Grant,
DJ:—The
plaintiff
was
incorporated
in
Canada
as
a
federal
company
on
October
26,
1953.
Its
business
has
been
that
of
construction
and
renovation
of
commercial,
institutional,
and
industrial
buildings.
At
all
material
times
its
president
and
manager
has
been
Michael
Morgan.
Its
parent
corporation,
the
Mitchell
Construction
Kinnear-
Moodie
Group
Limited,
a
construction
company
incorporated
in
England,
owned
all
the
issues
and
outstanding
capital
stock
in
the
plaintiff
company
and
controlled
and
directed
its
operations.
Its
chairman
and
director
thereof
was
at
all
material
times
one
David
Morrell.
Such
parent
company
was,
in
turn,
with
about
forty
other
companies
similarly
owned
by
a
United
Kingdom
conglomerate
named
Mitchell
Construction
Holding
Company.
Such
subsidiaries
were
engaged
in
a
similar
type
of
construction
work
with
extensive
contracts
in
many
parts
of
the
world.
I
shall
hereinafter
refer
to
officials
by
their
surname.
In
1963,
one
McMullen,
manager
of
the
industrial
commercial
investment
division
of
the
well-known
and
long-experienced
real
estate
firm
of
J
A
Willoughby
Sons
Ltd
of
Toronto
brought
to
the
attention
of
Morgan
the
fact
that
properties
on
the
north
side
of
Bloor
Street
in
the
City
of
Toronto
municipally
numbered
from
102
to
128
inclusive,
which
were
suitable
for
the
construction
of
a
large
office
building
thereon,
could
be
acquired.
Such
real
estate
company
was
acting
as
vendor’s
agents
for
one
Rigby,
the
owner
of
properties
numbered
102
to
108
which
had
a
frontage
of
69
feet.
Morgan
and
Morrell
became
very
interested
in
such
acquisition.
They
had
a
feasibility
report
prepared
by
Crang
and
Boake,
consulting
architects
and
the
Willoughby
firm
was
engaged
to
purchase
the
properties
for
them.
The
lands
involved
were
such
Rigby
property
and
six
other
separately-
owned
areas
lying
immediately
to
the
west
thereof,
having
a
total
frontage
of
another
210
feet.
The
plaintiff
and
its
parent
company
recognized
that
they
required
the
assistance
of
a
partner
who
could
redevelop
the
properties.
They
accordingly
approached
Metropolitan
and
Provincial
Properties
(Canada)
Limited,
whose
principal
business
was
real
estate
development.
It
was
a
subsidiary
of
an
English
company
bearing
the
same
name
and
will
hereinafter
be
referred
to
as
M
and
PP.
The
parent
companies
of
the
plaintiff
and
MPP
in
England,
in
March
1964
arranged
that
their
Canadian
subsidiaries
should
proceed
to
acquire
such
land
or
some
portion
thereof
and
that
M
and
PP
would
redevelop
such
Bloor
Street
properties
when
acquired
and
that
the
plaintiff
would
construct
the
office
building
which
was
to
be
designed
by
such
consulting
architects.
This
agreement,
although
never
reduced
to
writing,
provided
that
the
plaintiff
was
to
advance
the
capital
required
for
the
purchase
of
the
properties
until
August
1966
and
at
that
time
M
and
PP
were
to
repay
half
of
the
capital
advanced
by
the
plaintiff
and
were
to
be
responsible
for
providing
all
additional
financing
of
the
project.
The
moneys
required
for
the
purchase
of
such
lands
were
advanced
by
the
Bank
of
Montreal
to
the
plaintiff.
As
security
therefor,
the
plaintiff's
parent
company
in
England
arranged
for
a
guarantee
to
be
given
by
the
British
Linen
Bank
to
the
Bank
of
Montreal
in
the
amount
of
$500,000.
The
moneys
were
to
be
repaid
to
the
Bank
of
Montreal
by
August
1966.
The
plaintiff
and
MPP
incorporated
an
Ontario
company
named
Bloor-Tower
Developments
Limited
(hereinafter
to
be
referred
to
as
BTD)
to
hold
such
land
with
each
owning
50%of
the
issued
shares
thereof.
The
first
property
acquired
was
the
most
westerly
part
of
the
area
being
considered,
which
belonged
to
the
R
G
Dalton
Company
Limited,
and
had
a
frontage
of
114
feet.
It
was
purchased
on
April
23,
1964
at
a
price
of
$985,000.
Shortly
thereafter
it
was
learned
that
the
Rigby
property
had
been
sold
to
another
party.
Arrangements
were
immediately
made
to
purchase
the
Stark
property
lying
immediately
to
the
west
of
the
Rigby
property
to
prevent
the
purchaser
from
Rigby
extending
his
holdings
further
to
the
west.
Further
properties
making
up
the
plaintiff’s
acquisition
of
such
lands
were
secured
on
the
following
dates
and
at
the
following
prices,
namely:
(a)
The
Stark
property
at
110
Bloor
for
$150,000:
and
the
Swadron
property
at
114
Bloor
in
October
of
1964
for
the
sum
of
$120,000.
(b)
The
Christian
Science
Reading
Room
at
18-120
Bloor
on
October
26,
1964
for
$245,000.
(c)
The
Beauchamp
property
at
112
Bloor
in
January
1966
at
$155,000.
The
above
constituted
all
the
land
that
was
proposed
to
be
obtained
for
such
purposes
except
the
Marcus
property
at
116
Bloor
Street
West,
having
a
width
of
16
feet
which
was
about
the
centre
of
the
lands
already
acquired.
Morgan
obtained
an
option
to
purchase
this
property
on
August
9,
1966,
at
a
price
of
$250,000.
It
was
exercised
and
closed
on
May
31,
1967.
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.
As
a
result
thereof
arrangements
were
made
that
MPP
would
transfer
to
the
plaintiff
all
their
50%
portion
of
the
issued
shares
in
BTD
for
a
nominal
consideration
of
$100
and
would
be
released
from
its
obligation
to
provide
such
financing.
This
agreement
was
carried
out.
From
this
time
on,
it
is
apparent
the
plaintiff
did
not
use
any
further
moneys
of
its
own
or
that
of
the
parent
company
in
the
purchase
of
such
lands
except
such
as
was
borrowed
from
such
bank.
The
plaintiff
had
never
engaged
in
the
leasing,
financing
or
management
of
a
commercial
rented
building.
It
therefore
decided
that
it
would
require
an
associate
to
locate
a
prime
tenant,
provide
permanent
financing,
and
to
manage
the
project.
In
June
1967
the
plaintiff
sold
one-half
of
the
shares
which
it
held
in
BTD
for
the
sum
of
$75,000.
One-half
of
such
shares
were
sold
and
transferred
to
Bevanewil
Limited,
a
corporation
in
which
B
E
Wil-
loughby
was
a
majority
shareholder,
and
the
other
one-half
to
Charl-
mar
Properties
Limited,
a
corporation
of
which
J
C
Turner
was
the
principal
shareholder.
He
was
a
senior
officer
in
the
Willoughby
organization,
who
specialized
in
leasing.
In
the
spring
of
1968,
BTD
was
amalgamated
with
R
G
Dalton
Company
Limited
and
the
resulting
amalgamated
corporation
retained
the
name
“The
R
G
Dalton
Company
Limited’’
(hereinafter
referred
to
as
“Dalton’’).
Therefore,
after
April
1968,
all
of
the
land
from
110
to
128
Bloor
Street
West
was
owned
directly
by
the
amalgamated
corporation
(Dalton)
and
the
shares
in
that
company
were
owned
by
the
same
persons
and
in
the
same
proportion
as
the
shares
in
BTD
had
been
owned;
namely,
the
plaintiff
50%,
Bevanewil
25%;
Charlmar
Properties
Limited
25%.
By
agreement
of
February
12,
1970,
all
of
the
issued
shares
of
Dalton
were
optioned
to
the
Great
West
Saddlery
Limited
for
a
proposed
sale
price
of
$900,000.
The
optionee
made
an
initial
payment
of
$50,000
to
obtain
the
option,
and
an
additional
payment
of
$45,000
to
extend
the
option
to
September
30,
1970.
When
the
option
expired
on
October
1,
1970,
the
total
option
payments
of
$95,000
were
forfeited
to
the
shareholders
of
Dalton
in
proportion
to
their
holdings,
namely,
to
the
plaintiff
$47,500;
to
Bevanewil
Limited
$23,750;
and
to
Charlmar
Properties
Limited
$23,750.
On
November
6,
1970,
the
shareholders
of
Dalton
agreed
to
sell
all
of
the
issued
shares
in
that
company
to
Downtown
Brampton
Realties
Limited
for
a
price
of
$1,000,000.
When
that
sale
was
closed
in
February
of
1971,
the
plaintiff
sent
a
considerable
portion
thereof
to
the
United
Kingdom
so
that
the
plaintiff's
parent
company
could
pay
off
indebtedness
to
the
Bank
of
England.
By
Notice
of
Assessment
dated
January
25,
1972,
the
Minister
of
National
Revenue
added
to
the
reported
income
of
the
plaintiff
for
the
year
1967,
the
sum
of
$69,635
realized
on
the
sale
of
one-half
of
the
shares
of
BTD
to
the
two
corporations,
Bevanewil
Limited
and
Charlmar
Properties
Limited.
By
further
notice
dated
December
4,
1973,
the
Minister
of
National
Revenue
added
to
the
reported
income
of
the
plaintiff
for
its
1970
taxation
year
the
sum
of
$47,500
in
respect
of
the
forfeited
option
deposit.
The
Minister
further
added
to
the
reported
income
of
the
plaintiff
for
its
1971
taxation
year
the
sum
of
$490,597
in
respect
of
the
sale
of
one-half
of
the
shares
in
Dalton
to
Downtown
Brampton
Realties
Limited.
The
issues
between
the
parties
as
defined
in
the
pleadings
are
as
follows:
(a)
whether
a
gain
in
the
amount
of
$69,635
accruing
to
the
plaintiff
in
1967
on
the
sale
of
one-half
of
the
shares
in
BTD
was
on
Capital
account
or
on
revenue
account;
(b)
whether
a
gain
in
the
amount
of
$47,500
accruing
to
the
plaintiff
in
1970
when
option
payments
in
the
aggregate
amount
of
$95,000
were
forfeited
by
the
Great
West
Saddlery
Limited
was
on
capital
account
or
on
revenue
account;
(c)
whether
a
gain
in
the
amount
of
$490,597
accruing
to
the
plaintiff
in
1971
upon
the
sale
of
one-half
of
the
shares
in
Dalton
(following
the
1968
amalgamation
of
BIC
and
Dalton)
was
on
capital
account
or
on
revenue
account.
In
each
case,
the
Minister
claims
such
gains
by
the
plaintiff
were
on
revenue
account
and
Melcrete
claims
it
was
on
capital
account.
The
Minister
further
contends
that
all
such
acquisitions
were
made
by
the
plaintiff
in
the
course
of
its
business.
The
burden
of
proof
is
on
the
plaintiff
to
show
that
the
Minister
is
in
error
in
such
assessment
and
that
at
all
material
times
it
intended
to
construct
and
retain
a
building
on
such
Bloor
Street
property
for
the
purpose
of
deriving
a
rental
income
therefrom
and
that
when
it
acquired
such
land
it
had
no
intention
of
disposing
of
the
same
at
a
profit.
Johnston
v
MNR,
[1948]
CTC
195,
3
DTC
1182
at
201
[1183];
Willumsen
v
MNR,
[1967]
CTC
13,
67
DTC
5022
at
28
[5028];
Harmony
Investments
Limited
v
MNR,
[1965]
CTC
14,
65
DTC
5009
at
20
[5013].
I
have
no
difficulty
in
finding
that
the
plaintiff’s
business
was
that
of
a
construction
company.
Prior
to
1964,
it
had
been
confined
to
erecting
medium-sized
buildings.
Its
officers
were
anxious
to
obtain
the
reputation
of
a
company
competent
to
erect
large
commercial
buildings.
Morgan
stated
that
he
planned
to
purchase
the
Bloor
Street
property
so
that
the
officers
of
his
company
would
be
able
to
insure
that
construction
of
a
large,
commercial
building
thereon
would
be
in
their
own
hands.
I
am
of
opinion
that
the
primary
purpose
of
the
plaintiff
in
purchasing
such
Bloor
Street
property
was
that
it
might
erect
such
a
building
thereon,
and
thereby
become
known
as
a
contractor
fully
capable
of
fulfilling
such
a
contract.
However,
I
am
in
considerable
doubt
that,
at
the
time
it
acquired
such
land
or
any
part
thereof,
it
intended
to
retain
its
interest
in
such
building
as
an
investment
for
the
purpose
of
earning
rental
income
therefrom.
I
entertain
such
doubt
because
of
statements
made
in
writing
by
such
officials
during
the
period
of
acquisition
which
are
inconsistent
with
such
an
intention.
There
were
also
circumstances
existing
during
such
period
of
time
from
which
a
reasonable
inference
should
be
drawn
to
the
contrary.
I
shall
make
reference
to
those
statements
and
circumstances
which
in
my
mind
indicate
that
while
the
plaintiff
company
was
most
anxious
to
construct
the
building
on
such
property
it
was
apparent
to
it
there
were
many
obstacles
that
stood
in
the
way
of
it
being
able
to
complete
construction.
This
is
particularly
so
after
MPP
withdrew
from
the
project.
Even
if
it
were
successful
therein
there
was
always
the
greatest
problem
as
to
whether
it
could
raise
sufficient
moneys
to
pay
its
share
of
such
construction
and
retain
ownership
thereof
or
any
part
thereof.
Its
officials
and
advisers,
however,
did
recognize
at
all
material
times
that
such
land
was
in
such
an
area
that
its
value
would
greatly
increase
by
reason
of
the
current
construction
of
the
Bloor
Street
subway.
Willoughby’s
letter
of
November
8,
1963
(Exhibit
2)
refers
to
it
as
of
dynamic
potential
and
points
to
the
success
of
the
Colonnade
which
is
a
building
on
the
south
side
of
Bloor
Street
in
the
same
area
and
the
steady
development
of
that
part
of
the
City
of
Toronto
as
an
impetus
to
land
values.
It
followed
that
whether
the
building
was
erected
by
the
plaintiff
or
not
it
would
be
certain
of
an
extensive
profit
either
from
the
sale
of
the
land
as
it
was
or
with
a
building
thereon.
I
believe
the
proper
inference
to
be
drawn
from
all
the
circumstances
surrounding
the
plaintiff’s
acquisition
of
such
land
was
that
it
intended
to
dispose
of
such
property
either
as
it
stood
or
with
a
building
constructed
thereon
when
it
should
become
most
profitable
to
do
so.
In
adopting
this
course,
it
was
an
adventure
in
the
nature
of
trade
and
so
the
profits
therefrom
were
income.
In
coming
to
this
conclusion,
I
have
not
overlooked
the
evidence
of
Morgan
and
Morrell
to
the
effect
that
the
intention
was
that
the
plaintiff
would
hold
such
completed
building
as
an
investment
or
at
least
a
half-interest
therein
so
that
the
company
and
the
parent
company
might
benefit
from
the
rental
therefrom.
However,
I
feel
that
the
documentary
evidence
of
such
intention,
written
during
the
time
of
such
acquisition
should
be
given
more
weight,
even
though
it
is
in
conflict
with
the
oral
evidence
of
such
two
witnesses.
The
plaintiff
did
not
acquire
any
of
the
land
in
question
until
after
it
made
its
oral
partnership
agreement
with
MPP.
The
first
record
thereof
is
a
letter
from
Smith
of
MPP
dated
February
26,
1964
(Exhibit
15)
telling
of
the
arrangements
and
a
letter
dated
March
5,
1964
from
Morrell
to
Morgan
(Exhibits
12,
13
and
16).
The
first
property
purchased
was
the
Dalton
property
on
April
23,
1964.
While
this
correspondence
indicates
each
company
was
to
share
the
equity
on
a
50-50
basis,
the
word
equity
is
only
a
term
of
ownership
and
does
not
indicate
the
property
was
to
be
held
by
them
as
capital
investment.
If
that
were
the
intention
of
the
parties
at
such
time,
one
would
have
expected
to
find
it
clearly
set
out
in
such
letters
or
in
the
heads
of
agreement
between
the
parties
(Exhibit
16).
It
would
be
possible
for
the
plaintiff,
if
it
were
financially
able
to
do
so,
to
have
planned
to
keep
its
half
of
the
proposed
building
as
an
investment,
but
unless
its
partner
in
the
venture
had
the
same
intention,
problems
would
arise
in
regard
to
the
rights
of
each
half-owner.
In
such
circumstances,
one
would
expect
the
parties
to
perceive
such
problems
and
provide
for
them
in
such
arrangements.
By
letter
dated
March
18,
1964
(Exhibit
18)
from
Greenwood,
solicitor
for
the
plaintiff's
parent
company,
to
Fleming,
Smoke
and
Company,
the
plaintiff’s
solicitors
in
Toronto,
in
referring
to
purchase
of
the
Dalton
Company
shares,
stated:
We
wish
to
be
particularly
careful
to
avoid
any
risk
of
our
clients
(if
they
purchased
the
shares)
being
held
ultimately
liable
to
tax
on
the
profits
which
they
hope
will
arise
from
their
development
scheme.
Counsel
for
the
plaintiff
suggested
that
the
above
has
reference
to
tax
problems
of
the
Dalton
Company
which
might
be
carried
over
to
the
purchaser
of
the
Dalton
shares
rather
than
a
direct
purchase
of
the
property
itself.
It
is
my
opinion
that
this
reference
can
only
indicate
a
sale
because
of
the
use
of
the
word
“profit”.
Reference
to
“they”
can
only
mean
Willoughby’s
clients
who
are
the
plaintiff’s
parent
company
in
England.
The
word
“profit”
is
therein
definitely
associated
with
(their)
development
scheme.
I
can
only
interpret
such
words
as
indicating
that
the
plaintiffs
at
this
time
hoped
to
make
a
profit
from
the
sale
of
their
development
scheme
and
that
such
solicitor
was
seeking
to
avoid
taxation
thereof.
It
would
be
clear
that
tax
could
not
be
avoided
on
any
rental
income
therefrom.
In
a
letter
from
R
I
Horsell,
chief
financial
officer
of
the
plaintiff’s
parent
company,
to
Morgan
dated
July
21,
1964
(Exhibit
10)
Horsell
Stated:
Whilst
no
decision
has
been
made
as
to
whether
we
intend
to
retain
this
development
as
an
investment
or
to
dispose
of
it
in
one
shape
or
another,
we
must
contemplate
the
implications
of
either
possibility.
Later
on
in
such
letter,
he
raises
the
question
as
to
whether
Dalton
or
Bloor-Tower
should
hold
the
property
because
of
tax
implications.
In
a
further
letter
from
Horsell
to
Morgan,
dated
April
7,
1964
(Exhibit
20)
he
states:
The
matter
that
does
give
us
concern
is
the
one
I
briefly
touched
on
on
the
telephone
the
other
day.
This
is
the
question
of
tax
and
no
doubt
you
are
taking
all
the
steps
necessary
to
insure
that
we
are
not
involved
in
any
liability
in
respect
of
this
transaction,
nor
are
we
prejudicing
our
ultimate
ability
to
dispose
of
the
property
at
the
end
of
the
development
period.
In
a
further
letter
from
Horsell
to
Morgan,
dated
October
21,
1969
(Exhibit
104)
he
states:
The
major
part
of
our
argument
with
the
Bank
of
England
was
that
the
Bloor-Tower’s
development
scheme
was
undertaken
in
the
first
instance
in
conjunction
with
Fenston
and
Radziwill.
The
purpose
of
this
arrangement
was
that
we
would
provide
the
initial
capital
but
this
would
be
quickly
refinanced
permanently
by
Fenston
and
party
and
that
we
would
end
up
with
only
a
short-term
financing
commitment
but
take
a
proportion
of
the
development
profit
and
have
a
very
substantial
building
contract.
A
memo
from
Morgan
to
Morrell,
dated
October
31,
1966
(Exhibit
87)
states:
It
is
not
essential
that
we
retain
control
of
the
scheme
as
long
as
we
are
able
to
obtain
suitable
safeguards
with
regard
to
the
construction
contract
and
my
personal
responsibility
regarding
the
reading
room.
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.
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.
There
did
not
exist
an
exclusive
intention
on
the
part
of
the
officers
of
the
plaintiff
company
to
construct
and
operate
the
premises
as
an
investment
because
of
the
alternative
intentions
to
sell
under
circumstances
hereinbefore
related.
Willumsen
v
MNR
(supra);
Harmony
Investments
Limited
v
MNR
(supra);
Bay
ridge
Estates
Limited
v
MNR,
[1959]
CTC
158,
59
DTC
1098
at
164
[1101].
On
March
11,
1965
Bloor-Tower
made
a
proposal
to
the
Independent
Order
of
Foresters
(Exhibit
51)
that
it
would
rent
the
building
when
constructed
to
such
company
as
head
tenant.
Paragraph
8
thereof
would
have
given
such
tenant
a
right
of
first
refusal
if
the
property
were
to
be
sold
and
also
an
option
in
any
event
to
purchase
the
structure
at
the
tenth
year
after
completion.
While
this
proposal
was
never
accepted
by
the
Independent
Order
of
Foresters,
the
offer
of
such
an
option
is
inconsistent
with
an
intention
on
the
part
of
the
plaintiff
to
retain
such
property
as
a
capital
investment.
There
is
no
indication
in
the
evidence
that
the
plaintiff
or
any
of
its
related
subsidiaries
had
ever
adopted
the
practice
of
holding
real
estate
as
an
investment.
This,
of
course,
is
only
some
indication
of
what
their
general
practice
had
been
and
is
in
no
way
conclusive
in
making
the
decision
that
I
have
in
this
case.
For
these
reasons,
the
plaintiff’s
appeal
should
be
dismissed
with
costs.
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