Blok-Andersen v. MNR, 72 DTC 6309, [1972] CTC 338 (FCTD)

Cattanach, J:—This is an appeal from a decision of the Tax Appeal Board dated December 1969 in respect of the assessments of the appellant by the Minister to income tax for the appellant’s 1961, 1963 and 1964 taxation years.

There were four transactions, one in the 1961 taxation year, two in the 1963 taxation year and one in the 1964 taxation year which give rise to the issues in the present appeal. The basic question with respect to each transaction is whether any of the gains realized thereby are merely enhancements of investments as contended by the appellant, or profits from a business or adventure in the nature of trade within the meaning of sections 3 and 4 and paragraph 139(1 )(e) of the Income Tax Act,* [1] as contended by the respondent.

With respect to the transaction occurring in the appellant’s 1961 taxation year, it was the appellant’s alternative contention that since the appellant filed his income tax return on a cash basis and not on an accrual basis, he did not receive the amount in his 1961 taxation year which the Minister included as income in reassessing the appellant and that he received a much lesser amount in a much later taxation year. The appellant advanced a similar alternative contention with respect to the amount to which he was assessed by the Minister in his 1964 taxation year added to which was the contention that if the appellant should be found taxable on this amount then he should be entitled to certain deductions as business expenses.

In reply to the contention that the appellant should be taxed on a cash basis the Minister submitted that the appellant never adopted and the Minister never accepted the cash method of account, from which it follows that the amounts were properly included as income in the taxation years in question because the amounts were receivable by the appellant in those years, within the meaning of paragraph 85B(1)(b) of the Income Tax Act and in any event the amounts were directly or indirectly received by the appellant in money or money’s worth in the respective taxation years.

With respect to the appellant’s contention that if the amount realized upon the transaction in the 1964 taxation year is subject to income tax then there should be an appropriate deduction for expenses incurred. The Minister countered that in that event there should be an apportionment of those expenses which are attributable to personal living expenses.

To consider the foregoing rival contentions against the facts, it is expedient to outline first the general background of the appellant’s method of conducting his business followed by an outline of the specific transactions in question.

The appellant was born in Denmark but came to Canada with his family when he was one year old. He had an older brother. The family lived in New Brunswick until 1946 when they moved to Sarnia, Ontario. The appellant began his business career in that city at an early age. He first became a land surveyor. This occupation naturally led him to engage in the business of land development, that is, the purchase of raw land, providing it with services, subdividing it into building lots and selling the lots to building contractors and private individuals. The next logical step which the appellant took was to engage in the building of houses for sale followed by the building of apartments to derive rental income therefrom and then a concept of rental housing which was in advance of its time and at first proved unsuccessful because of an initial lack of public acceptance which was later overcome. He then engaged in the construction and acquisition of commercial property such as office buildings, a shopping centre, individual buildings which were rented to tenants engaged in retail enterprises, a gasoline service station and the like.

it was the invariable practice of the appellant to enter these undertakings by corporate entities on the advice of his legal and accountancy advisers. In these corporations, of which there were many, the appellant was sometimes the sole shareholder from the outset, sometimes there were other shareholders and sometimes the appellant became the sole shareholder by the purchase of the shares of the other shareholders and sometimes he divested himself of shares by sale to others.

While the appellant began his activities in Sarnia, Ontario he did not confine himself to that city. Through the media of corporations activities were conducted in St Thomas, London, Brockville and Kingston, all cities in the province of Ontario.

In 1950 the appellant, because of the knowledge acquired in his profession as a surveyor, felt it would be good business to engage in the development and sale of real estate. Accordingly in association with the Registrar of Deeds in Sarnia, who held the same view, and two other persons, a joint stock company was formed under the name Oakacres Land Company Limited. The appellant held 25% of the shares, the registrar 25% and the two other persons also held 25% each. The company purchased between 60 and 70 acres of land which were developed and subdivided and the lots were sold. In 1955 all lots were disposed of and the company was wound up and its charter surrendered.

Later in 1950 the appellant and the registrar caused the incorporation of another company under the corporate name of Lambton Lands Limited (hereinafter called “Lambton”) and each acquired 50% of the shares in this company. The objects of incorporation include a plethora of purposes. They were basically to trade in land, to develop land and to hold land and buildings for investment purposes. Nothing turns on the objects excepting that the company was authorized to engage in all the business activities in which it subsequently engaged.

The first acquisition of land by this company was 13 acres, 10 acres of which were subdivided into residential lots and 3 acres were zoned as commercial. The company built and operated a shopping centre in the commercial area in 1952 which was held by Lambton and produced rental income. The facilities of the shopping centre were extended in subsequent years and in 1958 the appellant acquired the 50% of the shares held in Lambton by the Registrar of Deeds so that the appellant became the sole shareholder. The shopping centre was held by Lambton for approximately 18 years until it was sold in 1970, a taxation year subsequent to the taxation years here under review.

Prior to 1953 the business of Lambton and Oakacres Land Company Limited had been the acquisition of vacant land, the development and subdivision thereof into building lots and the sale of the lots to building contractors. The appellant decided that it would be advantageous to engage in the building business as well. Accordingly in 1953 the appellant, together with a builder named Sly, caused the incorporation of North America Construction, Limited in which the appellant and Sly were the only shareholders holding the shares of the company in equal proportions. This company acquired subdivided land from Lambton upon which it built houses and sold the houses. In 1959 the appellant acquired the shares held by Sly so that the appellant became the sole shareholder. The company continued its building activities until 1963 when it became dormant.

In 1957 North America Construction (Kingston) Limited was incorporated. There were four shareholders with the appellant holding 45% of the issued shares. This company bought and developed land in Kingston, Ontario and built homes on the lots which it then sold. In 1958 and 1959 the company transferred its activities to Brockville, Ontario where it conducted the same type of business but in 1961 it erected two apartment buildings in Brockville. Since that time the company has been inactive.

In 1958 the appellant became associated with twenty other shareholders in Landevco (Sarnia) Limited. The motive for forming this company was that building lots in Sarnia were in short supply. The basic idea was that the company would buy available land so that it could be available to its shareholders, who were building contractors, when this need arose. The maximum percentage of shareholding allowed to each shareholder was 15%. Lambton, in which the appellant was then the sole shareholder, acquired 15% of the shares in Landevco (Sarnia) Limited.

ln 1954 a company was incorporated under the name of 83 Norman St (Sarnia) Limited with two equal shareholders, the appellant’s father and Lambton. The company built and owned a 21-unit apartment on the site indicated in the corporate name. In 1959 Lambton bought the appellant’s father’s interest and thus became the sole shareholder. This building was retained and the apartments were leased to tenants and produced rental income.

In 1956 a further company was incorporated under the name of 40 Maria St (Sarnia) Limited again with two equal shareholders, Lambton and the appellant’s brother, Uffe. The company built a 21-unit apartment building on the site indicated in the corporate name. In 1959 Lambton became the sole shareholder by acquiring the shares held by the appellant’s brother. This apartment building was retained and operated by Lambton.

In 1959 the appellant caused another company to be incorporated, this one under the name of 5 Schofield Park (Brockville) Limited in which the appellant was the sole shareholder. He paid $1,000 for all the issued shares of this company. The appellant acquired the sole interest because, as he testified, he wanted a personal investment. The company built a 21 or 22-unit apartment on land which had not been utilized by North America Construction (Kingston) Limited. It is the transaction in 1961 with respect to the shares in this company which gives rise to the first issue (and the two collateral issues) in the present appeal. In 1961 the appellant sold the shares which he had purchased in 5 Schofield Park (Brockville) Limited (which I shall hereafter refer to as Schofield Park) for $1,000 to Lambton for $31,000. Lambton credited the amount of $31,000 in the appellant’s open and running account in Lambton. The difference of $30,000 between the purchase and selling prices of the shares was included by the Minister in the appellant’s income for his 1961 taxation year.

This assessment the appellant disputes because, as I have indicated at the outset, it resulted from the sale of shares and the realization of investment of a capital nature, and alternatively that the gain was not received in the 1961 taxation year but in a later year in a lesser amount and that this circumstance is not affected by the provisions of paragraph 85B(1)(b) of the Income Tax Act.

The appellant testified that he adopted this course after consulting with his accountant who expressed the view that the appellant’s divergent holdings in multitudinous companies was becoming confusing. The appellant readily agreed. He was now the sole shareholder of Lambton, and Lambton was his principal company. Accordingly the appellant testified that he considered it advantageous to consolidate his diverse holdings and interest in Lambton. This he advanced as the motivating reason for his sale of the shares in Schofield Park to Lambton. Prior to that time he had sold none of his assets to Lambton. He testified that he did not contemplate the sale of the shares in Schofield Park to Lambton or anyone else when he first acquired them. amalgamation of the brothers’ companies.

At the same time, and in furtherance of this policy of consolidation in Lambton in contrast to the previous policy of incorporating a company to conduct each particular enterprise, the assets of Schofield Park, 83 Norman St (Sarnia) Limited and 40 Maria St (Sarnia) Limited which were 21-unit apartment buildings, one owned by each company, were transferred to Lambton, which was the sole beneficial shareholder, and the charters of these three companies were surrendered.

In 1954 a company was incorporated under the name of Canatora Lands Limited (hereinafter referred to as Canatora). This company engaged in the business of land development in the Kingston area, that is, it bought raw land, subdivided the land into lots, serviced the lots and then sold the serviced lots to building contractors. The two customers of Canatora were Lifetime Homes Limited and Tecon Construction Limited (hereinafter called “Tecon”) and, as indicated immediately above, both of these companies were engaged in the business of building homes for sale on lots which had been purchased from Canatora.

In Canatora, the land development company, the appellant owned 50% of the issued shares and the remaining 50% of the shares were held by William Buttery.

The appellant held no shares in Lifetime Homes Limited. The shares in that company were held by Boris Nosanchuk and William Buttery in equal proportions. It will be recalled that William Buttery and the appellant were equal shareholders in Canatora.

Tecon, a building company, had also been incorporated in 1954 (simultaneously with Canatora). The appellant held 50% of the shares in Tecon and the remaining 50% were held by Howard Sly.

In 1959 the projects of Canatora, Lifetime Homes Limited, and Tecon were substantially completed. Between 500 and 600 lots had been sold by Canatora to Lifetime and Tecon and an equal number of houses had been built and sold by Lifetime and Tecon but approximately 7 acres of land remained undisposed and Tecon held an option on a further 100 acres. It was the desire of the four persons involved, Sly, Buttery, Nosanchuk and the appellant to equalize their holdings in the undisposed land. Accordingly the appellant sold half of the 50% of the shares he held in Canatora to Boris Nosanchuk and William Buttery sold half of the 50% of the shares he held in Tecon to Howard Sly, so that, Sly, Buttery, Nosanchuk and the appellant each held 25% of the shares in Canatora. The appellant explained that he did not dispose of his shares in Canatora and Tecon to Lambton in furtherance of his policy of consolidating his holdings into Lambton because at that time he was not the sole shareholder in Lambton and the other shareholder in Lambton was a stranger to the projects in the Kingston area. Despite the fact that the projects of Canatora and Tecon were substantially completed in 1959 the companies still continued to receive income and the appellant received dividends in 1961 and 1962.

In the fall of 1961 the appellant, in association with his older brother, Uffe, conceived the idea of building the Drawbridge Inn in Sarnia. This was to be a hostelry of a distinctive character. I would assume that its character is indicated in the name selected. I would assume that it was to have a medieval atmosphere complete with drawbridge and moat. The appellant’s accountant, in his testimony, expressed some reservations as to whether an inn of this nature would “catch on” in a city the size of Sarnia so as to render it a profitable venture. There is no question that it was an ambitious undertaking.

Lambton had acquired waterfront land in 1961 suitable for the site and sketches of the proposed hotel had been prepared. The estimated cost of the building was approximately $1,000,000.

The appellant’s brother was a chemical engineer and owned a very successful company, Uba Chemicals Limited, which was engaged in the manufacture and sale of commercial chemicals. The capital investment of Uba Chemicals Limited in plant and equipment was not great but the company enjoyed an extremely high cash flow. On the other hand, Lambton was possessed of valuable lands but had a very limited amount of readily available cash. Neither company could finance the construction of the Drawbridge Inn alone but the basic concept was that by joining forces the completion of the building was feasible and practical. The plan evolved was that Lambton should transfer all real estate held by it to a company to be formed under the name of Uba Chemical Industries Limited and Uba Chemicals Limited would contribute an amount in cash. However it turned out that Lambton would have to contribute more than its lands to match the cash contribution of Uba Chemicals Limited.

The parties approached their banker and were given a verbal commitment for interim financing to the combined company, Uba Chemical Industries Limited. At about the same time financing was arranged with a trust company in the amount of $425,000. Uba Chemicals Industries Limited was incorporated on April 27, 1962 and was ready to take over on May 1, 1962. The interim financing from the bank was obtained about that date or shortly thereafter as was the commitment for financing from the trust company. In July 1962 the trust company withdrew its financing. Meanwhile about $200,000 interim financing had been drawn from the bank.

Lambton was indebted to the bank in the amount of $350,000, which debt was personally guaranteed by the appellant and to Uba Chemicals Limited in the amount of $60,000.

The joint enterprise, Uba Chemicals Industries Limited had drawn about $200,000 in interim financing from the bank.

When the trust company withdrew its commitment to finance the Drawbridge Inn the parties met with the bank and informed them of this withdrawal. In view of the lack of long-term financing the bank was most reluctant to make any further advances and became concerned about repayment of Lambton’s indebtedness to it.

Obviously other long-term financing was required forthwith.

Interim financing was arranged with Industrial Acceptance Corporation in the amount of $500,000, subject to long-term financing.

Long-term financing was arranged with another trust company in the amount of $325,000. It is my recollection of the evidence that this amount of $325,000 was paid to Industrial Acceptance Corporation and that a further advance in the amount of $175,000 was obtained from that company. In addition credit was obtained from the T Eaton Company Limited in the amount of $250,000 for furnishings.

As a result of this scramble for financing it remained for Uba Chemicals Limited and Lambton to make up a difference of $300,000 approximately to complete the Drawbridge Inn.

Meanwhile discussions were continuing as to combining the appellant’s company, Lambton and his brother’s company, Uba Chemicals Limited, into Uba Chemical Industries Limited.

A meeting was arranged between the parties and their respective solicitors and their accountant to conclude the transfer of assets to Uba Chemical Industries Limited and so effect the combination or amalgamation of the brothers’ companies.

At this point the appellant’s brother, Uffe, becomes the villain in the piece. He announced to the meeting that he was not going through with the arrangement. His reason for so doing was that he felt that he would be carrying the bulk of the load and that his successful chemical company would be dissipated unless the appellant matched his contributions dollar for dollar.

The bank was informed that the arrangement was likely to fall through. Naturally the bank became even more concerned about the repayment of its indebtedness in the amount of $350,000 from Lambton.

Accordingly Lambton gave the bank a second mortgage as real estate to the extent of $100,000 and security for another $100,000 covered by way of stocks and accounts receivable.

His brother’s ultimatum to the appellant amounted to this — either Lambton come up with its commitment or get out.

The concern of the appellant’s brother seemed to be justified. It was his view that he was the person with cash on the line. The burden of paying the outstanding loans would fall on him and his company. He doubted the appellant’s capacity to produce hard cash. Even so, bearing in mind the substantial amounts already expended on the partially erected Drawbridge Inn, his refusal to sign the transfer documents was petulant but not final. I assume it was a means to jolt the appellant into realizing that he must meet his brother’s contributions dollar for dollar and in cash. Since neither brother could complete the project with their own resources and since it would be folly to abandon the project, the brothers resumed negotiations but the appellant’s brother persisted in his stand that the appellant’s company, Lambton, should match the cash contribution of his own company, Uba Chemicals Limited.

The only possible way open to the appellant to match his brother’s contribution would be for the appellant to cause Lambton to sell properties owned by it to Uba Chemicals Limited. This he did. Six properties were sold to Uba Chemicals Limited for $136,000. This amount was used by Lambton to pay for its interest in the Drawbridge Inn.

At the same time the appellant’s brother insisted upon the payment of $60,000 owing by Lambton to Uba Chemicals Limited. This amount the appellant discharged by the sale of his 25% shareholding in Canatora for $10,000 to Uba Chemicals Limited and by the sale of his 50% shareholding in Tecon, also to Uba Chemicals Limited for $34,982.50. The appellant sold further personal assets in the amount of $8,000 and $7,000. Thus the indebtedness of Lambton to Uba Chemicals Limited in the amount of $60,000 was discharged and Lambton became indebted to the appellant in the amount of $60,000. An appropriate credit entry was made in the appellant’s open account in Lambton.

The six properties sold by Lambton to Uba Chemicals Limited were:

(1) an apartment building at 5 Schofield Park in Brockville, Ontario

(2) 9 Schofield Park — an apartment building

(3) 42 Convey Crescent — another rental building

(4) Sun Oil Service Centre

(5) 379 Meadow Crest Road

(6) 734 Bays Road

The first four mentioned buildings were properties from which rental income was derived by Lambton. The last two properties were houses which had been built for sale but had not been sold and were rented in the interval.

I have noticed that the learned member of the Tax Appeal Board stated in his reasons for judgment that the appellant sold his shares in Tecon to Lambton and I would assume from the language used that it was also the impression of the member that the appellant sold his shares in Canatora to Lambton as well. The evidence before me establishes conclusively that the shares in Tecon and Canatora were sold by the appellant to Uba Chemicals Limited.

It is the gain on the sale of shares in Tecon and Canatora by the appellant to Uba Chemicals Limited which gives rise to the dispute between the parties with respect to the assessment of the appellant for his 1963 taxation year. The appellant acquired the shares in Tecon for $500. Their sale price was $34,982.50. Therefore the resultant gain was $34,482.50 which amount was added to the appellant’s income by the Minister in assessing the appellant for that year.

Similarly the appellant acquired the shares held by him in Canatora for $250. The sale price of those shares was $10,000 resulting in a gain of $9,750 which was also added to the appellant’s income by the Minister for assessment purposes in the appellant’s 1963 taxation year.

The appellant contends that the sale of his shares in Tecon and Canatora was the sale of an investment being the disposition of shares in successful operating companies, that the appellant did not own all the outstanding shares in the companies and that the sale was motivated by the dire financial predicament in which Lambton was involved as has been described above.

On the other hand the Minister contends that the gain realized was profit to the appellant from a business within the meaning of paragraph 139(1 )(e) of the Income Tax Act.

The appellant was married and had a family of two children. The family had resided in a house at 1859 Norway Street, in Sarnia. In 1958, a real estate agent, who was a friend of the appellant, advised him that a house at 361 London Road in Sarnia had been listed for sale. The appellant, because of his knowledge of real estate in the area, knew the house. It had been the residence of the president of Polymer Corporation, a crown agency, and was situated in spacious grounds beautifully landscaped. The house itself was large with 5,000 square feet of living space. It was well constructed and consisted of eleven rooms. It was acknowledged to be the most outstanding residence in Sarnia. The appellant visited the house that very night and on January 22, 1958 made an offer of purchase which was accepted. The purchase price was $35,000 of which the appellant paid $15,000 in cash and arranged a mortgage for the balance of $20,000 with interest at 8% per annum. He sold his former home at a loss of $5,000.

The house so acquired was on a street which was the highway from London, Ontario. The area was zoned for multiple dwellings. This did not deter the appellant because he did not foresee any deterioration of the area for a period of 15 to 20 years. He knew that there were two apartment buildings at the far west end of London Road.

Polymer Corporation advised the appellant of the zoning conditions. The corporation had received a previous offer for the property which the prospective purchaser intended to use as a Shrine Club. This use was prohibited by the zoning regulations. The corporation wanted the appellant to know that the property could not be sold to this purchaser and there seems to have been a latent condition that the property should be continued in use as a single residence. The appellant so occupied the house. A third child was born there. Further the appellant expended some $9,000 in redecorating, laying of tiles, remodelling the kitchen and laying carpeting. He also expended an amount of $25,000 in furnishings, paintings, silverware and the like. Mr Irwin, the appellant’s accountant, described the house as having been transformed into a most gracious and elegant home.

In 1960 a local builder bought land about 300 yards west of 361 London Road, obtained a building permit and erected a three storey walk-up apartment building. This prompted the residents of the area to circulate a petition asking the municipality to rezone the area to single residential dwellings. The appellant was approached to sign the petition but he refused to do so. Instead he borrowed plans from the architect of the Drawbridge Inn suitable for an apartment building on the site and obtained a building permit. The appellant’s explanation of his actions was that he wanted to make certain that the site remained as zoned for multiple dwellings because he did foresee that some twenty years hence the area might cease to be desirable for private residences due to its location on the route to London, Ontario. It was against this future possibility that the appellant wished to guard. In his view the property would be more valuable at that future time if zoned for multiple dwellings.

The petition for rezoning was successful. The area was rezoned for single residences but the appellant’s home was excluded due to the action he had taken.

Sometime in 1962 unhappy differences arose between the appellant and his wife. The parties separated. The appellant’s wife and children continued to occupy the home.

On July 17, 1963 the appellant and his wife entered into a separation agreement. The appellant undertook to pay his wife a generous monthly allowance and gave her all the household goods and furniture in the house.

The appellant’s wife left the house and moved to London but subsequently returned to Sarnia. The wife was given custody of the three children until they attained 16 years of age with reasonable access to the appellant.

Because of the breakdown of his marriage the appellant had no further use for the home and accordingly he listed it for sale at $60,000. No offers were received for the house. Accordingly the appellant sold the house to Lambton at the price of $60,000. Lambton assumed the mortgage of $20,000 and $40,000 was credited to the appellant’s loan account in Lambton. It might be noted that except for two relatively short periods of time this loan account was always in a credit balance in the appellant’s favour.

In 1968 the appellant and his wife were divorced and the appellant has since remarried. He now lives in a more modest house.

In 1964 Lambton converted 361 London Road into six apartments and in 1965 Lambton also built a 56-unit apartment on the site.

In paragraph 2 of the appellant’s statement of facts with respect to the 1964 taxation year in the Notice of Appeal the appellant acknowledges that he received $952 in the 1964 calendar year and the balance of the $40,000 indebtedness in 1965.

In reassessing the appellant for his 1964 taxation year the Minister added to his income an amount of $16,000 being the gain on the sale of 361 London Road. The cost of the house was $35,000. The Minister acknowledged that $9,000 was expended in renovations making a total cost of $44,000. The sale price was $60,000 resulting in a gain of $16,000.

The Minister contends that this gain was profit from a business, while the appellant contends it was an enhancement of a capital asset. However, if that gain should be considered as income then the appellant contends that the cost should be the market value of the property when it ceased to be a residence in 1963, that the carrying charges such as real estate taxes and payments of interest on the mortgage should be deducted in computing the quantum of the gain and, again, that the appellant being on a cash basis rather than an accrual basis did not receive the gain until 1965 and that the gain should be taxable in that year rather than in 1964.

Against this background of facts the first obvious question for determination is the nature of the assets disposed of by the appellant, were they inventory or stock-in-trade of a business, or were they capital assets. In so stating I have not overlooked the fact that what the appellant sold to Lambton in 1961 were the shares in 5 Schofield Park and not the apartment building per se and what he sold to Uba Chemicals Limited in 1963 were shares held by him in Tecon and Canatora.

There is no question in my mind that the appellant and Lambton, in which company the appellant was the sole shareholder in the relevant taxation years, were traders in real estate, but the fact that a person is a trader in real estate does not preclude that person from holding investments or owning assets of a capital nature. 5 Schofield Park owned an apartment building from which it derived rental income. Lambton held several apartment buildings, office buildings and like buildings from which it derived rental income. If at the time of the acquisition of these buildings Lambton and the appellant acquired them with the exclusive purpose of deriving rental income therefrom the profits from the sale thereof under circumstances which made such sale obligatory or provident, would not be profits from a business or an adventure in the nature of trade. However if this was not the exclusive purpose at that time, but the appellant and Lambton had for their purpose, or one of their possible purposes, subsequent disposition at a profit, then the resulting profits would be taxable.

The question of fact as to what the purpose was in acquiring this particular type of rental property must be decided after considering all the evidence.

Throughout the relevant taxation years the interests and intentions of Lambton and the appellant were identical. With this circumstance in mind it is expedient to summarize the multitudinous transactions in which Lambton was involved.

At its inception in 1953 Lambton’s many activities included the development and sale of land lots and it built houses and sold them. Sometimes they could not be sold in which event the houses were rented. These houses are undoubtedly stock-in-trade and the rental thereof is expedient until their ultimate sale.

Lambton owned an office building called the Webster Building in St Thomas, Ontario. Part of the surrounding land was expropriated by the City for a parking lot. In the appellant’s view the return on this building was not commensurate with the outlay. Accordingly the building was sold in 1961 and the proceeds devoted to the development of other properties in St Thomas. The property so developed was rented to a retail grocery supermarket.

Also in St Thomas, Lambton owned the Smith and Cline Building. This was sold to another builder who demolished it and erected a more modern building on the site. I would assume from this circumstance that the sale price was much more attractive than the rental income.

In 1961 the appellant sold his shares in 5 Schofield Park to Lambton. The asset of this company was an apartment building.

In 1963 the appellant sold his shares in Tecon and Canatora to Uba Chemicals Limited.

In 1963 Lambton sold six properties to Uba Chemicals Limited. Three of these properties were apartment buildings (including 5 Schofield Park), one was a Sun Oil Service Centre which Lambton had held for over 10 years and the three apartment buildings had been held for lesser times. The remaining two were houses that had been built for sale but had not been sold.

In 1964 the appellant sold 361 London Road to Lambton. Lambton divided the house into six apartments and also erected a 56-unit apartment on the site.

There do not appear to be any sales between 1964 and 1968 other than houses which had been built for sale.

In 1968 the property in St Thomas which housed the retail grocery supermarket was sold to the tenant. The appellant proffered the explanation that the tenant proposed to enlarge a building he owned across the road and move his business to that site. The building was Suitable only for a store and the prospect of securing another tenant was remote in face of competition in close proximity. Therefore the appellant testified that Lambton had no alternative but to sell.

Lambton owned a shopping centre which it built about 1954 which it retained until 1971 when it was sold.

Shortly before this year the principal activity of Lambton was changed to that of an hotel and motel owner and operator.

By reason of the transactions between Lambton and Uba Chemicals Limited, Lambton became the owner of one-half of the issued shares in the luxury Drawbridge Inn which Lambton operates.

Lambton owned 110 acres at the Bluewater Bridge in Sarnia. A 56- unit motel was built on the site in 1967. This motel only supplied room accommodation. Lambton also bought the Bridgeview Marina (to accommodate guests’ boats as well as to operate otherwise as a marina) and constructed the “Inn at the Bridge”. This inn supplied room accommodation only.

in 1968 Lambton acquired the shares of Guildwood Inn. All these inns and mote! were in Sarnia. Dining and beverage services were available at the Guildwood Inn to guests of that inn and of the Inn at the Bridge and the Bluewater Bridge motel.

In 1970 the Holiday Inn chain contemplated the erection of an hotel in Sarnia and offered to buy the Inn at the Bridge from Lambton. Lambton sold and Holiday Inn carried out extensive additions and renovations. Over one hundred rooms and dining and beverage facilities were added. For Holiday Inn the location was ideal. For Lambton the appellant felt it was better to have Holiday Inn right next door and to work in collaboration rather than as competitors. Lambton gave Holiday Inn a 50-year lease on 20 acres on the condition that Holiday Inn build a chip and putt golf course at a cost of $100,000. The dining and beverage facilities of Holiday Inn and the golf course are available to the guests of Lambton’s Bluewater Bridge motel. The Guildwood Inn continues to operate independently.

The sales by Lambton of what may be termed “investment” properties were:

in 1961 the Webster Building in St Thomas;

in 1963 the 3 apartments and service centre to Uba Chemicals Limited;

in 1968 the grocery supermarket in St Thomas;

in 1970 the Inn at the Bridge; and

in 1971 the shopping centre.

Lambton still owns:

(1) three office buildings in St Thomas, excepting the Webster and supermarket buildings, which have been retained for over 15 years;

(2) 361 London Road acquired from the appellant and subdivided

into 6 apartments and a 56-unit apartment constructed on the site;

(3) 83 Norman Street — a 21-unit apartment retained for over 16 years;

(4) 400 Maria — also a 21 -unit apartment retained over 16 years;

(5) a 50% share ownership in Drawbridge Inn;

(6) the Guildwood Inn; and

(7) a marina.

From the foregoing outline of transactions it is apparent that Lambton was not reluctant to sell rental producing properties but in each instance the appellant has advanced compelling reasons to indicate that it was expedient for Lambton to do so.

Against this general background, I turn now to a consideration of the specific transactions by the appellant which give rise to the present appeal, the first of which occurred in his 1961 taxation year and involved the sale of all the issued shares of 5 Schofield Park by the appellant, who was the sole holder thereof, to Lambton in which company the appellant was also the sole shareholder at this time. The appellant acquired the shares for $1,000. He sold them to Lambton for $31,000. The only asset of Schofield Park was an apartment building. The appellant then became a creditor of Lambton in this amount on an open loan account in Lambton. The Minister included the difference between the acquisition and sale price of the shares in assessing the appellant to income tax.

The subject matter of the sale was shares. in my view the evidence conclusively establishes that the appellant was not a trader in shares but this does not conclude the matter. The question which next arises is whether the sale of the shares was merely an alternative method adopted by the appellant to dispose of the apartment building.

In Ronald K Fraser v MNR, [1964] SCR 657; [1964] CTC 372: 64 DTC 5224, the basic operation of two skilled real estate promoters was the acquisition of land with a view to profit on its sale so that the land became a trading asset.

The conclusion reached in the Fraser case was that the acquisition of shares in a company incorporated to hold such land was a method adopted to sell the land even though that end was accomplished by selling the shares rather than the land itself. Accordingly the profit realized upon the sale of the shares was held to be a trading profit, not a capital profit on the realization of an investment, just as the profit on the sale of the land itself would have been a trading profit.

In my opinion the sale of the shares in Schofield Park to Lambton was an effective alternative method adopted by the appellant to dispose of the apartment building to Lambton. It was the appellant’s avowed purpose to concentrate all his assets in Lambton. What eventually happened was that title to the apartment building was transferred from Schofield Park to Lambton and the charter of Schofield Park was surrendered.

Whether the gain realized by the appellant upon the sale of the shares is taxable as income, falls upon a determination of the crucial question whether the apartment was a capital asset or inventory.

The question of fact as to what the appellant’s purpose was in acquiring this particular apartment is one that must be decided after considering all the evidence. The appellant’s declared intention at the trial that the apartment was acquired as a personal investment is only part of the evidence. Present statements as to the purpose must be considered along with the objective facts.

The apartment was held for a relatively short period of time, from 1959 to 1961, a period of less than two years. The appellant, through the media of companies, was engaged in speculative real estate transactions before and after this particular acquisition. This is the only company throughout that long history in which the appellant was the sole shareholder. Giving careful attention to all the evidence, I am not satisfied that there is a balance of probability that the appellant acquired the apartment building for the purpose of deriving rental income therefrom to the exclusion of any purpose of disposition at a profit.

Accordingly the appellant has not discharged the onus which is upon him to demolish the assumption that, if the appellant had sold to a buyer wholly distinct from and uncontrolled by him, the profit from the transaction in question was profit from a business within sections 3 and 4 of the Income Tax Act as extended in paragraph 139(1)(e) thereof.

It was not disputed nor could it be successfully disputed that the transaction involving the shares in Schofield Park was a sale of these shares by the appellant to Lambton, which for the reasons I have decided is tantamount to a sale of the apartment building. In my view it is immaterial that Lambton was also wholly controlled by the appellant. They are separate corporate entities. The transaction was in truth a business deal. The appellant testified that the motivation of the transaction was to consolidate his holdings into Lambton. That being so it would follow that it would not matter to the appellant if he transferred the shares to Lambton at their original cost to him because his interest in the apartment building would remain the same having regard to his sole ownership of the shares in both companies. This he did not do. The sale price of the shares was determined by the value of the underlying asset. Accordingly a profit accrued to the appellant.

For the foregoing reasons I have concluded that the profit realized by the appellant on the sale of shares in Schofield Park was profit from a business.

Having so concluded the next issue which arises (which is also applicable to the transaction respecting 361 London Road in the 1964 taxation year) is when the profit accrued to the appellant. The contention on behalf of the appellant is that the appellant was on a cash basis of accounting (rather than the accrual method) and that being so the profit realized is not properly included as income until actually received.

It seems to me that a complete answer to this contention on behalf of the appellant is found in paragraph 85B(1)(b) as was contended by the Minister.

The general rule under the Income Tax Act is that tax is payable on income received by the taxpayer during the taxation year but an exception to the general rule is made in paragraph 85B(1)(b) to include not only actual receipts but also amounts which have become receivable in that year. For convenience I repeat, at this point, the pertinent language of paragraph 85B(1)(b) which reads, “In computing the income of a taxpayer for a taxation year, every amount receivable in respect of property sold or services rendered in the course of business in the year shall be included notwithstanding that the amount is not receivable until a subsequent year. ..”.

The use of the words “shall be included” in the portion of the section first quoted renders mandatory the inclusion of such an amount as income (subject to the exempting language which follows in that portion of the section which I have not re-quoted as yet).

The question arises whether the words “in the course of the business” as used in the above context are enlarged by the definition of the word “business” in paragraph 139(1 )(e) to include ‘‘an adventure or concern in the nature of trade”. In other words, does paragraph 139(1)(e) permit the substitution of the words “adventure or concern in the nature of the trade” for the word “business” in paragraph 85B(1)(b) so that the paragraph would read, “in the course of an adventure or concern in the nature of trade”.

The position taken by counsel for the appellant was that the words “in the course of business” necessarily imply a continuing process of sales rather than an isolated sale.

In my opinion such substitution is both permissible and logical and does no violence to the section so as to render it repugnant to the general scheme of the Income Tax Act or leading to an absurditv. The phrase “in the course of’ contemplates a succession of events in a regular order. lt also contemplates a result which follows from an event being set in motion. Such a result will arise in the case of an isolated sale as well as in a continuous number of sales.

The mandatory inclusion of an amount receivable as income in the year it became receivable is subject to the exception provided in paragraph 85B(1)(b) as follows, “. . . unless the method adopted by the taxpayer for computing income from the business and accepted for the purpose of this Part does not require him to include any amount receivable in computing his income for a taxation year unless it has been received in the year”.

It is obvious from the language of paragraph 85B(1)(b) that the method of accounting must be the accrual method unless the taxpayer adopts the cash method of accounting and the Minister accepts that method. The Minister did not accept the adoption of the cash method by the appellant and accordingly the exception in paragraph 85B(1)(b) does not apply.

What the appellant did receive in lieu of cash on the sale of his shares in Schofield Park to Lambton was a credit for $31,000 in an open loan account. In my view the profit was realized at that time. The appellant got the price he asked. It was his decision to accept a credit in a loan account rather than payment in cash. This does not detract from its nature as profit, nor as a profit at that time.

However, because of my conclusion that paragraph 85B(1)(b) is applicable, it becomes unnecessary for me to determine when the profit was received.

With respect to the appellant’s 1963 taxation year, the Minister included in the appellant’s income for that year the gain realized upon the sale of shares held by him in Tecon and Canatora to Uba Chemicals Limited.

Canatora was incorporated in 1954 to acquire unserviced land, to supply the services thereto, subdivide the serviced land into lots and to sell the lots to Tecon and Lifetime Homes Limited.

At the outset the appellant held 50% of the issued shares, the other 50% being held by William Buttery. In 1959 the appellant sold 50% of the shares held by him to Boris Nosanchuck and William Buttery sold 50% of the shares held by him to Howard Sly so that the appellant then held 25% of the total shares issued and the three other individuals held the balance of 75% in equal proportions of 25% each.

Tecon was also incorporated in 1954 for the purpose of building houses for sale. The appellant held 50% of the shares in Tecon and Howard Sly also held 50% of the shares.

Canatora still held raw land which it had not disposed of and options on other lands. Tecon held land which it had not utilized. Therefore both companies owned assets of value.

Because of the difficulties which have been set out in detail in connection with the construction of the Drawbridge Inn by Lambton, in which the appellant held all the shares, and Uba Chemicals Limited, in which the appellant’s brother had sole control, certain assets were sold by Lambton to Uba Chemicals Limited to meet the cost of Lambton’s participation. In addition Lambton was also indebted to Uba Chemicals Limited in the amount of $60,000. Uba Chemicals Limited insisted upon the immediate discharge of this indebtedness.

The appellant discharged this indebtedness of Lambton to Uba Chemicals Limited by selling his shares in Tecon to Uba Chemicals Limited for $34,982.50, his shares in Canatora for $10,000 as well as debts personally receivable by him in the amounts of $8,000 and $7,000. The appellant thereupon became a creditor of Lambton in the amount of $60,000 and an entry to that effect was made in the appellant’s loan account in Lambton. Since the shares in Tecon had been acquired by the appellant at a cost of $500 and the shares in Canatora had been acquired at a cost of $250, the appellant realized gains in the respective amounts of $34,482.50 and $9,750 which amounts were added by the Minister to the appellant’s income in the 1963 taxation year.

The subject matter of those two sales by the appellant to Uba Chemicals Limited was shares issued from the treasury of Tecon and Canatora. Shares normally constitute something which by their very nature is an investment and not an article of commerce unless the sale is by a person engaged in the business of trading in securities. In my opinion the evidence conclusively establishes that the appellant was not a trader in shares.

Both Tecon and Canatora are continuing corporations. They were both possessed of valuable assets. The number of shares sold by the appellant did not carry control representing as they did 50% and 25% of the voting power respectively. What the shares represent, in the particular circumstances of this appeal, is an interest in the corporations which are carrying on the respective businesses of building houses for sale and developing raw lands rather than what is tantamount to a sale of the assets of those corporations.

Further the circumstances under which the sales were made by the appellant were not such as would characterize them as a venture in the nature of trade. The sales were dictated by unusual conditions. The appellant sold assets held by him as assets of a capital nature or investments to meet the exigencies which were present and were the motivating reason for the sales.

In my opinion, therefore, what the appellant did was to realize an enhanced value of the shares held by him as an ordinary investment and not as an act done in the carrying on of a business.

The issue with respect to the appellant’s 1964 taxation year arises from the appellant’s purchase of the large residential house, municipally known as 361 London Road, Sarnia, Ontario with surrounding grounds in excess of an acre on January 27, 1958 at the purchase price of $35,000. After having expended $9,000 in remodelling and redecorating the house, the appellant sold the property in 1964 to Lambion for $60,000 thereby realizing a gain of $16,000 which amount the Minister added to the appellant’s income for the 1964 taxation year and assessed the appellant accordingly.

The issue is a simple one. The appellant contended that the profit realized was the enhancement in price of an investment, whereas the Minister contended that the profit was a gain in the operation of a business in a scheme of profit making.

There is no question whatsoever that the appellant at the time he purchased the house did so with the intention of occupying the house as a residence for his family and himself. He renovated the kitchen and did extensive redecorating. Even of more significance is that the appellant expended $25,000 for furnishings. The family did occupy the house in harmony until 1962, a period of some four years, during which time a third child was born to the marriage. In 1962 the appellant and his wife separated. The appellant left, but his wife and family continued to occupy the matrimonial home until some time in 1963, a further period of approximately a year. In 1963 the appellant and his wife entered into a separation agreement. The wife voluntarily left the matrimonial home for another city. She had custody of the children. The house was vacant. The appellant then listed it for sale but received no offers. Then he sold it to Lambton.

The principal thrust of the submission on behalf of the Minister was that the appellant was a dealer in real estate. That circumstance may well colour the transaction because as Lord Normand said in Commissioners of Inland Revenue v Fraser (1942), 24 TC 498, at page 502:

I said in a case which we decided only yesterday that one important factor may be the person who enters into the transaction.

Based upon his premises that the appellant was a dealer in real estate, counsel for the Minister then proceeded to the position that while the appellant had in mind the occupation of the house as a residence that, because his background and knowledge of the real estate market, he also had in mind a business purpose that he might at some future time turn the property to account at a profit.

Even accepting the Minister’s first premise that the appellant was a trader in real estate, that does not preclude him from investing in a home for occupancy by himself and his family. Regardless of his calling the appellant is fully entitled to acquire a house for residential purposes. His occupation as a trader in real estate will not change the character of the property acquired if it was in fact acquired for that purpose to the exclusion of its disposal in a scheme of profit making.

The presence of a profit motive at the time of the original purchase does not change the character of an asset which was the subject matter of investment into inventory and thus automatically convert a rise in value realized upon its sale into income.

It is inherent in every investment that the person making it does so with the hope and expectation that it will rise in value and that it may be sold ultimately to realize that enhancement in value. This is particularly so in the case of a house because in the interval it provides the owner with a home.

I do not think that any purchaser of a house for use as a home intends to hold it indefinitely. During a family’s younger years it serves as a haven. When the children reach maturity they almost invariably leave the family home to establish homes of their own. Thus the parents are left in lonely isolation. The house becomes too large for them and difficult for them to maintain in their declining years and they resort, in many instances, to an apartment where all necessary services are provided. Therefore I think it is fair to say that almost every home purchased is purchased with a view to its ultimate sale and no purchaser can be faulted for selecting an area or otherwise ensuring that such almost inevitable sale will result in a gain.

Such a general statement of principle was aptly put by Lord Buckmaster in Jones v Leeming, [1930] AC 415, where he said at page 420:

. . . an accretion to capital does not become income merely because the Original capital was invested in the hope and expectation that it would rise in value; if it does so rise, its realization does not make it income.

A corollary of that principle must be that an owner may take steps to maintain the value of his property and to ensure that it does not decline in value but rather that it will increase provided that those steps do not amount to a “maturing” of the property.

As I understood the argument on behalf of the Minister, much reliance was placed on the fact that the appellant obtained a building permit for the construction of a multiple dwelling on the site of 361 London Road and that that fact was indicative of this ulterior purpose.

In my view what the appellant did may be explained by his foresight directed to maintaining the value of his property in the event of its sale at some future time. The appellant recognized that 361 London Road, at the time of its purchase, was the most desirable residential house in Sarnia. He also recognized that it was in an area that would deteriorate but he forecast that such deterioration would not occur until 15 to 20 years later. He estimated that at the expiry of that time 361 London Road would have fulfilled its purpose as a home for his family and that that would be the time for its disposition. At the time he purchased the house he did so because of its desirability as a residence. He did not make specific enquiries about the zoning because, as he testified, he would have bought it even though the area was zoned for multiple dwellings. It came to his attention from the vendor that the area was non-commercial and he gave to the vendor a commitment that he would not sell to a prospective purchaser which had in mind a quasi commercial use which was prohibited by the zoning regulations in force.

During his family’s occupancy of the house and before his marriage breakdown an apartment building was erected on the street to the dismay and alarm of the other residents. Forthwith a petition was circulated to persuade the municipal authority to rezone the area for single residences. The appellant’s property was not affected adversely because of its site in a comparatively large expanse of secluded grounds. He declined to sign the petition but he went further. He obtained a building permit for an apartment building on the site. He did this expeditiously. He obtained plans from his architect, which the architect had readily available. Any plans would do and the plans obtained were not drafted for the site. Having obtained a building permit the appellant’s property was confirmed with a continuing use and would not be affected by any by-law changing the use of the immediate area. I am convinced this was a subterfuge on the part of the appellant which was successful. The area was rezoned for single residences but 361 London Road was excepted.

In my view this action by the appellant was the means by which he sought to preserve the value of his property against the time of its inevitable sale in the future which he foresaw after it had served its use as his family home.

That time came more quickly than the appellant foresaw but it resulted from his marriage breakdown rather than the deterioration of the area by the ravages of time. I ascertained in response to a question from myself that the relationship between the appellant and his wife was happy at the time he bought the house and at the time that he applied for a building permit on the site. The possibility of the marriage breakdown was not imminent at those times and was, therefore, not a contributing factor to the appellant obtaining a building permit.

On the contrary an extremely large sum was spent by the appellant in remodelling, redecorating and furnishing the house. He also gave his wife a present of a set of twelve silver service plates.

The appellant, during the course of his testimony, repeatedly emphasized that his intention in buying 361 London Road was to occupy it as a family home. Lord Hansworth, MR said in Hillerns & Fowler v Murray, 17 TC 77 at 87:

But a declaration of intention by persons charged will not do to secure immunity from the Income Tax Act. The question is: what is the character to be attributed to the acts done . . .? The quality and characteristics to be attached to the acts are all questions of fact because they are questions of degree.

After his wife left him it was reasonable for the appellant to sell the house. There was no further need of it as a family residence. He listed it for sale at a price of $60,000. In the listing agreement emphasis was placed on the fact that the lot was zoned for multiple dwelling. I see nothing reprehensible in the appellant doing so. He felt that this circumstance might influence a prospective purchaser. No offers were received. The appellant then sold the property to Lambton. The house was subdivided into six apartments and a 56-unit apartment was built on the site but not in conformity with the plans used to obtain the first building permit. These are all events subsequent to the sale, but they do reflect back upon what the appellant’s intention may have been at the time of the original purchase. As against this is the fact that his effort to sell to an independent buyer was unsuccessful and what was done to put a valuable property to its most advantageous use in all the circumstances.

After giving attention to all of the objective evidence I am satisfied that on the balance of probability the appellant acquired 361 London Road for the purpose of occupying it as a family residence to exclusion of trading, dealing or otherwise turning it to account.

Having reached the conclusion which I have it becomes unnecessary for me to consider the question of the deductibility of the expenses incurred by the appellant during his occupancy of the house and the possibility of apportioning those expenses.

In the result, therefore, the appeal with respect to the assessment by the Minister in respect of the appellant’s 1961 taxation year is dismissed with costs; the appeal with respect to the assessment for the 1963 taxation year is allowed with costs; and the appeal with respect to the 1964 taxation year is also allowed with costs.