Columbia Records of Canada Ltd. v. Minister of National Revenue, [1971] CTC 839, 71 DTC 5486

GIBSON, J.:—Two issues arise on this appeal from the income tax assessments of the appellant, Columbia Records of Canada Ltd., of Don Mills, Ontario, for the taxation years ending June 30, 1961, June 30, 1962 and June 30, 1963.

The first issue has to do with the correct treatment for income tax of a foreign exchange loss incurred in two ways in a borrowing of United States dollars by the appellant from its United States parent company. The borrowing took place when the Canadian dollar was at a premium and repaying when the Canadian dollar was at a discount.

The appellant in substance put this matter as to this issue in this way :

Since the Appellant carried on its business entirely in Canada, it converted the U.S. funds which it had borrowed . . . into Canadian currency. Accordingly, at the time of . . . repayment (of these loans) . . ., it was required to convert Canadian funds into U.S. dollars for the repayment to its parent corporation of the loans so payable in American funds. Due to fluctuations in the relative values of U.S. and Canadian currency during the period covered by the loans, the Canadian currency required to cover the repayments exceeded the Canadian currency originally obtained from the loans. In computing its income, the Appellant deducted the premiums of Canadian funds required for the repayment of the aforementioned loans as expenses incurred by the Appellant for the purpose of gaining or producing income from its business, within the meaning of Section 12(1) (a) of the Income Tax Act, in respect of each of the taxation years in which the repayment of a part of the loan was made. These premiums were paid and were expensed by the Appellant for the following taxation years:

Taxation year ended June 30, 1961	§$ 1,828.00
Taxation year ended June 30, 1962	53,163.00
Taxation year ended June 31, 1963	57,091.00

As a consequence, the appellant submitted that these sums represented expenses incurred on income account from its business within the meaning of Section 12(1) (a) of the Income Tax Act.

The respondent submitted that these sums constituted a loss or an outlay of capital or on account of capital, within the meaning of Section 12(1) (b) of the Income Tax Act.

In reaching this conclusion the respondent made the following assumptions which he put this way :

With respect to the allegations that the sums of $1,328.00, $53,163.00 and $57,091.00 referred to in paragraph 3 of Part A of the Notice of Appeal are deductible in computing the Appellant’s income for the taxation years, 1961, 1962 and 1963 respectively, the Respondent says that:

(a) during the 1955 taxation year, the Appellant borrowed from its parent corporation, Columbia Broadcasting System Inc., hereinafter referred to as “C.B.S.” a New York . corporation having its head office in the city of New York,

funds in the amount of $450,000.00 (U.S.) ;

(b) pursuant to the terms of a loan agreement dated the 1st day of July, 1959, between C.B.S. and the Appellant, the Appellant borrowed additional sums of $10,769.00 (U.S.) in the 1958 taxation year, $450,000.00 (U.S.) in the 1960 taxation year, and $200,000.00 (U.S.) in the 1961 taxation year;

(c) the total of the funds so borrowed by the Appellant from C.B.S. was $1,110,769.00 (U.S.) ;

(d) the total indebtedness was to be repaid as to all but $200,000.00 (U.S.) on or before December 31, 1970, as to all but $100,000.00 (U.S.) on or before December 31, 1971 and as to the balance on or before December 31, 1972. Demand notes were given to C.B.S. by the Appellant in respect of the said indebtedness, which indebtedness was secured by a mortgage of all of the Appellant’s goods and chattels and the assignment to C.B.S. of all of the Appellant’s accounts receivable;

(e) the indebtedness of the Appellant to C.B.S. was an indebtedness on capital account and the sums so borrowed by the Appellant from C.B.S. were used by the Appellant to acquire capital assets on capital account and no part of the funds so borrowed were used to pay income or current expenses in the course of the Appellant’s business or otherwise used on revenue account;

(f) the relationship between C.B.S. and the Appellant was that of lender and borrower.

The second issue has to do with whether or not the appellant was entitled to deduct as a ‘‘production incentive’’ from its income tax otherwise payable the following amounts pursuant to the provisions of Section 40A of the Income Tax Act, viz.:

The Appellant availed itself of the deduction from income tax provided by Section 40A on the basis that it was a corporation that had net sales for the relevant taxation year from the sale of ©! goods processed or manufactured in Canada by the corporation the amount of which was at least 50% of its gross revenue for the year, and hence it was a “manufacturing and processing corporation” as defined in Section 40A. The Respondent disallowed the foregoing deductions from income tax payable on the ground that the Appellant did not qualify as a “manufacturing and processing corporation” by reason of the fact that the records sold by the Appellant were not manufactured by it, but by Quality Records Limited.

June 30, 1962	...	$ 3,138
December 31, 1963		$24,684
The appellant put this matter in this way :

As to this, the respondent submitted that the appellant during the 1962 and 1963 taxation years was not a manufacturing and processing corporation within the meaning of Section 40A (2) (a) of the Act since it did not have net sales during the 1962 and 1963 taxation years from the sale of goods processed or manufactured in Canada by the appellant itself, the amount of which was at least 50% of its gross revenue for the year, and that it was not entitled to deduct from tax otherwise payable for the 1962 and 1963 taxation years an amount determined pursuant to the provisions of Section 40A of the Income Tax Act.

In reaching this conclusion, the respondent made the following assumptions which he put in this way :

In re-assessing tax in respect of the Appellant’s 1962 and 1963 taxation years, the Respondent disallowed the deduction from tax otherwise payable amounts claimed by the Appellant, purportedly under section 40A of the Income Tax Act, of $3,138.00 and $24,684.00 respectively. The basis upon which the said amounts claimed were disallowed was as follows:

(a) the Appellant was not a manufacturing and processing corporation within the meaning of section 40A of the Income Tax Act during its 1962 and 1963 taxation years and therefore was not entitled to claim in those years, any amount pursuant to section 40A;

(b) the Appellant did not have net sales for the 1962 and 1963 taxation years from the sale of goods processed or manufactured in Canada by the Appellant the amount of which was at least 50% of its gross revenue for the year.

The evidence disclosed that the appellant was incorporated in 1954 (and commenced business shortly thereafter) as a corporation under the Canada Corporations Act with a share capital of 500 shares of a par value of $100 which was fully subscribed ; that the balance of the financing of the company over and above the $50,000, for the purpose of carrying on its operations, came from borrowings from the appellant’s parent company in the United States; and in this respect the appellant for all intents and purposes kept a running account with the parent company in relation to these borrowings and repayments thereof.

In 1958 the appellant bought land and erected a building. Theretofore it operated from rented premises.

The appellant only engaged in trading operations during the relevant years and did not trade in foreign exchange. It never hedged 1 in foreign exchange.

Exhibit 27, Schedule 2 is a summary of current working capital requirements, financing available and capital additions and cash position for each of the relevant fiscal periods of the appellant for the period June 1959 to December 1963. The allocation is arbitrary and made by the appellant.

This Schedule discloses that the appellant made substantial profits during that period and purports to demonstrate that the subscribed capital plus retained earnings at all times far exceeded the book value of the fixed assets.

It was sought by this allocation to prove that the expense of the foreign exchange loss was a cost of monies borrowed in connection with the trading operations of the company in that it should be properly charged against working capital or circulating capital of the appellant and therefore, should be deductible as a trading expense in the relevant taxation years.

During the relevant taxation years the appellant by contract with Quality Records Limited (see Exhibit 3, the agreement between the parties dated May 4, 1961 and Exhibit 4, the agreement between the parties dated July 1, 1962) caused the records which it sold to the public to be pressed and delivered to the appellant.

The evidence disclosed how a record was made. In brief, either ‘‘tapes’’ or ‘‘lacquers’’ were obtained from the parent company or from a recording studio in Canada, from which there was made by persons other than the appellant, a “master” then a ‘‘mother’’ and finally a ‘‘stamper’’.

The “stamper” in all cases was produced in Canada by Quality Records Limited. The ‘‘stamper’’ was used to press out the records which in turn were made out of a vinolite material. The labels were put on such records at the time of pressing; the labels were obtained from printers in Canada made under contract by the appellant with such printers; and the records were then packaged by Quality Records Limited; all packaging components were imported from the parent company or obtained by contract by the appellant from some Canadian supplier.

The appellant at all times, during the making of these records, had supervising personnel in the Quality Records Limited plant. Among other things, their supervision was as to quality, production technique and production priorities.

The evidence also was that to make a record it was necessary to acquire two rights namely, the mechanical rights, that is the publisher’s right, and also, when recorded in Canada, the right to the artists’ performance which latter attracted liability for royalties pursuant to contracts for and on behalf of the artists.

So much for facts.

In sum, on the first issue, the appellant’s submission is that in this case the funds, borrowed from and repaid to the parent company of the appellant by the appellant, were borrowed funds used in the ordinary course of the appellant’s trading operations, and therefore the foreign exchange loss suffered on the borrowing and repayment of these funds should be considered an income loss in the relevant taxation years. The respondent’s submission on the contrary, was that such loss had nothing to do with the trading operations of the appellant and accordingly was a capital loss.

In this case in respect to subject borrowing and repayment of funds between appellant and its parent company, the relationship was that of borrower and lender.

Prima facie, therefore, because the business of the appellant ws not that of dealing in foreign exchange or borrowing or lending money, and because also no element of investment was involved here, the foreign exchange loss incurred, in the borrowinglending dealings between the appellant and its parent company, is one of capital and not of income. Montreal Coke and Manufacturing Company v. M.N.R., [1944] A.C. 126; Bennett and White Construction Company Limited v. M.N.R., [1949] S.C.R. 287; [1949] C.T.C. 1; Davies v. The Shell Company of China Ltd. (1951), 32 T.C. 133; British Columbia Electric Railway Company Limited v. M.N.R., [1958] S.C.R. 133; [1958] C.T.C. 21 ; and Alberta Gas Trunk Line Company Limited v. M.N.R., and Alberta Gas Trunk Line Company Limited v. M.N.R., [1971] C.T.C. 723 (Can. S.C.).

In Tip Top Tailors Limited v. M.N.R., [1957] S.C.R. 703; [1957] C.T.C. 309, was approved the test of Lord MacMillan in Montreal Coke and Manufacturing Company v. M.N.R. (supra) at. page 134, for determining whether or not such prima facie proposition obtains in a given case, or whether instead such transactions should be categorized as transactions in the ordinary course of trading operations, to wit :

. It is not the business of either of the appellants to engage in financial operations. The nature of their businesses is sufficiently indicated by their titles. It is to those businesses that they look for their earnings. Of course, like other business people, tey must have capital to enable them to conduct their enterprises, but their financial arrangements are quite distinct from the activities by which they earn their income. No doubt, the way in which they finance their businesses will, or may, reflect itself favourably or unfavourably in their annual accounts, but expenditure incurred in relation to the financing of their businesses is not, in their Lordships’ opinion, expenditure incurred in the earning of their income within the statutory meaning. The statute, in Section 5(b), significantly employs the expression “capital used in the business to earn the income”. differentiating between the provision of capital and the process of earning profits.

Abbott, J. in British Columbia Electric Railway Company Limited v. M.N.R. (supra) at pages 137-88 [31, 32] in reference to the test to be applied for determining whether any expenditure should be categorized as a capital exepnditure stated :

Since the main purpose of every business undertaking is presumably to make a profit, any expenditure made “for the purpose of gaining or producing income” comes within the terms of Section 12(1) (a) whether it be classified as an income expense or as a capital outlay.

The general principles to be applied to determine whether an expenditure which would be allowable under Section 12(1) (a) is ‘of a capital nature, are now fairly well established. As Kerwin, J., as he then was, pointed out in Montreal Light, Heat & Power Power Consolidated v. M.N.R., [1942] S.C.R. 89 at 105; [1942] C.T.C. 1 at 10 [affirmed [1944] A.C. 126; [1944] 1 All E. R. 743], applying the principle enunciated by Viscount Cave in British Insulated and Helsby Cables Limited v. Atherton, [1926] A.C. 205 at 214, the usual test of whether an expenditure is one made on account of capital is, was it made “with a view of bringing into existence an advantage for the enduring benefit of the appellant’s business”.

- Applying both of these tests within the statutory meaning of Sections’ 12(1) (a) and (b) of the Income Tax Act to the expenditures the appellant made resulting in the foreign exchange losses, I am of opinion for two reasons, that the same were made on capital account.

Firstly, the borrowings of funds from the parent company by the appellant were for the purpose of obtaining working capital, because the appellant’s issued capital of $50,000 was inadequate for such purpose. The repayment :of those borrowings by the appellant was one at a convenient time as and when by reason of retained earnings the appellant had monies surplus to working capital requirements and therefore was able to do so.

As a consequence, these financial transactions between the parent company and the appellant were quite distinct from the activities by which the appellant earned its income* [1] and therefore were not transactions in the ordinary course of the trading operations of the appellant.

Secondly, these financial transactions were entered into and the expenditures made (occasioned by foreign exchange losses in connection with these financial transactions), with a view of bringing into existence an advantage for the enduring benefit of the appellant’s business.f [2] Such advantage was a substantial factor that enabled the appellant to get into its trading business and to maintain its trading activities over the said period and in such a way that the appellant was able successively in each fiscal year to earn substantial earnings.

As to the second issue, the deductibility or not of the amounts of $3,138 and $24,684 pursuant to the provisions of Section 40A of the Income Tax Act, in sum, the appellant’s submission, which the respondent denies, is that during those years in doing what it did, resulting in the production of records, it was a ‘ manufacturing and processing corporation’’ within the meaning of Section 40A (2) (a), which reads in part:

2. In this section,

(a) “manufacturing and processing corporation” means a corporation that had net sales for the taxation year in respect of which the expression is being applied from the sale of goods processed or manufactured in Canada by the corporation the amount of which was at least 50% of its gross revenue for the year, . . .

If the appellant was such a manufacturing and processing corporation’’ the parties agree that it otherwise qualifies under said Section 40A for these deductions.

Many authorities were cited and analogies made (as to the latter, for example, the distinction between contracts of sale and contracts of skill and labour, sometimes considered by the Courts in book publishing cases and in contracts under which paintings or other works of art are produced) but none are of much assistance in determining the issue here.

In my view, in relation to the facts of this case, the manufacturing and processing corporation’’ within the meaning of Section 40A of the Income Tax Act during the relevant taxation years was Quality Records Limited only. Whether Quality Records Limited did so as an agent of the appellant or as an in- dependent contractor, or whether the records delivered by Quality Records Limited to the appellant were delivered pursuant to a contract of agency or a contract of sale (cf. Exhibits 3 and 4—the contracts between Quality Records Limited and the appellant), or otherwise, is not material.

What is material is that to be “a manufacturing and processing corporation’’ to qualify for a deduction pursuant to the provisions of Section 40A of the Income Tax Act, a corporation itself must physically process or manufacture in Canada the goods which otherwise qualify for the deduction under that section.

Applying this test, the evidence is unequivocal that the appellant did not itself physically process or manufacture the records during the relevant taxation years. Quality Records Limited did.

The appellant as a consequence, is not entitled to the claimed deductions under Section 40A of the Income Tax Act.

In the result, therefore, the appeal is dismissed with costs. SHIELDS-SNOW LIMITED, Appellant,

. '_ and

MINISTER OF NATIONAL REVENUE, Respondent.

Federal Court—Trial Division (Kerr, J.), November 26, 1971, on appeal from a decision of the Tax Appeal Board, reported [1969] Tax A.B.C. 507.

Income tax—Federal—Income Tax Act, R.S.C. 1952, c. 148—Section 139(1) (e)—Real estate transaction—Construction and sale of shopping centre by builder-investors—Whether profit income or capital gain.

In issue was whether a profit of $173,019 realized on the sale of a shopping centre was income from an adventure in the nature of trade or a capital gain from the sale of an investment. The company was admittedly in the construction business but was also holding some properties for investment. The project in question, begun in 1958, was financed almost wholly by borrowed funds and, though a viable operation, was sold three years later under pressure from the bank. It was testified for the appellant that this sale was caused by an unexpected tight money situation which left the company property rich and cash poor. For the Minister, on the other hand, the experience of the prime movers together with the slender financing indicated at least an alternative intention of selling the project at a profit.

HELD:

A careful consideration of all the evidence led to the conclusion that the property was acquired and developed with the intention of holding and operating it as an investment to the exclusion of any initial intention of disposing of it at a profit. Appeal allowed.

Harold Buchwald, Q.C. and D. G. Ward for the Appellant.

Frank Dubrule, Q.C. and Gerald J. Rip for the Respondent.

Cases REFERRED to :

Sutton Lumber & Trading Co. Lid. v. M.N.R., [1953] 2 S.C.R.

77; [1953] C.T.C. 237;

Regal Heights Ltd. v. M.N.R., [1960] S.C.R. 902; [1960] C.T.C.

384.

KERR, J.:—This is an appeal from a decision of the Tax Appeal Board (reported [1969] Tax A.B.C. 507) which dismissed an appeal of Shields-Snow Limited* [1] from its income tax assessment for its 1963 taxation year.

The issue is whether a profit of $173,018.99 realized from the sale of a shopping centre property in the Township of Scarborough, known as the White Shield Shopping Centre, was income from a business within Section 139(1) (e) of the Income Tax Act, as contended by the respondent, or was a capital gain, as contended by the appellant. The land was acquired in 1958. It was developed into a shopping centre, which opened in October 1959 and was operated thereafter until it was sold in October 1962.

Certain facts were agreed by the parties in an Agreed Statement of Facts (Exhibit A-1). I will set forth some of them, either verbatim or summarized, using for ready reference the paragraph numbering in the Agreed Statement.

1. The Appellant is a corporation resulting from change of name and series of amalgamations of corporations incorporated in the Province of Ontario, all of which took the following form:

(a) 2345 Yonge Street Limited was incorporated in 1948 and changed its name to Shields-Snow Limited in 1960;

(b) On or about October 2, 1961, Laurel Crest Holdings Ltd., Shields-Snow Limited, Silver Shields Construction Limited, and Stanwyck Developments Limited all amalgamated, by Letters Patent, to form a new corporation known as Shields-Snow Developments Limited;

(c) On or about the 23rd day of September 1963, Shields-Snow Developments Limited amalgamated, by Letters Patent, with Frimette Court Limited and Promenade Realty Limited to form the Appellant, Shields-Snow Limited.

Paragraphs 2 to 9 (Shareholdings and names of directors and officers, including those mentioned in paragraph 1).

10.. That some of the predecessor companies of the Appellant, and

in particular Shields-Snow Developments Limited, engaged in land development and trading, and also owned certain property on which it or they received rentals; and the person or persons who controlled and managed them had extensive knowledge and dealing in the real estate business in Toronto.

Paragraphs 11 to 13. Jack Mutiger, a builder, entered into agreements to purchase land in Scarborough at the corner of Kennedy Road and Lawrence Boulevard from Carroll’s Limited, and 2 other lots, 1132 and 1136 Kennedy Road, from L. Spence and H. E. Spence, and Margaret Knightly and Howard Knightly, and subsequently assigned all his rights in the agreements to 2345 Yonge Street Limited.

14. That, pursuant to the various assignments from Mutiger to 2345 Yonge Street Limited

(a) 2345 Yonge Street Limited purchased certain properties from Carroll’s Limited by Deed dated 14 November 1958, and registered 11 August 1959, for the consideration of $216,530 payable $22,500 cash, $44,030 by mortgage assumed and by mortgage back to the vendor of $150,000;

(b) 2345 Yonge Street Limited purchased a property from Edward Knightley and Margaret Knightley by Deed dated 14 July 1958, and registered 15 September 1958 for the sum of $22,000 in cash;

(c) 2345 Yonge Street Limited purchased property from Charles G. L. Spence and Helen Spence by Deed dated 13 August 1958 for the sum of $27,000 cash.

15. That pursuant to a contract with one Gladys I. Chappell, 2345 Yonge Street Limited purchased certain property from Gladys

I. Chappell by Deed dated 19 December 1958 and registered on 11 February 1959 for a consideration of $31,500 of which the purchaser paid $10,000 in cash and gave a mortgage back to the vendor of $21,500.

17. That 2345 Yonge Street Limited, after having purchased the aforesaid lands referred to above, removed the existing structures located thereon, and caused a shopping centre to be built on the said lands, which shopping centre was known as the White Shield Shopping Centre.

18. That the total cost to 2345 Yonge Street Limited of purchasing the said lands and of constructing thereon a shopping centré was $1,637,981.00.

19. That to pay for the cost of construction of said shopping centre on the said land and to discharge Chappell mortgage, 2345 Yonge Street Limited borrowed from the London Life Insurance Company $1,050,000 which sum was secured by a first mortgage on the said land and premises, given by 2345 Yonge Street Limited to the said London Life Insurance Company by mortgages dated 3 June 1959 and 27 August 1959 and registered 17 August 1959 and 31 August 1959, respectively.

20. That the Appellant borrowed from a syndicate comprised of Sarose Investments Ltd., Torontario Investments Ltd., (each owners of an undivided, 25% interest in the mortgage referred to below), and Max Goldberg (owner of a 50% interest in the said mortgage), $300,000, with interest at 11% per annum, which sum was secured by a second mortgage on the said lands and premises given by Shields-Snow Limited to the said syndicate, which mortgage instrument was dated 7 September 1960 and registered 15 September 1960.

21. That by a mortgage dated 13 June 1959 and registered 3 July 1959 Carroll’s Limited assigned to Steinberg’s Ltd. its mortgage in the said property, and Steinberg’s Ltd. by Postponement Agreement dated 21 September 1959 and registered 27 October 1959 postponed its mortgage on the said property in favour of the London Life Insurance Company mortgage.

22. That by Discharge of Mortgage registered 20 September 1960 Steinberg’s Ltd., upon receiving payment of $150,000 from 2345 Yonge Street Limited (or successor), discharged its mortgage on the said property.

23. That by mortgage dated 3 February 1961 and registered 16 February 1961 Shields-Snow Limited mortgaged the said property and premises in the amount of $180,000 in favour of the Toronto-Dominion Bank.

24. That, because of the amalgamation of Shields-Snow Limited (the successor in name to 2345 Yonge Street Limited) into the new corporation, Shields-Snow Developments Limited, on or about the 2nd day of October A.D., 1961, title to the lands upon which the shopping centre was located, became vested in Shields-Snow Developments Limited.

25. That, because of the amalgamation of Shields-Snow Developments Limited into the new corporation, Shields-Snow Limited, on or about the 23rd day of September A.D., 1963, Shields- Snow Limited became the successor corporate entity and hence the Appellant in these proceedings.

26. That by agreement in writing dated the 21st day of September A.D., 1962, Shields-Snow Developments Limited agreed to sell the said shopping centre to Samuel Keller, as trustee for a limited company to be formed, at and for a total sale price of $1,825,000, which sale after deducting therefrom solicitors fees and the real estate commission, resulted in a total sale price of $1,811,000, which resulted in a net gain to Shields-Snow Developments Limited in the amount of $173,018.99.

27. That the balance due on the date of closing of the sale of the said shopping centre from the purchaser to Shields-Snow Developments Limited was $596,875.36. A deposit in the amount of $25,000 by the purchaser was in the form of a contract in which the amount of $25,000 was substituted by the purchaser transferring ownership of a residential lot with a home thereon to the vendor.

The persons principally involved in the shopping centre venture were Stanley M. Snow, who is a son-in-law of Samuel L. Shields, and the latter’s two sons Victor and David Shields. Snow was the only one of them who gave evidence at the trial of this appeal.

S. L. Shields is a long-time well-to-do builder and property owner. He gave financial backing to his sons and son-in-law in connection with the purchase and development of the shopping centre.

Stanley Snow married Frimette, a daughter of 8. L. Shields, in 1949 and on advice of his father-in-law went into the business of buying land and building houses for sale, also buying raw land for housing developments, selling some of the lots and building houses for sale on others. By 1958 he was well established in his business. In those years Victor Shields was engaged in the same kind of business. In 1958 David Shields was a minor, about 17 years of age.

Snow testified that Shields Sr. advised him and Victor and David to join their forces in 1958, and they did so. Snow and Victor became active forthwith in their joint business. activities, and David became active when he came of age. Shields. Sr. agreed not to compete with them in the building business. He was aptly described by counsel for the appellant as a pater f.amilias who advised and gave financial support to his family.

The details of shareholdings of the related companies set forth in paragraphs 2 to 9 of the Agreed Statement of Facts indicate, inter alia, that on April 15, 1958 Snow and Victor and David Shields became owners of all the issued shares of 2345 Yonge Street Limited (later re-named Shields-Snow Limited in 1960), one of Shield Sr.’s companies, which until then had been dormant; in July 1958 they became owners of all the issued shares of Laurelcrest Holdings Limited ; in November 1958 they became owners of all the issued shares of Silver-Shields Construction Limited; and the issued shares of Shields-Snow Developments Limited (formed by the amalgamation of Laurelcrest, Shields- Snow Limited (#1), Silver-Shields Construction and Stanwyck Developments Limited) from its inception in October 1961 until its amalgamation into the appellant corporation Shields-Snow Limited in September 1963 were owned by Snow (or his personal holding company $. M. Snow Enterprises), his wife Frimette, and Victor and David Shields, as were also the issued shares of the appellant corporation after its incorporation in September 1963.

Snow testified that in mid-1958 he and Victor and David Shields were looking for a commercial site to be acquired and held for revenue-earning purposes as an investment in which each would have a one-third share. At that time also they intended to expand their previous activities and carry on on a bigger scale, developing raw land, building houses for sale and selling other lots vacant. Their companies so engaged were associated in their operations but each handled its own affairs and business deals.

The Mutiger shopping centre was soon acquired by 2545 Yonge Street. It had a steel framework erected for a food store, there was excavation for a row: of stores, and Mutiger had negotiated a number of leases, some for 20 years, with responsible companies, including Woolworths, Canadian Bank of Commerce, Steinberg’s, Royal Bank of Canada, Reward Shoes, Reitmans and Hunt Foods, conditional on completion of the shopping centre on time. The leases were taken over by 2345 Yonge Street, and the latter company also enlarged the site by purchase of the Chappell land. Most of the construction of the shopping centre was completed in 1959 and it had a “grand opening” in October of that year. It was held and operated successively by 2345 Yonge Street, Shields- Snow Limited (#1) and Shields-Snow Developments until it was sold in October 1962. At that time there were more lessees and the shopping centre was fully operative.

Snow said that in 1961 they had plans to construct a chain of shopping centres, including a Gold Shield Plaza at Cumming Avenue, in connection with which they approached Dominion Stores. They had a coloured mural specially designed for that purpose, which they erected at the White Shield Shopping Centre. However, the White Shield was the only shopping centre proceeded with.

Numerous financial statements of companies in the Shields family complex were filed as exhibits and there was extensive examination and cross-examination of them. But even if it were possible for me to summarize them, which is beyond my capacity, I do not think that any useful purpose would be served by attempting to do so. I shall refer to some items.

2345 Yonge Street looked to the Toronto-Dominion Bank for its initial funds in connection with the shopping centre. Later there was other financing on mortgages and additional borrowings from the Bank. The loans were short term, callable on demand. There were inter-company loans, cross-guarantees and investments in other companies in the Shields family group, including $172,118.45 in Frimette Court Limited (see pages 129 and 144 of Exhibit A-2). When London Life gave 2345 Yonge Street a mortgage loan of $1,050,000 it required, as additional security, personal covenants by Snow, Victor and David Shields and 8. L. Shields. The Bank was fully aware of the family interest. Exhibit A-8 shows that on January 19, 1961 Shields-Snow Limited (#1) authorized the giving of a guarantee to the Toronto-Dominion Bank of, the indebtedness: of Shields Construction Company Limited to that Bank. Snow testified that Shields Construction was a company wholly owned by $. L. Shields which had a bank loan of that amount and the Bank agreed that the money would be lent to Shields-Snow Limited (#1) and the Bank would continue to carry the loan with the guarantee.

There were also loans to the companies by their shareholders. The opening balance sheet of Shields-Snow Developments, as at September 30, 1961, and its balance sheet as at September 30, 1962 show shareholder’s loans payable in the sum of $268,370 and $307,066, respectively. Snow said that it was more convenient to make those loans than to subscribe for capital shares. S. L. Shields also gave considerable financial support to the project.

When Snow and his brothers-in-law decided to acquire the Mutiger property and develop the White Shield Shopping Centre their companies Laurelerest and Silver-Shields Construction had two housing divisions registered. They had projected cost estimates for the shopping centre of $1,600,000 and planned to complete it mainly with funds from a first mortgage loan from London Life, loans from the Toronto-Dominion Bank, and to a substantial extent by anticipated proceeds from their housing developments, At about the same time 2345 Yonge Street also commenced construction of an apartment building at 85 Lawton Boulevard, at a cost of about $800,000, on which it obtained a first mortgage loan of $500,000 from Manufacturers Life Insurance Company. The proceeds from the housing developments were also being looked to as one of the sources of funds for the apartment building.

The revenues from the housing developments did not live up to expectations in 1959 to 1962, due, according to Snow, to a tight money situation that dried up mortgage funds for house construction and left the companies in a position in which they had lands on which they had to meet mortgage payments but at the same time were unable to sell lots and houses on nearly the scale they had expected. In support thereof he referred to Exhibit R-5, Income Statement of Silver-Shields Construction, for the 10 months ended September 30, 1961, which showed $183,345 for land sales, which he said represented only about 40 lots, whereas they had expected to sell 150 to 200. They were, in his words, property rich and cash poor. In those years their borrowings from the bank and their overdrafts increased.

In February 1961 Shields-Snow (#1) gave two mortgages to Toronto-Dominion Bank to secure the liability of the company in the sum of $370,000, representing an indebtedness of $180,000 and another $190,000 in respect of a guarantee given by the company for Shields Construction Company Limited (a company owned by S. L. Shields).

The mortgages were given on the White Shields Shopping Centre and the apartment building at 85 Lawton Blvd. See Exhibit A-4. An earlier mortgage for $300,000 on the shopping centre had been given to a syndicate, as indicated in paragraph 20 of the Agreed Statement of Facts.

By the fall of 1961 the sum owed to the bank by the group had passed the $800,000 mark.

The only other witness for the appellant was G. E. W. Hemmans, now a General Manager, Credit, of the Toronto-Dominion Bank. He was the manager of its branch in Toronto from which the companies concerned obtained loans in the years in question. He confirmed the initial arrangements for bank loans and credit for the shopping centre and subsequent borrowings. The bank’s Toronto Division Headquarters advised Hemmans, by letter dated November 13, 1961 (Exhibit A-9), that a credit advance was authorized for Shields-Snow Developments in the sum of $250,000 on a strictly temporary basis, and the letter stated

In going along here, it must be distinctly understood that the -‘ Kennedy-Lawrence Shopping Centre will be sold without delay and the direct advance liquidated.

Snow testified that under pressure from the bank in the fall of 1961 the shopping centre was listed with a real estate firm for sale, but at an asking price that was intentionally put at too high a figure in order to discourage offers, as they did not want to sell. The best offer received was $1,750,000. Snow and his brothers- in-law refused the offer. Snow said they. wanted to hold on to the property. Following this refusal Shields-Snow Developments made a proposal in a letter dated December 18, 1961, Exhibit A-5, to the bank for further financing designed to keep the property. The letter stated that the company would have some $613,885 proceeds in October 1962 from 182 lots already sold and also expected to sell the remaining 60 lots by the spring of 1962, and the proposal was that $200,000 would be raised on a second mortgage on the apartment building at 85 Lawton Blvd, and turned over to the bank to reduce the company’s indebtedness, and that proceeds from the lots would also be turned over as they came in.

Thereupon the bank carried on the relationship through the spring and summer of 1962.

Snow and Hemmans both testified that the tight money situation continued, the expected sales of lots did not materialize, and the bank continued to press the company to put the shopping centre up for sale at a realistic asking price. Hemmans described his efforts in that respect as ‘‘suasion’’. The end result was the sale of the shopping centre, as set forth in paragraph 20 of the Agreed Statement of Facts.

Hemmans testified that everything bogged down in the spring and summer of 1961 and sources of funds fell flat. The company’s account was climbing and the bank was concerned about it. By November 1961 Laurelcrest ad Shields-Snow Construction had credits of $650,000 and Shields Construction had credit of $110,000. Hemmans said the sale of the shopping centre was the only practicable means available to the company in 1962 to reduce its indebtedness.

Snow testified that the proceeds of the sale enabled the company to make payments to the bank, which took pressure off the company, land sales picked up later and the company sold the remainder of the lots and continued on to process other subdivisions and also purchased three apartment buildings containing about 375 suites, and continued its usual activities.

The shopping centre was the only revenue-earning property that was sold. The apartment building at 85 Lawton Blvd. is still owned by the company. Snow still owns his half interest in the Glen Acre Shopping Centre, which he had built in 1955. The White Shield Shopping Centre ; is operating and is a viable operation.

Hemmans testified also that he was aware of the corporate position from the start and that the overall plan was for estate planning and a shifting of assets to Shields’ children with the benefit to accrue to them. He said he had no doubt that it was a family plan for investment.

Capital cost allowances were not claimed on the shopping centre. by 2345 Yonge Street or Shields-Snow Limited (#1), or by Shields-Snow Developments until its year ended on September 30, 1962, the auditor’s report for that year being dated December 12, 1962, which was after the shopping centre had been sold. Snow’s explanation for not claiming sooner was that there were no taxable profits and consequently the discretion to defer claiming capital cost allowances was exercised.

There was reference in the evidence and argument to the objects of the companies. In the letters patent of the appellant, dated September 23, 1963, its objects were stated to be, inter alia:

To carry on business as general contractors and builders . . . and to operate as a general construction company; . . .

‘To acquire . . . hold . . . construct . . . operate and maintain . shopping centr . . . apartment houses . . . Stores . . .

But in the letters patent of 2345 Yonge Street, dated February 14, 1958, there was no reference to shopping centres. Its objects were :

To carry on the business of an apartment house company and, in connection therewith, to acquire . . hold . .. and generally deal i in lands and real estate of all and every kind . . .

By supplementary letters patent, dated February 15, 1960, its name was changed to ‘‘Shields-Snow Limited” (#1) and its objects were changed by deleting the words ‘‘to carry on the business of an apartment house company’’ and substituting therefor the words ‘‘to carry on the business of a building company”.

The letters patent of Shields-Snow Developments Limited, dated October 2, 1961 (by which time the shopping centre had been built), expressed its objects to be, inter alia:

To carry on business as general contractors and builders for the construction, ‘erection, fabrication, building and demolition of all manner of buildings . . .

To acquire . . . hold . . . develop . . . generally deal in lands and real estate . .. build . .. shopping centres . . . apartment houses, stores .. .

I do not regard the fact that the objects of the company before the change in its letters patent on October 2, 1961 did not expressly include the operation of a shopping centre as of significant importance in the determination of this appeal. See Sutton Lumber & Trading Co. Lid v. M.N.k., [1953] 2 S.C.R. 77 at 83; [1953] C.T.C. 237; Regal Heights Ltd v. M.N.R., [1960] S.C.R. 902 at 907; [1960] C.T.C. 384 at 390.

Counsel for the appellant argued that there was a grand design to set up a corporate entity for the benefit of the two sons of S. L. Shields and his son-in-law Snow, with equal sharing and with objects of (a) land development and trading in land, and (b) having a revenue-earning property as a long term investment; Shields Sr. was the pater familias, the children were to be the beneficiaries ; the shopping centre was constructed solely with the intention that it would be a long term revenue-earning investment ; it was fully completed and operated for a time ; the conduct of the parties was consistent with that intention; Shields Sr., Victor Shields and Snow had other revenue-earning properties as investments, which they have not sold ; the tight money situation had not been foreseen; there was pressure by the bank to reduce indebtedness, and sale of the shopping centre was the only practicable way to cope with the situation; no sale had been intended when the shopping centre was being acquired and constructed.

Counsel for the respondent argued that the three persons most directly involved in the shopping centre venture were Snow, Victor Shields and Shields Sr., and they were astute and experienced business men actively engaged in a large way in buying, developing and selling real estate properties, and they were aware of the ups and downs of that kind of business; the shopping centre was a major venture with an estimated cost of $1,600,000, and it was dependent upon borrowed money and speculative; the shareholder’s loans were made to avoid tying up shareholder’s money in the capital stock of the companies; there were intercompany borrowings and cross- guarantees, and at the same time as Shields-Snow Developments was borrowing heavily from the bank it was investing substantial amounts in other Shields family companies — see, for example, that company’s financial statement as at September 30, 1961, showing investments in the sum of $220,683.31 in Glenview. Golf, Frimette Court, Samorstan Developments and Stansamore Developments, and its statement as at September 30, 1962, showing investments in other realty companies’’ in the amount of $613,232.95; the financial position of the companies that successively owned the shopping centre before its sale was collectively and individually precarious at all times; the shopping centre and the apartment building at Lawton Blvd, were proceeded with at one and the same time and each was looking to the same uncertain source of funds from the sale of building lots; in going into the shopping centre venture the parties must have had in mind a possible and even probable alternative of disposing of the property at a profit ; after it was sold the financial situation was improved, but no other shopping centre venture was initiated.

The onus is on the appellant to establish that the assessment made by the Minister is wrong.

The Tax Appeal Board heard, as witnesses, not only Snow and Hemmans, but others also, including Shields Sr., Victor Shields, the Shields’ family solicitor and the auditor and financial adviser of the Shields family. The Board concluded, in dismissing the appeal, that the case was not even a borderline case. But I must reach my own conclusions on the evidence before me.

Financing of long term investments by borrowed money is not unusual and it does not, of itself, negative an exclusive intention to acquire property as an investment without any alternative motivation of sale at a profit. The facts of financing, however, are factors to be considered in deciding whether, in the case of a particular property, there was a substantial element of speculation in the undertaking that would militate against concluding that there was an exclusive intention to acquire or develop the property for investment purposes only, without any motivation to turn it to account for profit should a favourable opportunity for a profitable sale arise. The business activities of the persons primarily involved and their activities related to the undertaking are other factors that may properly be considered in a given ease, such as this one.

What the Court must endeavour to determine from the evidence is the real character of the activities and involvement of the companies in question in the acquisition and development of the shopping centre and its eventual disposition, especially their intention or intentions at the time the property was acquired and developed.

The principal oral evidence was given by Snow, corroborated to some extent by the bank manager Hemmans, who, I think, was kept informed and was aware while the project was being developed of the intentions and purposes of the persons directly concerned. Snow was a good witness, not evasive or unresponsive to questions. He was cross-examined vigorously and in detail. His evidence must be weighed in the context of his interest and objectively along with all the other evidence, but my impression of him as he was giving evidence was favourable, his evidence was not contradicted in important points by other evidence, it was not implausible, and, on the whole, I think that I should accept it as factual and credible.

The evidence is not inconsistent with investment. The shopping centre was leased to long term lessees. It was held and operated for about 3 years. The owning company discouraged a sale of the property in 1961 although under pressure from the bank to sell it. The company made a proposal to the bank at that time designed to hold on to the property. Under continued pressure from the bank and because of a failure to realize expected monies from sales of building lots, the property was subsequently sold in October 1962. This was the only revenue-earning property sold. The appellant still owns the revenue-earning apartment building at Lawton Blvd. Snow still retains his interest in the revenueearning Glen Acre Shopping Centre, acquired in 1955.

After careful consideration of all the evidence I am satisfied that the appellant has established that the property was acquired and developed with the intention of holding and operating it as a revenue-earning investment to the exclusion of any intention or purpose at the time of its acquisition and development to dispose of it at a profit.

The appeal will, therefore, be allowed and the assessment made upon the appellant for its 1963 taxation year will be referred back to the respondent for re-assessment on the basis that the profit of $173,018.99 realized from the sale of the shopping centre was not a profit from a business. The appellant will be entitled to be paid by the respondent its costs of the appeal, to be taxed.