Trans Canada Holdings Limited* v. Minister of National Revenue, [1980] CTC 2791, 80 DTC 1689

D E Taylor:—These appeals, heard in the City of Toronto, Ontario, on June 24 & 25, 1980, are against income tax assessments for the years 1970 and 1971 respectively. In these assessments the Minister of National Revenue assessed to tax on income account, amounts of $23,750 and $207,676 respectively, which were gains arising from certain real estate transactions. In 1967, Bevanewil Limited (“Bevanewil” or the “Company”) purchased one-fourth of the outstanding shares of Bloor Towers Develop-

Trans Canada Holdings Ltd was the successor to Bevanewil Limited.

ment Limited (“Bloor Towers”). Bloor Towers owned all of the outstanding Shares of R G Dalton Company Limited (“Dalton Company”). In 1968, Bloor Towers and Dalton Company amalgamated to become The R G Dalton Company Limited with the result that Bevanewil Limited held a 25% interest in the amalgamated company (“Dalton”). The assets of Dalton consisted of lands and buildings in the City of Toronto known as 110-128 Bloor Street West. In 1970, Bevanewil and the other shareholders of Dalton entered into an agreement with The Great West Saddlery Limited (“Great West”), under the terms of which Great West was granted an option to purchase the shares of Dalton. Bevanewil received $23,750 as consideration for granting the aforesaid option and extensions thereof which were not exercised.

In 1971, Bevanewil and the other shareholders of Dalton sold all of the shares of Dalton to Downtown Brampton Realties Limited (“Brampton”) for $1,000,000. For 1971, the sum of $207,676 was included by the respondent as profit on the sale of Dalton shares to Brampton.

In assessing the appellant, the respondent relied, inter alia, upon sections 3, 4, and paragraph 139(1)(e) of the Income Tax Act, RSC 1952, c 148 and amendments thereto.

The detailed history of the development project, its interested parties, difficulties, changes and adjustments are all recorded in the case of Melcrete Construction Company Limited v Her Majesty The Queen, [1977] CTC 273; 77 DTC 5181, an appeal directly to the Federal Court of Canada regarding basically the same transactions. Melcrete was a 50% shareholder in Dalton, and shared to that proportion in the same gain realized on the transactions in question in these appeals. The appeal of Melcrete was dismissed.

Contentions

For the appellant:

—The appellant acquired the shares of Dalton as an investment for the purpose of earning income with the intention of causing a building to be constructed upon the property located on Bloor Street in the City of Toronto. When the appellant acquired the shares it had no intention of disposing of the shares at a profit.

—The shares of Dalton were a capital asset of the appellant.

—The profit realized by the appellant upon the sale of the shares of Dalton was a capital gain and was not income to the appellant.

For the respondent:

—The appellant in acquiring the shares of Dalton was primarily interested in the underlying realty assets of Dalton and at the time of acquiring the said shares it had the intention of turning the said realty assets into a profit in any manner.

—The appellant in granting the option to Great West earned income from a business or an adventure in the nature of trade.

—The sale of the said shares of Dalton by the appellant was merely an alternative method of selling the said underlying real estate assets of Dalton.

—The appellant’s profit realized on the sale of the said shares of Dalton was income from a business or an adventure in the nature of trade. Evidence

The only witness was Mr B Willoughby, President of the appellant company at the times material, and also President during the same period of the Toronto-based real estate firm of J A Willoughby Sons Ltd, or its successor (“Willoughby”). The evidence of Mr Willoughby was that Bevanewil was a family-held investment and management corporation; that J C Turner of Charlmar Properties Limited (referenced in Melcrete (supra)) was not only a valued and trusted employee of Willoughby, but also a business partner in other real estate ventures. In addition to acquiring (through the appellant company) the 25% interest in Dalton in 1967, Mr Willoughby had also merged Willoughby with another real estate firm (Gibson) with the anticipation that the new joint venture would be very successful, and cover more adequately the related fields of real estate development and property management which had not been a major area of activity in his own firm. According to Mr Willoughby, it was with this intention of “leasing” and “managing” Bloor Towers that he had entered into the Dalton venture. Mr Willoughby presented some evidence that the financial affairs of Willoughby had taken a serious downturn by the years 1969 and 1970, and that in particular real estate commissions had dropped off more than one million dollars annually from previous years. With the proposed completion of Bloor Towers, he hoped to once again earn substantial commission income for Willoughby from an exclusive rental listing, and anticipated increased building management revenue reaching several hundred thousand dollars per year for Willoughby. For Bevanewil, the appellant company, there was the prospect of dividend income from the project after completion. He submitted that the requirement to sell the property arose only because the 50% partner (Melcrete) could no longer finance the holding costs while awaiting development, and that the depressed real estate market in 1969 and 1970 did not permit him to advance further funds from Willoughby. In addition, he was at that time in the process of withdrawing Willoughby from the business arrangements he had taken on in 1967 with Gibson. Further, the prospects for a “prime tenant” had not materialized, and without that the banking arrangements to carry the land assembly were becoming very strained. He believed he could have kept up with his own end of the bargain (and also felt Turner could have done so), but he could not assume the added 50% from Melcrete. There was no alternative but to sell. In summary, it was the evidence of Mr Willoughby that his own personal position in the appellant company and Willoughby, impacted substantially upon the prospects for income therein, which could be gained from Bloor Towers when completed. It is this potential “stream of income” to the appellant which is the crux of the issue before the Board.

Argument

Counsel for the appellant distinguished this appeal from that of Melcrete (supra) by pointing out that there could be no allegation of “secondary intention” against Bevanewil because of the nature of the Minister’s pleadings, and that it was on the basis of such “secondary intention” that the learned Justice had found against Me/crete. Counsel noted that at the time this appellant entered into Dalton (1967), all the properties had been acquired, a distinction which counsel viewed as the removal of a major uncertainty which had weighed heavily against Melcrete (supra) in that judgment. The other two uncertainties highlighted in Melcrete (financing and a head tenant) were manageable for the appellant within the business structure available to Bevanewil, particularly with Mr Willoughby personally as a major shareholder in both the appellant company and Willoughby. Mr Willoughby could have maintained his own financial commitments (at acquisition of the shares in 1967) and prospects at that time for a prime tenant, while always difficult, were not impossible or even unlikely. However, between 1967 and 1969, business circumstances in Toronto had changed materially—there was no longer a prospect of an early “prime tenant”, and the financial situation of the company Willoughby was very strained. In summary, a sale was the only answer, even though this had never been contemplated.

Counsel for the respondent did not agree that the Minister was restrained from pleading anything (including secondary intention) but accepted that too great a departure from the written pleadings to some degree could shift the onus of proof to the Minister rather than leaving it with the appellant. Counsel’s major point was that the increasing value of this prime land made the acquisition of the shares in 1967 a good business investment for the appellant, and that the real intention had always been to sell either the property or, if a prime tenant could be obtained, to sell the completed building when constructed. The difficulties of financing and obtaining such a prime tenant were completely evident at all times to the appellant, according to counsel. Further, nothing by way of documentary evidence had been presented which could possibly link an income stream from the proposed building (even if completed) to the appellant company. The property in question was no different than other properties acquired, held and sold by this appellant company over the course of years, from which gains had been reported as income, not capital, by this appellant. Counsel particularly relied upon a quotation from Melcrete (supra) at 279 and 5186 respectively:

It was essential to the plaintiff’s success in completing the proposed building that it be successful in purchasing all the lands in question, except Rigby, and also securing funds therefor. Before it could be retained as an investment, the acquisition of a head tenant was necessary. At all material times it must have been apparent to the plaintiff and its officials that it was extremely problematical that it could be successful in either requirement. As businessmen, they must have intended that in the event of failure to secure all such land or necessary funds and a head tenant that the only alternative would be to sell the property. In such circumstances, there must have existed at least a secondary intention to sell the property if the development plans were frustrated.

Findings

In my view, recent decisions of this Board and judgments of the Courts have treated the subject of “secondary intention” with the utmost delicacy and caution. The simple option retained by a prudent businessman to dispose of a property under suitable circumstances, and the hope of recovering his investment and perhaps a profit, do not appear to me to be a conscious state of mind, easily characterized as an “intention to resell”, whether qualified by the term “secondary” or not. Nevertheless, it does rest with the appellant to clearly dispel from the Minister’s mind that even such a residual consideration formed a serious part of the acquisition decision. I have noted in other matters that the appellant’s entire course of conduct with regard to property transactions under review may well be relevant in a determination of the critical element of “intention”: See Bassani et al v MN R, [1977] CTC 2311; 77 DTC 208; Reg in Properties Limited v MNR, [1979] CTC 2149; 79 DTC 156; Sam Grossman v MNR, [1979] CTC 2132; 79 DTC 141; and Mary and William Wladyka v MNR, [1980] CTC 2408; 80 DTC 1374.

In my view, counsel for the appellant has placed too much stress upon “secondary intention” in interpreting the adverse decision of Melcrete

(supra). The significant phrase therein (quoted above) is: “/n such circumstances there must have existed at least a secondary intention to sell the property if the development plans were frustrated.” (Emphasis mine). As I see it, the “circumstances” to which the learned Justice referred earlier in that judgment, could lead to a conclusion that the only intention was to dispose of the development project at the most propitious time.

I note for the record that copies of two letters exchanged between the appellant and Dalton in October and November 1969 were entered by this appellant as Exhibits A-11 and A-12 as evidence that the intention of both parties in 1967 was to create a long-term investment. In my view, these letters must be rejected as proof of such a point in the light of the fact that the purchase arrangements between the appellant and Melcrete were made on March 3, 1967 and there is no such dedication of purpose almost immediately t h erea ft er which I can see in a quotation from 279 and 5186 of the Melcrete judgment (supra):

In a memo from Morgan to Horsell, dated June 13, 1967, (Exhibit 99b), Morgan states:

We committed ourselves to the banks that we would either have definite development plans by June, 1968 or, we would dispose of the property.

A further interesting phrase appears on the same page of the Melcrete judgment which directly involves the company Willoughby with the land purchase process:

Reference to “they” can only mean Willoughby’s clients who are the plaintiff’s parent company in England.

Mr Willoughby himself was a helpful and knowledgeable witness. His testimony would indicate that the idea of constructing a building on the site, renting the space and managing it through his corporate business structures, held a great deal of interest for him. It may even have been a possibility in his mind, and one he would have gladly accepted as the eventual outcome, if the circumstances warranted it. However, for these appeals to succeed the evidence must support a conclusion that such a prospect was a major or the sole consideration motivating the acquisition of the shares in question. Neither the position of Mr Willoughby personally in Willoughby, nor in the appellant company, is critical to a determination of that point. The issue before the Board is simply whether or not at the date of acquisition of the 25% interest by the appellant company, Dalton was engaged in a program to construct a building on the property it owned and retain the building for rental investment income purposes.

It is my reading of the Melcrete decision (supra) that the learned Judge rejected the attestations of the appellant Melcrete that Dalton and/or Melcrete’s original partner M and PP had as a recognizable primary intention, the objective of developing the site and retaining it as an income earning investment property. Since M and PP sold its interest in Dalton on May 5, 1966, it followed for Melcrete to succeed in that appeal, that it would be required to show that the adoption of such an objective (to develop and retain) had been the reason for the sale of a 50% interest in Dalton to this appellant and Charlmar in June 1967. In support of this, Melcrete put forward the following (from 275 and 5183 respectively of the judgment):

It therefore decided that it would require an associate to locate a prime tenant, provide permanent financing, and to manage the project.

It would appear Melcrete’s assertion was essentially that proposed by the appellant in this matter—that the arrangement in June 1967 provided the basis to overcome its remaining difficulties (the prime tenant, and the financing). I can appreciate that Willoughby, located in Toronto, might have been in a more favourable position to obtain a prime tenant than M and PP with headquarters in England. Willoughby, however, did not bring with it a head tenant, nor a guarantee of one. Neither did Willoughby provide a guarantee of financing for the project. To this degree, obtaining a head tenant was only a means of financing, and in my view, the only means of financing for the project, whether sold after construction or retained. Financing the construction remained the problem, not merely financing the interim carrying costs of the property itself. To this degree, with this appellant and Charlmar as partners, Meicrete was in a greater deteriorated position, from its original arrangements with M and PP, wherein financing had been arranged (see 275 and 5183 respectively):

On May 5,1966, M and PP and its parent company in the United Kingdom stated they wanted to withdraw from the project and to be released from the obligation to provide the financing therefor.

Conclusion

Since the learned Judge in Meicrete (supra) did not regard the ownership of the land and the ready availability of construction financing in May 1966 as evidence that Melcrete’s investment in the project was on capital account, it would be difficult indeed for the Board to accept that the mere introduction of new partners (this appellant and Charlmar), when coupled with dropping the financing guarantee, would be more persuasive.

Decision

The appeals are dismissed.

Appeals dismissed.