previously made on the 17th of January of that year to purchase the lands at $29,000 per acre. This sale to Urbandale resulted in a profit which is the subject-matter of this action.

Mr Aaron also stated that the lands were sold because they had been held for some eight years and because it looked as if it might take several years yet before plans for developing the lands would be approved and the balance of the mortgage of something over $100,000 would be falling due in 1981. This last motive is certainly not a very compelling one as 1981 was still seven years away at that time, they were not obliged to pay interest and could go on holding the lands for $2,500 per year on account of capital plus insurance and taxes, which amounted to a total of something less than $4,000.

The lands had never been advertised for sale and the purchase by Urban- dale resulted from a private offer without intervention of any agent. The plaintiff accepted from Urbandale an unsecured promissory note to guarantee the balance of the purchase price which balance amounted to $620,761.39. The note was repayable with interest at 10% over a period of ten years.

The fact that the company was incorporated for the sole purpose of holding a single parcel of land and did not engage in any other type of business, is a factor to be considered but is by no means conclusive as to what the object of the taxpayer was in purchasing the land. (See Birmount Holdings Limited v Her Majesty The Queen, [1977] CTC 34; [1978] CTC 358; 77 DTC 503; 78 DTC 6254; Hummel Corporation of Quebec Limited and Hummel Estate Corporation of Canada Limited v Her Majesty the Queen, [1979] CTC 483; 79 DTC 5426; and Program Properties Limited v Her Majesty The Queen, [1978] CTC 320; 78 DTC 6215.) The objects clauses of a corporation are also relatively unimportant in determining its intentions as compared with what it actually did. (See Regal Heights Limited v MNR, [1960] SCR 902;[1960] CTC 384: 60 DTC 1270; and Clemow Realty Limited v Her Majesty The Queen, [1976] CTC 129; 76 DTC 6094.) It is important where private company such as the present one is concerned to go behind the corporate veil and examine the background of the shareholders in order to determine more precisely if possible the purpose or purposes of the purchase.

The witness Aaron, who is now a mortgage broker, had been in the real estate management business for the greater part of his working life. His duties as an employee in that field had involved rental, maintenance and renovation of real estate holdings; he had worked for Urbandale for ten years as a real estate manager. He became a real estate salesman in 1962 and was employed as such for 21/2 years. Mr Aaron was also the brother-in- law of Urban Nadolny the Vice-President of Urbandale. During the ten years when Aaron was with Urbandale most of its business pertained to the development of rental property which it held for rent revenue purposes, but Aaron himself was not in any way involved in the development sphere of the operations. Urbandale also built apartments for the Ontario Housing Corporation and sold these upon completion. Previous to 1963, Urbandale had also engaged in the building of houses for purposes of resale. It also built condominium houses for resale after Aaron had left the company.

Two of the other shareholders of the plaintiff are housewives. Dr Sachs is a surgeon and had been involved in a small development of some ten acres or so in 1964 and 1965 with the plaintiff’s shareholders Samual Nadolny and Lillian Mehlman, as well as with one Richard Nadolny.

I do not feel that the past activities of the shareholders would characterize any of them as either a land developer for rental income producing purposes on the one hand or as a land speculator or trader on the other. There is no evidence that any of the shareholders had a past history of buying or holding real estate for revenue producing purposes and, except for the small ten-acre development in 1964-65, no evidence of any of them being land speculators in any way. The company itself, of course, did absolutely nothing with the land from the time of purchase until it was resold. The inactivity was to all intents and purposes complete: no representations were made by or on behalf of the taxpayer to municipal authorities at any time for development or future development of the lands nor was any attempt made to sell or to list the property for sale. Little can be deduced from this inactivity, which would be equally consistent with acquiring and holding land for future development as revenue producing real estate, as with purchasing and holding it for the purpose of future resale at a profit.

All purchases of land bought in the hope of making a profit are not necessarily adventures in the nature of trade (see MNR v Muzly Lawee and Naima E Lawee, [1972] CTC 359; 72 DTC 6342). It is seldom indeed that an asset is not purchased with the hope of ultimately making a profit should the time come to dispose of it. But what is important is whether selling at a profit was the main or one of the main purposes of acquiring the asset in the first place.

Since the plaintiff could not be characterized as a trader, it is of course, very important to determine whether or not it could be considered as having been engaged in an adventure or concern in the nature of trade, as found by Thorson, P in the case of MNR v Taylor, [1956] CTC 189; 56 DTC 1125 (see also CIR v Fraser (1942), 24 TC 498 at 502). In such cases, the actual intention at the time of acquisition is of paramount importance (see MNR v Lawee, supra, also Warnford Court (Canada) Limited v MNR, [1964] CTC 175; 64 DTC 5103). Evidence of what was actually done following the purchase is really useful in such cases only to determine what that original intention was, except possibly where subsequent actions might tend to indicate a substantial change of intention or orientation.

Mr Aaron in cross-examination stated that, at the time of purchase, no thought was given to the actual nature of the investment. In fact no thought was given to the ultimate use at all. About all the incorporators knew at the time was that they would not be farming the land and were not investing in it for farm purposes. What the ultimate use would be would depend on how the land would be affected by the future actions of the large land developers who had acquired other lands in the area. Mr Aaron also admitted that neither he nor any of the shareholders had any money of the kind required to develop the 250 acres and that they had no actual experience in development for revenue producing purposes, although he felt that expertise in this field could be obtained for a fee, should the opportunity present itself. They had no particular interest in that piece of land but were merely interested in it because of the possible prospects which might arise out of the development of other lands in the general area. Thus, there could be no question of any pride in possession or aesthetic enjoyment of the asset following the purchase, which in certain areas are found to constitute one of the main purposes of the purchase.

When being examined on discovery Mr Aaron had this to say about the intention of the incorporators at the time of purchase.

40. Q. What, as you recall, sir, was the reason for buying the land?

A. I think it’s fair to state that we didn’t have any specific—anything specific in mind at that time. It was just that Minto Construction, if I remember correctly, and Campeau Construction and Urbandale Realty Corporation had a considerable amount of land in that area, and for that reason it appeared to me and to everyone concerned that the land was the type of investment that eventually would reap a profit to us. That’s about the size of it. We had no specific purpose in mind in buying the land except as an investment.

41. Q. How was that profit to come about, sir?

A. I think about eight years after we bought the land Urbandale Realty had presumably in mind to develop the land, their land, and they approached us to—I can’t tell you whether there was some reason for their wanting this particular land because they, you know, needed it in their approach to the various municipalities, and that I really don’t know, but they approached us to sell them the land and we subsequently sold them the land.

42.Q. But, sir, going back to 1966 when you were discussing the purchase of this land with the people that might be interested in coming in on the purchase, you indicated it was anticipated at some point, although to you it was an investment, some income or profit would be derived?

A. Well, we hoped as much. Otherwise, we would not have purchased the land. We hoped that.

43. Q. How were you going to realize that profit?

A. We had no idea at that time.

44. Q Was it intended that the property should produce income, like income from the property itself?

A. I really don’t have an answer to that. I really don’t. We had nothing specific in mind at the time of the purchase of the land but we did purchase it with a view to making a profit some time in the future. That’s all I can tell you.

45. Q. You don’t recall whether that would be by way of development or by way of selling?

A. Well, I state again, we had nothing in mind specifically, whether we hoped that it would eventually be developed or that eventually we would sell it or what, we just didn’t have any idea at the time we bought it. The only reason we bought it is that there were vacant landowners in that area and we figured if the big guns are in there that eventually the thing will be developed and there should be an appreciation in the land either by way of selling it or by way of developing it. I think that possibly development was farthest from our minds for the simple reason that it requires tremendous amounts of capital to develop land, and you have to have experience at this type of thing and so on, and if anything we were, I think, we figured that we would probably sell it eventually rather than develop it, but I say we really didn’t buy it with anything specific in mind.

[The Italics are mine.]

In my view, the part which I have italicized of answer 45 is most revealing, especially when considered in conjunction with the following answer given to question 47:

47. Q. This particular group as a group didn’t have it in mind, there might have been individuals in the group—

A. Yes, I suppose, you know, if—I don’t think anyone had it in mind to develop the land. I don’t think so. You know, the people in here, one is a doctor and several are housewives and that sort of thing, and I don’t think that they have the knowledge and the experience to do this, and I certainly don’t have myself. I have been connected with real estate for some time but I don’t have the experience with this type of thing.

In my view of this evidence which was confirmed at trial by the same witness, it seems to me quite clear that, in the circumstances of this case not only has the taxpayer failed to establish that resale at a profit was not one of the prime reasons for acquiring the land but, on the contrary, the evidence establishes positively that, on the balance of probabilities, the main purpose of the purchase really was the prospect of being able to resell it at a profit. I therefore must conclude that the investment was not of a capital nature but rather an adventure in the nature of trade.

For the above reasons the appeal will be dismissed with costs and the assessments confirmed.