Malbi Investments LTD and Star Agencies (Realty) LTD v. Minister of National Revenue, [1973] CTC 2109

The Chairman:—These two appeals were heard together at the City of Edmonton in the Province of Alberta on October 20, 1971 by Mr J O Weldon, QC, then a member of the Tax Appeal Board. Judgment was not rendered by Mr Weldon before his term of office expired in March of 1972 and the parties were given the option of having these appeals disposed of in one of three ways. The first choice was to have judgment rendered on the transcript of the evidence and the argument as recorded at the hearing, the second was to proceed on the evidence in the said transcript and submit further argument, or, thirdly, the whole matter could be reheard.

The parties have, in writing, agreed that the two matters should be disposed of by a member of the Tax Review Board on the basis of the transcript of the evidence and argument adduced at the hearing before Mr Weldon.

The issue in these appeals appears to have been accepted as affecting the income of both companies for the 1966 taxation year, although in the case of Star Agencies (Realty) Ltd, due to the application of previous losses carried forward from 1964 and 1965 and a portion of a subsequent loss in 1967, any increase in its 1966 income was reduced to nil for taxation purposes, and the addition of a gain of $19,025 made in 1966 on the sale of certain shares was reflected in the form of an increase in its reported taxable income for 1968 because of the corresponding reduction in the amount of the 1967 loss available for application to its 1968 income. It has therefore appealed its 1968 assessment.

The point in issue in both appeals is whether or not the sale by the appellants of their respective shares in a company known as McMurray Mobile Home Park Ltd resulted in a profit that is taxable as income, or whether, on the contrary, it was a capital gain as alleged by the appellants.

The facts are not in dispute and, briefly, the situation was that the area of Fort McMurray in northern Alberta was about to become the population centre for the development of “the Canadian oil sands”, and accommodation was obviously going to be required, in the first instance, for workmen employed by the contracting companies, and subsequently for the employees of the factories and refineries which it was proposed should be built in this location.

The area in question is about 300 miles north of the City of Edmonton, and the development in the area commenced in about 1964. At that time, a Mr L Ulliac, who gave evidence for the appellants, went to Fort McMurray and purchased a parcel of land on which he indicated he intended to develop revenue-producing properties. He subsequently involved in the project one Roland Vincent, a Mr Lou Gunn, and the three Karylo brothers, Fred, William and Alex, whom he persuaded to act with him. The situation is that the Karylos owned, either in their own right or through the companies they controlled, of which the appellants were two, three-sixths of the holdings in this project, and Messrs Vincent, Gunn and Ulliac, through their respective vehicles, controlled the other three-sixths.

The evidence indicates that pressure was brought by local authorities to have a mobile trailer park constructed, together with the facilities necessary to service it, so that the contractors would have living accommodation in the area for their employees. The project was undertaken and there was unquestionably only a minimum amount of personal investment at the outset, with interim financing arranged through the bank and long-term investment to be arranged through mortgages.

The project was, as one might expect, bound to run into difficulties as a result of the climate in the area, and problems developed when the water services broke down due to the sudden freezing of the ground during an extremely hard winter in which construction did not proceed satisfactorily.

It became necessary for the individuals, through their corporate vehicles, to put in more money to keep the project going, and this led eventually to difficulties arising between the Karylos on one side and the other three gentlemen on the other. The Karylos wished to bring in still another party to invest in treasury shares or preferred shares in order to raise capital to meet the demands of the bank and also to meet certain increased construction costs. At this time, several meetings were held and many tie votes took place, and it was discovered that, either by error or by design, the memorandum of association did not provide for a casting vote by the president. The evidence seems to indicate that each side was suspicious of the other and afraid it would gain control, and so they could not agree on any outside party to call upon to supply the necessary infusion of funds.

I might say at that point that evidence was given at the hearing by Mr Ulliac, Mr Roland Vincent, and two of the three Karylos, and there was no great conflict in their evidence, nor would it appear that there was any great falling-out of the parties prior to the break-up of their association in the mobile home park company. Vincent, for example, was employed by Star Agencies (Realty) Ltd, which was a real estate and general insurance company, during the period in question, and continued in this employment even after the sale by the Karylos of their shares in McMurray Mobile Home Park Ltd.

The evidence indicates that attempts were made to find third parties that would buy out either the Karylo Group or the Ulliac Group, but these did not meet with success. It is clear from the evidence that neither party, or so it would appear to me, really wanted to abandon the project, but merely wished to force the other group out.

When this could not be achieved, each group made an offer to purchase the shares of the opposite group. This finally culminated in UI- liac’s group purchasing the Karylo shares at a profit to the two appellant companies in this case, they being the actual owners of the shares in question. I therefore use the term “Karylo” to cover both Malbi Investments and Star Agencies (Realty) Ltd.

This is an unusual situation in that the properties or tangible assets of the company were not sold, McMurray Mobile Home Park Ltd continued to operate—and was still operating successfully at the time of the hearing—and the evidence clearly indicates that neither the Karylo Group nor the Ulliac Group wanted to part with this investment in the future of Fort McMurray which has proved, over a period of time, to be a successful venture.

The evidence is, and I see nothing in the remarks of the presiding member to indicate his dissatisfaction with any of the evidence given, that an impasse was reached between the two factions and that that was the sole reason for the sale by the appellants of their interest in the Mobile Home Park company.

Much was made by counsel for the respondent of subsequent land development transactions entered into by the individuais who controlled these appellants. In the transcript there is also much discussion of the fact that the Karylos were in the real estate business and had held shares in other companies that developed and sold property, sometimes of a revenue-producing nature and sometimes not. With great respect, the presiding member at the hearing appeared on occasion to confuse the real estate agency of the appellant Star Agencies (Realty) Ltd with that of a real estate developer. This came about, in my view, from the fact that, in order for the Star agency to sell properties for clients, it was on occasion necessary for it to take its real estate commission in the form of an equity participation. This is not an unusual situation, and is not one that, in my view, is fatal to the outcome of this appeal.

In my opinion the evidence clearly indicates that the appellants’ purchase of the shares of McMurray Mobile Home Park Ltd was for the purpose of acquiring a long-term income-producing investment and, to my mind, no indication of an intention to sell at the first opportunity, or even to turn this investment to account at a profit if an opportunity to do so should ever arise, is disclosed in the evidence. The project was proceeded with, construction was completed, and a profit was made only after an impasse had been reached at the management level after the project was fully in operation.

Therefore, on all the evidence, I have concluded that the appellants have satisfied the onus upon them in this case, that the appeals should be allowed, and the relevant assessments in each case referred back to the respondent for reassessment accordingly.

Appeals allowed.