Metropolitan Properties Limited v. Minister of National Revenue, [1974] CTC 2127

The Chairman (orally: September 13, 1973):—This is an appeal. by Metropolitan Properties Limited, successor to Metropolitan Construction Ltd, against reassessment of the Minister of National Revenue for the 1969 taxation year in which the Minister has added back to in- come an amount of $540,000 claimed by the appellant to have been a capital gain.

The appellant is controlled by Myles Sheldon Robinson, who also was the principal shareholder, if not the sole shareholder, of several other companies, including International Development Corporation Limited, the purchaser of the land whose sale gave rise to the gain in question. There have been all sorts of amalgamations, changes of name, and so on, since the sale in 1969, and I do not think it adds anything to my decision to try and sort them out in these reasons.

This, then, is a trading case and, as I have said so often, it depends upon its own set of facts, subject, of course, to the general principles of law that were laid down by the courts over the years, such as the secondary intention principle imposed upon the country by Regal Heights Ltd v MNR, [1960] Ex CR 194; [1960] CTC 46; 60 DTC 1041, which was upheld by the Supreme Court (Cartwright, J dissenting), [1960] SCR 902; [1960] CTC 384; 60 DTC 1270.

The question of secondary intention does not, in my view, enter into this situation in any way. There is no evidence that the Regal Heights case is applicable herein by any stretch of the imagination, and the matter was not pursued by counsel for either side during the course of the evidence.

The facts are relatively simple. The only witness was Mr Robinson, who at times appeared to be a bit facetious or flippant, but I am satisfied that, considering his interest, and having observed him in serious matters, he is a very credible witness and I accept his testimony where it is necessary to base my decision on the facts that he has stated.

The appellant or its predecessor was incorporated in 1954 under the laws of the Province of Manitoba and, almost from the outset, engaged in house construction. It continued this activity to some degree right up to the present time. There were many “rollovers”, as Mr Robinson has called them, in the course of the years, but it is clear from the evidence that he and his companies are one of the largest, if not the largest, housebuilders in the metropolitan area of the City of Winnipeg, the evidence indicating that they have probably built some 10,000 houses in the general vicinity.

What happened was that, in the year 1957, the appellant company acquired a contract from the Department of National Defence whereby the company bought land and built some 430 houses, which were then rented back to the Department of National Defence or its nominees. This contract involved a very large undertaking for this relatively new company, and it was only able to do it as a result of perfecting, what we now call “prefabricated sections’, which made it possible to put the houses up within a period of one year from the time the first house was started until the last one was finished.

The type of construction that the companies were doing required that they have a plant to do the prefabricating, and they were allowed by the Town of St James, as it then was, to put up or operate such a plant in a residential area during the course of the work they were doing for the Department of National Defence. At the end of the job, the appellant was told, and I presume expected to be told, to remove its plant from the residential area. Since they had been so successful at it, it was necessary for them to find space that would allow them to continue this prefabrication.

A piece of property was purchased in the northern part of what is now the Metropolitan Area of the City of Winnipeg, but this property required a zone change which the company officers were never able to get. Apparently they were turned down finally by the Local Planning Board (or its equivalent at that time) about November or December of 1958, and early in 1959 the appellant’s president learned of a piece of property then in the hands of the liquidators of a company that had gone bankrupt and which was known as Winnipeg Light Aggregate Limited.

The liquidators were anxious to get rid of the property, and an agent that had been selling houses for the appellant company brought the property to the attention of Mr Robinson, and he purchased it in toto, for $50,000 I believe. The exact figures are not essential, but about $47,000 of the purchase price was for the buildings and improvements on what is known as Parcel B, which contained 7 acres and was what he needed as a site for the prefabrication operation. The second parcel, about a mile away, has been referred to as Parcel A, or the “farm parcel”, and contained about 150 acres, of which 20 acres were subject to an option in favour of the City or Town of Trans- cona for use as a dump. The property was, even at that time, being used for a dump, and the municipality of Transcona subsequently took up its option and the appellant was left with about 134 acres in this Parcel A, or farm land portion.

I am sure that Mr Robinson, in his evidence, was exaggerating somewhat, but he conveyed the impression that it was not until some time after the company purchased the two parcels that anyone even went and looked at the farm portion of the property, as Parcel B was what they were really interested in, and the said Parcel A has remained in the condition it was in at the time of purchase from 1959 until the present time.

Two things, I think, have been lost track of in the course of the lengthy evidence and the production of the many exhibits. The first is the fact that the important time, at least to my mind, in considering the implications of what took place, was the year of purchase, namely, 1959. The second is that it is a well-established principle of law that even a trader or a developer can make a capital gain.

In 1959 the Town of Transcona, which apparently was constructed solely to service the Canadian National Railway yards which were adjacent to it, was some 3 miles or more from Winnipeg. From there, I think the evidence indicates, it was about 6 miles, as the crow flies, to Parcel B which was used as the office and work area for the prefabricating of houses, and an additional mile from there to the farm parcel. According to the evidence, it was raw prairie between Winnipeg and Transcona in 1959. The roads were in an unfinished condition, there were many mud streets in Transcona itself, as well as many buildings without indoor plumbing facilities, and it was not considered one of the prime residential areas of what is now the metropolitan area of the City of Winnipeg.

As I have said, absolutely nothing was done with the farm property, and in 1969, ten years after its acquisition, the property was sold by Metropolitan to International Development Corporation Limited, which, so far as Mr Robinson was concerned, was merely transferring it from one hand to the other. This fact gave me a great deal of concern, because it seemed to me that, if the appeal should succeed, this was a very simple way of getting money out of one company and into the other with the distinct possibility of it getting there tax-free. However, the other parcel of land, the 7-acre parcel upon which the company had operated its “prefab” plant until 1967, was also transferred to International Development Corporation Limited by the same deed of transfer, and by allowing the appellant a capital gain on the 7-acre parcel, it would seem that the Department of National Revenue has accepted the fact that these corporations are separate legal entities, as indeed they are at law, although they were by no means dealing at arm’s length. If the Department of National Revenue, with its highly efficient investigative processes, is satisfied that there was a proper transfer of Parcel B and has reassessed on the basis that the gain on that portion of the sale was a capital gain, then far be it from me to find that the transfer of Parcel A by the same agreement was in any way different.

The main thrust of the respondent’s argument is that this property, that is, the farm property, was inventory, and that it was treated as inventory from the time it was purchased. It is also pointed out, and I agree, that where a builder or developer has such a piece of property that he subsequently makes a gain on, there is an additional onus upon him, over and above the general onus that falls upon every appellant in a tax case, to show that a specific piece of property was not inventory in his hands.

I have no hesitation in finding, notwithstanding one slightly troublesome matter, that his property was not inventory, nor was it treated as inventory by the appellant between 1959 and 1969.

The one slight matter that bothered me is that the municipal taxes were apparently written off. There is no evidence as to what the taxes would have been on a raw piece of land, but that did give me some concern. When one considers what inventory is and how it is defined in the Act and what it is known as in everyday business life, one could hardly say that a builder who, over the course of the years has built thousands and thousands of homes and has had to go out and find land upon which to build these houses, would let a piece of land sit idle if it was inventory in his operation. 'l hesitate to quote Mr Robinson, but I think he came as close as one can to describing it in down-to-earth terms when he said this farm parcel simply “came along with” Parcel B, the essential 7 acres, “just as one might get a free tie when one buys a suit”. I think that there is nothing in this case but a pure and simple fortuitous capital gain by the accretion in value of this property over the years through no specific effort on the part of the appellant notwithstanding the fact that the appellant had taken part in building houses in the Transcona area.

I think that this was, and I find it as a fact on the evidence of Mr Robinson, the only piece of raw land that the appellant had held in the 10-year period in question, and that it did not sell any other raw land. The company sold land that was serviced land, and land upon which houses could be built, but, as 1 say, that does not preclude it from making a capital gain on the sale of this raw land. It merely places a little heavier onus of explanation on the taxpayer before it can succeed.

On all the evidence I find that this was no more than a fortuitous capital gain in the hands of the appellant and the appeal will therefore be allowed and the matter referred back to the Minister for reassessment accordingly.

Appeal allowed.