Nachum Mizné, Laurent Mizné, Bertha Mizné, Maissoneuve Realties v. Minister of National Revenue, [1980] CTC 2665, 80 DTC 1559

Guy Tremblay [TRANSLATION]:—These cases were heard on common evidence at Montreal, Quebec on November 17, 1977 and November 10, 1978. They were taken under advisement on January 20, 1979 after pleadings had been filed.

1. Point at Issue

A. The point is whether the purchase on May 14,1970 by the appellant of real property located on Ontario Street in Montreal, Quebec is a genuine transaction. If the transaction is fictitious and the purchase was legally made by the appellant shareholders, then the appeals should be allowed in their entirety.

B. If the purchase transaction is genuine, then was the sale of the real property by the appellant company to the three appellant shareholders in April 1971 for one dollar a true sale?

(1) if the answer is no, the appeals should be allowed;

(2) if the answer is yes, then:

(a) is the profit resulting from the sale taxable in the hands of the appellant company?

(b) if the answer to the latter question is yes, then what is this profit?

the respondent argued that it was $94,800, and the appellant company that it was nil;

(c) if the answer is no, then should the value of the property transferred be regarded as income in the hands of the shareholders?

(i) if the answer is no, the appeals of the appellant shareholders should be allowed;

(ii) if the answer is yes, then what is the value of the property transferred? the respondent contended that it was $146,800 and the appellant shareholders that it was $52,000;

(d) the respondent contended that even if the appellant company is taxable on the profits, the appellant shareholders should also be taxed on the value of the property received.

2. Burden of Proof

The burden is on the appellants to show that the respondent’s assessments are incorrect. This burden of proof derives not from one particular section of the Income Tax Act, but from a number of judicial decisions, including the judgment delivered by the Supreme Court of Canada in R W S Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

3. Facts

3.01 The appellant is a corporation having as its principal purpose dealing in and construction of real estate. It was apparently not directly incorporated by the Miznés; it had previously been incorporated by notaries. The latter apparently simply transferred it to the Miznés when they went to see the notaries for an incorporation.

3.02 The principal shareholders of the appellant corporation are Nachum Mizné (two shares: $10), his wife, Bertha Mizné (one share: $5) and their son Laurent Mizné (one share: $5).

3.03 On May 24, 1970 the appellant corporation purchased (Exhibits A-1 and A-2) from Les Soeurs Missionnaires du Christ-Roi a real property (land and a building already constructed), located not far from the Musée des Beaux-Arts at 3467 Ontario Street (subsequently known as Avenue du Musée) in Montreal, Quebec for $52,000, including $17,000 cash and $35,000 payable on October 1, 1972.

According to the testimony of Mr Robert Farrell, a witness for the respondent, the attitude of the seller, the aforesaid corporation of Soeurs, was as follows with regard to the sale of real property;

Well, the nuns explained that their property was a burden to them and they had to get rid of it. They did not want to capitalize on it, they did not want to fix it up, they did not have the necessary staff and they did not want to be bothered with it. They let it go.

The appellants accepted this testimony through their counsel:

I accept the fact that the Mother Superior said that to Mr. Farrell. (SN p 167)

In September 1969, the Soeurs put it up for sale for $125,000, with the notation ‘‘Land 10,749 sq ft. This residence offered for the value of the land.’’ (Exhibit 1-12).

3.04 According to the evidence presented by the appellants, this property was purchased for the construction of a multiapartment building eight, 10 or 14 stories high (SN pp 4, 5, 44 and 47).

To answer your question directly, I did not study the zoning but I saw its potential. As a builder I saw its potential, Mr Chairman, I saw that something good could be done with this property.

Q. Why did this property have a good potential?

A. Because there were high-rises in the vicinity. (SN p 47.)

3.05 The municipal zoning was researched by the architect Miron and Mr Nachum Mizné (Mr Miron was authorized (Exhibit A-3) to study and plan the future structure to be constructed on the land). The research indicated that only buildings of at most 35 feet in height, or three stories, could be built (SN p 5), because of a by-law adopted in July 1968 and effective since September 30, 1968 (Exhibit I-19). The ten-to-fourteen-story buildings constructed in this zone had been built before 1967. Furthermore, the new zoning required a space of 15 feet to be left from the boundary line with the neighbouring property, with the result that there were 30 feet on which no construction could be done. As the land had a frontage width of 68 feet, this meant that there were only 38 feet on which to build, and it made construction of a new building practically impossible.

At this point the appellant had to change its policy with regard to this property; Mr N Mizné explained the facts:

A. Well, when I saw we could not build a high-rise on this land, so as to try and build something on it which would make some sense, a narrow building, or as Mr Klein said, a “toothpick factory”, I decided to try one final effort, and approached my neighbours who were owners on the left and right to see if I could purchase their properties and create a larger lot, with a wider frontage, and plan around this new purchase—to the south of my property, which was on the right if you stand facing the building in question—furthermore, my property is semi-detached from this property—so that the first idea which came to me was whether I could buy the other half of the building. Unfortunately, a Mr Clark who was the owner of it had signed a long-term lease with a medical institution, which was connected with the Royal Victoria Hospital, and in which they had made a Clinic for the preparation of patients for future kidney transplants, a “kidney centre”. So Mr Clark said that unfortunately he was bound by this long-term contract, that he could not consider a sale. On my left there was a property with quite a large piece of land, more than 200 square feet . . .

THE CHAIRMAN:

Q. When you say on the left, where is that?

A. Still on the north, facing the property. So, facing the property, on my right was the clinic and on my left, still facing the building, was a large piece of land of about 30,000 square feet with a frontage of 215 feet, which would have been ideal for meif I could buy it and add it to the property which I had already, and really construct something more viable.

The owner of this house with the aforesaid land was a Mrs Fleet, with whom I had several friendly discussions, and she told me in view of her age—she was quite old—an old lady—that she would very much like to sell, but she insisted on being able to end her days in the house.

I then saw this possibility being ruled out as well, because I could not wait and see whether the good Lord would give her a long life, it might last for who knows how long.

I therefore gave up this idea, and it was then that Mr Schecter really demonstrated his talent in continuing to make plans for what we had, in other words, Mr Chairman, to derive—to do the best with what we had. This was the only alternative at that time. (SN pp 7, 8 and 9.)

Later, in cross-examination, Mr Mizné summed up:

Q. And what did you do?

A. At that point, as I said this morning, I found that I could not buy the adjoining buildings and accordingly I tried to sell the property to Montreal Trust. When this did not succeed either, I said to myself: “My boy, you got stuck’’ as they say in English; ‘‘do whatever you can with it’’. I then hired the architect Schecter to renovate the existing building, clear away whatever was no good and use what was uSable, such as the foundations and the outside walls. (SN p 92.)

3.06 The fiscal year of the appellant corporation was from February 1 to January 31 of each year. The real property described above was at the time the only property of the appellant corporation, as appears in the assets on its balance sheet (Exhibit A-8) at January 31,1971. This balance sheet reads as follows:

Capital—Authorized

4,000 non-cumulative redeemable preferred 3% par value shares, $10 each

100 ordinary shares, no par value

Issued and paid-up:

4 ordinary shares	20
TOTAL LIABILITIES AND SHAREHOLDER’S EQUITY	$59,520

3.07 According to the evidence presented, the three appellant shareholders loaned the appellant corporation the $17,000 paid on account when the land was purchased, and also $4,500 later on for various current expenses. In addition, an amount of $3,000 borrowed by the company from the bank was guaranteed personally by the shareholders.

3.08 In the latter part of 1970, the property was offered for sale through Montreal Trust (which published advertisements in the Montreal Star and The Gazette) for four to six months, but no purchase offer was made.

3.09 On April 27, 1971, according to a notarized deed of sale (Exhibit A-7), the appellant corporation sold the said property to its three shareholders for one dollar ($1). At this point the interior of the building, according to the architect William Schecter, had been largely demolished (SN p 4 of Mr Schecter’s testimony). As the result of a municipal assessment challenge the Board of Revision of the district of Montreal determined that on September 1, 1971 the property was worth $248,500 ($160,000 for the building and $88,500 for the land).

3.10 The balance sheet of the corporation at January 31, 1972 reads as follows:

According to Mr Mizné, after the sale of the property the appellant com- pany discontinued its operations.

3.11 On August 20, 1971, for the purpose of repairing and reconstructing the building in accordance with the suggestions of the architect, William Schecter, the three Miznés borrowed from Canada Permanent Mortgage Corporation (CPMC) the sum of $170,000 (interest 10%—term five years). According to Mr Mizné, it was because CPMC required the loan to be made to him personally and not the appellant company that the property was transferred from the company to the shareholders. Mr Mizné was well known, whereas the appellant company was not well known. Moreover, Mr Mizné decided at that time to regard the investment as his future pension fund. In 1979, the appellants were still owners of the property.

3.12 The gross income from the property purchased in April 1971 was established at $17,496.75 for the period ending December 31, 1971. However, the result of operations ended in a loss of $4,020.30.

3.13 The balance sheet of the three shareholders at 31/12/71, with respect to this property, was as follows:

Liabilities

Loans payable	$ 38,519.28
Mortgage payable:
Canada Permanent Mortgage	170,000.00
	$208,519.28
Deficit	4,020.30
	$204,498.98

3.14 On April 27,1971 (the same date as the purchase of the property by the Miznés), before the same notary who prepared the contract of purchase, a counter-letter (Exhibit A-9) was signed to the effect that the parties appearing (the Miznés):

have only purchased the said property as agents, nominees and mandataries of Maisonneuve Realties Inc, from whom they have purchased it, and in fact the right of ownership of this property is in Maisonneuve Realties Inc, and the parties appearing further undertake to assign, sell and transfer to Maisonneuve Realties Inc, without other consideration than the sum of one dollar ($1), the property in question, provided the latter assumes, and gives the parties appearing full release therefor, the obligation to pay the mortgage and interest owed to Les Soeurs Missionnaires du Christ-Roi.

Counsel for the respondent objected to the filing of this counter-letter, on the basis that a counter-letter is only valid between the parties to the contract and not with respect to third parties. The respondent is a third party. This objection was taken under advisement. The point is dealt with in paragraphs 4.3.3 and 4.3.4.

3.15 Additionally, the chief witness, Mr Nachum Mizné, said with regard to the appellant company:

It, neither more nor less, served and acted at all times without our knowledge, without my knowledge; it served me especially at the outset, when I was considering a complete demolition, since the land in question and the entire street had a rocky surface;

The work involved dynamiting. Mr Nachum Mizne continued:

So, it always involved risks to the adjoining properties. I did not want to be personally liable in the event that there was damage. Maisonneuve Realties served to act without my knowledge to protect me from civil liability in the event of a demolition. (SN pp 24 and 25.)

3.16 Mr Nachum Mizné gave yet another reason why he used the company: it was because of the balance of $35,000 owing on the purchase of the land from the Soeurs in May 1970:

I did not undertake the matter without due consideration, but just in case there was something which did not work out, because the property, with vandalism and all of that, was not . .. I did not really know, and to protect myself against this responsibility for the balance of the selling price, I preferred to buy it in the name of Maisonneuve Realties. This is why, Mr Chairman—I explained it a minute ago—in the event that the demolition that was to be done, the dynamiting, the digging, might cause damage to adjoining properties—here again I did not want to be personally liable for such damage .. .

3.17 After the contract concluded on April 27, 1971 the three Miznés, in the financial statements filed with their tax returns, always indicated that they were acting as owners, each having a third share (Exhibits I-5 to I-8). (SN pp 136 and 137.)

They paid the taxes personally (SN pp 142 and 143).

It was Mr Nachum Mizné personally, and not the company, who challenged the municipal assessment of September 1971 (Exhibit 1-13). (SN p 171.)

Regarding the transfer of ownership, Mr Nachum Mizné stated in his testimony:

If I may, Mr Chairman, with the utmost honesty, if it is accepted by you, Mr Chairman, the transfer was made in April 1971. That was six and a half years ago, and the property is still mine, it has not changed hands. (SN p 72.)

Mr Mizné stated that he considered himself to be legally the owner:

We are still the owners today. The only owners of this so-called building are myself, my wife and my son, from the transfer in 1971 to date, which is nearly six and a half years. We are still the owners and we expect to remain so. (SN p 22.)

3.18 The appellant did not call any expert witnesses in connection with the value of the property at April 27, 1971. However, Mr André Roy, an expert witness, filed a valuation report (Exhibit 1-19) setting the value of the property at $135,500, as the result of a comparative study of eight sales. This careful study was subjected to close cross-examination.

3.19 On May 3, 1974, in assessing the appellant company for 1972 by a notice or reassessment, the respondent included the amount of $94,800, estimated profit as a result of sale of the property ($146,88 - $52,000).

3.20 On July 3, 1974 the respondent assessed each of the appellant shareholders by notice of reassessment for 1971, adding to their income the amount of $23,700 as an appropriation of funds relating to the land.

4. Act— Case Law—Comments

4.1 Act

(a) With respect to the appellant corporation, the chief legal provision concerned in the case at bar is subsection 17(5) of the old Income Tax Act. Subsection 69(4) of the new Act is identical. It reads as follows:

17.(5) Where property of a corporation has been appropriated in any manner whatever to, or for the benefit of, a shareholder, for no consideration or for a consideration below the fair market value, if the sale thereof at the fair market value would have increased the corporation’s income for a taxation year, for the purpose of determining the corporation’s income for the year, it shall be deemed to have sold the property during the year and to have received therefor the fair market value thereof.

(b) With regard to the appellant shareholders, subsection 8(1) of the old Income Tax Act (15(1) of the new Act) and subsection 81(1) of the old Income Tax Act apply. These sections read as follows:

8.(1) Where, in a taxation year,

(a) a payment had been made by a corporation to a shareholder otherwise than pursuant to a bona fide business transaction,

(b) funds or property of a corporation have been appropriated in any manner whatsoever to, or for the benefit of, a shareholder, or

(c) a benefit or advantage has been conferred on a shareholder by a corporation,

otherwise than

(i) on the reduction of capital, the redemption of shares or the winding-up, discontinuance or reorganization of its business,

(ii) by payment of a stock dividend, or

(iii) by conferring on all holders of common shares in the capital of the corporation a right to buy additional common shares therein

the amount or value thereof shall be included in computing the income of the shareholder for the year.

81.(1) Where funds or property of a corporation have, at a time when the corporation had undistributed income on hand, been distributed or otherwise appropriated in any manner whatsoever to or for the benefit of one or more of its shareholders on the winding-up, discontinuance or reorganization of its business, a dividend shall be deemed to have been received at that time by each shareholder equal to the lesser of

(a) the amount of value of the funds or property so distributed or appropriated to him, or

(b) his portion of the undistributed income than on hand.

4.2 Case Law

The cases referred to by the parties were the following:

1. Allfine Bowlerama Limited v MNP, [1972] CTC 2603; 72 DTC 1502;

2. Beaumont v La Société de Prêt et Placement de Québec, [1967] CS 262;

3. La Cité de Longueuil v Canadian Pratt-Whitney Aircraft Co Ltd, [1965] QB 337:

4. Elbros Corporation v The Protestant School Board of Greater Montreal & The Montreal Catholic School Commission (unreported);

9. Elmwood Estates Inc v MNR, 37 Tax ABC 245; 65 DTC 66;

6. Garage Henri Brassard Limitée v MNR, [1960] CTC 321; 60 DTC 1205;

7. Hiwako Investments Limited v HMQ, [1978] CTC 378; 78 DTC 6281;

8. Sidney Holtzman v MNP, 29 Tax ABC 378; 62 DTC 388;

9. Imperial Oil Ltd v MNP, [1972] CTC 455; 72 DTC 6390;

10. Javelin Foundries & Machine Works Limited v MNP, [1967] Tax ABC 572; 67 DTC 392;

11. Ronald Francis Theres Maclsaac v MNP, [1974] CTC 576; 74 DTC 6380;

12. Montreal v Sun Life Assurance Co of Canada, [1952] 2 DLR 81;

13. Osler, Hammond and Nanton Limited v MNP, [1963] CTC 164; 63 DTC 1119;

14. Peter Unruh Construction Co Ltd v MNP, [1971] Tax ABC 765; 71 DTC 519;

15. Regal Heights Ltd v MNP, [1960] CTC 384; 60 DTC 1270;

16. Leonard Silver v MNP, [1976] CTC 2043; 76 DTC 1039;

17. Berthold Silverman v MNP, 37 Tax ABC 443; 65 DTC 213;

18. T K Sales Ltd v MNP, [1973] CTC 340; 73 DTC 5284;

19. Philip Wiseman et al v The City of Montreal and The Board of Pevi- sion of the District of Montreal (unreported);

20. Charles A Guénette v MNP, 37 Tax ABC 193; 65 DTC 11;

21. Frederick C Poole v MNR, [1971] Tax ABC 860; 71 DTC 597;

22. Jean-Marc Champoux v MNR, [1969] Tax ABC 268; 69 DTC 235;

23. Charles-Edouard St-German v MNP, [1969] CTC 194; 69 DTC 5086;

24. Max Ronald Olanow v MNP, 41 Tax ABC 17; 66 DTC 285;

25. John A Andersen v MNP, [1968] Tax ABC 616; 68 DTC 493;

26. Albert Perron v MNP, 25 Tax ABC 166; 60 DTC 554;

27. Dominion Engineering Co Ltd v MNP, [1944] CTC 216; 2 DTC 674;

28. MNP v Robert P Ouellette and John E Brett, [1971] CTC 121; 71 DTC 5094;

29. Aaron Blauer v MNP, [1971] CTC 154; 71 DTC 5113;

30. Dirk Schouten v MNP, 32 Tax ABC 22; 63 DTC 397;

31. Les Industries Roy Limitée v MNP, 22 Tax ABC 103; 59 DTC 307;

32. Christy Couvelis v MNP, 21 Tax ABC 126; 59 DTC 29;

33. Manitou-Barvue Mines Limited v MNP, [1965] CTC 534; 65 DTC 45;

34. HMQ v F H Jones Tobacco Sales Co Ltd, [1973] CTC 784; 73 DTC 5577;

35. MNP v Kelvingrove Investments Limited, [1974] CTC 450; 74 DTC 6357;

36. HMQ v E V Keith Enterprises Ltd, [1976] CTC 21; 76 DTC 6018;

37. MNP v Albani Thibault, [1962] CTC 137; 62 DTC 1114.

4.3 Comments

A. Was the purchase of the real property by the appellant a true purchase?

4.3.1 According to counsel for the appellants, the appellant company was only used as an agent or mandatary of the shareholders to protect them with respect to the balance of the selling price and to protect their personal liability in the event of demolition and dynamiting (paras 3.15 and 3.16). Furthermore, they were the ones who always (either directly or through a loan personally endorsed by them) provided the necessary money, either for the purchase of the property or for current expenses and repairs (paras 3.07 and 3.11).

Thus, according to learned counsel for the appellants, the Miznés had always been the true owners of the real property from March 1970 onwards, and there was no appropriation.

4.3.2 The evidence disclosed several facts which tend to disprove this argument.

First, the incorporation itself cannot be denied. The process of incorporation by a notary and his partners and the transfer of shares to the actual shareholders (para 3.01) is a current practice. The purpose of the incorporation, which was to protect the appellant shareholders with respect to financial liability, is even one of the ordinary purposes of incorporation of a business. In the case at bar, the fact that the shareholders made loans to the company and gave their personal endorsements to guarantee a bank loan was absolutely essential if they wanted the company to start operation. In fact, the shareholders only invested $20 in the purchase of shares (para 3.02).

The Board does not have before it a counter-letter to the effect that at the time of purchase of the property by the company in May 1970, the latter was only a sham and the shareholders who had actually provided the money were the true owners.

In view of the evidence presented, the Board can come to no other conclusion than that the purchase of the real property in March 1970 was a genuine transaction by which the appellant company became owner of the property purchased.

B. Was the sale of the real property by the appellant to the appellant shareholders a true sale?

4.3.3 Additionally, the evidence is that at the time of the sale of the property by the company to the three shareholders on April 27, 1971 a counterletter was submitted in evidence by the appellants. This counter-letter is to the effect that the purchasers were only nominees and the true owner remained the appellant corporation. If it is valid, this counter-letter conflicts with the appellants’ basic argument that they are and have always been the owners. However, an objection was made to the filing of this evidence by counsel for the respondent on the basis that this counter-letter cannot be pleaded against the respondent, since he is a third party (para 3.14).

Article 1212 of the Civil Code, which deals with the counter-letter, reads as follows:

Counter-letters have effect between the parties to them only; they do not make proof against third persons.

It is appropriate here to review the definition of the counter-letter and certain basic truths regarding it; the following is taken from the Répertoire universel et raisonné de Jurisprudence, 5th ed, revised and amended in 1815 by M Merlin, former attorney general to the Court of Cassation in Paris. These are the fundamental principles which were at the basis of Art 1321 of the Code Napoléon, and which were subsequently relied on by the drafters of the Quebec Civil Code.

The counter-letter is ‘‘a deed which the parties intend to remain secret for some time, and in which they explain, extend or limit the agreements contained in another earlier deed, which is public”.

I ...

The contract and the counter-letter are two separate deeds, which can only have effect as to the points on which they do not cancel each other out.

II ...

III. In general, there is nothing unlawful about counter-letters: they even often relate to matters which if made public could result in harm to the contracting parties; however, as they may be used to cover up fraudulent practices, the law looks upon them with a doubtful eye, when any dispute arises out of them.

Nadeau and Ducharme, the authors of the Traité de droit civil du Québec, vol 9, make the following observations on the evidentiary value of the counter-letter:

402. The evidentiary value of the counter-letter.—Article 1212 of our Civil Code is loosely worded. It is clear that the codifiers did not intend to say that counterletters were of no evidentiary value with respect to third parties. A counter-letter prepared in the form of an authentic deed, or even a counter-letter by simple contract that is acknowledged or authenticated, cannot fail to be proof of its contents, even with respect to non-contracting parties. However, while such a counter-letter has binding force between the parties, it has none with respect to third parties, or with respect to parties to the original contract who have not participated in the counter-letter. As to them, it has no effect.

It would accordingly have been preferable, in our Code, to retain the wording of the corresponding article in the French Civil Code.

The French Civil Code provides as follows, in Art 1321:

Counter-letters are only effective between the contracting parties: they have no effect as against third parties.

Nadeau and Ducharme go on to make the following observation:

The unsatisfactory wording of our article results from the legislator’s failure to make the distinction between the evidentiary effect of deeds and the efficacity or binding force of the agreements which they contain with repect to third parties.

4.3.4 In the case at bar, it can be seen merely from reading the counterletter (Exhibit 9) that the appellant corporation was not a party to it. Thus, it cannot be used as the basis for an objection to the counter-letter, and for the argument that it is still owner of the building, when by the original deed it had given up the building to the appellant shareholders. Furthermore, there were only two parties to the original deed: the appellant corporation and the appellant shareholders. As in fact only one party (the shareholders) participated in the counter-letter, the question arises as to the validity of the counter-letter.

Can one party to a contract change the evidentiary force of that contract merely by a counter-letter and so bind the other party?

If the answer to this question is yes, it would appear that all the fundamental principles of contracts are affected. Additionally, can the fact that the three purchasers are the three shareholders of the company make up for the absence of the other party, namely the company? The answer is no. It is of the essence of a counter-letter that when there are only two parties to a contract, those two parties must also be parties to the counterletter. They cannot be replaced by a presumption. The Board must accordingly regard this counter-letter as void qua counter-letter, and therefore treat the original contract of April 21,1971 as transferring ownership of the real property to the appellant shareholders.

The testimony of the principal shareholder, Mr Nachum Mizné, leaves no doubt as to the transfer of ownership of the property from the company to its shareholders. This situation is also reflected in the financial statements. The same is true of the actions of the shareholders (para 3.17).

C. Is the profit on the transaction of April 27,1971 taxable in the hands of the appellant company?

4.3.5 In brief, did the appellant corporation make a capital gain or did it earn business income?

The uncontradicted evidence is that the real property was purchased for the purpose of constructing a multi-apartment building of from eight to fourteen stories. As a municipal by-law prohibited construction of such a building, the appellant sought in vain to purchase the adjoining land. It was decided to resell the property (para 3.04).

As there were no takers, it was decided to build, but first to demolish the interior and rebuild, retaining the outside walls. Retaining the outside walls was undoubtedly the only way of getting around the new zoning by-law, which required that any new construction be built at least fifteen feet from the boundaries of adjoining lots (para 3.05). The lending institutions refused to finance the appellant; however, they were willing to lend to the shareholders. The latter purchased in April 1971. They are still the owners.

4.3.6 In the opinion of the Board, the fact that the Miznés still have this property confirms the original intention of the appellant company to build a multi-apartment building of eight to fourteen stories and retain it as an investment. Why then did the Miznés not purchase the property directly? The evidence clearly showed that, if they wanted to construct a building of about ten stories, they had among other things to demolish everything and start from scratch, which might mean dynamiting, and a consequent risk of damages; they therefore proceeded by means of a limited liability company. The conclusions arrived at by the Board in paras 4.3.1 and 4.3.2 remain valid. However, the intention alleged by the appellants that they bought the property for investment purposes is, in the opinion of the Board, confirmed by the fact that the Miznés bought the property and still have it at the present time. This fact rebuts the presumption of commercial use existing for a company, especially when one of its purposes is to build and conduct real estate transactions. It also rebuts the presumption which may result from the fact that the principal shareholder is involved in other companies of the same type.

If a purchaser had bought the property when it was put up for sale in the fall of 1970, it would then undoubtedly have been more difficult for the appellant company to shift the burden of proof. Mere proof of intent to invest would not have sufficed. The evidence presented before the Board, after the shareholders who later became purchasers had held the said property for eight years, confirms the original intent of the company to purchase the Subject property for investment purposes.

4.3.7 The Board cannot see anything to make the alleged profit which may have been made when the sale took place in 1971 an ordinary business profit, or even that resulting from an “adventure or concern in the nature of trade”, as the respondent maintained.

It is appropriate here to cite Noel, J in Paul Racine, Amédée Demers and François Nolin v MNR, [1965] CTC 150; 65 DTC 5098:

To give to a transaction which involves the acquisition of capital the double character of also being at the same time an adventure in the nature of trade, the purchaser must have in his mind, at the moment of the purchase, the possibility of reselling as an operating motivation for the acquisition: that is to say that he must have had in mind that upon a certain type of circumstances arising he had hopes of being able to resell it at a profit instead of using the thing purchased for purposes of capital. Generally speaking, a decision that such a motivation exists will have to be based on inferences flowing from circumstances surrounding the transaction rather than on direct evidence of what the purchaser had in mind.

In R M Power v HMQ, [1975] CTC 580; 75 DTC 5388, Addy, J of the Federal Court, after citing the foregoing passage from the judgment of Noel, J, goes on to point out that ‘‘facts often speak louder than words, and that free acts are very good indication of what a person really intends”.

The purchase of the property by the shareholders and the holding of it for eight years is a fact of this type which proves the original intent of the corporation. The intent of the principal shareholders in a company is identical with that of the company. This principle is well established by precedent, in Regal Heights Ltd v MNR (No 15 in the list of cases cited) and Peter Unruh Construction Co Ltd v MNR (No 14 in the list of cases cited).

4.3.8 Accordingly, with respect to the appellant company, the Board concludes that a consequence of the transaction of April 1971 and the alleged profit resulting from subsection 17(5) of the old Act, a capital gain was produced. The appeal of the appellant company is accordingly allowed.

D. Should the fair market value of the property transferred to the shareholders for $1 be regarded as income in the hands of the shareholders?

4.3.9 The argument of the appellant shareholders in support of their position that the income should not be taxed is that the appellant company ceased its operations as the result of the sale of the property to the shareholders (para 3.09). The appellants submit that the tax exemption therefore applies, in accordance with subparagraph 8(1 )(c)(i) of the old Act, cited above.

The key words used by the legislator, which may be applied to the case at bar, are “discontinuance of its business”; the French text reads “la cessation de l’entreprise”. To begin with, the discontinuance of the company’s business does not at first sight appear to imply discontinuance of the company itself. However, let us consider what the phrase “discontinuance of its business” means. This phrase is not defined as such in the Act.

The word “business”, however, is defined in the Act, in paragraph 139(1)(e):

“Business” includes a profession, calling, trade, manufacturing or undertaking of any kind whatsoever and includes an adventure or concern in the nature of trade but does not include an office or employment.

As this definition uses the word “includes” and not “means” it may be concluded that the meaning of “business” is not limited to the terms of the definition, but that these terms may be added to the ordinary meaning of the word “business”.

In its ordinary meaning, the dictionary defines “business” as an “operation”, which may be agricultural, commercial, industrial and so on.

The word “discontinuance” is not defined in the Act. The dictionary states “act of discontinuing”. “To discontinue” further means: “terminate, not continue, suspend”. The “discontinuance of its business” may accordingly be defined as the “termination of the company’s commercial operations”.

This is a different thing from the “termination of the company’s existence”, or the “liquidation of the business”. It is quite clear that when the company ceases to exist, or its business is liquidated, there is a “discontinuance of the business”. However, the phrase “discontinuance of the business” has a wider meaning. In the opinion of the Board, a company may “discontinue its business”, “terminate its commercial or industrial operations”, without thereby “ceasing to exist” or “liquidating its business”.

Use of the word “business” in subparagraph 8(1 )(c)(i) presents a problem which can be solved with the aid of the foregoing ordinary definition.

As soon as “discontinuance of its business” is mentioned, this at first sight appears to mean, applying it to the appellant’s case, that the latter was Carrying on a business of buying and selling real property. Additionally, it was decided above that in the case of the sale of the subject property, this was a Capital gain. In the opinion of the Board the word “business” here is taken in its ordinary sense, that of “operation”. The company began its operations by purchasing the subject property. It discontinued them by reselling it. It might be argued that in the strict sense of “operations” (that is, from the point at which it began collecting rental) the company had not yet begun its operations. It could not therefore terminate them, and accordingly could not profit from the possible exemption provided for in subparagraph 8(1 )(c)(i). The Board is of the opinion that the appellant company began its operations by purchasing the real property, namely the capital asset that would produce income.

The cases consulted do not appear to have defined these expressions. The case law cited by the respondent does not relate to the specific point of “discontinuance of the business”. The Board is definitely of the opinion that by obtaining the real property in question for $1, there was an appropriation by the shareholders unless one of the exemptions provided applies. The decision of the Board must be based on these exemptions, in particular “the discontinuance of the business”.

4.3.10 To begin with, it is a question of fact whether the company discontinued its operations.

Can the company be said, by selling the only property which it owned, and which it had acquired for investment purposes, to have discontinued its operations?—Yes, at least temporarily.

The Board must decide whether the Act means “permanent discontinuance” or merely “temporary discontinuance” of the business.

It is difficult to believe that the reference could be simply to a temporary discontinuance; otherwise, it would be too easy for the shareholders to transfer company property to themselves from time to time under the guise of “discontinuance of the business”.

Then, does “permanent discontinuance of the businesss” mean “final discontinuance of the business”?

The Board is inclined to think so, although a substantial interruption of several years, with appropriate explanations, might justify a resumption of the business. However, even if the discontinuance had to be final, can it be said that an interruption of eight years constituted a final discontinuance? It is possible, if the question of intent was originally joined to the question of fact.

4.3.11 Thus, the Board believes that the intent to discontinue the business permanently must be accompanied by an actual discontinuance for a taxpayer to be able to benefit from the exemption provided in subsection 8(1) cited above.

As income tax is annual, how can a company rely on the discontinuance of its operations in order to benefit from subsection 8(1), by filing its tax return for a given year, unless it had an actual intent to discontinue the said operations? This principle seems fair and reasonable.

Did the appellant company manifest such an intent in any way? What is the evidence in this regard?

The intent might have existed at the time of the sale of the company’s only and last material asset, namely the real property.

The contract of sale to the shareholders (Exhibit A-7) of course contains nothing in this respect. Can the matter be clarified by the counter-letter which the appellant submitted as Exhibit A-9? To begin with, this counterletter has been declared void qua counter-letter for the reasons explained above (paras 4.3.3 and 4.3.4). Can the same document be used as evidence in deciding as to the purchasers’ intent with respect to discontinuance of the appellant company’s business?

The Board believes that it can. This document was issued by the purchasers, who are all shareholders of the company. The nullity of the document as a counter-letter does not divest it of its evidentiary value in some other connection, if there is one. It is appropriate here to repeat the text of the counter-letter, cited above in para 3.14. The purchasers:

have only purchased the said property as agents, nominees and mandataries of the Maisonneuve Realties Inc, from whom they have purchased it, and in fact the right of ownership of this property is in Maisonneuve Realties Inc, and the parties appearing further undertake to assign, sell and transfer to Maisonneuve Realties Inc, without other consideration than the sum of one dollar ($1), the property in question, provided the latter assumes, and gives the parties appearing full release therefor, the obligation to pay the mortgage and interest owed to Les Soeurs Missionnaires du Christ-Roi.

It will accordingly be seen from this document that there was an intent to return the real property to the company. Such a return was to be made within a relatively short time, since it is mentioned that the company will assume the mortgage owed to Les Soeurs Misssionnaires de Christ-Roi. According to Exhibit A-2, this mortgage was to be repaid in October 1, 1972 (para 3.03).

The conclusion that must be drawn is that the shareholders, and thus the company, intended (although this evidence could not suffice to confer evidentiary force on the counter-letter) not to discontinue the business permanently.

4.3.12 Accordingly, the exemption provided for in subparagraph 8(1)(c)(i) cannot be applied and the fair market value of the real property transferred in April 1971 must be regarded as income in the hands of the shareholders.

E. What is the fair market value of the real property transferred to the shareholders in April 1971?

4.3.13 The appellants, who had the burden of proof, did not present any special evidence. However, they submitted the argument that since the date of the purchase in March 1970 the real property has not increased in value. It was bought for $52,000 between persons dealing at arm’s length, and in April 1972 it was still worth $52,000. The respondent showed that although Les Soeurs Missionnaires du Christ-Roi also were not forced to sell, they were in such a position that they sold the property for less than the market value (para 3.03).

4.3.14 However, the respondent called an expert witness, Mr J André Roy, who filed a valuation report as Exhibit 1-19. His conclusions, arrived at after a careful study using the comparative method, were that the real property was worth $135,000 in April 1971. As the appellant company had itself established that the building was worth $46,000 on January 31, 1971 (Exhibit A-8) (para 3.06), he accordingly allowed the land a value of $88,700. If this information is compared with that in the finding of the Board of Revision of the district of Montreal (para 3.08), which found the valuation of $248,500 - $88,500 for the land and $160,000 for the building—reasonable for September 1, 1971, it can be seen that the value of the land is quite Similar; the respondent regarded this as an appropriation of funds for the land only, and not the building. He included $23,700 for each of the three, which makes a total of $71,100 for the land.

4.3.15 Recalling once again that the burden of proof rested on the appellants, and that the latter presented no direct evidence, and were unable in cross-examination to rebut the respondent’s evidence, the Board must uphold the valuation of the land for $71,100 which was relied on by the respondent in arriving at the notice of reassessment issued on July 3,1974.

4.3.16 The Board must accordingly uphold these notices of reassessment by the respondent on the appellants.

5. Conclusion

The appeals by the appellant shareholders (Nachum Mizné, Laurent Mizné and Bertha Mizné) are dismissed. The appeal of the company (Maisonneuve Realties Inc) is allowed, and the whole referred back to the respondent for reassessment in accordance with the foregoing reasons for judgment.

Appeals of appellant shareholders dismissed. Appeal of appellant company allowed.