Mainland Crystal Glass LTD v. Her Majesty the Queen, [1977] CTC 117, 77 DTC 5080

Smith, DJ:—In this action the plaintiff is appealing from a reassessment of its income for the 1971 taxation year by which the Minister of National Revenue added $39,115.97 to the plaintiff’s taxable income, and from a decision of the Tax Review Board dated March 7, 1975 dismissing the plaintiff’s appeal from the reassessment.

In May 1949 Edwin E Bean, an Edmonton businessman, native to that city, began the business of installing automobile and commercial glass, chiefly automobile glass, under the name of Edmonton Crystal Glass. In December 1953 he caused the plaintiff (at that time having the name of Edmonton Crystal Glass Ltd) to be incorporated under the laws of Alberta, to take over his business. During the last five years the general commercial glass share of the company’s business has increased until now its total business is about equally divided between automobile and commercial glass. In October 1972 the plaintiff’s name was changed to Mainland Crystal Glass Ltd.

The objects for which the company was incorporated, and these have never been changed, were the following:

To purchase or otherwise acquire, store work and make merchantable, install, sell and deal in automobile glass of all kinds, safety glass, plate glass, window glass, and all other kinds of glass and glass products whatsoever.

To purchase or otherwise acquire, store and use all such other kinds of materials or products as may be necessary for the working, making merchantable, installing, selling and dealing in said glass and glass products.

To carry on the trades or businesses of glass manufacturers, engineers, installers, repairers and workers, and to do all things incidental to and in connection with the said trades or businesses.

Mr Bean is president and general manager of the company and owns 9 out of the 10 issued shares of the stock.

The plaintiff’s business prospered and in 1965 it began to expand by acquiring other glass companies and opening branches of its own. In 1965 Lee’s Crystal Glass in Red Deer was acquired as a proprietorship, and in 1970 it was transferred to the plaintiff. Exhibit A-1 is a diagram showing this and other, but not all, developments of the plaintiff’s business. In 1966 a branch was started in New Westminster as a proprietorship and transferred to the plaintiff at the beginning of 1968. In 1967 a branch of the plaintiff was opened in Jasper Place (now part of Edmonton). In 1967 a glass company in Vancouver was acquired by the plaintiff.

According to Exhibit A-1 and Mr Bean’s oral testimony no further expansion occurred until 1972. In April 1972 the assets of Delta Glass Co Ltd in Delta were acquired and the business continued by the plaintiff. On January 1, 1973 a branch in North Vancouver was opened. In March 1973 the assets of Gordon’s Auto Glass Ltd in Winnipeg were acquired and the business continued as a branch. On February 1, 1974 and July 1, 1974 two branches were opened in Toronto, and on June 1, 1974 a branch was opened on 103rd Street, Edmonton. The last expansion shown on Exhibit A-1 was in August 1974, when the assets of Norm’s Classic Glass Ltd in Langley were acquired.

Mr Bean indicated six additional expansion movements, viz: in 1974 a business was purchased in Kelowna and a new branch was opened in North Edmonton; in March 1976 a company in Vernon, BC was purchased, in June a new branch was opened in Camrose, Alberta, in September a company in Fort Saskatchewan was purchased and a lease was taken on premises for a new branch in BC.

As a result of all this expansion the total business of the plaintiff has shown great growth. In 1968 Mr Bean said the sales volume was something less than $1,000,000, in 1969 it was approaching $1,200,000, but in the current year it will be about $7,000,000.

One of the principal reasons why the plaintiff began its expansion program in 1965 was that, in the early years of that decade, two giants of the glass industry, one in eastern Canada and one in the west, began aggressive expansion, buying up a number of the better companies. Competition from these two large companies was difficult to meet, largely because of two advantages possessed by them and not available to the plaintiff. One was volume discounts on purchases of glass, the other being carload freight rates on shipments. Mr Bean said the real benefit of volume discounts from a glass manufacturer only became available when annual purchases from that manufacturer were not less than $1,000,000, a level which the plaintiff did not reach till 1974. At that level the plaintiff could and did receive a distributorship and distributor’s discounts, which he said resulted in prices about 25% lower than formerly. Nor could his business warrant buying glass by the carload until his glass requirements had become considerably greater than they were in 1965. He was somewhat apprehensive that if the plaintiff's business did not expand to a point where he could enjoy these advantages equally with the giant companies, their competition might force him to sell out to one of them.

At first all went well, but early in 1967 Mr Bean’s wife became ill. Cancer was suspected and in February 1968 her illness was definitely identified as a malignant brain tumor. Three years later, on February 10, 1971, Mrs Bean died.

In Mr Bean’s evidence, when he was informed of the nature of his wife’s illness and that her life expectancy was therefore limited, he decided that he would give up his expansion plans for the plaintiff, at least for the duration of her illness. He wished to be able to spend more time with his wife and three children, but acquiring or building branches in various parts of Canada and getting them well established necessitated his being away from Edmonton frequently, and sometimes for lengthy periods of time. This was his decision, though his financial advisers urged upon him the need to continue expanding in order to meet growing competition. What Mr Bean decided to do was to invest surplus funds of the plaintiff in stable, passive investments that would produce a steady income and would not require constant attention from him.

Late in 1968 a parcel of 7 lots of land, about three-quarters of a mile east of and on the same street (Whyte Ave) as the plaintiff’s head office, was brought to his attention as being on the market. The plaintiff purchased these lots on December 31, 1968 for the asking price, about $90,000. Mr Bean then began discussions with Lloyd Christenson, a contractor, about what he desired to build on the land. The building was designed and the plans drawn by two draughtsmen in the office of Mr Christenson’s company, Christenson Contractors Ltd. About September 17, 1969, the construction contract was let to the Christenson Company for $350,000. Three hundred thousand dollars of the price was provided by a mortgage loan and the balance of $50,000 was to be provided from surplus funds of the plaintiff. In the end the cost proved somewhat higher than $350,000 and the cash investment of the plaintiff in the building became about $70,000. The total cost of land and building was thus about $460,000, and the plaintiff’s equity about $160,000. The building was 3 storeys in height, with 10 stores on the ground floor and 24 residential suites on the upper two floors.

Mr Bean stated that his purpose in buying the land and erecting the building was to carry out his plan of investing surplus funds of the plaintiff in property that would produce income over the years. It was in no way his intention to go into this project with a view to making a quick, profitable sale. In other words his contention was that this transaction was simply a capital investment and not a venture in the nature of trade.

Mr Bean said the building was completed early in 1970 and renting to tenants began.

However firm Mr Bean’s original intention had been to hold this property as a long-term revenue-producing investment and not to sell it, it is clear from the evidence that by the end of 1970 his position had become less rigid. About the middle of December of that year he was approached by a real estate agent representing German clients who were looking for real property in Edmonton. On their behalf he expressed an interest in this property of Mr Bean. Mr Bean said the property was not for sale but that he might entertain the idea of selling if the price was right. He quoted a price of $575,000, which he said would, in his opinion, be too high for the Germans. There were several discussions, but no firm offer was made at that time. Then, around the middle of 1971 the agent came back to him with an offer of $530,000 from the Germans, all cash down to the mortgage. A week or so later the offer was accepted, resulting in a profit of about $70,000 and providing the plaintiff with about $230,000 cash.

The question for the Court to resolve is whether the transaction was one of a capital investment in real property with the one purpose of deriving revenue from it, followed by a sale about a year and a half after the building had been completed, at a substantial profit which the plaintiff was entitled to treat as a capital gain, not income; or was it a transaction in the nature of trade resulting in a profit which must be held to be income? Accepting, as I do, that Mr Bean’s primary motive was to acquire and hold a revenue-producing capital asset, a further question arises, viz: Did Mr Bean have in his mind the thought that he might sell at a profit? Certainly the time during which the land was purchased and the building erected was a period of rising real estate values, in Edmonton as in other cities in Western Canada, a fact of which it is fair to assume Mr Bean was well aware, by reason of his expansion acquisitions in Edmonton and elsewhere in the recent past.

As always in these cases, the answer will turn upon the facts of this particular case. In cases of this kind also, judges have frequently held that while the oral evidence of the taxpayer in court must be considered, his actions at the time of the transaction are often of much greater weight than his oral statements made long afterwards. The facts which tend to support the plaintiff’s position in this case must be balanced against those that tend in the other direction, to determine, on a balance of probabilities, what is the true nature of the transaction. And the burden of proving that the Minister was wrong in making his assessment lies on the plaintiff.

Several facts were advanced in support of the plaintiff’s position. The one on which counsel placed most reliance, and which is certainly entitled to a good deal of weight, is the fact that the plaintiff’s expansion activities, in so far as they are indicated by the acquisition or construction of new branches, were halted following the acquisition of a branch in Vancouver in September 1967 and were not resumed until April 1972, when the assets of Delta Glass Ltd were acquired. Since the latter date, expansion has proceeded at a rapid tempo. The hiatus of more than four years in setting up new branches is consistent with Mr Bean’s evidence that some time in 1967, or at latest early in 1968, he decided, because of his wife’s serious illness, that he would cease expanding the plaintiff’s business into new locations, so that he would be able to be in Edmonton much more and able to spend more time with his wife and family. It is not conclusive, however, as there may have been other facts militating against expansion during that period. No evidence of such facts was submitted to the Court, but one thing that could have had a dampening effect on expansion plans is the well-known fact that interest rates for all purposes were rising in 1968, that they rose spectacularly in 1969 and the first few months of 1970, after which they began to decline.

The fact that the plaintiff did acquire land and erect a 3-storey building on it, divided into 10 stores and 24 apartments, which at its final cost was estimated to produce a net annual income of nearly 14%, is consistent with Mr Bean’s evidence that he had decided to invest surplus funds of the plaintiff in capital assets with a longterm income-earning capacity. On the other hand it is not inconsistent with the Minister’s position that this investment was made with a view to selling the property at a profit, which in turn would provide capital needed for expansion. A fact that may or may not have some significance is that, having decided as he said on a change in investment policy some time in 1967 or early 1968, Mr Bean proceeded pretty deliberately to put the new policy into operation. It was not till December 1968 that he purchased the land, and only in September 1969 that he let the building contract, with the result that only in the early spring of 1970 was the property in a position to begin earning revenue. There could be various reasons for not proceeding more rapidly, but we have no evidence on the point and any attempt to reach a conclusion on it would be speculation.

Several points about the building itself were submitted as being supportive of the plaintiff’s position. The quality of the building was said to be definitely better and the cost therefore higher than would have been the case if sale had been the objective. The building was faced with brick, the trimmings and several kinds of fittings were said to be of better quality than usual in such buildings, the entrance leading to the upstairs suites opened into an open area extending to the top of the third floor, and at eye level on the third floor was installed a large, attractive crystal chandelier, which Mr Bean valued at $1,000 and which was visible on all floors and from outside the building; and finally the name given to the building was Crystal Manor, which name, using the plaintiff company’s logo, appears in a Neon sign installed over the entrance. It was submitted that the name Crystal in the design of the logo was jealously guarded by the plaintiff and would not have been used on a building which it was intended to sell. Mr Bean said he chose the name and used the logo because he intended the property to be part of the company and wanted recognition of that fact by having the company’s name on it.

All of these things afford some support for the plaintiff’s position, but again the argument about them is not all on one side. For example, the argument that the building was of higher quality and therefore more costly than would have been the case if it was being built for sale, on the ground that not all the higher cost would be recoverable in higher rents, is met by the evidence that the German buyers might be willing, because of the high quality of the building, to pay a higher price than they would have paid for a similar building of somewhat lower quality, even though the return on that higher price would be somewhat lower than they would usually expect. Again the fact that, when the property was sold, the contract for the Neon sign, which was on a rental basis, went along with the building, weakens considerably the argument based on the importance of the name and the logo to the plaintiff.

It is, I think, clear that Mr Bean never had the intention of disposing of the plaintiff company. Nor had he ever the intention of stopping its expansion permanently. During his wife’s lengthy, tragic illness, he spent a good deal of time at home, certainly more than formerly, but he did not neglect the plaintiff’s business. He spent much time at the office. In his oral testimony he stated that the plaintiff had held its own in 1968, 1969 and 1970, but its business had not grown. He said its total sales in 1968 were about $1,000,000 and that in 1969 they were about $1,200,000, but that costs, particularly the amount paid to salesmen, had increased. However one of its branches, Lee’s Crystal Glass, of Red Deer, had fared somewhat better. Lee’s sales in 1968 were $105,000, increasing in 1969 to $144,000 and in 1970 to $172,000. Mr Bean attributed the fact that the plaintiff had held its own between 1968 and 1970, and also the better record of Lee’s in Red Deer, to the good work of his manager, who he said did almost all the work.

There is no indication in the evidence that the plaintiff’s business was neglected during the years of Mrs Bean’s illness, nor that its business activity slackened.

On the other side of the question a number of arguments were submitted which, it was argued, indicated or at least tended to indicate that, if an intention to sell had not been in Mr Bean’s mind from the beginning, the possibility that the property might be sold was always present.

It is clear from Mr Bean’s evidence that in his opinion expansion was the only means by which the plaintiff could successfully meet the competition of the two expanding giants of the industry. Only by means of greatly increasing its business could it gain the great advantage of being granted a distributorship by a glass manufacturer. Both before his wife’s illness and subsequently Mr Bean felt that without expansion he .would be forced to sell the plaintiff to one of the giants. While he stopped immediate expansion during his wife’s illness, this was only a temporary measure. Mr Bean was a very competent, highly successful businessman. As such it is a practical certainty that he knew what was happening to real estate values in Edmonton. It is difficult to think, in these circumstances, with the need for expansion in the fairly near future, and capital to bring it about always present in his mind, that he was not also conscious of the fact that the purchase of land in 1968 and its development by erecting a revenue-producing building on it would not only bring income but that, when capital became needed for expansion of the plaintiff’s business, the property could be sold at a profit, thus making substantial funds available for that purpose. Two things tend to support this argument, though by no means conclusively. When Crystal Manor was sold in 1971 the proceeds were, as Mr Bean testified, taken into the plaintiff's business and used for expansion. This fact is not without significance though Mr Bean explained it as a complete change of mind on his part, in that after his wife’s death six months earlier the motive which had led him to embark on investing surplus funds in long-term revenue-producing, passive assets no longer existed, and further in that it was better for the plaintiff to invest in its own expansion than to continue with investments like Crystal Manor.

The second fact is that in 1971 the plaintiff, in partnership with a Mr Klopstein, entered upon a building enterprise (known as Park Lane) for the express purpose of selling it at a profit. This enterprise was entered upon shortly before the sale of Crystal Manor. The fact that the later enterprise was admittedly a venture in the nature of trade is no proof that Crystal Manor should be held to fall in the same category. It does show that in 1971 Mr Bean made use of a real estate purchase for the purpose of obtaining funds for expansion of the plaintiff company, and that he did so in a manner very similar to what actually occurred in the case of Crystal Manor.

The plaintiff’s investment in Park Lane was stated to be only about $35,000. Though built for sale it was not sold till 1974. Mr Bean said the profit realized “was not too great’’.

One further building project should be mentioned. In 1972 the plaintiff constructed another rental building—Shelley Manor—in which it invested $60,000. This property was still owned and operated by the plaintiff at the date of the trial of this action. It appears clear that capital for the many expansion projects of 1976 was obtained without any need to sell Shelley Manor.

In addition to the plaintiff’s business, Mr Bean had other activities which he carried on in his own name. For example, he said that he bought farmland from time to time, and also horses. Apparently these activities were not reduced during his wife’s illness. He stated that in 1968, 1969 and 1970 he was in the business of acquiring horses and training them for show and for jumping. Then in 1972 he incorporated a stable, putting his horses and some farmlands into it. He said the stable business was still profitable.

The total picture that emerges in these years from 1968 to 1972 is not of a man who had withdrawn significantly from his very active way of life, but of one whose mental and physical energies continued to be directed into interesting business ventures from which he derived both personal satisfaction and profit. Mr Bean is obviously a man with a very active business-mind, who is always thinking, planning and moving ahead.

Mr Bean impressed me as being an honest witness who was relating the facts as he remembered them. He freely admitted at least one fact that might be considered detrimental, that he had continued to pay his wife a salary of $8,000 a year through all the years of her illness, though she was unable to do any work. But while I have no hesitation in acquitting him of any attempt to mislead the Court I think his memory at the time of the trial, December 1976, of all that was in his mind in 1968 and 1969 concerning what the plaintiff might do with the property that became Crystal Manor, is not completely reliable. When the land was acquired and the building erected there was no thought of promptly selling it, nor was there any need to do so, as expansion plans had been temporarily shelved. I am convinced, however, largely from two facts, (1) Mr Bean, a keen businessman who had been buying land from time to time, was well aware of the rising real estate market; (2) he did intend to resume expansion of the plaintiff’s business by opening new branches when the tragic burden of his wife’s illness no longer existed, plus his evidence that it was better for the plaintiff to invest surplus funds in expanding its own business than to put those funds to other uses, that in Mr Bean’s mind there was always the possibility that Crystal Manor might be sold to provide capital for the plaintiff’s expansion and that in such an event there was every likelihood that a good profit would result. This is precisely what happened in 1971.

The argument that the good quality built into Crystal Manor indicated an intention to hold it as an investment and not to sell is not convincing. It was sold at a good profit, one which I infer from Mr Bean’s evidence was better than that realized on the sale of Park Lane, a building of lower quality which, though admittedly built for sale at a profit, was not sold until about three years after construction.

My conclusion on the facts is that in the Crystal Manor transaction there was an element of trade from which a profit might be anticipated. In my opinion, therefore, the Minister’s reassessment was justified and accordingly the claim is dismissed, with costs.

Counsel for both parties referred the Court to a number of cases in some of which the decision was in favour of the taxpayer and in others in favour of the Crown. I have read all of these cases with care. They all turned on a proper understanding of the facts. I find it unnecessary to discuss them here, only commenting that I have found nothing in them to cause me to change my opinion on the facts.