Richard P Fraleigh v. Minister of National Revenue, [1981] CTC 3044, [1981] DTC 949

D E Taylor:—This is an appeal heard in London, Ontario, on June 26 and October 14, 1981 against a 1976 income tax assessment in which the Minister of National Revenue had taxed the gain realized on the sale of certain corporate shares, as on income rather than on capital account. The respondent relied, inter alia, upon section 9 of the Income Tax Act, SC 1970- 71-72, c 63, as amended.

In assessing, the Minister assumed that the appellant:

— is a dealer in real estate and a land developer;

— has engaged in numerous land transactions both personally and through corporations controlled by him;

— controls large inventories of the land held for development and speculation;

— in September 1973, together with Ronyx Corporation Limited (Ronyx) formed a corporation known as Ronleigh Properties Limited (Ron- leigh) with each party contributing $20 on account of 20,000 common shares each, which number of common shares (40,000) constituted the entire authorized share capital of the corporation. During the fiscal year ended September 30, 1974, the first year of the operation of Ronleigh, the corporation purchased a large holding of vacant land on Dundas Street East, London, Ontario (the property involved in this matter) for the purchase price of $1,366,556. The purchase was financed externally by way of mortgages through lending institutions and through intercompany loans.

— sold his 20,000 common shares of Ronleigh pursuant to an agreement dated July 30, 1976 for the sum of $775,800.

Contentions

For the appellant:

— The transaction was not an adventure in the nature of trade (a sale of land), disguised as a sale of shares, but a legitimate sale of a 50% interest in an ongoing business.

For the respondent

— The appellant did not acquire his shares in Ronleigh with an exclusive investment intention (with the intention of earning rental income); the appellant acquired his shares with the intention of selling them at a profit at the first favourable opportunity.

Evidence

In his testimony, and under cross-examination, the appellant confirmed the essential elements of the factors upon which the Minister had relied in assessing. In addition, it was shown that the “large holding of vacant land” acquired by Ronleigh in 1974 had resulted from the combining of abutting land holdings of Fraleigh and Ronyx respectively, which they had acquired separately prior to the incorporation of Ronleigh. Ronyx was a public corporation also engaged in the business of land development and trading. The acquisition by Ronleigh from Fraleigh had taken place at fair market value, and the personal income tax returns of the appellant showed that the profit realized on the sale of the land had been declared as on income account. The original acquisition of the property by Fraleigh had been for the purpose of trading, not as an investment. It was the usual business practice of the appellant to hold land in a corporate structure, and his income tax returns indicated interest in several, such as Parcreek Developments Limited, Elgin Park Developments Limited, Richleigh Investments Limited, Intercapital Corporation Limited, Alpar Realty Limited, Lady Jane Donuts Realty Limited, Sari Developments Limited, etc.

The appellant noted that he did not think he had either the expertise or the resources to complete the subdivision development planned for the subject property, and that these were the facilities brought to Ronleigh by Ronyx. During the time he had been a shareholder of Ronleigh, he had tried to pursue the development plans as actively as possible, and in fact some progress had been made. However, the methods by which Ronyx operated did not suit him — the public corporation and its officials simply were too slow to act, so finally, in frustration, he sold his shares to Ronyx and terminated his interest in Ronleigh and the development. A copy of the agreement between Fraleigh and Ronyx (Exhibit A-3) was filed with the Board, and certain of the significant clauses read as follows: (It will be noted that the term Ronark is sometimes used to represent Ronyx, and at the date of the agreement, the name Ronleigh had not been accepted, and the new corporate vehicle was referred to as Newco).

3. Fraleigh and Ronark shall sell to Newco and cause Newco to purchase all of the Real Property as follows:

Block From		Approximate Area	Price Price
1	Elgin	8 acres	$120,000
2	Ronark	38 acres	$525,000
3	Richleigh	50 acres	500,000
4	Paul Fraleigh	40 acres	200,000 approximately
	in trust

5. Ronark for and on behalf of and in the name of Newco and with the assistance and co-operation of Fraleigh shall conduct the day to day operations of Newco in planning the proposed joint development, negotiating with all government bodies, engaging and instructing consultants and preparing the Real Property for sale. Neither of Ronark or Fraleigh shall be entitled to any payments for services rendered pursuant to this paragraph and all payments required to be made to others shall be made by Newco as part of the cost of the joint development.

6. Ronark shall be responsible for arranging and financing the provision of services to the Real Property in stages as various parts of the Real Property are approved for development by the directors of Newco and by the municipal and Governmental authorities, including the construction of all municipal roads and services to the Real Property in accordance with the requirements of the City of London and the Public Utilities Commission of the city of London and other authorities to enable building permits to be issued to purchasers of lots or parts of the Real Property. All contracts for such work or part or parts thereof shall be let by Ronark on a competitive basis and shall be first approved by the directors of Newco. Ronark shall be entitled to perform portions of the work itself provided that its price for such work is competitive and that such price is approved in advance by the directors of Newco. All expenditures for the said work to be performed as set out in this paragraph shall be paid in the first instance by Ronark, Ronark shall be entitled to be reimbursed by Newco in an amount equal to the total expenditure by Ronark for such work including payment for any work done by Ronark itself as aforesaid plus 5% of such total expenditure as a fee. In addition Newco shall pay to Ronark interest on all amounts expended by Ronark at a rate equal to the prime lending rate being charged by Ronark’s Bank from time to time during the period in which such amounts are owing, plus 1%, calculated from the times expenditures are made by Ronark for such work to the dates of payment by Newco as hereinafter provided. Newco shall pay to Ronark the amounts due to Ronark as aforesaid out of the proceeds of sales by Newco of any part of the Real Property on a priority basis and before any distributions of any nature to the shareholders of Newco. Notwithstanding the foregoing, in the event that Newco is in a cash position at any time to pay for any part of the services being installed at such time, it shall apply such available monies towards the payment of the price of such work and Ronark’s fee of 5%.

6A. It is the intention of Ronark and Fraleigh to cause Newco to develop a portion of the Real Property for the construction of zero lot line single family housing. If Newco is successful in so developing a portion of the Real Property for such purpose, Ronark, as further consideration for its services as provided in paragraphs 5 and 6 hereof, shall have the option to purchase for a period of two years from the date of this agreement up to 100 of such zero lot line lots from Newco at a price of $6,000 for each such lot, which price shall include the cost of all services (including laterals to the lot line) and any other costs to permit a building permit to be issued for the erection of a single family dwelling upon application by Ronark, all of which costs shall be paid by Newco. Such option may be exercised by Ronark with respect to any one or more of such lots at any time and from time to time during the said period for two years by giving written notice thereof to Newco and a copy of such notice to Fraleigh. The purchase price of any lot or lots so purchased shall be paid by Ronark to the extent of 10% thereof as a deposit with such written notice of exercise of the option, to the extent of an additional 10% thereof upon completion of the purchase which shall be within 60 days of the giving of such notice and the balance by a mortgage bearing interest at 6% per annum payable within one year of the date of completion of the purchase, with the privilege to Ronark of paying any part or all of the purchase price or mortgage at an earlier date.

In a reporting letter to the appellant from the law firm of Richmond, Richmond, Stambler & Dockstader, London, Canada, dated January 7, 1974 (Exhibit A-1), the following comment is found:

As you know, the agreement provides that there are four directors of Ronleigh Properties Limited, two of which are nominated by you and two of which are nominated by Ronark. You are President and the writer, at your direction, has been made Treasurer. The Vice-president and the Secretary are nominees of Ronark. The Secretary of the company is Mr R K Fraser and my best recollection is that Mr Donald G Ness is the Vice-President.

And in a separate letter dated November 14, 1974 (Exhibit A-4) on a Ronark Developments letterhead signed by D G Ness, Senior Vice President, and dealing with “Ronleigh — Others”, there is this paragraph:

Naturally Paul both parties want to get the maximum mileage out of Ronleigh and any other properties you might bring to our attention. In my absence from London in the event that you stumble on a prospect for Ronleigh it is suggested that you contact D G Macdonald, and in the event that he is not available R K Fraser, at 20 Hughson Street South, Hamilton, ’phone 416-528-6354. I am sure either of the above named gentlemen can speak with complete authority and will certainly protect our mutual interest.

Argument

For the appellant:

Counsel for the appellant relied upon certain jurisprudence which included:

Fraser v MNR, [1964] CTC 372; 64 DTC 5224;

Irrigation Industries Limited v MNR, [1962] CTC 215; 62 DTC 1131;

Hiwako Investments Limited v The Queen, [1978] CTC 378; 78 DTC 6281;

Kit-Win Holdings (1973) Limited v The Queen, [1981] CTC 43; 81 DTC 5030;

Weldon & Robb v The Queen, [1980] CTC 301; 80 DTC 6224;

Blok-Andersen v MNR, [1972] CTC 338; 72 DTC 6309;

Shipp et al v MNR, [1967] CTC 330; 67 DTC 5222;

DeToro v MNR, [1965] CTC 321; 65 DTC 5194;

Racine, Demers and Nolin v MNR, [1965] CTC 150; 65 DTC 5098;

Grossman v MNR, [1979] CTC 2132; 70 DTC 141;

Counsel further submitted in argument:

... I would submit that in this case the evidence is clear that the shares were acquired with the intention not of earning rental income but with the intention of earning dividends ultimately from the distribution of the “after tax profits” from Ronleigh’s business operations and this is, I would submit, the normal method by which one derives income from shares.

. . . We do not deny that Ronleigh Properties acquired the land in question with the intention of developing it and re-selling it at a profit. There was no intention on the part of — or at least a very secondary intention on the part of Ronleigh Proeprties Limited to derive rental income from this property. However, the disposition of the land by Ronleigh Properties Limited is not the issue in this case. The issue is how the gain on the sale of Mr Fraleigh’s shares is to be treated.

. . . I am going to discuss subsequently . . . the issue of whether the sale of shares in Ronleigh Properties Limited was simply an alternative means by which Mr Fra- leigh realized gain with respect to the land held by that corporation (This was referred to by counsel for the appellant as the “Fraser Doctrine” arising out of the Fraser decision (supra).

The purpose . . . of this part of my argument is to establish that unless the Fraser type doctrine applies that the sale of shares by Mr Fraleigh in this case was a sale of a capital asset that was acquired for the purpose of investment and that there are no trading aspects to the case and that the jurisprudence in fact supports that an acquisition and a disposition of shares is a capital transaction . . . Mr Fraleigh invested in the shares of Ronleigh Properties Limited with a view to investing in a business on a long-term basis and that for the purpose of earning dividend income ultimately from those shares and in the hope that there would be some capital appreciation and in fact there was capital appreciation and he realized a gain on the sale of those shares.

. . . we do not deny that Mr Fraleigh is an experienced real estate businessman and that he is engaged either personally or through various corporations controlled by him in a number and a variety of real estate projects. However, he has not engaged in any share transaction, so what we have here is a single, isolated purchase and sale of the shares of a corporation (engaged in the business of real estate development) . ..

. . . I would point out that there was in my view no intention at the time of acquisition of the shares of Ronleigh Properties Limited to re-sell them at a profit at the first favourable opportunity, that it was intended as a long-term investment in the land development business.

. . I would submit that a single purchase and sale of shares of a corporation cannot constitute a business or an adventure in the nature of trade unless there are some clear indicia of a trade or badges of trade as the cases sometimes refer to it.

He was anxious to learn the land development business with as little risk as possible.

. . . the possibility of the sale of the shares of Ronleigh to Ronex was not forsee- able by Mr Fraleigh at the time of acquiring his shares, . . . he intended to make an investment and hoped that Ronleigh would acquire his property and develop the property over a 10, 12, 15-year period and he was looking for other properties that it could develop. It just does not seem credible that he would have intended or foreseen the possibility of selling under circumstances like this to Ronex at the time that he acquired his shares.

. . my (second) argument concerning the sale of shares as an alternative method of selling land . . . is appropriate at this time (and) I would like to reiterate that we do not contest the fact that Mr Fraleigh is active in real estate. However, we would make the point that even a trader in real estate can make a capital investment . . . the doctrine that I am going to discuss characterizing the gain on the sale of the shares of a corporation by reference to the underlying assets of thé corporation originated in the case of Ronald K Fraser (supra), a judgment of the Supreme Court of Canada . . .

The (decided) cases . . . , especially the Irrigation Industries case (supra), indicate that prima facie shares are a capital investment and that therefore it is much easier to regard a sale of shares of a corporation as the disposition of a capital investment entitling the taxpayer to capital gains treatment than it is to regard the sale of land, whether raw land or improved land or even income-producing property as the disposition of an investment and therefore what this doctrine is designed to do, and in fact does, is to prevent taxpayers from transferring assets which, if they sold, would result in ordinary income, from transferring those assets to a corporation and then selling the assets of the corporation and arguing that the sale of the shares of the corporation is a capital transaction.

That, it seems to me . . . is the basis of the doctrine and it is an eminently sensible one. However, I think it has its limitations and if I could refer now to case .. . which is the Shipp Family and the Minister of National Revenue case (supra) at page 330, and Exchequer Court of Canada judgment and in this case the taxpayers formed two corporations, one to acquire land, the other to construct and operate a shopping centre on the land.

I : in my view the important paragraph of the judgment (is) (at p 336):

“The principles of Ronald K Fraser v MNR . . . have no application here. Such principles apply when at the time of incorporation persons (1) have acquired

real estate with the thought that it be sold as well as for income, and (2) have caused a company to be incorporated for the express purpose of attempting to get profit on capital account which otherwise would be income.”

. .. I would suggest that applying that two-fold test to the case before us, that clearly number 1 is satisfied, we have not argued, we have admitted that if Ron- leigh Properties Limited sold its property that the profit from the sale of that property would be ordinary income.

However, it is a two-fold test. . . , and the principles in the view of the Exchequer Court in the Shipp case (are) that the principles of the Fraser case only apply when both principles are satisfied and the second principle is that the corporation be incorporated for the express purpose of converting what would otherwise be ordinary income to capital gain.

. . . The Fraser doctrine is modified even further and I would refer to . . . the B/ok- Andersen case (supra), which is a judgment of the Trial Division of the Federal Court, and this is an extremely long judgment, complicated facts . . . , but I think I can summarize them very briefly.

On page 352 . . . dealing with the first sale of shares, the sale of shares of the corporation which was 10 per cent owned by the taxpayer, a corporation called schofield Park:

In my opinion the sale of the shares in Schofield Park to Lambton was an effective alternative method adopted by the appellant to dispose of the apartment

building to Lambton. It was the appellant’s avowed purpose to concentrate all his assets in Lambton. What eventually happened was that title to the apartment building was transferred from Schofield Park to Lambton and the charter of Schofield Park was surrendered.

. . . some of the important matters that it seems to me emerge from that portion of the judgment, the matters that were emphasized by the Court — the fact that the business of the corporations whose shares were sold continued; the fact that the shares that were sold did not constitute the entire shareholding of the corporation, and did not carry control of the corporation. Third, that the sale of a portion of the shares of the corporation could not be considered to be tantamount to a sale of the assets of those corporations because it was a partial sale of the shares and the court referred finally to the circumstances of the sale. The sales were dictated by unusual conditions. . . . I would submit that all of these factors are equally present in the present case.

. . . these principles and facts that emerge from the Blok-Andersen case or the modifications that the Blok-Andersen case make on the Fraser doctrine are also brought out in the more recent case of Weldon & Robb (supra) . . .

. . . the principles that seemed to emerge there are: (1) if it is a partial sale of shares of the company generally, that will be considered to be a capital investment; and the second thing is that where the active operations, the business of the company continues, that the sale of the shares of the corporation will not be considered to be the sale of the assets of the corporation.

The third thing that emerges from the case, and this goes back to the point that was originally made in the Shipp case, that the Fraser doctrine is appropriate in circumstances where the incorporation of the company is done for the express purpose of, in effect, transferring the assets of the corporation and converting what would otherwise be ordinary income into capital gain..

. . . in all of these cases, all of the shares of the particular corporation were involved and it seems to me in that situation it is reasonable and appropriate to view the sale of the shares as an alternative to selling the assets of the corporation. It is not a reasonable alternative when only a partial shareholding, especially a non-controlling shareholding, is involved. . .. (Also) in those cases, the offers to purchase were received with respect to the corporation’s assets in the first instance or they were received in the alternative. In other words, the purchaser would make an offer to either buy shares or assets and left it up to the vendor to decide which route he preferred..

As I indicated earlier, in my view the Fraser doctrine is appropriate where, through the mechanism of selling shares of a corporation, a taxpayer converts what would be ordinary income into capital gain. I would submit, however, that that doctrine must be limited because the disposition of the shares of a corporation which is engaged in active business operations can always be regarded as the realization of the value of the underlying assets or of the business of the corporation because it is in the nature of the shares of the corporation that they represent an investment in the ongoing business and in the underlying assets of the corporation. As the cases I have dealt with indicate, the Fraser case is generally restricted to circumstances where the particular corporation is formed with the express purpose of the sale of the shares and for the purpose of converting what would otherwise be ordinary income in the disposition of the assets of the corporation into a capital gain on the disposition of the shares.

Where the business operations of the corporation whose shares are sold have continued, it is inappropriate to treat the gain on the sale of the shares as in effect a sale of the assets of the corporation because, in fact, the assets of the corporation have not been sold.

For the respondent:

.. . Fraser, of course is a Supreme Court of Canada case, . . . To the extent that Fraser says something clearly, I don’t think that can be modified by the Federal Court, for example. . . . in the Shipp case, and I believe Mr Justice Gibson gave a two-part test that had to be satisfied before Fraser could apply, and one part of that was that a share transaction had been set up to in effect convert ordinary income into income on capital account. . . . I submit that that does not follow from a reading of the Fraser case and I further submit that I don’t think that reasoning has recommended itself to anyone else at the Federal Court or in any other court, because I don’t see that test used anywhere else. Certainly not in cases that have cited Fraser as either using it or distinguishing it in arriving at a decision in this kind of trading case..

Now . . . the doctrine of Fraser as I see it . . . relies upon certain elements: two active and skilled real estate promoters making a profit in the ordinary course of their business and if they couldn’t make it one way, they would make it another way. Except for Fraser, the kind of real estate transaction that would normally result in income (or a profit, a taxable profit) could not be got at for the reason my friend gave in this argument the other day, and that is that shares are prima facie capital property. Fraser, in my submission, is the authority to look at the substance of the transaction to remove, for the purposes of deciding the matter of taxability, the distinction between the shareholders and the company itself and seeing what has gone on, and if what has gone on is that a person has sold property, in effect held and sold property through shares, then that property is going to be taxable as if that company and the shares had not existed and the land itself had been sold.

. . . I Would like to draw your attention to the case of James Rex Burgess and Ross M Forward v Minister of National Revenue (73 DTC 5040, [1973] CTC 58). I have Supplied my friend with a copy of this. These are not identical facts, but there are some points of similarity. They are not identical in that the land which was put into a corporation was all sold at the same time and I am sure on that basis my friend will seek to distinguish the case, but I do wish to point out the items of similarity.

Findings

In my appreciation of this case and the relevant jurisprudence, the central point is whether the "Fraser doctrine” (as it was termed by counsel for the appellant) should apply, and if so, the interpretation placed upon that doctrine as it fits the facts of this matter. Certain points raised by counsel for the appellant regarding the inadequacy of the Minister’s pleadings, and other jurisprudence which might avoid the necessity of applying the "Fraser doctrine” are noted for the record, but they are not pertinent or persuasive in my view. Both parties during argument referred to the critical quotation from Fraser (supra) at 376:

Some point was made of the fact that the appellant did not in one case sell a store and in the other case vacant land but shares in two companies. I agree with Cameron, J that this was merely an alternative method that they chose to adopt in putting through their real estate transactions. The fact they incorporated companies to hold the real estate makes no difference. Associated London Properties, Ltd v Henriksen (H M Inspector of Taxes) (1942-45), 26 TC 46.

Counsel for the appellant called on the Board to reject an extreme interpretation of that statement — that the sale of any corporate shares in a real estate oriented company would always produce an “income account” profit or loss for the vendor of the shares. I would agree with him, and the decision in this matter should not be so interpreted. Counsel also made considerable and commendable efforts to provide an appropriate interpretation of Fraser (supra) as it could be seen in the subsequent judgments. Certain of his comments related to these judgments and those of counsel for the respondent, in reply, have been summarized above. As I see it, counsel for the appellant has proposed that the Board allow the appeal based upon three distinctions from Fraser (supra) which arise out of his reading of the subsequent jurisprudence noted:

(1) It is a partial sale of shares of the company, generally that will be considered to be a capital investment . ..

(2) the active operation, the business, continues (and as such it signifies that the sale of the shares of the corporation will not be considered to be the sale of the assets of the corporation) . . .

(3) . . . the Fraser doctrine is appropriate in circumstances where the incorporation of the company is done for the express purpose of in effect transferring the assets of the corporation and converting what would otherwise be ordinary income into capital gain.

Dealing with the first point referred to above, I would agree that in Fraser (supra) all of the shares were sold, but the rationale which would make the result different in a partial sale was not made clear to me in this matter. Mr Fraleigh might have greater difficulty distinguishing his own gain as on capital account rather than on income account if, for some reason, all the shares had been sold and the balance of the shareholders taxed on income account, but I fail to see how he has less difficulty merely because the other shareholder in this matter (Ronyx) not only retained its shareholdings but acquired those of Fraleigh. There is no question in my mind that counsel for the appellant is correct in assuming (and I believe he must be doing so) that had the corporate structure been different, and Fraleigh owned all of the shares of Ronleigh, in the circumstances of the sale in this case, the gain realized by Fraleigh would have been taxable on income account. There simply would have been an uninterrupted flow of profits from his dealings in the land, first by way of the sale of the land to Ronleigh and then by way of the sale of the shares in Ronleigh — the “Fraser doctrine” would have applied. I fail to see how the sale, or the retention, by another shareholder, of his own separate and distinct shareholdings in Ronleigh can have any bearing on the outcome of this matter, to the benefit of the appellant.

Turning to the second point above, it is equally without merit. In relying on this point, counsel for the appellant placed considerable significance upon the following quotation from Weldon and Robb (supra) to be found at 304 thereof:

Similarly, in the other decisions referred to, the final transaction involved the purchase of the entire undertaking of the company and therefore effectively terminated active participation by the vendors, and although not conclusive in itself, this certainly has proven to be a very persuasive circumstance in bringing the Court to the conclusion that the sale of the shares was nothing more than an alternate mechanism for the sale of assets.

Counsel also relied on Blok-Andersen (supra) at 352:

“What eventually happened was that title to the apartment building was transferred from Schofield Park to Lambton and the charter of Schofield Park was surrendered.”

However, it is equally important to note the appropriate qualification by the learned Associate Chief Justice in Weldon and Robb which immediately follows the quotation above:

“I do not, of course, suggest that the corporate vehicle must be cast aside in every case where all shares are sold and examples to the contrary are abundant.”

And in the same way, from Blok-Andersen, the surrender of the charter appears to be immediately ignored by the learned Justice as he continues at 352:

Whether the gain realized by the appellant upon the sale of the shares is taxable as income, falls upon a determination of the crucial question whether the apartment was a capital asset or inventory.

The quotation indicates to me that the question for determination in this appeal is not whether the shares had been acquired as inventory or investment, but whether the real estate had been so acquired, as inventory or investment, and this brings us to the “Fraser doctrine”. No other support was provided by counsel for the assertion that the conduct or business decisions of a corporation beyond the input of a taxpayer can have a bearing on the taxable status of that taxpayer. While it would be more consistent with all the facts in Fraser (supra) had the business of Ronleigh been terminated, that is a distinction without a difference as I see it, and not one which, at least alone, would warrant the tax treatment requested by this appellant. The final curtain in terms of his interest in or impact upon Ronleigh, was brought down for Fraleigh at the time of the sale of his shares.

The main argument from counsel on his third point (the “Fraser doctrine” application) arises from a quotation to be found in Shipp (supra) at 336 which has already been quoted but is referenced again:

The principles of Ronald K Fraser v MNR (supra) have no application here. Such principles apply when at the time of incorporation persons (1) have acquired real estate with the thought that it be sold as well as for income, and (2) have caused a company to be incorporated for the express purpose of attempting to get profit on Capital account which otherwise would be income.

Clearly, in the instant case, the Board does not have difficulty with the first point made by Gibson, J in Shipp (supra) — there was no intention in Ronleigh to use the real estate in question for the purpose of earning income, it was for sale. On the second point, I concur completely with the comments. It might not even be necessary to apply the principles of the “Fraser doctrine” where such an express purpose were evidenced — the Income Tax Act itself could inhibit the tax treatment claimed by the transaction at issue. Earlier in his judgment, the learned Justice (on 335) recognized and noted this:

“On the pleadings it is not alleged by the respondent that the incorporation of Applewood Village Shopping Centre Limited was a scheme or contrivance to avoid tax.”

Accordingly, as I see it, the issue of a “sham” corporation was not a factor in the judgment rendered, and that judgment in Shipp (supra) was based on the determination of the Justice that “The . . . appellants . . . acquired the shares as an investment . . that is the real estate was solely for the purpose of earning income, and was not for sale. Again I fail to see how counsel can rely on the Shipp (supra) judgment in support of this case, since the reason for acquisition of the real estate was exactly the opposite here.

It might be sufficient at this time to simply point out that the appellant has failed to dislodge the onus placed upon him within the directly relevant jurisprudence (Fraser, supra) to show that this appeal should not be dismissed in the same manner. However, a few words on that judgment and its related succeeding judgments could be useful. I have quoted earlier that which I hold to be the critical and significant comment in Fraser (supra) This is amplified by a comment to be found in De Toro (supra) at 329:

In my view, the fact that the profit was made by the appellant and Carr from the sale of the shares in the Company and not from the sale of the real property, is immaterial.

Further (even though finally allowing the appeal on the grounds discussed above), the learned Justice in Shipp (supra) commented on at 336:

From the evidence it is clear that the appellants were not in the business of trading in shares.

To be taxable, therefore, the profit from the sale of these shares must be categorized as income as a result of trading in the “business” of real estate carried on by the appellants.

Finally, and as I see it importantly, from Blok-Andersen, at 349:

... I have not overlooked the fact that what the appellant sold to Lambton in 1961 were the shares in 5 Schofield Park and not the apartment building per se . .

At 350:

In 1961 the appellant sold his shares in 5 Schofield Park to Lambton. The asset of this company was an apartment building.”

At 352:

It was not disputed nor could it be successfully disputed that the transaction involving the shares in Schofield Park was a sale of these shares by the appellant to Lambton, which for the reasons I have decided is tantamount to a sale of the apartment building. In my view it is immaterial that Lambton was also wholly controlled by the appellant. They are separate corporate entities. The transaction was in truth a business deal.

At 353:

the sale price of the shares was determined by the value of the underlying asset.

From the above I would conclude that the point to be made in this decision is that where the sale price of corporate shares of stock is based upon the value attributed to the assets underlying those shares (as opposed to the accumulated earned surplus, for example); and those underlying assets were acquired by the corporation as inventory for sale rather than as investment for earning income, any resultant gain by the vendor of the shares may be considered as profit on income account for tax purposes, arising from a venture in the nature of trade,and not as on capital account arising out of the realization of an investment asset.

It would be an unwarranted conclusion that the above comment virtually classifies the gain on the sale of all shares as on income account. It is general in principle, but it requires a complete understanding of all relevant facts before its application. The nature or extent of factors which might produce a different tax result where shares are sold rather than the underlying asset, is not a subject of necessary examination in this decision, other than to say that there was nothing brought to my attention at the hearing which I recognized as modifying the direct impact of Fraser (supra) on this appeal. Mr Fraleigh personally, or in other corporations he controlled, had been the owner of the real estate involved before its acquisition by Ronleigh; from the date of its original purchase by Fraleigh through its tenure in Ronleigh at least up until the date of the sale of the shares by Fraleigh, it had been inventory for sale; Fraleigh was an acknowledged, experienced and capable real estate trader before, during and after the transactions relevant to this appeal; he owned a 50% interest of the shares of Ronleigh and while it could not be said he controlled the corporation, it is equally true that it was not controlled by the other shareholder to any great extent; the other shareholder in Ronleigh was an acknowledged, experienced and competent dealer in real estate; at the time of the sale of the real estate from Fraleigh to Ronleigh, the appellant had received full value for the land — either in cash or mortgages; he had paid $20 for 20,000 shares in Ronleigh — giving him a 50% interest. That summary is not meant to be all inclusive, or all exclusive, merely an indication of the basis upon which the Minister’s assessment was made — the nature and character of the underlying assets and their purpose had not been altered in any way by the corporation Ronleigh. While the Board does not dispute that it was a corporation with an apparently valid business purpose and that Fraleigh may well have contemplated the receipt of dividends from his shares at some time, neither of these factors has a bearing on the taxing results which must flow from an examination of this transaction under review. The gain at issue is on income account.

Decision

The appeal is dismissed.

Appeal dismissed.