Kensington Land Developments LTD v. Her Majesty the Queen, [1976] CTC 783, 77 DTC 5011

Collier, J:—The plaintiff company sold, in 1967, a shopping centre in Edmonton, Alberta. The Minister of National Revenue added into taxable income the gain ($41,831.18) on the sale, as a profit from a business or from an adventure in the nature of trade. The plaintiff disagreed, contending the gain was on the capital side, and not therefore taxable. The plaintiff’s appeal to the Tax Review Board was dismissed. This appeal followed.

As always in cases of this type the facts are paramount. The issue between the parties is essentially one of fact.* [1] The plaintiff, at all material times, was controlled by one Hans Hartwig and Diversified Holdings Ltd (“Diversified”). The voting shares of Diversified were held essentially by Hartwig. There is little doubt that from 1964 or 1965, to the time of the sale, the activities and destinies of the plaintiff and Diversified were controlled and directed by Hartwig.

I should say at the outset that I found Mr Hartwig to be a candid witness. He, married with two children, came to Canada from Germany in 1951. He worked first on a ranch in Alberta and then in the oil fields.

Some time prior to 1955 he became a real estate salesman. He eventually bought the controlling. interest in a real estate company called Progressive Real Estate Limited. He was active in that business in Edmonton from 1955 to 1957. He has since become a very successful businessman.

In 1957 he purchased some raw land in the Kensington area of Edmonton. At that time it was zoned for agricultural purposes. It was apparently obvious the zoning was going to change. Hartwig had in mind the construction of a shopping centre. He was approached by two Edmonton businessmen. They agreed to provide the financing for the shopping centre. Hartwig was to provide his land. A company, Kensing- ton Shopping Centre Limited, was formed. A shopping centre was planned and tenders called for. At some stage Hartwig realized he had put up the land and his partners had really put up nothing. An arrangement was made whereby Hartwig’s interest was bought by the other two. The shopping centre was, however, completed.

Hartwig said he was angry because he felt he had been taken advantage of. He determined to construct another shopping centre on land adjacent to the other one. In 1959 the first portion of the land on which the plaintiff’s shopping centre was eventually built was purchased. The plaintiff company was incorporated as a private company on September 9, 1959. The original shareholders were Hartwig, a limited company controlled by one person, and another businessman. Hartwig held 99 shares. The other two shareholders held 50 shares each.

Diversified was incorporated in December 1959. It is clear the business of this company, from its inception, was to hold. any assets or interests of the Hartwig family.

The remaining part of the shopping centre land was purchased in 1961. On March 30, 1961, Brent Holdings Ltd (“Brent”) was incorporated. The shares in that company were held equally by Diversified and Battle River Supply Company Limited. The latter company was controlled by a Professor Miller. Brent in 1961, or not too long after, constructed the Empire Park Shopping Centre. in Edmonton. Subsequently it commenced construction of an apartment building in Banff. Some difficulties arose. The Empire Park centre was, in 1965, sold in order to raise sufficient money to complete the apartment buildings. Hartwig or Diversified entered into an agreement in that year to buy out the other Brent shareholder.

At about the same time as all these activities were commenced or being carried on, Hartwig bought a cattle ranch in the East Kootenay area of British Columbia. At the time of purchase it was not operational. lt had been, according to Hartwig, a long-time dream to live with his family on a ranch.

I now revert to the activities of the plaintiff. After the final land purchase was made in 1961 construction of a small shopping centre commenced in the following year. This was done through Wigmar Construction Ltd (“Wigmar”), another private company, incorporated in February of 1962. Wigmar was controlled by Diversified. Mrs Hartwig held one share. The original portion of this small shopping centre was completed in 1963. The company immediately ran into difficulties in obtaining tenants and collecting rents. The City of Edmonton prior to 1962 had indicated the area would be developed in certain ways. This did not occur. The Kensington area remained thinly populated. The shopping centre earned income but it was a very small return indeed on the investment.

Hartwig’s two associates in the plaintiff company wanted to sell. They felt the shopping centre was, or was going to be, a financial failure. In 1963 the Alberta Liquor Control Board committed itself to renting space for a liquor store. The plaintiff then constructed, in 1964, the additional buildings required. The liquor store trade apparently did not increase the general shopping centre trade. Hartwig, in 1964, bought out his associates in the plaintiff company.

Hartwig testified he always intended to keep this particular shopping centre as an investment; his purpose was to use the income from it to enable him to operate and live on the ranch. Until 1964, however, he did not have sole control of the destinies, activities or corporate intentions of the plaintiff company. No evidence was led as to the intentions of the other two original shareholders of the plaintiff.

In 1965 and thereafter Diversified became active in various projects. Hartwig, through Diversified or other companies, built an apartment and stores in Fort Saskatchewan, and some other commercial properties in Regina and in Rimbey. As earlier recounted, construction of Brent’s Banff apartment commenced around 1965.

The plaintiff, through Hartwig, decided to sell the shopping centre. The reason, according to Hartwig, was the low rate of return and the cost of maintaining the ranch. I am convinced there were other reasons as well. Hartwig through his companies was venturing into other projects. Money was needed for them; if the financing and carrying out of those activities required the sale of the plaintiff’s shopping centre, then sale there would be.

In November of 1966 the plaintiff listed the shopping centre for sale. It was ultimately sold in the latter part of 1967.

Hartwig’s activities after the sale are, to a limited extent, relevant. He and the family moved to the ranch in 1968. He, and his companies, however, continued in the building business. In 1971 the family moved to Victoria where they presently reside. The Hartwig companies have, Since 1971, expanded and increased the volume of their building activities.

The practice of the Hartwig companies since 1967 has been to construct or develop properties of various kinds. Where it has been expedient to hold them as investment, that has been done. Where it has been expedient to sell in order to raise or replenish funds for other projects, that has been done.

In my view, that practice was Hartwig’s pattern of business conduct and intended conduct going right back to the early 1960’s. In those early years, however, (compared to later years) not too many opportunities to follow that pattern arose. After scrutinizing all the facts and circumstances disclosed at trial, I am convinced the various commercial properties built by Hartwig, or by companies which he controlled or in which he had an interest (including the plaintiff company’s property) were held for revenue or income purposes, only until such time as it was expedient in the overall Hartwig plan to turn them to account.

Mr Hartwig candidly agreed this has now been his general pattern for many years. When money is required for new projects, and financing through the usual channels is not available, then an asset or assets are sold. To my mind that pattern was part of the corporate intention, and a motivating purpose of the plaintiff, when the land here was bought and the shopping centre constructed.

Mr Hartwig testified he always looked, then and now, on the various projects as “investments”. He said that, with the exception of one or two projects such as a subdivision in Victoria, there was never any initial intention to sell. He added that, when financial requirements in the sense I have earlier described arose, then he did not hesitate to sell . . . but only at a profit.

To my mind, that consistent pattern stamps the plaintiff's purchase of land, construction of the centre and its sale in 1967 as the carrying on of a business as that term is used in the “old” Income Tax Act.

The gain is therefore taxable as income.

The appeal is dismissed. The defendant is entitled to costs.