Progress Management Co. v. R., [1975] C.T.C. 244, 75 D.T.C. 5174

Mahoney, J:

1 The issue is whether a gain realized on the disposition of real estate is taxable as income or not taxable as a gain on realization of a capital asset. The plaintiff is, and at all material times has been, a private company incorporated in British Columbia, 75% of whose shares are owned by Karel Alston and 25% by Alston's wife.

2 Alston graduated in chemistry, specializing in the metallurgical aspects of that science, in Czechoslovakia, in 1936. The first ten years of his post- graduate life were spent in the military forces of various countries and, in 1946, he acquired British citizenship as a result of his service in the British army. On discharge, he settled in Vancouver where he was employed by General Metals.

3 In 1949 he went into business for himself, causing the incorporation of the plaintiff, under the corporate name Metalex Ltd, and, through it, specialized in the pre-moulding of lead weights for the commercial fishing fleet based in the Vancouver area. At first, the plaintiff occupied rented premises—a building about 25 feet square—at 5th and Cambie Streets in Vancouver.

4 In 1951, for approximately $1,000, the plaintiff bought a 1 acre parcel on No 3 Road in the Municipality of Richmond and, with the aid of a $5,000 IDB loan, erected a building which Alston had designed. While into other hardware for the fishing fleet, the plaintiff's business was still primarily the production of weighted lines. The conventional method of producing these lines was to apply lumps of molten lead to cotton ropes. It was a slow and inefficient process. Alston's first improvement was to pre-mould the lead weights which avoided damaging the ropes by burning. Then, with an associate knowledgeable in the braiding of rope, he developed a process whereby a lead wire was incorporated in the rope itself resulting in the weight being a core enclosed in a fabric envelope. This product was well and quickly accepted.

5 In 1955 the provincial government expropriated the No 3 Road property and, in the result, the plaintiff realized a $22,270.55 capital gain. The plaintiff acquired a 11/4acre site on No 5 Road in Richmond at a price of approximately $6,500 and, initially, built a 12,000 square foot building for the lead core rope manufacture. As time went on, two more buildings of 6,000 and 5,000 square feet respectively were erected to accommodate the smelting, refining and manufacturing operation that developed. In the mid-1950's, the fishing industry was upset by labour unrest. The season was short, the plaintiff's markets unsettled and Alston looked for things that would sustain a year round operation. He decided to go into the secondary smelting of lead from scrap automobile batteries. The only other firm in that business in the area had closed down, its plant having become irredeemably obsolete. The plaintiff developed the smelting and refining operation, turning out between 20 and 130 tons of lead monthly, in what Alston describes as a plant adequate only as a “pay as you go pilot plant”. He was satisfied that scrap batteries from BC would support production of 500 tons per month and that he could reach 1,000 tons if he went into Alberta and northern Washington for supplies. There was however no room on the No 5 Road property for the enlarged smelter. Alston had in mind a much larger operation and the possibility of “going public”.

6 In June 1965, apparently in confirmation of more general undertakings given during the 1963 provincial election campaign, the BC Minister of Highways announced, inter alia, the start of design of a four-lane, $10 million, bridge across the North Arm of the Fraser River to replace the existing Fraser Street Bridge. Taken at face value, this announcement and subsequent published statements and artists' conceptions undoubtedly signalled the eventual taking of the No 5 Road Property for the bridge's southerly approaches.

7 The plaintiff felt it would need in the order of 10 acres to accommodate the proposed expanded smelting operation. Alston saw a sign on a property some 700 yards east of the No 5 Road property, contacted the agent and, on August 17, 1967, bought a 17 acre parcel on Vulcan Way from the Aluminum Company of Canada. The vendor refused to sell less than the whole parcel, which was not subdivided. The $120,000 purchase price was provided $60,000 by a bank loan and $60,000 by the plaintiff's own funds. The plaintiff declined the opportunity to buy an additional 32 acres adjoining offered by the same agent.

8 In May 1968 the Premier of British Columbia announced that the new bridge would be built at Knight Road, rather than Fraser St. This is some 400 yards east of the Vulcan Way property or 1,100 yards east of No 5 Road. This announcement obviated any need to move from No 5 Road because of threatened compulsory acquisition. The need for a larger site for the expanded facility remained.

9 Up to this point in time, aside from evolving the processes to be embraced in the new plant and formulating the plant's concept in Alston's mind, the only step taken toward implementing the plan for the Vulcan Way land was the arrangement with the CNR for permission to construct a private railway crossing to provide much needed improved access. Efforts to obtain a public crossing had failed because the municipality declined to fix the location of public crossings pending a firm decision on the location of the bridge and its approaches. The private crossing was completed, at a cost to the plaintiff in the order of $1,000, in September 1968.

10 In July 1969 the plaintiff purchased six steel trusses for its proposed building at a cost of $2,310 from Trinity Union College, Langley, B.C. These were delivered to the site. This was in keeping with Alston's practice of being his own architect, engineer and contractor. It appears that soil conditions in the area are such that, to avoid construction on piles, it is necessary to “pre-load” the land to be built on. Pre-loading involves piling more earth on top of the ground to compact it—the more the better. The plaintiff had, in August 1967, attempted to have the North Fraser Harbour Commissioners discharge on to the property, sand dredged up in its channel maintenance operations but this was not possible for reasons outside the plaintiff's control. In October and November 1969, at a cost to the plaintiff of about $20,000, a dredging company did pre-load a portion of the property with sand to a depth of 8 to 10 feet. The only use the plaintiff made of the property was to deposit there waste from the smelting operation at No 5 Road.

11 The plaintiff had had complaints from neighbours over the years about smoke and odours emanating from the No 5 Road plant. It was constantly attempting to improve the situation. In early 1969 some livestock near the plant died. A year-long investigation by health and environmental authorities ensued during the course of which the plant was visited frequently.

12 In April and May 1970 the fact of these investigations into the existence of mercury and lead contamination in the vicinity of the plaintiff's plant was widely publicized in the local media. On July 17, 1970 a notice was distributed to households in the area around the plant by the municipal medical health officer which stated:

A fallout of dust in this area contains an excessive amount of lead and has contaminated soil, grass and vegetables.

Because the vegetables and other home grown produce, including fruit, may contain excessive amounts of lead, you are warned that consumption of these could be injurious to your health.

The amount of lead absorbed by different varieties of vegetables varies; some pick it up in large amounts while others only absorb small amounts. Nevertheless, the continued intake of these contaminated vegetables could be harmful.

Eggs, milk and meat produced in the area are not contaminated.

Because of the lead contamination which has occurred in this area, you are advised that fruit and garden produce grown on your property may contain slightly higher than normal amounts of lead.

This lead can be easily removed by routine washing of all fruit, leafy and root vegetables.

Unwashed produce should be avoided.

A fallout of dust in this area contains excessive amounts of lead.

Because fruit and vegetables grown on your property this year may contain excessive amounts of this lead, you are advised to discard this year's crop.

Do not plow the vegetables back in. Instead, pile them on your property close to the entrance and they will be removed at a later date.

13 The notices themselves were news. The Richmond Review of July 22 headlined “Home-Grown Vegetables Cited as Health Hazard”; The Province of July 23 identified the plaintiff as the likely culprit under a headline “Richmond Seeing Red Over Lead” and the Vancouver Sun of the same date also implicated the plaintiff under a headline referring to the Provincial Health Minister: “Lead Peril: Loffmark Pushes Hunt”. The plaintiff says that newspapers were restrained compared to the “phone-in” radio shows that were then a feature of Vancouver life. I believe him. Alston says that he made up his mind, then and there, to get out of Richmond. Sometime later, the plaintiff settled, for $5,000, an action commenced by two neighbour families arising out of the lead contamination.

14 Alston held discussions with officials of Canada Ropes Ltd, to whom the lead core process had been sold in June 1966, which led to an understanding that if, as and when he could get the smelter into operation in a manner satisfactory to the authorities, Canad Ropes would buy it. The plant was extensively rebuilt and, after inspection, recommenced operations in December 1970. The sale of assets closed on or about July 2, 1971; Canada Ropes is still operating the No 5 Road plant.

15 On May 21, 1970, as a result of an unsolicited approach, the plaintiff, for a consideration of $10,000, granted the CNR an option to buy the Vulcan Way property for $380,000. That was at a time when the plaintiff was very much under the gun from the authorities but before it was being explicitly identified by the media. The plaintiff was freed of its option commitment on September 8, 1970 and, on February 9, 1971, the property was sold for $365,000. It is gain on that sale that is in issue here.

16 Alston says that he had never had much luck in the stock market. It is not surprising that he decided real estate investment was a promising field. In addition to the plaintiff's experience, Alston had personally bought an apartment block in West Vancouver for $400,000 on June 1, 1968 and sold it for $438,000 three months later. The Minister of National Revenue had accepted the result as a capital gain. It is significant that this transpired after the plaintiff's purchase of the Vulcan Way property.

17 Alston caused the incorporation of a new company, Fairway Development Corporation Ltd, in April, 1971, to deal in real estate. Its main capitalization was a $100,000 loan from the plaintiff. Between July 1971 and September 1974, Fairway bought and sold five parcels, all at a profit. Since September 1974 it has owned no real estate.

18 The plaintiff's corporate name was changed from Metalex Ltd on October 1, 1971. Between October 1971 and March 1974 the plaintiff has bought, sold and, in some cases, renovated, a number of properties. It still owns several. It is today, and has since late 1971 been, an active trader in real estate. It disputes that its disposition at the Vulcan Way property was a transaction in the course of its new business as a real estate trader. Rather, it says, that disposition was the realization of a capital asset of its previous business. I think that position is well taken. This follows from my conclusion that the Vulcan Way property was originally acquired as a capital asset by the plaintiff with the intention that it be the site of a new larger plant.

19 It remains to be determined whether a secondary intention is to be imputed to the plaintiff: an intention that, if its plan to build the new plant were for some reason or other, foreseen or otherwise, not carried out, it would resell the land at a profit. In order to impute such an intention, I must find, as a fact, that at the time it acquired the Vulcan Way property, Alston had in mind, as an alternative object to the main object of building a new plant, that it would turn the land itself over at a profit.

20 The ingredients of the so-called doctrine of secondary intention were most lucidly propounded by Noël, ACJ in Racine et al v Minister of National Revenue, [1965] C.T.C. 150 at 159, 65 D.T.C. 5098 at 5103:

In examining this question whether the appellants had, at the time of the purchase, what has sometimes been called a “secondary intention” of reselling the commercial enterprise if circumstances made that desirable, it is important to consider what this idea involves. It is not, in fact, sufficient to find merely that if a purchaser had stopped to think at the moment of the purchase, he would be obliged to admit that if at the conclusion of the purchase an attractive offer were made to him he would resell it, for every person buying a house for his family, a painting for his house, machinery for his business or a building for his factory would be obliged to admit, if this person were honest and if the transaction were not based exclusively on a sentimental attachment, that if he were offered a sufficiently high price a moment after the purchase, he would resell. Thus, it appears that the fact alone that a person buying a property with the aim of using it as capital could be induced to resell it if a sufficiently high price were offered to him, is not sufficient to change an acquisition of capital into an adventure in the nature of trade. In fact, this is not what must be understood by a “secondary intention” if one wants to utilize this term.

To give to a transaction which involves the acquisition of capital the double character of also being at the same time an adventure in the nature of trade, the purchaser must have in his mind, at the moment of the purchase, the possibility of reselling as an operating motivation for the acquisition; that is to say that he must have had in mind that upon a certain type of circumstances arising he had hopes of being able to resell it at a profit instead of using the thing purchased for purposes of capital. Generally speaking, a decision that such a motivation exists will have to be based on inferences flowing from circumstances surrounding the transaction rather than on direct evidence of what the purchaser had in mind.

21 Whether or not a secondary intention existed, at the critical time, to do the critical thing, is entirely a question of fact. No amount of judicial authority can translate that into anything, for the trial judge at least, but a question of the credibility of the proponent of its absence. It is trite to say he would not be in court unless he denied the secondary intention. Evidence as to surrounding circumstances, to the extent that it is consistent, or otherwise, with his story only assists, and cannot be conclusive, in a finding as to the truth, or otherwise, of what is, by its very nature, an insubstantial proposition.

22 Alston impressed me as a man of integrity; I have no reason to doubt that he has honestly described the circumstances of the acquisition. That the plaintiff later abandoned the business it had engaged in and developed from its inception in favour of investment and trading in real estate is clear. The evidence as to when that transpired is equally clear and is supported by convincing reasons for the change. Those reasons did not exist when the plaintiff acquired the Vulcan Way property and that is the critical time if a secondary intention is to be imputed to the plaintiff. It was also well before Alston personally, for the first and only time, did a real estate deal. That he escaped taxation on that gain is, on the evidence, both inexplicable and immaterial.

23 The weight of the evidence before me supports the proposition that when the plaintiff bought the Vulcan Way property it did so for the purpose of putting its new plant there and that the possibility of resale at a profit was not an operating consideration in the decision to buy. The appeal is allowed with costs.