Meteor Holdings Ltd, Blaze Holdings LTD v. Minister of National Revenue, [1984] CTC 2221, 84 DTC 1189

Sarchuk, TCJ:—The appeals of Meteor Holdings Ltd (Meteor) and Blaze Holdings Ltd (Blaze) are from assessments to income tax for their respective 1978 taxation years. Both appeals were, by consent, heard on common evidence. While not all facts apply to each of the appellants, in all material respects the intention of the respective appellants is identical and the same considerations and principles are applicable in each instance.

As has been stated many times, the question in cases of this kind is essentially one of fact with each case depending on the particular circumstances surrounding the transactions in issue. A fairly extensive history of the business affairs of the appellants was given by two directors and officers of the appellants, Keith Valk and Fred Bosch.

Mr Valk, an electrician, has been a shareholder of the appellant Meteor since 1969 and became an officer and a director in 1973. In 1976 he became a shareholder, director and officer of Blaze and has held these positions in both companies since that time.

Mr Fred Bosch is an accountant residing in Calgary. He became a shareholder of Meteor in 1973 and has been an officer and director of both appellants since 1976. Mr Bosch’s evidence in most respects paralleled that of Mr Valk. Both men, as was the case with most of the shareholders, were employed in an employment situation providing no pension plan and for that reason the concept of an investment company such as Meteor appealed to them.

Meteor Holdings Ltd

At the time of its incorporation in 1969 Meteor had 13 shareholders. Their initial contribution totalled $66,700. While the shareholdings were not equal no one person held 51 per cent of the shares. There has never been any agreement between any of the shareholders as to the manner in which they would vote their shares; there were no voting blocks and in relation to all decisions each shareholder had one vote regardless of the size of his shareholding.

The purpose of Meteor was to enable the shareholders to develop a source of retirement income to supplement what might be available to them through the Canada Pension Plan. With two exceptions none of the shareholders were employed in circumstances where pension plans were available. The discussions which led to incorporation of Meteor involved a group of people who were basically looking for future security. Most of them were cautious and concluded that investment in real estate would be the best possible vehicle for a stable return since in their view the acquisition of property was relatively secure. It was their expectation that they would not see much in the way of a return on investment for twenty to thirty years.

Meteor did not enter into any form of management contract with any shareholder nor with any other party for that matter. It was a co-operative effort, with some of the shareholders looking after the properties by way of collecting rents and dealing with tenant problems, but with the exception of Mr Bosch who looked after the books and accounts, no one was involved on a daily basis. Decisions as to the acquisition (and in subsequent years the disposition) of property by Meteor were not made by the directors. In each and every case the ultimate decision was made by a vote of shareholders.

During the relevant period of time Meteor was involved in the following transactions:

1. In 1969, it purchased two lots at 1925-11th Ave, SW, Calgary, Alberta. Two houses were torn down and an apartment block was built on the site. The total cost was $190,000, financed by a mortgage for $150,000 with the balance being paid in cash. This first acquisition is still owned and operated by Meteor as a rental property.

2. In May of 1969, Meteor acquired two vacant lots on 16th Avenue, NW, Calgary, for $44,000 cash, with the intention of erecting an office building. A substantial sum of money was expended on an artist’s rendering of the proposed building; plans and specifications were drawn-up; and arrangements were made with Royal Trust for the necessary financing. In 1974, the lots were sold as a result of the frustration of their plans caused by the refusal of the municipal authority to grant certain permits.

3. In 1972, Meteor purchased a lot at 1535-26th Avenue, SW, Calgary. An old dwelling house was demolished and a twenty suite apartment was constructed. The appellant paid $55,000 in cash, for the lot and obtained a mortgage of $107,000 to finance the building. This apartment is still owned by Meteor.

4. In 1976, an apartment block at 111-117 24th Avenue SE, (the Stafford- Dorchester) was purchased for $450,000 of which approximately $150,000 was a cash payment. It consisted of two buildings each containing 16 suites and was purchased as a going concern. In December 1977, a better investment property became available and the Stafford-Dorchester was sold for $700,000. This is the disposition in issue.

5. On January 1, 1978, Meteor, in a joint venture with Blaze Holdings Ltd acquired a property at 9940 Fairmount Drive, SE, Calgary, (Fairmount Estates) for the price of $2,538,000. This property was operated as a rental property for two years and was sold in November of 1979 for $3,132,000.

With the proceeds of the sale of Fairmount Estates, Meteor made the following acquisitions:

1. In September 1980, Meteor acquired a 50 per cent interest in the AeroMeridian Warehouse, Oklahoma City, Oklahoma for $450,000 (U.S.). This rental property is owned to this date by Meteor.

2. In February 1981, Meteor acquired a twenty suite apartment block at 2022-11th Avenue SE, Calgary for the sum of $385,000. It too is still owned and operated by Meteor as a rental property.

Blaze Holdings Ltd

Blaze Holdings was incorporated in 1974, but did not become active until 1976. Most of the shareholders of Blaze were and are shareholders of Meteor. Mr Valk testified that some of the older investors in Meteor did not wish to become involved in an opportunity which had presented itself as a result of which certain shareholders of Meteor purchased Blaze and used it to acquire an apartment block in Medicine Hat.

Blaze like Meteor consisted of a group of investors with no one person owning or having a controlling interest. As was the case with Meteor there were no agreements as to how the shares would be voted and there were no voting blocks. All decisions were taken on a one shareholder-one vote basis and not on the basis of the respective shareholdings.

The sole acquisition by Blaze prior to the transaction at issue was the purchase in Medicine Hat of a twenty-three suite apartment. It was acquired on January 1, 1976 for $390,000, with a cash payment of $131,000 raised through capital contribution. This property was operated as a rental property until January 1978, at which time it was sold to enable Blaze to conclude an arrangement with Meteor for the acquisition of Fairmount Estates. The equity in the Medicine Hat property was Blaze’s sole contribution to the purchase price. It is the disposition of the Medicine Hat property that is in issue in the Blaze appeal.

The Transactions in Issue

Given the fact that Meteor and Blaze had common directors and shareholders it was not surprising to hear evidence that Blaze disposed of its Medicine Hat property because it too believed that Fairmount Estates was a better investment. The Court was told that Fairmount Estates was larger, containing one hundred and eight suites as opposed to the thirty-two suites in the Stafford-Dorchester. As far as the Medicine Hat property was concerned it was stated that the rental market had deteriorated and accordingly when the opportunity for a better acquisition arose the shareholders of Blaze were convinced of the wisdom of converting their equity in the Medicine Hat Apartments to an equity position in Fairmount Estates.

It was the evidence of both witnesses that because of its size and financial requirements the acquisition of Fairmount was beyond the ability of Meteor by itself. According to Mr Valk, Meteor could have remortgaged some of its assets and would have been able to sell the Stafford-Dorchester, but even these steps would not have provided adequate funds. The shareholders were anxious to purchase and decided to get Blaze into the picture. When the vendor of Fairmount was prepared to accept the Medicine Hat Apartments owned by Blaze as a “trade-in” the acquisition was consummated.

It was always understood that a merger of the two appellants would be concluded as part of the plan relating to the acquisition of Fairmount Estates. The merger in fact took place and the subsequent decisions to dispose of the Fairmount Estates and to buy the Oklahoma City and the 11th Avenue, Calgary, properties were made by the merged entity.

The evidence satisfies me that the disposition of Stafford-Dorchester by Meteor in December 1977 was for the sole purpose of acquiring Fairmount Estates. It was a rental property giving Meteor no difficulty at that particular time and would not have been disposed of were it not for the availability of the larger and better property.

The motivation for the acquisition of Fairmount by Blaze was reinforced by the fact that the apartment block in Medicine Hat although relatively new, had shown a decline in its occupancy rate.

The subsequent disposition of Fairmount in November 1979 resulted from the development of an unexpected but real problem relating to the plumbing in the building. The witnesses testified that it was just a matter of time before all of the piping would have to be replaced. Initial estimates done by one of the shareholders and subsequently by Albatross Plumbing and Heating projected the costs to be in the range of $250,000. It was conceded that the problem at Fairmount was not immediate, but it was one which gave cause for future concern. As a result the shareholders agreed that it was an opportune time to dispose of Fairmount. The property was not listed but the appellants let it be known that they would entertain offers to purchase. In due course an offer was brought to them by Block Bros and was accepted.

Following the disposition of Fairmount but prior to any further acquisitions a decision was taken to pay dividends of some $235,000 to the shareholders. This decision was hotly disputed and was just barely approved by a majority of the shareholders.

The evidence of Mr Valk and Mr Bosch in chief left the impression that all of the appellants’ acquisitions were made with substantial cash payments, amounting in most instances to at least 25 per cent of the total purchase price, and that such funds were obtained from the shareholders by way of capital contribution. However, upon cross-examination it became evident that this was not quite precisely the case. Mr Bosch conceded that several of the earlier acquisitions had been substantially re-financed to provide funds for further acquisitions. For example, the Stafford-Dorchester had been acquired by way of contributions from the shareholders (about $15,000 or 10 per cent of the purchase price) and the balance by way of re-financing other assets. Mr Bosch also conceded that the same method was utilized in the acquisition of Fairmount. Neither Mr Bosch nor Mr Valk were able to state how much additional borrowing was required for the Fairmount purchase, but admitted that was the case.

Upon cross-examination counsel elicited the fact that two or three of the shareholders were substantially involved in the real estate business, either directly or indirectly, to wit, Clarence Wagenaar, Hillcrest Investments Ltd and Ria Jager. It is not without significance that Fairmount was purchased from Hillcrest Investments Ltd or that other shareholders had an interest in Alpine Drywall and Decorating Ltd, the vendor of the Stafford-Dorchester property.

There were several shareholders in both Blaze and Meteor who were knowledgeable in real estate with Mr Clarence Wagenaar being particularly active. Both witnesses maintained that although the appellants relied upon those shareholders for their expertise, discussions relative to any acquisition were full and thorough and the decisions were always consistent with the shareholders’ intention of developing a pool of assets for the long term. Both stated that to the best of their recollection, there were never any discussions of the possibility for resale at the time a property was being considered for acquisition. The potential of each investment was looked at carefully but neither witness could recall ever discussing what would be done with the buildings if anything went wrong. Mr Bosch in particular was adamant on this point stating on several occasions that “we never looked at it this way’’. It was the attitude of the shareholders that real estate at that point in time was profitable to operate and it was a foregone conclusion in their minds at least that the rental market would remain stable.

Mr Bosch described a typical meeting. A property would be referred to the shareholders (on several occasions by Mr Clarence Wagenaar) and the proposer would make a submission. The property would be described, a financial statement would be produced, the shareholders would review the financial position of the acquisition and would consider whether or not it appeared to be a viable operation.

In relation to the appellants’ property acquisitions in general, both witnesses stated that there were occasions when properties were brought to their attention by one or another of the shareholders. On such occasions if the shareholder was involved in the property being acquired he would absent himself and would not take any part in the decision-making process.

When questioned on the involvement of Mr Wagenaar as vendor in several transactions Mr Bosch said that the appellants always bore in mind that he would still remain as an owner due to his shareholdings in Blaze and Meteor. Both witnesses emphasized that because of a commonality of interests most of the shareholders had become reasonably close; they had a common goal and felt that they were in the fortunate position of having Mr Wagenaar to provide advice and counsel.

The issues are whether or not the respondent was correct in reassessing on the basis that:

(a) the profit realized from the sale of the property situated at 2398 Southview Drive SE, Medicine Hat, Alberta was properly taken into account in computing the appellant Blaze’s income in accordance with the provisions of section 3 and subsection 9(1) of the Act; and

(b) in the case of Meteor, whether the profit realized from the sale of the Stafford-Dorchester was properly included in computing Meteor’s income in accordance with the aforementioned provisions.

The appellants say that they realized a capital gain on their respective dispositions and that the respondent erred by including the full amount of such capital gains in their respective incomes.

It was argued on behalf of the appellants that their shareholders set out to develop a substantial pool of revenue producing capital properties to provide financial support in their later years. It was never the intention of the appellants to do anything more than to acquire rental properties which would, over the long term, provide sufficient equity and cash flow to act as a form of retirement fund for the individual shareholders. The appellants argued that in fact during the existence of Meteor and the more limited existence of Blaze only one dividend has been paid to the shareholders.

It was the stated intention of the shareholders at the time of incorporation of each of the appellants that properties would be acquired for a long term hold. While conceding that some of the properties were the subject of sale in the years prior to the taxation year in question and that there were sales in subsequent years the appellants maintain that their overall objectives have not changed since Meteor was incorporated in 1969. The appellants point to the fact that two of the three initial acquisitions made between 1969 and 1972 are still held today as revenue producing rental properties and that the single disposition prior to the taxation year in question came about as a result of a thoroughly frustrated plan.

The appellant Meteor points to the fact that the Stafford-Dorchester apartment was an acquisition which was consistent with its intentions and that it would not have been sold after one year had it not been for the availability of what appeared to be a better investment. A similar argument was advanced on behalf of the appellant Blaze, and it was further argued that Blaze had made but one investment and all that had transpired was the exchange of the one investment property for another.

It was the respondent’s position that one of the incorporating objects of both appellants was to buy and sell properties. Counsel pointed to clause 3(a) of Meteor’s Memorandum of Association which reads:

3 (a) To purchase or otherwise acquire and to hold, sell, exchange or otherwise dispose of and deal in the property, real or personal, rights and assets of and bonds, debentures, debenture stock, shares of all classes and securities of any form or type issued by any individual, partnership, corporation or company, public or private, incorporated or unincorporated.

The appellant Blaze was incorporated in the same manner.

In the instant case these objects are of only limited assistance in ascertaining the intention of the appellant. The respondent argued that during the period 1975 to 1979 the appellant Meteor was involved in four real estate transactions where the holding period was one to two years. It was argued that the sales in Meteor’s 1978 and 1979 fiscal years were not unsolicited. Great emphasis was placed on the fact that three shareholders of both appellants were involved in the real estate business and that Mr Wagenaar in particular was deeply involved in the appellants’ affairs, introducing property to the shareholders, selling property to them, and arranging for the disposition of properties. His knowledge and experience, it was argued, permeated both appellants’ decision making process. It was contended that given the circumstances surrounding Mr Wagenaar’s involvement in Blaze and Meteor it was incumbent upon them to provide him as a witness so that all facts would be before the Court and that failure to do so entitled the Court to draw a negative inference from his failure to testify, the negative inference being that his input on the feasibility of investments, his experience and activity in the real estate market and his knowledge of the availability of opportunities for re-sale were indicative of the true intentions of the appellants. Counsel urged the Court to find that had he been called his evidence would have disclosed that the appellants’ acquisitions were not motivated solely by the desire for long term investment. While the Court may in certain circumstances draw the appropriate inference when a key witness is not called, in my opinion it would not be appropriate to do so in this case.

The respondent’s position is not so much that the two properties were acquired by the respective appellants with the primary intention of re-sale at a profit at the earliest appropriate time, but that at the time of acquisition the appellants’ conduct and actions were consistent with a conclusion that they had a secondary or alternative intention of turning the property to account by means of re-sale. The difficulty with this position is that it depends in great part on the Fairmount purchase and sale which immediately followed the disposition of the properties in issue. It was argued that the timing of the purchase and sale of the Stafford-Dorchester property by Meteor and the purchase and trade of the Medicine Hat apartment by Blaze, coupled with the quick turnover of the subsequently acquired Fairmount Estates unequivocally demonstrated an intention other than that of investment. I do not agree.

If we were dealing with the acquisition and disposition of Fairmount the respondent’s contention that there was a secondary intention present might be tenable. However, I am not dealing with Fairmount and am only required to determine what the intentions of Meteor and Blaze were at the time they respectively acquired the Stafford-Dorchester and Medicine Hat properties.

While the evidence of Messrs Valk and Bosch is helpful in endeavouring to determine the appellants’ intention is it the conduct of the corporate appellant and the steps they took up to and including the acquisition of the two properties that gives me a true indication of their intentions? While I do not accept the argument that Mr Wagenaar played a negligible role in the decision making process of both appellants I also do not accept the suggestion that his input was so influential as to colour unalterably the appellants’ intentions.

It is not surprising to have witnesses insist that the appellants’ intentions were solely to make investments and that the possibility of re-sale was never discussed nor considered. It is also not uncommon to hear evidence and arguments that subsequent dispositions were caused by events occurring beyond the taxpayers’ control. As I stated earlier, if one were considering the disposition of Fairmount the respondent’s position that the transaction had the double character of being an investment and an adventure in the nature of trade might be tenable. However, on all the evidence before me in relation to the two properties in question I am satisfied that neither appellant had the possibility of re-selling in its mind at the moment of acquisition. The intentions of the corporate appellants were not vague. They were well defined and were consistent in the manner in which they were carried out in all the years up to and including the taxation years in question. There are no circumstances surrounding these two transactions which would properly entitle me to draw the inference that re-sale was an operating motivation for the acquisitions. The conduct of the appellants at the time of acquisition of the Stafford-Dorchester Apartments and the Medicine Hat Apartments was consistent with an investment intention and inconsistent with any other rational conclusion.

The appeals are therefore allowed.

Appeals allowed.