Varennes Holdings Corp. v. R., [1975] C.T.C. 230, 75 D.T.C. 5164

Walsh, J:

1 This is an appeal from a judgment of the Tax Review Board of May 3, 1974 maintaining a reassessment issued by the Minister of National Revenue in respect of plaintiff's 1967 taxation year. The issue before the Tax Review Board related to whether the disposition of a portion of plaintiff's property was an adventure in the nature of trade and therefore taxable income or not, and, further, in the event that it was so held, what was the appropriate cost of the portion of the property so disposed of by plaintiff. The Board dismissed plaintiff's appeal but referred the matter back to the Minister to determine the appropriate cost to plaintiff of the property so disposed of by it. Both issues are now before this Court.

2 Plaintiff and its principal shareholders are admittedly large-scale developers of shopping centres and commercial and residential property, and on September 13, 1956 one of the principals, Mr Harry Dubrovsky, since deceased, purchased a large tract of farm land in Varennes on the south shore of the St Lawrence River, not far from Montreal, for a price of $375,000. On January 24, 1957 Mr Dubrovsky transferred these lands to plaintiff stating in the deed that he had made the earlier purchase in trust. Some 10 years later on February 28, 1967, over half of the property consisting of 256 arpents was sold to Murphy Oil Co Ltd for $729,933 and it is the profit from this sale which led to the reassessment which is the subject of the present proceedings.

3 Plaintiff was incorporated on July 31, 1956, its principal objects clause being as follows:

1. To acquire by purchase, lease, exchange or other legal title and to hold and own land with or without buildings in Varennes, County of Verchères, P.Q., as may from time to time be determined, and to develop the same and to construct buildings thereon if and as required and to administer and manage the same for investment purposes and to act as real estate lessors and administrators in connection therewith and to dispose of the said immoveable properties in whole or in part for such consideration, upon such terms and conditions, as may be thought proper.

4 Plaintiff contends that in acquiring the property in question it was always its intention to develop it as a residential and commercial development, building a shopping centre on part of same. Quebec Highway No 3 runs through the property as does the Canadian National Railway whose tracks border the highway. There are public roads on one side of it and to the rear and it borders the St Lawrence River in front for a distance of some 3,100 feet. At the time of the purchase it also included two adjacent islands in the St Lawrence River. All of these attributes made it desirable for development although it had certain minor disadvantages in that the portion on the river bank was low-lying and subject to some flooding in the spring. Plaintiff allegedly, before purchasing the property, received some assurance from the municipal authorities that services would be installed on same, the nearest part of the property being some three-quarters of a mile from the municipal water system. During the 10-year period from 1957 to 1967, nothing was done to develop the property and the services were not installed, although plaintiff claims to have had frequent meetings with municipal authorities seeking this. The sale to Murphy Oil was as the result of an unsolicited offer submitted to plaintiff by a real estate agent and one of the principal considerations for making the sale, according to plaintiff, was the expectation that an industrial purchaser, such as Murphy Oil, could hasten the installation of services. Murphy Oil wanted part of the water front to build a basin for large oil tankers so purchased part of the water frontage and part of the north-east side of subject property as well as most of the area on the far side of the railway tracks and highway, leaving plaintiff with only a small triangular lot between the highway and tracks together with the major part of the river front property bounded in the rear by the highway. Plaintiff understood that Murphy Oil did not intend that a refinery should be built on the property purchased but merely an oil storage depot. The basin would necessitate the building by Murphy Oil of a high dyke to prevent spring flooding. Plaintiff felt that this would be advantageous for it, although since Murphy Oil only purchased some 640 feet of river front, there would still be nearly 2,500 feet of plaintiff's property along the length of which a retaining wall would have to be built if flooding of same in spring was to be prevented. In any event, the purchase by Murphy Oil did nothing to hasten the servicing of the property which remains unserviced to this day.

5 Mr Louis Dubrovsky testified that he is secretary of plaintiff and that a company known as Ace Holdings owns 30% of the shares in plaintiff and he himself holds 16% of Ace Holdings' shares, Ace Holdings being a family corporation. He and other members of his family have been active in real estate development since 1946 or 1947, entering into the field of developing shopping centres when they first commenced being built in a big way in the 1950's. They have developed some of the biggest shopping centres in Montreal, including the Van Horne Shopping Centre built in 1954, the Cavendish Mall having an area of over one million square feet for which they purchased the property in 1967 but only built in 1973 at a cost of some $15,000,000, and the Versailles Shopping Centre in the east end of Montreal which was built at a cost of some $20,000,000. He stated that land has to be bought some time in advance and frequently is not serviced at the time it is bought and, in fact, lengthy negotiations have to be entered into with the municipalities in connection with zoning and services. Their plans frequently do not advance to the detailed drawing stages for some time. They foresaw that the south shore of the St Lawrence near Montreal would have a great future, which is why they bought the subject property. He gave the distance as 12 miles from Montreal although another witness, Mr Fernand Brodeur, who has always lived in the Varennes area and is an alderman of the Village and secretary of the Parish and School Commission, gives the distance as 18 miles and stated that he worked in Montreal in 1952, near the Jacques Cartier Bridge which would be the shortest way of getting to Varennes at that time and that it always took him at least one hour to make the trip.

6 Mr Louis Dubrovsky did not himself communicate with the municipal authorities at Varennes, this being done by his late brother Harry Dubrovsky who allegedly was assured that there would be no difficulty in getting the services. It was their intention to use the islands for parks or marinas, with access to them by boat and to build apartments and a shopping centre on part of the property. He stated that in a development of this sort about 60% of the land is used for building, about 35% being given up for streets and 5% for parks. He conceded that not all proposed developments mature into successful projects but stated that the developer must always be optimistic. It is only after exhausting all possibilities of developing that they might then consider a sale. The company would still develop the balance of the property even now if they could obtain the necessary services. It never sought to sell same. He has been taxed before on profits realized on land sales and also on share sales in the Tax Review Board case of Birchwood Holdings Inc v. MNR, [1971] Tax A.B.C. 1125, 71 D.T.C. 751, and in Harry Dubrovsky and Louis Dubrovsky v Minister of National Revenue, [1970] C.T.C. 403, 70 D.T.C. 6279, respectively. This is, of course, by no means conclusive as each transaction must be considered on its own merits and there is no doubt whatsoever that plaintiff and its principals are developers on a very large scale, with the greater portion of their revenues coming from rentals for shopping centres and apartment buildings rather than from real estate sales. Ace Holdings, for example, had $489,168 gross revenues from rentals in 1973 while Nordic Development Corporation controlled by Joseph Schreter and Louis Bass, who between them also own 61% of the shares of plaintiff, had rental income in 1972 amounting to $1,588,075.

7 The evidence indicates, however, that plaintiff did not make any serious efforts to obtain the necessary services in order to develop the property, nor did Murphy Oil with respect to the portion which they bought. This may well have been because the property was bought long before there were any signs of serious development in the area. The Louis Hippolyte Lafontaine tunnel joining the east end of Montreal to the south shore as part of the Trans-Canada Highway was not built until about 1966 or 1967 and the Metro connection to the south shore via St Helen's Island was only built just prior to Expo 67. In 1954 therefore the subject property was in no way comparable to the Van Horne, Côte St Luc or even the Ville D'Anjou areas of Montreal, which were developing very rapidly, so that, even conceding that the planning of a shopping centre and commercial development may take several years to come to fruition during which services have to be installed and problems resulting from building or zoning by-laws overcome, as was the case in connection with the Versailles Shopping Centre in Ville d'Anjou, it was nevertheless evident that such developments would be required and could undoubtedly be constructed within a few years of acquiring the property. These areas were in no way comparable to the area in which the subject property is located, which in 1954 was in an area which was not developing and did not really start to develop until after the construction of the tunnel and the extension of the Metro some 12 years later and even yet is largely undeveloped.

8 The evidence made with respect to approaches to the municipal authorities in order to obtain services is vague and inconclusive to say the least. Mr Louis Dubrovsky admitted that he had never contacted any of them personally but that his deceased brother Harry Dubrovsky made the approaches before they bought the property and subsequently. No communications were ever made in writing, nor were there any firm assurances that services would be provided, although allegedly the Mayor, when approached, was enthusiastic. Mr Joseph Schreter testified that he went with Harry Dubrovsky to speak to the Mayor of Varennes who was English-speaking at the time but that later the Mayor changed and as neither he nor Mr Dubrovsky spoke French, they had communication difficulties and they found there was a change in climate at the City Hall. He does not recall, however, whether it was the Mayor of the Parish or of the Village as he only went to discuss the matter with the Mayor with Mr Dubrovsky on the one occasion. On a subsequent occasion after they had bought the property he went with Mr Dubrovsky to the City Hall and the Mayor was absent so they saw other employees only. They kept in touch with municipal authorities through a Mr Presterman who had a store and who also owned some property in the area and was also interested in obtaining services. All the municipal officials they met were enthusiastic about their plans.

9 However, to refute this, defendant called the various municipal officials who might be expected to have had knowledge of any communications made by plaintiff. Notary Jules Phaneuf, who was secretary-treasurer of the Village of Varennes, the Parish of Varennes and the School Commission from 1953 to 1963 stated that the property in question was not in the village but in the parish up until July 1, 1962. In 1956 the Mayor of the Parish was Adrien Prevost who did not speak English. There was no city hall in the Village nor Parish in 1956, any municipal business being conducted from the basement of Notary Phaneuf's home where he had his office. Public meetings would be held in the parish hall but there was no office there. Mr Presterman had part interest in a property in the area which he wished to subdivide and he told him to make a formal request in writing for sewers and water services which was done in 1958 or 1959 and after the council referred the matter to their engineers his request was approved for thirty or forty houses. The witness stated that he would have personally been aware of any request made by plaintiff and knows of none. He was the only notary in the area. Around 1955 large purchases between Sorel and Montreal were made on the south shore as a result of the St Lawrence Seaway development which resulted in heavy industry being built farther east between Varennes and Vercheres. In 1956 and 1957 the Varennes water system was privately owned, belonging to a man by the name of Brunet and was insufficient to service any large development. Eventually the Village built a new one in 1958 or 1959 although it was built on land within the limits of the Parish, but there was an agreement to furnish the Parish with water. The Mayor of the Village in 1956 was named Loranger and he spoke English and remained as Mayor until 1961 so was Mayor at the time the water system was built. Water connections would be within about a mile of subject property. In 1968 to 1970 water was furnished for Hydro Quebec which was 5 miles distant. Mayor Loranger would have had a personal office as he was an insurance agent and the customs collector for the area but there was still no City Hall.

10 Fernand Brodeur who has always lived in Varennes and from 1962 to 1963 was an alderman of the Village and after 1963 was secretary-treasurer of both the Parish and the School Commission, and is now director-general of the School Commission of Varennes, also testified. He was Mr Phaneuf's successor in office and corroborated his evidence to the effect that if a developer wanted services application would have to come through the secretary- treasurer's office. Since 1963 he recalls no such application. In addition to Hydro Quebec, Dow Chemicals and Gulf Oil have built large plants on the south shore and the municipality put in three miles of water mains for Dow Chemicals on request. He can see no reason why the same would not have been done for the subject property if any formal request had been made since the distance to bring water to plaintiff's property would only be about three- quarters of a mile and the sewer mains were already on the edge of the property on the Montée Ste-Julie in 1959. They had never received any application for services from Murphy Oil either. Its land was zoned as residential in 1968. He believes the Mayor of the Parish may have met its representatives in Montreal but he never saw any written zoning application nor was there any verbal one made to the council.

11 Maurice Dessureault, the assistant secretary-treasurer for the Town of Varennes from 1964 to 1972 and secretary-treasurer of the Village also confirmed that no request had ever been made by plaintiff for water or services nor had he ever met any representatives of plaintiff. He produced a copy of by-law No 385 of the Parish adopted on July 14, 1966 which established a port zone in which about 80% of the subject property is located, and prohibited the building of oil refineries or storage depots. This would also have had the effect of preventing residential development in this area unless and until the zoning by-law was changed. This seems to negate plaintiff's contention that at the time it sold the property to Murphy Oil early in 1967 it still intended to use the remaining property for residential and commercial development and hoped that the sale to Murphy Oil would expedite the obtaining of services which they could use for this purpose.

12 All that can be concluded from this evidence is that, while the late Mr Harry Dubrovsky and Mr Schreter evidently spoke to an English-speaking Mayor at the time of buying the property and, as is not altogether surprising, received an enthusiastic response with respect to their development plan, they apparently consulted the wrong Mayor, namely that of the Village and not of the Parish where the subject property is located, and in any event no formal application for services was ever made in writing nor were any serious efforts made to obtain them, plaintiff being content to await developments with respect to the property. This is in marked contrast with the conduct of plaintiff's principals in connection with their other developments where they assiduously sought changes in zoning, prepared plans, arranged for the furnishing of services and eventually overcame the many obstacles encountered by any developer. While they certainly had the knowledge and experience to undertake a major development on the subject property at the time they bought it, this appears to have been little more than a vague possibility for some time in the distant future. Certainly, their conduct does not include the absence of a secondary intention of selling the property at a profit in the event that, for some reason, the development could not be eventually proceeded with as planned. While plaintiff's principals may well be primarily developers rather than speculators, they were certainly knowledgeable about the increasing value of properties on the south shore at the time they bought the subject property, during a period when, as the witness Phaneuf, who is well informed with respect to the area, stated, speculators were acquiring large parcels of land in the area. This is clearly in line with the finding in the case of Regal Heights Limited v Minister of National Revenue, [1960] S.C.R. 902, [1960] C.T.C. 384, 60 D.T.C. 1270, in which Judson, J, in rendering judgment, said at pages 905–6 [388–9, 1272]:

There is no doubt that the primary aim of the partners in the acquisition of these properties, and the learned trial judge so found, was the establishment of a shopping centre but he also found that their intention was to sell at a profit if they were unable to carry out their primary aim. It is the second finding which the appellant attacks as a basis for the taxation of the profit as income. The Minister, on the other hand, submits that this finding is just as strong and valid as the first finding and that the promoters had this secondary intention from the beginning.

Having regard to his background in real estate transactions and to his vague and evasive way of answering many of the questions put to him on cross- examination, as well as my conviction, having regard to the evidence as a whole, that the appellant recognized in the situation that faced his builder- clients a very favourable opportunity to acquire properties that, having regard to his experience, he must have known would almost certainly become more valuable with the passage of time, I am of opinion that one of the reasons that moved the appellant to acquire these lots in 1951 event, I am not persuaded by the evidence that the appellant has discharged the onus of showing that such was not one of such reasons.

To give to a transaction which involves the acquisition of capital the double character of also being at the same time an adventure in the nature of trade, the purchaser must have in his mind, at the moment of the purchase, the possibility of reselling as an operating motivation for the acquisition; that is to say that he must have had in mind that upon a certain type of circumstances arising he had hopes of being able to resell it at a profit instead of using the thing purchased for purposes of capital. Generally speaking, a decision that such a motivation exists will have to be based on inferences flowing from circumstances surrounding the transaction rather than on direct evidence of what the purchaser had in mind.

13 On the question of valuation of the property sold to Murphy Oil, plaintiff claims that this was of greater value than the portion retained by it because of the location of most of it on the higher side of the subject property as well as to the rear of the Canadian National Railway track and the highway. This would make it possible to build a siding for industrial use connecting with the railroad track without the necessity of an underpass under the highway. The islands were expropriated by the federal Government in 1968 at a price of $11,000 for 24 arpents or an average of about $450 per arpent according to the evidence of Mr Margolese, plaintiff's accountant. Exhibit P-5, being a plan connected to the option granted to Murphy Oil, gives the area of the entire property, excluding the islands in the river, as 464.472 arpents. Plaintiff's schedule of land on hand as of August 31, 1967, prepared by Mr Margolese, takes this figure and values the 464.472 arpents as of September 1, 1966 as $469,526.92. He then takes the figure of 256.43 arpents as the area sold to Murphy Oil for the price of $754,933, and, basing himself on an estimate given to him by the directors of the company of $500 per arpent as the value of the remaining land, assigns this value to the 208.042 arpents remaining making a total of $104,021. Adding this to the price of the land sold gives him a figure of $858,954 which he calls total realizable value on land. He then takes the proportion the proceeds of the sale to Murphy Oil is to the total realizable value of the land and applies this ratio to the figure of $469,526.92 being the value at which the land was shown on the company's books, and arrives at a figure of $412,626.92 as the cost of the Murphy Oil land. This leaves a balance of only $56,900 as the value of the remaining 208.042 arpents as of August 31, 1967. This calculation is, of course, only valid if one of the premises on which it is based, namely that the remaining land was in 1967 worth only $500 per arpent is correct and this is a figure given him by the directors of plaintiff, his own client.

14 The Minister disputes this calculation pointing out that the price of the land sold to Murphy Oil worked out at nearly $3,000 per arpent while the book value of the remaining land of $56,900 on the basis of this calculation, would work out at under $275 per arpent. The calculation would give the cost of the lands sold to Murphy Oil on the basis of Mr Margolese's calculation as approximately $1,610 per arpent, some six times greater than the book cost shown for the remaining land. While, unfortunately, the deed of sale to Murphy Oil was not produced, Mr Louis Dubrovsky testified that the price was fixed on a per foot basis. Whether this is so or whether it was merely for a global price, as was suggested in argument, it is not disputed that no distinction was made in the sale price between the water front property and that to the rear on the other side of the highway and railway tracks. No attempt was made by plaintiff to adduce any expert evidence as to whether water front property, which can be protected, although at considerable expense, by a retaining wall, and would otherwise be subject to flooding, is of more value because of its potential for residential development than property to the rear, which would not be subject to flooding, but is adjacent to a major highway and railway track and would therefore be more suitable for commercial or industrial development, or whether the water front property is of less value as plaintiff contends. It must be remembered that the water front property retained by plaintiff is some 1,600 feet in depth and is bordered by the highway so that a considerable portion of it is also very suitable for commercial development and, in fact, more so than the portion of the property sold which is bordered by the railway tracks. Moreover, only a comparatively small portion of the total area of the remaining property is subject to flooding. The evidence as to flooding was of an unsatisfactory nature, one witness being called by plaintiff, actually an employee of defendant in the assessment department, who visited the land shortly before the hearing in April, and who had also visited it in September 1973. All he could say was that the water was higher in April than it had been in September but that not much of it was coming on to the portion still held by plaintiff, although there was some flooding in the area towards the northern part of the property adjacent to the water front portion sold to Murphy Oil and that the water had come up perhaps 100 feet from its summer level. There was some snow still on the ground and this may well not have been the peak of the flooding period, but he was not qualified to say how far peak flood waters might reach, nor to give any evidence about river or land elevations.

15 In defending his calculation, Mr Margolese claims it is in accordance with good accounting practice. He supports the valuation of the remaining land of $500 per arpent by stating that when the land had to be valued for estate tax and succession duty purposes as a result of the death of Bessie Dubrovsky, one of the shareholders of Ace Holdings which has a share interest in plaintiff, the figure of $500 was used. After some discussion it was agreed four years later with the Chief Assessor and the Provincial Assessor that the figure of $600 would be accepted. He also relies on the average price of $450 per arpent paid when the islands were expropriated by the federal government in 1968. If the valuation of $500 per arpent is accurate, however, or anywhere near accurate, it is difficult to see why Murphy Oil would have paid an average of nearly $3,000 per arpent for the land which it bought.

16 Mr Dessureault, the municipal secretary-treasurer, testified that the municipal valuation of the property in 1974 which was obtained as a result of a report by professional evaluators, is $2,000 per arpent for all parts of the property whether water front or not and the same figure applies to all the Murphy Oil property. This evidence was not introduced to attempt to establish a valuation for the property in 1967 on the basis of 1974 valuations, but merely to show that, in so far as municipal valuations are concerned, the same value is given to all parts of the subject property.

17 While at first sight it might appear inconsistent for the Minister to accept one value for a property for estate tax purposes and then give a different value to similar property sold by plaintiff in order to calculate plaintiff's profit on the sale, I do not find that he is estopped from doing so. In the case of Admiral Investments Limited v Minister of National Revenue, [1967] C.T.C. 165, 67 D.T.C. 5114, Mr Justice Cattanach stated at page 174 [5120]:

It is well settled that while a decision reached by the Minister in one taxation year may be a cogent factor in the determination of a similar point in a following year, the fact that a concession may have been made to a taxpayer in one year, does not, in the absence of any statutory provisions to the contrary, preclude the Minister from taking a different view of the facts in a later year when he has more complete data on the subject matter. There is nothing inconsistent with the Minister altering his decision according to the facts as he finds them from time to time. An assessment is conclusive as between the parties only in relation to the assessment for the year which it was made. (See MNR v British and American Motors Toronto, Limited, [1953] Ex. C.R. 153, [1953] C.T.C. 177.)

18 I believe the same principle would apply and that a valuation fixed for estate tax purposes, and agreed to by way of settlement after some discussion, does not bind the Minister in his evaluation for income tax purposes of property sold by the taxpayer.

19 I find that plaintiff has failed to discharge the burden of proof of establishing that the land sold to Murphy Oil Co Ltd had a greater value per arpent than the land retained by it. I cannot, therefore, agree with the calculation made by Mr Margolese on the basis of which plaintiff's return was filed and find that the cost price of the land sold to Murphy Oil Co Ltd must be determined by prorating the cost of such land as shown on the books of the company prior to the sale on the basis of the proportion of the area so sold to the total area of the land owned by plaintiff at that time, and that on this basis the calculation made by the Minister in connection with the reassessment of plaintiff's income tax for the year 1967 is correct. The decision of the Tax Review Board, although dismissing plaintiff's appeal, would refer the matter back to the Minister to fix a fair valuation of the cost of the land sold by plaintiff to Murphy Oil Co Ltd. In view of my above conclusions I find this to be unnecessary. Plaintiff's appeal is dismissed and the reassessment made by the Minister is confirmed, with costs.