Sabo Brothers Construction Ltd. v. R., [1996] 2 CTC 2073, 96 DTC 1188

Beaubier J.T.C.C.: - This matter was heard in Edmonton, Alberta on November 20, 21 and 22, 1995 pursuant to the General Procedure of this Court. An Agreed Statement of Facts was filed and the Appellant called one witness, Kenneth Rawson, C.A.

At the opening of the hearing the Appellant withdrew its appeal for 1988 and the Respondent abandoned any claim to the application of sub section 245(2) of the Income Tax Act in respect to the Appellant relating to this appeal. The parties argued the application of subsections 88(1), 10(1), 248(1) “inventory”, 55(1) and section 9 respecting the matters in issue. The only year remaining in issue is 1986.

The Agreed Statement of Facts reads:

1. For the purposes of this appeal only, the parties, by their counsel, admit the following facts. The parties agree that their admissions of facts shall have the same effect as if the facts had been formally proved and accepted by the Court as true. The parties each reserve the right to adduce additional evidence that is relevant and probative of any issue before the Court and that is not inconsistent with the facts admitted here. Capitalized terms have the meaning provided in the Notice of Appeal and Reply.

SABO BROS. CONSTRUCTION LTD. (the “Appellant”)

2. At all material times, the Appellant, Symac Investments Ltd. (“Symac”) and Snowcap Developments Ltd. (“Snowcap”) were taxable Canadian corporations within the meaning of the Income Tax Act of Canada (the “Act”).

3. At all material times, all of the issued shares of the Appellant were owned equally by Sabo Bros. Construction Inc., John Sabo Enterprises Ltd. and Sabo Bros. Enterprises Ltd. (the “Appellant’s Shareholders”).

4. The Appellant was incorporated in 1963 to carry on the construction and development business of three brothers, Frank, John and Joe Sabo, who were the company’s founding and equal shareholders. The brothers grew up in Warburg, Alberta and had been in partnership in the construction and development business for approximately 10 years prior to incorporation. They started first with road construction and land clearing in the Warburg area in the early fifties and then housing in the Edmonton area from 1958 to 1960.

5. The brothers’ practice in the housing field was always to purchase land, build on it and sell it at a profit. In 1960, the Edmonton housing market began to deteriorate and Frank Sabo left for a year to work in Oregon while Joe Sabo remained in Edmonton building houses.

6. In 1961, when Frank Sabo returned, the brothers decided to shift their emphasis to constructing commercial buildings. In 1963 they incorporated the Appellant which carried on the development business thereafter. In that year, the Appellant bought a series of city properties and constructed 5,000 square feet warehouses on them which were subsequently sold. It was part of the business strategy of the Appellant to make sufficient profit from these development activities to be able to acquire commercial properties of its own.

7. By 1968, the Appellant had accumulated sufficient funds to buy larger parcels of land and subdivide them for development. The first of these was a five acre parcel in the Strathcona Industrial Subdivision in southeast Edmonton. Two years later, it acquired a 20 acre parcel in southeast Edmonton, had it rezoned from agricultural to industrial and subdivided it for redevelopment. Most of these properties were then sold to investors and to the occasional tenant-owner. The industrial market was extremely strong during the next few years and the company was able to leverage the increased value of its land to obtain bank financing to greatly expand its development operations. The recession that began in 1981 and continued throughout the 1980s in Alberta affected the amount of cash available for the company to pursue its development activities. Between 1981 and 1985, the Appellant’s gross revenue declined from over $6 million annually to just over $4.3 million annually. An income summary for the Appellant’s business from 1976 - 1989 is attached as Schedule “A”.

8. Development activity slowed during the 19803. This problem was exacerbated by the high interest rates prevailing during that period and industrial vacancy rates in excess of 20%. The Appellant responded to this changed situation by adjusting its operations to meet the economic realities of the marketplace. It continued to develop, but on a reduced level that reflected the general decline in economic growth and the company’s restricted cash flow. A substantial commercial property at 8616 - 51 Avenue, Edmonton, was developed between 1981 and 1983 at a cost of $3.4 million (“Gallery 51”). This strained the financial capacity of the Appellant to its limits.

9. Since its incorporation in 1963, the operating philosophy of the Appellant and the motivating business plan were always that properties were a commodity that could be used to make money either by buying, developing and holding them, or reselling them at a profit, or developing them for sale. It is clear that the Appellant was always in the development and property management business and that it bought, built or sold essentially generic industrial structures.

10. Through the 1970s and 1980s:

(a) There was a standing arrangement with Sabo Bros. Realty Ltd., their principal realtors, that the Appellant was prepared to sell any of its properties, whether raw land or developed commercial properties, if the price was right;

(b) The Appellant earned rental income revenue of approximately $4,100,000 per year from approximately 51 commercial properties. The rental properties were held for lengthy periods subsequent to their acquisition with relatively few dispositions. The rental properties were generally, but not always, “capital property” as that term is defined in paragraph 54(b) of the Act. A list and description of those properties held in 1989 is attached as Schedule “B”.

(c) The Appellant also owned inventory of real property. A list of the inventories at each year end of the Appellant is contained in Schedule “C” which includes reference to a sale of an inventory property in 1979. The following properties, which came into inventory when they were purchased, were shown in inventory at year ends:

Lou Dykes Land: 1975

Gallery 51 Land: 1976

5304 - 89 St. Land: 1976

Point 51 Land: 1976

Pacific Rim Land: 1978

Symac Land: 1986

Other than the three pieces which remained in inventory until 1991, the remaining properties described below were shifted from inventory and became part of fixed assets after they were developed and it was determined by the Appellant to retain and rent them:

Gallery 51: 1984

Point 51: 1980

5304 - 89 St.: 1979

Gallery 51 and Point 51 were developed as offices while 5304 - 89 Street was developed as an office and warehouse. All three properties remained fixed assets of the company until a “butterfly division” in 1991;

(d) The Appellant continued to do construction and other work on a contract basis. Although it never had formal divisions, it did operate an excavating business under the trade name “Sabo Bros. Excavation” which was supervised by John Sabo and run from a different address (8805 - 53 Avenue, Edmonton) with a different telephone number, from 1975 until approximately 1990;

(e) The key employees of the Appellant were as follows:

Frank Sabo, President

John Sabo, Vice-President

Joe Sabo, Secretary-Treasurer

Accountant/Comptroller

Gary Dutshak 1978-79

Nancy Lutz 1979-82

Abdululah Ghazyani 1982-91

Collections Manager

Arnold Sabo 1978-81

Al Dadnane 1981-87

John Nitz 1987-91

Architect/Draftsman

Romas Feldman 1983-91

There were a number of additional employees and subcontractors hired by the Appellant over this period.

11. Despite the recession experienced in Edmonton in the 1980s, the Appellant continued throughout that period to employ the services of a full-time architect and draftsman whose primary responsibility was in relation to the design of future projects of the Appellant.

12. Frank Sabo made all significant decisions concerning the acquisition, development and sale of properties in the Appellant, and concerning the Symac Series of Transactions and Snowcap Series of Transactions. He died in November, 1993. John Sabo died in 1989. Joe Sabo is presently seriously ill and had no material involvement.

13. The Appellant continued to seek business opportunities in the 19803. Not only were there actual purchases and sales, but Frank Sabo was on the lookout for potential opportunities. In part, this was the result of standing orders to Sabo Bros. Realty Ltd., to bring him “deals”, but also because of the large number of people referred to him by tenants, business associates and financial firms who came “through the door” looking to rent or, in appropriate circumstances, buy property from the Appellant. In addition, there were people looking to sell property to the Appellant because it was generally known that it was prepared to buy if the price was right. Frank Sabo had built up extensive contacts in the southeast industrial area of Edmonton because the Appellant had built nearly half of the warehouses in that sector and in so doing, became familiar with a large number of tenants and property owners.

14. In relation to the acquisition of properties, the usual practice of the Appellant was to concentrate on three issues: (1) price; (2) location; (3) suitability for known or likely tenants or purchasers.

15. Because of his business contacts and personal experience, Frank Sabo had acquired a keen knowledge of the going rate for property, particularly industrial property, in Edmonton. As a result, two or three times a month, he would receive calls from appraisers wanting his view with respect to price trends. The Appellant was then in a unique position to quickly assess value, evaluate location and determine whether it would appeal to tenants or purchasers. Because of its financial stability, the Appellant could make decisions quickly as to whether or not to purchase and could pay cash for the property. However, this financial strength also allowed it to drive a hard bargain on the properties it did purchase and it developed a reputation for not being an “easy sale”.

16. The Appellant experienced the highly speculative “boom days” in Alberta of the 1970s, and was concerned when property values declined dramatically in the early 1980s, while at the same time, interest rates rose dramatically. This caused the Appellant to be more conservative in its activities in the 1980s, which it considered prudent business sense. After the economy began to turn around in the late 1980s, development activities of the company became more active again, and are being pursued by the Sabo families today.

17. During its 1986 taxation year which ended on December 31, 1986, the Appellant and the Appellant’s Shareholders entered into two series of transactions (the “Symac Series of Transactions” and the “Snowcap Series of Transactions”) referred to in paragraphs 18 through 26 and 31 through 38 of this Agreed Statement of Facts. It is agreed those transactions were legally and effectively carried out, and created the series of transactions the parties to the transactions intended.

SYMAC AGREEMENT

18. Pursuant to an agreement in writing dated May 31, 1986 (the “Symac Agreement”), the Appellant acquired all of the issued and outstanding shares in the capital stock (the “Symac Shares”) of Symac from Symac’s shareholders: Systems Construction Ltd. and McIntyre Ranching Co. Ltd. (collectively the “Symac Vendors”), each of whom held 50 Symac Shares.

19. At all material times, the Symac Vendors were dealing with the Appellant at arm’s length within the meaning of the Act.

20. At all material times, the Symac Vendors were dealing with the Appellant’s Shareholders at arm’s length within the meaning of the Act.

21. At the time the Appellant entered into the Symac Agreement, Symac’s assets consisted only of undeveloped real property in the southeast industrial area of Edmonton suitable for industrial development. This real property is legally described as:

Plan 772 0055 Block One (1) Lot One-A (1-A) Containing 0.817 Hectares (2.02 Acres) more or less Edmonton (N.E. 15-52-24-W4th) Excepting thereout all Mines and Minerals

(the “Symac Lands”).

22. Symac had acquired the Symac Lands at a cost of $415,000. At the time the Appellant entered into the Symac Agreement, the Symac Lands had a cost amount for income tax purposes and financial statement purposes in the aggregate of $922,996 (the “Symac Lands’ Cost Amount”) and a fair market value of $123,500. The Appellant had determined as of the end of its 1986 taxation year, however, that the fair market value was $75,000.

23. At the time the Appellant entered into the Symac Agreement, Symac had the following liabilities:

(a) $256,709 to First Western Trust Company;

(b) $26,000 to the Bank of Nova Scotia;

(c) $10,086 of property taxes payable to the City of Edmonton;

(a) through (c) collectively referred to as the “Symac Liabilities”)

and

(d) $630,200 payable to the Symac Vendors by way of shareholder loans (the “Symac Shareholder Loans”).

24. Pursuant to the terms of the Symac Agreement, the Appellant acquired the Symac Shares for an aggregate purchase price of $1 and agreed to discharge the Symac Liabilities.

25. Concurrent with the acquisition of the Symac Shares by the Appellant, the Appellant’s Shareholders each acquired a one-third interest in the Symac Shareholder Loans for an aggregate purchase price of $25,705.

26. After the Appellant had acquired all of the Symac Shares and prior to the end of the 1986 taxation year of the Appellant, Symac was wound up pursuant to the provisions of the Business Corporations Act of Alberta and the Symac Lands were distributed to the Appellant on the winding up. On the winding up of Symac, the Appellant agreed with the Appellant’s Shareholders to pay the Symac Shareholder Loans in accordance with their terms.

27. At all material times, the only business Symac carried on was the holding of the Symac Lands for sale or development and sale, as an adventure in the nature of trade.

28. The reason the Appellant and the Appellant’s Shareholders entered into the Symac Series of Transactions was so that the Appellant would acquire on the winding up of Symac, the Symac Lands for sale, or development and sale, and thereby obtain the benefit it considered would flow from the application of the provisions of the Act. That benefit obtained was the reduction in tax that would otherwise have been payable by the Appellant but for the Symac Series of Transactions, which reduction in tax resulted in a reduction of the Appellant’s current operating debt and accordingly also resulted in a reduction in the cost of borrowing funds for the purpose of carrying on its business.

29. After the acquisition of the Symac Lands by the Appellant in 1986, attempts were made to either find a buyer or a tenant for the land.

30. In 1991, the Symac Lands were transferred to Frank Sabo Enterprises Ltd., now known as Sabo Bros. Construction Inc. Eecol Electric and Sapco Foods Ltd. were secured as tenants in the fall of 1992 and a 31,876 sq. ft. warehouse was constructed on the property during 1993. The property continues to be owned by a company owned by Frank Sabo’s daughter.

SNOWCAP AGREEMENT

31. Pursuant to an agreement in writing dated September 24, 1986 (the “Snowcap Agreement”), the Appellant acquired all of the issued and outstanding shares in the capital stock (the “Snowcap Shares”) of Snowcap from Snowcap’s shareholders, Goodwin Boe, Mike Paskoski, Donald Kreycik, Alex Sterrenberg, Ronald Peterson and Reinhold Sedens (collectively called the “Snowcap Vendors”), who held an aggregate of 105 Snowcap Shares.

32. At all material times, the Snowcap Vendors were dealing with the Appellant at arm’s length within the meaning of the Act.

33. At all material times, the Snowcap Vendors were dealing with the Appellant’s Shareholders at arm’s length within the meaning of the Act.

34. At the time the Appellant entered into the Snowcap Agreement, Snowcap’s assets consisted of properties legally described as:

Plan 4983 A.M.

Block 28

Lots 17 to 20 Inclusive

Edmonton

Kennedale

Excepting thereout all Mines and Minerals

Plan 4983 A.M.

Block 28

Lots 23 to 24

Inclusive

Edmonton

Kennedale

Excepting thereout all Mines and Minerals

Plan 4983 A.M.

Block 28

Lots 1 to 4 Inclusive

Edmonton

Kennedale

Excepting thereout all Mines and Minerals

Plan 4983 A.M.

Block 28

Lots 5 to 12 Inclusive

Edmonton

Kennedale

Excepting thereout all Mines and Minerals

(collectively the “Snowcap Lands”).

35. Snowcap had acquired the Snowcap Lands at a cost of $534,000. At the time the Appellant entered into the Snowcap Agreement, the Snowcap Lands had a cost amount for financial statement purposes of $906,456; a cost amount for income tax purposes of $643,660 (the “Snowcap Lands’ Cost Amount”), and a fair market value of $225,000.

36. At the time the Appellant acquired all of the Snowcap Shares, Snowcap had liabilities to the Snowcap Vendors by way of shareholder loans, which in the aggregate totalled $705,416 (the “Snowcap Shareholders Loans”).

37. Pursuant to the terms of the Snowcap Agreement, the Appellant acquired the Snowcap Shares for an aggregate purchase price of $105 and concurrent with the Appellant’s acquisition of the Snowcap Shares, the Appellant’s Shareholders each acquired a one-third interest in the Snowcap Shareholders Loans for an aggregate purchase price of $339,895.

38. After the Appellant had acquired all of the Snowcap Shares and prior to the end of the 1986 taxation year of the Appellant, Snowcap was wound up pursuant to the provisions of the Business Corporations Act of Alberta and the Snowcap Lands were distributed to the Appellant on the winding up. On the winding up of Snowcap, the Appellant agreed with the Appellant’s Shareholders to pay the Snowcap Shareholders Loans in accordance with their terms.

39. The reason the Appellant and the Appellant’s Shareholders entered into the Snowcap Series of Transactions was so that the Appellant would acquire on the winding up of Snowcap, the Snowcap Lands for sale and on the sale of those lands, obtain the benefit it considered would flow from the application of the provisions of the Act. That benefit obtained was the reduction in tax that would otherwise have been payable by the Appellant but for the Snowcap Series of Transactions, which reduction in tax resulted in a reduction of the Appellant’s current operating debt and accordingly also resulted in a reduction in the cost of borrowing funds for the purposes of carrying on its business.

40. Snowcap had been in the business of buying, developing and selling commercial properties. Prior to 1979, it had:

(a) Purchased a property and then developed it as a warehouse property for rental, and eventually sold the property prior to 1979; and

(b) Purchased 18 acres of land which it had developed for industrial use and sold.

41. In approximately 1979, Snowcap purchased the Snowcap Lands for the purpose of development and sale or possibly development and rental. After 1979, the Snowcap Lands were the only asset of Snowcap. The Snowcap Lands consisted of a number of lots located in the northeast industrial area of Edmonton, which were assembled into larger parcels for the purposes of industrial development. Prior to 1982, Snowcap undertook significant work to cause the Snowcap Lands to be rezoned from agricultural to industrial use, and created and carried out development and marketing plans for the Snowcap Lands.

42. Prior to the end of its 1986 taxation year and subsequent to the wind up of Snowcap, pursuant to the option to sell granted to it in the Snowcap Agreement, the Appellant sold the Snowcap Lands to the Snowcap Vendors for the sum of $225,000.

GENERAL

43. In computing its income subject to taxation for its 1983 taxation year, the Appellant carried back and deducted the full amount of the 1986 Non- Capital Loss.

44. In April 1993, the full principal amounts of the Symac Shareholders Loans and the Snowcap Shareholders Loans were repaid by the Appellant.

45. By Notices of Reassessment dated August 17, 1990, the Minister of National Revenue (the “Minister”) reassessed the amount of tax and interest payable by the Appellant with respect to its 1983 and 1986 taxation years, resulting in a liability of the Appellant to the Respondent as follows:

(a) with respect to the 1983 taxation year:

(i) tax $ 69,485.28

(ii) arrears interest $ 25,200.48

(iii) refund interest $ 4,325.62

(iv) previous assessment ($ 1,012.90)

(v) total liability for 1983: $ 97,998.48

(b) with respect to the 1986 taxation year:

(i) tax $397,313.91

(ii) arrears interest $195,043.86

(iii) total liability of 1986: $592,357.77

46. The Minister’s Notice of Confirmation indicated that:

(a) The deduction of $847,966 claimed in 1986 as an inventory write down on the Symac Lands should not be allowed as, in the Minister’s opinion, the Symac Lands were held in an adventure or concern in the nature of trade and that land so held is not within the meaning of subsection 10(1) of the Act and section 1801 of the Regulations passed pursuant to the Act.

(b) The loss on the disposition of the Snowcap Lands in the amount of $418,660 claimed as a deduction from income was not an outlay or expense incurred by the Appellant for the purpose of gaining or producing income within the meaning of paragraph 18(1 )(a) of the Act.

(c) The Snowcap Lands were capital property within the meaning of section 54 and subsection 248(1) of the Act and the $418,660 loss on the disposition of the Snowcap Lands was a capital loss within the meaning of paragraph 39(1 )(a) of the Act and, that, an allowable capital loss of $209,330 within the meaning of paragraph 38(b) of the Act was deductible in computing the taxable income of the Appellant for its 1986 taxation year in accordance with paragraph 3(b) of the Act, but the capital loss on the disposition of the Snowcap Lands resulted in a benefit in the amount of $209,330 being conferred on the Appellant in its 1986 taxation year within the meaning of subsection 245(2) of the Act.

(d) The 1983 taxable income of the Appellant should be increased by the sum of $185,562 by virtue of the determinations made by the Minister in (a) to (c), the Minister having determined there was no non-capital loss for the 1986 taxation year that was deducible in computing the taxable income for Construction Ltd.’s 1983 taxation year in accordance with paragraphs 111(1 )(a) and 111 (8)(b) of the Act.

Paragraphs 28 and 39 of the Agreed Statement of Facts are parallel. Broken down, they state, respecting each transaction:

1. The Appellant would acquire on the winding up, lands for sale

— (“Symac”) or development and sale

— (“Snowcap”) and on the sale of those lands

2. The Appellant would obtain the benefit it considered would flow from the application of the provisions of the Acct.

3. That benefit obtained was the reduction in tax that would otherwise have been payable by the Appellant.

4. The reduction in tax resulted

(a) in a reduction of the Appellant’s current operating debt and accordingly also

(b) in a reduction in the cost of borrowing funds for the purpose of Carrying on its business.

The words were drafted with care. From them, the Court finds:

A. In both cases the Appellant had a purpose, on the winding up, of acquiring lands for sale.

B. In the case of Symac it might also be for development and sale.

C. Upon sale of the lands the Appellant would thereby obtain the benefit it considered would flow from the application of the Act (this would occur if there was a gain or a loss or if for any other reason the provisions of the Act might apply to a sale).

D. The Income Tax Act benefit which in fact was claimed by the Appellant was a reduction in income tax.

E. The sale and the reduction in tax resulted in a reduction of the Appellant’s current operating debt.

F. That also resulted in a reduction in the Appellant’s cost of borrowing for the purpose of carrying on its business.

The Appellant, Symac and Snowcap were each in the business of acquiring and selling land for a profit. In Friesen v. R. (sub nom. Friesen v. Canada), [1995] 3 S.C.R. 103, [1995] 2 C.T.C. 369, 95 D.T.C. 5551, the Supreme Court of Canada decided that land held as a venture in the nature of trade constituted inventory in a situation similar to Symac’s. Therefore, each had land in inventory at the time of the windings up in 1986.

Mr. Rawson was the chartered accountant in charge of the Appellant’s financial affairs and income tax returns and supervised their preparation at all material times. The Appellant valued its land inventory at the lower of cost or net realizable value at all material times. Mr. Rawson relied on Frank Sabo for these values and considered his values to be reliable. Frank Sabo died before the hearing. The parties agreed that the fair market value upon winding up was $225,000 in the case of Snowcap and $123,500 in the case of Symac.

The counsel and the Court have had the benefit of the decisions of the Supreme Court of Canada in Friesen, supra, and of the Federal Court of Appeal in Mara Properties Ltd. v. R. (sub nom. Mara Propeties Ltd. v. Canada), [1995] 2 C.T.C. 86 (sub nom. R. v. Mara Properties Ltd.), 95 D.T.C. 5168. The first thing to determine is whether the land of Symac and of Snowcap became inventory of the Appellant upon the windings up. “Inventory” is defined in subsection 248(1) of the Income Tax Act:

“inventory” means a description of property the cost or value of which is relevant in computing a taxpayer’s income from a business for a taxation year;

Subsection 9(1) states:

Subject to this Part, a taxpayer’s income for a taxation year from a business or property is his profit therefrom for the year.

Paragraph 88(l)(c) of the Income Tax Act states:

Where a taxable Canadian corporation (in this subsection referred to as the “subsidiary”) has been wound up after May 6, 1974 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 taxable Canadian corporation (in this subsection referred to as the “parent”) and all of the shares of the subsidiary that were not owned by the parent immediately before the winding-up were owned at that time by persons with whom the parent was dealing at arm’s length, notwithstanding any other provision of this Act other than subsection 69(11), the following rules apply:

(c) the cost to the parent of each property of the subsidiary distributed to the parent on the winding-up shall be deemed to be the amount deemed by paragraph (a) to be the proceeds of disposition of the property, plus, where the property was a capital property (other than depreciable property) owned by the subsidiary at the time that the parent last acquired control of the subsidiary and thereafter without interruption until such time as it was distributed to the parent on the winding-up, the amount determined under paragraph (d) in respect thereof,

Respecting paragraph 88(1 )(c), Marceau J.A., speaking for the majority in Mara, stated at page 89 (D.T.C. 5169-70):

It does not say that the parent will be considered for tax purposes to be in the same situation as the subsidiary was with regard to the property. It determines a deemed cost of acquisition but it does not determine, as I read it, whether that deemed cost and the actual proceeds of sale of the property will enter into the calculation of the parent’s income from its business. That determination must be made according to section 9 of the Act which defines business income. In order to satisfy the requirements of that provision, the parent must demonstrate that the property has become part of its own inventory.

But does the fact that both parent and subsidiary were in the same business, in itself, impose a finding that the property necessarily became part of the inventory of the parent since it was part of the inventory of the subsidiary? In my view, it could be so only if the transaction or series of transactions by which the land was acquired was entered into by the parent in the course of, within the ambit of, or for the purposes of its business. It is well established, in the jurisprudence, that a transaction which is devoid of the ordinary characteristics of trade, especially if devoid of any possibility of yielding some direct or indirect, immediate or eventual profit, is not a trading transaction and any property so acquired cannot be regarded as stock-in-trade...

In Friesen, Major J., for the majority, said at page 376 (D.T.C. 5555):

The first point to note about this definition of inventory is that property is not required to contribute directly to income in a taxation year in order to qualify as inventory. Provided that the cost or value of an item of property is relevant in computing business income in a year that property will qualify as inventory.

Major J. said this within the context of subsection 10(1) which he had already quoted. It reads:

For the purpose of computing income from a business, the property described in an inventory shall be valued at its cost to the taxpayer or its fair market value, whichever is lower, or in such other manner as may be permitted by regulation.

At page 384 (D.T.C. 5559), Major J. referred to inventory and the valuation method when calculating business income:

In summary, I conclude that the valuation method in s. 10(1) is available for inventory held as part of an adventure in the nature of trade. The valuation method becomes relevant in any particular taxation year through the calculation of business income. Business income is calculated according to well- accepted commercial and accounting principles. According to these principles the value of inventory is relevant to the computation of income in years prior to sale since it comprises part of the cost of sale. ...

Thus, the Appellant must establish that the property acquired in the winding up has become part of its own inventory. In order to do this, the Appellant must establish that the Appellant itself had the intention upon the winding up of earning business income in that taxation year or another taxation year from the property so acquired. The Agreed Statement of Facts distinguishes between “what the Appellant acquired the lands for.” The Snowcap lands were acquired “for sale”. The Symac lands were acquired “for sale or development and sale.”

In respect to the Snowcap lands, paragraph 42 of the Agreed Statement of Facts states:

42. Prior to the end of its 1986 taxation year and subsequent to the wind up of Snowcap, pursuant to the option to sell granted to it in the Snowcap Agreement, the Appellant sold the Snowcap Lands to the Snowcap Vendors for the sum of $225,000.

The Snowcap lands were in northeast Edmonton, whereas the Appellant’s normal business area was southeast Edmonton in the 1980s (paragraphs 41 and 13 of the Agreed Statement of Facts). Edmonton is a fairly large industrial city.

It is possible to interpret the Appellant’s option to sell the Snowcap lands as merely providing the Appellant with a floor price which it could realize from the lands in any event. But intention and timing are important. The Appellant acquired the lands to sell them - it is not agreed nor is there any other evidence that they were acquired to sell for a profit. Pursuant to its option, the Appellant sold the lands at a loss in the same taxation year in which it acquired them. The speed with which the Appellant sold the lands at a loss, viewed in the context of the other facts of this transaction, indicates that this was not a business transaction. It did not have the pos sibility of yielding a direct or indirect, immediate or eventual profit.

The Appellant’s claim for a business loss in respect to the Snowcap transaction is dismissed. The Respondent withdrew its reliance upon subsection 245(2) of the Income Tax Act respecting this transaction. Instead, the Respondent’s counsel placed his reliance upon subsections 245(1) and 55(1) of the Act and the decision of Strayer J.A. for the majority in Fording Coal Ltd. v. R., [1996] 1 C.T.C. 230, (sub nom. R. v. Fording Coal Ltd.), 95 D.T.C. 5672 (F.C.A.), delivered on November 15, 1995.

Because the Appellant’s claim for a business loss is denied, there is a question as to whether the disposition of the Snowcap lands was a capital loss within the meaning of paragraph 39(1 )(a) of the Income Tax Act and that an allowable capital loss within the meaning of paragraph 38(b) of the Income Tax Act was deductible by the Appellant in computing its taxable income for its 1986 taxation year.

Subsection 55(1) reads:

For the purposes of this subdivision, where the result of one or more sales, exchanges, declarations of trust, or other transactions of any kind whatever is that a taxpayer has disposed of property under circumstances such that he may reasonably be considered to have artificially or unduly

(a) reduced the amount of his gain from the disposition,

(b) created a loss from the disposition, or

(c) increased the amount of his loss from the disposition,

the taxpayer’s gain or loss, as the case may be, from the disposition of the property shall be computed as if such reduction, creation or increase, as the case may be, had not occurred.

Thus, the question is whether the result of the Appellant’s sale of the Snowcap lands, or transaction in respect thereto, is that the Appellant has disposed of property under circumstances such that the Appellant may reasonably be considered to have artificially or unduly created a loss from the disposition. In respect to such a claim for deduction, Strayer J.A., speaking for the majority in Fording, said at page 9:

But I can imagine no public purpose, nor has any been suggested, which would be served by allowing the deduction in the present case so as to allow the respondent to deduct, from future income from properties it previously owned, the expenses incurred in the past exploration and development of other newly acquired property which has produced nothing since its acquisition. In my view, these deductions being contrary to the object and spirit of the sections which nevertheless permit them, they may be seen as artificially reducing income.

In this case there was no business purpose to the sale. Nor is there any evidence before the Court that the Snowcap land as a capital property produced or could produce any income for the Appellant. There is an agreed fact that the claimed tax benefit produced a reduction in the Appellant’s cost of borrowing funds for the purposes of carrying on its business. Any tax benefits that may exist are not a result of the capital property itself having, or being intended to have, any commercial use in the business of the Appellant. There is no evidence that it did. The tax benefits claimed do not arise solely from the operation of the Act. The deduction was claimed as the result of an action by the Appellant that has no business purpose.

Therefore pursuant to subsection 55(1), in respect to the Snowcap transaction, the Appellant may reasonably be considered to have artificially or unduly created a loss from the disposition and the loss should be computed as if such creation of a loss had not occurred.

For the foregoing reasons, the Snowcap assessment is referred to the Minister of National Revenue for reconsideration and reassessment on the basis that the $418,660 loss on the disposition of the Snowcap lands was a capital loss and that subsection 55(1) shall apply in respect thereto.

In respect to the Symac lands, paragraphs 29 and 30 of the Agreed Statement of Facts read:

29. After the acquisition of the Symac Lands by the Appellant in 1986, attempts were made to either find a buyer or a tenant for the land.

30. In 1991, the Symac Lands were transferred to Frank Sabo Enterprises Ltd., now known as Sabo Bros. Construction Inc. Eecol Electric and Sapco Foods Ltd. were secured as tenants in the fall of 1992 and a 31,876 sq. ft. warehouse was constructed on the property during 1993. The property continues to be owned by a company owned by Frank Sabo’s daughter.

In the light of subparagraph 10(a) of the Agreed Statement of Facts, the Court finds that the acquisition and subsequent attempts to sell the Symac land were made by the Appellant with the intention of earning a profit. After more than three years, this land was transferred. In the context of all the facts, the Court finds that the Appellant intended to “acquire ... the lands ... for sale, or development and sale” at a profit. At acquisition the Appellant intended to earn business income in that taxation year or another taxation year by either selling the Symac land or by developing and selling the Symac land.

The Appellant had the means with which to carry the Symac land in inventory and it did so. In 1986 and subsequent years it had the business know-how and staff to sell or to develop and sell the Symac land at a profit in the Edmonton market. The Agreed Statement of Facts states that: The land, namely, “undeveloped real property in the southeast industrial area of Edmonton suitable for industrial development” (para. 21) and was typical of the holdings it was accustomed to selling or developing; the Appellant was prepared to sell any of its properties if the price was right (subpara. 10(a)) and it was on the lookout for potential opportunities (para. 13).

To use the criteria set forth by Dickson J. in Moldowan v. R. (sub nom. Mo Ido wan v. The Queen), [1978] 1 S.C.R. 480, [1977] C.T.C. 310, 77 D.T.C. 5213 at pages 484-87 (C.T.C. 312-14; D.T.C. 5215), the Appellant had a profitable experience in its past years, it had the training, it had an intended course of action of sale or development based upon proven experience in the immediate area, and it had a capability as capitalized to show a profit after charging capital cost allowance. In 1986 the Appellant had a reasonable expectation that it would profit from the acquisition of the Symac lands.

The Appellant’s claim for a business loss in respect of the Symac transaction is allowed. The parties agreed that the fair market value of the Symac lands is not $75,000; it is $123,500. As a result the Symac assessment is referred to the Minister of National Revenue for reconsideration and reassessment accordingly.

The assessments before the Court are referred to the Minister of National Revenue for reconsideration and reassessment in accordance with these reasons.

The parties’ success in respect to this matter is divided. There is no order as to costs.

Appeals allowed in part.