Regin Properties Limited v. Minister of National Revenue, [1979] CTC 2149, 79 DTC 156

Delmer E Taylor:—This is an appeal against an income tax assessment in which the Minister of National Revenue taxed for the year 1975, on income account rather than on capital account, the gain on disposal of a certain real property. In the reply to notice of appeal, the respondent relied, inter alia, upon sections 3, 4, 123.2, 129 and subsections 9(1) and 248(1) of the Income Tax Act, SC 1970-71-72, c 63, as amended.

Facts

The income tax assessment in question reads in part as follows:

The appellant (hereinafter referred to as “Regin” or “the Company”) is a company incorporated under the laws of the Province of Ontario on December 16, 1965. During the years 1966 and 1967, the appellant acquired real property (hereinafter referred to as “the property”), near Markham, Ontario. This property was in two parcels, more particularly described as parts of lots 3, 4 and 5, Concession 9, Town of Markham, comprising a parcel of approximately 441.92 acres and parts of lots 4 and 5, Concession 10, Town of Markham, comprising a parcel of approximately 201 acres. On or about February 4, 1974, the land situated in Concession 10 was expropriated by notice of expropriation issued by the Lieutenant-Governor in Council and on the same day the land in Concession 9 was rezoned as Green Belt. The company concluded in the year 1975 a satisfactory agreement as to the compensation to which it was entitled for the lands in Concession 10 which were expropriated by the Province of Ontario in the year 1974. At the same time in 1975, the company sold to the Province of Ontario the property in Concession 9. It is the gain resulting from the purchase in 1966 and 1967, and the disposition of the property in 1975, which forms the basis of this appeal.

Contentions

It was contented on behalf of the company that:

— All of the shares of the taxpayer are beneficially owned for members of the family of von Thurn and Taxis (hereinafter referred to as “the family”).

—The family is an ancient German family which ruled one of the many principalities of which central Europe was constituted during the Middle Ages.

—The family was instrumental in setting up the original European postal system and by doing so acquired the foundation of a considerable fortune.

—The security of the family’s wealth so acquired and subsequently augmented has frequently been in jeopardy as a result of, among other things, political upheavals and erosion caused by inflation.

—The family has continually endeavoured to preserve its wealth by investing in countries which it finds attractive by reason of their political Stability.

—The experience of the family is that investments in land are most Suitable for mitigating inflationary losses of their wealth which the family has attempted to preserve over the course of several centuries.

— No offers to purchase the property were solicited by the family nor has the family ever acquired land for the purpose of resale. It is the policy of the family to render its landholdings productive of income at the earliest economic opportunity.

—The effect of the Green Belt rezoning was not only to reduce the value of the land but also to render it entirely inappropriate as an investment for the preservation of the family’s wealth.

—The expropriation and sale of the lands, after they had been held for over eight years, was not sought or desired, and at no time did the company do anything to render the lands more saleable or take any steps which could be regarded as being in furtherance of a profit-making venture.

—The intention of the company was to hold the land as an investment and, more particularly, to maintain the family’s wealth in a politically stable environment.

—The gain realized is a gain on capital account, and qualifies as Canadian investment income, given rise to refundable dividend tax on hand; no corporate sur-tax is payable by the appellant and the appellant is entitled to a dividend refund.

The position of the respondent was that:

—The property in question may be described as follows:

— In all cases the properties in question were leased to former owners or to new tenants on a short-term basis with the exception of one property which was leased for 10 years, with a clause in the lease whereby in the event the company should make a bona fide sale of the property the tenant would surrender its lease on three months’ notice.

—On March 27, 1975 an agreement was reached with the company establishing a consideration in the amount of $1,529,100 for the properties in Concession 10 which had been expropriated.

— By an agreement the properties in Concession 9 were sold to the Province of Ontario on March 27, 1975, for a total consideration of $3,394,100.

—As a result of the said expropriation and sale to the Province of Ontario on March 27, 1975, the company realized a profit (after certain expenses) in the amount of $4,163,240.

— During the period that the company owned the said properties, it realized no net income or profit from the rentals of the said properties.

—The company in purchasing the said properties did so not with the exclusive intention of earning rental income therefrom but with the intention of turning the same to account for profit in any manner whatsoever, including resale.

—The profit realized by the company on the expropriation and sale of the said properties was properly included in the appellant’s income with respect to the 1975 taxation year as business income from an adventure in the nature of trade, and the Minister submits further that such income was active business income.

The Board notes the references above by the appellant to such matters as “Refundable Dividend Tax on hand”, “Dividend Refund”, “corporate surtax”, “Canadian investment income”, etc., and by the respondent that “such income was active business income”. These matters were not dealt with specifically at the hearing, and the sole issue which the Board was called upon to determine was whether or not the gain on the relevant transactions should be treated as on income or capital account.

Evidence

The sole witness for the appellant was His Highness Prince Johannes von Thurn und Taxis. As background to his investment in Canada, he described in interesting detail the family history commencing in the Middle Ages, particularly the establishment of the original European postal system which gradually became nationalized, providing the basis for the family fortune. The family philosophy is that land is the safest and best method of preserving capital. The family acquired and continues to own vast tracts of land in Europe, although some two-thirds of the holdings were lost during or after the Second World War. Thereafter the Prince embarked on a policy of buying land in North and South America. In view of the political stability of Canada, he purchased farms, timber limits and revenue-producing properties in Canada. He also purchased a huge ranch in Brazil which he is actively cultivating.

The property involved in this dispute was acquired in keeping with this philosophy, and held the potential of industrial or commercial, or even agricultural use within the framework of the total holdings and business interests of the family. There had been no thought or intention of sale at the time of purchase. The Prince described the manner in which he conducted his extensive and world-wide business interests, including the appellant company, and left no doubt that he was completely responsible for any major decisions such as those before the Board in this matter, although he did not involve himself with administrative details or the specifics of carrying out the directives he issued.

Argument

Counsel for the appellant presented compelling support for the assertion of the taxpayer, and it can be summarized using his own words:

All of the surrounding circumstances, including the history of land holding of the family and of the Prince personally, establish that it was never the intention of the family to sell this or any other lands that it owns. In this connection, the decision of Mr Justice Addy in Roy M Power v Her Majesty the Queen, [1975] CTC 580, 75 DTC 5388, should be borne in mind. At 584-585 and 5391 respectively, Mr Justice Addy states that the direct evidence of intention at the time of purchase is undoubtedly the most cogent evidence that the Court has to consider.

. . . the sole and cental question is whether the property was acquired with the intention of turning it to account by resale. As stated, this assumption has been, in my submission, completely demolished and one really need not look beyond that.

. .. that is the test, did he intend to sell it? His evidence was clear. He repeated it no, we hold and we hold for centuries and that is what happened.

In addition to Power (supra), counsel quoted with approval from:

R WS Johnston v MNR, [1948] SCR 486; [1948] CTC 195; 3 DTC 1182; Sutton Lumber & Trading Company Limited v MNR, [1953] CTC 237; 53 DTC 1158; The Hudson’s Bay Company Limited v Stevens (1909), 5 TC 424; MNR v Muzly Lawee and Naima E Lawee, [1972] CTC 359; 72 DTC 6342; Her Majesty the Queen v Stanfold Investment Corporation, [1974] CTC 19; 74 DTC 6035; Irrigation Industries Limited v MNR, [1962] CTC 215; 62 DTC 1131; Clemow Realty Limited v Her Majesty the Queen, [1976] CTC 129; 76 DTC 6094; Her Majesty the Queen v Harold Borin sky, [1977] CTC 570; 77 DTC 5389; Hiwako Investments Limited v Her Majesty the Queen, [1978] CTC 378; 78 DTC 6281; Douglas H Sherman v MNR, [1973] CTC 192; 73 DTC 5164; The Queen v Grant Kyllo, [1976] CTC 409; 76 DTC 6235; Wisdom v Chamberlain (HM Inspector of Taxes), 45 TC 92.

From the above cases, counsel deduced:

(1) That land is a proper form of investment and even if it were purchased in the hope and expectation that it might rise in value does not of itself make a subsequent disposition a taxable event.

(2) That where nothing is done to advance or foster the sale of land, its subsequent realization is the realization of an investment and does give rise to taxable income.

Counsel for the respondent put forward certain grounds upon which the Board should hold that the transactions in question represented an adventure in the nature of trade—that some factors brought out in evidence pointed to a conclusion that there had been a conscious secondary intent of resale at the date of acquisition and, alternatively, that because there was no stated purpose for the acquisition other than to hold it for possible use, or as a hedge against inflation (ie, to preserve the family wealth), only by a sale could any anticipated appreciation in value be realized. The respondent’s list of authorities included:

Birmount Holdings Limited v The Queen, [1977] CTC 34; 77 DTC 5031; Malton Indoor Health Spa Ltd v MNR, [1972] CTC 551; 72 DTC 6489; Southern Investments Limited v MNR, [1970] Tax ABC 1149; 70 DTC 1729; The Queen v Cadboro Bay Holdings Ltd, [1977] CTC 186; 77 DTC 5115; The Queen v Rockmore Investments Ltd, [1976] CTC 291; 76 DTC 6156; The Queen v M RT T Investments Ltd, [1976] CTC 294; 76 DTC 6158; E S G Holdings Limited v The Queen, [1976] CTC 295; 76 DTC 6158; Juergen Baginski v MNR, [1978] CTC 2679; 78 DTC 1493; Saul Bookspan v MNR, [1978] CTC 2128; 78 DTC 1092; Baramy Investments Ltd v MNR, [1977] CTC 2558; 77 DTC 400; The Queen v Grant Ky/Io, [1976] CTC 409; 76 DTC 6235; The Hudson’s Bay Company Limited v Stevens, 5 TC 424.

Findings

In my view, the respective arguments of both counsel for the appellant and counsel for the respondent show appreciation for the two major issues raised at this hearing—whether or not there was at acquisition, a recognizable intention to resell, which according to the respondent would create a prima facie case for taxation on income account; or whether or not the potential for capital appreciation in value was a motivating factor at acquisition, and if so, the effect this should have on the evidence of a prima facie case for taxation on income account.

The Board can dispose of the first point in summary fashion. None of the inferences of “intention to sell” which can be drawn from the minor discrepancies highlighted by counsel for the respondent can detract from a major fact—Prince Johannes presented himself to the Board as the major witness, and denied any such intention or objective. His personal attendance cannot be attributed only to the amount of income tax involved; it is also a clear reflection of his character in accepting responsibility and speaking for himself, so vividly demonstrated in the background family information he volunteered and in the responses he provided to questioning. I am sure that the Prince had available to him ample alternative resources, both financial and human, which could have permitted him quite legiti- mately to absent himself from the hearing. His evidence regarding the purpose he had in mind for the property is accepted without question—at the date of purchase, there was no intention to sell.

However, I cannot accept the corollary advanced by counsel for the appellant—“that really is the end of the case’’. In my view, while providing a substantial base from which to contend that the appellant’s gain may not be on income account, it does not determine without question that it is on capital account. The responsibility of the appellant in matters of this kind is to establish that the gain in question is on capital account, or that it is not on income account. The intention of the taxpayer at acquisition remains a very vital element, but merely establishing that there was no intention of resale does not deal with the questions—what was the original intention? or what happened to the original intention?— when in fact a sale ensued.

Reference is made to a recent decision of this Board S Grossman v MNR, [1979] CTC 2132; 79 DTC. The intention of the appellant, at acquisition, as perceived by the Board in that appeal, was to sell at a profit. As pointed out therein, that fact alone cannot be regarded as determinative that the gain involved should be on income account, it remained open to the taxpayer to establish that the proper basis for taxation should be on capital account, which he failed to do. The opposite perspective in the instant appeal—that there was no intention to resell—can equally be regarded as significant but not determinative of a conclusion that the gain should be on capital account, and again it remains for the taxpayer to establish the appropriate taxing designation.

In Grossman (supra) it was noted that the existence of certain situations reflected in Hiwako (supra) could reasonably lead to a tax assessment on income account, which then must be dislodged if possible by the taxpayer. These situations were:

(1) where there was “an expectation on the part of the purchaser, at the time of purchase, that . . . it could be sold at a profit and that such expectation . . . induced him to make the purchase . . or

(2) “If property is acquired when there is no business . . or

(3) “one possibility in the mind of the purchaser is to use the property as the capital asset of a proposed business’’; or

(4) . . the purchaser has not considered how he will use it (the property)’’ (italics mine).

In reviewing the above situations for purposes of the instant appeal, it can be seen that (1) does not apply; it can be argued that (2) does not apply (in view of the wide-spread business interest of the Prince); but in my view, both (3) and (4) have relevance here. One possibility in the mind of the Prince was to use the property at some time in the future in a productive capacity (#3), and the other was to hold the property, whether or not it was productively used, aS a means of preserving the family wealth (#4). These possibilities were never brought to fruition, they were terminated and, since that termination activated, accompanied or encompassed profit on the transaction, it rests with the taxpayer to show that it should not remain in income account where the Minister has placed it. The reversal of the stated intention (to hold the land in perpetuity), according to counsel for the appellant, was founded upon the following:

The Green Belt zoning sterilized the value of the land and it made it impossible to be developed at any future time . . .

A portion of its lands were expropriated and the balance was sold because the zoning had sterilized the value of the land and rendered it unsuitable as a means of preserving the family’s wealth.

_.. this family buys land to hold for generations and the expropriation and virtual forced sale of the lands owned by the appellant were not, by any stretch of the imagination, part of a profit making, land speculation scheme.

In reviewing the disposition of the property and the reasons advanced for such disposition, the Board turns first to the portion of the land zoned Green Belt but not expropriated (sold for some $3,394,100). The Board notes that while such rezoning might have had some dibilitating effect on the land, such a result was far from certain. There is in fact no evidence before the Board that the property was less, more or equally valuable either as potentially productive land, or as a means of preserving the family wealth, the day before the zoning, compared to what it was worth the day after. Over the centuries during which retention of the land had been anticipated, ample opportunity would exist for changed, even improved zoning, or at least flexibility in permitted use. In fact decades or even centuries into the future, such “Green Belt’’ zoning could prove a valuable asset, not a liability at all. In my view, however, the most telling point is that at the date of sale the one purpose for the acquisition (to preserve the family fortune) could not be considered at risk since the settlement for the land expropriated (about 200 acres) had ben considerably greater, by itself, than the total paid for all the property, and there is no evidence that the expropriation settlement was in any way conditional upon the sale of the balance of the land (some 433 acres). The Board also notes that since the other purpose for the acquisition (possible productive use) had been so vague, there is no evidence it could not have been conducted as well on the remaining 433 acres as on the total. The Board therefore readily reaches the conclusion that there was neither frustration nor reason for abandonment of any original intention related to holding the land in perpetuity, and that the gain on the portion of the property sold should be taxed on income account. The asset acquired had no generic or inherent quality of “investment” or “inventory” at the date of acquisition—only subsequent events silhouetted the appropriate income tax treatment. The income tax treatment was determined by what the appellant finally did with or to the property.

With respect to the gain on the settlement for the property expropriated, I have seen no evidence that the stated objective of the taxpayer was violated by him. I can accept that while the appellant’s purpose in acquiring the property was indefinite, perhaps unusual, even unique, it was not invalid. It was, however, terminated by the expropriation. There is no evidence that the appellant anticipated the expropriation at acquisition, or actively promoted the event during ownership. The appellant did not consciously decide to “trade in” the asset in the sense of accepting cash for land—that decision was made for the Company at the date of the expropriation order by the Province of Ontario and only the quantum of the settlement remained. Following the same line of reasoning as that indicated for the portion of the land that was sold, I find no basis in that event (the expropriation) to accord the character of “a venture in the nature of trade”, or “trading” to this part of the transaction in question. I would refer to the decision of Southern Investments Limited v MNR, [1970] Tax ABC 1149 at 1150; 70 DTC 1729 at 1730:

The appellant says that the sum mentioned should be treated as a capital gain, as it Was neither its desire nor intention to sell the property involved and the expropriation that occurred was something over which it had no control. That the fruits of expropriation might ordinarily constitute a capital accretion is true, but

there are exceptions that depend on the circumstances that obtain. The present matter strikes me as coming within one of these exceptions. (Italics mine).

Since the gain at issue here does not appear to me to come within any exceptions, it should be taxes as on capital account.

Decision

The appeal is allowed in part in order that the gain realized on the financial settlement arising from the expropriation of a portion of the property shall be taxed as on capital account, and the gain realized on the sale of the balance of the property shall be taxed as on income account. The entire matter is referred back to the respondent for reassessment, all in accordance with the above reasons for judgment.

Appeal allowed in part.