Morbane Developments LTD v. Minister of National Revenue, [1981] CTC 490, 81 DTC 5362

Addy, J:—Although this matter, which concerns the assessment of the taxpayer for the 1973 income tax year, was heard previously by the Tax Review Board, it was brought before this Court, not by way of appeal from that tribunal under section 172 but by way of a joint request under subsection 173(1) of the Income Tax Act to have a question of law, of fact or of mixed law and fact determined.

The legal issue turns on whether, during 1973, the applicant was carrying on an “active business” or whether, as alleged by the applicant, its income during that year was “Canadian investment income” within the meaning of paragraph 129(4)(a) of the Income Tax Act. The specific question read:

Whether or not the amount of $625,420 was income derived by the taxpayer in 1973 from an active business?

The following allegations of fact were made by the taxpayer in the application and were admitted therein by the respondent:

1. The taxpayer was incorporated on January 4, 1960 under the laws of Ontario. Its shares were held equally by two groups — that of Mr Max Tanenbaum and that of Mr William McLachlan.

2. The taxpayer acquired 107 acres of land (the “land”) north of Highway 27 in 1960. The land was serviced and subdivided as an industrial subdivision by others.

3. The land was acquired to form a land bank for the purposes of another company, McLachlan Construction Ltd. (“McLachlan”) which was in the business of designing, engineering, building and selling industrial buildings in what is known as a “turnkey” operation.

4. From September of 1961 to April of 1969, the taxpayer sold to McLachlan 26 parcels of land in the land of varying acreage upon which (except in two instances) McLachlan constructed industrial and commercial plants for its clients.

5. The subdivision, the servicing and the sale of the land aforementioned were executed by agencies other than the taxpayer and no additional lands were acquired by the taxpayer after the original acquisition. The taxpayer paid a fee or commission to McLachlan on the sale of the parcels of land.

6. The taxpayer had no offices, no employees save Mr Lindsay McLachlan for a limited period, no telephone and did not advertise except for a sign posted on the land. The taxpayer had no customer other than McLachlan.

7. The Department of Transportation and Communication, in 1969, effected a “freeze” on the taxpayer’s remaining unsold lands by registering a “designation plan” which indicated it intended to build a highway through the lands and prevented building thereon without a permit issued by it.

8. In the period March 1973 to April 1975 the taxpayer, as a result of either expropriation or resulting sale, conveyed approximately 12 acres to the Province of Ontario for the purpose of a highway immediately adjacent to the land.

9. After April, 1969, the taxpayer was a party to no land transactions, other than with the Province of Ontario aforementioned. Its only activity was to collect rent from a building it had built on the land in 1967 and leased on a long term basis to United Tire.

10. The expropriation by the Government of Ontario in 1973, aforementioned, resulted in a payment by way of compensation in the amount of $716,140. After deducting the cost of the land and other expenses in the aggregate amount of $90,720, the balance of $625,420 was included in computing the taxpayer’s income for the 1973 taxation year.

The Minister declared in the application that, in assessing the Applicant for 1973, he relied on the following facts, in addition to those mentioned above, namely:

1. The McLachlan group carried on the business of general contracting through various companies controlled by it.

2. The Tanenbaum group carried on the structural steel and cement business through various companies controlled by it.

3. In 1956 Max Tanenbaum and Finlay W. McLachlan acquired 107 acres of vacant land in Etobicoke, Ontario. Subsequently, in 1960 the taxpayer acquired the 107 acres from Mr Tanenbaum and the successors of Mr McLachlan who had died in 1956.

4. The land was developed by contracting out the necessary work and was subdivided for purposes of sale.

5. The land was sold by the taxpayer in small parcels as follows:

6. There were no sales of land during 1970, 1971 and 1972.

7. The taxpayer treated the land as inventory of its business. In 1967, the taxpayer, in its books, transferred five acres from the inventory to fixed assets and had a building constructed thereon at a cost of $572,282 which, upon completion was rented out on a long-term basis.

All of these assumptions of fact were established at trial.

The applicant claims that it never, at any time since its incorporation in 1960, carried on an active business and that, alternatively, if it ever had, then it had ceased to do so previous to 1973, by reason of the fact that by 1970 the parcels which had been subdivided had been almost all disposed of and that the Department of Transport and Commications of Ontario, by registering a plan of designation, had effectively frozen development of most of the remaining lands.

Subparagraph 129(4)(a)(ii), as it existed previous to the amendment of subparagraph 129(4)(a)(ii) by 1974-75, c 26, read as follows:

(4) In subsection (3),

(a) “Canadian investment income” of a corporation for a taxation year means the amount, if any, by which the aggregate of

(ii) all amounts each of which is the corporation’s income for the year (other than exempt income or any dividend the amount of which was deductible under section 112 from its income for the year) from a source in Canada that is a property, determined, for greater certainty, after deducting all outlays and expenses deductible in computing the corporation’s income for the year to the extent that they may reasonably be regarded as having been made or incurred for the purpose of earning the income from that property,

In 1974-75, c 26, subsection 82(2), subparagraph 129(4)(a)(ii) was amended by adding, after the word “property” where it first occurred in that subparagraph the words: “(other than property used or held by the corporation in the year in the course of carrying on a business)”. Subparagraph 129(4)(a)(ii) was also amended again by 1979, Chapter 5, subsections 41(2) and (3). These subsequent amendments, of course, cannot be taken into account in interpreting the law as it existed in 1973, if indeed they would have any bearing on such interpretation in any event.

It has been admitted in the application that the taxpayer was carrying on a business. As to the test that is to be applied in determining whether a business is active or not in 1976, in the case of Her Majesty The Queen v Rock- more Investments Ltd, [1976] CTC 291; 76 DTC 6156, the then Chief Justice of the Federal Court of Appeal in delivering the unanimous judgment of that Court had this to say at 293 [6157]:

[Active Business]

Having reached that conclusion, the second question to be answered is whether the business that was being carried on was an “active” business within the intent of section 125. Obviously, the concept of “active” business is not used to exclude a business that is in an absolute state of suspension because section 125(1 )(a)(i) is dealing with “income . . . from an active business” and it must be assumed that the word “active” was used to exclude some businesses having sufficient activity in the year to give rise to income. More than that, as it seems to me, nothing can be said in a general way, at this stage, as to what is meant by the word “active” in section 125(1 )(a)(i). Each case must be dealt with by the fact finder according to the circumstances of the case. It may be that experience in the application of the provision will make evident other conclusions of a general nature that can be deduced from the statute as to how the concept of “active” business is to be applied. I do not, myself, feel capable of deducing any such general conclusion at the present time.

[The italics are mine]

Following that, my brother Gibson, J., in 1977, in Her Majesty The Queen v Cad boro Bay Holdings Ltd, [1977] CTC 186; 77 DTC 5115 laid down as a test that any amount of business activity giving rise to income would necessarily classify the undertaking as an active business and that for a business not to be considered active it had to be in an “absolute state of suspension.” However, the Court of Appeal in dealing with the question again this year in the case of King George Hotels Limited v Her Majesty The Queen, [1981] CTC 87; 81 DTC 5082, would not accept that any such test existed and returned again to the law as stated in the Rockmore case. Urie, J., with whom the other two members of the Court agreed, stated at 90 [5084] of the above report:

Before disposing of the appeal I think that it should be stressed that whether a business is an active or inactive one is, as earlier pointed out on the authority of the Rockmore case, supra, one of fact dependent on the circumstances of each case. That being so, it is neither possible nor desirable to lay down any rule or principle applicable in every case. It cannot be said, therefore, in my view, that income from “other than an active business” necessarily means that derived from a business that “is in an absolute state of suspension” or one “devoid of any quantum of business activity” as has been said in earlier decisions in the Trial Division. In any given case, the business may be of that kind but whether or not it is, is not necessarily determinative of the issue, the resolution of which depends on the fact finder’s view of the true nature of the business based on the facts in the particular case. The quantum of activity may well vary from case to case but still it is necessary for the Court to weigh all of the evidence to characterize the quality of the particular business.

Therefore, at present, there does not exist a firm definition or standard by virtue of which a business is to be characterized as active within the mean- ing of subsection 129(5). The Court of Appeal has ruled that it is up to the trial judge to review all of the facts and to satisfy himself whether there has been sufficient activity for the income to be considered as income derived from an active business.

The facts of this case are summarized of course in the application to which I have referred previously, together with the additional facts which the Minister relied on and which, as previously stated, were finally established at trial.

There are, however, certain additional matters which arise out of a further consideration of the admitted facts in the light of the evidence adduced at trial. In the first place, there appears to be a contradiction between the statements in paragraphs (4) and (5) of the agreed facts. If 26 parcels of land were sold by the taxpayer to McLachlan as stated in paragraph (4), then it is totally illogical that a commission would be paid to McLachlan for the sale to it of those lands. The details of what was paid to McLachlan were contained on Exhibit P-5 filed at trial. They were described therein both as commissions and as land management fees. In addition, real estate commissions were paid to real estate agents on most of those same sales. It also appears that the real estate commissions were founded not only on the cost of the land but on the cost of the lands and buildings after McLachlan had erected the buildings on them. At trial the applicant’s first witness was the president of McLachlan who testified that the amounts paid to McLachlan were not commissions but land management fees. The second witness the Vice- President of McLachlan called them land management fees also but neither one was certain as to how these amounts were arrived at, that is, whether it was on the basis of a percentage, or on a time basis or on the basis of actual cost, plus percentage, etc. The best that can be said is that they appear to have been charges incurred by the applicant and paid to McLachlan for services rendered in connection with each of the sales.

The evidence, in my view, clearly established that the sales were made to third parties and not to McLachlan as indicated in the statement of facts.

The objects of the company, as laid down in the letters patent, as in the case of the other relevant facts are not determinative of the issue. They are, however, material and it is to be noted that they comprised, the purchasing, selling, leasing and improving of lands which includes the laying out of lots. In the letters patent we also find the right to carry on the business of general contractors, builders and, subject to the Professional Engineers Act, to carry on the business of engineering. None of these latter activities were carried out by the applicant but were in fact the main activities of McLachlan.

It seems clear, however, that all decisions as to selling were made by McLachlan and that no sales could be made without the latter erecting a building on the land, except for two sales of vacant land made with McLachlan’s permission. I feel that it has been established that the sale of land was part and parcel of a business enterprise by McLachlan and Tanenbaum which ensured that the former, through its construction business and the latter through its steel and cement enterprise, would derive active business income from the installation of materials and supplying of services pertaining thereto. These three corporations were engaged in a venture each of which derived a particular benefit therefrom. When McLachlan was able to convince a customer to buy the land with a building on it, Tanenbaum would thereby be able to furnish the steel and cement work and the tax- payer would be able to obtain what presumably was a good price for its assets, namely, the land. It appears that all of the business decisions for and on behalf of the taxpayer were made by McLachlan presumably after some consultation with Tanenbaum. There was no evidence of any business decisions having ever been taken by the taxpayer in a regular manner. Under these circumstances however, and as McLachlan charged the taxpayer for those extra services, the taxpayer has failed to establish that it was not carrying on an active business at least until 1969. I attach little importance to the fact that the business activity of the taxpayer was carried out through another party, namely McLachlan. What is important is that the revenue was derived from a business activity of the taxpayer regardless of who might actually be carrying out the activity or doing the work on behalf of the taxpayer which eventually led to the production of income. The Court of Appeal dealt with this specific point in the case of E S G Holdings Limited v Her Majesty The Queen, [1976] CTC 295; 76 DTC 6158, where Chief Justice Jackett, as he then was, in delivering judgment of the Court, which reversed the finding of the trial judge on this point, stated at 296 [6159]:

With respect, I do not agree that there is any material difference in principle, in so far as the carrying on of an active business by a corporation is concerned, between carrying it on through the agency of officers or servants of the corporation and carrying it on through the agency of an independent contractor. The question is whether the taxpayer’s “income” is “from an active business” and, in my view, the answer must be the same in both cases.

The question now arises as to whether, since 1969 and more particularly by 1973, the applicant had ceased to carry on an active business. There is again here on the taxpayer a positive onus of proving this issue. Where a company has been carrying on an active business, a mere absence of revenue or expenditure from that business for a period of time does not necessarily mean that any revenue collected at a later time is not still revenue from an active business.

There were no sales in 1970, 1971 or 1972. This is not altogether surprising for in 1969 the Department of Transport and Communications had decided to expropriate a good portion of the lands for highway purposes, although it was not certain where exactly the limits of the road would be established. The plan of designation filed at the time, as stated in the admitted facts, effected a “freeze” on most of the taxpayer’s remaining unsold lands. It was not until 1973 that the compensation was effectively settled and paid and that the required documents transferring title were executed. The prize realized would presumably be the market price or better.

Up to and including 1969, over a period of nine years, the taxpayer had sold approximately 71 acres or some 26 parcels of land (refer to paragraph 4 of agreed fact) in addition to five acres which were built on and which had been rented by the applicant under a long-term lease to United Tire. There remained some 32 acres available for sale. Following the registration of the plan of designation in 1969, which in effect prevented the applicant from developing for the time being almost all of the remaining acreage, there is no evidence that the applicant would not have continued to sell parcels from its land inventory as it had in the past. As in the case of previous sales all of the negotiations regarding compensation were carried out by McLachlan on behalf of the applicant and, finally, three parcels totalling something like 14.2 acres of land were retained or acquired by the Province of Ontario during 1973 in return for the compensation which forms the object of the present litigation.

Where as in the present case, by reason of an expropriation, the same nature of asset, namely land, carried on the inventory of the company is paid for as if it had been sold on the open market and where the disposal of that asset constituted, previous to the expropriation, an activity which rendered the business an active one, then I cannot see how the mere fact that a compensation was obtained through expropriation rather than a purchase price through sale on the open market would change the nature of the company’s enterprise, in the absence of any evidence that it would otherwise not have sold those lands in the interval. In essence, it was stock-in-trade of the company which was expropriated and there is no satisfactory evidence that it would not have sold it previously had it not been for the “freeze” imposed by the plan of designation. There were active negotiations by McLachlan, on behalf of the applicant, which led to the estimate settlement of the expropriation price.

Under these circumstances, I find that the answer is “yes” to the question put to this court by the parties, namely, “whether or not the amount of $625,420 was income derived by the taxpayer in 1973 from an active business?”

There will be no costs.