Diamond Developments LTD v. Minister of National Revenue, [1984] CTC 2992

Bonner, TCJ [ORALLY]:—The appellant appeals from assessments of income tax for the 1979 and 1980 taxation years. Those assessments were made on the basis that the 1979 profit realized on the sale of the Seagate Apartments was business income.

It was the appellant’s position that the profit was a fortuitous capital gain realized from an unsolicited offer. Its thesis was that its course of conduct throughout the lengthy holding of the property was consistent with the intention of investment. It had bought the land in 1969, completed the construction of the apartment building in 1972 and, as previously mentioned, it sold it in 1979, having rented it in the meantime.

The company was incorporated under the laws of Alberta in 1965. It was a public company, although its shares were at no time listed on any exchange and it obtained an exemption from prospectus requirements. Colby H Quilliam was the sole witness called by the appellant at the hearing of these appeals. He is now the secretary and managing director of the appellant. He now has effective control of the company. Either directly or indirectly he now owns about forty-five per cent of its shares.

The company was incorporated at the behest of Mr Quilliam and a number of other persons who, for the most part, were clients of Mr Quilliam’s accounting firm. They sought opportunities to develop land and apartments on the west coast. That is the business for which the appellant was incorporated. The appellant’s first venture was in land development. Subsequently, it commenced building apartment houses in Vancouver which it rented and then sold.

Mr Quilliam testified that the Seagate property was acquired in order to build a better than average apartment and to keep it as an asset of the company. The site was on the seashore and was unusually attractive. The construction was, Mr Quilliam said, better than usual and incorporated features which would not have been present if the intention had been to sell.

Mr Quilliam described the circumstances leading up to the sale. An unsolicited offer was received in 1979. The price offered was $3.2 million. An informal counter offer was made at $3.5 million with $1 million to be paid in cash. At the time the appellant was in need of cash because the market for condominiums had gone soft a year or two before at a time when the appellant had on hand a large inventory of condominium units. The appellant, as a result of sales in an adverse market, had lost $400,000 in 1978 and, but for the gain now in question, it had a 1979 operating loss of $100,000. Thus, it needed cash and it therefore sold.

Mr Quilliam’s view as to the role or function of the Seagate Apartments was at variance with that of Stanley Stuart who, up to and including the time of sale of the Seagate, was managing director of the appellant company. As early as December of 1971 the directors of the company including Mr Quilliam, on a motion of Mr Stuart, resolved to prepare comprehensive brochures on all three buildings owned by the company (including the Seagate) with a view to marketing them.

There was something of a dispute over the introduction of draft minutes of a directors’ meeting which indicated in January of 1973 Mr Stuart reported to the directors of the company that preliminary investigations had indicated that Seagate could be sold at a $500,000 profit if it could be converted into a condominium. Mr Stuart, according to the draft minutes, was directed to proceed with further investigation as soon as new legislation was available. Those minutes of the meeting were unsigned and Mr Quilliam said that he had no particular recollection of the meeting. The lack of probative force of those unsigned minutes is not counteracted by the fact that they were produced to the respondent’s officials by the appellant’s accountant. However, the appellant made no attempt to rebut the assumption pleaded in paragraph 7(e) of the reply to the notice of appeal, namely, that:

. on February 22, 1973, the Appellant through its Board of Directors decided to convert the Seagate Apartment to a condominium complex for resale; however the conversion did not take place.

I can therefore proceed on the basis that early in 1973 (and I note there is a divergence between January and February) the directors made the decision to convert with a view to sale.

There was some debate at the hearing as to whether Mr Quilliam was the directing mind and will of the company. Counsel for the appellant pointed out that Mr Quilliam had de facto control and there is no doubt on the evidence that he did hold, with shares which he owned or controlled through proxies, de facto control of the company. However, that does not seem to make much difference in the long run because according to the minutes entered in evidence Mr Quilliam at no time attempted to restrain the activities of Mr Stuart who, at the time, was managing director of the appellant, which activities were directed toward the investigation of the sale of the Seagate. Those activities seemed to be quite inconsistent with the thesis that the building was held as a long-term investment. It is impossible to conclude on the evidence that the Seagate had always been regarded and treated by the appellant as a capital asset. Taxability and the characterization of the operations of a body corporate cannot rest on the private thoughts and unexpressed intentions of a shareholder, even when that shareholder has de facto control.

In trading cases the nature of the property sold and the length of time for which it was held are factors of considerable weight. Thus, a revenue generating asset such as this apartment building held for a significant period of time such as seven years will ordinarily be seen to be a capital asset, but another factor of considerable importance in such cases is the nature of the ordinary business of the taxpayer who has acquired and later sold the property. Where, as here, profit is earned from the carrying on of the ordinary business operations which the taxpayer was incorporated to carry on and did in fact carry on, that profit is income from a business. The fact that the apartment was held for a period of time during which it generated rental revenues does not alter the case. The fundamental operation of acquiring land, obtaining development permission, developing, leasing and selling is indistinguishable from other business operations of the appellant company. The only intention to hold the apartment as an investment was that of Mr Quilliam and, as noted previously, it was unexpressed and apparently unenforced.

The sale in 1979, although fortuitous, was made to raise cash needed in the course of carrying on the ordinary business operations of the appellant. I find that this case is indistinguishable in principle from the case of Canadian Kodak Sales Limited v MNR, [1954] CTC 375; 54 DTC 1194.

For the foregoing reasons the appeals will be dismissed.

Appeals dismissed.