Dumas v. MNR, 89 DTC 5004, [1989] 1 CTC 52 (FCA)

Pratte, J. [Translation]:—The appellant is appealing from a judgment of Dubé, J. of the Trial Division which allowed an appeal brought by the respondent from a decision of the Tax Review Board and restored the assessments vacated by that decision.

The only question at issue is whether the trial judge was correct in finding that the profit of nearly $200,000 made by the appellant by selling the shares he held in Ville-Neuve Construction Ltée ("Ville-Neuve") to Mr. Raymond Malenfant on November 6, 1969 was business income rather than a capital gain.

Ville-Neuve was created by letters patent on November 22, 1961 for the primary purpose of carrying on the business of a general contractor and builder. The appellant was its sole shareholder, with his wife and accountant, who apparently only held qualifying shares. From the time of its creation the company carried on the activities for which it was established. In early summer 1967 the Communauté des Frères des Écoles Chrétiennes agreed to sell it land located at the intersection of Henri IV and des Quatre Bourgeois boulevards in Ste-Foy, in the suburbs of Québec, where the appellant apparently planned to build a shopping centre, office buildings and houses. The deed of sale for this land was not signed until March 17, 1969, because of a difference between the seller and the buyer. That fall, when it proved more and more difficult for the appellant to proceed with his building projects, he agreed to sell the land to Raymond Malenfant. However, Ville-Neuve did not sell the land itself. Instead, the appellant for tax reasons arranged for Malenfant to buy at an agreed price all the shares in Ville-Neuve, which had previously been stripped of all its assets other than the land desired by Malenfant. It is the profit made by the appellant on the sale of these shares which gave rise to the assessments restored by the judgment a quo.

The trial judge first held that at the time the appellant's company bought the land he had at least a "secondary intent" to resell at a profit. It may be at once noted that it is not necessary for this Court to rule on the validity of this first finding. The judge also found that the profit the appellant made in selling his shares was income because, in his view, it was immaterial that the transaction had been concluded by a sale of shares rather than sale of the land itself. He said the following on this point:

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

In our opinion, this passage from the trial judge's reasons shows that he did not correctly understand the meaning of Fraser, a judgment which this Court, following the Supreme Court in Freud,' [1] has had occasion to clarify in McKinley. [2] We then said:

The decision of the Supreme Court of Canada in Ronald K. Fraser v. M.N.R., [1964] S.C.R. 657; [1964] C.T.C. 372; 64 D.T.C. 5224, on which the trial judge relied, is not an authority for the proposition that, for income tax purposes, the existence of a company as a separate entity may be disregarded. That decision was explained by Pigeon, J. in M.N.R. v. Freud, [1969] S.C.R. 75 at 80; [1968] C.T.C. 438 at 441-2; 68 D.T.C. 5279 at 5281-2:

On the first question, the decision of this Court in Fraser v. M.N.R., [1964] S.C.R. 657; [1964] C.T.C. 372, appears to be in point. It was there held that where real estate operators had incorporated companies to hold real estate, the sale of shares in those companies rather than the sale of the land was merely an alternative method of putting through the real estate transactions and the profit was therefore taxable. This decision does not in my view necessarily imply that the existence of the companies as separate legal entities was disregarded for income tax assessment purposes. On the contrary, it must be presumed that the companies remained liable for taxes on their operations and their title to the land, unchallenged. I must therefore consider that the decision rests on the view that was taken of the nature of the outlay involved in the acquisition of the companies' shares by the promoters.

It is clear that while the acquisition of shares may be an investment (M.N.R. v. Foreign Power Securities Corp. Ltd., [1967] S.C.R. 295; [1967] C.T.C. 116), it may also be a trading operation depending upon circumstances (Os/er Hammond and Nanton Ltd. v. M.N.R., [1963] S.C.R. 432; [1963] C.T.C. 164; Hill-Clarke- Francis Ltd. v. M.N.R., [1963] S.C.R. 452; [1963] C.T.C. 337). Due to the definition of business as including an adventure in the nature of trade, it is unnecessary for an acquisition of shares to be a trading operation rather than an investment that there should be a pattern of regular trading operations. In the Fraser case, the basic operation was the acquisition of land with a view to a profit upon resale so that it became a trading asset. The conclusion reached implies that the acquisition of shares in companies incorporated for the purpose of holding such land was of the same nature seeing that upon selling the shares instead of the land itself, the profit was a trading profit not a capital profit on the realization of an investment. The principle appears equally applicable in the circumstances of this case. If the respondent and his friends had been successful in selling the prototype sports car, they might well have done it by selling their shares in the company instead of having the company sell the prototype, and there can be no doubt that if they had thus made a profit it would have been taxable. . . .

The question to be decided in this case is, therefore, in my view, whether the appellant's profit from the acquisition and sale of the shares was a taxable profit of the same character as that taxed in Fraser's case.

The evidence shows that the appellant sold at a profit shares of Siebens Leaseholds Ltd. The profit he thereby made was a trading profit, and therefore a taxable profit, if the appellant was embarking on a venture in the nature of trade when he acquired those shares. On the other hand, if the acquisition of those shares by the appellant was an "investment" in the sense in which Pigeon J. used that word in the Freud case, then the profit made by him on the realization of that investment was a Capital profit. Therefore, the sole question to be determined on this appeal concerns the nature of the outlay made by the appellant when he acquired, for $167, the 167 shares of Siebens Leaseholds Ltd. that he later sold for a little less than $200,000.

It is clear that in the case at bar the appellant had no intention of selling his shares in Ville-Neuve at the time he acquired them; he simply wanted to carry on his business. It follows that the appeal should be allowed with costs.

Appeal allowed.