Norton Investments LTD v. Her Majesty the Queen, [1976] CTC 451, 76 DTC 6267

Collier, J:—The plaintiff sold, in 1970, two pieces of property, described at trial as Melville 2 and Melville 3, for $257,000. Melville 2 had been purchased by it in 1964 for $38,000; Melville 3 in 1967, for $100,000. The Minister of National Revenue added into taxable income the net gain ($125,491) on the 1970 sale as “. . . a profit from a business or . . . from an adventure in the nature of trade . . .”. The plaintiff disagreed, contending the gain was on the capital side, and not therefore taxable. This appeal followed.

As always in cases of this type, the facts are paramount: The issue between the parties is essentially one of fact.* [1]

The plaintiff was incorporated in British Columbia in 1935. It is owned or controlled by the Norton family in England. The Norton interests in British Columbia were started around 1890 by George P Norton Sr. Over the years, usually through corporations, the Norton family alone or with others, have “invested” in British Columbia. The family interests have been largely in real estate and, I gather, at times in Canadian securities. The plaintiff company was formed, for practical purposes, to buy and manage what used to be known as the Lyric Theatre property on Granville Street in Vancouver. That property was bought in 1935 for approximately $205,000. The principal tenant for many years was Famous Players Theatres Ltd. It operated a movie house. Around 1957 that tenant declined to renew its lease. The plaintiff then sold the building for $750,000.

Some of the moneys realized were used to buy, in the same year, property known as Melville 1. It adjoined Melville 2 and Melville 3 (earlier referred to and subsequently purchased). Melville 1, consisting of two lots, was the largest of the three purchases. The evidence is unclear as to what Melville 1 was used for at the time of its acquisition. Subsequently, and at least from 1964, it was leased to a tenant who carried on a surface parking lot operation. Melville 1, in 1961, was transferred by the plaintiff to another of the Norton companies.

Melville 2 was purchased, as earlier recounted, around 1964. t and Melville 1 were rented to the tenant referred to above, Imperial Parking Ltd (Imperial). At that time, and in the general area of these properties, it was evident that office tower developments were being constructed or planned west of Burrard Street on Georgia, and in the area north of Georgia. Bentall One, for example, was completed by Dominion Construction Co Ltd in 1967. The project had begun, of course, some time before. Mr Kaye, a director of the plaintiff company and a businessman, has lived in British Columbia since 1934, a great deal of the time in Vancouver. He candidly admitted he was aware of these developments; he also was aware of the commercial growth in the business area of the West End: demolition of old houses, use for surface parking, and then development as office or other buildings.

I note here, although I am speculating somewhat as to any connection, that from 1963 to 1965 there appeared to have been some kind of reorganization or restructure of the Norton corporate holdings in England, including windings-up and liquidations.* [2]

In 1967 there were negotiations between Imperial and those representing the plaintiff. Imperial had, in 1964, purchased Melville 3. its hope was to construct eventually, on the three properties, a parking garage. For various reasons, including difficulty in financing, that could not be done. Imperial endeavoured, as well, to negotiate with the plaintiff a long-term lease of 75 years. It was unsuccessful.

The plaintiff then offered to purchase Melville 3 from Imperial. An agreement was reached. The price paid was $100,000. Five-year leases of the three properties were next given to Imperial. The leases had “sale and development” clauses. The lease could be terminated by the plaintiff on 90 days’ notice, but Imperial was given first right of refusal or acceptance on a proposed sale. The properties were again operated by Imperial as surface parking lots.

The rate of return to the plaintiff was between 2% and 3%. On behalf of the plaintiff it was said the Norton interests were satisfied with this low return, because of United Kingdom tax and investment capital considerations. The following extract from certain correspondence was, by agreement, read into evidence:

The same considerations apply with the new money, namely that we want to invest it in funds where it can be kept indefinitely and will increase in capital value; income being of minor importance.

On the other hand, the following assessment, by a realty company to the plaintiff, at the time of the purchase of Melville 3 (again read into evidence by agreement) was as follows:

By such acquisition and the creation of an area of 30,492 sq. ft., situated in this strategic growing office building area, you would control one of the last major site areas in the rapidly developing area bounded by Granville to Burrard, Georgia and Pender.

In 1970 the City of Vancouver indicated it was considering expropriation of a portion of Melville Street. The area included the plaintiff's three properties. Dominion Construction Co Ltd had a key interest in that particular area. They were planning or had started construction of Bentall Three. Dominion made an unsolicited offer to purchase Melville 1, 2 and 3. The plaintiff, rather than be subjected to expropriation, decided to sell. A price of $600,000 for the total area was agreed upon. The portion owned by the plaintiff (2 and 3) sold for $257,000.

On behalf of the plaintiff it is contended the purchase of the three Melville Street properties, and particularly 2 and 3, was part of Its traditional policy in respect of its interests in British Columbia: to invest on a long-term basis, accept (for United Kingdom tax reasons) a low return, and hope for accretion in capital value. The premature disposal of the two properties in question, it is asserted, was brought about by the real threat of expropriation, and the fortuitous unsolicited offer of purchase by the developer, Dominion. All this, it is urged, puts the gain into the capital side of the tax ledger.

I am, on the facts here, unable to accede to the plaintiff’s position. Mr Kaye, in cross-examination, gave, to my mind, a frank answer as to the intentions and purposes of those who controlled the destinies and affairs of the plaintiff company. He said the properties were acquired for investment purposes. He described that in this way: The plaintiff was not in the business of developing sites such as these (essentially vacant city lots) on its own; its business or plan was to hold them and either lease to local developers on a long-term basis, or sell them* [3] to would-be developers, or others.

There was not here, as I see it, in respect of these properties, a so-called “secondary intention”. There was, at the outset, an alternative, equally dominant intention or plan: to turn properties to account by sale, if a satisfactory opportunity arose. In this case the plaintiff was unable to find a satisfactory local developer to whom it was willing to lease. It was not, on the evidence, prepared to give a 75-year lease to one potential developer, Imperial. Instead, it bought Imperial’s adjoining property, gave a short-term lease with a sale and development clause, then sold to another developer, Dominion. In respect of its handling of the Melville Street acquisitions, the plaintiff’s gain was, on my view of the facts, a profit from a “business” as set out in the “old” Income Tax Act. The two properties were, in the plaintiff’s assets, either inventory or the commodity for adventures in the nature of trade. It matters little, to my mind, which characterization is adopted. The result is taxability in Canada as income.

The action is dismissed. The defendant is entitled to costs.