John L Mould v. Minister of National Revenue, [1981] CTC 2003, 81 DTC 15

John B Goetz:—This is an appeal by the appellant with respect to his 1976 taxation year whereby he disposed of all his holdings of shares in Beaufort Hills Limited (hereinafter referred to as “Beaufort Hills”) whereby the respondent assessed the proceeds of the sale as income from a business or an adventure in the nature of trade. The appellant claims that it was a capital gain. In reassessing the appellant, the respondent relies, inter alia, upon sections 3, 4, 9, paragraph 20(1 )(n) and section 248 of the Income Tax Act, SC 1970-71-72, c 63, as amended.

Facts

John Mould is a consultant and was a consultant counsellor before being elected to the city council. This is related to the field of developers and commercial property. He was engaged in the building of houses on lots which he subdivided during the period 1948-1952. In 1952 he was elected a councillor, subsequently became mayor in 1969 and has had no dealings in real estate since that time other than the purchase of a lot for himself. In 1972 he acquired certain shares in the capital stock of a corporation known as Beaufort Hills Limited. He acquired the shares, he says, for a nominal cash consideration plus a $30,000 shareholder’s loan to Beaufort Hills. His interest in shares in Beaufort Hills was 12 /2%. A corporation known as Ricenburg Developments Limited held 50% of the shares; Messrs Meister and Beallor held 12 /2 % ; and a corporation known as Belle Gardens Properties Limited also held 12%%. There was no share purchase agreement between the shareholders, but rather a restriction in the Letters Patent of the corporation required the majority of the directors of the corporation to consent to the transfer of shares. The appellant admits that he had experience in the real estate development business but that he had not been a trader or dealer in securities and that his acquisition of shares in Beaufort Hills was to acquire an investment which would produce dividend income and capital appreciation. The appellant appeared to be aware of the activities and real estate experience of the other shareholders of the company. The total holdings and the total assets of Beaufort Hills was 159.7 acres of unimproved land. Beaufort Hills was incorporated for the purpose of subdividing and selling that land. In early 1976, the company decided not only to develop land and service lots but to construct homes and erect them on the lots and to sell the homes as a package.

The appellant’s chief occupation being that of a municipal consultant with respect to real estate development clearly qualified him for the purposes for which the Beaufort Hills was incorporated. He says that when Beaufort Hills changed from merely servicing and subdividing lots to the construction of homes on such lots, and selling them as fully developed lots with homes thereon, he opposed this which is hard to understand in that it was in this period when homes were selling well. He says he was approached by Mr Meister to purchase his shares and at first said he evaluated the sale of the shares without relation or considering the enhanced value of the property, but did admit that subdivided lots certainly had enhanced the value of the property. I do not think in any way the added activity of the company in constructing homes on the subdivided lots depreciated the value of the property, but rather increased the value of its real estate holdings.

The respondent filed financial statements of Beaufort Hills which show that as of December 31, 1973 its total assets, mainly composed of real estate, amounted to $623,944. These assets kept increasing in value until as of December 31, 1977, such assets totalled $971,141. As of December 31, 1977 the value of the 159.7 acres plus a small amout of cash and a large cumulated carrying charges and development costs increased the total assets to $1,414,128. It is very clearly seen then that the land as development property certainly increased in value to a very dramatic degree.

Findings

It is my feeling, having regard to the experience of the appellant in the real estate business, particularly in the development area, that he had a primary or, at least, an alternative intention of trading in, speculating in or turning the shares to account for profit whenever a favourable opportunity to do so presented itself—which in this case he did. The principal and only real asset of the company was real estate and the holding of shares merely an alternative method of trading the real estate assets to account for profit, therefore making it an adventure in the nature of trade. See James Rex Burgess and Ross M Forward v MNR, [1973] CTC 58; 73 DTC 5040, at 62 and 5043 respectively, where Mr Justice Heald stated as follows:

I consider the decision of the Supreme Court of Canada in the case of Ronald K Fraser v MNR, [1964] SCR 657; [1964] CTC 372, 64 DTC 5224; to be relevant to the Situation here. In that case, the appellant and an associate, both experienced real estate operators, jointly acquired four contiguous parcels of land, intending to build a shopping centre and apartment houses for investment purposes. The two associates then formed two corporations, selling the shopping centre land to one and the apartment house land to the other. The associates received all the issued shares of both corporations in equal proportions. Construction of a store was commenced on the shopping centre site, but before it was finished, the associates sold all their shares in the corporation holding that land and shortly afterwards all their shares in the other corporation. Mr Justice Judson, delivering the judgment of the Court, held that the associates were carrying on a business; they intended to make a profit and if they could not make it one way, then they made it another way. The fact that they incorporated companies to hold the real estate made no difference. The sale of shares, rather than the sale of land was merely an alternative they chose to adopt in putting through their real estate transactions. The Court accordingly held the profit on the shares to be taxable as income.

In my view, the facts in this case are even stronger in favour of a taxable transaction than in the Fraser case. In the Fraser case, the main original intention was to construct fixed assets and to hold them as investments from which income would be derived. In the case at bar, there was never any intention to hold this land for revenue. The intention was clearly to acquire the raw land, improve it by clearing, installing roads, subdividing, servicing with Sewer and water and then reselling at a profit.

see also Scace, in Taxation and Real Estate, c 14, page 513, where it is Stated:

The case of Fraser v MNR (supra) is one of the most important tax decisions involving real estate. There the appellant and an associate purchased four contiguous parcels of land with the intention of errecting a shopping centre and a number of apartment houses. Each partner incorporated a private company and the land was sold in return for shares. After some progress had been made on the project, the shares were sold at a profit. Although much reliance was placed on the cases involving share transaction, the Supreme Court of Canada pierced the corporate veil and held the profit to be taxable. At pages 376 and 5226 respectively, Mr Justice Judson said:

“.. . this was merely an alternative method that they chose to adopt in putting through their real estate transactions. The fact that they incorporated companies to hold the real estate makes no difference.”

As a result, it is absolutely clear that a person who would be taxable on a real estate gain realized personally will not be able to avoid the tax by effecting the transaction through a corporation.

The Fraser decision was followed in DeToro v MNR, [1965] CTC 321; 65 DTC 5194; Slater v MNR, [1966] CTC 53; 66 DTC 5047; and Dubrovsky v MNR, [1967] CTC 617; 67 DTC 445. It would therefore appear that the same result might pertain where a capital interest in a trust or in a company is sold where the underlying asset is trading in land.

I so find in this case, that that was, if not the original intention of the appellant in acquiring shares in Beaufort Hills, at least a secondary interest and intent. I find that the sale of the appellant’s 12 /2% interest in the company, of all his shares, to Mr Meister, for the sum of $230,000 (less repayment of the $30,000 loan) was an adventure in the nature of trade and not a Capital gain.

I have also considered the following cases: Irrigation Industries Limited v MNR, [1962] CTC 215; 62 DTC 1131; Branlyn Management Ltd v Her Majesty The Queen, [1974] CTC 579; 74 DTC 6471; Regner Blok-Andersen v MNR, [1972] CTC 338; 72 DTC 6309; and William W Siebens v MNR, [1971] CTC 557; 71 DTC 5310.

For the above reasons, I dismiss the appeal.

Appeal dismissed.