Guy Dumas v. Minister of National Revenue, [1978] CTC 2961, [1978] DTC 1704

Roland St-Onge [TRANSLATION]:—The appeal of Mr Dumas came before me on September 15, 1977 in Quebec City, Quebec. The Board must decide whether, in respect of the 1969 taxation year, the sale of all his shares in the company Ville-Neuve Construction Ltée constituted a taxable adventure in the nature of trade or a non-taxable Capital gain.

Ville-Neuve Construction Ltée was incorporated on December 22, 1961, and on March 17, 1969 it acquired a plot of land belonging to the Corporation des Frères des Ecoles Chrétiennes (hereinafter referred to as ‘Les Frères”) for $1,385,650, $50,000 of which was paid in cash, with the remainder ($1,335,650) due in 1977 free of interest.

Everything began on June 28, 1967, when Mr Dumas sent to Les Frères a letter offering to buy their plot of land located at the intersection of Henri IV and Quatre-Bourgeois boulevards in Ste-Foy (lots 207, 208, 209 and 214 in the Ste-Foy. land register) for a total price of $1 per net square foot, including $50,000 in cash at the time the deed was notarized.

On July 5, 1967 Les Frères accepted this offer in writing. Immediately after this acceptance, Mr Dumas took steps to obtain, and did obtain, through By-law No 1204 (Exhibit A-4), changes in the existing zoning scheme, and had a subdivision plan prepared for the lots in question, as indicated on the plan submitted as Exhibit A-5.

Since Les Frères and Mr Dumas were unable to reach an agreement about the total selling price, the latter consulted Mr André Blanchet, a lawyer in Alma, who on March 15, 1968, brought against the sellers an action to transfer title.

Mr Blanchet testified as to the following. Mr Dumas’ efforts to have the lots in question re-zoned were successful and 316,695 square feet were set aside for the building of streets. Since Mr Dumas did not want to pay for this surface area, Les. Frères refused to sign the sales contract.

Mr Dumas, who would buy land, construct buildings on it and then sell it, and Mr Blanchet, who had been involved in the construction of shopping centres in Dolbeau and Alma, then decided to proceed jointly to obtain a clear title and build a shopping centre. In addition to his legal fees for the action in progress Mr Blanchet, for his participation in the event that a shopping centre was built, had the option of buying 40% of the shares in Ville-Neuve Construction Ltée.

Mr Blanchet therefore decided to move from Alma to Quebec City in order to devote all his time to this project. To this end, an office was rented near the lots in question and the action was settled so that Ville-Neuve Construction Ltée could have clear title to the lots as soon as possible. A plan, a model and a preliminary report on the economic feasibility of the lots were obtained, with a view to attracting tenants to this project.

On May 19, 1969 they obtained a preliminary study and a photograph of the model, both of which were prepared by the architects Tremblay and L’Abbe. In addition to a shopping centre, this project called for a 400- to 500-room hotel, an office tower, single-family dwellings or row housing, and a garage.

These facilities were all necessary in order to attract large tenants to the project, such as Simpsons-Sears, Hudson’s Bay, Eaton’s or Morgan’s, and thereby also attract other smaller tenants such as Provigo and Zeller’s.

Further, plans had to be obtained that were acceptable to both parties before undertaking construction that would last from 18 to 24 months.

To show that the parties’ sole intention was to construct a shopping centre, Mr Blanchet mentioned the names of various persons who had tried unsuccessfully to purchase the lots in question in 1969.

(1) Marcel Gauthier, through a Quebec City agent named Marcel Fortin, made an offer of $1,900,000 on behalf of a Montreal company when the action for the transfer of title was still unsettled. The offer was refused the same afternoon, even though Messrs Dumas and Blanchet could have realized a substantial profit of $400,000.

(2) Roland Couillard had written to the appellant offering to purchase the lots for $1.30 per square foot, even though he had already offered Les Frères $1.10 per square foot for the same land.

(3) Georges Couillard, an agent, had also wanted to purchase the lots, but Messrs Blanchet and Dumas refused to meet with him.

Mr Blanchet explained that he and Mr Dumas were far more interested in retaining an investment with a 4 to 5% net yield on leases indexed to the cost of living than in realizing a profit of $400,000.

He went on to describe the numerous efforts made in Toronto and Quebec City to obtain an evaluation report and a preliminary feasibility study (Exhibits A-10 and A-11), which were received on. May 26 and August 11, 1969 respectively.

Mr Blanchet also met with a Mr Gauvreau, who was to assist him in signing up tenants; however, after receiving unfavourable replies from Hudson’s Bay, Simpsons-Sears and Eaton’s, they decided to seek two smaller tenants such as Zeller’s, Metropolitan Stores, Provigo and Steinberg’s, instead of one large tenant, and also met with representatives of the Hilton, Mount Royal and Bonaventure hotels.

Some time after October 15, 1969 Mr Malenfant contacted Mr Dumas, who agreed to sell ail his shares in Ville-Neuve Construction Ltée. Mr Malenfant, who owned the Motel Universel in Quebec City, had another project in mind for the land in question which would be much less costly.

Mr Blanchet further explained that Mr Dumas had preferred to sell his shares than have the company sell its lots, in order to retain control of the company so long as the balance of the selling price was not paid in full, and that the company had divested itself of its other assets because of a tax problem. Although Mr Dumas had apparently purchased and sold lots personally, the proceeds of this sale had been credited to his company; it thus owed him some $145,000. When the shares were sold, the company therefore transferred to Mr Dumas one building, two automobiles and two balances on the selling price in full repayment of this debt.

In cross-examination, Mr Blanchet stated that he had known Mr Dumas for 30 years; that as part of his duties as attorney, he had advised Mr Dumas to acquire the land as soon as possible and to construct a shopping centre with apartment blocks similar to the Laurier project in Quebec City; that the land in question was strategically located near the Quebec City Bridge and a cloverleaf under construction; that the Bank of Montreal was willing to consider interim financing in anticipation of long-term financing when written leases were obtained; and that the shopping centre, to be called Place Henri IV, was to occupy all the land.

In addition to corroborating Mr Blanchet’s testimony, Mr Dumas testified that his company had been incorporated to make investments and construct single-family dwellings; that he had always been the principal shareholder in his company; that his company had not been incorporated to purchase lots from Les Frères and dispose of them through the transfer of all his shares, and that even though he had a real estate agent’s licence, he had never acted as such.

His company had been involved in housing development up to 1967, when he decided to concentrate on building a shopping centre. Before meeting with Mr Blanchet, the appellant had already obtained the following zoning through By-law No 1204:

287.000 net square feet in a commercial zone;

300,000 net square feet in a zone set aside for the construction of ten-story buildings;

362.000 net square feet in a zone set aside for the construction of three- story buildings;

120.000 net square feet in a zone set aside for single-family dwellings;

the remainder—316,695 net square feet—to be set aside for the construction of streets.

After his meeting with Mr Blanchet, the latter suggested to him that the commercial zone be increased so that a shopping centre with an office tower and a hotel could be constructed.

Mr Blanchet was retained full time for the shopping centre project in early 1969. In addition to the persons that Mr Blanchet had met with in order to obtain a mortgage loan and interim financing, the appellant had discussed the project with a great many large- and smaller-scale tenants.

To demonstrate that the project was seriously considered, Mr Dumas submitted stationery with the letterhead ‘Place Henri IV’’ and a list of expenses (Exhibit A-17):

On September 22, 1969 Mr Dumas received a letter from Mr Gauv- reau telling him that Eaton’s was not interested in locating in Quebec City; he further learned that Simpsons-Sears was moving into the Laurier Project. As a result of this information Mr Robert Morin, the accountant, Mr Blanchet and Mr Dumas met to study the feasibility of changing the plans and building a smaller shopping centre including, inter alia, two of the small-scale tenants.

The appellant found that it would be twice as costly to build in winter and that the real estate tax on a commercially-zoned piece of property would cost as much as $50,000. He did not want to be responsible for a substantial mortgage for too long a period. It was then that Mr Malenfant telephoned him to make an offer. Mr Dumas’ lawyer advised him to transfer his shares in Ville-Neuve Construction Ltée rather than have his company sell the lots.

The respondent then called two witnesses; Mr Raymond Malenfant, the purchaser, and Mr Richard Cloutier, an auditor with the Department of National Revenue, Taxation.

Mr Malenfant testified that the City of Ste-Foy did not want to go through with the zoning amendment for a shopping centre before the promoter had a promise to lease space in it from a large-scale tenant, and that he had had to spend over a year before obtaining the zoning amendment in 1971.

Mr Cloutier explained that, prior to 1969, the lots purchased from Les Frères were part of the inventory of Ville-Neuve Construction Ltée, but that they were subsequently reclassified as capital assets, and that according to the company’s balance sheets there was nothing owing a director.

Counsel for the appellant referred the Board to the following cases, inter alia:

(1) R K Fraser v MNR, [1964] CTC 372; 64 DTC 5224;

(2) Shipp et al v MNR, [1967] CTC 330; 67 DTC 5222.

In Fraser it was held that the sale of shares constituted income from a business, whereas in Shipp the company that constructed the shopping centre was not incorporated with the concealed purpose of constructing and selling a shopping centre.

Referring to the facts, counsel for the appellant argued that at the time Ville-Neuve Construction Ltée was incorporated in 1961, it did not know the company would one day purchase the land from Les Frères and that other commercial reasons would justify the incorporation of the said company. According to him, the appellant wanted his company to purchase the land with a view to constructing a $15,000,000 shopping centre on it and deriving revenue from the rental of commercial space; and because of certain difficulties, the appellant contacted Mr Blanchet, who advised him to construct a $35,000,000 shopping centre.

Counsel for the respondent stressed the fact that, prior to the sale of the shares, Ville-Neuve Construction Ltée had divested itself of all its assets in order to sell the lots, as had the company in Siebens v MNR, [1969] Tax ABC 783; 71 DTC 5310, that in accordance with the decision in W J McKinley v MNR, [1971] CTC 574; 71 DTC 5320, a taxpayer who acquires shares in a company solely concerned with the purchasing and selling of real estate engages in an adventure in the nature of trade, and that the lots in question represented an item of inventory, not an investment.

There is no doubt that Ville-Neuve Construction Ltée had been incorporated for quite some time before the appellant decided to purchase the lots on which to construct Place Henri IV. It cannot therefore be claimed that this company was incorporated to serve as a vehicle in a real estate transaction.

Hence if Ville-Neuve Construction Ltée was not incorporated to serve as a vehicle in a real estate transaction and the lots in question were not items of inventory, it is logical to believe the appellant’s witnesses were speaking the truth when they explained that these lots were too valuable to be used for housing, and that the said lots were purchased solely with the intention of constructing a shopping centre on them.

Even though the balance sheet of Ville-Neuve Construction Ltée did not indicate any substantial amount owing to a director, the uncontradicted evidence was that Mr Dumas had personally purchased and sold the lots, the proceeds from which ($145,000) had been credited to his company.

There is no substantial point in the evidence to prevent me from believing Messrs Dumas and Blanchet.

The appeal pertains to the 1969, 1970, 1971 and 1972 taxation years, since the respondent included a sum of $199,486.85 in the appellant’s income for the 1969 taxation year, while allowing him a reserve of 100% for 1969 and 1970 and of $172,128.85 for 1971, and taxing him on $27,358 in 1971 and $172,128.85 in 1972.

For these reasons, the appeal is allowed and the whole is referred back to the respondent for reassessment in respect of the 1969, 1970, 1971 and 1972 taxation years, in accordance with the above reasons for judgment.

Appeal allowed.