Marvo Construction Company Limited v. Minister of National Revenue, [1973] CTC 2149, 73 DTC 127

The Chairman (orally):—This is an appeal by Marvo Construction Company Limited against a reassessment of the Minister of National Revenue for the taxation year 1969. It involves the question of whether or not the profit made by the appellant on the sale of a project known as Harbour Square Development was a capital gain or income in that taxation year. Having said that, it follows that this again is one of the classic cases known as “trading cases” which, as I think all parties agree, subject to the principles of secondary intention as laid down in the case of Regal Heights Ltd v MNR, [1960] CTC 46, 384; 60 DTC 1041, 1270, must be determined, basically, on their facts, because one must try to interpret from the evidence, both oral and documentary, the intention of the appellant at the time of purchasing the property.

During the course of this judgment, I may from time to time use the term “Marlowe” rather than “Marvo” or even refer to Mr Marlowe as the appellant, because it is agreed that he is the beneficial owner of the appellant company, that he was the motivating force in whatever its course of action was or was intended to be, and was the main witness on its behalf in this appeal. The other witness called by the appellant was a Mr Balmer, who is qualified as an expert to some degree in real estate financing and in putting together equity projects of some magnitude.

Mr Marlowe was born in Hungary in 1920. His professional training involved attendance at a military academy and service during the war in the Air Corps of his native Hungary, and the family history and businesses included a construction business. He found it necessary to flee his native country in 1956, as did so many of his countrymen, and he did so via Vienna, arriving in Canada, I believe, in the summer of 1957. He took up employment in Ottawa with a firm known as Canadian Aero Services, which is part if not all of its correct name, and he was engaged in map compilation for that company. He found that this was not leading him anywhere and, as his prospects were negligible, he sought means to better himself and felt that real estate offered the quickest route to financial success. He took a course in real estate and I think he obtained his salesman’s licence.

He was perceptive enough to recognize that in Ottawa at that time there were no buildings being operated on the well-known “lease- back” basis of today, whereby buildings are built and leased back to tenants for long periods of time thereby providing revenue as well as a Capital asset to the owner of the building. He joined up with a man by the name of Fred Toller and they created two companies, Tolmar Construction Ltd and Gulf Investments Ltd, and both of these, although the degree is not clear from the evidence, experienced some success over the years. The years were short, as, in 1961, Mr Marlowe either obtained or was bidding on a contract in Hamilton, Ontario, and Toller felt that this was too far from his home base in Ottawa, whereupon Marlowe decided to settle in Toronto and carry on in that area, although the Ottawa companies appear to have continued thereafter in Ottawa. The material time relevant to this appeal is from 1961 on, after Mr Marlowe had settled in Toronto.

As his first construction job, he obtained the contract for what became known as Britannica House in Toronto next to The Colonnade, which is known as one of the larger constructions of revenue property in that area of Bloor Street. Prior to that, he had incorporated a limited company, which is now the appellant in this case. The evidence indicates that he was the beneficial owner of all the shares of that company, and it was pointed out by counsel for the respondent that the objects of the company, which is a Canadian company as distinguished from a provincial corporation, are those mainly, if not entirely, of a construction company operation.

I think I should say, in passing, that it is often argued that careful attention must be paid to, and at one stage in these trading cases great emphasis was placed on, the exact wording of a company’s objects in its letters patent, but I think the current view is to look at what actually has taken place in the day-to-day operations of a limited company rather than at what the printed word says that it may do. So I think that this is a neutral factor just as it would be if the company’s objects included the right to invest in and develop revenueproducing properties, which certainly would not be conclusive in favour of the appellant if in fact it did not carry on that business.

One cannot lose sight of the fact that in 1962, when Mr Marlowe’s business offices were in the Terminal Building on the waterfront of Toronto adjacent to the Canada Steamship Line offices—or in the same building—he was exposed daily to the large tract of land owned or leased by that company that was going virtually unused because CSL had moved its docking facilities to the Oakville area. The evidence is that he conceived, or had a vision of a project encompassing that area of the metropolitan downtown section of Toronto in the Queen’s Quay area, lying south of the railway tracks and the Gardiner Expressway, which had been either ignored or treated by the citizens as a very unlikely place to do anything other than catch a ferry to Toronto Island. Nevertheless, he could see the development of this area into a multiuse project of apartments, office blocks and commercial buildings, including a trade mart and a hotel, at a time when, in the words of Mr Balmer, “such a thought was inconceivable to most of the so-called knowledgeable investors in this country”. It speaks well, I think, for a man who had been so short a period of time in this country, that he could foresee the possibilities of that area which now, some ten years later, Canadians have seen fit to develop along precisely the same lines and concepts as he then envisaged.

I have been flooded with documents, some 50 or 51 in number, in this case, all of which I think have served some purpose in assisting me in arriving at a conclusion on the matter. It is a case that has been meticulously prepared, as one must do when the details of what actually took place are so important. I have endeavoured to scan, if not read in their entirety, all the exhibits filed, and I have in my own mind broken the appeal down, with regard to the factual situation, into three time periods:

The first is from the purchase in 1962, or the entrance into the agreement of purchase and sale with Canada Steamship Lines by the appellant, up to the end of 1964 when the re-zoning had been achieved and the Ontario Municipal Board had approved the by-laws of the City of Toronto authorizing the needed zone change as finally agreed upon, which also included some land exchange.

The second is the period to September 1965, the time when Marlowe assumed, on his evidence, on which I will comment further, that he had the financing and the backing of Great Northern Capital Ltd pursuant to the agreement identified as Tab 10 of Exhibit A.

The third is the period from September 1965, when GNC pulled out, to the ultimate sale of the property in 1968 to Campeau Corporation which resulted in the profit in question.

Appellant’s offer to purchase the land from Canada Steamship Lines involved the payment of $3,000,000 by way of $1,000,000 down and $2,000,000 over the three-year period of the mortgage. The terms of the offer to purchase were so loose as to actually constitute an option to the appellant (or Marlowe) because thereby he was allowed, without the need for any additional expenditure of money, further extensions of time, and it was only the last two extensions, I believe in February 1965 and April 1965—the last two extensions, in any event, that cost the appellant or Marlowe additional money. This would seem to confirm the evidence of Mr Marlowe that he enjoyed an extremely compatible relationship with the senior officers of CSL at the material time.

The first step, of course, was to get the zoning changes from the City of Toronto, and Mr Marlowe, I think giving every indication of his lack of experience in dealing with municipal corporations in this country, at that stage indicated that he thought twelve months would be ample time in which to get such a zone change. It in fact took him almost two years to get it, involved the attendance by him at literally hundreds of meetings with all sorts of committees, municipal, federal and citizen, before he was able to arrive at an acceptable plan of land use for this area. During this time he expended a considerable amount of money on having plans or sketches drawn and changes made to meet the wishes of the various committees and, in my view, showed a patience almost biblical in nature before obtaining his desired result. In December of 1964, the zone change was approved, including the land exchanges, by the Ontario Municipal Board. At that time, in my view, he had not only invested a considerable amount of time and funds but had finally obtained a piece of land that was very saleable from that date onward.

The next step was to enter into discussions with Power Corporation in late 1964 to try and obtain working capital and initial or interim financing that would allow the commencement of the first phase of a program that envisaged, if all phases were completed, an expenditure of some $76,000,000, a project which today, I venture to say, will, whenever it is completed by the purchaser from him of this portion of the project, require funds of at least twice that amount. In any event, he had at that time acquired, on a contractual basis for a short period of time, the services of Mr Balmer; and Power Corporation, although interested, never consummated a formal agreement.

Two versions of why this did not take place, or of why the eventual result came about, were given: one by Mr Marlowe, who indicated that the contract with Power Corporation provided that his interest, or the appellant’s interest, could be diluted by the issuance of further share capital or debentures and he would have become, or could have become, a very negligible part of the operation; and the other, given by Mr Balmer, was that Balmer had found a more attractive offer for Marlowe, who then refused Power Corporation’s offer and, subsequently, the originator of the better offer (who was never identified) either reneged, or withdrew—to put it more delicately—and the appellant was left with no formalized agreement with either party.

Eventually, in January of 1965, an agreement was drafted and subse- quently executed between the appellant company and Great Northern Capital Ltd, whose parent company was Atlantic Acceptance Corporation—or vice versa (I am not sure which, but the result would have been the same in any event). This agreement, which the appellant, through Marlowe, took as being the agreement under which he could commence his project, provided for the payment of $1,500,000 by Great Northern, and clause 7 thereof gave the latter an option whereby they could pick up a substantial percentage of shares and still leave both Marlowe and Great Northern with a substantial interest in this project. The provision that had worried Marlowe in the Power Corporation agreement was overcome in the GNC agreement by the requirement that a 70% vote be required to issue further treasury stock or debenture certificates and, Marlowe being sure of retaining a 40% interest, this 70% vote assured him of some protection that he would not have had with Power Corporation.

At this point, it should be mentioned that the transaction that involved the City of Toronto and the Toronto Harbour Commission had involved agreement on behalf of the appellant to construct a warehouse with a value of some $1,700,000 for the Toronto Harbour Commission and to construct a ferry dock with a value of approximately $200,000 for the City of Toronto. It is to be seen that the approval of the municipal and federal bodies did not come easily, and in the land exchanges only about 5,000 square feet was gained by the appellant.

During all this time, as is evidenced by Exhibit A-32, Mr Marlowe had been visiting throughout the world and negotiating with financing bodies that might prove a likely source of long-term financing for the various phases of the project. I should say at this time that, on the evidence of Mr Marlowe, and I think substantiated by Mr Balmer, three types of financing were required: working capital of some $1,500,000 was needed urgently; about $8,000,000 to $9,000,000 was needed for interim financing; and $600,000 was, I think, eventually contemplated as being revolving credit that would get the first and second phases started. Then, as the company began to produce its own revenue, this would assist in the interim financing. Lastly, they needed long-term financing, which, as laymen know it, is mortgage financing, through institutional lenders, that would run for 30 to 35 years for projects of this kind.

Marlowe has not been able to produce anything concrete, up to the signing of the GNC agreement, that would indicate that the people with whom he spoke were seriously interested in entering upon the development project. He explains this by saying that it was very difficult to have (and I am paraphrasing his evidence) these large multi-national corporations commit themselves, in a way that would require them to tie up vast sums of money, until the project was at least cleared—as it was in 1964—and some construction under way by means of interim financing. Throughout the year 1965, on Marlowe’s evidence, he believed that GNC was going to exercise the option in clause 7 of the agreement (Tab 10 of appellant’s Exhibit A), and become, in his terms, a partner formally, although he deemed GNC, rightly or wrongly, to have been a partner from the time it began advancing him money. There is some basis for support for this belief, because Tab 10 of Exhibit A contains, in Schedule G thereof, an agreement of employment, to put it briefly, whereby Marlowe was committed to remain with the project to its completion.

I think at this time I might comment on my assessment of Marlowe as a witness, because in these cases, as I have said so many times, the least that one can expect of an appellant involved in a trading case is that he take the stand and proclaim his intentions to have been only those of an investor, and this he invariably does. This places the Board or the court in question in the unenviable position of then trying to get inside the minds of the individuals to determine whether or not that intention existed at the material time or whether it is merely an intention conjured up with the assistance of capable counsel to provide the necessary evidence to support the non-taxability of the profit subsequently made.

I said recently, in a case in Edmonton, that after a term on the Bench and a term on this Board l believe that I can, with some degree of accuracy, assess an individual when he is giving evidence, although I do not delude myself that I have not been fooled or deceived by witnesses from time to time. However, I have observed this witness over a period of two days in the witness box. I have observed the manner in which he has given his evidence. I have considered his interest in the outcome of this appeal, his demeanour at all times, and his willingness to admit to a failure of memory on occasion or to some slight inconsistencies that might have arisen in his testimony by virtue of the passage of time. I may say, therefore, that I have no hesitation in accepting his evidence as being the complete truth that he believes to be the case today. The matter that I must determine is whether or not over the years he has convinced himself of the truth of the evidence he has just given, and the only means I have of testing that possibility is to consider it in the light of his actions in the period from 1962 to 1968.

First of all, I am satisfied that, when he says that he intended to be a part of this project from the beginning, he meant it then as he means it now. His actions in preparing brochures, in acquiring the assistance, sometimes on credit, sometimes on payment, of experts in their field in the preparation of such brochures, the diligence with which he proceeded with the applications for municipal and federal approval, the attempts that he made to obtain financing, and the agreement that he entered into with GNC, convince me that these could only be the actions of a man intent on a long-term proposition. In 1965 the property had appreciated in value to at least $13,000,000. He had completed the land exchanges. He had completed, after much delay, the purchase from CSL and he had expended funds in the hundreds of thousands of dollars to perpare and advertise this project. He had even succeeded, through his ability to persuade others of the feasibility of this project, in getting the Ontario Government to produce a brochure extolling the virtues of a trade mart. In 1965, one can take, I’m sure, judicial notice of the collapse of Atlantic Acceptance Corp in the summer of that year, an event which stunned the financial world and extremely affected the lending institutions of the United States, who were, to a large extent, the main source of long-term financing funds at that time; and, in the evidence of Mr Balmer, it emphasized a situation which had already, because of world-wide monetary tightening, begun to have an effect on large financial projects in this country. Balmer’s belief was that it was questionable whether any Canadian corporation or consortium of corporations could have undertaken a project of this size, and that it would have required assistance from multi-national investors.

I find Balmer to be a witness with no axe to grind. His evidence was uncontroversial and, in my view, was highly acceptable to this Board. Only a few days before the collapse of Atlantic Acceptance, a considerable sum of money, approximately $400,000, was advanced by GNC to complete the land exchange program. And so there is support for the belief of Marlowe in the seriousness of GNC’s actions up until that time and for his belief that, even until September of 1965, they were still prepared to proceed.

The respondent’s counsel, in his usual competent cross-examination, raises the very good point as to why, if GNC was so anxious to become a partner or to have an equity position in this transaction, it did not enter into such an agreement instead of the type of agreement that was set out (in Tab 10). Marlowe’s answer is that clause 33 prevented the assignment of any of these matters till all the land exchanges had been completed, and it would have been too great an effort to return again to the municipal authorities to have that particular by-law amended, and so they chose the course that they did. Whether it was the right course, in hindsight, or not, is not for me to say and, on all the evidence, I think it was a realistic approach at the material time.

In 1965 things changed. GNC was directly affected by the collapse of Atlantic Acceptance, all its directors resigned, and new directors were appointed by various large institutions that had an interest in the outcome of the Atlantic affair, whereupon an entirely new board took over. In the meantime, the appellant had entered into a project in Montreal and a project in Toronto, and was unable to continue either in its own way on account of what has been described as “guilt by association”. The company was unquestionably held in a poor light by virtue of its dealings with GNC (ie, Atlantic Acceptance) and therefore financing was not available to the appellant. I accept the explanation as to why the Sherbrooke-Cavendish transaction in Montreal did not proceed as intended and as to why the idea behind the Trinity-Front operation in Toronto had to be abandoned and the project completed in the manner in which it was, and I find nothing in these actions to affect my final decision in this appeal.

After GNC pulled out, Marlowe again made attempts to find financing and these attempts continued through 1966, 1967 and 1968. He had correspondence and contacts with Societa Italiana per condotta d’acqua and others. He had a letter indicating, if not an intent, at least a certain specific interest of Western International Hotels in the hotel phase of the project. He had correspondence from American institutions, as shown in Exhibit A-39, Teachers Insurance and Annuity Association of America evidencing an interest in the project; and throughout all of this, he maintained a constant refusal to negotiate with any lender who was interested only in purchasing the project outright. This is uncontradicted throughout. The most that he was prepared to concede to a lender was an equity position, and Balmer says that by this time, through the increase in value of this land, an equity had been built up sufficient to ensure the appellant of a substantial percentage of any consortium that would proceed with the project.

in 1967, Marlowe suffered a setback, as a result, perhaps, of an error in judgment that occurred in 1964. Power Corporation acquired control of CSL, and Marlowe no longer had the close cooperation and even solicitous assistance of the senior officers of CSL. He had not paid the mortgage back on the purchase price of the CSL land except to some small extent, but the interest unpaid had brought the mortgage back on closing almost to its $2,000,000 standing. An action for foreclosure was commenced in the Supreme Court of Ontario in April of 1967 against the appellant company. Obviously a DOR was filed and a period for redemption was fixed. Subsequently, on June 14, 1968, an application was made in the Ontario Supreme Court before The Honourable Mr Justice W J Henderson for an extension of time to redeem the lands. The extension was granted only until December 3, 1968, on certain conditions, which included the payment of costs forthwith or the motion to be dismissed. Therefore, after six years of devoting 90% to 95% of his time, after investing all his own funds and cajoling or persuading professional people who were not in the habit of extending such credits to go along with him, he was now faced with the possibility, and more Ikely the probability, of losing everything.

It was at this time that the opportunity to sell the entire project outright to the Campeau Corporation came about. It is in evidence that Campeau was about to go public and wanted this parcel of land in Toronto to add to its assets to make its shares more attractive in one of the main financial markets of this country. An agreement was entered into and the transaction was finally closed a matter of days before Canada Steamship Lines Limited would have been in a position to apply for a formal order of foreclosure. At the last minute, Campeau Corporation, or so one can only infer, knowing the need of the appellant found ways to reduce the balance due on closing by about a quarter of a million dollars. In this closing price, it was also necessary for Campeau to assume over $7,000,000 in Habilites, and here we have the completed sale which the Minister says was in the mind of the principal shareholder of the appellant from the beginning.

in my view, no such thought or intention existed. If the Regal Heights case and its famous secondary intention is applied, I think that the overriding factor that must be present is the motivating factor of “profit at the earliest opportunity”. This clearly would have been, in my view, during late 1964 or early 1965. That the project was feasible is unquestioned, in view of the fact that one can see parts of it in existence today. One usually looks, in these cases, for what have been termed “badges of trade or of a trader” and a few of them that I have come to recognize over the course of hearing many of these cases would be:

(1) any attempt on the part of the appellant to dispose of the property: (2) any attempt to advertise it for sale, or to make it known discreetly that the property was for sale without any official attempt to list it for sale; (3) a turnover in a short period of time—although not conclusive, this is certainly a factor; (4) a failure to make any investigation of the possibility or feasibility of success of the project or to look into the available means of financing it to completion; (5) a failure to do more than token acts to support the alleged intention of turning it into a revenue-producing asset; and (6) a favourite badge of trade is the purchase of land in an area that is obviously going to be swallowed up by the advancement of urbanization in a given direction. My conclusion is that none of these factors, none of these so-called badges of trade or of a trader, are present in this case. I am satisfied that, from the beginning to the end, this appellant intended to be a part of, if not the sole owner of, this Harbour Square development project.

One item that has caused me considerable difficulty is the fact that both Marlowe and the appellant had very little in the way of funds of their own. Really, I suppose, if I look very closely at it, I would find that he had no more than $24,000 or $26,000 plus an expectation of a couple of hundred thousand dollars from the Britannica Building, and so on; and the question that bothered me was whether or not we can allow a person with such meagre funds to have such a vision and make such a profit under our existing laws. And I can only answer my own query with another: Why not? Surely we have not yet reached the point where, for a visionary to make a non-taxable profit, he must, at the material time, be a man of great substance—and, to me, whether the material time be 1962 or 1965, the position is the same.

I am satisfied that, even after all had turned against him in 1965, he still had the same intent that he had in 1962 to see the property developed with his own company as a major holder of the equity in the developing company. At no time, in my view, did he ever deviate from this avowed purpose.

Before closing, I must refer to Exhibit R-1, which counsel for the respondent urges upon me as showing that in February of 1965, notwithstanding the evidence of Marlowe, he really did not know, or did not believe, that he had a firm partnership agreement with GNC because, in the last paragraph on the last page, he speaks of a permanent partner rather than an interim partner. There is no doubt whatsoever, on reading the document, that at that time he had an interim partner and that GNC never became a permanent partner for the reasons outlined, but that does not say that the actions of GNC to date and the belief of Marlowe were not that it would be before long. In fact I think, if the matter were to go further, any court, looking at respondent’s Exhibit R-1, would see support for all I have said with regard to this appellant’s intention to proceed with the proposition as an investor and not as a land assembler bent on turning the property to account at the first opportunity. That letter, in my view, sets out actions that are so inconsistent with the actions of a promoter bent on selling an assembled parcel of land as to be supportive of Marlowe’s own argument that his intention was as I have found.

On all the evidence, I am satisfied that the appellant has discharged the onus cast upon it by the Act, and the appeal should be allowed and referred back to the Minister for reassessment accordingly.

I am indebted again to both counsel for their assistance and the extreme preparation they have devoted to this difficult case.

Appeal allowed.