Cattanach, J:—This is an appeal from a decision of the Tax Appeal Board, dated May 21, 1971, whereby the assessment of the appellant by the Minister to income tax for its 1967 taxation year was confirmed.
In assessing the appellant as he did, the Minister had included as income to the appellant an amount of $21,677.08 realized by it on the sale of a small shopping centre and land adjacent thereto.
The contention of the appellant is that it sought to create, and did create, an asset from which it would derive rental income so that the asset so created is a capital asset and that the gain realized upon the disposition of that asset is a non-taxable capital gain.
On the other hand the contention of the Minister is twofold (1) that the amount realized is income arising in the ordinary course of the appellant’s business and accordingly taxable under sections 3 and 4 of the Income Tax Act and (2) that the amount realized is profit from “an adventure or concern in the nature of trade” within the extended definition of “business” in paragraph 139(1)(e).
For convenience I reproduce sections 3 and 4 and paragraph 139(1)(e):
3. The income of a taxpayer for a taxation year for the purposes of this Part is his income for the year from all sources inside or outside Canada and, without restricting the generality of the foregoing, includes income for the year from all
(a) businesses,
(b) property, and
(c) offices and employments.
4. Subject to the other provisions of this Part, income for a taxation year from a business or property is the profit therefrom for the year.
139. (1) In this Act,
(e) “business” includes a profession, calling, trade, manufacture or undertaking of any kind whatsoever and includes an adventure or concern in the nature of trade but does not include an office or employment;
The appellant is a joint stock company incorporated pursuant to the laws of the Province of Alberta on June 28, 1962 under the name of Makoi Holdings Ltd with an authorized capital consisting of 20,000 shares without nominal or par value which might be issued for a consideration not exceeding $20,000. The inclusion of the word “Holdings’ in the corporate name is a complete misnomer and bears no relationship whatsoever to the objects for which incorporation was obtained nor the business in which the appellant engaged.
The memorandum of association in clause III sets forth in 12 paragraphs lettered (a) to (I) the objects for which the appellant was established.
Paragraph (a) authorizes the appellant to carry on the business of dealers in building materials.
Paragraph (b) authorizes the appellant to carry on the business of general contractors and builders without limitation as to the class of structures to be built.
In paragraph (d) the appellant is authorized to carry on the business of paving construction and dealers in supplies therefor.
By paragraph (j) the appellant is authorized to deal in real property and sundry rights.
The four foregoing paragraphs, along with paragraph (c), which basically authorizes the designing of private and public works, in my view, constitute what may be properly considered as the “objects” for which the appellant was incorporated.
The remaining seven paragraphs, being (e), (f), (g), (h), (i), (k), and (I) are more properly “powers” which were introduced into the memorandum to enable the appellant to carry out its “objects” as expressed in the other five paragraphs.
Under The Companies Act of Alberta, RSA 1970, c 60, the incorporation of companies is by memorandum of association. It has been held in Ashbury Carriage Company v Riche (1875), LR 7 HL 653, that a company so incorporated has no inherent common law rights and accordingly is restricted in its activities to carrying out the objects and exercising the powers set forth in the Memorandum of Association.
Subsection 20(1) of The Companies Act of Alberta provides, that for the purpose of carrying out its objects a company incorporated under that Act has the powers enumerated in the section except those expressly excluded by the memorandum. There is no such exclusion in the memorandum of the appellant.
Paragraph 17 of subsection 20(1) confers
the power to sell, improve, manage, develop, exchange, lease, dispose of, turn to account, or otherwise deal with all or any part of the property and rights of the company,
Paragraph 18 of subsection 20(1) bestows on a company the power to invest and deal with such moneys of the company as are not immediately required, in such manner as may from time to time be determined.
The power in paragraph 18 of subsection 20(1) also expressed in paragraph (h) of the memorandum of the appellant in somewhat different language.
What the appellant did in each of its financial years following in- corporation was to purchase serviced building lots from a land developer and build thereon single family dwellings. In some instances the houses were built on speculation and in other instances the houses were built for specific customers. The number of houses built on speculation and for customers was approximately equal.
The appellant was described in evidence as a young, aggressive and progressive company but sorely in need of working capital.
In its 1962 calendar year, the year of its incorporation, the appellant built five houses, in 1963 ten, in 1964 and 1965 twenty, in 1966 twenty-five, in 1967 thirty, in 1968 thirty-five to forty, in 1969 sixty to seventy and in 1970 ninety to one hundred. At the present time it builds about 150 houses annually.
In its fiscal year ending June 30, 1963, its initial year, the appellant’s financial statements show a gross revenue of $85,858 with a nil profit. In its next year, June 20, 1964 a gross revenue of $482,000 was received with a net profit of $17,000. For the year ending June 30, 1965 the gross revenue was $562,000 odd with a profit of $9,000. In the June 30, 1966 year the appellant’s gross revenue was $606,000 resulting in a net profit of $4,000, whereas in the next year, June 30, 1967 the gross revenue was $709,000 with a net profit of $36,000. In setting forth the foregoing I have rounded the figures rather than setting forth the precise figures appearing in the financial statements because my purpose is to illustrate the extent of the appellant’s activities and its resultant profits.
There were only three shares in the capital stock of the appellant which were issued and these shares were issued for a total consideration of $4. One share was held by Peter Epp, Jr and one each by his father and his brother. Mr Epp is a professional engineer and has had extensive experience in the building industry. He is the general manager and secretary-treasurer of the appellant. His brother is the president and his father is the vice-president. Mr Epp, Sr had been in the house-building business for some years but his interests are now exclusively concentrated in the appellant.
Mr Epp, Jr had also caused the incorporation of a company known as Makoi Construction Limited in 1959, some two and one-half years prior to the incorporation of the appellant. This company was controlled by Mr Epp who owned two-thirds of the issued shares at all relevant times.
This company was engaged in the business of building commercial buildings principally apartment buildings and small shopping centres. This it did for customers at a firm price. The firm price for small shopping centres was always in the range between $30,000 to $45,000 in the years 1962 and 1963.
Mr Epp, Jr was the manager of both Makoi Construction Ltd and the appellant.
The member of the Tax Appeal Board who heard this matter in the first instance found that the appellant and Makoi Construction Limited were associated corporations within the meaning of paragraph 39(4)(d) of the Income Tax Act in that Makoi Construction Ltd was controlled by Peter Epp, Jr who was also a member of the group of persons that controlled the appellant. If it should become material in the determination of the present appeal I would agree with that finding.
Shortly prior to 1964 the appellant had built some houses on lots purchased by it from Kelwood Corporation Limited in a development known as the Acadia subdivision in the south-east area of the City of Calgary. An area in the subdivision had been zoned for a shopping centre and not for housing development. The housing had approached the northern boundaries of the area so zoned and was in the process of development beyond.
Mr Epp’s father was the originator of the thought that the land should be acquired by the appellant and a shopping centre erected thereon.
The appellant obtained a feasibility report dated January 22, 1964 from a real estate agent at a cost of $280 the purport of which was that a shopping centre on that location would be successful.
The appellant obtained a verbal option from Kelwood Corporation Limited to purchase the site consisting of 1.14 acres for $35,933.
The appellant then began negotiations with prospective tenants of a shopping centre to be built. The appellant considered it essential to have as an anchor tenant a grocery supermarket. Negotiations with Western Grocers Limited resulted in an almost certain commitment to lease premises in the centre. Mr Epp, Jr also negotiated prospective leases with compatible tenants.
On May 13, 1964 the appellant exercised its verbal option with Kelwood Corporation Limited and purchased the land for $35,933.
On September 4, 1964 it obtained a commitment from Royal Trust Company to make a loan of $86,000 secured by a first mortgage.
In the meantime the appellant had entered into a contract for the construction of the shopping centre with its affiliated corporation, Makoi Construction Ltd.
On October 1, 1964 a building permit was obtained and construction began immediately thereafter.
On October 2, 1964 a confirmation of its intention to lease was received from Western Grocers Limited.
The building was substantially completed on December 18, 1964 when Western Grocers Limited occupied its premises.
In January 1965 construction was completed and the remaining tenants, whom I believe to have been five in number, moved in.
It happened that some of the tenants were not successful in their enterprises and were obliged to vacate the premises leased. There was evidence that this is not unusual and is to be expected in new areas. The unsuccessful tenants were replaced by other tenants.
The projected construction costs were $95,513 inclusive of the cost of the land at $35,933. By the simple mathematical process of subtraction that would leave the estimated cost of the building at $59,580. At this point it is significant to note that Makoi Construction Limited, prior to the construction of this shopping centre, had designed and constructed four small shopping centres, which were between one-half and three-quarters the size of this shopping centre, at costs of $27,000 to $45,000, the maximum cost being ‘about $15,000 less than the cost of this shopping centre. The difference in cost was not attributable to an inflationary increase in costs. All the buildings were constructed within three years, but the higher cost of the appellant’s shopping centre was due to its greater size and the superior quality of the materials used. Heavier sewage and conduit lines and extra water facilities were installed at greater cost to accommodate an extension in the number of stores if the need should subsequently arise. Further Mr Epp, Jr did extensive landscaping to make the shopping centre more attractive and to harmonize with the residential character of its surroundings.
There was evidence to the effect that these additional built-in features which made the building more costly would not attract a correspondingly higher price on the sale of the building.
The actual cost of the construction of the building is shown in the financial statements of the appellant as $64,789.92 or approximately $65,000 which is extremely close to the projected cost of approximately $60,000. This cost of $64,789.92 when added to the cost of the land at $35,933 results in a total cost of $100,722.92.
In August 1965 the appellant had the building appraised by Howard P Hamilton, a real estate agent and appraiser, who placed a valuation on the land and building of $144,831.93.
The project was financed by a first mortgage loan in the amount of $86,000 obtained from the Royal Trust Company.
In arranging this loan Mr Epp, Jr who had many prior dealings of like nature with the Royal Trust Company in the course of the business of the appellant and Makoi Construction Limited, presented the feasibility report that had been obtained from Howard P Hamilton in which the market value of the shopping centre was shown to be $129,500.
By statute the Royal Trust Company is limited to lending money on a first mortgage to two-thirds of the market value of the property which is the security for the loan.
The amount of the mortgage loan approximates two-thirds of the estimated market value of the property.
The balance of the cost, being the difference between $100,722.92 and $86,000 which is $14,722.92 was borne by the appellant with accommodation financing by Makoi Construction Limited.
In cross-examination it was disclosed that the cash advance made by the appellant towards the financing of the project was $7,000 which had been paid for a formal option for the land and which became part of the payment of the purchase price when the option was exercised.
The balance, which is in the approximate amount of $7,000, was advanced by way of accommodation by Makoi Construction Limited.
As intimated before, the building was fully completed and fully occupied by January 1965.
As the building neared completion insurance was placed on it in the amount of $90,000. It should be borne in mind that the ultimate construction cost was approximately $65,000. Accordingly the amount of the insurance which coincided with the market value of the building exceeded the actual cost by about $25,000.
In the appellant’s 1966 year the excess of rental revenue over expenses was approximately $3,000. This is referred to as a “cash-flow” in paragraph 6 of the Notice of Appeal. This amount would appear to be the approximate annual income from the shopping centre.
Mr Epp in his search for an anchor tenant also had in mind that a gasoline service station would be a most desirable tenant on the site. He approached all major oil companies and learned that their uniform policy in that area was that they should own ‘the land and building. Accordingly Mr Epp instructed his solicitors to proceed with subdivision plans of the appellant’s shopping centre whereby a one hundred foot strip of land was segregated in order that such land might be sold if occasion arose. Such an occasion did not arise prior to the disposition of the entire site.
In view of the fact that Makoi Construction Limited constructed the building with its employees and provided the financing not covered by the first mortgage and the minimal cash contribution of the appellant it seemed incongruous that the project should be undertaken by the appellant bearing in mind the close affiliation of the two corporations. Mr Epp, Jr gave the explanation in his testimony. The idea of building a shopping centre originated with his father. His father was a shareholder in the appellant but not in Makoi Construction Limited.
As I mentioned at the outset the appellant was a young and aggressive company engaged in the speculative and custom business of building single residential dwellings for sale at a profit.
The appellant carried on this business by use of a line of credit advanced by its banker. The manager of the branch at which the appellant did its banking business was limited in extending a line of credit to the customer to an amount of $15,000. For amounts in excess of $15,000 the branch manager was required to make application for approval to the district office. This was done on behalf of the appellant and its line of credit was fixed at $35,000.
Because this amount was in excess of the branch manager’s discretion, and I assume the line of credit was reviewed annually by the district office, it followed that the branch manager reviewed the affairs of the appellant each year usually in the three months following the close of the appellant’s financial year on June 30.
This practice was followed by the branch manager in late September or early October in 1965.
At this time the appellant wished to increase its line of credit from $35,000 to $50,000. Because the amount exceeded the local manager's discretion he submitted an application to the district office which refused to increase the credit extended to the appellant but maintained that credit at its previous level of $35,000.
Some two months later, in December 1965, the branch manager renewed the application to increase the appellant’s credit to $50,000. This time the extension of the appellant’s credit to $50,000 was approved subject to the condition that the additional $15,000 of credit could only be used at peak periods when the building activity of the appellant required extra resources.
When the appellant undertook the construction of the shopping centre the bank manager took no objection to the appellant applying its resources in this manner.
In the following year, that is subsequent to June 30, 1966, the bank manager discussed the working capital of the appellant with its officers. At this time he expressed the opinion to the appellant that its working capital was extremely low and unduly strained. As it was his duty to do he reported this opinion to his superiors. He did this because he was aware of the heavy emphasis placed by his employer, the bank, and its officers to whom he must apply for renewal and increase of credit, on the working capital position of a customer in determining what credit is to be extended to the customer.
Further it was the opinion of the branch manager that the rental income from the shopping centre would accumulate too slowly to improve the working capital position of the appellant.
in his view, which view was shared by his superiors, if the increase in the line of credit requested by the appellant was to be forthcoming there must be an infusion of working capital forthwith.
With this purpose in mind he recommended to the appellant that the shopping centre should be sold.
The branch manager was insistent that his advice to sell the shopping centre was a recommendation only and most certainly was not put as an ultimatum. There was no suggestion that the appellant’s tine of credit would be reduced below the amount of $35,000 which it enjoyed although that might have been a possibility due to the tight money situation prevailing. On the other hand it was the manager’s view that there was no prospect for the appellant’s credit being extended to $50,000 on a permanent basis unless there was an immediate increase in its working capital. The most effective way to do this, in the manager’s view, was to sell the shopping centre. The appellant concurred that this would be the most practicable way to increase its working capital.
While the sale of the shopping centre was merely a recommendation by the bank manager and not an ultimatum, nevertheless, in my view, the appellant was presented with a Hobson’s choice. If the appellant was to get the increase it wished the bank would increase that credit only if the shopping centre was sold.
During cross-examination the manager conceded that if he had known that the appellant had only advanced $7,000 in cash toward the shopping centre, that fact might have made a difference. I fail to follow how this fact would change the situation accepting as I do the bank’s basic premise that there must have been an infusion of working capital to justify an increase in the credit extended to the appellant.
In 1965 the bank manager had stressed the fact to the appellant that the bank’s loanable funds were under pressure and that preference upon those available funds would be given to customers with adequate working capital. In October 1966 the definite recommendation was made by the bank manager that the appellant sell its shopping centre to secure an increase in its bank credit.
The appellant acceded to that recommendation. In October 1966 the bank manager so reported to the district office. On October 7, 1966 the district office approved an increase in the appellant’s line of credit to $50,000.
In the spring of 1966, prior to its discussion with the branch manager of its bank, the appellant had listed the shopping centre for sale with a real estate agent, for an asking price of $145,000. This asking price coincided with the appraised value made by Howard P Hamilton and at which property was carried on the appellant’s balance sheet subject to the auditor’s notation as to the cost.
in June 1966 the land was subdivided into two parcels, one parcel was that on which the shopping centre was built together with parking facilities, and the other parcel was a 100 foot strip of unoccupied land.
An enquiry from a prospective purchaser, who turned out to be the ultimate purchaser, was received on September 24, 1966.
On October 24, 1966 the appellant received its first and only definite offer. However that offer was for the shopping centre and the land on which it was built and was in the amount of $114,000, although there had been negotiations prior to October 24, 1966 but the negotiations culminated on that date.
On November 1, 1964 two agreements were entered into by the appellant, one for the sale of the shopping centre proper for $114,000 and the second for the sale of the 100 foot strip of land for $16,000, making a total purchase price of $130,000 or $15,000 less than the initial asking price.
These sales resulted in a gain to the appellant in the amount of $21,677.68 which the Minister included as part of the appellant’s income and assessed tax accordingly. It is this assessment that gives rise to the present appeal.
On one particular aspect the evidence of the bank manager did not emerge with the clarity I would have hoped for. There is no doubt that in the interview with the officers of the appellant which took place in October 1966 the bank manager made the very definite recommendation that the shopping centre be sold. However the evidence is that in the spring of 1966 which is well prior to the interview with the bank manager in October 1966 the appellant had listed the shopping centre for sale.
Following on the appellant’s previous annual interview with its bank manager, that is the one that took place in October 1965, the appellant’s request for an increase in credit was first refused, but later, in December 1965, it was approved for peak periods. There does not appear to have been a recommendation in definite terms by the bank manager at that time that the shopping centre be sold. He did say that the “concern” about the appellant’s low working capital was not so great at that time as it was in October 1966. I assume that “concern” meant the bank manager’s concern and that of the District office. That the “concern” was not so great as it later was must have been so because the appellant’s credit was increased for its peak periods. It is, therefore, logical to conclude that no definite recommendation was made by its branch to the appellant to sell its shopping centre in 1965. That recommendation was made in October 1966 at which time the appellant had already listed the shopping centre for sale. It follows logically from these facts that the appellant was not influenced by the recommendation of its bank manager in October 1966 because it had made the decision to sell prior to that time.
It may well have been that the bank manager had deplored to the appellant its inadequate working capital but even if that was so the decision to increase that working capital by the sale of the shopping centre in the spring of 1966 must have been on the appellant’s initiative and could not have been influenced by the recommendation of its bank manager made in October 1966 which appears to have been the only time that he made a recommendation to that effect.
Again, as stated at the outset, the rival contentions between the parties are, on behalf of the appellant, that, at the time of its acquisition of the shopping centre, it had the intention of obtaining rental income therefrom to the exclusion of any intention of a subsequent disposition at a profit and, on behalf of the Minister, that what the appellant did falls precisely within the appellant’s business or in any event the appellant acquired the land and built the shopping centre thereon with the intention and for the purpose of selling the property.
With respect to the first contention on behalf of the Minister, that is, that the construction and sale of the shopping centre was the appellant’s business Duff, J (as he then was) said in Anderson Logging Co v The King, [1925] SCR 45 at 56; [1917-27] CTC 198 at 207; 52 DTC 1209 at 1214:
The sole raison d’être of a public company is to have a business and to carry it on. If the transaction in question belongs to a class of profit-making operations contemplated by the memorandum of association, prima facie, at all events, the profit derived from it is a profit derived from the business of the company.
While Sir Lyman P Duff specifically mentioned a “public” company his remarks are equally applicable to a “private” company which status the appellant had under its articles of association.
There is no doubt that the objects of the appellant as set out in its memorandum of association, particularly paragraphs (b), (c) and (i) specifically authorize the appellant to build and sell a shopping centre.
The fact that a particular transaction falls within the objects contemplated by the memorandum of association is merely a prima facie indication that a profit so derived is profit from the business of the company. Being a presumption it may be rebutted.
In Sutton Lumber & Trading Co, Ltd v MNR, [1953] 2 SCR 77; [1953] CTC 237; 53 DTC 1158 Locke, J said at page 83 [244, 1161]:
The question to be decided is not as to what business or trade the company might have carried on under its memorandum, but rather what was in truth the business it did engage in. . . .
Accordingly one is not entitled to infer from the circumstances that because the appellant was incorporated for the purpose of building structures for sale at a profit that the transaction whereby the appellant built a shopping centre and subsequently sold it, necessarily constitutes that transaction as part of the appellant’s business with the consequence that the gain realized is income from its business and therefore taxable.
The question resolves itself into one of fact.
By virtue of Article Ill, paragraph (h) of its memorandum of association the appellant has the power to invest its moneys not immediately required in such manner as is from time to time determined.
The position of the appellant is that is just what it did.
In support of that position reliance was placed on the fact that the business of the appellant was restricted to the construction and sale of single family dwellings and that in no instance, other than that of the shopping centre, did it retain any building for the rental revenue that could be derived.
The position of the appellant is that there is no impediment to a trading company making an investment and realizing an enhanced value of that investment.
Such a proposition so stated is incontrovertible. However the Minister does not accept the appellant’s premise that what the appellant did constituted an investment but contended that this particular transaction was precisely within the objects for which the appellant was incorporated and accordingly was its business or alternatively that the transaction was an adventure or concern in the nature of trade in any event.
I propose to consider the Minister’s second contention, that is, that the transaction was a venture in the nature of trade.
As indicative that the construction of the shopping centre was with the exclusive intention of deriving rental income therefrom, the appellant points to the fact that its business activities had been restricted to building single dwelling houses for sale and in no instance, other than that of the shopping centre, had it ever constructed and retained any building of any kind for rental revenue. From this it follows that the transaction involving the shopping centre stands isolated and alone.
However the profit from a single transaction is not necessarily by way of accretion to capital but may well be a profit of a revenue or income nature provided it bears indicia of trade. Lord President (Clyde) has observed in Balgownie Land Trust Ltd v CIR (1928-29), 14 TC 684, that “A single plunge may be enough provided it is shown to the satisfaction of the Court that the plunge is made in the waters of trade”.
It is always a question of fact if a particular transaction amounts to an adventure in the nature of trade and in determining the matter the principal consideration is the intention of the person concerned.
if it was the appellant’s exclusive intention at the time of acquisition to hold the shopping centre for the rental revenue therefrom then the profit from the sale of the shopping centre on the abandonment of that purpose would not be a profit from a business or an adventure in the nature of trade. If that was not the appellant’s exclusive intention at that time there can be no doubt, in the circumstances, that the purpose of the acquisition of the shopping centre, or one of the possible purposes, was a subsequent disposition thereof at a profit, then the resulting profit is profit from a business or an adventure in the nature of trade and is therefore taxable.
The onus of establishing that the former circumstance was the case falls on the appellant.
The appellant’s declaration at trial that the intention was to hold the shopping centre for revenue producing purposes is only part of the evidence. Statements now given as to the intention at the time of acquisition must be considered along with the objective facts and the question of fact as to what the appellant’s intention was in acqutring the shopping centre must be decided after considering all the evidence.
The construction of the shopping centre was completed in December 1965. It was listed for sale in the spring of 1966, some 15 or 16 months later. There was no long tenure.
Transactions of sale are characteristic of trade but not necessarily distinctive of it. Much depends on the circumstances and a circumstance present in the present case especially indicative of trading is that of a comparatively quick sale if that quick sale is not satisfactorily explained.
The explanation proffered was that the sale was made on the recommendation of the appellant’s bank manager to improve its strained working capital to justify an increase of the appellant’s line of credit to expand its dwelling house construction activities. For the reasons outlined above that recommendation by the appellant’s bank could not have been the factor which dictated the appellant’s decision to sell the shopping centre. That decision must have been on the appellant’s initiative.
The fact that the appellant was incorporated for the object of carrying on the business of building contractors with the power to invest its surplus funds is not conclusive of the matter but the appellant’s professed objects are not to be left out. On the contrary the objects must be kept in mind when considering the transaction in question.
The objects of the appellant as set forth in its memorandum are to carry on the business of a building contractor. For the most part it limited its activities to building residential ‘houses. There is little distinction between building houses for sale and the building of a shopping centre for the same purpose.
In CIR v Fraser (1940-42), 24 TC 498, the Lord President (Clyde) said that, in general, it follows that a single transaction amounts to an adventure in the nature of trade when entered into by an individual in the line of his own trade than when outside that line.
The appellant also had the power in its memorandum to invest moneys not immediately required. The question to be determined is what was the appellant doing when it built and sold the shopping centre, was it carrying out its business of building a shopping centre in speculation of sale or was it exercising its power of investing funds surplus to its immediate requirements.
Much evidence was directed to establishing the young and aggressive nature of the appellant and its difficulty in realizing a much larger enterprise because of a dearth of working capital. That being the case it would follow that the appellant had no funds not immediately required for its business, in which event the logical inference is that the shopping centre was inventory rather than a capital asset.
The appellant advanced only a minimal amount of cash towards the construction of the shopping centre. There was a first mortgage of $86,000, a cash advance by the appellant of $7,000 and accommodation to a like amount by Makoi Construction Limited.
At the very outset of the undertaking the appellant projected the market value on completion to be $129,500 and the amount of the first mortgage loan advanced was predicated upon that market value. The estimated cost of construction, inclusive of the cost of the land, was $95,000. Therefore the estimated market value exceeded the estimated cost by $34,500.
During the construction of the shopping centre insurance in the amount of $90,000 was placed on the building. The amount of the insurance coverage coincided with the market value. The actual cost of the buttding was approximately $65,000 so market value of the building exceeded the cost of construction by $25,000.
Therefore the appellant had an asset the market value of which was $130,000 which had cost the appellant approximately $100,000.
The difference was characterized by counsel for the Minister as a built-in profit of $30,000, a circumstance which was well known to the officers of the appellant.
There was also an appraised value of $145,000.
It was equally well known to the appellant from its inception that it was vital to the conduct of its business to have a line of credit with its bank.
Because of the emphasis put by the appellant’s bank manager on adequate working capital in determining the credit to be extended to a customer I think it can be inferred that this fact was communicated to the appellant at an early stage.
Therefore what the appellant had was an asset which the appellant knew had a market value between $129,500 and $145,000 which it had acquired at a cost of approximately $100,000 and with a minimal cash outlay by the appellant.
To businessmen with the acumen of the officers of the appellant the logical inference is that they knew from the outset that the appellant was possessed of an asset with a so called “built-in profit” which could be realized when circumstances might dictate.
In so inferring I have not overlooked the circumstance that the appellant was virtually certain that an anchor tenant before construction was begun, that the entire complex was rented on its completion and that the net income from rentals was approximately $3,000 annually which represents a high return on the appellant’s outlay. This fact did not influence the conclusion of the appellant’s bank, in October 1966, that this return would not increase the appellant’s working capital quickly enough but an infusion of working capital was required before it would increase the appellant’s credit.
The fact that the centre was fully rented is also susceptible of making a more advantageous sale more easily obtainable and this fact has the further advantage of providing the appellant a return in the interval.
In its search for a tenant the appellant considered that a service station would be an advantage. On learning that every major oil company would insist on freehold ownership the appellant was willing to sell and subdivided its land for that purpose. This fact is not conclusive one way or the other, but it does illustrate the willingness of the appellant to sell part of the realty.
After having given careful attention to all the evidence, I am not satisfied that there is a balance of probability that the appellant constructed the shopping centre with the sole intention of retaining ‘and operating it as a revenue producing property to the exclusion from the outset of any purpose of disposition at a profit.
That being so the appellant has failed to discharge the onus cast upon it.
In view of the conclusion I have reached on the second contention of the Minister that the transaction was an adventure or concern in the nature of trade, I do not find it necessary to reach a conclusion on the alternative contention of the Minister that the transaction was one within the appellant’s ordinary course of business as authorized in its memorandum of association.
The appeal is dismissed with costs.