Citation: 2008TCC8
Date: 20080115
Docket: 2004-2638(IT)G
BETWEEN:
SASKATCHEWAN WHEAT POOL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Bowman, C.J.
[1] This appeal is from
an assessment made under the Income Tax Act for the 1997 taxation year
whereby the Minister of National Revenue disallowed a loss claimed by the
appellant of $30,149,842 on the sale of a 636 acre parcel of land. The issue is
whether the loss is on revenue or capital account. A number of other issues
raised in the pleadings were settled and the settlement will be reflected in
the formal judgment.
[2] The parties entered
into an Agreed Statement of Facts and Issues (“ASF”) and it is attached as
Appendix A to these reasons. Oral evidence was given on behalf of the
appellant by three witnesses whose testimony was not challenged on
cross-examination or otherwise contradicted.
[3] In the 1960s and
later, Western Co‑operative Fertilizer Ltd. (“WCFL”) was in the business
of manufacturing and selling fertilizer. It was owned equally by the appellant,
sometimes referred to as SWP, Alberta Wheat Pool (“AWP”) and Manitoba Pool
Elevators (“MPE”), (collectively the “Pools”). In the 1960s and 1970s it
acquired a 530 acre parcel of land located in the southeast quadrant of Calgary
(the “section 15 property”), a 636 acre parcel of land located just outside Calgary (the “section 26
property”) and some other property in Calgary and Medicine Hat.
[4] By 1983, WCFL was
having financial difficulties and was being pressed by its bankers to reduce
its bank indebtedness. As of January 31, 1983, the section 15
property was appraised at a value of $24,000,000 and the section 26
property was appraised at a value of $11,000,000.
[5] In 1982, the Pools
incorporated MAALSA Investments Ltd. (“MAALSA”). Its outstanding common shares
were owned 40% by AWP, 40% by SWP and 20% by MPE. The purpose was for MAALSA to
acquire for $40,000,000 the section 15 property and the section 26
property and an option to acquire other properties in Calgary and Medicine Hat. The intent was that
WCFL use the proceeds from the sale of lands to pay down its bank indebtedness.
[6] The Pools arranged
for the financing needed to enable MAALSA to acquire the lands in 1983. The
Pools guaranteed MAALSA’s obligations under the financing and advanced funds to
MAALSA to satisfy its obligations under the financing arrangements and other
costs related to the lands. In 1993 the appellant advanced an additional
$16,000,000 to MAALSA to pay off the indebtedness under the financing and in
1993 and 1994 MPE and AWP advanced funds for the same purposes. MAALSA
recognized these advances as indebtedness to the respective shareholders.
[7] Paragraph 5 of
the ASF sets out the activity with respect to the section 15 property. It
is of less concern to us than the section 26 property. The section 15
property was sold by MAALSA back to WCFL.
[8] Section 6 of
the ASF describes the fluctuations in the valuation of the section 26 property.
In June of 1996 it had an appraised value of $2.52 million.
[9] In November 1996,
each of the Pools demanded repayment from MAALSA of the amount owed to them. It
could not do so. Its only assets were the section 26 property, a small
amount of cash and a lease on
the section 26 property. MAALSA offered to quit claim its assets to the
Pools in satisfaction of its indebtedness to them. On December 17, 1996,
the board of directors of the appellant resolved that the appellant accept the
quit claim and that the section 26 property once acquired be immediately sold.
On December 20, 1996, the Pools retained a real estate agent to market and sell
the section 26 property. On December 23, 1996, the appellant acquired
a 40% interest in the section 26 property.
[10] The parties agree
that at that time the property had a fair market value of $2.5 million and that
MAALSA was indebted to the appellant in the amount of $30,970.624.
[11] The section 26
property was actively marketed by the agent. A number of offers were received
and rejected but finally an offer from Hopewell Enterprises Ltd. was accepted
and the property was sold for net proceeds of $2,045,724. The appellant’s share
was 40% of that amount or $818,110.
[12] The appellant
claimed a loss for 1997 of $30,149,842 being the difference between the deemed
cost of the property ($30,967,952) and the net proceeds payable to the
appellant of $818,110. The parties agree that the loss is $30,149,842 and that
the deemed cost of the property under subsection 79.1(6) was $30,967,952.
[13] One point should be
noted. The loss was substantially greater than it would otherwise have been
because the Income Tax Act deems the cost of the property acquired to be
(subject to some qualifications that do not apply here) the cost of the debt.
The debt surrendered when the section 26 property was taken over was
$30,967,952. If there appears to be some artificiality in this result it is an
artificiality that arises from a clear provision of the Income Tax Act.
In fact, the commercial gain (or perhaps more accurately, the accounting gain)
was $438,926 (Joint Book of Documents, Tab 49).
[14] One thing is clear:
when the Pools acquired the section 26 property from MAALSA they intended
to sell it as soon as possible at the best price they could get. Does this in
itself turn the acquisition and sale into an adventure in the nature of trade?
If an intention, at the time of acquisition of a property, to sell it is all
that is required to turn a transaction into an adventure in the nature of trade
then that intention is clearly present.
[15] The respondent
argues that a mere intention at the date of acquisition to sell property does
not in itself turn the transaction into an adventure in the nature of trade and
that there must be a commercial animus — an intent to realize a profit. The
tests are well known. The classic analysis of the term “adventure in the nature
of trade” is found in the decision of Thorson P. of the Exchequer Court
of Canada in the leading case M.N.R. v. Taylor, 56 DTC 1125. The tests
set out in Taylor were approved by the Supreme Court of Canada in Irrigation
Industries Ltd. v. M.N.R., 62 DTC 1131 and were followed in the well known
case of Happy Valley Farms Ltd. v. M.N.R., [1986] 2 C.T.C. 259.
[16] In Racine, Demers and Nolin v.
M.N.R.,
[1965] DTC 5098, Noël J. said at 5103:
In examining
this question whether the appellants had, at the time of the purchase, what has
sometimes been called a 'secondary intention' of reselling the commercial
enterprise if circumstances made that desirable, it is important to consider
what this idea involves. It is not, in fact, sufficient to find merely that if
a purchaser had stopped to think at the moment of the purchase, he would be
obliged to admit that if at the conclusion of the purchase an attractive offer
were made to him he would resell it, for every person buying a house for his
family, a painting for his house, machinery for his business or a building for
his factory would be obliged to admit, if this person were honest and if the
transaction were not based exclusively on a sentimental attachment, that if he
were offered a sufficiently high price a moment after the purchase, he would
resell. Thus, it appears that the fact alone that a person buying a property
with the aim of using it as capital could be induced to resell it if a sufficiently
high price were offered to him, is not sufficient to change an acquisition of
capital into an adventure in the nature of trade. In fact, this is not what
must be understood by a “secondary intention” if one wants to utilize this
term.
To give to a
transaction which involves the acquisition of capital the double character of
also being at the same time an adventure in the nature of trade, the purchaser
must have in his mind, at the moment of the purchase, the possibility of
reselling as an operating motivation for the acquisition; that is to say that
he must have had in mind that upon a certain type of circumstances arising he
had hopes of being able to resell it at a profit instead of using the thing
purchased for purposes of capital. Generally speaking, a decision that such a
motivation exists will have to be based on inferences flowing from
circumstances surrounding the transaction rather than on direct evidence of
what the purchaser had in mind.
[17] We are, of course,
not dealing here with a so-called “secondary intention”. We are dealing with an
uncontradicted assertion that the Pools intended to sell the section 26
property as soon as possible after it was surrendered to them. At no time was
it ever the intention of MAALSA or the Pools to hold the section 26
property for any purpose other than resale.
[18] The respondent’s
position is that since the appellant’s cost of the property as fixed by
subsection 79.1(6) of the Income Tax Act was about $30,000,000 it
was inconceivable that, at the time of the quit claim transaction, they could
have expected to realize a profit. A loss was a certainty.
[19] In fact the
appellant realized an accounting profit. It is only because of the high cost
attributed to the property under subsection 79.1(6) that a loss for income
tax purposes was realized. If an intention to realize a profit on the
disposition of property is an essential ingredient in determining whether a
transaction is an adventure in the nature of trade, I think the contemplated
profit must be a commercial profit, not one that is distorted by a provision of
the Income Tax Act.
[20] Nonetheless I find it
somewhat unsatisfying to approach the question of the deductibility of the loss
by focussing solely on the intention at the moment of acquisition. It is true
that when the section 26 property was acquired by the appellant and the other
two shareholders of MAALSA they intended to dispose of it as soon as possible
at the best price they could get. They obviously had competent legal and
accounting advice and must have known that because of the operation of
subsection 79.1(6) the loss for income tax purposes would be substantially
different from any gain or loss they might realize for accounting purposes. I
do not think that it can fairly be said on the evidence that their purpose was
to sustain a loss. Nor do I find it useful to speculate about what the tax
consequences might have been had MAALSA and the Pools dealt with the matter in
a different way. A variety of alternatives come to mind: MAALSA might have sold
the section 26 property; the Pools might have sold the debt or the shares of
MAALSA; the debt might have been written off; MAALSA might have been wound up
and lands distributed to the Pools. All of these might have yielded different
tax results but the simple fact of the matter is that it is not what happened.
The enquiry is what the tax consequences are of what they did do, not of what
they might have done.
[21] Two very different
approaches are advocated by counsel for the parties. If one approaches the transaction
using the language customarily employed when one speaks of an adventure in the
nature of trade the suggestion is that one must focus only on the last
transaction — the acquisition and sale and ignore the overall commerciality of
the series of transactions leading up to the acquisition and sale. There is
some support for the view that one must ignore the preceding sequence of events
and the overall commercial reality of the matter: If I am to follow the position of the
majority in Singleton I can look only at the final transaction – the
acquisition of the section 26 property with a view to its immediate resale
and its subsequent sale. On this basis, I am forced inexorably to the
conclusion that the section 26 property was acquired with the intention of
selling it as soon as possible and since it was sold at an accounting profit it
may be inferred that the purpose was to realize that profit. The fact that for
income tax purposes there was a loss is simply because the Income Tax Act requires
that there be included in the cost of property acquired in satisfaction of a
debt the amount of the debt.
[22] Counsel for the
appellant argued that I should look at the entire sequence of events. He said:
“The Appellant respectfully submits that
the determination whether the Appellant engaged in “an adventure or concern in
the nature of trade” should only be made by considering all of the events and
all actions of the Appellant leading up to disposition of the section 26
property from the time that the Appellant acquired its interest in MAALSA in
1983.
[23] Whether I am entitled to
take this approach may be open to question but let us assume that I may do so
and see where it gets us.
[24] MAALSA was created in
1982 by the three Pools essentially as a vehicle to assist WCFL out of its
financial difficulties by acquiring the lands from WCFL. There is no basis to
conclude that the section 26 and section 15 properties sold by WCFL to MAALSA
were capital in MAALSA’s hands. Clearly they were not. The evidence is uncontradicted
that they were never intended to be held as capital assets by MAALSA. They were
vacant and produced minimal rent. The only thing that could be done with them
was to sell them or develop and sell them. The section 15 property had
environmental problems and was ultimately sold back to WCFL.
[25] There is a strong evidentiary
basis for saying that MAALSA was an agent of the Pools. Nonetheless, there is authority
that it is only in rare circumstances that one corporation can be seen as an agent
of another. The matter was fully discussed by Cattanach J. in Denison
Mines Limited v. M.N.R., 71 DTC 5375, (aff’d 72 DTC 6444 (F.C.A.);
aff’d 74 DTC 6525 (S.C.C.)), at 5388). Generally speaking, the business of a
subsidiary is not the business of the parent or the controlling shareholder: Odhams
Press, Ltd. v. Cook, [1940], 3 All E.R. 15. One point that might
distinguish MAALSA from the Denison case and the Odhams case and indeed from the myriad
of cases following Salomon v. Salomon & Co., [1897] A.C. 22,
is that it does not appear that MAALSA carried on any business at all in any
meaningful sense. It was merely a passive repository of the lands held for
resale, received the minimal rent and was financed by the Pools to cover its
expenses. The financing of the purchase of the lands from WCFL was guaranteed
by the Pools. AWP on behalf of the Pools administered MAALSA’s affairs, to the
extent that there were any. If there ever were a case for saying that a company
held property for its shareholders it is this one. Whatever analysis one adopts
the lands remained inventory from the time they were acquired by MAALSA until
they were sold by the Pools.
[26] It follows therefore
that whether I consider, as urged by counsel for the appellant, all of the
circumstances leading up to the sale or whether I consider only the final step,
I come to the same conclusion: the loss did not result from a sale by the
appellant of a capital property. It was on revenue account.
[27] Numerous authorities
were referred to by counsel for both parties and lengthy written arguments were
filed. I do not think any purpose would be served by an extensive reference to
those authorities. Counsel for the appellant referred to a decision of Justice
Campbell Miller of this Court in Laramee v. The Queen, 2007 TCC 635 in
which he referred with approval to the following passage from Truscan Realty
Ltd. v. The Queen, 96 DTC 1513:
The determination here is
essentially one of fact and no purpose would be served by a lengthy citation of
authorities. The conclusion that I have reached here, is in my view, consistent
with that reached by Walsh, J. in Her Majesty the Queen v. Lavigueur, 73
DTC 5538, the Supreme Court of Canada in M.N.R. v. Freud, 68 DTC 5279,
and by Kempo, J. in Panda Realty Limited v. M.N.R., 86 DTC 1266. The
conclusion must be based upon “a commonsense appreciation of all the guiding
features. . .” (M.N.R. v. Algoma Central Railway, 68 DTC 5096), and upon
“the practical and commercial aspects” [of the transaction] (Her Majesty the
Queen v. F.H. Jones Tobacco Sales Co. Ltd.), 73 DTC 5577, and upon “what
the expenditure is calculated to effect from a practical and business point of
view rather than upon the juristic classification of the legal rights, if any,
secured, employed or exhausted in the process”. (Hallstroms Pty Ltd. v.
Federal Commissioner of Taxation (1946), 72 C.L.R. 634).
[28] I am aware that one
might argue that advances by a shareholder to a company are prima facie capital
and that when an asset of the company is surrendered to the shareholder in
satisfaction of the debt the asset is capital in the hands of the shareholder. This
argument was not made but in any event I would regard such an analysis in the
context of this case as unrealistic and mechanical. It is difficult to see the
advances to MAALSA as capital investments by the Pools in any ordinary sense. Although
it is not necessarily determinative, I note that there is no evidence that
interest was ever charged and even if interest did accrue there was no
possibility that it would ever be paid. On any commonsense and realistic
analysis of the matter the loss on the section 26 property was a loss on
revenue account. In determining whether a loss or an expenditure is on revenue
or capital account one must not permit one factor to dominate all other
considerations. To let this case turn on the fact that there were advances to a
company owned by the Pools and to ignore all other factors would be
inconsistent with what the Supreme Court of Canada said in Algoma (supra):
Parliament did not define the
expressions “outlay . . . of capital” or “payment on account of capital”. There
being no statutory criterion, the application or non-application of these
expressions to any particular expenditures must depend upon the facts of the
particular case. We do not think that any single test applies in making that
determination and agree with the view expressed, in a recent decision of the
Privy Council, B.P. Australia Ltd. v. Commissioner of Taxation of the
Commonwealth of Australia, (1966) A.C. 224, by Lord Pearce. In referring to
the matter of determining whether an expenditure was of a capital or an income
nature, he said, at p. 264:
The solution to
the problem is not to be found by any rigid test or description. It has to be
derived from many aspects of the whole set of circumstances some of which may
point in one direction, some in the other. One consideration may point so
clearly that it dominates other and vaguer indications in the contrary
direction. It is a commonsense appreciation of all the guiding features which
must provide the ultimate answer.
[29] One cannot remain
oblivious to the fact that the lands were inventory in MAALSA’s hands, were on
any realistic view of the matter held for the Pools, and from the outset were
intended to be disposed of whether by MAALSA or by the Pools.
[30] The determination of
this type of question in these cases is not an easy one. It is an exercise in
judgement, common sense and an assignment of weight to a variety of factors. Although
as I mentioned in footnote 1 to paragraph 21 of Imperial Tobacco Canada Ltd.
v. The Queen, [2007] T.C.J. No. 482 (QL) I have learned to be somewhat wary
of placing too much reliance upon my own common sense in this type of question,
nonetheless I propose once again, to rely on my own common sense and to conclude
that, taking all of the factors into account, the sale of the section 26
property here was on revenue account.
[31] The appeal should
therefore be allowed and the assessment referred back to the Minister of
National Revenue for reconsideration and reassessment to allow the appellant in
computing its income to deduct the loss of $30,149,842 sustained on the sale of
the section 26 property.
[32] The appeal is also
allowed to give effect to the settlement of the other issues reached by the
parties.
[33] The appellant is
entitled to its costs in accordance with the tariff. I see no reason for any
extraordinary or additional award of costs, as requested by appellant’s
counsel, simply because counsel for the respondent asked for time to file
written arguments. Her request was entirely justified.
[34] Counsel for the
appellant is directed to prepare a draft judgment reflecting the conclusion I
have reached with respect with the loss and also implementing the settlement
reached with respect to the other issues as set out in paragraph 8 of the
appellant’s opening statement. If the issue with respect to non‑capital
losses for other years as set out in paragraph 9 of the appellant’s
opening statement can be appropriately included in the judgment this should be
done. If not, the parties should communicate with the court to arrange a
conference call. At all events, if counsel for the respondent approves the form
of the draft judgment it should be sent to the court and if I agree with it I
will sign the formal judgment accordingly.
Signed at Ottawa, Canada, this 15th day of January 2008.
“D.G.H. Bowman”
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