Les Entreprises Chelsea Limitee v. Minister of National Revenue, [1970] CTC 598, 70 DTC 6379

JACKETT, P.:—This is an appeal from a decision of the Tax Appeal Board dismissing an appeal from the appellant’s assessment under Part I of the Income Tax Act for the 1965 taxation year.

The assessment was made by virtue of Section 85E(1) of the Income Tax Act, which reads as follows:

85E. (1) Where, upon or after disposing of or ceasing to carry on a business or a part of a business, a taxpayer has sold all or any part of the property that was included in the inventory of the business, the property so sold shall, for the purposes of this Part, be deemed to have been sold by him

(a) during the last taxation year in which he carried on the business or the part of the business, and

(b) in the course of carrying on the business.

Counsel for the parties in this Court expressly agreed that the sole question to be decided by this Court is whether the appellant ceased to carry on business before the end of 1965. If it did, the appeal must be dismissed. If it did not, the appeal must be allowed.

The appellant commenced business in or about 1958 by acquiring two farms and from that time, at least until November 2, 1965, it carried on a business of trading in land by selling parcels of the land so acquired.

In the first part of 1965, the appellant still had approximately one-half of its original inventory of land and the City of Hull desired to acquire such land for an industrial park. An arrangement was worked out under which, on November 2, 1965, the City of Hull purchased all the shares in the appellant for $525,150 and, on January 21, 1966, the appellant sold all its remaining land to the City of Hull for $525,150, which amount was then paid by the appellant to the City pursuant to a shareholders’ resolution, which provided that the amount be paid to the City as the appellant’s sole shareholder and that this be done with a view to a surrender of the appellant’s charter.

It is common ground, in these circumstances, that any profit made by the appellant in 1966 would have been exempt in that year from taxation under Part I of the Income Tax Act by virtue of Section 62(1) (c), which reads:

62. (1) No tax is payable under this Part upon the taxable income of a person for a period when that person was

(c) a corporation, commission or association not less than 90% of the shares or capital of which was owned by Her Majesty in right of Canada or a province or by a Canadian municipality, or a wholly-owned corporation subsidiary to such a corporation, commission or association;

The respondent, however, takes the view that the profit from the sale of land by the appellant to the City of Hull was taxable in the 1965 taxation year because, on the view that he takes of the matter, the appellant had ceased to carry on business on November 2, 1965, the day when the City bought the appellant’s shares, and, therefore, by virtue of Section 85E(1), the land sold in 1966, which was included in the inventory of the appellant’s business, must be deemed to have been sold by the appellant

(a) during 1965, the last year in which, according to the respondent, the appellant carried on business, and

(b) in the course of carrying on that business.

As I have already indicated, the only question that I have to decide is whether the appellant did, in fact, cease to carry on business in 1965.

There is no dispute that all the basic facts have been placed before the Court and no question of onus of proof arises. The sole question is, whether, on a proper appreciation of the facts as established, the appellant ceased to carry on business in 1965.

While there is no detailed evidence concerning it, until the time the City bought its shares, the appellant was a company without employees or premises of its own whose affairs were carried on for it by one of its corporate officers along with the officer’s other business interests, which consisted largely of the management of substantial businesses carried on by other companies in which he was a large shareholder. After the City acquired the shares, the appellant’s business was carried on in the same manner by City officials along with their other work as City officials. Having acquired an inventory of land as the opening act of its business operations, it would appear that the appellant’s subsequent business operations consisted of scattered sales, probably with substantial intervals of time when nothing was being done in the course of the appellant’s business at all. In my view, where one finds such a business, as long as there continues to be land of the original inventory of the business in the ownership of the company, it is reasonable to assume that the business has not been brought to an end in the absence of some evidence that something has been done to bring the business to an end, as, for example, where the corporation takes the land out of the business and dedicates it to the creation of some structure to be used as the capital asset of another business.

I think it is not unfair to say that the respondent rests its case primarily on the fact that, until November 2, 1965, the shares of the appellant belonged to private persons who used their position as shareholders to cause the company to carry on a business with a view to making a profit whereas, after that time, the shares belonged to the City of Hull who had decided that it was in due course going to purchase the appellant’s remaining land at a price that had already been determined so that there were thereafter, in fact, no profit-making efforts on behalf of the appellant in the sense of efforts to develop business that would increase the appellant’s profits beyond those that were already "‘in the cards’’.

No matter how I look at the respondent’s argument, it seems to me that it comes to this, that, if a corporation that is a potential purchaser of inventory of a trading corporation defers such a purchase until it has acquired all the shares in the trading corporation and then purchases all of the trading corporation’s inventory, the sale by the trading corporation is not a sale in the course of its business.

There is no doubt in my mind that, if the appellant had sold the land in question to the City of Hull in January, 1966, without the City having first purchased its shares, that would have been a sale in the course of its business even if there had been nothing done by the appellant in the course of its business since early 1965. (Such lulls in business activities are normal in a business such as the appellant’s business was.) In my view, the situation, as far as the appellant’s business is concerned, does not assume a different character merely by reason of the fact that the appellant’s shares were purchased by the City of Hull. Such provisions in the Income Tax Act as those contained in Section 17 are based on the premise that persons not dealing with each other at arm’s length, such as related corporations, can do business and do in fact do business with each other notwithstanding their relationships.

It is also argued for the respondent that the sale by the appellant to the City of Hull was part of a process of winding up the appellant. It is true that, once the sale was made, the appellant proceeded to distribute its assets to its shareholders, and that it must, therefore, as of that moment, have ceased to carry on business. I can find, however, no basis for saying that it had ceased to carry on business before its final sale of inventory. If a trading corporation took the position, on an income tax appeal, without any factual foundation, that its final sale of inventory was not in the course of business but was part of the process of winding up its affairs, I have no doubt that the argument would be rejected by reason of the lack of factual foundation. I do not think that the situation can be any different when it is the respondent who chooses so to categorize a trader’s final sale of inventory.

Having regard to my conclusion on the respondent’s position, I do not need to deal with the appellant’s supplementary arguments based on unsuccessful efforts made after November 2, 1965, to sell land and based on the negotiation, after that time, of a settlement of the appellant’s right to compensation in respect of the expropriation of some of its land, which negotiation went on for years after 1965.

The appeal will be allowed. with costs and the assessment that. is the subject matter of the appeal will be referred back to the respondent for re-assessment on the basis that the appellant did not cease to carry on business before the end of its taxation year 1965.