Berman v. Minister of National Revenue, [1975] C.T.C. 2077, 75 D.T.C. 49

The Assistant Chairman:

1 This is the appeal of Joseph Berman from an income tax assessment in respect of his 1967 taxation year. By agreement of counsel for both parties, the appeal of Joseph Berman was heard simultaneously and on common evidence with those of Mrs Ida Berman and Mrs Pearl Lighter.

2 Jay-El-Jay Investment Corporation (hereinafter referred to as “Jay- El-Jay”) and Norman Holdings Corporation (hereinafter referred to as “Norman Holdings”) were personal corporations controlled by the Joseph Berman family which consisted of Mr Joseph Berman, his wife Ida Berman and his daughter Pearl Lighter. Early in 1959, Jay-El-Jay and Norman Holdings in association with Irving Eklove and Sydney Starr, two real estate brokers who were partners in the firm of Eklove & Starr, and other parties, acquired an undivided minority interest in 20 million square feet of raw land along the Laurentian Autoroute in the Laval area of Ile-Jésus near Montréal.

3 In June of 1959, for purposes of being registered as owners of the 20 million square feet of land in undivided interest, the above-mentioned parties caused to be incorporated eight separate companies. Jay-El-Jay and Norman Holdings held corporate shares in four of these companies as follows:

Denvin Inc owning 15% whose shareholders were: Jay-El-Jay, Norman Holdings and Eklove & Starr Realties Ltd;

Metcalfe Construction Co Ltd owning 15% whose shareholders were: Jay- El-Jay, Norman Holdings and Eklove & Starr Realties Ltd;

Stero Investments Inc owning 10% in which Jay-El-Jay, Norman Holdings and Ivanhoe Corporation (a totally-owned subsidiary of Steinberg's Ltd) were shareholders;

Gale Realties & Development Co owning 10% in which Jay-El-Jay, Norman Holdings and Ivanhoe Corporation were the shareholders.

4 In 1967 Jay-El-Jay and Norman Holdings sold their shares in Denvin Inc and realized, in the transaction, a profit of $188,267.81. By notices of reassessment dated March 27, 1972 the Minister of National Revenue, as a result of this transaction, included in the computation of the income of each of the appellants for their 1967 taxation year, as undeclared deemed dividends from Jay-El-Jay and from Norman Holdings, the following amounts:

Jay-El-Jay Investment    Norman Holdings
                                    Corporation           Corporation
Mr Joseph Berman                      $37,306.33          $13,680.93
Mrs Pearl Lighter                      26,642.01           77,326.97
Mrs Ida Berman                                --           20,410.59

5 Notwithstanding the apparent complexity of the facts herein, some of which are only incidentally pertinent to the issue, we have before us a simple trading case. The fact that two personal corporations are involved in the disputed transactions does not in my opinion alter the nature of the issue nor require the application of criteria other than those usually applied in trading cases. A personal corporation, regardless of the objects provided for in its charter, can engage in a venture in the nature of trade, and the only question before the Board is whether Jay-El-Jay and Norman Holdings in fact did so in 1967.

6 From the evidence adduced, there can be no doubt that Mr Joseph Berman was in fact the active shareholder and the administrator of the operations of Jay-El-Jay and of Norman Holdings. Mrs Ida Berman and Mrs Pearl Lighter testified that they took no part in the administration and indeed had no real knowledge of the operations of their two personal corporations.

7 In 1959 Mr Berman caused Jay-El-Jay and Norman Holdings to acquire their undivided interest in the 20 million square feet of raw land in Laval, Québec, along with, as I have said, two very active real estate brokers (Messrs Eklove and Starr) and other parties that were not clearly identified.

8 The evidence was very vague as to the purpose for which the undivided interest in the raw land was originally acquired by Jay-El-Jay and Norman Holdings. Mr Joseph Berman, speaking for the appellants, was very non- committal as to the purpose of the purchase in 1959 and the shopping centre project to which he referred seems to have arisen some years after 1959. In my opinion it is most unlikely that the original purpose of acquiring 20 million square feet of raw land was to build a shopping centre on it.

9 Mr Berman, in his testimony, stated that he was not happy when Steinberg's Ltd, through its wholly-owned subsidiary, Ivanhoe Corporation, showed interest in the land for the purpose of building a shopping centre thereon, because, according to Mr Berman, it would take too much time before Steinberg's would reach a firm decision as to whether or not they would build a shopping centre on the said land. Eklove and Starr, according to the evidence, had, from the beginning, no intention of taking part in any shopping centre project.

10 In the face of these facts, it is difficult to conclude that Jay-El-Jay and Norman Holdings acquired an undivided interest in the land for the purpose of developing and operating a shopping centre. On the other hand, the acquisition by the two personal corporations of an undivided interest in 20 million square feet of land in association with experienced and active real estate brokers could conceivably indicate a speculation in raw land whose value, according to the record, being situated where it was, would necessarily rise. There is evidence, that was not effectively contradicted, that Eklove and Starr actively attempted to sell the land; that they were advertising it for sale; and that they had “For Sale” signs on the property.

11 Their subsequent incorporation of Denvin Inc, whose shareholders were Jay-El-Jay, Norman Holdings and Eklove and Starr Realties Ltd, for purposes of being registered as holders of an undivided minority interest in the land, does not in my view alter the purpose for which the land was first acquired. Denvin Inc merely became the vehicle through which Jay-El-Jay's and Norman Holdings' interest in the land would be handled.

12 On December 12, 1962, by memorandum of agreement in which Mr Joseph Berman was the fourth party, the group of companies owning an undivided interest in the 20 million square feet of land were to form a corporation in association with Campeau Corporation, each owning a 50% interest in the land for the purpose of developing a residential as well as a commercial area. The agreement actually provided that Ivanhoe Corporation, Campeau Corporation and Berman would be granted options on certain portions of the land. Campeau Corporation obtained options on the land to be used for residential purposes whereas Ivanhoe was to have options on 40% of the land set aside for commercial purposes on which area a shopping centre would be built, and Mr Joseph Berman was to be given options on the remaining 60% of the commercial land (clause 22 of the agreement). However, clause 23, paragraph (i) of the agreement prohibited Mr Berman from constructing a shopping centre on 60% of the commercial land which his option would cover.

13 It is my understanding that this agreement was not implemented. However, the fact that it was signed by Mr Berman would lead one to believe that the construction and development by him of a shopping centre on the land was not uppermost in his mind by the end of 1962.

14 By an option to purchase signed by Mr Berman on June 21, 1965 (Exhibit A- 6) Jay-El-Jay was ready to sell to International Investment Company SA (hereinafter referred to as “International Investment”) all or part of its shares in Denvin Inc and, as a result of this option, on December 31, 1965 Jay-El-Jay sold to International Investment 9 common shares of Denvin Inc for $54,000 (Exhibit A-7). From the evidence it appears that this amount of $54,000 was owed by Denvin to International Investment. In the light of the option granted by Mr Berman to sell through Jay-El-Jay all of Denvin's shares in the land, I find it difficult to understand how Mr Berman can now claim that the long-standing purpose of Jay-El-Jay and of Norman Holdings in acquiring the land was to invest in the development and operation of a shopping centre.

15 On August 3, 1965, 6 years after the acquisition of the land by the personal corporations, an agreement was reached between the group of corporations having an undivided minority interest in the 20 million square feet of land (then zoned as agricultural land) and Deauville Realties Ltd. The latter, as agent of the corporations, was to obtain from the Municipality of Chomedey a rezoning of the land from agricultural to residential, and/or industrial, and/or commercial, to permit the proposed development of all of the said land. In paragraph 17 of the agreement of August 3, 1965 the companies granted to Ivanhoe, a wholly-owned subsidiary of Steinberg's, an exclusive and irrevocable option to purchase any part of the 2,000,000 square feet described as commercial and shown, on the plan prepared by Warshaw and O'Neill, as a shopping centre. The option was valid until October 1, 1967 (Exhibit R-1).

16 On September 20, 1966, by deed of exchange (Exhibit A-5), Electra Realty Corp, represented by its president, Joseph Berman, and Ivanhoe Corporation arranged an exchange of land with the group of companies, including Denvin, that held an undivided minority interest in the 20 million square feet of land. The land thus acquired by Electra Realty Corp and Ivanhoe was subsequently developed into one of the largest shopping centres in Canada. Mr Berman was no doubt involved in various trading transactions in the said land ever since 1959.

17 However, other than oral statements of Mr Berman that he had had long negotiations with Ivanhoe and Steinberg's in connection with the shopping centre project, the appellant produced no evidence which might contradict the facts as they appear on the written record or which might even indicate that Mr Berman, at that period of time, was one of the promoters of, or that he was in any way involved with, the development of the shopping centre; and there is, of course, even less evidence, written or oral, that might indicate that Mr Berman's purpose in 1959 in acquiring Jay-El-Jay and Norman Holdings' minority interest in the undivided land was to invest in the development of a shopping centre. It may well be that, once Steinberg's had definitely decided to develop a shopping centre on part of the property, Mr Berman, who, it was alleged, had sufficient capital to do so, saw an opportunity to participate and at that point in time did have negotiations with Ivanhoe and Steinberg's on the subject but, as I see it, that opportunity arose long after, and was completely independent of, the purpose for which Jay-El-Jay and Norman Holdings originally acquired the interest in the 20 million square feet of land in Laval. Whether Simpsons or Eaton's or both did not want the presence of minority shareholders in the Laval shopping centre project and, as claimed by the appellant, therefore forced Denvin out in 1967 by purchasing its shares from Jay-El-Jay and Norman Holdings, is in my view not pertinent to the issue in this appeal.

18 In my opinion, what is pertinent is whether Jay-El-Jay and Norman Holdings acquired their interest in the land as a long-term investment and what that long-term investment in raw land, undertaken jointly with active real estate brokers, really was. Counsel for the appellant alleges that Jay- El-Jay and Norman Holdings held the land for 8 years. In differentiating between an investment and a trade, the length of time a property is held is merely relative and its usefulness as a criterion is dependent on the other facts of a given case. It is on record that there was a softening of the land market from 1960 to 1965. Holding on to land in these circumstances does not carry much weight in determining whether the said land was acquired for resale or for a long-term investment.

19 It also seems to me important that some specific indication be given as to the nature of the project or use contemplated for the land at the time of its acquisition and as to what was envisaged as the object of the alleged long-term investment. In this instance, there is no valid existence that Mr Berman had any long-term investment project in mind. On the evidence adduced, I am not satisfied that, at the time of the acquisition of their interest in the land by Jay-El-Jay and Norman Holdings, their purpose was to develop a shopping centre either with, or independently of, Steinberg's participation. The transactions and the behaviour of Mr Joseph Berman while acting on behalf of Jay-El-Jay and Norman Holdings from 1959 to 1967, with regard to their interest in the land are not in any way indicative of a person in pursuit of a long-term investment.

20 In the absence of evidence to the contrary, one can only conclude that the purpose of the acquisition of the interest in the land was for resale at a profit.

21 Counsel for the appellant claims that, even if it had not been the intention to participate in the development of the Laval shopping centre, the investment of funds by Jay-El-Jay and Norman Holdings would, in any event, have constituted a capital transaction. I do not believe, as suggested by counsel, that the placing of funds by personal corporations into a third company would automatically constitute a capital investment. It all depends on the nature of the investment made and the goal that was being pursued.

22 In my view, Jay-El-Jay and Norman Holdings bought an undivided interest in land for the purpose of resale and such a transaction is not a capital investment. It was either the business of the companies or a venture in the nature of trade as it would have been for any other legal entity. The subsequent and related incorporation of Denvin and the eventual sale of Jay-El-Jay's and Norman Holdings' corporate shares in Denvin do not, in my view, alter the nature or purpose of the original transaction entered into by Jay-El-Jay and Norman Holdings, and the profit realized by them on the sale is, in my opinion, taxable income.

23 On the facts of the appeal, I have come to the conclusion that the acquisition and sale of the undivided interest in 20 million square feet of land in Laval constitutes a venture in the nature of trade, and the profit of $188,267.81 realized in the disposition of their interest through the sale of their corporate shares in Denvin is income to Jay-El-Jay and Norman Holdings. I also hold that that income was properly deemed by the Minister of National Revenue to have been proportionately distributed to each of the appellants as shareholders of the two personal corporations and to have been received by them pursuant to subsection 67(1) of the Income Tax Act.

24 The appeal is therefore dismissed.