Wilderton Shopping Centre Inc v. Minister of National Revenue, [1972] CTC 319, 72 DTC 6277

Heald, J:—This is an appeal from the decision of the Tax Appeal Board wherein the appellant’s appeal from a reassessment for the taxation year 1963 was dismissed. Said reassessment seeks to impose a tax in the sum of $27,765.80.

The appellant was incorporated in 1954 under the laws of the Province of Quebec. The purposes of incorporation as set out in the letters patent were inter alia:

1. To purchase or otherwise acquire and to hold and own a parcel of land in the City of Montreal lying between the south side of Kent Avenue, the north side of Van Horne Avenue, the east side of Darlington Avenue and the west side of Wilderton Avenue, with such additions thereto as may be considered necessary to construct a building or buildings to be occupied in whole or in part as a shopping centre and to act as real estate lessors and administrators in connection therewith and to sell and dispose of the said immoveable property in whole or in part for such consideration and under such terms and conditions as may be thought proper; . . . (italics mine)

At all relevant times the beneficial shareholding in the appellant corporation is as follows:

Louis Naimer was the president of Union Electric Supply Co Ltd, a very large electrical supply firm in Canada. Bert Silverman has been in the real estate and mortgage loan business for the past forty years. Max Seigler has been and is his partner in many real estate ventures. Ivanhoe Corporation (hereafter Ivanhoe) is a wholly owned subsidiary of Steinberg’s Limited, one of the largest food retailers in Canada. Ivanhoe can best be described as the “real estate arm” of Steinberg’s. It owns about thirty shopping centres across Canada. Steinberg’s is either the sole tenant or one of the tenants in most of Ivanhoe’s real estate developments.

In 1953 one Daneau was the owner of a block of land in the City of Montreal on Van Horne Avenue (one of the main arterial streets in Montreal) between what is now Wilderton Avenue and Darlington Avenue, containing an area of approximately 459,000 square feet. Daneau was in the business of building and operating apartment blocks. He had previously borrowed money for his ventures from both Silverman and Naimer. In 1953 he came to them to borrow money for the purpose of building apartment blocks on this property. Silverman advised him that they were not lending on land at that time but that he and his associates (Seigler and Naimer) might be interested in buying the property for a shopping centre. Silverman testified that he was assured by Daneau that while only part of subject property was zoned commercial at that time, that there would be no difficulty in getting the balance rezoned commercial.

Silverman said that they contacted the proper officials at City Hall and satisfied themselves that there would be no difficulty in rezoning the balance. Mr Silverman’s evidence was that he then contacted Mr Samuel Steinberg of Steinberg’s as to the possibility of leasing a portion of the proposed shopping centre to them. Steinberg’s would not lease but were prepared to become a majority partner in the shopping centre venture. In the result, the property was purchased from Daneau for $750,000 cash and was transferred to the appellant in 1957. Silver- man’s evidence was that the intention of the partners was to build the shopping centre on the entire piece of land. At the time of purchase, the land was zoned as follows:

Appellant took no immediate steps upon acquisition in 1954 to commence construction of a shopping centre on subject property. Silver- man said that in about 1955 appellant discovered that the rezoning was going to be more difficult than they had anticipated; that many negotiations and discussions ensued through the years and that finally in 1959 a partial rezoning was achieved with the following result:

Thus appellant decided to utilize the commercial area for the shopping centre. Construction was started in 1959 and completed in 1960. Thereafter, appellant sold the land zoned residential amounting to 164,240 square feet to various purchasers and it is the profit on these sales that form the subject matter of this appeal. It is appellant’s contention that these sales transactions are not trading transactions; that appellant’s sole intention was to construct a shopping centre and parking lot on the entirety thereof; that such intention was frustrated by the inability to rezone a substantial portion of subject property from residential to commercial leaving appellant with no choice but to resell said residential portion for apartment block purposes, a permitted use under the residential zoning.

The facts and circumstances in the case at bar are quite similar to the case of Regal Heights Ltd v MNR, [1960] CTC 46; 384; 14 DTC 1041; 1270. In that case, four associates purchased several parcels of land in 1952, 1953 and 1954 and put them together for the purpose of a shopping centre. In February 1954 the appellant company was incorporated and all the property transferred by the partners to it in return for shares. In September 1954 it became apparent that a shopping centre of the kind intended could not be established on the property when a large department store, with which the promoters had been negotiating, announced that it intended to locate elsewhere in the neighbourhood. Frustrated in its intentions, the company disposed of the lands in three separate sales in 1954 and 1955 at a sizeable profit which the Minister sought to tax as income resulting from an adventure in the nature of trade. Dumoulin, J upheld said assessment in the Exchequer Court and the taxpayer’s appeal to the Supreme Court of Canada was dismissed. At page 54 [p 1045] the learned Trial Judge said:

We have here another of those “frustration” cases which, of late years, seem to occur with increasing frequency.

I already spoke my conviction that Messrs Cohen, Raber and Belzberg should be taken at their word that the motivating intention of this transaction was indeed to erect a shopping centre.

Even so, does a primary purpose necessarily exclude a secondary or ancillary one, meant to save the day should a “bolt out of the blue” shatter all else? Highly competent and experienced business men such as these surely did not ignore there was a second string to their bow: the estate’s profitable resale, should, peradventure, the shopping centre one snap. A contrary opinion seems hardly tenable.

Here, as in the Regal Heights case (supra), the evidence establishes that the primary purpose was to build a shopping centre. A shopping centre was in fact built on a portion of the property. However, in my view, the evidence also establishes a secondary or an alternative intention, namely, to resell a portion of the land at a profit if their Original plan was “frustrated”. In my view, the following circumstances Clearly establish such a secondary or alternative intention at time of purchase of subject property:

(a) The objects and purposes of the company include the power to sell and dispose of the property or part thereof.

(b) The company through its shareholders knew of the zoning imperfection at the time the land was acquired. They purchased the property knowing that more than half of it was not zoned to permit shopping centre construction. In the words of Bert Silverman, ‘‘we decided to take a chance”. The principals of this company were experienced real estate operators. They were deeply involved in real estate in Montreal; this was a choice location with great future potential; they were well aware of this. I believe they knew very well that if they were not able to rezone commercial so as to utilize the balance of the land for a shopping centre, that this would still be very attractive and valuable property for apartment construction, a permitted use, and that they would in all likelihood be able to resell at a profit. I believe they also knew very well that there was a distinct possibility that they would not be able to rezone the entire area to commercial. The Ivanhoe people were in real estate in cities all over Canada. Silver- man had extensive real estate experience. Anyone with experience with community planning boards and regulations would know that rezoning is, in most cases, speculative and uncertain.

(c) Shortly after appellant’s shareholders acquired subject property, the Montreal architectural firm of Eliasoph and Berkowitz was instructed by Samuel Steinberg on behalf of the appellant to prepare preliminary plans for said shopping centre. On June 2, 1955 said firm of architects submitted four alternative preliminary layouts as a basis for further discussion. The covering letter from the architects to the appellant is revealing as to appellant’s intentions as early as 1955, long before the final rezoning and shortly after appellant’s shareholders ac- quired subject property. The significant portions of said letter are as follows:

On the Sketch Plan submitted drawing #P-1 makes full use of the lot for the Shopping Centre with no consideration for any land to be sold for apartment construction. . . . Drawing P-2 allows for 73,000 square feet of store and parking for approximately 500 cars. The land north of the proposed Street at the rear can be sold for apartment construction and those apartments shown on the south side of the street, back to back with the stores allowing for a service driveway underneath the rear end would have — built by the Shopping Centre. Drawing P-3 allows land on both sides of the proposed street to be sold for apartment development . . . Drawing #P-4 permits the use of a 110’ lot north of a proposed street for apartment development. . . .

Thus, as early as June 1955, after instructions and presumably discussions with Samuel Steinberg, representing the majority shareholder (Ivanhoe) of the appellant, the architects presented four alternative plans for development of subject property — only one of these alternatives suggested full utilization for a shopping centre — the other three all contemplated partial shopping centre usage and partial apartment usage. None of the witnesses who testified on behalf of the appellant were able to say specifically what instructions were given by Mr Steinberg in commissioning the architects. The submission was that the suggested alternative usages involving apartments came from the architects, of their own volition. I do not accept this submission. I do not believe that the architects would have voluntarily, and on their own, submitted apartment alternatives without some indication from the instructing client that the apartment alternatives were a possibility to be considered. No one from the architectural firm was called to give evidence. It would have been possible, surely, to have the architects testify as to the instructions received from the appellant. The onus is on the appellant to establish the facts relied on to challenge respondent’s assessment. The evidence before me is certainly open to the inference that appellant considered apartment construction on a portion of subject property as early as mid-1955 and, since it was not in the apartment business, such an intention would necessarily involve resale of part of the land to someone who was in the apartment business.

(d) The business background and history of appellant’s shareholders strongly indicate a trading intention in this venture. I detailed earlier the business experience of Mr Bert Silverman as a real estate operator of forty years standing in the City of Montreal. Then, of course, the majority shareholder of appellant, Ivanhoe, is a very large real estate corporation, having assets in the order of 130 million dollars. Its gross revenue from leasing amounts to about 12 million dollars annually. However, over the years, in addition to buying land and building shopping centres thereon, it has been rather extensively involved in “raw land” real estate transactions. The evidence was that it would “pool” land far in advance of possible use; that it might buy three potential locations in one general area and then only use one site for a shopping centre, selling the other two.

Mr Leo Goldfarb, who was a vice-president of Ivanhoe during the periods relevant to the appeal, testified that Ivanhoe “would dispose of the lands when it was no longer feasible to keep them”. The evidence was that in 1962 Ivanhoe sold some ten different parcels of land and in 1963 some thirteen different parcels of land.

I think it is clear from the evidence in this case that the pattern evolved by Ivanhoe in its own transactions was also the pattern it established for the appellant. Bert Silverman testified that Ivanhoe was in full charge of appellant’s operations because of its superior experience in this area.

(e) The subsequent sales (six) by the appellant of the balance of subject property not used by it for the shopping centre and parking were all to apartment block developers. All six agreements contained a restrictive covenant that said property was to be used only for the purpose of constructing residential apartment buildings and a further restrictive covenant that the purchaser must commence construction of said residential apartment building within approximately six months of purchase.

In my view, these sales and these restrictive covenants are corroborative of the secondary or alternative intention at time of purchase to resell a portion of the property for apartments in the event the full commercial rezoning did not materialize.

The shopping centre and the high-rise apartment development would complement one another. A shopping centre nearby is a definite asset to prospective tenants in high-rise apartments. Conversely, fully tenanted high-rise apartments represent to a shopping centre a built-in clientele within easy walking distance. Each would serve to make the other more viable and I am satisfied, from the evidence, that the appellant, through its shareholders, was fully aware of such a possibility and such a potentiality when it purchased subject land.

For all the above reasons, I have concluded that the Minister was correct in taxing the profit herein as income resulting from an adventure in the nature of trade.

The appeal is therefore dismissed with costs.

ORDER AS TO COSTS