Baramy Investments LTD v. Minister of National Revenue, [1977] CTC 2558, 77 DTC 400

The Assistant Chairman:—As in many other appeals, the issue in these appeals, which appeals are from an assessment for income tax for each of the 1972, 1973, 1974 and 1975 taxation years, is whether or not the income of the appellant company is from an active business. The appeals however are different from those other appeals heard by this Board and the few heard by the Federal Court of Canada in that the appellant does not contend that its income is from an active business within the meaning of section 125 of the Income Tax Act (after tax reform), rather it contends its income is not from an active business, while the Minister takes the position on this occasion that section 125 is applicable.

The only oral evidence tendered was given by Mr Ronald Lauber, a chartered accountant of Edmonton. Mr Lauber was the president of Rondlau Management and Services Limited (hereinafter referred to as “Rondlau”), a corporation whose business was providing management and consulting services to clients. Baramy Investments Ltd (hereinafter referred to as “Baramy”) was, for the years in question as well as from 1968 to date, a client of Rondlau. It was retained by Baramy to manage its investments and land holdings in Canada. The appellant at all relevant times had only two beneficial shareholders, Mr and Mrs Larry Superstein, both of whom were residents of the United States of America. Mr Superstein had a 75% interest in the appellant. Until a recent amendment to The Companies Act of Alberta, the two of them were the only directors. Baramy was incorporated in June 1954 and, about that time, commenced its activities which expanded with the passage of time. The Supersteins did come to Canada about once a year to see what was going on. They kept in touch with Lauber by phone. Rondlau had an office in Edmonton where Lauber worked. Rondlau had other clients for whom it provided similar services, one of whom was a corporation which was associated with the appellant, namely, Riviera Hotel Company Limited. In Rondlau’s office, besides Lauber, were two girls who were employees of Riviera Hotel Company Limited and who did work for Baramy.

In a very summary fashion, the money invested in the appellant by the Supersteins was used to buy real property which was leased to produce rents. Initially Baramy bought land on which buildings had been erected and it leased the property to various tenants. The buildings on the whole were industrial or commercial complexes. On one occasion the land purchased had a residence on it which it leased until the building was demolished and another structure erected.

As to the leased structures, a building would be erected and it would be rented out through agents. The agents would endeavour to get a lease proposal from a prospective tenant and Lauber would consider the lease. He wanted triple net leases where the tenant paid all costs and taxes and the landlord provided no services. Lauber would negotiate with the prospective tenant and, when negotiations were completed and if he were satisfied, he would have the solicitor for the appellant (who was not an employee of the appellant but a private practitioner) prepare a memorandum on the matter for the Supersteins. The Supersteins were not intimately involved with the lease, but they approved every lease before it was granted. After their approval, the solicitor would prepare the lease and it would be signed. Either Lauber or Rondlau would sign on behalf of the appellant, but they could only do so on the approval of the Supersteins.

As to land transactions of the appellant which resulted in revenue to the appellant, all land was purchased with the intent, at the time of purchase, to build a commercial or industrial complex for rent. At the time of purchase it could be that the intent was not to put the land to that use for several years hence. However, some land was sold which did produce a gain. Lauber stated that all the land sold was, with one exception, undeveloped land. With respect to sales, that operation was low-key; the company did no advertising and all sales came as a result of unsolicited offers. In general, an agent on behalf of the purchaser would submit an offer. If the offer was reasonable, Lauber would get in touch by phone with Superstein and a decision would be made as to the sale. The number of land sales by the appellant in the four years in question was estimated to be seven in number. The net total land sale gains in those four years, as represented by the appellant, were about $800,000. Lauber advised that the appellant had on hand about six parcels of raw land at the beginning of its 1972 year, it bought about seven parcels in the four years in question, and he stated at the closing of its 1975 year it had about three to four parcels on hand. All the profit from these land sales was reported and taxed as business income.

As to interest income, this arose basically from two sources: surplus cash was invested in bank certificates which paid interest to the appellant; and, usually the land the appellant sold was sold pursuant to an agreement for sale, which agreement provided that the balance due and unpaid would bear interest until paid. The appellant also indicated it had a source of revenue which it categorized as rental income-partnership. This was rental income from properties where its interest was that of a partner. In addition to those sources of income, it had management fee income which it offset against its expenses. These were the recovery of overhead expenses.

As to expenses, Baramy had to pay for the services rendered to it with respect to its real estate—be it rental, building, or purchase and sale—and it had solicitors, agents, etc acting for it who were paid appropriate fees for their services. With respect to the management fees received by Baramy, the debtor was the Supersteins or one of their companies. As to the rental of property, there were about 18 parcels owned in 1972, all except one of which produced revenue. The revenue totalled in excess of $650,000 and the total expenses, excluding depreciation, were about $437,000. The costs (all approximate) included leasing costs ($31,000), insurance ($7,000), mortgage interest ($283,000), taxes ($92,000), repair and maintenance ($4,000) and utilities ($7,300). While very few tenants were on a triple net lease in 1972, many were in 1975. Rental was received each month from each tenant and, in some buildings, the appellant had more than one tenant. As to the appellant’s income from interest, the evidence was that it was interest received from agreements for sale and interest earned on investment certificates. Specifically an asset was not shown as an investment certificate but, on the 1975, 1974 and 1973 bank statements, an asset of “term deposits” was stated. The amounts were $545,000, $288,000 and $140,000; none was shown for 1972. The marked change is noted as is the nomenclature.

While the detail could be greater, I believe the activities of the appellant have been reasonably set forth. It must be decided whether or not, in the years in question, the appellant was in business. If the answer is in the affirmative, then it must be decided whether or not the income was from an “active business’’ as, contrary to the approach in all of the reported cases, the appellant takes the position that its income is not from an active business. The Minister’s position however is that the income came from an active business.

To decide the issue one should be guided by the facts and the comments in the decided cases and, in this respect, I refer mainly to the cases of MRT Investments Ltd et al v The Queen, [1976] 1 FC 126; [1975] CTC 354; 75 DTC 5225 (Trial Division) and the same case on appeal [1976] CTC 294; 76 DTC 6158, as well as the appeal case of The Queen v Rockmore Investments Ltd, [1976] 2 FC 428; [1976] CTC 291; 76 DTC 6156. There is also the further case of The Queen v Cadboro Bay Holdings Ltd, [1977] CTC 186; 77 DTC 5115. I should mention that there are numerous objects set forth in the appellant’s memorandum of association, three of which read as follows:

3 (a) To promote, organize, manage or develop or to assist in the promotion, organization, management or development of any corporation, company, syndicate, firm, partnership, enterprise or undertaking, or to take over, manage and dispose of in any manner whatsoever any business or undertaking in which the Company may be interested or in the securities of which it may have invested its funds or with which it may have business relations.

(b) To purchase or otherwise acquire and hold or otherwise deal in real and personal property and rights and in particular lands, buildings, hereditaments, business or industrial concerns and undertakings, mortgages, charges, contracts, concessions, franchises, annuities, patents, licenses, securities, policies, book debts and any interest in real or personal property, any claims against such property or against any person or company and any privileges and choses in action of all kinds.

(e) To take part in the management, supervision or control of the business or operations of any company or undertaking having objects altogether or in part similar to those of the Company or in which the Company may be interested and for that purpose to appoint and remunerate any directors, accountants or other experts or agents to manage, operate and carry on as managers the property, franchises, undertakings and business of any corporation any of whose shares, bonds, debentures or other securities are held by the Company for such remuneration as may be deemed reasonable and proper.

What the appellant has done would appear to be within the ambit of those objects and, in this respect, one should recall the words of Duff, J in Anderson Logging Company v The King, [1925] SCR 45 at 56; [1917-27] CTC 198 at 207; 52 DTC 1209 at 1214, which were quoted by Walsh, J in the MRT Investments Ltd case at page 149 [370, 5235]:

The sole raison d’etre of a public company is to have a business and to carry it on. If the transaction in question belongs to a class of profitmaking operations contemplated by the memorandum of association, prima facie, at all events, the profit derived from it is a profit derived from the business of the company.

While the appellant’s counsel contended that the income of the appellant was not from an active business, the suggestion was made that, if I were disposed to so consider its income in total, I should then, because of paragraph 129(4)(a), look at each source of its income to determine whether or not each source of its income was from an active business. Were I to hold that one or more of the sources were not from an active business, I should remit the matter to the Minister for reassessment accordingly.

In considering the matter I do believe I should look, as suggested by Walsh, J in the MRT Investments Ltd case, at the course of conduct of the appellant over an extended period of time that would encompass at least twenty years (the appellant was incorporated in 1954). As I view the activities of the appellant, its prime or main purpose was to acquire land and buildings or land alone and erect buildings to rent. It appears from its activities that it always had at least a secondary intent of turning that land to account when the erection of a building for rent was not feasible, so that the land was at all times bought for resale if the first plan could not be carried to fruition. To me they (sale and rental of land) are the two main sources of income to the appellant, the interest received on agreements for sale automatically followed when land was sold over an extended period. The character or source was still related to the sale of land. The interest arising on the “term deposits’’ would appear to be interest on money put in those deposits or certificates for a short term while that money could not be used with respect to the acquisition of other land and buildings. It is assumed on the sale of land and buildings or land alone, while some of the selling price was to be received over an extended period in the future, some was payable in cash.

The appellant’s counsel made reference to the decision in ACR Corporate Services Ltd v MNR, [1976] CTC 2432; 76 DTC 1322, as a basis, pursuant to paragraph 129(4)(a), for separating the source of income. I believe that case is distinguishable from the present appeals in that the appellant’s business in that case was that of a corporate secretary. It sold shares and realized a capital gain and it was the amount realized from the sale of shares which was invested in credit union certificates and which produced the interest income. The appellant there contended that all its income was from an active business; the Minister contended that this interest was not from an active business. The decision confirmed the Minister’s position. As I viewed the matter, there was no association or relationship between the corporate secretary business income of the appellant and the funds used to purchase the certificates. In addition, there was only the one purchase of the certificates and the one receipt therefrom of interest. I do believe the cases are readily distinguishable.

As a result, in light of the facts of these cases, I am of the view that the assessments have been properly made and the appeal for each year is dismissed.

Appeal dismissed.