Philip Goddard and Jan M Rienstra, Bruce W Shaw (Deceased) v. Minister of National Revenue, [1972] CTC 2206, 72 DTC 1216

Roland St-Onge:—For the reasons put forward in Leo O Lund v MNR, in which judgment was delivered today, these appeals are also dismissed.

Appeals dismissed.

SWALLOWFIELD FARMS LTD, Appellant,

and •*

MINISTER OF NATIONAL REVENUE, Respondent.

Tax Review Board (J O Weldon, QC), February 17, 1972.

Income Tax Act, RSC 1952, c 148 — 3, 4, 139(1)(e) — Real estate transaction

Swallowfield was incorporated by one Gordon John for the purpose of taking title to the Joughlin estate farm property. It was associated with Gordon John Limited which carried on a trucking business. The farm property was resold after three years for a profit of $80,000, which the Minister considered income.

The Minister refused to recognize Swallowfield’s farming activities as a farming business and disallowed a loss of $1,453.69 claimed for 1968. It was the Minister’s submission that the property was acquired primarily as a speculation in land.

HELD:

The purchase and resale of the farm property in the name of Swallowfield was an adventure in the nature of trade.

The decision in Adanac Apparel Ltd v MNR, that the appellant did not have the necessary corporate power to enter into the business transaction that produced the profit sought to be taxed, was in direct conflict with Regal Heights Ltd v MNR. Swallowfield was taxable with respect to the profit arising from the purchase and sale of the farm property whether or not the business was ultra vires of its corporate powers. Appeal dismissed.

G F Jones for the Appellant.

S A Hynes for the Respondent.

J O Weldon:—This appeal of Swallowfield Farms Ltd (“Swallowfield”) with respect to its 1968 taxation year was heard at Victoria, British Columbia on September 15, 1970 under the Tax Appeal Board as it was then constituted. The parties were represented by counsel as follows: G F Jones, Esq for the appellant and S A Hynes, Esq for the Minister.

Swallowfield was incorporated by its president Gordon John on May 8, 1964 for the purpose of taking title to a 448.6-acre farm property complete with farm buildings and residence purchased by him from the estate of Agnes Ann Joughlin on June 25, 1964 for the sum of $60,000. The above property is situated in the Municipality of North Cowichan in the Chemainus District near Westholme, British Columbia, about 45 miles north of Victoria. The Chemainus River runs through the said property. Swallowfield adopted June 30 as the end of its fiscal year. According to “Agreement Among Associated Companies” contained in the appellant’s 1968 return, Swallowfield is associated with another company known as Gordon John Limited incorporated by Mr John in 1957. The latter company was brought into being to carry on a trucking business formerly carried on by Mr John as a proprietorship business from 1947 to 1957. The share capital of both Gordon John Ltd and Swallowfield amounts to the sum of $4 represented by 4 shares of $1 each which have been issued to Mr and Mrs John. According to Swallowfield’s balance sheet as at June 30, 1965, its 4 issued common shares -are held as follows: Gordon John - 3 shares and his wife Shelagh John - 1 share. Incidentally, the above corporations have, obviously, been used and are being used by Gordon John as mere vehicles with which to carry out his own personal plans. Accordingly, I propose to attribute to Swallowfield Mr John’s extensive background as a subdivider and dealer in real estate.

Following the resale of the Joughlin estate farm property by Swallowfield for $150,000 on August 31, 1967 — ie after a holding of 3 years and 2 months — it received a Notice of Reassessment from the Minister dated May 7, 1969 which contains the following statement:

A. Reconciliation of Income

Net loss declared		$ 1,453.69
Add: Disallowed farm expenses:—
Amount claimed	3,635.33
Amount allowed	2,181.64	1,453.69
		NIL
Net profit from disposal of real estate		80,000.00
Taxable Income Assessed		$80,000.00

It should be observed from the above statement that the Minister appears to have refused to recognize Swallowfield’s farming activities as constituting a farming business in its 1968 taxation year and, accordingly, has disallowed the loss of $1,453.69 claimed by it in the said taxation year made up as follows:

In assessing Swallowfield for its 1968 taxation year, the Minister assumed, inter alia:

(a) that in 1964 the Appellant acquired 448.6 acres of land in Westholme, BC, for $60,000.00;

(b) that the above property was acquired by the Appellant with a view to trading, dealing, or otherwise turning it to account at a profit;

(c) that the profit of $80,000.00 realized by the Appellant on the disposition of the above property in September of 1967, constitutes income to the Appellant within the provisions of Sections 3, 4 and 139(1)(e) of the Income Tax Act (RSC 1952, c 148 as amended).

It was the Minister’s submission “that the 448.6 acres of land acquired by the Appellant was acquired primarily as a speculation in land, with the ultimate intention that the farm would be resold at a profit while at the same time providing the Appellant’s chief shareholder with a personal residence until such sale took place”.

Ai the conclusion of the hearing of the appeal, the Board reserved judgment partly because of the mass of evidence to be reviewed but mainly because Mr Jones, counsel for the appellant, placed such great reliance in the course of his argument on the case of Adanac Apparel Ltd v MNR in which he had acted for the appellant and which was tried before me in the first instance and dismissed (see [1968] Tax ABC 1256), the said case being later retried as a case de novo (in which he, Mr Jones, again acted for the appellant) before the Honourable F A Sheppard, Deputy Judge of the Exchequer Court of Canada and allowed (see [1969] CTC 484).

Dealing first with the present appeal on its own merits without regard to the effect of the Adanac case (supra), it was clearly obvious to me throughout the hearing of the appeal: that Swallowfield was only able to make a puny effort at operating Its 448.6-acre farm property during the comparatively short period of its holding thereof which was, of course, because of Gordon John’s activities on the mainland of British Columbia which, apparently, kept him away from home a great deal of the time; that the whole tone of the appellant’s evidence — provided by its solicitor J H L Gillis, Esq and the said Gordon John — fell far short of supporting its and Gordon John’s professed purpose of conducting a serious farming operation on the large Joughlin estate farm property as well as providing a permanent home in the country for Gordon John, himself, his wife and four children; that Swallowfield was, accordingly, unable to destroy the basis of the Minister’s disputed assessment herein, namely, that the said property had been acquired by Gordon John (title was, of course, taken in the name of his “nominee” corporation Swallowfield) for the immediate purpose of providing a home in the country for himself and his family and for the eventual purpose of turning the said property to account at a profit as and when he was able to do so.

On the basis of the above observations which became more and more obvious to me as the hearing of the appeal proceeded, it should be concluded without more ado that the appellant did, in fact, demonstrate its preference for turning the Joughlin estate farm property to account at a profit using the property in the meantime as a home for its president Gordon John and his family and for some light but interesting farming activities which were not too burdensome. As already mentioned, the above property was resold on August 31, 1967 for $150,000 which gave Swallowfield a profit of $80,000. In the result, the Board’s conclusion is that the purchase and resale of the 448.6-acre Joughlin estate farm property within a period of 3 years and 2 months by Gordon John in the name of Swallowfield should be characterized as an adventure or concern in the nature of trade within the meaning of sections 3 and 4 and paragraph 139(1 )(e) of the Act.

The only other question still to be decided is: how is the disposition of this appeal affected by the decision of the Exchequer Court in the Adanac case (supra). While the whole basis of my earlier decision in that case was that Adanac (or Edward Mallek, its controlling shareholder) moved hurriedly to purchase the property in question therein (it adjoined his store property) when it was offered to him for $30,000 or at a figure less than /2 of the price of $62,000 at which it was posted for sale two and a half years earlier knowing perfectly well that there was hardly a ghost of a chance that he could make use of it in his business known as Eddy’s, and that he had at the time of the acquisition of the said property the alternative intention of turning it to account at a profit as he actually did do within 2 years less 16 days of its purchase, I propose to limit my comments herein with respect to the final decision in the Adanac case to the matter which the learned deputy judge in that appeal considered to be so relevant and vital to his decision, namely that Adanac did not have the necessary corporate power in its memorandum of association to enter into the business transaction which produced the profit the Minister sought to tax in that case and failed completely in his efforts to do so. My purpose is, of course, to decide whether or not the same consideration is relevant to Swallowfield in this appeal because both companies, Adanac and Swallowfield, were incorporated under memoranda of association and, no doubt, carried out their respective disputed transactions under some general or ancillary power contained therein.

In determining the appellant’s tax liability in its 1968 taxation year under the provisions of the Act applicable thereto, it has not been possible for me to see what difference it could possibly make in the Minister’s assessment thereof whether or not the real estate profit made by Swallowfield in the said taxation year had arisen in a type of business which did not fall within the four corners of one of the specific objects for which Swallowfield was established because the Minister’s primary duty lies solely in taxing the profit arising therefrom after he has come to the conclusion that such profit appears to him to be of an income nature. In that regard, it should be observed that the aforesaid duty of the Minister to tax business profits extends to businesses of all kinds some of which may even be of an improper, illegal or downright immoral nature. Generally speaking, the only persons who appear to have had any real or valid interest in the matter of Swallowfield’s corporate powers were Swallowfield, itself, and the purchaser of its farm property who would be, of course, very much interested in acquiring a perfect legal title to the property being purchased, Swallowfield’s own interest lying and being in its ability to hold its purchaser to their sale agreement. All the Minister is trying to do in this appeal is to tax the profit made by Swallowfield in its business transaction characterized earlier herein as an adventure or concern in the nature of trade. Similarly, all the Minister was trying to do in the Adanac case was to tax the profit made in its business transaction which the Board characterized in the first instance also as an adventure or concern in the nature of trade. The crux of the matter now under consideration is stated concisely and with great clarity by Mr Justice Judson in the classic case of Regal Heights Limited v MNR, [1960] CTC 384, as follows (page 390):

The question to be determined is not what business or trade the company might have carried on but rather what business, if any, it did in fact engage in.

For the reasons set out above it should be concluded: that Swallowfield is taxable with respect to the profit arising from its purchase and sale of the Joughlin estate farm property whether or not the business so engaged in by Swallowfield was ultra vires of its corporate powers; that the above-mentioned decision of the Exchequer Court in the Adanac case (supra) should be treated as being in direct conflict with the Regal Heights case (Supra), and that the present appeal should be decided (and dismissed) on the basis of the principle quoted above enunciated in the Regal Heights case.

Before completing these reasons, I should like to take the opportunity to observe that it would be a most surprising state of affairs if a corporate taxpayer could escape paying taxes on a profit arising from a business in which it was not specifically established to engage in.

In the result, as already indicated, the appeal with respect to the 1968 taxation year should be dismissed and the relevant assessment confirmed.

Appeal dismissed.