Walsh, J:—This is an appeal from the income tax assessment of appellant for its 1967 and 1968 taxation years. Appellant is a private Ontario company incorporated on September 1, 1954, 90% of the shares being owned by J C Stephenson and 10% by his wife. While the company had very broad powers in its charter permitting it to purchase and develop real estate, prepare building sites, lay out building lots and clear, build on and improve same, its business had, according to the evidence of Mr Stephenson, been confined to the development of a property known as the “Home Farm”. This property had been owned by his family for several generations, the south 50 acres since 1841 and the north 50 acres since the early 1900’s. Seventeen acres had been expropriated in 1939 or 1940 for an airport and another 18 acres had been sold during the 1940’s by a series of Veterans’ Land Act sales. He acquired the remaining 65 acres by purchase from his father and sold it to the company and commenced developing and subdividing same. Approximately 135 houses were built on the southern portion of it between 1954 and 1959 at which time he stopped building as he found he was losing money on this and thereafter merely sold serviced lots.
It is not this property with which the present action is concerned, but a property referred to as the “Stonehouse Farm” consisting of about 120 acres which was purchased by appellant in June 1964 for $85,000, of which $25,000 was paid in cash, the balance consisting of a mortgage for $60,000. The Stephenson family had known the Stonehouse family for many years but this property was not adjacent to the Home Farm nor was it purchased for the purpose of residential development. Appellant contends that it was purchased solely as an investment. It was in the Township of Whitby and not within the limits of either the Town of Whitby or the City of Oshawa, was at the time of the purchase unserviced and, in fact, could not be serviced unless and until a new pumping station and sewage treatment plant was built as it was at a lower level than the Town of Whitby and the City of Oshawa and could not be drained through the existing sewers of either municipality. It was zoned for industrial use and was at the time of the purchase and until its eventual sale leased to a farmer who owned the adjoining farm and cropped the land and used it for pasture. Rental income for the years ending March 31, 1965 to March 31, 1969 for the use of the farm and the three buildings on it varied between $1,850 and $2,170 and after the payment of taxes, insurance and maintenance on it, the net revenue varied between a loss of $78.92 in the year ending March 31, 1967 and a maximum net revenue of $1,200.89 for the year ending March 31, 1965. Charging mortgage interest on the property against this resulted in a net loss of $599.11 in the year ending March 31, 1965, $2,501.77 for the year ending March 31, 1966, $3,678.92 for the year ending March 31, 1967, $2,825.44 for the year ending March 31, 1968 and $2,395.86 for the year ending March 31, 1969, the whole as appears from a statement prepared by the company’s auditors, filed as Exhibit A-10. It is therefore apparent that while the property yielded some revenue, it could not be considered to be a good investment from the point of view of the revenue it yielded and was undoubtedly purchased in the anticipation that it would increase in value as the two adjacent municipalities developed and expanded and could eventually be disposed of at a substantial profit, as in fact it eventually was. The mere fact that a property is purchased with the intent of later reselling it at a profit does not of itself make this profit taxable as an adventure in the nature of trade as the intent to make a profit can be as much a characteristic of an investment transaction as of a business transaction. This principle was set forth by Lord Buckmaster in Leeming v Jones, [1930] AC 415, in which he stated at page 420:
An accretion to capital does not become income merely because the Original capital was invested in the hope and expectation that it would rise in value; if it does so rise, its realization does not make it income.
This was approved by Martland, J in Irrigation Industries Limited \ MNR, [1962] SCR 346; [1962] CTC 215, in dealing with the purchase and subsequent resale of securities at a profit and the same principle was extended by Kearney, J in MNR v Valclair Investment Company Limited, [1964] CTC 22, and MNR v Cosmos Inc, [1964] CTC 34, tc land or other assets capable of producing income whether, in fact, the had done so to any substantial extent or not at the time of the sale See also the judgment of Noël, J, as he then was, in the case of Pau Racine, Amédée Demers and François Nolin v MNR, [1965] DTC 5098 [1965] CTC 150.
The question we have to determine in the present case is whethe this property was really acquired by appellant as an investment, as i claims, or whether it did not rather form part of the inventory of th< company, being acquired and ultimately disposed of as part of it business operations as a real estate developer.
Although appellant concedes that the provisions of its charter wer sufficiently broad, and the experience of Mr Stephenson in real estat was sufficient to enable it to subdivide and develop land for industrie as well as residential purposes, it nevertheless argues that a distinctio should be made between what it could do and what the facts indicate its actual intentions were with respect to the said property, and the all it had ever done in connection with the development of propert was with respect to the Home Farm which was a residential develop ment whereas the Stonehouse Farm was a property which could nr be developed at all at the time it was acquired nor in the immediatel foreseeable future, and that therefore it was entitled to acquire sam as an investment just as if it had invested its surplus assets in stock or bonds with the view to eventually selling them at a profit, whic would not have been taxable in accordance with the findings in th Irrigation Industries case (supra). In this connection, reference can i: made to the statement of Judson, J in Regal Heights Ltd v MNR, [196C SCR 902: [1960] CTC 384, in which, referring to the significance I the objects clauses set out in the company’s charter, he stated I page 907 [390] :
Nothing turns upon such a statement in such a document. The question be determined is not what business or trade the company might have carrie on but rather what business, if any, it did in fact engage in.
That judgment dealt with the doctrine of secondary intention which not applicable here, as there is no evidence whatsoever indicatir that appellant ever had any intention of developing the property itse and that the sale at a profit was a secondary intention resulting mere because the primary development plan could not be carried out. further proof of its contention that it never had any intention of takir the subject property into its inventory with the intention of developh same, appellant points out that the inventory of land available for sa on the Home Farm still consisted of approximately 20 acres at tl time the Stonehouse Farm was acquired, that there was a great de of serviced industrial land in the area owned by the neighbouring mu cipality which was offering it at a lower price than private develope could so that there was at the time no market for serviced or unserviced industrial property, that it had never advertised the land for sale or otherwise sought to dispose of it, and it was held for a period of over five years before two sales were made under threat of expropriation in 1966 to the Town of Whitby and the CNR.
The subject property was bounded to the north by the service road adjacent to the south side of Highway 401 and to the west of the northern portion of the property (that is the portion north of the CNR tracks) by Thickson Road which intersects Highway 401 at a cloverleaf. The CNR tracks run from east to west along the south side of the northern portion of the subject property and separate this portion from the southern portion of the property consisting of some 45.6 acres. This southern portion of the property is separated from Thickson Road by a farm belonging to someone else across which there is no right- of-way, and this southern portion is similarly land-locked to the south and east by properties. belonging to other proprietors so that the only access to it is by a right-of-way across the CNR tracks. The Town of Whitby bought a small strip along the west side of the northerly portion of the property for the widening of Thickson Road in 1966 under threat of expropriation. In the same year the CNR also under threat of expropriation bought a narrow strip at the southern extremity of the northerly half of the property for the widening of its main line and in a second purchase bought a somewhat larger piece of land on the northern extremity of the southern portion of subject property for the purpose of building a hump marshalling yard. While there is some discrepancy in the dimensions of the portions taken as set forth in the pleadings, surveys, and descriptions of the properties in question in the deeds, this need not concern us here. As a result of these sales, appellant was taxed in the amount of $4,600 in 1967 and $9,048.20 in 1968 when the proceeds were received. It is common ground between the parties that the 1967 assessment of $4,600 made no allowance for the cost of acquisition of this portion of the property, but that in 1968 an allowance was made for the cost of acquisition of the property for which payment was received in 1967 as well as for that for which payment was received in 1968 so that taking the two years together, which has been done in the present appeal, proper credit was given to appellant for the cost of acquisition and the amounts claimed are the correct amounts, the only issue being whether these were capital gains, as appellant contends, or income received from a trading transaction, as respondent claims. The balance of the property was sold on June 23, 1969 to Pinetree Development Company Limited for $425,250 with a $100,000 down payment as a result of an unsolicited offer after an earlier offer from the said purchaser in the amount of $360,000 had been rejected by appellant, but any profits which may have resulted from this sale are not in issue before me since they would relate to the 1969 or subsequent taxation years of appellant which have not yet been assessed.
The fact that the profits in issue in the present appeal resulted from sales under threat of expropriation rather than from an arm’s length sale by a willing informed vendor to a willing informed purchaser does not affect their taxability as such if it is found that the property was acquired by appellant as part of its inventory for eventual disposal in the course of its business.
Appellant company was merely the vehicle through which Mr Stephenson carried out his residential real estate development of the Home Farm and the company’s intentions when it acquired the Stonehouse Farm can be equated with his intentions. His background is, therefore, of some relevancy. He was brought up on the Home Farm which was northwest of Oshawa beyond the city limits at the time, and graduated from Technical School as a draftsman. In 1939 he became an apprentice tool designer for General Motors and in 1942 went to work in Peterborough for Genelco, its subsidiary which was making Bofors antiaircraft guns. He attempted to join the navy in 1943 but was frozen in his work at Genelco by selective service. In 1944 his father was not well and needed help on the farm so he got permission to return to Oshawa to work with General Motors in connection with the design of military trucks, at the same time helping his father with the farm. In 1948 he went to work full time on the farm but in 1952 they sold the livestock and he became a salesman for the Oshawa district for Coolvent Aluminum Awnings which were being manufactured there. He subsequently purchased a dealership from them and later became eastern sales manager. In 1953 he discussed a partnership agreement with the proprietors of Coolvent but when at the last minute they demanded the collateral security of a mortgage on the farm the deal fell through. It was at this time that he purchased the farm from his father and incorporated the appellant company and began the real estate development. When he stopped building houses in 1959 he returned to school to obtain his senior matriculation intending eventually to go on to university but found this very difficult as he now had a family so although he obtained his senior matriculation three years later he did not carry on further with his formal education. He insists that when he bought the Stonehouse Farm he had no clear idea as to what he might eventually do with it but the terms were quite generous as the fifteen year mortgage called for only 6% interest for the first five years and 672% for the next five and finally 7% for the last five years, plus $2,000 a year on account of the principal. The company had income from the sale of lots on the Home Farm which was continuing and could readily finance this. Before buying it he consulted with the Department of Highways and found that they had tentative plans for widening route 401 to eight lanes in about twenty years and he felt that this would enhance the value of this property. After the CNR built its marshalling yard on the property taken from appellant, this doubled the length of the grade crossing and increased the height of the grade substantially as the tracks were built up, making the crossing from the southern portion of the property to the north very hazardous. He attempted to get them to build an underpass but this was refused. As a result of the building of the hump yard and raising of the level of the track itself the flow of the surface water on the land which had formerly been from west to east into a creek was interrupted by silting in the creek resulting in considerable flooding. He admitted, however, that this had formed part of the claim against the railway company when the land was purchased from appellant. In addition to the housing development on the Home Farm appellant had built a small shopping centre of six stores on a corner of it zoned as commercial and in 1959 appellant had sold a parcel adjacent to this to Rosslynn Plaza Limited, a company which he had formed with another partner on which from 1965 to 1967 they constructed a residential apartment block which they intended to hold as an investment. Considerable difficulties were encountered in the construction and a Mechanic’s Lien trial took place which the company lost as a result of which the apartment block and shopping centre had to be sold in 1969. Except for this unfortunate experience he testified that he had been engaged in no other speculative real estate venture.
About four years after Stonehouse Farm was purchased some favourable developments which increased its potential value took place. The Town of Whitby on January 1, 1968 annexed this territory which made it more likely that proper zoning and services would eventually become available as the Town had recently developed an adjacent industrial park and had, in 1968, obtained the first industry for it namely the Consumers’ Gas. Certain policies of the Town of Whitby had an influence on the offer which appellant received in 1969 for the balance of the farm. In order to maintain a proper municipal tax base the town required developers to provide a balanced land assembly consisting of residential, commercial and industrial lands before permitting any residential development. The purchaser of the subject property already had residential and commercial properties which it wished to develop and was in need of an industrial parcel of land to complete the necessary assembly. A real estate agent, McQuay, who had acted before for Stonehouse when appellant had purchased the property in question approached Mr Stephenson again, this time on behalf of the purchasers. Stephenson had not listed the property with him for sale but eventually agreed to pay the commission, believing this to be the common practice. The first offer which was submitted to him was refused but the later offer was too good io refuse and, in fact, the agent himself testified that it was the purchaser who established the price which was to be offered and that he, himself, felt this was too high. He gave evidence relating to sales of comparable properties about this time and subsequently and in almost all cases they were for a lower price. While all of this evidence relates to 1969 and subsequently it is relevant in attempting to determine the intention of appellant with respect to the property. Appellant further argued that the fact that this was a capital transaction is supported by the fact that the proceeds of the sale were reinvested in capital assets of stocks and bonds.
Sidney Hopkins, CGA, appellant’s auditor, testified and produced financial statements of the company for the years 1964 and 1967 to 1969 inclusive. The statements indicate that the company did not bring the Stonehouse Farm into its land inventory under current assets but included it under fixed assets. The amount of $9,048.20 is shown in the 1968 statement as “capital gain on sale of rented property”. The manner in which the company treated the acquisition and sale of this property in its books is not, of course, conclusive but nevertheless has some evidential value.
It may well be that appellant, as it claims, had no intention of ever subdividing or developing this property and was holding it solely with the view of ultimate disposal of same at a profit. Certainly it did nothing to promote the ultimate development and sale of it and it is in evidence that when it bought it there was no definite plan by the Town of Whitby to include this area in its territory nor any indication as to when water and sewer services might become available to enable it to be developed. It was, and in fact still is, even in the hands of the present owners, being used solely for agricultural purposes. For these purposes the income derived from the rental of same would not, however, justify the purchase as a revenue-producing investment and the justification for the purchase can only be found in the prospect of future sale at a profit. While the time at which the land would have increased in value to such a substantial extent as to justify the holding of it for many years before a profitable sale could be anticipated was incapable of determination at the date of the purchase, it was nevertheless relatively certain that it would eventually increase substantially in value. It had a strategic location bordering on the service road of a main highway, route 401, and was between two rapidly growing municipalities, the Town of Whitby and the City of Oshawa. It is about two miles from the main General Motors’ plant in Oshawa and about one- quarter of a mile from the Lasco Steel Plant in Whitby. After the expropriations with which we are concerned here, the balance of the property was sold the next year, which was some years earlier than appellant could have reasonably foreseen at the time of the purchase but this was purely fortuitous and resulted from factors beyond appellant’s control and on which it could not have counted at the time of the purchase. To this extent the profits realized on the sale of the property would have constituted capital gain on the realization of an investment had it not been for the fact that appellant was in the business of dealing in and developing land. The cases of Brampton Brick Limited v MNR, [1963] Ex CR 305; [1963] CTC 57, Commissioners of Inland Revenue v Reinhold, 34 TC 389, and Irrigation Industries Limited v MNR (supra) can be distinguished therefore since in each of these cases the investment in question was an isolated transaction entirely outside and apart from the regular business activities of the taxpayer. The facts of the present case also result in its being distinguishable from my recent judgment in the case of Bead Realties Limited v MNR, [1971] CTC 774, since in that case, although some of the principal shareholders of the company had had some experience in dealing with real estate, it was not the principal business of any of them, and moreover there was evidence of serious attempts made to develop the property as a revenue-producing investment by constructing industrial buildings on it to the specifications of potential tenants for the purpose of leasing same to them. I found that this was the real intention of the parties at the time of the purchase of the property and that there was no secondary intention of selling same at a profit except in the general sense that, as has been stated in several cases, anyone will sell anything of which he is not obliged to retain the ownership provided a price is offered which is too good to refuse. Accordingly, the profits on the sale of the property as the result of a very generous^ unsolicited offer, as in the present case, were held not to be taxable, but the distinction lies in the fact that the owners had, for some time, been endeavouring to develop the property in such a manner as to receive substantial investment income from same, while in the present case no such development was attempted nor, in fact, was it possible.
Had the present property been bought by Mr Stephenson himself there might have been a serious question as to whether it could not, in fact, be considered as an investment by him on which the profits resulting from the sale would avoid taxation as an isolated transaction of an investment nature. While he had considerable experience in dealing with and developing real estate, the evidence indicated that he had never been in the business of speculating in it and he had been in other businesses in addition to real estate. While it is true, as I previously stated, that in the case of a company such as appellant wholly controlled by one shareholder, the intentions of the company must be considered as identical with those of the shareholder, the business of the company is not necessarily the same as that of the shareholder. The same shareholder might control several companies, each engaged in an entirely different business and might thus be engaging in several different businesses whereas each company would be confined to the business in which it was engaged. While the appellant in the present case had only dealt with the subdivision of the Home Farm, the construction and sale of houses on it, the subsequent sale of lots on it, and the construction and operation of a shopping centre in connection with this development and this may well have been the primary reason for which Mr Stephenson caused it to be incorporated, it nevertheless was given wide powers in its charter to deal in and develop real estate of every nature. I am not prepared, therefore, to make the fine distinction which appellant seeks to the effect that such a company can buy some real estate for development and include it in its inventory and other real estate as an investment and, by the simple device of including it in its fixed assets, avoid tax on any profit resulting from the eventual resale of same. While the company could properly include as fixed assets an office building which it was occupying in connection with the operation of its business, I am of the opinion that in view of the very wide powers given to it in its charter, any other properties acquired by it should be included in inventory and profits from the disposal of same taxed as regular business profits. For the above reasons, appellant’s appeal against the assessment in respect of its 1967 and 1968 taxation years is dismissed with costs. STEWART & MORRISON LIMITED, Appellant,
and
MINISTER OF NATIONAL REVENUE, Respondent.
Supreme Court of Canada (Martland, Judson, Ritchie, Spence and Pigeon, J J), January 25, 1972, on appeal from a judgment of the Exchequer Court, reported [7970] CTC 431.
Income tax — Federal — Income Tax Act, RSC 1952, c 148 — 12(1)(a), (b) —
In 1963 the appellant corporation, a firm of industrial designers, formed a US subsidiary to carry on a similar business in New York. The New York office had its own staff, letterhead, invoices, etc but was master-minded by the appellant, which supplied or guaranteed the funds required by the subsidiary for rent, salaries, travelling expenses and other operating expenses. Funds so advanced by the appellant were shown on the books as loans. The New York office failed to prosper and was closed in 1966, leaving the appellant with an irrecoverable outlay of $72,343 which it sought to deduct in that year on the ground that the New York office, though set up as a separate legal entity, was in fact operated as a branch of the Canadian company. That view was accepted by the Tax Appeal Board but the Board’s decision was reversed by the Exchequer Court.
HELD (per curiam):
The appellant’s advances were correctly classified as loans to its American subsidiary and the deduction of the appellant’s losses had been rightly found to be prohibited by paragraph 12(1)(b) of the Act. Appeal dismissed.
J G Edison, QC and R D Dalgarno for the Appellant.
G W Ainslie, QC and J R Power for the Respondent.
CASE REFERRED TO:
L Berman & Co Ltd v MNR, [1961] CTC 237.
Judson, J (all concur):—The issue in this appeal is whether the appellant taxpayer, Stewart & Morrison Limited, in computing its income for the fiscal period ending June 30, 1966, is entitled to deduct as an expense an amount of $72,345. It had written off this amount as a bad debt in respect of loans which it had made to its wholly- owned American subsidiary. These loans were made during the period March 1964 to April 1966. The Tax Appeal Board decided in favour of the taxpayer ([1969] Tax ABC 65). This decision was reversed on appeal to the Exchequer Court ([1970] CTC 431).
The facts were dealt with in great detail in the reasons delivered in the Exchequer Court. I adopt the summary of the facts made at the conclusion of his reasons by the learned trial judge (pp 438-39). They are as follows:
The evidence adds up to this, as I appreciate it. The respondent decided that an American subsidiary, to be wholly owned by the respondent, would be incorporated and would carry on business in the United States and be a source of income and profit for the respondent. The subsidiary would carry on business as a separate American company in its own name and right, but it would, to use Stewart’s words, be “master-minded” by its parent company and their affairs would be closely related and managed. The subsidiary needed capital, but had none. The respondent would supply, or arrange to supply, the needed capital. It arranged and guaranteed -a bank loan direct to the subsidiary and also made direct advances of money to enable it to get started and continue to operate. The advances were treated by both companies and by their auditors, and in the respective books and accounts, as loans from the respondent. Book entries do not necessarily denote the true nature of transactions, but I think that the advances in question were correctly treated as loans. The fact that the money so provided was used by the subsidiary to pay its operating expenses, and was lost in a losing cause, does not determine or change its nature of money lent by the respondent to the subsidiary.
In my opinion, the advances were outlays by the respondent of a capital nature, so far as it is concerned, the deduction of which is prohibited by section 12(1)(b) of the Act and the appeal may be disposed of on that finding alone.
The learned trial judge has correctly characterized these dealings between the parent company and its American subsidiary. The parent company provided working capital to its subsidiary by way of loans. These loans were the only working capital the American subsidiary ever had with the exception of the sum of $1,000 invested by Stewart & Morrison Limited for the acquisition of all of the issued share capital of its subsidiary. The money was lost and the losses were capital losses to Stewart & Morrison Limited. The deduction of these losses has been rightly found to be prohibited by paragraph 12(1)(b) of the Income Tax Act.
We are not concerned in this appeal with what the result would have been if the appellant taxpayer had chosen to open its own branch office in New York. For reasons of its own, it did not choose to operate in this way. II: financed a subsidiary and lost its money.
The case of L Berman & Co Ltd v MNR, [1961] CTC 237, relied upon by the appellant in this case, is, in my opinion, not in point. In the Berman case the taxpayer made voluntary payments to strangers, ie the suppliers of its subsidiary, for the purpose of protecting its own goodwill from harm because the subsidiary had defaulted on its Obligations. The basis of the decision in the Exchequer Court was this (p 244):
It paid the amounts because it had been doing business with the suppliers and was going to continue to do business with them. The payments were made by it for its own purposes and their amounts never became debts of United to the appellant [Berman].
I would dismiss the appeal with costs.