Donald Alastair Fergusson, Robert Alan Fergusson v. Minister of National Revenue, [1984] CTC 2084, 84 DTC 1107

Bonner, TCJ:—The appellants appeal from assessments of income tax for the 1973 taxation year. The appeals were heard together, the principal issue being common to both. The assessments were made on the basis that the gain realized by the appellants upon the disposition of property located in Victoria, British Columbia, was income from an adventure in the nature of trade. The property in question was purchased in December 1969 by Highland Development Company (hereinafter sometimes called “Highland”), a partnership in which each of the appellants held a 50 per cent interest. The vendor was Imaginaction International Ltd (hereinafter sometimes called “Imaginaction”). At all relevant times each appellant held 40 per cent of the issued shares of that company.

Imaginaction had purchased the property in December 1968. It borrowed from a bank, upon the guarantee of the appellants, $415,000 of the $481,000 purchase price. That debt was assumed by the partnership, Highland, upon acquisition of the property. The property comprised one city block of land located in downtown Victoria. At the time of purchase and at all relevant times thereafter the improvements consisted of an old building and a parking lot. A restaurant was located in the building. The revenues generated by the property were insufficient to cover operating expenses, taxes and interest on the bank debt.

The appellants did not contend that either they or Imaginaction bought the property as a source of the revenues generated by existing improvements. They asserted that both Highland and Imaginaction intended to develop an apartment, office and commercial complex. Donald Fergusson testified that Imaginaction worked upon the development of the property during 1969. The work described in evidence was of a preliminary and exploratory nature. Neither the leases nor the commitment for permanent financing necessary to the accomplishment of the proposed development was ever secured.

In October 1969 it was decided that the Victoria property should be transferred from Imaginaction to Highland for purposes of a reorganization of the financial affairs of Imaginaction. That reorganization was considered to be a desirable preliminary to a proposed public offering of Imaginaction shares. The transfer of the property was not in fact accomplished until December 5, 1969, when conveyance was made to a trustee for Highland.

On December 20, 1969, there was published in a widely read financial newspaper an analysis of the financial statements of National Student Marketing Corporation, a public company in which each of the appellants held very significant blocks of shares. As a result the market value of those shares collapsed and the appellants entered a period of great financial difficulty. It was the appellants’ thesis that those financial difficulties frustrated the accomplishment of their original intention to develop the Victoria property.

On behalf of the appellants it was argued that their intention at the time of acquisition of the property by Imaginaction and throughout the ensuing period leading up to the transfer to Highland on or about December 5, 1969, was as material as their intention at the time of the acquisition by Highland. It is true that the intention of a corporation is that of the individual who is its directing mind and will and that the intention of a partnership is that of the persons who control its operations and decisions. It is also true that the individuals whose intentions were those of both Imaginaction and Highland were the appellants. However, the intention of the appellants at the time that Highland bought from Imaginaction may well have been different from that which led to the purchase by Imaginaction. It would, in my view, be wrong to regard this case as if it were one in which Highland bought in 1968 and proceeded to make those development efforts which in fact were made by Imaginaction during the period from December 1968 to October 1969. Furthermore, the evidence as to the efforts made by Imaginaction was slim. It was not shown that any decision was ever reached to proceed with any reasonably well-defined development. The lack of such decision without doubt explains the lack if evidence as to the coste of the project said to be contemplated and as to the plans for financing that project.

What the partnership bought was a rather small equity in a property which could be carried in its then existing state only at a loss. The property was one which could be developed into a self-sustaining investment only by means of a development project which would necessarily involve large borrowings. Imaginaction was not shown to have secured mortgage commitments and Highland was not shown to have attempted to secure them.

At the time that Highland acquired the property the bank was pressing for repayment of the loan which it had made to finance the acquisition. In response to that pressure Larry Witherspoon, Managing Director of Highland, listed the property for sale early in November 1969. That asking price was $1.3 million.

Both appellants testified that the sale of the property was neither discussed with Mr Witherspoon nor authorized by them and that they were unaware of his action. As I see it, Mr Witherspoon simply took the step which, as must have been apparent to all, was the inevitable consequence of inability to proceed with a preferred course of action, namely, development. The development proposed was nothing more than a hope or desire. It cannot, on the evidence, be found to have been an intention. The evidence of studies undertaken by the appellants in the spring of 1972 with regard to a scaled-down development which it was hoped would be consistent with the financial resources then available lends only feeble support to the alleged original intention. In summary, it has not been shown that an intention to develop motivated the purchase by the partnership to the exclusion of the intention assumed by the respondent, namely, that of turning the property to account for profit. The gain realized on resale was therefore income from an adventure in the nature of trade.

The only remaining issue relates to the appeal of Robert Fergusson. He did not reside in Canada in 1973. It was the position of the respondent, however, that Robert Fergusson carried on business in Canada and was therefore liable to tax under paragraph 2(3)(b) of the Income Tax Act. The respondent’s argument was that Highland was a partnership, that a partnership is the relation which subsists between persons carrying on business in common with a view of profit and that this appellant was therefore carrying on business in Canada. The uncontroverted evidence was that Highland did virtually nothing in Canada except acquire the Victoria property, carry on the business of operating a parking lot thereon, lease the parking lot subsequently and, finally, sell the Victoria property. The operation of the parking lot by Highland ended on December 31, 1971. All of the day-to-day business operations of Highland were carried on from the office in San Francisco, save for the parking lot. The transaction which comprised the acquisition and resale of the Victoria property was, quite plainly, an adventure in the nature of trade. There was no continuity of Canadian operations which would support a conclusion that Highland carried on business in Canada.

The respondent submitted that the extended definition of the word “business” to be found in subsection 248(1) of the Income Tax Act applies for all purposes of the Act and that if this appellant’s gains were from an adventure in the nature of trade in Canada he is deemed, by section 253, to have carried on business in Canada within the meaning of subsection 2(3). This is a conclusion which is not open to me, having regard to the decision of the Exchequer Court in Tara Exploration and Development Co Ltd v MNR, [1970] CTC 557; 70 DTC 6370. At 6376 Jackett, P, stated:

With great doubt as to the correctness of my conclusion, I am of opinion that section 139(l)(e) does not operate to make a non-resident person subject to Canadian income tax in respect of a profit from an adventure that otherwise does not amount to, and is not part of, a “business”. With considerable hesitation, I have concluded that the better view is that the words “carried on” are not words that can aptly be used with the word “adventure”. To carry on something involves continuity of time or operations such as is involved in the ordinary sense of a “business”. An adventure is an isolated happening. One has an adventure as opposed to carrying on a business.

My conclusion 1s, therefore, that the appeal succeeds on the ground that the appellant does not fall within the charging section of the Income Tax Act.

There has been no material change to the applicable statutory provisions. The appeal of Robert Fergusson will therefore be allowed and the assessment for his 1973 taxation year will be referred back to the respondent for reconsideration and reassessment on the basis that his share of the gain realized upon the sale of the Victoria property forms no part of his . incomes from businesses carried on by him in Canada”, within the meaning of subparagraph 115(l)(a)(ii) of the Income Tax Act. The appeal of Donald Fergusson will be dismissed.

Appeal of Donald Fergusson dismissed. Appeal of Robert Fergusson allowed.