F W Woolworth Co Limited v. Minister of National Revenue, [1983] CTC 2075, 83 DTC 85

M J Bonner:—The appellant appeals from assessments of income tax for the 1972 and 1974 taxation years. On assessment the respondent treated as income part of the gain realized on the sale:

(a) in 1972 of a shopping centre site in the Giffard area of Quebec City and of a shopping centre site in the Town of Levis on part of which a store had been constructed; and

(b) in 1974 of lands in Levis adjacent to the second of the aforementioned shopping centre sites.

The appellant carries on the business of a retail merchant. It operated two types of stores, variety stores under the Woolworth name and junior department stores under the Woolco name. It wanted to expand its Woolco operations into the retail market in and around Quebec City. With that object in view it assembled two blocks of land suitable as shopping centre sites. The first, in Giffard, comprised about eighteen acres. It planned a Woolco store thereon. That store, together with the adjacent land necessary for parking, was to occupy eleven of the eighteen acres.

The second block, in Levis, comprised ninety-three acres. A twenty-five acre part thereof was rezoned at the behest of the appellant to permit shopping centre uses. A Woolco store was constructed thereon which, with adjacent land necessary for parking, occupied thirteen of the twenty-five acres. In December of 1972 the appellant sold both the eighteen-acre parcel and the twenty-five acre parcel. At the same time it granted to the purchaser an option entitling it to buy a further nineteen acres adjacent to the twenty-five acres. That option was exercised, resulting in the sale of the nineteen acres in 1974.

By the assessments under appeal the respondent treated as income:

(a) the gain realized on the sale of seven of the eighteen acres at Giffard sold in 1972;

(b) the gain realized on the sale of twelve of the twenty-five acres at Levis sold in 1972; and

(c) the gain realized on the 1974 sale of the nineteen acres at Levis which had been optioned.

The respondent treated the gain realized on the disposition of the Woolco store site at Giffard, the Woolco store at Levis and the adjacent parking areas as gains on capital account. In short, the issue is whether the gains realized on the sales of surplus lands, that is to say, those lands not required for the two Woolco stores and their adjacent parking areas, were income from a business.

The Woolco store at Levis and the Woolco store constructed at Giffard following the first sale and the adjacent lands required for parking were leased back to the appellant, such leases being for a term of twenty years with four five-year options to the appellant to renew.

The appellant contended that:

(a) for its Woolco operations it required stores in shopping centres dominant in the relevant trade area;

(b) the development by it of the two shopping centres in question was the best if not the only way of securing the retail space which it needed at the time in the Quebec City area;

(c) its intention at the time of acquisition was, in each case, not to make a profit from resale but rather to use its ownership of the land acquired to secure a long-term lease of the required Woolco space on the most favourable possible terms by selling such land at cost;

(d) such being its intention, the transactions were of a capital nature; and

(e) the doctrine of secondary intent can have no application here because its primary intent was fulfilled.

The evidence established that the appellant concentrated on seeking profits from the operations of its retail stores. Plainly, it preferred to employ its resources in such retail operations. Thus, where possible it chose to lease retail premises rather than to purchase them. In some cases, however, it had to buy in order to secure the store which it required. In some of those cases the properties thus acquired were resold at depreciated book value with provision being made as part of the transaction for a lease-back to the appellant on very favourable terms. In effect, the appellant demonstrated a tendency to relinquish the opportunity for monetary gain on resale in exchange for lower rents.

In the 1960s the Woolco division of the appellant was involved in an expansion drive. It wished to enter the Quebec City retail market, but it was initially unable to find satisfactory sites. An attempt to secure space in the Fleur de Lys shopping centre across the road from the Giffard property failed and the space in that centre was occupied by a competitor. An attempt was made to interest the developer of the Fleur de Lys centre in the Giffard site. The attempt failed, apparently because the developer thought that the site, which was divided into three parcels each in different ownership, could not be assembled. One of the parcels was tied up in litigation. Another was owned by a religious order which was not overly inclined to sell. Only the third was available.

The appellant proceeded to assemble the site itself. It retained the services of a real estate broker who was thought to be favourably regarded by the order of nuns which owned the second parcel. During the period between February and August of 1968 the appellant secured from the nuns and the owner of the third parcel either options or agreements of purchase and sale which were conditional upon the availability of the first parcel. It then retained a lawyer who managed to expedite the litigation to the point at which the first parcel was offered for sale at option pursuant to a court order. The appellant was the successful bidder.

All of this was done with the approval of the executive committee of the appellant’s parent company. The evidence showed that the executive committee was, in fact, the directing mind and will of the appellant in so far as the transactions in question in the appeals are concerned.

The main witness at the hearing of the appeals was David Currie, the official of the appellant who was responsible on a day-to-day basis for the acquisition of Woolco retail space. He acted under the direction of the executive committee. His evidence was that the objective of the executive committee at all times was to secure retail space in a Woolco store located in a shopping centre and to occupy such space, if at all possible, under a long-term lease. In authorizing the acquisitions the executive committee envisaged that a developer would be found and a deal worked out with him whereby the developer would acquire the site and build a shopping centre.

In the fall of 1968 the executive committee rejected efforts by Mr Currie to persuade it to permit the appellant to take advantage of development opportunities which Mr Currie felt were open to the appellant as a result of the fact that it was a major user of shopping centre retail space. The most the parent would permit the appellant to do was to:

Purchase land sufficient for the Woolco unit and the parking lot and building our own store and parking facilities, and have a developer buy and build other retail facilities on additional adjacent land to complete the shopping centre. In this situation we would end up with a Company owned store and parking area and rights in the adjacent shopping centre — eg store No 6080 Kitchener, Ontario.

In the fall of 1968 the appellant found a second potential shopping centre site at Levis. It was well located, both in relation to existing traffic arteries and in relation to a proposed bridge which was expected to link the area with downtown Quebec City. The site consisted of ninety-three acres held in nine separately owned properties. One twenty-five acre part was, as a result of the appellant’s efforts, rezoned to permit shopping centre uses. The second part was zoned for public uses only, but discussions between officials of the appellant and elected officials of the Municipality led the appellant to conclude that, at least to the extent necessary for expansion of the shopping centre beyond the twenty-five acre part, rezoning would present no problem.

The appellant felt that the market potential for a regional size shopping centre existed and that the twenty-five acre parcel would be insufficient for such purposes. An area of ninety-three acres was more than required for a regional shopping centre, but the choice which the appellant had was between a parcel too small for a regional centre and one large enough for such a centre with land to spare. A regional centre was favoured by the appellant because of the potential vulnerability of a smaller centre to one of regional size which could always be constructed and house competing interests.

In a memo of November 20, 1968, recommending the purchase of the land at Levis, Mr Currie stated:

If this proposition is approved, a submission involving the development of a company owned Woolco Department Store on a portion of Parcel “A” would be forwarded at an early date. We have worked out the basic terms of an agreement for the development of the Company owned land in Quebec City (Blvd Ste Anne) and we feel that the same developer would be prepared to handle both deals on the same conditions.

The executive committee approved the purchase a few days later and stated in part:

The remainder of the acreage is to be held in contemplation of negotiating a satisfactory disposition arrangement which will serve to reduce our total investment in the property.

Following the purchases the appellant continued negotiations with the developer. Initially the negotiations proceeded on the basis that the land would be leased to the developer on a long-term lease. It, in turn, was to develop and operate the shopping centres containing the Woolco stores which the appellant sought. In the outcome, however, that is not what happened. No arrangement was concluded with the first developer. Negotiations with others ensued and the sales in issue here were made. The sales were made at or about market value and not at prices calculated to result in any sort of preferential rent on the leasebacks of the Woolco stores.

It must be remembered that what the respondent has treated as income is not the gain on the sale of the two Woolco sites but rather the gain on the sale of the land surplus to requirements for the Woolco stores. Although that surplus land was bought with a view to enabling the appellant to ensure that it would be used for purposes which would complement the Woolco stores, it was never the appellant’s intention to use that surplus land itself as a source of income. Mr Currie does not appear to have ever succeeded in persuading the executive committee to buy and keep as an investment land in excess of that needed for Woolco operations. The preferred intention of the executive committee (as opposed to Mr Currie) appears to have been to resell the surplus land and that is exactly what it did (save for that part of the Levis site which the appellant still retains unused).

In both cases the activities of the appellant in relation to the surplus lands were distinguishable from those of a land dealer in only one respect, that is to say, the primary intention was not to earn a profit from resale but rather was to ensure such development of the surplus lands as was desired for purposes of the adjacent Woolco operation.

It has long been held that where:

. . . a transaction is of the same kind and carried on in the same way as a transaction of an ordinary trader or dealer in property of the same kind as the subject matter of the transaction it may fairly be called an adventure in the nature of trade.” [1]

As to that distinguishing feature, the absence of a desire to turn a profit, the arguments advanced by counsel for the appellant were essentially similar to arguments rejected in the Taylor case. In that case the respondent purchased a vast quantity of lead which he subsequently resold to a company. The respondent was the President and General Manager of that company. He entered into the transaction in order to secure raw material for the company and not for the purpose of making a profit. Thorson, P, said at 1140:

It is of no avail to the respondent that when he purchased the lead he did so without any intention of selling it to the Company at a profit. He did not pretend that his purchase was for an investment purpose. All his reasons were business reasons of a trading nature. His adventure was a speculative one. When lead prices broke others in the industry were unwilling to gamble but he did not hesitate. He saw advantages of a business nature in the transaction and these outweighed with him the risk of loss which he undertook.

The same considerations apply here. For the foregoing reasons, the appeals will be dismissed.

Appeal dismissed.