Gianita Holdings Limited v. Minister of National Revenue, [1979] CTC 3043, 79 DTC 819

Delmer E Taylor:—This is an appeal heard in the City of Toronto, Ontario, on September 18, 1979, against an income tax assessment in which there was added to the appellant corporation’s reported taxable income for the year 1975 a net amount of $32,876.69 which resulted from the expropriation of certain real property owned by the taxpayer. The above amount of profit was regarded by the Minister as on revenue, not capital account, as provided for under sections 3, 9 and 248 of the Income Tax Act, SC 1970-71-72, c 63, as amended.

Background

The basic facts are not in dispute and can be briefly summarized as follows:

—The appellant is a Canadian corporation incorporated in Canada to carry on business;

—The chief shareholder of the appellant is F Califano;

— In 1970 the appellant acquired two parcels of real estate in the Township of Markham for a total consideration of $52,500;

— Both of the said two parcels of real property were forcibly taken by the Department of Public Works of the Government of Canada on January 30, 1973;

— By way of total compensation (exclusive of interest), the appellant received for the said forcible taking the sum of $96,512.69, which sum was received by the appellant in the following amounts on the following dates:

— During ownership, the appellant had incurred certain carrying costs associated with the property.

Contentions

The position of the appellant was as follows:

—The amount received by it as compensation for the forcible taking of its Said two parcels of real property was on capital account;

—The property was not acquired as part of an adventure in the nature of trade.

The position of the respondent was as follows:

—The appellant acquired its interest in the property and at all times held it with a view of trading in, dealing in, or otherwise turning it to account for a profit;

—The profit realized by the appellant on the expropriation of the properties was income from a business.

Evidence

The chief (and controlling) shareholder of Gianita Holdings Limited, Mr Califano, confirmed the general background facts and in examination and cross-examination, added that he had:

— been in the building construction business in Italy;

—come to Canada in 1967, acquired landed immigrant status and although he returned to Italy to wind up his business affairs there, he came back to Canada two or three times a year for the next few years to maintain that status, until he finally became a Canadian resident;

—substantial cash from winding up his businesses in Italy, which he gradually transferred to Canada;

— incorporated a company (not the appellant) in 1968 and through that company, in the same year (1968), purchased 31 acres of vacant agricultural land in the general vicinity of the Village of Markham, in the Province of Ontario. This property was subsequently sold in the year 1974;

— incorporated the appellant company in 1969 and acquired through it the subject property consisting of two parcels of vacant agricultural, unserviced land, totalling some 23 acres about six or seven miles from the Village of Markham;

— no prior knowledge of the expropriation of the subject property by the Government of Canada;

— no particular purpose or intention in mind in either acquisition—specifically the one under appeal in this hearing—other than to safely invest the money he was bringing from Italy. He considered land as a good hedge against inflation and had thought that at some time he might be able to use the property in question in this appeal for the construction of some buildings—apartments or stores perhaps;

—no intention at the time of acquisition of disposing of the property;

—earned only nominal income from the rent of the property, not sufficient even for the carrying charges;

— been frustrated by the expropriation in his desire and expectation to keep the property for a long-term investment, and make some use thereof.

Argument

Counsel for the appellant relied heavily upon the decision in Regin Properties Limited v MNR, [1979] CTC 2149; 79 DTC 156, to support the contention that the gain must be on capital, not revenue account, and quoted from pp 2155 and 162 respectively of that decision as follows:

With respect to the gain on the settlement for the property expropriated, I have seen no evidence that the stated objective of the taxpayer was violated by him. I can accept that while the appellant’s purpose in acquiring the property was indefinite, perhaps unusual, even unique, it was not invalid. It was, however, terminated by the expropriation. There is no evidence that the appellant anticipated the expropriation at acquisition, or actively promoted the event during ownership. The appellant did not consciously decide to ‘trade in’ the asset in the sense of accepting cash for land—that decision was made for the Company at the date of the expropriation order by the Province of Ontario and only the quantum of the settlement remained. Following the same line of reasoning as that indicated for the portion of the land that was sold, I find no basis in that event (the expropriation) to accord the character of ‘a venture in the nature of trade’, or ‘trading’ to this part of the transaction in question. I would refer to the decision of Southern Investments Limited v MNR, [1970] Tax ABC 1149 at 1150; 70 DTC 1729, at 1730:

The appellant says that the sum mentioned should be treated as a capital gain, as it was neither its desire nor intention to sell the property involved and the expropriation that occurred was something over which it had no control. That the fruits of expropriation might ordinarily constitute a capital accretion is true, but there are exceptions that depend on the circumstances that obtain. The present matter strikes me as coming within one of these exceptions. (Italics mine.)

Since the gain at issue here does not appear to me to come within any exceptions, it should be taxed as on capital account.

According to counsel, the conditions from Regin (supra) should obtain equally in the present appeal because, although the intentions of this appellant for the use of the property were indefinite, such intentions included its possible use as a capital item for the production of income. Also, Gianita had done nothing to enhance the potential for resale of the property.

Counsel made a substantial point of reinforcing that this appellant had, for all intents and purposes, left the property quite idle—no improvements, no “for sale” signs, no efforts to dispose of it.

Counsel advanced a second argument, to be considered only in the event the Board found against the taxpayer on the main contention—that the funds received should be regarded as income in the particular years re- ceived rather than all in 1975 when final settlement was reached. This argument was based on the perspective that the interim payments (for which the relevant documentation was submitted) were in fact final payments up to the particular points in time—to which the appellant had complete right, and therefore were income. Counsel’s view was founded on the decision in MNR v Benaby Realties Limited, [1967] CTC 418; 67 DTC 5275.

The third argument of counsel (again contingent upon the Board finding against the taxpayer on the main point) was that the Minister had not allowed the taxpayer the “small business deduction’’ permitted to active business corporations under subsection 125(1 ) of the Act. It was proposed that the decision in The Queen v Cadboro Bay Holdings Ltd, [1977] CTC 186; 77 DTC 5115, left no doubt that if it is to be regarded as a business, then it is an active business.

With respect to the appellant’s main argument, counsel for the respondent pointed out that the appellant had been specifically incorporated to hold the land; the company charter (submitted as an exhibit) was for dealing in real estate; the property had been heavily mortgaged; no early commercial or industrial use of the property was discernable at the date of purchase; and it was not used to produce income. The acquisition, therefore, could only have been speculative on the part of the appellant for purposes of resale, and was an adventure in the nature of trade. With regard to Regin Properties (supra), it was the view of counsel that this appellant could not claim the same relief, and he quoted from pp 2152 and 159 respectively of that decision:

The family philosophy is that land is the safest and best method of preserving capital. The family acquired and continues to own vast tracts of land in Europe, although some two-thirds of the holdings were lost during or after the Second World War. Thereafter the Prince embarked on a policy of buying land in North and South America. In view of the political stability of Canada, he purchased farms, timber limits and revenue-producing properties in Canada. He also purchased a huge ranch in Brazil which he is actively cultivating.

The property involved in this dispute was acquired in keeping with this philosophy, and held the potential of industrial or commercial, or even agricultural use within the framework of the total holdings and business interests of the family.

Dealing with the “year of taxation’’ question, counsel for the respondent rejected the proposition of the appellant that the law, and the arrangements for payment accepted by Gianita, provided any foundation for allocating to the years of receipt the income in question, rather than accumulating the payments until the time that a final settlement was reached. The 1973 and 1974 payments were made “on account” of the final settlement in 1975.

On the “active” business issue, counsel did not agree that one single transaction—buying a property and selling it—could be classified as an “active” business, even though treated by the Minister as a “business”. However, a rationale for such a view by the Minister was not made quite clear to the Board.

Findings

The decision in Regin (supra) conceded that the use of the property ina productive manner could not be ruled out, and the benefit of any doubt for the gain on the property expropriated was accorded to the taxpayer. Some Similarity may be drawn between Regin (supra) and the instant appeal on the following bases to be found at pp 2154 and 161 respectively:

One possibility in the mind of the Prince was to use the property at some time in the future in a productive capacity (#3), and the other was to hold the property, whether or not it was productively used, as a means of preserving the family wealth (#4). These possibilities were never brought to fruition, they were terminated and, since that termination activated, accompanied or encompassed profit on the transaction, it rests with the taxpayer to show that it should not remain in income account where the Minister has placed it.

And at pp 2155 and 162 respectively:

There is no evidence that the appellant anticipated the expropriation at acquisition, or actively promoted the event during ownership. The appellant did not consciously decide to ‘trade in’ the asset in the sense of accepting cash for land—that decision was made for the Company at the date of the expropriation order by the Province of Ontario and only the quantum of the settlement remained.

There are, however, at least three points upon which distinctions of merit can be made between Regin (supra) and the instant appeal, all noted by counsel for the respondent. First, there was ample evidence in Regin (supra) that a world-wide family-controlled business already existed within which the property acquired could easily have had a productive purpose, a Situation which does not obtain in the instant case. This appellant, Gianita, acquired the property “when there was no business ..a condition which would entail substantial obstacles for an appellant, as indicated in Regin (supra). In the instant appeal, the business purpose at the time of acquisition was not only indefinite, it was non-existent. Second, at the date of acquisition of the subject property by Gianita, Mr Califano (through a separate company) already had owned for about two years another parcel of land in the Village of Markham, acquired under similar circumstances, for which no productive use had developed. Third, the company charter for Gianita in this matter is significant since the objects of the company, except for clauses (a) and (b) thereof (which themselves deal with the construction industry), through clauses (c) through (h) entirely relate to transactions in land and buildings, including all forms of purchasing, subdividing, selling, mortgaging, etc.

The point was made by counsel for the appellant that since no action was taken to enhance the value or potential of the property for resale, the transaction should be considered on capital account. It is of very little substance either way on that particular point—but it does have significance later on in this decision in connection with one of the appellant’s alternative arguments.

Finally, the appellant’s position that the acquisition was a hedge against inflation, is less than persuasive. It was acknowledged by Mr Califano that the inflation rate in 1970 was perhaps 5 to 6% while the investment interest rate was 8 or 9%. Considered together with the fact that the property earned less income than its carrying costs, it is difficult indeed to accord any merit to this argument.

In my view, Gianita can find little comfort in either of Regin (supra) or Southern Investments Limited (referenced in Regin) for its contention that the profit on the expropriation should be on capital account. The appellant in this case has failed to eliminate or even minimize the prospect of sale as the motivating factor in the purchase of the property. The profit on this expropriation fits precisely into the exceptions noted in Southern (supra), and the decision to dismiss the main contention of the appellant will be consistent therewith. In this connection, I quote from Southern (supra) at pp 1150 and 1730 respectively:

... I think that dealing in real estate may very well be said to be a part, at least, of its real business. Paragraph (b) of the Letters Patent reads as follows (the italics are mine):

TO carry on business as investors, brokers and agents, and to undertake, carry on and execute all kinds of financial, commercial, trading and other operations which may seem to be capable of being conveniently carried on in connection with any of the objects of the Company or calculated directly to enhance the value of or facilitate the realization of or render profitable any of the Company’s property or rights.

I think that, without referring to any of the other nine comprehensive paragraphs relating to objects and powers in the Letters Patent, the paragraph quoted could well embrace dealing in, or turning real estate to account.

The expropriation proceedings, whether they were welcomed or not by the appellant, nevertheless afforded a means of disposing of the property and gave the appellant a profit; it was one way of turning the land to account even if not in the manner originally anticipated. In the circumstances, the proceeds of the expropriation became income in the coffers of the appellant.

While not dealing with the identical point raised in this appeal, some further enlightenment on this general matter of “revenue account versus capital account” transactions can be gained from a review of the recent decision of the Federal Court of Appeal in Kensington Land Developments Ltd v Her Majesty The Queen, [1979] CTC 367; 79 DTC 5283.

On the matter of the proper year or years for assessment of income tax on the receipts from the expropriation (counsel’s second proposition), the appellant largely bases his position on Benaby Realties (supra), particularly the quotation to be found at pp 420 and 5276 respectively:

. . . in the absence of a binding agreement between the parties or of a judgment fixing the compensation, the owner had no more than a right to claim compensation and there is nothing which can be taken into account as an amount receivable due to the expropriation.

It is contended by counsel that at each stage of the financial settlement proceedings when an amount (or a second, third or fourth amount) was paid, this was complete—subject only to the rights of the appellant to claim additional compensation. According to counsel, while the fifth and last amount (10 May 1975—$12,206.80) established the total compensation, since the appellant did not pursue the matter further, it was no more than one in a series of payments, each equally complete at that particularly relevant moment in time.

I can appreciate that certain phrases from Benaby (supra) such as final settlement, binding agreement, finally determined, or the amount fixed, could give support to the position of counsel for the respondent that these are not trade receipts for the particular year in which they were received. However, in my view such a possible interpretation is clearly rejected in the subsequent decisions in Vaughan Construction Company Limited v MNR, both at the Exchequer Court level, [1968] CTC 165; 68 DTC 5099, and at the Supreme Court level, [1970] CTC 350; 70 DTC 6268. At pp 355 and 6271 respectively of the Supreme Court decision, it is noted:

What was then directed to be paid (and which was in fact paid in that year) was, so far as it represented in any portion thereof a gain arising out of the appellant’s business, properly assessable to tax in 1957.

In the instant appeal the payments made to the appellant may not have been the result of specific court orders, but I certainly agree with the proposition of counsel for the appellant that at the particularly relevant dates they were final. Quotations taken from the letters from the Department of Public Works to the appellant confirm this view:

From letter of April 24, 1973:

The amount offered therefore, is the ‘net’ estimated value of your interest. In accordance with the Expropriation Act you may accept this offer without prejudice to your right to claim additional compensation.

And from letter of April 25, 1974:

We attach a form which sets out all previous offers made, and the new adjusted Market Value offer and related entitlements. It also indicates the amount which we are now offering to pay you. This latest offer is made as an amendemnt to the Original Section 14 offer and is therefore again without prejudice to your right to claim additional compensation.

The Board has not been given a viable argument by counsel for the respondent which would allow for consideration of the payments at issue as other than “final”, and accordingly the argument of counsel for the appellant will be sustained.

On counsel’s third proposition, the “active” business question, it is proposed that since a single “adventure in the nature of trade” constitutes business, it is axiomatically “active” business based on the decision in Cadboro Bay (supra). Counsel made it quite clear that the business transactions which related to the small amount of income earned by Gianita were not to be considered as the basis for claiming the “active business” designation; neither was reference made to any effort which resulted in the increased payments received in 1973,1974 and 1975 after the date of the expropriation. In its simplest format, according to counsel this appellant was “active” as a corporation because of the activity in acquiring the property in 1970 as a venture in the nature of trade, and holding it until 1973 when it was expropriated. Any possible “active” characteristics for purposes of this part of the argument, as I would understand it, therefore ceased with the expropriation.

There are several obstacles which the above proposition has difficulty in surmounting. First, the year assessed is 1975—and according to the above parameters established by counsel for the appellant, the company was not in “active business” in that year. The same view would obtain for the year 1974 and for the period of the year 1973 after the expropriation—there was no “business”, let alone “active business” with relation to this appeal—there was no longer real property owned by the appellant. For the year 1973, the appellant’s rationale might have merit for the period January 1, 1973 to January 30, 1973, the date of the expropriation. However, a fundamental difficulty is faced by the appellant, which is also to be found in Cadboro Bay (supra). In that decision, at pp 197 and 5122 respectively, the learned judge comments as follows:

(For reasons that are stated later in this judgment, what is income from ‘‘a business other than an active business” must mean income from a business that is in an “absolute state of suspension”; (see quotation from The Queen v Rockmore Investments Limited that is, devoid of any quantum of business activity, but which has some asset which produces income.)

The Board concludes that in the instant appeal the “active business” characteristics of the corporation were evidenced by the transaction in which it acquired the real property in the year 1970. This was a transaction which would be carried out by a corporation in active pursuit of the objectives outlined in the company charter. In my view, the business purpose of the corporation was and remained its interest in the disposal of the property at a profit but that objective, by the evidence provided to the Board by the appellant itself, was not pursued between 1970 and 1973—it was placed in an “absolute state of suspension”. The reasons for such suspension, which must have been considered appropriate by the appellant at the time, were not provided to the Board at the hearing, but I am satisfied that such a description accurately fits the complete lack of activity in this matter. The appellant company was brought out of this state of suspension by the expropriation and the venture in the nature of trade upon which it had originally embarked, was completed. (The Board in not deciding that there would have been any different result from some other form of disposition of the property.) The distinction which is to be made from Cadboro Bay (supra) is that in this appeal there was no quantum of business whatsoever conducted in keeping with the objective of the acquisition, during the period from the purchase of the property to its expropriation.

Further support can be found for the above opinion in a recent decision of this Board (Morbane Developments Ltd v MNR, [1979] CTC 2794; 79 DTC 674) in which facts and circumstances more indicative of an “active” business than those in the instant appeal were brought forward, but the appellant did not succeed, as noted at pp 2797 and 677 respectively:

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 the President of both companies), is nevertheless a legal entity which was carrying on its own business. The fact that the alpellant had no office, no staff and no telephone are not, in themselves (s/c), 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 appellant, 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.

Decision

The appeal is allowed in part and the matter referred back to the respondent for reassessment in order that the income earned by Gianita Holdings Limited be reflected in the income tax assessments for the years in which such amounts were received rather than all in the year 1975. No information was provided to the Board upon which the calculation of “income” as opposed to “funds received” might be made, and no opinion as to the amounts to be considered taxable in each of the three years is expressed thereon. In all other aspects the appeal is dismissed.

Appeal allowed in part.