Morbane Developments LTD v. Minister of National Revenue, [1979] CTC 2794, 79 DTC 674

The Chairman:—The appeal of Morbane Developments Ltd is from an assessment in respect of the 1973 taxation year. In its tax return of that year, the appellant reported taxable income in the amount of $644,614 as Canadian investment income pursuant to paragraph 129(4)(a) of the Income Tax Act, SC 1970-71-72, c 63, as amended, and calculated its refundable dividend tax on hand at the end of its taxation year ending September 30, 1973, in the amount of $158,311. By notice of reassessment dated January 6, 1976, the Minister of National Revenue allowed the appellant a small business deduction of $50,000 and eliminated the refundable dividend tax. Of the reported taxable income of $644,614, the Minister assessed $625,420 as being income from an active business and $19,194 as being income from an inactive business.

Issue

Simply stated, the only issue in this appeal is whether the appellant was engaged in an active business in the pertinent taxation year.

Summary of Facts

The appellant company was incorporated on January 4, 1960, and its shares were held equally between two groups—Mr Max Tanenbaum’s group and Mr William McLachlan’s group.

Mr McLachlan, its president, testified that the appellant company acquired 107 acres of land north of Highway 27 in 1960, and the land was serviced and subdivided for sale purposes. Mr McLachlan was also president of McLachlan Construction Ltd whose business was to design, engineer, build, and sell industrial buildings in what is known as a turnkey operation.

Mr Tanenbaum, representing the other shareholders, was in the structural steel and cement business and it is my understanding that he did the steel and the cement work that went into the industrial buildings constructed by McLachlan Construction Ltd.

The evidence is that the land was acquired by the appellant company as a land bank which McLachlan Construction Ltd would purchase, then build and sell the industrial buildings to its own clients as required. The appellant paid a commission to McLachlan on the sale of its land (Exhibit A-4).

From September of 1961 to April of 1969, the appellant sold to McLachlan Construction Ltd 26 parcels of land of varying acreage on which McLachlan (except in 2 instances) constructed industrial and commercial plants for its clients. In September of 1967, the appellant built a plant and leased it to United Tire on a long-term lease. From March of 1973 to April of 1975 the appellant entered into three transactions with the Province of Ontario, either through expropriation or sale in relation to a proposed highway immediately adjacent to the appellant’s property. (Exhibit A-3).

The subdivision, the servicing and the sale of the lands were executed by agencies other than the appellant company and no additional land was acquired by the appellant after the original acquisition. The appellant had no offices and no employees except for Mr Lindsay McLachlan; it had no phone of its own; it did not advertise except by way of a sign erected on the land; and, it had no clients other than McLachlan Construction Ltd. After the period from April of 1969 to April of 1975, no land transactions were entered into by the appellant other than with the Province of Ontario in respect of the construction of the highway. The appellant’s only activity in that period of time was to collect the rent from the United Tire building.

Contentions

It is the appellant’s contention, as stated in the notice of appeal, that:

11. Throughout its existence the undertaking of the Appellant as it related to the purchase, holding and sale of its one parcel of land was a single undertaking and did not constitute an active business within the meaning of paragraph 125(1)(a) and subparagraph 129(4)(a)(iii) of the Act.

12. Even if the undertaking of the Appellant as it related to the purchase, holding and sale of land had at any time constituted an active business, such active business ceased in 1969. The expropriation referred to in paragraph 4 above did not involve any activity by or on behalf of the Appellant and accordingly the income arising from such sale cannot be considered to be income from an active business within the meaning of paragraph 125(1)(a) and subparagraph 129(4)(a)(iii) of the Income Tax Act.

The respondent’s submissions, on the other hand, state:

7. The Respondent submits that the Appellant was carrying on an active business within the meaning of Subsection 125(1) of the Income Tax Act during its 1973 taxation year, that the income earned by the Appellant during its 1973 taxation year was income from an active business within the meaning of Subsection 125(1) of the Income Tax Act, and that consequently the Respondent properly assessed the income earned by the Appellant in 1973 as income from an active business pursuant to Subsection 125(1).

Subsection 125(1) reads:

(1) There may be deducted from the tax otherwise payable under this Part for a taxation year by a corporation that was, throughout the year, a Canadian- controlled private corporation, an amount equal to 25% of the lease of

(a) the amount, if any, by which

(i) the aggregate of all amounts each of which is the income of the corporation for the year from an active business carried on in Canada,

exceeds

(ii) the aggregate of all amounts each of which is a loss of the corporation for the year from an active business carried on in Canada,

(b) the amount, if any, by which the corporation’s taxable income for the year exceeds the aggregage of

(i) 10/4 of the aggregate of amounts deducted under subsection 126(1) from the tax for the year otherwise payable by it under this Part, and

(ii) 2 times the aggregate of amounts deducted under subsection 126(2) from the tax for the year otherwise payable by it under this Part,

(c) the corporation’s business limit for the year, and

(d) the amount, if any, by which the corporation’s total business limit for the year exceeds its cumulative deduction account at the end of the immediately preceding taxation year,

except that in applying this section for a taxation year after the 1972 taxation year, the reference in this subsection to “25%” shall be read as a reference to “24%” for the 1973 taxation year, “23%” for the 1974 taxation year, “22%” for the 1975 taxation year, and “21 %” for the 1976 and subsequent taxation years.

Subparagraph 129(4)(a)(iii) reads:

(4) In subsection (3),

(a) “Canadian investment income’’ of a corporation for a taxation year means the amount, if any, by which the aggregate of

(iii) all amounts each of which is the corporation’s income for the year (other than exempt income) from a source in Canada that is a business other than an active business, determined, for greater certainty, after deducting all outlays and expenses deductible in computing the corporation’s income for the year to the extent that they may reasonably be regarded as having been made or incurred for the purpose of earning the income from that business,

exceeds the aggregate of amounts each of which is a loss of the corporation for the year from a source in Canada that is a property or business other than an active business; and

In support of the Minister’s assessment, counsel for the respondent contends firstly, that the appellant was operating a business, and secondly, that it was operating an active business within the meaning of section 125 of the Act.

Counsel refers to the numerous and widespread objects of incorporation contained in the appellant’s letters patent to establish not only that the appellant corporation was a business but that it was an active business for the whole period between 1960 and 1973. He rejects one of the appellant’s submissions to the effect that if the Board considers the appellant to have been active at the outset of its operations, it ceased to be active after 1969. The respondent suggests that there was, at no time, any change in the nature of the appellant’s enterprise which was to buy and develop land to use for its own purposes, or to develop it for resale as set out in the letters patent. Counsel claims that the transactions of land with the Province of Ontario was part of the appellant’s normal enterprise because it had known of the Government’s plans to build a highway on the site as far back as 1966. The respondent’s position, therefore, is that the appellant never ceased operating an active business and that the proceeds of the disposal of land to the Province of Ontario in 1973 was income from an active business.

Findings of Facts

Both counsel rightly agree that the appeal can only be determined on its facts. On the basis of the evidence, I have no difficulty in concluding that the appellant was operating a business. However, irrespective of the numerous objects of incorporation listed in its letters patent, the appellant’s business consisted of an original purchase of 107 acres of land, the subdivision and the servicing of the land, the leasing of an industrial building on a long-term net net net lease, and the sale of parcels of land as required by its only client, McLachlan Construction Ltd. The fact that the subdivision and the servicing of the land was performed by someone other than the appellant and that the sales were made by an agent to whom the appellant paid a commission, does not, in my opinion, make the appellant’s enterprise any less a business. The question is whether the business was active.

The appellant company, which admittedly, is not at arm’s length with McLachlan Construction Ltd or with Mr Lindsay McLachlan (who is President of both companies), is nevertheless a legal entity which was carrying on its own business. The fact that the appellant had no office, no staff and no telephone are not, in themselves, determinative of whether or not the appellant’s business was active. The facts, in my opinion, that are very much more indicative of the nature of the appellant’s business are that: the ap- pellant, in the pertinent period, made but one purchase of land and did not renew its land inventory; that it did not actively advertise (other than by a sign on the land) land for sale; and, that it sold land to only one customer, and from 1960 to 1969 had engaged in an average of less than three sales a year. Considering all of the facts together, I cannot conclude that the appellant was carrying on an active business from 1960 to 1969. The evidence is clear to me, that the appellant was in fact holding land and acting as a land bank, disposing of its principal asset as required by its only customer. An average of three sales per year cannot, in my opinion, be considered as an active business within the meaning of section 125. The appellant’s only other income was rent from the lease of an industrial building which, as I understand it, was considered by the Minister as income from an inactive business.

As for 1969, the only remaining land, other than the subject property, was twelve acres in the northerly portion of the original acquisition which had been frozen by the Department of Transportation and Communications and which became very difficult to develop and, indeed, has not yet been developed. Even if the twelve acres of land had been disposed of by the appellant and developed by McLachlan Construction Ltd, as were the other lands, it would not, in my view, make the nature of the appellant’s business any more active. It is the nature of the appellant’s business since its inception which I consider to be inactive. A fortiori the disposal of the subject property to the Government of Ontario for the purpose of building a highway by negotiable sale or expropriation, and notwithstanding that the appellant may have known in 1966 that the land would be expropriated, the disposition of the property to the Government cannot be considered as part of an active business exercised by the appellant.

Decision

I hold, therefore, that the proceeds derived from the disposition of land by the appellant to the Government of Ontario in 1973 is not income from an active business within the meaning of the Income Tax Act.

The appeal is therefore allowed and the matter referred back to the Minister for reassessment in accordance with the above reasons.

Appeal allowed.