Adanac Apparel Ltd. v. Minister of National Revenue, [1969] CTC 484, 69 DTC 5300

SHEPPARD, D.J.:—This appeal is by Adanac Apparel Ltd. against an assessment for the years 1965 and 1966 alleged to be in error, aS made on the basis that 715 Fisgard Street, Victoria, B.C. was acquired for the business of dealing in land or otherwise turning to account for a profit and was not acquired to gain or produce income within Section 1102(1) (c) of the Income Tax Regulations.

The appellant was incorporated in British Columbia in May, 1963, under Memorandum of Association with these objects:

(a) To manufacture and deal in merchandise, particularly apparel. (Ex. A(l), Objects A to C.)

(b) To act as manufacturer’s agent and to operate deposit accounts, to promote sales of the company’s products. (Ex. A(1), Objects C and D.)

The appellant was throughout owned and controlled by Eddy’s Limited, which operates a store at the corner of Douglas and Fisgard Streets in Victoria, B.C. for selling apparel. These companies are owned and controlled by Mallek, who is also a director of both companies.

The appellant’s contention is that the purchase of the lands and buildings in question at 715 Fisgard Street was for the purpose of a bargain barn arising out of the business of Eddy’s Limited. The history of Eddy’s Limited is as follows:

In 1934 the company started a shop for the sale of women’s apparel in rented premises on one lot at the corner of Douglas and Fisgard Streets (Ex. A2). That business grew from annual sales of $30,000 to annual sales of about $1,000,000 at the present time. The original building was initially leased at approximately $30 per month and was later purchased by Eddy’s Limited. At that period and before the lot was acquired by Eddy’s Limited a ten foot lane at the rear of the property and an easement over the rear three feet of the lots now owned by Eddy’s Limited was given by the then owner to a third person.

In 1939 Eddy’s Limited purchased the Piggley Wiggley shop and lot which was next door to the south and thereupon Eddy’s Limited operated its business in the two buildings and built an addition to the rear of both buildings.

In 1941 Eddy’s Limited purchased the linen shop then immediately to the south and thereafter operated its business over the three lots.

In the period 1950-1958 Eddy’s Limited built a three-storey addition to the rear of the shop, constructed a balcony in the building and removed certain of the walls to permit Eddy’s Limited to operate a bargain basement.

In 1960 Eddy’s Limited built an addition to the balconies on the south and north sides and in that period obtained an option from Millar & Coe to purchase their business and assignment of their lease in the toy shop immediately to the south.

Montague, who owned. the three lots immediately to the south of Eddy’s Limited, including that occupied by Millar & C-oe, refused to permit Eddy’s Limited to open the wall between its business and the toy shop. For that reason the option from Millar & Coe was dropped.

In the 1960’s, P. Burns & Co. Ltd. advertised the property in question, known as 715 Fisgard Street, for $62,000. That property is east of the lane and to the rear of the shop of Eddy’s Limited and consisted of two lots with buildings thereon. Mallek offered P. Burns & Co. Ltd. $26,000 for the property but nothing was heard. In 1963 an official of the Burns Co. called in Mallek and they arranged a sale at $80,178, apportionable $12,900 for the two lots and $17,270 for the two buildings. The sale was completed in October, 1963. At that meeting Mallek was asked to whom Burns & Co. would convey the property and Mallek stated to put it in the name of Adanac Apparel Ltd. Mallek intended to operate a bargain barn in the building immediately to the east of Eddy’s Limited. To obtain that building he had to purchase the two properties, as in Sterling Paper Mills Inc. v. M.N.R., [1960] C.T.C. 215.

Immediately Mallek began negotiations with Montague to arrange that Eddy’s Limited might acquire from Montague the lane and easement in question or obtain aerial access to the lots (715 Fisgard Street). These negotiations began orally and included an offer by Mallek, which Montague refused by letter of October 30, 1963 (Ex. All). By letter of November 1, 1963 (Ex. A8) Mallek made a further proposal to Montague with an enclosure containing a diagram of the property (Ex. A9). That proposal Montague refused by letter of November 12, 1963 (Ex. A10).

By lease of January 1, 1964, the appellant leased the most westerly lot on 715 Fisgard to Pacific Products Use and Service Ltd., and gave an option to purchase (Ex. A16). The lease and option lapsed in August 1965 and Mallek demolished the buildings and converted the buildings to a parking lot.

About October 1, 1965, the appellant sold the property to realize the net amount of $34,965 and realized thereon a profit of $3,287, which profit the Minister assessed as taxable income, on the grounds that the appellant acquired the property for the purpose of trading and turning to account for profit.

The appellant appealed to the Tax Appeal Board and that appeal was dismissed. Thereafter the appellant appealed to this Court.

The issue is whether the property in question, 715 Fisgard Street, was purchased for the purpose of trading as held by the Minister or on the other hand for the purpose of use as store premises as contended by the appellant.

Mallek has testified that he purchased the property for use as a bargain barn, thinking he could arrange access from the shop of Eddy’s Limited to the property on 715 Fisgard Street, and when he found he could not make such a deal with Montague, who owned the lane and easement, then the property on Fisgard Street was useless for the purposes for which it was acquired and accordingly the appellant sold it for a gross amount of $35,000 or net of $34,965 to one Sinclair who operates a ladies ready-to-wear shop two doors to the south of Eddy’s Limited.

The statements of Mallek should be accepted for various reasons. Mallek is a successful businessman who sells, under Eddy’s Limited, ladies’, men’s and children’s apparel, and whose sales have increased from $30,000 per year in 1934 to approximately $1,000,000 at present. This indicates that many have found him to be a reliable businessman.

Moreover, the increase in sales has raised the problem of obtaining a sufficiently large premises for the increasing business conducted by Eddy’s Limited. In 1934 Eddy’s Limited began business at the corner of Douglas and Fisgard Streets and extended to the south by purchasing the adjoining property of Safeway Limited and of the furniture store. In the decade commencing 1950 Mallek, for Eddy’s Limited, attempted to purchase the leasehold property of Millar & Coe next adjoining to the south and obtained a written option to purchase their business and an assignment of their lease, but Montague refused to allow the adjoining wall between Eddy’s Limited and the property of Millar & Coe to be opened so as to include the Millar & Coe building into the shop of Eddy’s Limited. Hence further expansion to the south was precluded. Extensions were attempted within the building of Eddy’s Limited. In 1941 a lean-to was constructed at the rear for storage. In the 1950’s there were built additions to the store. In the decade of 1960 balconies were built. The bargain basement was found to be too small and was therefore closed.

The expansion that remained for Eddy’s Limited was to purchase the property to the rear at 715 Fisgard Street and that was blocked by Montague refusing to allow access from Eddy’s Limited through the lane to the Fisgard Street property.

The story of Mallek is therefore confirmed by the surrounding circumstances. The need for expansion was clear and extension was blocked to the south as indicated by the letters of Mallek and Montague. There remained the possibility of expanding into the property on Fisgard Street.

Moreover, Mallek would not purchase property on Fisgard Street for the purpose of selling at a profit. The only real value of property on that street is to be obtained by connecting it with a building or business on Douglas Street and therefore when Montague refused Mallek access to the property on Fisgard Street the plans of Mallek were frustrated and he sold the property for what it would bring. The profit realized appears to be somewhat modest for the risk of $30,178 and the interest thereon until the sale. The return does not indicate that the purchase was made with an expectation of realizing a profit.

Further, it was legally impossible for the appellant company to engage in the business of buying and selling land. The appellant was incorporated to deal in merchandise, particularly in apparel (Ex. Al, Objects A to C inclusive) and being a Memorandum company incorporated under the Companies Act of British Columbia, had no authority to engage in the business of land (Ex. Al), and no existence for the business of dealing in land.

In Bonanza Creek Gold Mining Co. v. The King (1916), 26 D.L.R. 273 Viscount Haldane, at page 278 stated :

For the company, it is said, is a a pure creature of statute, existing only for objects prescribed by the legislature within the area of its authority and is therefore restricted so far as legal capacity is concerned on the principle laid down in Ashbury Carriage Co. v. Riche, L.R. 7 H.L. 653.

The effect of a memorandum on such a company is explained in Ashbury Carriage v. Riche (1875), L.R. 7 H.L. 653, by Lord Cairns at page 669 :

That is, therefore, the Memorandum which the persons are to sign as a preliminary to the incorporation of the company. They are to state “the objects for which the proposed company is to be established”; and the existence, the coming into existence, of the company is to be an existence and to be a coming into existence for those objects and for those objects alone.

at page 670 :

It states affirmatively the ambit and extent of vitality and power which by law are given to the corporation, and it states, if it is necessary so to state, negatively, that nothing shall be done beyond that ambit, and that no attempt shall be made to use the corporate life for any other purpose than that which is so specified.

at page 671:

The Memorandum of Association is, as it were, the area beyond which the action of the company cannot go;

and at page 672 :

The question is not as to the legality of the contract; the question is as to the competency and power of the company to make the contract.

A purported transaction outside those objects such as the business of dealing in land is a nullity and could create no liability on the company acting wltra vires. Sinclair v. Brougham, 11914] A.C. 398, pp. 414 to 415 and 418.

The Companies Act (R.S.B.C. 1960, c. 67) which applies to the appellant, contrasts ‘‘the objects’’ and ‘‘the powers’’ of such a company. The objects. (referred to in form 1 and Section 22(1)) have the purpose and effect hereintofore set forth. On the other hand, ‘‘the powers’’ are provided for in Section 22(1) which reads in part as follows:

A Company has as ancillary and incidental to the objects set forth in the memorandum the powers following, etc.

The ‘‘powers’’ being ‘‘ancillary and incidental to the objects, have no independent existence but arise as means of carry out a named object. Hence a company with the object of buying and selling apparel could require a building and lot to carry on that business and then would have the power to purchase or lease such real property (Section 22(a)), or having acquired the building and lot the company may wish to discontinue its use, and then would arise the power of sale (Section 22(q)). Such a power is quite distinct from an object to buy and sell land which would permit the company to engage in that business and may result in the profits so derived being taxable income. Again such a statutory or memorandum company is in contrast to a Letters Patent or Prerogative Company which has generally the capacity of a natural person as explained in Balstone Farms Ltd. v M.N.R., [1966] C.T.C. 738 by Cattanach, J. at pp. 749 and 750.

This appellant had power to purchase, hold and sell the Fisgard land. It had the object to deal in merchandise and particularly in apparel (Ex. Al) and hence by statute had power to acquire land to carry out the named object (Companies Act, Section 22(a)). It was, therefore, open to the appellant to carry on a bargain barn and to acquire 715 Fisgard Street for that purpose. As the appellant was a wholly-owned subsidiary of Eddy’s Limited or Mallek as principal shareholder of Eddy’s Ltd. and in both a director could require the appellant to carry on the business of bargain barn and to continue to operate that business or to discontinue at any time by sale to Eddy’s Limited or by sale to a third person when the plan became frustrated by Montague’s refusal to permit rights over the lane {Companies Act, Section 22 (q)).

The evidence of Mallek is more readily acceptable because it was intra vires of the appellant to acquire the property in question at 715 Fisgard and not ultra vires as it would have been for the appellant to carry on the business of buying and selling land. It is not suggested that Mallek considered these legal difficulties but it is sufficient to say that the memorandum of the appellant company precludes it carrying on the business of dealing in land.

The cases cited for the respondent do not assist as they do not raise the doctrine of ultra vires.

In Regal Heights Ltd. v. M.N.R., [1960] C.T.C. 384, Judson, J. at page 390 states :

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.

That was the question in the following cases: Balstone Farms Ltd. v. M.N.R., [1968] C.T.C. 388; Sutton Lumber & Trading Co. Ltd. v. M.N.R. [1953] S.C.R. 77 at 93 ; [1953] C.T.C. 237 at 253 ; Regal Heights Ltd. v. M.N.R., [1960] C.T.C. 390.

In the other judgments cited for the respondent the question was whether the laws of a province could restrict therein the activities of an extra-provincial company. In Campbell v. Morgan, [1919] 1 W.W.R. 268, the question was whether an extra-provincial company could, in Alberta, register title to land. In Becher v. Woods (1865), 16 U.C.C.P. 29; McDiarmid v. Hughes (1888), 16 O.R. 570; and Garner v. Gavan, [1952] 2 D.L.R. 804, the question was whether or not the Ontario Mortmain Act restricted an extra-provincial company operating in Ontario.

In Creelman v. Hudson’ Bay Co. (1919), 48 D.L.R. 234 (P.C.), the issue was whether or not a certificate of indefeasible title satisfied the obligation of a vendor to make title for the purchase. That is not the issue here as there is neither the relation of vendor and purchaser nor a certificate of indefeasible title to be considered.

In conclusion the appellant company was not in the business of buying and selling land and did not purchase the land in question, 715 Fisgard Street, for resale at a profit.

The assessment is referred back to the Minister to be re-assessed according to these reasons.

The appeal is allowed with costs.