Regina Shoppers Mall Limited v. Minister of National Revenue, [1984] CTC 2091, 84 DTC 1081

Taylor, TCJ:—This is an appeal heard in Ottawa, Ontario, against income tax assessments for the years 1976, 1977 and 1978, in which the Minister of National Revenue had taxed on income rather than capital account the gain realized on the sale of a parcel of real property in the City of Regina, Saskatchewan. The matter has a long and complex history and is most appropriately described by quoting the appellant’s notice of appeal and the respondent’s reply to notice of appeal:

NOTICE OF APPEAL

Notice of Appeal is hereby given to the Tax Review Board from the Reassessments dated the 30th day of July, 1980, with respect to the Appellant’s 1976, 1977 and 1978 taxation years, as confirmed by the Minister’s Notification of Confirmation dated the 26th day of March, 1981.

A. STATEMENT OF FACTS

1. The Appellant is a body corporate, incorporated pursuant to the laws of the Province of Saskatchewan on February 6, 1969, and having two equal shareholders, being Mr & Mrs F W Hill.

2. In early 1961, the Appellant acquired a piece of property in South Regina comprising 27.5 acres (hereinafter referred to as ‘Parcel M‘) for the purpose of constructing thereon a regional shopping centre.

3. Immediately after acquisition the Appellant began excavation for the shopping centre while negotiations ensued with major prospective tenants including Dominion Stores, Kresge and The Hudson’s Bay Company. Construction was delayed pending these negotiations and after several years the major prospective tenant, The Hudson’s Bay Company, decided not to construct a store on Parcel M.

4. Between 1961 and 1976, portions of the property were disposed of and utilized as follows:

(a) In 1976, .7 acre was sold to the City for roads on the corner of the property. This cust (sic) off 2.3 acres which, in turn, were sold to McCallum Hill Ltd., a related company.

(b) In 1968 .5 acre was leased to Shell Oil Ltd. for twenty years.

(c) In 1969 a portion of the property was leased to A & W Food Services for ten years.

(d) In 1969 and 1970 the taxpayer constructed a neighbourhood shopping centre on approximately 2.5 acres.

5. As well as the foregoing, between 1961 and 1976 the taxpayer went through various negotiations to have the land developed as rental residential property. Specifically:

(a) In the late 1960s, negotiations were entered into with the Intendes Group to construct apartments on the undeveloped portion of Parcel M. The Appellant incurred approximately $25,000 in costs in determining the feasibility of this utilization, but eventually this plan was abandoned.

(b) In March 1971, the Appellant entered into a joint venture with Ruttan Development Corporation to construct apartments on Parcel M and other properties. Apartments were constructed on the other property, but Ruttan did not construct the required apartments on Parcel M. A lawsuit ensued with the result that by 1974 the agreement was terminated.

(c) In 1974, the appellant again began negotiations with K Mart and Zellers in

hopes of making the centre a regional centre. These negotiations came to naught.

(d) It then became apparent that a townhouse development would be best suited to Parcel M. The Province of Saskatchewan prohibited one building and selling condominiums while at the same time retaining the leasing of the underlying land. The Appellant, still wishing to retain ownership of the land, had its solicitor petition the Province to have this restriction removed. This petition, made in the mid 1970s, was to no avail.

6. Accordingly, after holding the property for approximately fifteen years, and attempting to develop the property for rental purposes during that period the Appellant, realizing that its intended use of the property was not feasible, sold the property in early 1976 to Headway Corporation Limited and Marathon Investments Limited, a related company.

7. In computing its taxes for the 1976 taxation year the Appellant treated the disposition as capital and included in its income a taxable capital gain in the amount of $384,951.

8. By Reassessments dated the 30th day of July, 1980, Revenue Canada reassessed the taxpayer treating the gain on the disposition of the property in the amount of $1,690,229 as income against which there was allowed a reserve of $1,267,672. The amount of $1,267,672 was then included in the income of 1977 against which there was claimed and allowed a reserve of $1,255,615. The amount of $1,255,615 was included in the income of 1978 against which there was claimed and allowed a reserve of $963,431.

9. By Notices of Objection dated the 12th day of September, 1980, with respect to the taxation years 1976, 1977 and 1978, the Appellant objected to the said Reassessments.

10. By Notification dated the 26th day of March, 1981, the Minister confirmed the Reassessments.

B. THE STATUTORY PROVISIONS UPON WHICH THE APPELLANT RELIES AND THE REASONS WHICH IT INTENDS TO SUBMIT.

11. The gain received by the Appellant on the disposition of the property was capital in nature, with the result that the full amount of the gain should not be included in the Appellant’s income.

REPLY TO NOTICE OF APPEAL

In reply to the Notice of Appeal dated May 4, 1981 in respect of assessments for the 1976, 1977 and 1978 taxation years, the Respondent, the Minister of National Revenue, says as follows:

A. STATEMENT OF FACTS

1. He does not admit any allegations of fact or law contained in the Notice of Appeal except as expressly admitted hereinafter.

2. He admits paragraphs 1, 4, 7, 8, 9 and 10 of the Notice of Appeal.

3. In answer to paragraph 2 of the Notice of Appeal, he admits that the Appellant acquired in early 1961 property in South Regina comprising 27.5 acres but denies that the property was acquired for the purpose of constructing thereon a regional shopping centre.

4. In answer to paragraph 6 of the Notice of Appeal, he admits that the Appellant sold the balance of the property in early 1976 to Headway Corporation Ltd and Marathon Investments Ltd, but otherwise does not admit paragraph 6.

5. He does not admit paragraphs 3 and 5 of the Notice of Appeal.

6. In further answer to the Notice of Appeal, he says that:

(a) Mr F W Hill, in addition to owning one half of the shares in the Appellant’s company, is the controlling shareholder in McCallum Hill & Co Ltd (referred to hereinafter as McCallum Hill) which was incorporated in 1953.

(b) On May 5th, 1955 McCallum Hill entered into an option agreement (referred to hereinafter as the Kramer option) with a Mr Robert A Kramer to purchase 457.13 acres of land (referred to hereinafter as “the land’’) in South Regina at a price of $3,000.00 per acre.

(c) On May 2nd, 1956 Hillsdale Shopping Centre Ltd (referred to hereinafter as Hillsdale) was incorporated at the instigation of Mr. F W Hill, with equal shareholding between Mr & Mrs F W Hill.

(d) That on May 8th, 1956 an agreement for sale of that portion of the land designated as block J was entered into between McCallum Hill and Hillsdale at the option price of $3,000.00 per acre.

(e) That from May 8, 1956 to December of 1958, Mr F W Hill, through Hillsdale, made efforts to construct a shopping centre on block J but abandoned these efforts due to difficulties encountered and block J was eventually expropriated in 1962.

(e) That on February 6th, 1959 the Appellant was incorporated at the instigation of Mr FE W Hill with Mr & Mrs F W Hill as equal shareholder.

(g) That in early 1961, McCallum Hill transferred to the Appellant the Kramer option with respect to that portion of “the land’’ designated as block M (referred to hereinafter as block M) being the property here in question, which option was exercised by the Appellant.

7. In assessing the Appellant for its 1976, 1977 and 1978 taxation years to include in income all of the gain realized by the Appellant on the sale of that portion of the land designated as block M, the Respondent acted upon the following assumptions of fact:

(a) That throughout the active existence of the Appellant its interest and intention were identical with those of McCallum Hill and the interest and intention of McCallum Hill with respect to that portion block M coincided with those of Mr F W Hill.

(b) That the Kramer option was acquired by McCallum Hill in May of 1955 for the purpose of developing a planned residential subdivision and the bulk of “the land” was in fact subdivided into residential lots which were sold to builders who erected homes for individuals or for sale.

(c) That at the time McCallum Hill acquired the Kramer option in May of 1955 neither it nor Mr F W Hill had any intention to build a shopping centre on that portion of “the land” eventually designated as block M.

(d) That prior to the Appellant’s acquisition of block M, Mr Hill was aware of the difficulties involved in building a shopping centre on “the land”, particularly that a successful and experienced competitor was building a major shopping centre nearby, that as a result major department stores would not be willing to locate on “the land’’, and that plans existed for the building of a nearby university which would eliminate potential residential development.

(e) That Mr F W Hill, through McCallum Hill, Hillsdale and the Appellant, was a trader and developer of real estate.

(f) That an operating motive for the acquisition of block M was the expectation that it could be sold either in whole or by lots for profit.

(g) That this expectation was realized by the sale of block M in 1976 to Headway

Corporation Ltd and Marathon Investments Ltd for a profit of $1,690,229.00.

(h) That prior to the sale of block M, the Appellant applied to City Council to have it rezoned from commercial to residential and submitted plans for a proposed residential development for block M.

(i) That that portion of “the land” designated as block M was inventory to the Appellant.

B. THE STATUTORY PROVISIONS UPON WHICH THE RESPONDENT RELIES AND THE REASONS WHICH HE INTENDS TO SUBMIT

8. The respondent relies, inter alia, upon subsection 152(1.1), sections 3, 4, 9 and 248 of the Income Tax Act, SC 1970-71-72, chapter 63 as amended.

9. The Respondent submits that the profit from the sale of block M was a profit from the business of trading in real estate and was properly included as income of the Appellant by the Respondent for the 1976, 1977 and 1978 taxation years.

10. If block M was acquired as a capital property, which is not admitted but specifically denied, the Respondent submits that the fair market value as at December 31, 1971 used by the Appellant in calculating its capital gain was incorrect.

11. The Respondent further submits that the Appeal in respect of the 1977 taxation year of the Appellant should be quashed, as it is in respect of a nil assessment from which there is no appeal and the Appellant has not requested that the Minister make a determination of the Appellant’s non-capital loss under the provisions of subsection 152(1.1) of the Income Tax Act.

THEREFORE the Respondent submits that the Appeal for the 1976, 1977 and 1978 taxation years should be dismissed.

The Court also had the benefit of the explicit and well-considered judgment of the Federal Court in Hillsdale Shopping Centre Limited v The Queen, [1981] CTC 322; 81 DTC 5261 which dealt with what was then Parcel “J” of the same large tract of land, while this appeal deals with Parcel “M” (also referred to in Hillsdale, (supra))). The trial of the issue took some three days and produced some seventy-five exhibits, some of them quite lengthy, about equally divided as between those provided by the appellant and those provided by the respondent. Mr F A Hill was the principal witness and there was no contest by counsel for the appellant that indeed Mr Hill was the guiding mind and will for the corporate dealings recounted for the Court. In my view, the matter comes down to a consideration by the Court of two contentions made by the appellant. Paragraphs 2 and 6 of the notice of appeal read as follows:

2. In early 1961, the Appellant acquired a piece of property in South Regina comprising 27.5 acres (hereinafter referred to as ‘Parcel M’) for the purpose of constructing thereon a regional shopping centre. (Underling mine)

6. Accordingly, after holding the property for approximately fifteen years, and attempting to develop the property for rental purposes during that period the Appellant, realizing that its intended use of the property was not feasible, sold the property in early 1976 . . . . (Underlining mine)

I am satisfied that Mr Hill (personally and/or through his various corporate endeavours) was an accomplished and knowledgeable land developer, and as such would avail himself of any reasonable opportunities to benefit from raw land resources at his disposal. In so doing he would attempt to produce the most economical, cohesive, attractive, well-planned, saleable and profitable community possible. In a residential development of some 450 acres it is reasonable to accept his assertion that a portion of the total average available would have been “set aside” for a shopping plaza. In this matter, it is alleged that Parcel “M” was just such a site; but, it is equally alleged that it was dedicated and always remained so consecrated to just such a purpose. There is no evidence that the “single family home” subdivision type of development was ever contemplated for Parcel “M”, and the evidence would support a view that such a use (single family homes for sale) would not have been looked on with favour by the municipal planning authorites. Since the date of acquisition of Parcel “M” was separate from and later than the rest of the 450-acre raw land development parcel, it is contended by the appellant that it can only be considered as having been so dedicated to its use as a shopping plaza site for purposes of renting the store premises when constructed. However, I am far from convinced that it can be said that the only use to which the relevant parcel of land could be put, was that of a “shopping plaza’’. In the context of the total 450-acre housing development, I am sure that a shopping plaza, preferably a regional shopping plaza, possibly a community shopping plaza, but virtually as a necessity a neighborhood shopping plaza adjacent to, or in conjunction with the “single family home” development would have been an asset and a profitable one, both to Mr Hill and to the residents. It must be remembered however, that during the times material (1955 to 1976) Mr Hill was not the only player on the scene, even though he was one of the major ones. His own testimony provided insights into the conflicting and competing forces at work in the land development field during that period.

The Court was provided with a learned description of the distinctions among the various categories of shopping plazas regional, community and neighborhood. In very general terms a “neighborhood” plaza requires 5 to 10 acres of land; a “community” plaza, 10 to 20 acres of land; and a “regional” plaza, from 20 to 40 acres of land. The category of the plaza which could be developed was determined also by the competition in the area expected to be the customer drawing range, and the other characteristics of topography, geography, population distribution, roads and services, etc, which could impinge upon its success or failure. Simply put, one could contemplate a “regional” shopping plaza if sufficient raw acreage were available, perhaps as much as 40 acres, but availability of sufficient land did not in itself assure that potential tenants (particularly major ones) would see the site as appropriate.

“Parcel M“ (about 27 acres) fell above the size required for a “community” plaza, and in the mid-range for which one could realistically contemplate a “regional” plaza. A “regional” plaza by any definition must virtually sanitize a very large residential area against the construction of a competing “regional” plaza. While there might be exceptions, in general terms, I take from the evidence and testimony adduced at this hearing that the development of one viable “regional” plaza virtually ensured that only relatively minor “neighborhood” plazas, or at best a very limited number of “community” plazas, could be supported in the same customer service area related to or surrounding “Parcel M”.

The main contention of the appellant is noted above and quoted as follows:

In early 1961, the Appellant acquired a piece of property in South Regina comprising 27.5 acres (hereinafter referred to as “Parcel M”) for the purpose of constructing thereon a regional shopping centre.

To the degree that such a statement is based upon the recognition that “Parcel M“ could not be used for single family dwellings, and that it was much too large for a “neighborhood” plaza, and probably too large for even a “community” plaza, I accept it. In addition, I would note that situated as it was on the northern edge of Mr Hill’s housing development, with restricted immediate drawing power on the other three sides, because of the geography, it was not ideally suited for either a “community” or a “neighborhood” plaza, and that appears to have been recognized in the notice of appeal. In the range of possible plaza development only a “regional” plaza was realistic, but the parcel of property was not restricted as far as other uses were concerned (other than single family) and its potential for use as the site for multiple family residential rental units always existed as far as I am aware.

I am satisfied that the efforts to “monopolize” the “regional plaza position” were intense in the Regina area during the early times relevant to 1960, 1961 and 1962, and that Mr Hill participated actively, even fervently, in those efforts and towards his objective of building on “Parcel M” a “regional” shopping plaza. I am equally satisfied that the evidence casts serious doubt upon the viability and acceptability of such a “regional” plaza at that site. Valiant efforts were made by counsel for the appellant to highlight the advantages of the site — certain road accessibility and traffic patterns existing and contemplated. However, in my mind, situated where it was, it did have inherent disadvantages; but, that is beside the point. I am sure that putting together the “regional shopping plaza”’ would indeed have been a “coup” for Mr Hill, and I can only give him credit for trying. In my view however, if he did not do so, and he did not, the other options, a “community” or “neighborhood” plaza, were not at all viable.

Having reached that conclusion, in my view, the matter is quite straightforward. The precise date, even the exact year, at which the Hudson Bay Company turned its back on the prospect of a store on “Parcel M”, may not be easy to agree upon, but it was certainly not later than 1962. At that time The Bay decided to build in the downtown Regina area and that critical date may even have been as early as 1960 or 1961. However, as of a date no later than 1962, there was no longer any possibility of “Parcel M” being viable as the site for a regional shopping plaza, that is a shopping plaza effectively serving all of Regina proper and its environs. In addition, The Golden Mile Plaza (a competitor) had opened during the same time frame, about 1961. The site of ‘‘Parcel M“ was then bracketed, at about equal distance of approximately two miles, by The Bay store anchoring the downtown Regina shopping area, and the Golden Mile, diametrically on the other side, to attract new urban residents in the developments which had sprung up. “Parcel M”, restricted as it was on one side by the Wascana River, and theefore only accessible by a bridge, even a new bridge, could not hope to attract the necessary volume and mix of tenants and customers to make it a viable operation on the grand scale originally contemplated. From 1962 on, the site had the potential for only a much smaller shopping centre. Mr Hill’s own information casts grave doubts on the viability of either a “community” or a “neighborhood” plaza, and I regard the efforts in this direction as having been forced on him, possibly to make the sale of his houses more attractive. For whatever reasons, he made some commercial investments at the site. There is no evidence he would ever have acquired the property for those limited purposes, and the site has not proven to be viable for such commercial ventures in the years since then. Its uneconomical nature for multiple unit residential rental was also apparent to Mr Hill, so the only option was to hold it for sale, which he did. That sale and the resulting rental development did not prove to be viable, even though Mr Hill made the best possible arrangements he could, retaining a part ownership of the purchasing organization for the developement of “Parcel M”.

The crux of the matter, therefore, as I see it, and the point upon which this issue must be determined, is that Mr Hill, as a trader in real estate, was aware of the possibility of building a very major shopping plaza (regional) on “Parcel M” when he acquired it, did all in his power to bring that about, but when he failed, he held onto the property until an alternative use could be seen with a better prospect for gain that turning it immediately towards the obvious direction — multiple residential rental use. The best alternative use — and the likely one for Mr Hill from 1962 on — was its eventual sale at a profit. There was no evidence of substance which supports a conclusion that during the intervening period (1962 to 1976), Mr Hill considered as serious the prospect of making “Parcel M” into a viable investment of a real estate rental nature. It was simply not a viable proposition, and he could not build single family homes on it. One can applaud his efforts, both physical and financial to maintain his own hopes for it and its possible interest to clients as a “regional” plaza, but the cause had been lost by 1962, and I am prepared to find that he was adequately aware of that fact since he had always rejected the prospect of multiple family residential use or at least never pursued it. The future of “Parcel M” was as inventory for sale, and to that degree, at least after 1962, it was indistinguishable from any of the other real estate trading assets of this appellant corporation or of Mr Hill personally.

The appeal is dismissed.

Appeal dismissed.