Ace Holdings Limited v. Minister of National Revenue, [1976] CTC 2281, 76 DTC 1219

Roland St-Onge:—This appeal is from reassessments bearing date July 28, 1973, wherein taxes in the sum of $244,706.88, $166,909.58, $85,180.97 and $28,453.75 were levied in respect of income for the taxation years 1967, 1968, 1969 and 1970 respectively.

The reassessments in question seek to tax the appellant company on certain expropriations which were effected on certain parcels of land which had been held for periods of 11 to 16 years prior to their disposal.

In the first five paragraphs of its Notice of Appeal, the appellant alleges:

1) THAT Appellant is a company with substantial holdings of property from which it derives substantial income, at the present time holding property constructed at a cost in excess of $3,500,000 and deriving gross rentals therefrom in an amount in excess of $470,000 per annum;

2) THAT, indeed, this Board has, at an earlier time, concluded that Appellant has a dual character in that it has on occasion dealt with lands and paid income tax thereon, whereas in other instances its lands and developed property were held on investment account (Ace Holdings Ltd (No 1) v MNR, [37 Tax ABC 320] 65 DTC 114 and Ace Holdings Ltd (No 3) v MNR, [37 Tax ABC 419] 65 DTC 192).

3) THAT indeed, representatives of Appellant and the Minister of Revenue held meetings in the past and said dual character has been adopted by Appellant and approved by the Minister in that certain properties of Appellant have been characterized as speculative land, the carrying charges of which Appellant has expensed, and other lands have been held on investment account and the carrying charges in relationship thereof have been capitalized;

4) THAT this understanding has on many occasions been ratified and confirmed by representatives of the Minister of Revenue;

5) THAT indeed, pursuant to this arrangement, Appellant capitalized carrying charges during the period 1963 to 1969 in amounts in excess of $550,000 and Appellant refrained from expensing these amounts in virtue of the understanding as aforesaid;

The respondent admits the above paragraph 2 but denies the others and alleges in his Reply to the said Notice of Appeal:

6(a) Since its incorporation in 1952, the Appellant has carried on and is still carrying on an extensive business of buying and selling real estate.

(b) All the circumstances indicate that the dispositions referred to in the assessments under appeal were dispositions made in the ordinary course of the Appellant’s business of buying and selling real estate.

Following reassessments by which the appellant company was disallowed carrying charges on land which had been considered by the Minister as being held as investment, the appellant agreed voluntarily to capitalize the said carrying charges, with the result that in 1965, 1970 and 1974 the appellant had actually capitalized the following amounts:

The appellant’s first witness was the respondent’s auditor, Mr Jacques Trudel, who testified that the appellant was reassessed on the proceeds of the expropriation because all its shareholders were considered traders and also because the great majority of the appellant’s income (90%) came out of capital gain.

Counsel for the appellant argued that, in 1965, the Minister and the appellant company entered into a deal in respect of which the lands under appeal were placed into an investment portfolio for which the carrying charges were capitalized. According to him, the respondent, because of this deal, is estopped from reassessing the appellant company for the years under appeal. The appellant never changed its course of conduct with respect to these lands and, even if its shareholders were traders and the appellant received over $1,000,000 for the expropriation of these lands, it does not change the status quo.

Then he referred to a definition of “estoppel in pais” in the case of Kozak v Misiura, [1928] 1 WWR 1; [1928] 1 DLR 591, in the Saskatchewan Court of Appeal where Turgeon, JA says (at page 597 of the latter report) that

The principle of an estoppel in pais is that: a person who has acted in a particular way is precluded from afterwards assuming a position inconsistent with such act to the prejudice of another; 21 Corp Jur p 1202. It is essential to the application of such principle that the party who seeks to avail himself of it should show that, owing to the act complained of, he was led to do something which he would not otherwise have done.

Counsel for the appellant contended that the appellant falls squarely within that definition. The deal entered into between the parties was with respect to the same lands and the appellant has capitalized all the carrying charges to its disadvantage. He further argued that, if the Minister were allowed to change his position, the appellant would suffer a great prejudice because of a capitalization of over $1,000,000.

He also argued that the doctrine of estoppel is applicable even against the Crown, and commented on the following cases: (1) British and American Motors Toronto Ltd v MNR, 5 Tax ABC 411; 53 DTC 1113; (2) Admiral Investments Ltd v MNR, [1967] CTC 165; 67 DTC 5114; (8) Woon v MNR, [1950] CTC 263; 50 DTC 871; (4) Mark G Smerchanski v MNR, [1974] CTC 241; 74 DTC 6197.

Appellant’s counsel stated that all those cases are distinguishable from the appellant’s appeal because, in the case at bar, the Minister, prior to the deal, was aware of all the facts and knew that some of the appellant’s shareholders were active in real estate business. There was also the further question of the Minister not being estopped because he had to comply with a statutory requirement. To this, counsel for the appellant argued that the question of deciding whether land is bought for investment or income is a question of fact, not law.

Counsel for the Minister argued, inter alia, that the doctrine of estoppel is not applicable in the present appeal because an assessment is always made for one particular year and the Minister is never bound for future years; that, if there was a deal, this deal was illegal; that the Minister can change his mind even if he has made an erroneous decision in preceding years; and that, according to the decision in MNR v Inland Industries Limited, [1972] CTC 27; 72 DTC 6013, it is illegal for the Minister to contract with respect to taxation if it is not done according to the Income Tax Act as the Minister’s decision cannot overrule the law of the land.

In. income tax cases, the doctrine of estoppel cannot be applied when a court has to deal with a taxation year which is beyond the actual years of the agreement. Furthermore, even if the Minister made an error in the manner in which he proceeded, the Crown is not bound by the laches of its servants (William B Salter v MNR, 6 Tax ABC 193; 52 DTC 148).

Consequently, in the case at bar, the Board cannot allow the appeal by applying the doctrine of estoppel.

The second point of this appeal is whether the land was acquired for investment purposes or as stock-in-trade. Five witnesses testified in this regard: Mr Harold Margolese, a chartered accountant; Mr Irving Ludmer, a real estate developer; Mr Leo Goldfarb, vice-president of Trizec Corporation Ltd and president of Place Bonaventure; Mr Elie Solomon, chartered accountant; and Mr Louis Dubrovsky, executive developer and president of the appellant company.

They all corroborated the fact that the appellant company’s intention, at the time of the acquisition of the land expropriated, was to acquire it for investment purposes. It is already in evidence that the appellant company had tremendous holdings earning substantial rental income. Messrs Dubrovsky and Goldfarb and Mr Milton Eliasoph, an architect, all testified that the land was acquired to erect thereon a shopping centre and that a survey was prepared to that effect. Also, numerous plans (Exhibits A-16, A-17 and A-18) were prepared and soil tests executed valued at some $52,000 to $60,000. Mr Eliasoph stated that in 1957 some serious objections were raised by the Merchants’ Association for the St Hubert Street area, and a delegation was sent to City Hall to oppose the erection of the proposed shopping centre on the site of the Hughes Farm. Mr Goldfarb also testified to the same effect, and I cite from page 66 of volume 2 of the transcript:

. + SO, our major opposition to developing the shopping centre really came from the St Hubert Street Merchants’ Association. As a matter of fact, if I may say so, the gentleman who was a very powerful man at that time, Mr Saulnier, he himself had a store very close by, and without his approval in the zoning, forget it.

Following this opposition, a decision was taken to erect a smaller shopping centre. According to Exhibits A-27 and A-28 a permit was issued but later revoked (March 18, 1960) and, on June 16, 1960, an order was sent by the City which reads in part as follows: . You are required to stop all work without delay.” The appellant took legal action against the City and the homologation of the zoning which the City had used to revoke the permit was declared invalid. During the proceedings, the City changed the zoning from commercial to 5-storey residential. The appellant applied for a new permit and, upon refusal by the City, new litigation was commenced.

Beside this frustration, an existing road had been changed three times during the period in which the appellant was trying to erect the shopping centre.

During the evidence, two other points were brought out to prove that the land in question could not have been held for the purpose of erecting a shopping centre. First, the area was not zoned for a shopping centre, and secondly, the land had been bought too far in advance. Messrs Ludmer, Goldfarb and Solomon testified that, at the time of their attempt to build a shopping centre, there was no such thing as a “shopping centre” zoning. Mr Goldfarb testified as follows (see page 71, vol 2, of the transcript):

. . . Q. Mr Goldfarb, have you as a a developer working for Trizec and previous to that with Steinberg, do you acquire frequently lands that are not ideally zoned for shopping centre Purposes, even in recent times and with the knowledge that you have got some problems to overcome? A. Well, we always have and still are, and I believe we always. will acquire land which is not ideally zoned, where you can go out to get a Permit to build a shopping centre because even to this day the subdivisions are not clearly Stated, where this block of land is specifically put aside for a shopping centre. More and more the cities are now making master plans, which is a new area, which shows a specific piece of land designated as a shopping centre, but even today I can give you two (2) examples, very quickly, where we bought two (2) pieces of land, one (1) in Winnipeg and the other one (1) in North Toronto, in one case it has been for ten (10) years in association with Eaton’s that we have been trying to get the land zoned and terms given and proper roadways attached to the centres before the thing could be started. We feel it will still take two (2) years but we know we are going to get, it is only a matter of time because we are working with tne municipality.

All the evidence adduced henceforth dealt with the Hughes Farm but there were also three other transactions, known as Cote St-Luc, Cote Ste-Rose and the Clement Farm. The Côte St-Luc transaction occurred in 1969 and realized a gain of $3,749.87. According to Exhibit A-2, that land was deemed to be for investment purposes. Mr Dubrovsky testified (see page 141, vol 2 of the transcript) that this land was held for 21 years, had no services at the time of the hearing, that there were offers to buy received but not accepted, and that the gain mentioned above was earned following an expropriation.

Also, according to Exhibit A-2, the Clement Farm property was deemed to have been acquired for investment in 1942, which means it was held for 14 years before the expropriation. The Côte St-Luc property was bought in 1955-1958, with one Mr Peppermint, for a possible development. Years later, the appellant company acquired Mr Peppermint’s shares. The appellant sold a tract of land in order to open a street for a school. A local residential developer was interested in buying part of it for a highrise building. The piece of land sold was insignificant in comparison to the total holding of land, and the appellant company still owns the balance of the property.

Another piece of property, known as Persillier L’Acadie, was acquired in 1953 in association with Messrs Rojac & Segals with a clause that no one would sell for a period of three years (Exhibit A-45) without offering the others first refusal. The appellant and Roiac attempted to develop the said land, and many meetings were held with the City in order to erect a shopping centre.

The final result was that the City wanted to retain a tract of that land for a park and the appellant presently is still trying to erect a shopping centre thereon.

Counsel for the appellant argued that, although the appellant’s shareholders could have been regarded as active traders, the company should be judged by what it in fact does, and not by what its shareholders do. In other words, we must look at the taxpayer to measure what its intention was.

The appellant company was active for 25 years, and the land in question was acquired in 1953, 1954 and 1955. In 1956 the Minister, when reassessing the appellant, deemed some vacant lots to have been acquired for investment purposes, and all the carrying charges thereon, as previously mentioned, were capitalized. Had the appellant been allowed to deduct the said charges, it would have reported losses in all those years.

Appellant’s counsel also stated that the reasons given by Mr Trudel were not valid in fact and in law because the Minister had already considered the land as investment, the vast majority of which was expropriated.

He also argued that the Minister should not have taxed the appellant on the said expropriated land because a deal had been made, which the Minister had respected up to 1965, and the appellant had capitalized all the relevant expenses and had never changed its course of conduct with respect to these lands.

He also stated that there was sufficient evidence to convince the Board that the appellant’s intention, with respect to the expropriated land, was to build a shopping centre thereon, and that substantial and sincere efforts were made in that regard; and there is ample evidence to show that the appellant was frustrated in its intention: and that both the appellant and the Minister had considered the land in question as being held for investment purposes.

Counsel for the respondent agreed that it is possible for the best “wheeler-dealer” to make a capital gain, but argued that the case at bar is unique because the appellant company’s shareholders are developers and possess all kinds of interest in real estate holdings worth millions of dollars. In fact, their holdings are so substantial that one should look at this industry of developing land as a whole, and, as developers, they are exposed to expropriation, which is part of the risk of being in this business.

He went so far as to say that, because 90% of its earnings came from capital gain, the appellant company was “in the business of making capital gains”.

He also argued that a silent partner is bound by the intention of an active partner, that the appellant company was a fictitious division, and that all the people involved in the present appeal were all of the same organization.

According to him a shopping centre could have been built on the land in some shape or form even if it was not the ideal shopping centre, but the kind of frustration the officers of the company encountered served their purpose well, since the shareholders were able to realize a substantial gain and since the buying of such substantial parcels of land exposes a buyer to expropriation.

He referred the Board, among other cases, to Rosslyn Estates Limited v MNR, [1972] CTC 65; 72 DTC 6051, to say that the appellant company purchased its lands as stock-in-trade and that, consequently, the expropriation of those lands renders the gain taxable; and also to Rothenberg v MNR, [1965] 1 Ex CR 849; [1965] CTC 1; 65 DTC 5001, to show that, as in the case of Ace Holdings Limited (the appellant company), the land was not acquired only for the ideal purpose of building a shopping centre.

In reply, counsel for the appellant stated that the Minister is not an expert in land developing or in erecting shopping centres, and therefore he should not tell a taxpayer how to manage his holdings; that what was good in 1950 was not necessarily so 15 years later when a central mall was more popular.

The thrust of the plans in 1962 shows the intention of erecting a central mall and, later, some other plans show that the appellant was ready to accept half a loaf, but the City ordered it to stop all projects. The appellant fought and won the case. The City then changed the zoning and the appellant had to fight again. Counsel for the appellant stated: “That /s frustration,” and asked: “How long must a taxpayer wait and hold property? Is 17 years of frustration not enough when a Catholic School Commission expropriates a substantial portion of the land?” A portion was sold only when it became obvious that a shopping centre could not be built.

As may be seen, it is already in evidence that the appellant had a dual character in that it had on occasion dealt with lands as stock-in- trade and paid income tax thereon, whereas, in other instances, its lands and developed property were held on investment account. The only question remaining for the Board to decide is whether the lands expropriated were being held by the appellant company on investment account or as stock-in-trade.

All the land in question was, at one time or other, considered a prime prospect for a shopping centre. Apparently the respondent does not believe that this was the appellant’s real purpose for acquiring the said land because all the appellant’s shareholders were dealers in real estate.

The Board, however, does not believe that this case can be decided on this element alone. It has to discover whether the appellant was serious in its shopping centre project.

All the appellant’s witnesses in turn were able to convince the Board that the appellant’s shopping centre project was serious and that the land was actually held as an investment.

It is in evidence that the appellant undertook many steps and incurred considerable expense to realize its project, but unfortunately the appellant was frustrated on many occasions, and finally the land in question was expropriated. As may be seen, the appellant never made a move to sell it but, on the contrary, directed all its efforts to building a shopping centre.

The Board is convinced that this land was held as an investment, because the appellant company already had an investment portfolio; it was deprived of the said land by expropriation; it never tried to sell the land and even refused offers to sell; it undertook all the necessary steps to achieve its purpose and incurred substantial expense in trying to build a shopping centre; and, finally, the appellant company capitalized all the carrying charges in respect to the land in question.

All these factors are more than sufficient to convince the Board that this land was held more as an investment than as stock-in-trade.

Furthermore, for ten years the Minister has considered that this land was being held as investment and has demanded that the appellant capitalize the carrying charges. Although the Minister is not estopped from reassessing in other years, this does not mean that, because the appellant’s shareholders are active in trading and the appellant company has realized a substantial capital gain, those gains therefore become taxable, especially when the taxpayer has been deprived of the land through expropriation.

According to the evidence adduced, the appellant, with respect to the expropriated land, did not have the badges of trade and acted more as an owner than as a trader.

For the above reasons, the appeal is allowed.

Appeal allowed.