Her Majesty the Queen v. Metropolitan Properties Limited as Successor to Metropolitan Construction LTD, [1974] CTC 527, 74 DTC 6434

Bastin, DJ:—This action is an appeal from a decision of the Tax Appeal Board dated September 13, 1973 whereby an appeal by the defendant against a reassessment of the Minister of National Revenue for the 1969 taxation year in which the Minister had added to income an amount of $539,000, claimed by the defendant to have been a capital gain, was allowed.

The relevant facts are that in 1954 Myles S Robinson incorporated a company called Metropolitan Construction Ltd to construct houses. In that year he built 30 houses, in 1955 he built 100 houses and in 1956 he built 100 houses including 12 in Transcona. In 1957 the company made a successful tender to build 430 homes to rent to service personnel adjacent to the RCAF base in St James. The terms were that the Department of National Defence would supply the land and mortgage money at 4% to the builder, to be repaid over a period of 40 years and during this period the builder would maintain the houses and collect the rent. The houses were to be built within two years. This deadline could not be met by conventional construction methods so Robinson devised a plan to prefabricate wall sections, roof sections, plumbing and cabinets and assemble them on the site. This method saved a great deal of time and allowed the employment of many unskilled and semi-skilled workmen in place of skilled and highly paid tradesmen. The Department rented him nearby land for his prefabrication plant and the municipality permitted the operation of this plant for this project only, contrary to the zoning regulations. Robinson completed the 430 houses within two years and continued to use this prefabrication method of construction in his extensive building operations until about 1966 when he found that it was difficult to sell uniform stereotyped houses.

Following the success of the Department of National Defence project Robinson had very successful building operations in different parts of Winnipeg. He incorporated numerous companies to carry on his operations, some to isolate the risk of a particular venture from his other assets, and others to serve a particular purpose, such as a company to supply second mortgage money, another to rent heavy equipment to his building companies and a real estate company to sell his houses. As- Metropolitan Construction Ltd held 450 houses in St James on which it was collecting rents and had acquired other assets, he made this an investment company and incorporated Metropolitan Homes Limited to carry on the building operations. In 1956 he incorporated International Development Corporation Limited to acquire undeveloped land, service it with sewer, water and roads, and turn it over to one of his construction companies for house building.

As soon as the Department of National Defence project was finished the municipal authorities became insistent that he close his plant in St James. Robinson began a search for an alternative site which required a railway siding and access to a main road. He found such a place on Pembina Highway opposite the Southwood golf course in the Municipality of Fort Garry, but after buying it he was unable to induce the municipality to change the zoning to permit its use for his purpose. Finally he learned of a site in Transcona through one of his salesmen. A company called Light Aggregate had occupied buildings on 7 acres but had become bankrupt. It also owned a quarter section of land some distance away from which it had obtained clay for its manufacturing purposes. Part of this farm land was used as the city garbage dump. The liquidator had only these two assets to dispose of and had been trying to find a buyer for them for some time. It is understandable that the plant would be difficult to sell due to the fact that employees for light industry would have to be induced to come from Winnipeg, and Winnipeg would be the natural market. But it is significant that the liquidator was unable to sell the parcel of farm land either for farming or for some other purpose. This tends to support Robinson’s evidence that in 1959 this property was virtually valueless. The liquidator offered the two parcels of land and buildings and equipment in one deal, placing a value of $1,000 on the farm land described as Parcel A, a value of $2,000 on the land on which the plant stood described as Parcel B, and $47,000 for the buildings and equipment.

Robinson testified that the only reason he bought the plant in Transcona was that he had to move from St James. He had no intention of buying Parcel A which was of no use to him for any purpose but he took it along with Parcel B because he had no option. I accept his testimony that he would not have bought Parcel A at any price. Following the purchase of Parcels A and B nothing was done with Parcel A until the spring of 1974. It was entered in the books of the company as an asset valued at $1,000 and it has appeared in this way on the balance sheet for each year until 1969.

As stated by Chief Justice Jackett of the Federal Court of Appeal, who was then President of the Exchequer Court, in Warnford Court (Canada) Limited v MNR, [1964] Ex CR 944; [1964] CTC 175; 64 DTC 5103, for the purpose of determining whether a transaction is a transaction in the course of business or is an adventure in the nature of trade, the time at which the intention of the purchase is material is at the time of acquisition. The onus rests on the defendant to prove that when it offered to buy Parcels A and B on January 16, 1959, Parcel A was not acquired as a revenue asset, that is, as inventory or as an adventure in the nature of trade. If the evidence supports this finding, the land in question will be deemed to be a capital asset even though it was not used in any way. The onus on a house builder to prove that any land it purchased was not inventory is a heavy one, but if the evidence of Robinson is believed that onus has been discharged. ! consider that he was a truthful witness and that his testimony is consistent with the probabilities in the existing circumstances, particularly the condition of Transcona at the date Parcel A was acquired.

Transcona came into existence over 60 years ago as the railway yards and repair shops of the Canadian National Railway. Most homes were built to accommodate railway employees, most of whom had modest incomes. Many houses did not have sewer and water, and even today a proportion are without these amenities. In 1959 most houses were old and unattractive by present day standards. The insurance companies which then supplied the money to build new homes under the Central Mortgage and Housing Act would not loan in Transcona. There were a few gravel roads but most were mud and the municipality presented a drab and unattractive appearance. There was then no apparent reason to expect that Transcona would not remain indefinitely a stagnant community of poor houses, unpaved streets and backward municipal services.

It seems improbable that anyone could have foreseen the extraordinary developments which changed this condition. I believe Robinson’s testimony that he did not do so. The factor which changed the building practices in greater Winnipeg and transformed Transcona was the creation in 1960 of the Metropolitan Corporation of Greater Winnipeg which included all the suburban municipalities around Winnipeg, in which extensive house building had been carried on in a haphazard and uneconomic manner, producing what has been described as urban sprawl. The corporation was given the power not only to prohibit this haphazard development which it promptly exercised but also to finance the building of access roads and drainage. It may be significant that Transcona was not put under the control of the Corporation although East Kildonan which is adjacent to it was made part of Greater Winnipeg and came under this planning control. The effect of this was to create a tremendous demand for building lots where these were available and they were available in Transcona. It is true that even in the 1950’s some people who were faced with the shortage and high cost of building lots in Winnipeg were prepared to tolerate the unattractive features of Transcona and build there, but this was a minor factor. Even the great demand for building lots caused by the freezing of unplanned development by the Metropolitan Corporation of Greater Winnipeg might not have affected Transcona to the extent to which it did but for the circumstance that Robinson had been forced to locate his plant in Transcona and on that account had acquired the option on 320 building lots which in 1954 Transcona had given to one Popeil and which Popeil had been unable to exercise. Robinson proceeded to build houses on these lots, and this led to extensive building in Transcona and ultimately to the creation by one of Robinson’s companies of a modern, attractive housing development called Kensington Square. In the result, Transcona has become an attractive residential community for persons working in Winnipeg. Parcel A which in 1959 was waste land, useless except as a garbage dump and remote from the residential area of Transcona, has become a potential building site.

The foundation of the plaintiff’s case is that all this was foreseeable, if not in 1959 then shortly afterwards, so that even if the fortuitous acquisition of Parcel A in 1959 did not give this land the character of inventory or of an adventure in the nature of trade most of the increase in value has occurred after Robinson realized its potential value. Hindsight tends to give the impression that the ultimate result was inevitable, ignoring all the chances which had to turn out favourably for the result to occur.

Assuming as I do that the chance acquisition of Parcel A by the defendant was the acquisition of a capital asset, it then became nothing more than an entry of $1,000 in the balance sheet of the company. It is unrealistic to believe that a businessman involved with the innumerable problems of a risky and complicated business would have time to concern himself with this insignificant item until circumstances forced it on his attention. It was. acquired as a capital asset and remained so until it was transferred from Metropolitan Construction Ltd to International Development Corporation Limited in November 1969 to develop as a housing development by building roads and installing sewer and water to be available for house building by one of Robinson’s building companies.

In the agreement between the two companies the consideration for Parcel A was fixed on the recommendation of professional appraisers at $540,000 with $50,000 cash and a mortgage for the balance and for Parcel B at $110,000. The agreement contained the following clause:

(f) It is understood and agreed and it is hereby stated that in the event that the value of said Parcel A being purchased hereunder is appraised by the Department of National Revenue, Canada, pursuant to the provisions of The Income Tax Act, RSC 1952, Cap 148, and Amendments thereto, at a valuation or valuations different from an amount hereinbefore set forth, or the terms of this transaction are assessed on a basis other than as herein set out, the Parties hereto shall be at liberty:

(i) to accept the valuation of the said Department of National Revenue as the consideration between the Parties hereto, or the terms as asserted, and the price or terms (as the case may be), accordingly shall be adjusted between them and any deficiencies resulting thereby shall forthwith be paid by the PURCHASER to the VENDOR, or, alternatively, any excess resulting thereby shall forthwith be refunded by the VENDOR to the PURCHASER, upon the receipt of such appraisal or valuations and acceptance thereof by the VENDOR and the PURCHASER; OR

(ii) to rescind the within purchase as if the same had never been entered into.

The agreement was attached to the 1969 income tax return of Metropolitan Construction Ltd. The Minister of National Revenue allowed $93,000 of the $110,000 consideration for Parcel B as capital gain, but held $539,000 of the consideration for Parcel A to be taxable income. On December 21, 1972 the two companies purported to rescind the agreement to sell Parcel A and the land was reconveyed and the consideration repaid. Metropolitan Construction Ltd filed notice of objection to its assessment and took an appeal to the Tax Appeal Board, which held that the profit of $539,000 was capital gain. On December 22, 1972 Metropolitan Construction Ltd and International Development Corporation Limited amalgamated and became Metropolitan Properties Ltd.

I consider that I should deal with the defence that the clause in the agreement dated December 22, 1972 between the two companies which I have quoted by enabling them to rescind the transaction with respect to Parcel A, has nullified the assessment by the Minister. In my opinion the law is clear that a condition permitting the parties to a transaction to rescind it on the happening of some event is a condition subsequent, the result of which is that the agreement is valid until the happening of the specified event. The provision in the agreement in question is of this nature. It follows that the Minister of National Revenue, if he considered that the sale gave a taxable profit to Metropolitan Construction Ltd, was bound to make an assessment and this assessment remains valid until it is set aside by the court or until the Minister makes a reassessment. I assume that the purpose of Robinson, in inserting this clause, was to obtain a ruling in advance from the Minister, and with that in mind he attached a copy of the agreement to the defendant’s 1969 income tax return. However, as the law stood at that date the Minister had no power to make a binding ruling.

I hold that Metropolitan Construction Ltd acquired Parcel A as a capital asset and that the profit on the sale to International Development Corporation Limited was a capital gain and not taxable. I dismiss the action with costs.