Citation: 2011 TCC 144
Date: 20110308
Docket: 2000-3248(IT)G
BETWEEN:
S.T.B. HOLDINGS LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Rip, C.J.
[1]
S.T.B. Holdings Ltd.
("STB") appeals income tax reassessments for its 1990 and 1991
taxation years. In its 1989 fiscal year STB acquired all of the shares of
Newport Industries Ltd. ("Newport") and immediately thereafter Newport was wound up into STB. Assets transferred to STB on wind up
included land that was in Newport's inventory. On the basis the appellant carried
on a real estate business previously carried on by Newport during the relevant
years and the land it owned was also inventory, STB purported to apply
paragraph 88(1.1)(e) of the Income Tax Act ("Act")
and claimed:
a) in its 1990
taxation year a non capital loss of $9,882,810 and a write down of inventory of
$1,224,937; and
b) in its 1991 taxation
year, a non capital loss carried forward from a previous year of $1,164,124 and
a non capital loss on disposal of the Newport land in the
year of $86,778.
[2]
The Minister of
National Revenue ("Minister") denied the write down and the losses on
the basis that the business carried on by Newport in which the losses were
incurred was not carried on by STB for profit or with a reasonable expectation
of profit throughout its 1990 and 1991 taxation years, and, in any event, the land
in issue was not acquired by STB for the purpose of gaining or producing income
from a business or property.
Statement of Agreed Facts
[3]
The appeals proceeded
to trial with the testimony of James R. Houston, the prime mover of
STB, Richard Browning, a former officer of STB and Jeffrey Wren, a
real estate developer. Also, the following Partial Agreed Statement of Facts
and Definition of Issues ("Agreed Statement of Facts") was filed:
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A.
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FACTS:
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1.
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The Appellant,
S.T.B. Holdings Ltd. ("STB"), is a company incorporated under the
laws of the Province of British Columbia with a registered and records office at 1500 –
1040 West Georgia Street, Vancouver, British Columbia.
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2.
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STB's fiscal
year end was May 30 for its 1990 and 1991 taxation years.
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3.
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During STB's
1989 taxation year, STB acquired all the issued and outstanding shares in the
capital of Newport Industries Ltd. ("Newport"). Newport
was subsequently wound-up prior to STB's 1989 taxation year end.
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4.
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Prior to the acquisition
of Newport by STB, Newport and STB were not related
corporations.
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5.
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In computing
income for its 1990 and 1991 taxation years STB:
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(a)
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deducted the
amount of $9,832,810 in 1990, which represented non‑capital losses
carried forward from Newport;
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(b)
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deducted the
amount of $1,164,124 in 1991 which represented non‑capital losses
carried over from Newport;
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(c)
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claimed a
write-down of its land inventory in the amount of $1,224,937 in 1990; and
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(d)
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deducted a
loss on income account in the amount of $86,778 in 1991 resulting from the
disposition of the land.
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6.
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On May 13,
1996, the Minister of National Revenue reassessed STB to disallow the amounts
set forth in paragraph 5 above.
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7.
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The land
referred to in paragraph 5 above consisted of approximately 50 lots
(the "Victoria Square Property") and a 3 foot by 50 foot strip
of land (the "Austin Property").
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8.
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The Victoria
Square Property and the Austin Property are located on the southern edge of
Calgary's downtown core and near Stampede Park. The Victoria Square Property and
the Austin Property comprised a significant portion of two city blocks. Stampede Park includes the Calgary
Stampede Grounds and the Olympic Saddle Dome.
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9.
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The Victoria
Square Property and the Austin Property are shown in yellow in the plan of
Blocks 90 and 97 at Tab 1 of the Joint Book of Documents.
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10.
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The legal
descriptions for the Victoria Square Property and the Austin Property are at
Tab 2 of the Joint Book.
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Background
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11.
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Newport was incorporated on January 2, 1974 under the laws of the Province of Alberta. At all material
times prior to May 29, 1989, Newport had a fiscal year‑end of September 30.
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12.
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At all
material times, Newport
carried on business. An operating motivation of Newport was to make a profit on the purchase and sale of real estate. Newport acquired the Victoria Square
Property and the Austin Property with this operating motivation in mind.
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13.
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From
incorporation to April 23, 1983, all 100 issued and outstanding common
shares of Newport were owned
legally and beneficially by Edward Wensel ("Wensel").
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14.
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On April 23,
1983, Wensel pledged legal title to 99 of his 100 common shares of Newport to Austin Curtin Sales Ltd.
("Austin Curtin Sales") as security for a $300,000 loan made in
July 1982 by Austin Curtin Sales to Wensel and Newport (the "Austin
Loan"). Legal title to the remaining common share of Newport was transferred from Wensel to
Austin Curtin Sales on November 15, 1983. At all material times, Newport and Austin Curtin Sales were not
related.
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15.
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Wensel was the
beneficial owner of all the issued and outstanding common shares of Newport until he sold his shares to STB
in May 1989.
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16.
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257262 B.C.
Ltd. (renamed S.T.B. Holdings Ltd. on June 21, 1983) was incorporated on
November 30, 1982 under the laws of the Province of British Columbia.
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17.
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On
June 22, 1983, 75 Class A voting shares of STB were issued from
treasury to Jacqueline Houston and 25 Class A voting shares
were issued to the Houston Family (No. 2) Trust. At all material times,
the Class A voting shareholdings of STB remained unchanged. At all material
times, the Class A voting shares were the only issued voting shares of
STB.
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18.
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On
June 22, 1983, Jacqueline Houston and her husband,
James R. Houston ("Houston"), were appointed secretary and president, respectively, and
both were appointed directors of STB. At all material times, they remained
directors and retained their respective offices.
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19.
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On or about
June 29, 1986, STB acquired a 37.5% interest in two Calgary, Alberta real estate projects as
a joint venturer (Airways Distribution Centre Joint Venture and Riverview
Distribution Centre Joint Venture.)
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20.
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On May 4,
1987, STB was registered as an extra‑provincial corporation in the Province of Alberta and was certified to carry on business under the name of 257262
British Columbia Ltd.
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21.
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On
April 13, 1989, 400967 Alberta Ltd. ("400967") was
incorporated under the laws of the Province of Alberta. At all material times Houston was the president, secretary and sole director and owned all the
issued and outstanding voting shares of 400967.
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Victoria
Square Property & Austin Property
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22.
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In 1981, Newport purchased the Victoria Square
Property for $8,445,365. The purchase was financed by loans from the Royal
Bank of Canada
("RBC"). The RBC loans were guaranteed by Wensel and Camalta Motors
Ltd. ("Camalta") and were secured by, among other things, a
mortgage in favour of RBC over the Victoria Square Property.
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23.
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Camalta was a
private corporation which was associated (within the meaning of the Income
Tax Act (Canada)
(the "Act")) with Newport.
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24.
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Subject to the
agreements described below in paragraphs 32, 33, 35, 37, 39, 40, 42 and
47 legal title and beneficial interest for the Victoria Square Property was
held by Newport until its
wind-up.
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25.
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By August
1982, the fair market value of the Victoria Square Property had risen to
approximately $25,000,000. In the fall of 1982 and in 1983 the fair market
value of the Victoria Square Property fell dramatically in conjunction with
the overall Calgary real
estate market. In August 1983, the fair market value of the Victoria Square
Property was approximately $4,650,000.
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26.
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In 1985,
Austin Curtin Sales acquired legal title to the Austin Property. Subject to
the agreements described below in paragraphs 32, 33, 35, 37, 39, 40, 42
and 47 legal title and beneficial interest for the Austin Property were held
by Austin Curtin Sales immediately prior to the purchase by STB of the Austin
Property in 1989.
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27.
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On
October 9, 1984, the City of Calgary adopted By‑Law
No. 18P83, the "Victoria Park East – Area Redevelopment
Plan", which set forth a redevelopment plan for a large area of Calgary which included the Victoria
Square Property and the Austin Property.
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28.
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From 1984 to
1989, among other activities, Wensel sought a purchaser of either the Newport lands (Victoria Square Property
and Austin Property) or the shares of Newport.
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29.
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In May 1985,
RBC wrote to Clarkson Gordon, Thorne Riddell Inc. and Coopers &
Lybrand informing them that Newport may be an attractive takeover target for one of their client's
companies preferably in the same line of business.
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30.
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On
May 30, 1985, RBC started a foreclosure action for the Victoria Square
Property against Newport, and
Wensel and Camalta as guarantors. Newport, Wensel and Camalta defended and
counter-claimed for damages arising from advice provided by RBC to Newport. The litigation was resolved by
way of agreements described in paragraphs 33 and 35 below.
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31.
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On
December 17, 1987, 376182 Alberta Ltd. (renamed Homa Holdings Ltd.
("Homa") on April 21, 1988) was incorporated. At all material
times, Homa was not related to Newport, STB, 400967 or Austin Curtin Sales.
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32.
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On
February 16, 1989, Homa entered into an agreement with Newport to purchase the Victoria Square
Property, other than certain excluded lots, and the Austin Property.
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33.
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On
March 2, 1989, RBC, Newport, Wensel, 396414 Alberta Ltd. ("396414") and Camalta
entered into a settlement agreement (the "Settlement
Agreement") regarding Newport's indebtedness to RBC and associated litigation.
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34.
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396414 was a
corporation established by Wensel. At all material times, Wensel was the sole
shareholder and director of 396414.
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35.
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On
March 2, 1989, RBC, Newport, Wensel, 396414 and Camalta entered into a side agreement (the
"Bank Side Agreement").
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36.
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On
April 17, 1989, Homa entered into an agreement with Austin Curtin Sales
to purchase the Austin Property (the "Austin Purchase Contract").
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37.
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On
April 19, 1989, Newport,
396414, Camalta, Wensel and Homa entered into a settlement and sale agreement
(the "Settlement and Sale Agreement").
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38.
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On
April 19, 1989, Wensel, 396414 and Homa entered into a consulting
agreement (the "Consulting Agreement").
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39.
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On
April 19, 1989, Newport,
396414, Camalta and Wensel assigned to Homa certain of their rights under the
Settlement Agreement and the Bank Side Agreement (the "Assignment
of Rights").
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40.
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On
April 19, 1989, Homa agreed with Newport, 396414, Camalta and Wensel that should Homa exercise its rights
under the Assignment of Rights and become the registered owner of the
Victoria Square Property, its obligations under the Settlement and Sale
Agreement and the Compensation Agreement would crystallize
(the "Letter Agreement").
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Acquisitions
and wind-up of Newport
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41.
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On May 9,
1989, STB, Newport, 396414 and Wensel entered into an agreement for the
purchase by STB (or one or more of its nominees) of all the issued and
outstanding shares and the debts and liabilities of Newport. The anticipated closing date was May 26, 1989.
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42.
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On
May 23, 1989, Wensel, 400967 and STB entered into an agreement under
which STB would purchase from Wensel the beneficial interest in all the
issued and outstanding shares of Newport. In addition, 400967 would purchase all right, title and interest
in and to Newport's
indebtedness to RBC. Wensel was also to use his best efforts to cause the
debts listed in Schedule A of the agreement to be assigned to 400967.
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43.
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On
May 23, 1989, Austin Curtin Sales, 400967 and STB entered into an
agreement under which STB would purchase from Austin Curtin Sales legal title
to all the issued and outstanding shares of Newport and the Austin Property. In addition, Austin Curtin Sales would
assign the Austin Loan to 400967.
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44.
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Through an
escrow closing on May 29 and 30, 1989, the transactions contemplated
under the agreements described in paragraphs 42 and 43 above were
completed.
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45.
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On
May 29, 1989, STB resolved to wind-up Newport effective May 30, 1989.
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46.
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By agreement
dated May 29, 1989 and delivered by release from escrow on May 30,
1989, the assets of Newport
were assigned to and assumed by STB.
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47.
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By agreement
dated May 30, 1989, Newport, 396414, Camalta, Wensel and Homa agreed to terminate (effective
midnight May 29, 1989) the Settlement and Sale Agreement, the Consulting
Agreement, the Assignment of Rights and the Letter Agreement. The agreement
was held in escrow and, as part of the escrow closing, the conditions of the
escrow were satisfied and the agreement released from escrow prior to Newport's dissolution.
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48.
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By agreement
dated May 30, 1989, Austin Curtin Sales and Homa agreed to terminate
(effective midnight May 29, 1989) the Austin Purchase Contract. The
agreement was held in escrow, and as part of the escrow closing, the
conditions of the escrow were satisfied and the agreement released from
escrow prior to Newport's
dissolution.
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49.
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On
May 30, 1989, Newport
was formally dissolved.
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50.
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By agreement
dated May 30, 1989, STB granted an option to Homa for the purchase of
the Austin Property and the Victoria Square Property (other than Lots 17‑20,
Block 90, Plan C).
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51.
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By agreement
dated May 30, 1989, STB granted an option to Homa for the purchase of
Lots 17‑20, Block 90, Plan C in the event that Homa did
not obtain an option over Lots 19 and 20, Block 97, Plan C
(the "Khullar Property") prior to noon on May 30, 1989.
The Khullar Property is shown on Annex 1.
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52.
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An option in
favour of Homa for the Khullar Property was obtained prior to noon on
May 30, 1989.
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53.
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On
May 30, 1989, Homa granted STB an option with respect to the Khullar
Property.
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54.
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Effective
May 30, 1989, STB (extra provincially registered in Alberta as 257262 British Columbia Ltd.)
was the registered owner in the South Alberta Land Registration District of
the Victoria Square Property and the Austin Property. Lots 17‑20,
Block 90, Plan C were free of any charges other than a mortgage in
favour of the Canadian Imperial Bank of Commerce.
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55.
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The
transactions outlined above in paragraphs 36 to 54 are schematically
summarized in the diagrams at (Annex 2).
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56.
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At the
conclusion of the transactions outlined above in paragraphs 36 to 54 the
status of the Victoria Square Property, the Austin Property and the Khullar
Property was as shown on the plan at Annex 1.
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57.
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A copy of the
caveat forbidding registration filed by STB in connection with its option
related to the Khullar Property (described in paragraph 53 above) and
the accompanying Certificate of Title was produced.
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58.
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By letters
dated March 30, 1990, Homa elected to exercise its options to acquire
the Victoria Square Property, the Austin Property and the Khullar Property.
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59.
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Notwithstanding
paragraph 58, in the end Homa did not exercise its options to acquire
the Victoria Square Property (excluding Lots 17‑20 of
Plan 90), the Austin Property or the Khullar Property, and Homa never
became the owner of any of those properties under the various options or
otherwise.
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60.
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By agreement
dated July 12, 1990, STB granted 383148 Alberta Ltd.
("383148") an option to purchase the Victoria Square Property and
the Austin Property and provided further arrangements with respect to the
Khullar Property. 383148 was a company created by the Calgary Stampede for
the purpose of assembling lands for the Calgary Stampede.
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61.
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By notice
dated July 23, 1990, 383148 gave notice of its intent to exercise the
July 12, 1990 option.
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62.
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On
August 22, 1990, STB sold the Victoria Square Property and the Austin
Property to 383148 for $4,430,846.
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63.
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On
August 31, 1990, 383148 purchased the Khullar Property for $490,063.59.
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64.
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The agreements
described in this Partial Agreed Statement of Facts and Definition of Issues
are authentic and each agreement accurately reflects the particular agreement
between the parties as of the date of the agreement or as otherwise
described.
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65.
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The Statement
of Claim and the Statement of Defense and Counterclaim described in
paragraph 30 above are authentic and accurately reflect the pleadings as
of the date shown.
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66.
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True copies of
STB's tax returns for its taxation years ending in 1987 to 1991 were produced.
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67.
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True copies of
Newport's tax returns for its
taxation years ending in 1988 to 1989 were produced.
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68.
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True copies of
400967's tax returns for its taxation years ending in 1989 to 1991 were
produced.
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69.
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At the time of
its dissolution, Newport had
available losses of $10,996,934 which could be carried forward to reduce
future years income for income tax purposes. The losses were in respect of Newport's business activities and were in
relation to the Victoria Square Property and the Austin property.
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70.
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When STB
entered into the agreement described in paragraph 41 above, STB was
aware that Newport had
significant non‑capital losses available to be carried forward.
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71.
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The parties
agree that all of the requirements of subsection 88(1.1) of the Act
(as it read at all material times) are met for STB's 1990 and 1991 taxation
years other than the requirements in subparagraphs 88(1.1)(e)(i).
The applicability of subparagraphs 88(1.1)(e)(i) is in dispute.
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B.
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ISSUES
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72.
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The issues to
be decided are therefore:
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(a)
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Are the
requirements of subparagraph 88(1.1)(e)(i) met for STB's 1990
taxation year?
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(b)
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Are the
requirements of subparagraph 88(1.1)(e)(i) met for STB's 1991
taxation year?
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C.
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DISPOSITION:
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73.
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If
paragraph 72(a) is answered in the affirmative, the Appeal for 1990
should be allowed in full.
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74.
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If
paragraph 72(a) is answered in the negative, the Appeal for 1990 should
be dismissed subject to the Court's consideration of the claim for the
inventory write down described in paragraph 5(c) above.
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75.
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If
paragraph 72(b) is answered in the affirmative, the Appeal for 1991
should be allowed in full.
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76.
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If
paragraph 72(b) is answered in the negative, the Appeal for 1991 should
be dismissed subject to the Court's consideration of the loss deducted
described in paragraph 5(d) above.
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[4]
Subsection 88(1.1)
of the Act in general provides how a parent may use the non‑capital
losses (net capital losses, restricted farm losses or limited partnerships
losses) of its subsidiary on its winding up as may reasonably be regarded as a
loss from carrying on a particular business and any other portion of a non‑capital
loss of the former subsidiary. Subparagraph 88(1.1)(e)(i) restricts
the use of a former subsidiary's non‑capital losses where control of the
parent or subsidiary has changed. It is the interpretation of subparagraph 88(1.1)(e)(i)
on the facts before me that determines these appeals.
[5]
During the years in
appeal subparagraphs 88(1.1)(e)(i) read as follows:
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Where a Canadian corporation (in this
subsection referred to as the “subsidiary”) has been wound-up and not less
than 90% of the issued shares of each class of the capital stock of the
subsidiary were, immediately before the winding-up, owned by another Canadian
corporation (in this subsection referred to as the “parent”), … for the
purpose of computing the taxable income of the parent under this Part … for
any taxation year commencing after the commencement of the winding-up, such
portion of any non-capital loss … of the subsidiary as may reasonably be
regarded as its loss from carrying on a particular business (in this
subsection referred to as the “subsidiary's loss business”) … for any
particular taxation year of the subsidiary (in this subsection referred to as
the “subsidiary's loss year”),to the extent that it …
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Lorsqu'une corporation canadienne (appelée
« filiale » au présent paragraphe) a été liquidée, qu'au moins
90 % des actions émises de chaque catégorie du capital-actions de la
filiale appartenaient, immédiatement avant la liquidation, à une autre corporation
canadienne (appelée « corporation mère » au présent paragraphe) … aux
fins du calcul du revenu imposable de la corporation mère en vertu de la
présente partie … pour toute année d'imposition commençant après le début de
la liquidation, la fraction d'une perte autre qu'une
perte en capital … subie par la filiale, qu'il est raisonnable de considérer comme
résultant de l'exploitation d'une entreprise donnée (appelée
« entreprise déficitaire de la filiale » au présent paragraphe), … (appelée
« année de la perte subie par la filiale » au présent paragraphe), dans
la mesure où chacune de ces fractions …
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(a) was not deducted in computing the
taxable income of the subsidiary for any taxation year of the subsidiary, and
…
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a) n'a pas été déduite dans le calcul du
revenue imposable de la filiale pour une année d'imposition de celle‑ci,
et
…
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shall, for the purposes of this subsection, …
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est, pour l'application du présent paragraphe, …
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(c) in the case of such
portion of any non‑capital loss … of the subsidiary as may reasonably
be regarded as its loss from carrying on the subsidiary's loss business, be
deemed, for the taxation year of the parent in which the subsidiary's loss
year ended, to be a non‑capital loss … of the parent from carrying on
the subsidiary's loss business, …
except that
(e) where at any time
control of the … subsidiary has been acquired by a person or group of
persons, no amount in respect of the subsidiary's non‑capital loss … for
a taxation year ending before that time is deductible in computing the
taxable income of the parent for a particular taxation year ending after that
time, except that such portion of the subsidiary's non‑capital loss … as
may reasonably be regarded as its loss from carrying on a business … is
deductible only
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c) dans le cas de la fraction d'une perte autre qu'une perte en
capital, … subie par la filiale qu'il est raisonnable de considérer comme la
perte qu'elle a subie dans l'exploitation de son entreprise déficitaire
réputée être, pour l'année d'imposition de la corporation mère dans laquelle
s'est terminée l'année de la perte subie par la filiale, une perte autre
qu'une perte en capital, … subie par la corporation mère résultant de l'exploitation
de l'entreprise déficitaire de la filiale, …
sauf que
e) en cas d'acquisition, à une date donnée, du contrôle …
de la filiale par une personne ou un groupe de personnes, aucun montant n'est
déductible au titre d'une perte autre qu'une perte en capital … subie par la
filiale pour une année d'imposition se terminant avant cette date, dans le
calcul du revenu imposable de la corporation mère pour une année d'imposition
donnée se terminant après cette date, à l'exception de la fraction de cette perte
qu'il est raisonnable de considérer comme résultant de l'exploitation d'une
entreprise … qui sont déductibles
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(i) if that
business is carried on by the subsidiary or the parent for profit or with a
reasonable expectation of profit throughout the particular year, and …
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(i) seulement
si cette entreprise est exploitée par la filiale ou par la corporation mère à
profit ou dans une attente raisonnable de profit tout au long de l'année
donnée, et …
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Background
[6]
There is little, if
any, evidence as to what activities and business were carried on by Newport
prior to 1984. Mr. Wensel, the controlling mind of Newport, was deceased at time of trial. The Minister, in
assuming facts when assessing STB, concluded that the business of Newport was buying and selling land without incurring development
costs and described this as a business of land speculation. On the other hand,
the Minister considered the appellant to carry on the land development
business, a business different from that carried on by Newport.
The actual evidence before me does not lead me to conclude one way or the other
what Newport's business was when it incurred the losses
subject to this appeal. I discuss this later in these reasons.
[7]
The principal of the
appellant, James Houston, a professional engineer, has been active in the
real estate business since arriving in Vancouver in 1957. In 1982 his business had a "big fall" and he
"started over again", incorporating the appellant in 1983. Through
the appellant and other entities, before and after 1983, Mr. Houston said
he bought land for resale, for development and sale and to develop for
investment.
[8]
Before 1983,
Mr. Houston had purchased subdivided land in Port Moody which he
owned for several years and then "took in" Canadian Industries Limited
("CIL") and later "bought them out". Eventually he sold his
interest in the Port Moody property to Corma, an Alberta
land development company. He had also acquired land in Pitt Meadows and
built houses for sale as well as acquiring land which he sold to the British Columbia government. Mr. Houston estimated that prior to
the incorporation of STB he was involved in "somewhere between 50 and
100" investments.
[9]
Sometime after STB was
incorporated Mr. Houston got together with Richard Browning and Bev
Armstrong and after "developing a relationship" agreed to participate
in projects together. Mr. Armstrong was a former employee of
Mr. Houston who had a background in finance and development.
Mr. Browning had construction experience. Mr. Houston described
Messrs. Armstrong and Browning as "young guys in their late 20's or early
30's". Mr. Houston was 49 years of age at the time. The three
agreed that all future projects would be held as to Houston, 50 percent,
and each of Browning and Armstrong as to 25 percent. Projects would be
held by different entities, corporations and partnerships. "Pacific
Western Realty" was the marketing name to be used for the projects.
[10]
At all relevant times
Pacific Western had a small group of employees, about seven or eight, according
to Mr. Houston. All construction was done by contractors "whom we
worked closely with".
[11]
In 1990 STB had
12 investments in limited partnerships and joint ventures. All, except
one, were in real estate. The exception was the Red Robin
Restaurants of Canada partnership. The ownership interests in real
estate properties varied from 37.5 percent to 50 percent. The
investments included options in properties in False Creek which were sold
at a profit, "probably" before taking title to the properties. STB
also purchased a property across from the B.C. Hydro building in Vancouver but sold the property to Hong Kong interests
before the start of construction. Another property, at Thurlow and Alberni
streets in Vancouver, was acquired and a mixed‑use
building was constructed. The building consisted of commercial tenants and a
rental apartment tower, which STB had "condominiumized" but sold as a
single property. Other properties owned by STB included investments in the Vancouver area and a rental property in Calgary, "operationally almost identical to Thurlow and
Alberni". Mr. Houston commented that being active in trying to find
Red Robin locations made the appellant "fairly knowledgeable"
about the real estate market and development business.
[12]
Mr. Browning
corroborated much of Mr. Houston's evidence. He described
Mr. Houston, Mr. Armstrong and himself as opportunists in that any
property they purchased would be put to account in the most profitable way,
depending on demand at the time. If there was a low vacancy of office space, an
office building would be built, if there was a low residential rate, housing
would be built and if money could be made by turning over the property, the
property would be sold. All depended on the market place at the time.
Acquisition of Newport
[13]
Mr. Houston first
became aware of the possibility of acquiring the shares of Newport "a maximum of 60 days" before STB
agreed to purchase the shares. He acknowledged he was motivated to purchase the
Newport shares "because it had the potential
of sheltering income". The transaction was brought to Mr. Houston by
his lawyer as "a tax deal". STB expected to have income in its 1990
fiscal year of over $13,000,000 from two limited partnerships, both of which
had May 31 year-ends. Newport had substantial non‑capital losses
that could be carried forward to STB's 1990 and later taxation years.
[14]
Mr. Wensel, the
principal of Newport, discussed the possible sale of the shares
to the appellant. Mr. Houston soon learned that Homa had an option to
purchase much of the Victoria Square Property and the Austin Property. Lots 17
to 20 were not under option, however, at the time. Mr. Houston also
learned that Mr. Wensel once had an offer for the Properties but "the
Royal Bank talked him out of it".
[15]
The Victoria Square
property acquired by Newport in 1981 "was very interesting",
according to Mr. Houston, because it and the Austin Property consisted of two
city blocks very close to downtown Calgary. At the time
the land was used as parking for Stampede and Saddledome events. In 1984 the
Victoria Park East Area redevelopment plan, where the Newport
Land was situated, foresaw commercial and residential
development with "very high densities for the residential"; this attracted
Mr. Houston due to his background in residential properties.
[16]
Mr. Browning testified
that "we were moderately familiar with the Calgary
market". He spent a lot of time in Calgary
and is of the view he "was reasonably well‑connected in the business
community and … had a pretty good idea of the lay of the land, politically … as
far as development approval went". He was the "go to partner" on
developing real estate and he was responsible for vetting the feasibility uses
for the Victoria Square Property.
[17]
Politically,
Mr. Browning explained, Calgary operated differently from Vancouver. Calgary had a ward system with elected aldermen.
Homeowner associations in Calgary wards were influential. The two aldermen representing
the area where the Victoria Square Property is located "vigorously"
supported affordable housing and "that would encourage us to go down that
route", Mr. Browning declared.
[18]
A feasibility study for
development potential of the Victoria Park Property was made by Jeff Wren,
an employee of Pacific Western. Mr. Wren had spent a significant time
"physically working in Calgary". Mr. Houston said Mr. Wren
would be the person at Pacific Western who would get involved in looking at the
property's potential. The study was prepared "to make sure that we hadn't
made any mistakes", Mr. Houston testified. While he was confident in
his own appreciation of property potential, Mr. Houston wanted
"somebody [to] have a good look at it" and Mr. Wren came back
"with a theoretical development plan". Mr. Wren prepared his
report on the basis of a hotel development and a Red Robin restaurant and some
residential potential. A reason for including the restaurant was that he knew
STB owned the franchise. He included a parkade because of the proximity to the
Stampede and hockey arena. Mr. Wren was not aware Homa had an option on
the Property. However, Mr. Wren, according to Mr. Houston,
"wasn't a housing man" and there was no housing on the plan.
Mr. Houston stated that in 1989 the Calgary
residential vacancy rate was "quite low" and that was a "key
item" in thinking about the residential aspects of the property.
[19]
Crown counsel
challenged Mr. Houston's view that residential, or a large portion of the
property being residential, was required to make the property viable. Crown
counsel questioned Mr. Houston why there were no documents to confirm his
evidence. Mr. Houston declared that it was not necessary to have someone
undertake a study of the property based on residential development in the same
way Mr. Wren did for commercial development. It is not necessary,
Mr. Houston insisted, because in his view commercial was not the best
potential for the property. He said that at the time he had no idea exactly
what was going to take place. Mr. Wren's job, Mr. Houston recalled,
was to show us " … that we had not missed anything and that it was economically
viable". Mr Houston repeated that Mr. Wren's expertise was
commercial and Mr. Wren did the study, rather than someone with
residential expertise, because he was handy at the time.
[20]
While Mr. Houston
was not excited about Homa's plans for the Properties — Homa planned a
commercial development including a hotel and 20,000 square foot
restaurant — he acknowledged that if some hotel operator were interested, "we
would have looked at it". Restaurants were under consideration by the
appellant but not the size contemplated by Homa. The Red Robin restaurants
operated by Mr. Houston's group were about 6,500 square feet. However, the
Stampede Association did find favour with Homa's plans which also included
retail sites and a "small" office building. Mr. Browning thought
there was room for commercial interests but Mr. Houston believed the site
was too far from downtown Calgary to be a prime retail site. Residential
units together with traffic from the Stampede and conventions, which
Mr. Houston described as "sporadic", would be required to
support commercial enterprises and "a moderately priced residential
development close to downtown was a winner", in his view.
[21]
Mr. Houston was
not worried about the option Homa had on the Victoria Park and Austin properties.
He had spoken to a Mr. Hartung of Homa and concluded that Homa was not a
professional developer and was getting into something its principal had no
experience. He viewed Homa's chances of getting financing "pretty
remote". However, Homa informed Mr. Houston it represented West
German investors who had financial capability and that there were tax
advantages for West Germans investing in Canadian real estate. So while there
was a possibility of producing a major equity position, Mr. Houston was of
the view that under Canadian rules, that is, what and how Canadian banks would
finance, the Homa project was not "financeable".
[22]
If Homa exercised its
option, Mr. Houston stated, Newport would still have land on a corner,
Lots 17‑20, that would be beside a major development and, once
built, would generate a lot of traffic. STB would be in a position to build a
mixed‑use building similar to Thurlow and Alberni. Also, he saw STB as a
possible joint venturer with Homa because of its experience and background in
development. Mr. Houston and Mr. Browning recalled that STB had dealt
with the same person at the hotel chain that Homa did. "We understood
costs, architects … these guys had no idea". In any event, Lots 17‑20
would have increased in value.
[23]
Mr. Houston stated
that he knew the Austin property had potential as mixed‑use
development so "any land you can get your hands on was good business as
long as the price was right". Besides, the Austin Property was part of the
package that included the Newport shares.
[24]
In any event when STB
purchased the shares of Newport, it was looking at the development
feasibility of the Properties, according to Mr. Browning. This was a large
block of land and STB was "trying to look into the crystal ball five years
down the road" to see what the Calgary market would
be. In 1989, Mr. Browning recalled, "Calgary
was not in good shape" economically. Most exploration companies were shut
down, the price of oil was low. Calgary office buildings had a high vacancy rate.
[25]
STB acquired all of the
issued and outstanding shares of Newport on May 29, 1989 for the sum of $468,476
and the nominee of STB, 400967 purchased the indebtedness of Newport by payment to the Royal Bank of $2,000,000. Newport was wound up on May 30, 1989. The cost of
settling the other Newport debts aggregated $1,401,524.
[26]
Lots 17, 18, 19
and 20 were also acquired by STB "free and clear" on May 30,
1989.
[27]
Mr. Houston agreed
that there was "some urgency" — words used by respondent's
counsel — that the acquisition of Newport be concluded by May 30,
1989 so that Newport's losses would be able to be utilized by STB in its 1990
fiscal year when it anticipated substantial income.
[28]
In Mr. Houston's
view the Royal Bank loan
had to be preserved "because it's what had created the deduction".
400967 Alberta Ltd. purchased the debt from the Royal Bank so as to avoid the
application of the debt forgiveness rule in the Act.
Another reason proffered by Mr. Houston for acquiring the debt was that
the transaction was complex and part of the deal was that Mr. Wensel had
to settle with creditors. He did not want "unknown creditors coming out
the woodwork" [and] "by maintaining the debt position in the
entirety, it protected us from unknown creditors".
[29]
Prior to the
acquisition of the shares of Newport, STB arranged for the Canadian Imperial
Bank of Commerce ("CIBC") to finance the transactions. The amount of
the loan was $2.5 million with interest at the rate of prime plus one and
one quarter percent interest. The term of the loan was one year, to be paid in
full by May 31st, 1990. Mr. Houston described this loan and the
interest on the loan as "pretty standard" since one ordinarily does
not get involved in amortization on a one year loan. He reiterated that STB
"had no idea exactly what was going to happen with the property" once
purchased.
[30]
Mr. Houston
acknowledged on several occasions that tax planning went into the construction
of the transaction for the acquisition of the shares of Newport. STB had to
acquire an Alberta license to carry on business in Alberta.
Precautions had to be taken to ensure that Newport's
debts were not forgiven and that once acquired, Newport's business would have
to be carried on by STB with a reasonable expectation of profit throughout the
year in which it wished to utilize Newport's losses. However,
Mr. Houston also said that he saw the underlying property in Newport as a
"real opportunity" for development and whether Homa was successful or
not, STB could wind up with a good piece of development real estate to work on
its own or together with another developer.
[31]
In his opening
statement, counsel for the respondent commented that very little documentation
exists concerning STB's acquisition of Newport.
This was pursued in cross‑examination. For example, STB did not prepare
any development plan for the properties. Mr. Houston's position was that
since Homa controlled the land, Homa would be the party to the development
plan. Newport would co‑operate with Homa. And, he
said, there was no reason to do anything further with Lots 17‑20
until the ultimate development of the site was settled. Again, Mr. Houston
did not think Homa was going to be able to do what it wanted to, even if they
got the money. STB felt that Homa would have to hire someone in the development
business who knew what they were doing because Homa had no idea what was
happening. And Mr. Houston believed that it was possible that STB could
integrate into the project that would be contiguous to its property. There was
no need for written documents or written reports in these circumstances. There
were no documents prepared for a joint venture with Homa because Homa was doing
its own thing at the time.
[32]
Appellant's counsel
questioned Mr. Houston on discussions he or his associates had with the
Calgary Stampede Association. Mr. Browning dealt with the Stampede
Association on behalf of STB and it was Mr. Houston's impression that the
Stampede Association had been told not to buy any property but once STB
acquired the Victoria Park and Austin properties, the Stampede Association
"were prepared to oppose us … in doing any major residential development
…". Mr. Browning initiated a meeting with a Calgary Stampede
official, Mr. Ron Jaqus, after the purchase and it became clear to
him that the Stampede wanted the Victoria Square Property developed in a way
that would not "hinder" its operations. The Stampede wanted a use of
the Property that would be beneficial to it and "that meant … commercial
use". Mr. Browning's impression was verified in discussions with a director
of the Stampede, Mr. Robert Poffenroth, who was also a lawyer in Calgary and represented the Stampede.
[33]
To clarify several of
the key transactions: the agreement between STB, Newport,
396414 and Wensel for the purchase by STB (or a nominee) of the shares of Newport and its debts and liabilities is dated May 9,
1989. The transaction was structured so that STB would purchase the shares of
Newport and its nominee, 400967, would purchase, among other debts, all right,
title and interest in Newport's indebtedness to the Royal Bank. STB also
agreed to purchase the Austin Property and legal title to the Newport shares from Austin Curtin Sales. These transactions
were closed before May 31, 1989.
[34]
As set out in
paragraphs 47 and 48 of the Agreed Statement of Facts, on May 30 the
agreements described in paragraphs 36, 37, 38, 39 and 40 were terminated.
On the same day, after the dissolution of Newport,
STB granted an option to Homa on the Austin Property and the Victoria Square
Property as well as Lots 17‑20 in the event Homa did not obtain an
option on the Khullar Property prior to noon on May 30. The purchase price
to be paid by Homa for the Properties was $4,000,000. The option was to expire
on April 1, 1990. Homa's original option to purchase the Properties was
also for the price of $4,000,000. Homa did acquire an option on the Khullar
Property and also on May 30, Homa then granted an option with respect to
the Khullar Property to STB
who, on acquiring the Khullar Property, sold it to the Stampede's nominee.
[35]
STB did nothing with
the Properties until Homa attempted to exercise its option, notwithstanding Mr. Browning's
earlier discussions with Stampede officials. Mr. Houston explained that
there would be no plans by STB for the Properties until Homa decided what they
were going to do "and we had no way of knowing at that point". In
other words, until Homa decided what it was going to do with the property, STB
was powerless to do anything on the site.
[36]
When Homa gave notice on
March 30, 1990 that it would exercise the option on the Properties,
Mr. Houston's reaction was that "They decided they were not going to
be able to do the project". Homa did not have the money to proceed.
Mr. Houston explained that Homa "had a development permit but they
had no working drawings, they had nothing other than sketches and some pictures
and some basic plans." In his view, in order to proceed with this project
one had to have a "very major equity position" to make it work. He
added that "if they were going to use anybody on the Canadian side, any
bank, unless they have that major equity position, they did not have enough
information at that point. They could not tell you exactly what it was going to
cost. They did not have any tenants. They did not have a hotel commitment. The
logical thing for them to do would be to ask for an extension, … [but] … if
they asked for an extension, … presumably we would have asked them for some
money." Something, in Mr. Houston's view, would have happened. He
stated that "If they asked for an extension at that point, then he thought
there was a chance that they were going to eventually exercise the
option." In his view, "Anybody who was knowledgeable in the
development business, if they really thought they could do the deal, would have
negotiated an extension of the option, as opposed to saying … in terms of where
they were with the development process".
[37]
STB asked Homa
"Where is the money?" to purchase the Properties and, according to
Mr. Houston, Homa replied that the titles to the Properties were not clear.
Mr. Houston did not agree since both the Royal Bank of Canada and the CIBC had loaned money on security of the Victoria
Square Property and "so the idea that there was something wrong with the
title just did not make any sense." Finally, Mr. Hartung of Homa acknowledged
that the option had expired but wanted $50,000 from STB. STB refused. Homa
countered with an offer of selling their drawings and plans to STB for
$250,000. Again, the offer was refused by STB because, in Mr. Houston's
opinion, their drawings and plans had no value whatsoever. Homa filed various
caveats on the property and finally, in July 1990, a settlement was reached:
Homa agreed that they would not exercise the option and they would clear title
to the properties; STB agreed that if it used Homa's drawings in any form, STB
would pay Homa $250,000. Mr. Houston said this was quite an easy thing to
agree to because he did not intend to use the drawings.
[38]
In reply to appellant's
counsel's question as to the reasons STB took ownership of Newport itself rather than with a partner, Mr. Houston
was not shy in replying "Because STB needed the losses."
Mr. Houston added that if the property had not been sold and STB would
have had to proceed with its development, the property would have been
reorganized in such a way that the three partners, that is himself,
Messrs. Browning and Armstrong would have owned the Properties as to
50 percent, 25 percent and 25 percent respectively.
Sale to Calgary
Stampede
[39]
Mr. Houston could
not recall specifically whether STB approached the Stampede to sell or whether
the Stampede approached STB to purchase the properties. Until July 1990, Homa
was dealing with the City of Calgary and Mr. Houston understood that Homa may
have received a development permit. Again, discussions between
Mr. Browning and Stampede officials led STB to realize that the Stampede
wanted control of the Properties if not by ownership, then by what was to be
developed on them.
[40]
In reply to his
counsel's question as to what led to his decision to sell the Properties,
Mr. Houston recalled that in 1984, the Victoria Park East area
redevelopment plan offered a variety of options including high density housing,
retail and commercial zoning. However, he repeated that he did not believe it
was realistic to convert the whole site into a commercial development. He was
adamant that a "big portion of it" had to be housing but the Stampede
Association made it very clear that they would oppose housing, notwithstanding
what two aldermen thought or some other people in the district thought.
Mr. Houston saw this as "a long drawn out battle" with the
Stampede and STB was not interested in getting into a long drawn out battle
with the Stampede Association. But STB concluded there was only one buyer under
these circumstances and that buyer was the Stampede Association; the Properties
were sold to the Stampede Association through its nominee 383148 Alberta Ltd.
[41]
The Stampede's initial
offer for the Properties was $3.725 million, approximately $20 per square
foot. Mr. Houston thought this was their minimum offer. Mr. Houston
did not have any concern if the properties would not be sold because "We
were big enough that we could carry it and hang on to it. We did not have to
sell it." Negotiations continued until a counter offer at $4.8 million
was accepted, provided that another apartment property known as the Khullar
Apartments be included with the property. Mr. Houston explained that the
Khullar property was on a corner on 13th Avenue and
by acquiring the Khullar property, that the Stampede would be in a position to
"cancel" 13th Avenue and make the properties contiguous. The
price for the Properties, including the Khullar property, which was acquired by
STB for the Stampede Board, aggregated $4.432 million. Mr. Houston
calculated that the Khullar property was about $25 a square foot for a corner
and he believed the amount for the both properties, not including Khullar, was
about $23.50 a foot. He believed this was the top of the market at the time.
[42]
In cross-examination of
Mr. Houston, respondent's counsel distinguished between the business of
STB and the businesses of other corporations or entities owned by
Mr. Houston, either directly or indirectly. Mr. Houston confirmed
that in only one instance before 1989 was STB involved in the purchase of land
for resale and that was the property in False Creek. In the False Creek project
STB was the partner. Mr. Houston confirmed that STB would usually be a
part of a limited partnership which would buy a particular property. In his
examination for discovery Mr. Houston stated that the partners of the
partnership would usually be STB and two other corporations. STB also
participated in joint ventures.
Analysis
[43]
For the appellant to
succeed subparagraph 88(1.1)(e)(i) of the Act requires that Newport's business that incurred the losses, the loss
business, be carried on by STB once its assets are wound up into STB. There is
no issue before me that Newport's assets were acquired by STB in STB's
1989 taxation year. The Minister, in assessing, assumed that Newport had ceased to carry on any business, including the
business that incurred the losses, in 1984. The issues are whether STB carried
on STB's business in 1990 and 1991 taxation years and, if so, whether Newport's business was carried on by STB for profit or with a
reasonable expectation of profit throughout 1990 and 1991.
[44]
Appellant's counsel's declared
that the issue before me is quite simple: whether, after acquiring control of
another corporation and acquiring the assets of that corporation, a taxpayer
corporation in the real estate business may deduct non‑capital losses
incurred by the other corporation in the real estate business.
[45]
There are, as the
Minister states, three questions I must consider:
i) was STB carrying
on Newport's loss business;
ii) if STB was
carrying on Newport's loss business, was it carrying on that
loss business throughout 1990 and 1991;
iii) if the answer to
ii) is yes, then was the loss business carried on by STB for profit or with a
reasonable expectation of profit.
i) Business of Newport
[46]
As I stated earlier,
evidence of the business Newport carried on during the years it experienced
the losses is wanting. Mr. Wensel, the controlling shareholder of Newport during the early 1980s, was dead at time of trial. No
witness who may have had knowledge of Newport's business
testified. I am loathe to accept without question as fact an assumption made by
the Minister in assessing that may be an essential element in deciding an
appeal and, while it is not proven to be false, the truth of the fact assumed
is uncertain. Such assumption may be based on hearsay, for example. On the
evidence before me the fact assumed appears to be the result of a conclusion of
an auditor reading a bank manager's report of March 9, 1981 that includes
the comment that, "As a rule of thumb, they [i.e. Newport] endeavour to
turn the land over within 12 to 24 months without incurring development
costs." The writer also refers to Mr. Wensel gathering land on the
basis of a "quick turnover". A "Personal Resume" of
Mr. Wensel states that he incorporated Newport
and started to assemble land for sub‑division as well as for "reorganizing
and selling" for development. There was also a description of Newport's business in another bank report, dated
October 21, 1988, that it was in real estate development. Also produced
were an appraisal report of 1982 noting the Properties had potential for
development, an undated Laventhol & Howath hotel marketing study for the
Property, probably prepared in 1983 or 1984 describing Mr. Wensel as a
developer,
and correspondence dated July 29, 1983 from the Mayor of Calgary to
Mr. Wensel referring to his plan for developing the Victoria Square
Property with a hotel. The financial statements of Newport
for 1988 describe the Properties as being held for future development. The submission
by the Minister that before September 1984 Newport carried on the business of
land speculation "and it was this business … that gave rise to the non‑capital
losses …" and the submission by STB that before September 1984 Newport was in the land development business are both based
on hearsay. It is clear, however, that at all relevant times, Newport carried on a real estate business and that this
business may have included land speculation and land development.
ii) Business of STB
[47]
Respondent's counsel denied
that STB carried on a business in 1990 and 1991 that had been carried on by Newport. In particular, STB was not carrying on a business
with the Properties. Counsel reviewed STB's real estate activity and concluded
that prior to 1989 STB had purchased land on its own account only on one other
occasion. All other acquisitions of land were "through the limited
partnerships of which it is a member." And Mr. Houston, himself,
admitted to purchasing land, subdividing the land and then selling. But,
counsel argued, STB itself was never engaged in buying land for quick resale.
[48]
That a person is a
member of a partnership is no indication that he or she is not carrying on a
business. Indeed, the Partnership Act of Alberta
defines "partnership" as:
the relationship that subsists between persons carrying on a
business in common with a view to profit.
[49]
Article 50 of the Partnership
Act states that a limited partnership may be formed to carry on any
business that a partnership without limited partners may carry on.
[50]
The wording of the Partnership
Act is clear: a partner carries on a business with one or more other
partners.
It is not the "partnership" that carries on the business. On the
evidence, STB carried on a real estate business in 1990 and 1991, as well as in
prior years. That it carried on a business with others does not change the fact
it carried on a business.
[51]
Respondent's counsel
argued that Newport was in the speculation business while STB
carried on the land development business, a different business. The respondent
denies the appellant's position that the real estate business is a generic
business that may include land speculation and developing land for resale. Counsel
for respondent argued that the appellant's proposition does not accord with
common sense since even if a real estate development business always includes
the business of speculation, due to the possibility of an unsolicited offer
carrying forward, the converse cannot always be true. A "taxpayer could
arrange his business such that he only engages in the flipping of
property" without any knowledge or ability to undertake development.
[52]
Counsel for the
respondent explained that if real estate business is a generic business and
"always encapsulates the business to develop and the business to earn
income from speculation, then there would be no basis for the income/capital
test which involves a search for whether there was a secondary intention".
[53]
The term "real
estate business" conjures up many activities: land development, land
speculation, property rental, real estate broker or agent … the list is
unlimited. There is a real estate business, one that covers every conceivable
real estate activity, but not all real estate businesses are the same business
or substantially similar businesses. For example, the land developer is not
carrying on the same business as a real estate broker and the person who
carries on business of renting residential units is not necessarily carrying on
the same business as a person who is exclusively a land speculator. There are
exceptions of course; each case will rely on its own facts.
[54]
I cannot agree with
respondent counsel's submission that real estate business cannot be considered
a generic business. However, the real estate business is not a "one size
fits all" sort of business. Often in the real estate business a private
corporation's business activity is characterized by the personality of its
principals and their toleration for risk. A taxpayer in the real estate business
may own land for resale as well as land for development for its own account or
to develop property for resale. A taxpayer may buy the land with the intention
of subdividing and then sell the subdivided lots, or the taxpayer may buy the
land, subdivide it and build residential properties and lots for its own
account. There may be times that a taxpayer because of his experience and
knowledge of the industry may know of a good buy of land, has no immediate
plans for the land but nevertheless acquires the land. A taxpayer, similar to
Mr. Armstrong's description of the Pacific Western group, may buy property
for one purpose and quickly change his or her mind and do something else with
the property.
[55]
The Act itself
takes a rather liberal view in describing a particular activity in defining
"farming" and "fishing", for example. Farming
includes such distinct activities as maintaining of horses for racing, raising
of poultry, fur farming, fruit growing, keeping of bees. Fishing includes
catching shellfish and marine animals. In Interpretation Bulletin 206R,
published on October 29, 1979, the predecessor to the Canada Revenue
Agency commented that "comprehensive rules on when business operations are
of the same kind are not possible" but gave as examples the activities
that come within the definitions of farming and fishing. Earlier in the
Bulletin it is stated that "the fact that the business operations of a
taxpayer are of different natures, for example manufacturing and selling, does
not preclude them from being the same business" if there is some
connection, interlacing or dependence between the activities.
[56]
Mr. Houston and
his associates appear to be savvy real estate operators. While the Properties
were purchased for tax purposes, Mr. Houston, never lost sight of the fact
that the Properties had development potential for profit. Once STB acquired the
Properties Mr. Browning was in contact with the Calgary Stampede to
determine how the Properties may be dealt with. Eventually he negotiated the
price with the Stampede.
[57]
I agree with my
colleague Archambault J.'s comments in Gaz Metropolitain Inc. v.
The Queen,
that:
It seems clear that the purpose of s. 88 of the Act is
to prevent a company whose principal activity is, for example, the sale of
natural gas from buying a company whose principal activity is the manufacturing
of television sets unless the latter business is carried on for profit, and the
losses can be deducted only to the extent of the income from the television
manufacturing business.
[58]
Property purchased on
speculation or for development for resale usually is inventory; the land is
purchased for resale at a profit; the purchaser of the land is carrying on a
business. It may be one thing to distinguish a business where land is purchased
for resale from a business where land is purchased as an investment to earn
income from the property, as rent, for example.
It is more difficult to distinguish as separate businesses where the basic
intent is the same, to buy land and resell, one way or the other. Land
speculation and land development are not carried on in watertight compartments;
there is frequent leakage from one to the other, in particular when carried on
by the same person. Land purchased for development and resale may have to be
sold, without the land being developed and land bought on speculation may turn
out to be a good development site.
[59]
The respondent alleged
that the appellant lacked documentation to support its claim for what it could
have done with the Properties. I agree with the appellant's witness that STB's
efforts to plan for development of the Properties would not be worthwhile as
long as Homa had an option to purchase the Properties. Also, there is no
evidence before me that private corporations, closely held, require that all
decisions and plans be documented. This is one of the attraction of a private
corporation: it can make decisions move more quickly than a widely held or
public corporation. Directors can make decisions waiting for an elevator for
example; corporate formalities can be dealt with later. It need not be bottled
up with paper.
[60]
In the appeal at bar STB
has sold real estate soon after purchase and has also developed land for resale:
two branches of the same business insofar as STB is concerned. To put it in a
nutshell, STB carried on the real estate business however it could do so to
make money. Mr. Houston had a history of acquiring real estate, usually in
a limited partnership. Mr. Houston explained that one could make money in
real estate in at least three ways: a) buying and selling without any thought
of development, b) buying and selling the land after taking the property
through the development application process, and c) buying the land, completing
the development application process, building on the land, and then either
selling it or keeping it as an investment. Mr. Browning described the
partnerships he participated with Mr. Houston as opportunist; they would
deal with the land in the best way to make a profit by land not subject to the
option and being near the Homa development. Although the transaction was tax
motivated, STB acquired the Properties, according to Mr. Houston, as an
opportunity to make a profit by building residential units on the Properties.
And if Homa exercised its option on the Properties, STB could still make a
profit by developing Lots 17 to 20, not subject to the option, that would
be contiguous to Homa's development. STB had been carrying on a real estate
business from its inception, buying, selling and improving real estate. And
during 1990 and 1991 STB had substantial income from this business. STB's
income from real estate partnerships and joint ventures in 1990 was
approximately $13,000,000.
[61]
Newport's activities, as far as one could fathom,
were not dissimilar from that of STB. On the balance of probabilities it sold
land shortly after acquiring it. At the same time there is some basis to
conclude that when Newport could not sell the Victoria Square
Property, it made inquiries whether the Property could be developed. This was
STB's business and for the short time it owned the Property STB was doing what Newport was attempting to do. But STB had smarter owners than
Newport with better financial means, greater
experience and knowledge and who were better able to control the situation. STB
acquired the Properties with a reasonable expectation of gaining a profit one
way or another. It was carrying on the same business as Newport when Newport incurred the losses. STB was holding the
Properties it acquired from Newport and its other interests in the course of
continuing to carry on its business for profit or with a reasonable expectation
of profit.
[62]
The appeals are allowed
with costs.
Signed at Ottawa, Canada, this 8th day of March, 2011
.
“G.J. Rip”
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