Allarco Developments Ltd. (Formerly Paris Investments Ltd.) v. Minister of National Revenue, [1970] CTC 390, 70 DTC 6274, rev'd on other grounds [1972] CTC 172, 72 DTC 6154

JACKETT, P.:—This is an appeal from the assessment of the appellant under Part I of the Income Tax Act for the 1964 taxation year whereby there was included in the appellant’s income for that year an amount of $669,900 as being a ‘‘gain on sale of the Bellamy Hill land’’.

The appellant is a closely held company that has engaged in many activities and that has had interests, usually controlling interests, in many other closely held companies engaged in many activities. It has among other things acquired and held much land, some of which was acquired for the purpose of creating income-producing assets to be held by the appellant, and some of which was acquired for the purpose of re-sale at a profit either undeveloped or after development as expediency might dictate. Throughout its existence, a controlling interest in the appellant has been held by a professional man who, while actively engaged in the practice of his profession, has still found the time to manage the appellant’s widespread activities.

The events giving rise to the present appeal commence with a purchase by the appellant in 1961 of 503 acres of land lying in the path of development of the City of Edmonton at a cost of $700,000, being an average cost of $1,391.65 per acre. One of the very important reasons that motivated this acquisition was the possibility of re-sale at a profit, probably after a subdivision. Another important fact in the minds of those controlling the appellant when deciding to acquire this land was that, in their view, it would acquire a rising. value over the years regardless of whether the appellant subdivided it or not.

The expectations of the appellant with reference to the 503 acres of land so acquired were, however, frustrated when, almost immediately after the acquisition, the appropriate authorities re-zoned some 420 acres of that parcel so that its future use was restricted to that of park lands (“Metropolitan Recreational’’). When that happened, the picture with regard to this land changed so that the probable value of the land became less than what the land had cost the appellant.

The new situation with which the appellant was thus faced caused the appellant to direct its energies toward some way of extricating itself from its difficulty. The result was that it came up with a scheme for the acquisition and development of a site in the City of Edmonton (sometimes referred to as the ‘‘ Bellamy Hill land”) using part of the lands that had been zoned as park lands as a means of acquiring such site.

The site in question consisted of 1.23 acres of land bordering on the central part of Edmonton that had not previously been the subject of development because it was situated on a steep slope. The scheme that was ultimately adopted was to build a large public parking garage on the slope in such a way that the top of the garage would provide a site at street level on which a hotel ‘‘tower’’ could be constructed. To turn the concept for this imaginative proposal into a workable project, two things, among many others, were necessary, namely,

(a) acquisition of the site from the City, and

(b) arrangements to finance the project.

By 1964, the appellant had worked out with the City, on the one hand, and the Great West Life Assurance Company, on the other hand, proposed arrangements to accomplish these essential objects.

Great West was prepared to provide $6,000,000 for the scheme

(a) by a $5,000,000 first mortgage bond arrangement, and

(b) by purchasing the site for the project for $1,000,000 and leasing it back to the appellant for ninety-nine years on the basis of an adjustable rent, free of all expenses, plus a Share of net earnings.

The City was prepared to transfer the site to the appellant in exchange for a transfer of 215 acres of the park lands and the right to acquire another 217.14 acres at a price of $1,000 per acre. Neither the City nor Great West was prepared to enter into the transaction in question except on the basis of the appellant binding itself to produce the proposed garage and hotel, and upon being adequately secured with reference thereto.

The preliminary documents evidencing these arrangements as binding agreements were executed in July 1964. As a matter of some significance, it is to be noted that the documents containing the agreement with Great West bear date of July 7, while that containing the agreement with the City was executed on July 17. It follows that the financing of the development was assured before the appellant committed itself to acquire the site. It is also of importance to note that, while the Great West agreement is contained in two separate letters, one relating to the acquisition and lease-back and the other relating to the mortgage bond, they were clearly regarded as constituting together one ‘‘financing arrangement”? as both letters contained a paragraph to substantially the same effect that, in the case of one of them, reads as follows:

In the event that it is determined that the purchase by The GreatWest Life of the said land and the making by Great-West Life of a mortgage loan on the leasehold improvements is not a legal or acceptable investment under the British and Canadian Insurance Companies Act or by any other authority governing Great-West Life will within a reasonable period of time submit to the applicant an alternative proposal for financing the whole transaction for the maximum amount possible, but in any event not more than the total amount intended to be financed by such mortgage and by such purchase of land, it being intended that such failure of the financing as herein presented shall not be deemed to constitute refusal to finance on the part of Great-West Life nor does it release or permit the applicant to look elsewhere for financing of the transaction.

The agreements so reached were carried out and the structures contemplated have been built up and are now operating.

(In the above summary of the facts, it should be noted that I have omitted reference both to the various names that the appellant has had from time to time and to the roles played by the appellant’s related or associated companies. As I find the facts, these facts do not in any way detract from the appellant’s position as the real party to the various transactions.)

By the assessment appealed from, the respondent included in the appellant’s income for its 1964 taxation year, for purposes of Part I of the Income Tax Act, an item of $669,900 as being “gain on sale of the Bellamy Hill land considered to be taxable income’’. This amount is computed as follows:

This is the item the correctness of which is challenged by this appeal.

By its Reply to the Notice of Appeal as originally filed, the respondent set out the basis upon which it supported the assessment of the profit in question as follows:

5. In support of the said assessment the Respondent says as follows :

(i) On or about April 1, 1961 a subsidiary of the Appellant purchased a 503 acre parcel of land which was transferred to the Appellant at cost in June, 1961. That property was acquired by the Appellant with a view to trading or dealing therein or turning it to account in such manner as was available.

(ii) On or before July 7, 1964 the Great West Life Assurance Company advised that its officers had approved the purchase of the Belamy Hill property for $1,000,000.00. (iii) On or about July 17, 1964, the Appellant agreed to

acquire the Bellamy Hill property from the City of Edmonton in exchange for part of the land mentioned in subparagraph (i).

(iv) On or about August 22, 1964, the Appellant sold its interest in the Bellamy Hill property to the Great West Life Assurance Company for $1,000,000.00 and realized a profit on the transaction of $669,900.00.

(v) The Appellant arranged to acquire the said property with a view to trading or dealing therein or turning it to account and the profit therefrom was income of the Appellant from a business or an adventure in the nature of trade carried on by the Appellant in Canada and at the time of acquisition of the Bellamy Hill property the Appellant contemplatd its resale to the Great West Life Assurance Company.

(vi) The purchase of the property was effected through and with the advice and direction and instigation of Dr. Charles Allard who was active and experienced in dealing in and trading in real estate in Edmonton and elsewhere in Canada either personally or through companies

through which he carried on an extensive business of real estate trading, development and speculation.

(vii) The Appellant prior to, and during the 1964 taxation year has dealt in land and was a dealer in land, and the transactions leading to the sale of the Bellamy Hill property, and the sale of the property were part of the Appellant’s business operations and the profits thereby realized were income of the Appellant for its 1964 taxation year from a business, adventure or concern in the nature of trade or as part of a profit making scheme.

6. The foregoing facts, inter alia, were before the officials of the Respondent on assessing and in confirming the assessment, and were taken into account in concluding that the profit of $669,900.00 was income of the Appellant for its 1964 taxation year.

The gist of this approach, as I understand it, is that the appellant acquired the Bellamy Hill site from the City ‘‘with a view to trading or dealing therein or turning it to account’? and, having done so, turned it over to Great West in accordance with an arrangement previously made so that the profit was a profit from a business or adventure in the nature of trade and was therefore taxable. I find, on the evidence, that the appellant acquired the Bellamy Hill site for the exclusive purpose of creating thereon an income producing asset, that it carried out that purpose and that the sale to Great West Life was an integral part of the financing arrangement that was worked out for it by Great West to fit in with Great West’s preferred method of financing such an operation. Looked at another way, the acquisition from the City and the re-sale to Great West were only part of a series of transactions whereby the appellant acquired an income producing asset consisting of a 99-year lease of a garage and a hotel. These transactions were clearly not transactions in the course of carrying on the trading activities of the appellant. I therefore reject the respondent’s position as set out in the Reply as originally filed.

However, that is not the end of the matter because the respondent amended its Reply to the Notice of Appeal to add a new paragraph 6A, reading as follows:

6A. The Respondent says in the alternative that the exchange of lands with the City of Edmonton, whereby the Appellant acquired the Bellamy Hill property in exchange for a portion of the 503 acre parcel of land referred to in paragraph 5(i) hereof, (which land was intended by the Appellant to be subdivided and sold in the course of its business) was a sale or realization by the Appellant of the portion of the said 503 acre parcel of land, and that upon that sale or realization the Appellant received the Bellamy Hill property having a fair market value of not less than $1,000,000.00 and that accordingly the said sum of $1,000,000.00, being the fair market value of the Bellamy Hill property or the proceeds of realization thereof, should be included in computing the Appellant’s income for 1964 as the proceeds from the sale of inventory.

Having regard to this, the appellant has amended paragraph 17 of its Notice of Appeal to read as follows:

17. In January 1965, the City of Edmonton acquired the 217.4 acres referred to in paragraph 8 hereof for a total consideration of $217,000.00 thus giving rise to a loss of $58,200.

and has added a new paragraph 3A to its ‘ Reasons for Appeal ’ ’ in its Notice of Appeal, reading as follows:

3A. Further, the gain on the sale of the Bellamy Hill land should be increased from $669,000 to $727,400 and the loss of $58,200 to which reference is made in paragraph 17 of the Statement of Facts should be deducted in computing the income of the appellant for the taxation year 1964.

My conclusion on this aspect of the case is that there was involved in the transaction with the City a disposition by the appellant in 1964 of part of the 503 acres of land that were acquired by the appellant in 1961 as what might be described as trading lands. Any profit or loss involved in that disposition should, in my view, be taken into account in determining the appellant’s profit for the purposes of Part I of the Income Tax Act for the 1964 taxation year. I am not, however, in a position, on the evidence before me, to determine whether or not there was such a profit or loss.

I do not propose to make any finding in this appeal on the question as to what is the precise transaction giving rise to the potential profit or loss in question. It may be, as paragraph 6A of the Reply to the Notice of Appeal assumes, that there was an ‘‘exchange’’ of some of the trading lands for the Bellamy Hill property and that such exchange was a transaction in the course of the appellant’s trading business. I doubt that that is a correct view of the matter. In the first place, I do not think that the somewhat complicated transaction with the City can be severed into parts and I do not think that there was a simple exchange as such. In the second place, the transaction with the City was a part of the series of transactions whereby the appellant acquired its long term leasehold interest in the present hotel and garage complex and was not a transaction in the course of the appellant’s trading business at all. The better view, in my opinion, is that the appellant, in effect, removed the park lands in question from its trading inventory to use them to acquire the hotel and garage site and that, upon so removing them, it was bound, for the purpose of computing its profits from the trading business, to take into the revenues of its trading business the fair market value of the lands so removed. I think this would have been so if a trader in house properties took a house out of his inventories to use it for his private residence, and I see no difference where a trader removes trading inventories to use them as capital assets of a producing business or as consideration for the acquisition of such assets.

However, I express that only as a tentative view because I do not think that I should decide, in the present case, any more than that there is a transaction in the trading business that ought to be considered.

My decision is that the respondent erred in taking into profit the item under attack but that the evidence that establishes that error shows that there were possible profits or losses of another kind that should have been considered and that were omitted. I cannot, therefore, merely correct the assessment by deleting the item attacked.

I recognize that the pleadings are such that the appellant might feel that he was not put on proper warning of this alternative possibility. I gave the appellant, during argument, an opportunity of electing for a further hearing but, after consideration, he decided not to accept it.

In my view, in the circumstances, there should be judgment allowing the appeal with costs and referring the assessment under appeal back for re-assessment on the basis that the item of $669,900 was not properly included in computing the appellant’s income for the 1964 taxation year, but that consideration should be given to whether there was any profit or loss arising out of the disposition of any part of the 503 acres acquired by the appellant in 1961 that should be so included.