Magilb Development Corp LTD v. Minister of National Revenue, [1982] CTC 2278, 82 DTC 1249

M J Bonner:—The appellant appeals from assessments of income tax for its 1975 taxation year, for its first 1976 taxation year ending August 31, 1976, and for its second 1976 taxation year ending December 31, 1976. On assessment the Minister disallowed the deduction of certain interest. As to that matter the appellant has conceded that the assessments are correct. Further, on assessment for the second 1976 taxation year the Minister computed the gain on certain land sales on the basis that the rise in value of the land during the period from December 31, 1971, to December 31, 1976, was income. The appellant’s contention was that the land did not cease to be a Capital asset in its hands until January 1, 1976. It was common ground that the land was a capital asset in the hands of the appellant up to December 31, 1971. Thus, the only issue was on which of the two dates the land was converted to inventory.

The land in question was part of a 73 acre parcel bought by Gilbert Her- mary in the 1930’s. It was farmed by him first for dairy purposes and later for the production of potatoes. In 1955 the potato operation stopped.

Gilbert Hermary had 14 children, one of whom died in infancy. He was never a particularly well man. In 1961 he was committed to a mental hospital where he remained for a year. Thereafter, until his death, he suffered from periodic bouts of severe depression. In 1963 the appellant was incorporated and the land was transferred to it. According to the evidence of Andrew Hermary, one of the children of Gilbert Hermary, this step was taken to ensure that the land would not fall into the wrong hands and to implement a scheme for the support of the parents. Under the scheme the children were each to pledge $1,000 for the support of the parents payable at the rate of $30.00 per month, and the children were to receive shares. Four of the children, however, failed to pledge or pay.

The land was to be safeguarded from improvident sale by the father by its transfer to the company and by the corporate structure which made two directors a quorum. Thus, the father, though one of the three directors in fact appointed, could not act alone. He could not alone use the corporate seal. I may note at this point that the scheme had a gaping hole in it until 1974 because until then the father had de jure control of the company. In 1974 the father’s shares were distributed among the children eliminating that hole.

Andrew Hermary portrayed the events of 1971 on which the Minister relied as evidence of a conversion of the land to inventory as being the actions of the father on a frolic of his own and not the actions of the company. The events in question involved consideration of a scheme for the erection of a senior citizen’s home on part of the property, the extraction of sand from the property and an application for permission to develop a mobile home park on the property. One other such action was the making of an application to the municipality for permission to subdivide for residential purposes. Andrew Hermary testified that his father was lonely and depressed following the death of his wife in 1967 and that the family had no qualms about the father’s “fantasies” as they were called because the contacts made by the father in the course of his activities alleviated his loneliness and did not endanger the farm because the father alone was, in Andrew Hermary’s view, powerless to dispose of the appellant’s property or otherwise commit the appellant.

I cannot accept the appellant’s thesis that the acts of the father were not acts of the appellant corporation. I do not think it can be said that a person who has an absolute majority of voting shares and who is therefore in a position to replace other directors who oppose him is not the directing mind and will of the corporation if he is inclined to be such. Secondly, Andrew Hermary’s view that the appellant corporation was a device ntended to preserve the farm for the shareholding children until after the father and mother had no use for it may not, and indeed does not appear to have been a view fully shared by all the children. The only witness to testify was another of the childen, Gilberta Gusek. She was asked if she was of the view that the farm was held for the children and she replied that, despite the corporation, the farm, to her, was her father’s.

I have, from another standpoint, serious reservations about Andrew Hermary’s portrayal of the 1971 actions as his father’s personal frolics. The father’s actions were consistent with the appellant’s corporate name and objects. The lawyer who incorporated the company acted on the instructions of the brother, Maurice. It is not at all clear that Maurice and the other brothers and sisters saw the purpose of the company in the same way as Andrew Hermary did. Equally, it is not clear that had the father attempted to pursue the 1971 subdivision application the other brothers and sisters would have been inclined to view the action as something to be opposed. Furthermore, had the father been as seriously deficient mentally as was suggested (as opposed to simply being subject to recurring bouts of depression) it would appear likely that the solicitors acting on the father’s instructions would have detected the situation and would have refused to act.

The appellant submitted, however, that even if there was a corporate intent to subdivide in 1971 and an application for approval, such action was not sufficient to convert to inventory the farm which the respondent admitted was initially a capital asset in the appellant’s hands. I quite agree that, taken alone, the formation of a corporate decision to subdivide is insufficient to effect a conversion. What must be found, and what the Minister apparently assumed, was that, and I quote the words of Mr Justice Catta- nach in Harry Moluch v MNR, [1966] CTC 712; 66 DTC 5463 at 718 [5466]:

. . . the appellant embarked upon a business using the lands as inventory in the business of land subdividing for profit . . .

Having regard to the arguments advanced on behalf of the appellant, I must emphasize that the test turns on the sort of activity upon which the appellant embarked. The letter put to Andrew Hermary on cross-examination showed that the appellant sought and obtained preliminary approval of a plan of residential subdivision of the land. It appears, too, that an engineer was engaged and CMHC approval was sought. That evidence as to what was done in 1971 was very scanty. There was no evidence as to what further steps were required or were foreseen as necessary in carrying out the subdivision scheme. It may be that the operations envisaged were of such an uncomplicated nature that had they been carried to completion the appel- lant could not be said to have commenced to carry on a business. I quite accept the decision of the Exchequer Court in John Lloyd McGuire v MNR, [1956] CTC 98; 56 DTC 1042, as authority for the proposition that the simple acts of filing a plan of subdivision and of selling lots according to that plan do not, by themselves, constitute a business. There is, however, no evidence upon which I can find that such acts alone were all that the appellant had in view. Even ten years ago it was not at all unusual for municipal and planning authorities to insist on the installation of full municipal services as a condition precedent to the approval of the subdivision and sale of urban subdivision lots. In the absence of evidence that the subdivision process upon which the appellant embarked was of the simple kind typified by the McGuire case, I must find that the appellant has failed to establish that it did not embark on a business venture in 1971 and thus then effect a conversion of its land to inventory.

In the result all three appeals fail and judgment will issue dismissing them.

Appeals dismissed.