Regina Shoppers Mall Ltd. v. The Queen, 86 DTC 6091, [1986] 1 CTC 261 (FCTD), aff'd 89 DTC 5482 (FCA)

Pinard, J.:—This is an appeal from a decision of the Tax Court of Canada ([1984] C.T.C. 2091; 84 D.T.C. 1081) dated January 12, 1984, dismissing plaintiffs appeal from income tax assessments for its 1976,1977 and 1978 taxation years.

In November 1960, the plaintiff acquired a parcel of land ("Parcel M”) located in South Regina and comprising 27.5 acres for the alleged purpose of constructing thereon a regional shopping centre (Statement of Claim, par. 2). This intended use of the property proved not to be feasible and after holding "Parcel M” for some 15 years, the bulk of the property (some 20 acres) was sold in early 1976 to Headway Corporation Limited and Marathon Investments Limited, a related company.

In computing its taxes for the 1976 taxation year, the plaintiff treated the disposition as capital and included in its income a taxable capital gain in the amount of $384,951.

By reassessments dated July 30, 1980, with respect to the taxation years 1976, 1977 and 1978, the Minister of National Revenue treated the gain on the disposition of the property, in the amount of $1,690,229 as income.

After objection by the plaintiff to the said reassessments and after notification by the Minister confirming such reassessments, the plaintiff filed its notice of appeal to the Tax Review Board (now the Tax Court of Canada).

The plaintiff is a company which was incorporated pursuant to the laws of Saskatchewan, on February 6, 1959, having the following restricted objects:

(a) To acquire land and any other property in the South-Eastern Section of the City of Regina, in the Province of Saskatchewan, or elsewhere in the City of Regina, for the purpose of Community Shopping Centre or Centres;

(b) To develop a community shopping centre or centres in the City of Regina and for that purpose to construct, build, improve, lease, rent, control, develop and manage all and every kind of building, structure, shop, store, office, premises, plant, service station and any other business or other premises of all or any kind which may be considered conclusive or incidental to the development or benefit of any such shopping centre.

By a special provision in the document of incorporation, it was provided that the incidental powers set out in clause (q) of section 30 of the Saskatchewan Companies Act were expressly excluded:

(q) To sell, improve, manage, develop, exchange, lease, dispose of, turn to account, or otherwise deal with all or any part of the property and rights of the company.

The share capital of this company was owned equally by Frederick W. Hill and his wife. As in Hillsdale Shopping Centre Ltd. v. M.N.R., [1977] C.T.C. 402; 77 D.T.C. 5256 (F.C.T.D.) and [1981] C.T.C. 322; 81 D.T.C. 5262 (F.C.A.), events both antecedent and subsequent to the incorporation of the plaintiff are relevant to the determination of the issues in this appeal.

In the Hillsdale Shopping Centre Limited case, the Federal Court of Canada had to deal with a similar company which was incorporated pursuant to the same laws, with the same restricted objects and with a share capital owned equally by the same Frederick W. Hill and his wife. The following extract of this Hillsdale decision by the Court of Appeal contains facts that were all established by the evidence in the present case (at 324 (D.T.C.) 5262-63):

Frederick W. Hill (Hill), the principal actor, graduated from the University of Saskatchewan in 1941 and joined his father's company in 1946 after having obtained a masters degree in business administration at Harvard, subsequent to wartime services with the RCAF and the United States Airforce. His duty with his father’s company initially related to the management of its insurance department and management of a fidelity assurance bond business. In 1950 Hill formed a surety company named Western Surety Company which today is wholly owned by him. In 1953 Hill incorporated McCallum Hill and Co. Ltd., to purchase the operating assets of his father's company. The business of that company was begun in 1903 by Hill's father in a partnership known as McCallum Hill which was incorporated in 1935. In 1953 Hill, as above stated, purchased the assets owned by the 1935 company from the estates of the then deceased original partners and incorporated a new company under the name of McCallum Hill and Co. Ltd. to continue the business of the former company. The shares of McCallum Hill and Co. Ltd. (hereinafter referred to as McCallum Hill) have, since incorporation been held 99% by Hill and 1% by his wife.

Since 1953 McCallum Hill has been engaged in land development in the area of Regina south of Wascana Lake. Having concluded the subdivision of an area known as Block “A”, in 1955 McCallum Hill secured from one Kramer an option on 457.71 acres, the obvious purpose of which was for development, largely residential. It was consistent with the development of the land controlled by McCallum Hill that a community shopping centre should be included and Hill made the decision that such development should afford a long-term commercial investment from which he and his wife would receive income.

At all material times Frederick W. Hill was, whether in his personal capacity or as the president and directing mind of McCallum Hill Limited, the plaintiff Regina Shoppers Mall Limited and other corporations, an experienced developer of real estate, whether commercial or residential, in the area of the City of Regina.

There is no doubt that Frederick W. Hill caused McCallum Hill Limited to enter the said Kramer option for the purpose of acquiring the lands comprised by it in stages and for the purpose of developing them in the most feasible and profitable ways that might offer themselves. In fact, the bulk of the said land was subsequently acquired by McCallum Hill Limited in stages and was developed, subdivided and sold or rented by it.

At the time of the said development, on May 2, 1956, Frederick W. Hill caused another company, Hillsdale Shopping Centre Limited, to be incorporated with the view of acquiring and developing "Parcel J" "for the purpose of a Community Shopping Centre or Centres"; such plans were abandoned in about 1959 when this project proved not to be feasible, and “Parcel J" was subsequently expropriated at a profit to that corporation.

It is following the abandonment of the shopping centre plans for "Parcel J" that Frederick W. Hill caused the plaintiff to be incorporated with the view of acquiring and developing "Parcel M" for the purpose of building a large size shopping centre.

The question therefore is whether the plaintiffs profit from the sale of the bulk of “Parcel M" was a capital gain or whether it was a profit from a business, within the meaning of section 9 and subsection 248(1) of the Income Tax Act, therefore falling to be included in the plaintiffs income pursuant to section 3 of the same Act.

It has been consistently held in cases of this kind that such a question is one of fact; also, the onus of disproving the Minister's assumption, in assessing the plaintiff as he did, that the sale of land amounted to a "business" or "a venture or concern in the nature of trade”, is on the plaintiff. Indeed, the following comments in the two following cases apply to the instant Case:

In The Queen v. David Froese, [1977] C.T.C. 526; 77 D.T.C. 5364, Collier, J. stated, at 527 (D.T.C. 5365):

As always in cases of this kind the question is essentially one of fact; each case must depend on its particular facts.

In Hillsdale Shopping Centre Limited v. M.N.R. (supra), Urie, J., for the Federal Court of Appeal, stated, at 328 (D.T.C. 5266):

It was next said that the learned trial judge had erred in proceeding on the basis that the onus of disproving that the Minister’s assumption that some part of the proceeds of the expropriation were taxable, lay upon the taxpayer.

If a taxpayer, after considering a reassessment made by the Minister, the Minister's reply to the taxpayer's objections, and the Minister’s pleadings in the appeal, has not been made aware of the basis upon which he is sought to be taxed, the onus of proving the taxpayer's liability in a proceeding similar to this one would lie upon the Minister. This defect may be due to a number of reasons such as a lack of clarity on the part of the Minister in expounding the alleged basis of the taxability which could include an attempt by the Minister to attach liability on one of two or more alternative bases thus failing to make clear to the taxpayer the assumption upon which he relies.

In all other cases the onus is on the taxpayer to disprove the Minister's allegation of liability on the assumptions propounded. In the instant case, throughout the whole proceedings the appellant was made aware that the Minister assessed part of the proceeds of the expropriation as profit from a business contrary to the allegation of the taxpayer so that this ground of attack is without merit.

It is clear that F. W. Hill at the beginning intended to use “Parcel M” as the site for a large size shopping centre strategically located and capable of accommodating the residential portion of the 457.31 acres subject of the Kramer option. I believe that this was the main motivation for F. W. Hill to buy "Parcel M" in November 1960.

Indeed, Mr. Hill had previously given a lot of his time and of his energy, and he had also spent an important amount of money for the services of serious and noteworthy consultants, all in view of developing a shopping centre on “Parcel J’. Negotiations had been entered into with numerous prospective tenants and an agreement was secured with at least one of them, Dominion Stores Ltd.; some form of agreement with S.S. Kresge Co. Ltd. had also been made, even though no lease was ever signed. F. W. Hill had even caused one of his companies to pay for the construction of a bridge on the important nearby Broad Street, in order to improve access from the downtown area of the City of Regina.

While these efforts were related to “Parcel J’’, a good part of them was also to benefit the proposed development of a more important shopping centre on "Parcel M".

As a matter of fact, in April 1958, Mayer Whittlesey and Glass, a firm of consultants whose services had been retained by McCallum Hill, made a report recommending that any shopping centre in the whole development project of the land subject of the Kramer option should be located on "Parcel M” lying to the east of the realigned Broad Street and that "Parcel J” should be designated for office and institutional use. This report was later adopted by the City of Regina, with relation to the new street pattern, at the request of McCallum Hill through its solicitors.

When later F. W. Hill changed his own views with regard to the location of the shopping centre, he began discussion, in 1960, with the Hudson's Bay Co., the presence of a major department store being crucial to ensure the sound development and the survival of a regional shopping centre or even of a large community shopping centre. The evidence has established that three categories of shopping centres were then developed in similar communities: the regional shopping centre, requiring over 20 acres of land, the community shopping centre, requiring from 10 to 20 acres of land, and the neighbourhood shopping centre, requiring from one to 10 acres of land.

In the fall of 1960, while exploratory discussions were being pursued with the Hudson's Bay Co., the plaintiff began the excavation for what F. W. Hill described as Phase I of the regional shopping centre project on “Parcel M". Both the agreement with Dominion Stores Ltd. and the understanding with S.S. Kresge Co. Ltd., even though first related to "Parcel J”, required that the excavation for the shopping centre begin before December 31, 1960, and F. W. Hill himself recognized that one of the reasons for this excavation, made without the existence of any concrete building plans, was to keep these two prospective tenants interested in the shopping centre on “Parcel M".

When in early 1962 the Hudson's Bay Co. turned down the plaintiff and decided to remain in the downtown area of the City of Regina, it had been the only major department store which the Plaintiff had tried to get as a tenant in the projected shopping centre on “Parcel M”. Upon learning of the Hudson's Bay Co.'s decision not to be part of this project, F. W. Hill testified that the plaintiff then suspended its plans, that it had to assess the market and to look at other investments. Ultimately, in 1969 and 1970, a neighbourhood shopping centre was built on the south-west corner of "Parcel M”, on an area of about 4.5. acres still belonging to the plaintiff and including a parking space, a gas station and a restaurant. As for the excavation in 1960 of some 11 acres for what purported to be Phase I of the projected large size shopping centre, this excavation was filled up some nine to 10 years later.

After the Hudson's Bay Co. pulled out, there is only vague evidence as to what happened with relation to the efforts for developing a major shopping centre on “Parcel M”.

In 1966, 0.7 acres were sold to the City of Regina for roads on the corner of this property. This sale cut off 2.3 acres which, in turn, were sold to McCallum Hill Ltd.

For the period beginning in early 1962 and extending to the sale of the bulk of "Parcel M” in 1976, F. W. Hill’s testimony was rather directed towards his efforts concerning other kinds of investments for "Parcel M’’. The plaintiff alleges that in the late 1960s, negotiations were entered into with the Intendes Group to construct apartment buildings on the undeveloped portion of “Parcel M”, but that eventually this plan was abandoned. In March 1971, the plaintiff entered into a joint venture with Ruttan Development Corporation to construct apartment buildings on “Parcel M” and other properties; apartments were constructed on another property, but Ruttan did not contruct the required apartments on "Parcel M". A lawsuit ensued with the result that by 1974 the agreement had been terminated. In the mid 1970s, the plaintiff had not succeeded in having a restriction removed that prevented it from selling condominiums and at the same time from retaining ownership of the land. After these additional plans also proved not to be feasible, the plaintiff, who had refused to sell smaller parts of "Parcel M”, decided to sell the bulk of it at a substantial profit.

One must look at the facts in this particular case keeping in mind that the status of developer or even trader in real estate does not preclude holding for investment. As indicated by Cattanach, J. of the Trial Division of the Federal Court, in the Hillsdale case (supra), at 405 (D.T.C. 5258): "There is no doubt that McCallum Hill was a trader in land and that residential lots and similar lots comprise its stock in trade. However, because a person is a trader for one purpose does not mean that that person cannot also be an investor. Into which category the person falls is one of fact.”

I also agree with the same judge when in Regner Blok-Andersen v. M.N.R., [1972] C.T.C. 338; 72 D.T.C. 6309, he writes at 356 (D.T.C. 6323):

Even accepting the Minister’s first premise that the appellant was a trader in real estate, that does not preclude him from investing in a home for occupancy by himself and his family. Regardless of his calling the appellant is fully entitled to acquire a house for residential purposes. His occupation as a trader in real estate will not change the character of the property acquired if it was in fact acquired for that purpose to the exclusion of its disposal in a scheme of profit making.

The presence of a profit motive at the time of the original purchase does not change the character of an asset which was the subject matter of investment into inventory and thus automatically convert a rise in value realized upon its sale into income.

Comments to the same effect were also made by the Chief Justice of the Federal Court of Canada, in Hiwako Investments Ltd. v. The Queen, [1978] C.T.C. 378; 78 D.T.C. 6281, at 383 (D.T.C. 6285):

In my view, an intention at the time of acquisition of an investment to sell it in the event that it does not prove profitable does not make the subsequent sale of the investment the completion of an “adventure or concern in the nature of trade”. Had the alleged assumption been that there was an expectation on the part of the purchaser, at the time of purchase, that, in the event that the investment did not prove to be profitable, it could be sold at a profit, and that such expectation was one of the factors that induced him to make the purchase, such assumption, if not disproved, might (1 do not say that it would) support the assessments based on “trading” if not disproved.

But in my view, and there is no contradiction, the problem raised by this action is one in respect of which the applicable principles remain those stated by Noël, J. in Racine, Demers and Nolin v. M.N.R., [1965] C.T.C. 150; 65 D.T.C. 5098, where at 159 (D.T.C. 5103) he aptly defines the concept of secondary intention to resell as follows:

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.

Here, the inference flowing from the circumstances surrounding the transaction leads to the conclusion that indeed there was a secondary intention that effectively motivated the plaintiff at the time it acquired the property "Parcel M’’. The plaintiff has failed to establish a balance of probability that it did acquire title to “Parcel M” for the purpose of investment to the exclusion, at the time of acquisition, of any purpose of disposition at a profit.

First, the restricted nature of the corporate powers of the plaintiff did not preclude the possibility of turning over the land at a profit as a real motivating factor in the plaintiff’s acquisition of it. The plaintiff was in the same position as was Hillsdale Shopping Centre Limited, in the Hillsdale case (supra), where the Federal Court of Appeal said, at 327 (D.T.C. 5265):

While the restricted nature of the corporate powers of the taxpayer may have precluded it from lawfully engaging in any on-going activity with respect to Block “J” other than that of a shopping centre, it is a fact but it is not a critical one in determining liability for tax. The question to be decided is not as to what business the company might have carried on according to its charter, but rather what business it did carry on. That necessitates a careful review of the facts. The following are relevant facts arising from the incorporation which should be borne in mind;

(a) that the Appellant's incorporation was one step in the general development scheme by McCallum Hill, and a shopping centre, conveniently located, was a feature favourable to the sale of residential units;

(b) that the person who caused the incorporation of the Appellant was the major shareholder of McCallum Hill;

(c) that the Appellant, on incorporation, became endowed with all the advantages that had accrued from the activities of Hill and McCallum Hill prior to its incorporation;

(d) that as an incorporated company, without in any way violating the restrictions in its corporate powers, it could bring about its own winding up, the distribution of its assets amongst its shareholders and the surrender of its charter.

Here, as in the latter case, throughout the existence of the plaintiff company, “its interests and intentions were identical with McCallum Hill and the interests and intentions of McCallum Hill with respect to the shopping centre project coincided with those of Mr. Hill.”

Then, most of the efforts made by F. W. Hill to develop a shopping centre and most of the costs resulting therefrom, even though of a certain benefit to the projected development of “Parcel M’’, were first related to another property, "Parcel J”.

After the Hudson's Bay Co.'s refusal of early 1962, most of the efforts of the plaintiff towards other investment capable of generating rental income on “Parcel M” were unsuccessful; all this activity was purely speculative and had surely not been seriously contemplated by the plaintiff before 1962; all these failures led the plaintiff to sell in 1976 the bulk of “Parcel M” that had remained raw undeveloped land which, without further development or its sale, had been and was still incapable of yielding any returns and had been and continued to be merely a burden through the payment of mortgage interest and property taxes.

Turning now to the time of acquisition, it is clear that when the plaintiff bought “Parcel M” it intended to use that key site for the purpose of building a regional shopping centre. This is alleged by the plaintiff in its statement of claim and it is printed in the publicity made in support of this development. This intention also appears from the size of the land acquired, from the plan of the proposed shopping centre dated September 29,1959 and from the fact of the discussion begun with a major department store, Hudson's Bay Co.

I agree with the defendant's contention that a community shopping centre was not at that time a good or a realistic investment for any reasonable business person and certainly not for a shrewd land developer like F. W. Hill, and this, mainly because of the opening of a nearby community shopping centre, by Principal Investments Ltd., in the summer of 1960. This perspective is clearly confirmed by F. W. Hill in a memorandum he wrote in 1956, when he became aware of the plans of his competitor; it is also unequivocally admitted by the plaintiff itself in the statement of claim dated January 20, 1959, in an action it took against Loblaw Groceries Co. Ltd., a prospective tenant who preferred to go with Principal Investments Ltd.; finally, this view was also shared by the plaintiff’s witness James F. Harris who, as another consultant whose services had been retained by F. W. Hill in view of developing a shopping centre, advised his client accordingly in a letter dated July 29, 1960.

The construction of the small neighbourhood shopping centre in 1969 and 1970 was certainly not the kind of shopping centre planned for in 1960 and was only the result of an afterthought.

Consequently, it was crucial that the plaintiff be assured, at the time it acquired “Parcel M’, of the presence of a major department store in its projected large size shopping centre. This unfortunately was not the case. Only exploratory discussions had begun with Hudson's Bay Co., the sole major department store the plaintiff had approached. These discussions led nowhere, despite promotional activities, including the excavation on “Parcel M”, that the plaintiff had engaged in. Consequently, no major tenancies or commitments therefor on which the feasibility of the project depended existed at the time of the acquisition of “Parcel M” nor at any subsequent time.

The venture therefore was entirely speculative. I must agree with the defendant's assertion that the plaintiff acquired “Parcel M” speculatively and with the operating motive of putting it to profitable uses in one way or another, including its sale at a profit in the event that its desire to develop a shopping centre on the site should prove not capable of realization; when its desire to develop “Parcel M”’ for a regional shopping centre.proved not capable of realization the plaintiff, in pursuance of its overall objective of realizing a profit from the land, finally caused the bulk of it to be rezoned from commercial to residential uses, which was easier than rezoning from agricultural or residential to commercial uses, and sold the property at a substantial profit.

The spirit of the following comments made by Heald, J. in Lehrer v. M.N.R., [1972] C.T.C. 255 at 261; 72 D.T.C. 6224 at 6228-29, is well applicable to F. W. Hill, the driving force behind McCallum Hill Ltd., the plaintiff and other corporations in the present case:

In my view, appellant, as an experienced and sophisticated businessman, bought this land because it was a good “buy” and because it was in the “path” of Saskatoon's commercial development. I do not think that subject property was “dedicated” at the time of acquisition to any particular use. The improvements on it at that time were minimal. I think it was capable of ending up either as a venture in the nature of trade or as a revenue producing investment.

Therefore, the proceeds from the sale of the bulk of “Parcel M” constituted a profit from a business of the plaintiff, the result of an undertaking or venture in the nature of trade, and thus fell to be included in the plaintiff's income pursuant to section 3 of the Income Tax Act.

This conclusion appears to be in total accordance with the well-known and often referred to decision of the Supreme Court of Canada, in the similar matter of Regal Heights Ltd. v. M.N.R., [1960] C.T.C. 384 at 389-90; 60 D.T.C. 1270-73:

These efforts were all of a promotional character. The establishment of a regional shopping centre was always dependent upon the negotiation of a lease with a major department store. There is no evidence that any such store did anything more than listen to the promoters' ideas. There is, understandably, no evidence of any intention on the part of these promoters to build regardless of the outcome of these negotiations. There is no evidence that these promoters had any assurance when they entered upon this venture that they could interest any such department store. Their venture was entirely speculative. If it failed, the property was a valuable property, as is proved from the proceeds of the sales that they made. There is ample evidence to support the finding of the learned trial Judge that this was an undertaking or venture in the nature of trade, a speculation in vacant land. These promoters were hopeful of putting the land to one use but that hope was not realized. They then sold at a substantial profit and that profit, in my opinion, is income and subject to taxation.

Throughout the existence of the appellant company, its interest and intentions were identical with those of the promoters of this scheme. One of the objects stated in the memorandum of association of the company was

“To construct and operate apartment houses, blocks, shopping centres and to otherwise carry on any business which may be conveniently carried on in a shopping centre.”

Nothing turns upon such a statement in such a document. The question to be determined is not what business or trade the company might have carried on but rather what business, if any, it did in fact engage in. (Sutton Lumber and Trading Co. Ltd. v. M.N.R., [1953] 2 S.C.R. 77 at 93; [1953] C.T.C. 237 at 253.)

As also recognized by Le Dain, J., then with the Federal Court of Appeal, in De Salaberry Realties Ltd. v. The Queen, [1976] C.T.C. 656 at 660; 76 D.T.C. 6408 at 6412, a speculative character in the primary purpose of acquisition for investment has been taken as an indication of a secondary intention to resell should the primary purpose fail.

For all those reasons, the action will be dismissed with costs against the Plaintiff.

Appeal dismissed.