Roland St-Onge:—This appeal was heard at the City of Victoria, in the Province of British Columbia on November 5, 1971 by the Tax Appeal Board as it was then constituted, and is from a reassessment dated December 7, 1970 wherein a tax in the amount of $49,611.94 together with interest in the amount of $3,358.38 was levied in respect of income for the 1969 taxation year.
The appellant, incorporated under the laws of the Province of British Columbia, purchased raw land in the City of Victoria on January 19, 1966 for the alleged purpose of development at a price of $290,000 and on October 16, 1968 sold it for a price of $600,000. The Minister taxed the profit on the ground that it was profit arising from an adventure in the nature of trade within the relevant section of the Income Tax Act.
According to the evidence, four individuals — Mr Douglas J Lemery, a businessman; Mr Kenneth J Davis, a real estate agent; Mr Earle A Morrison, an industrial designer; and Mr Robert W Siddall, an architect
— purchased the land, paying $10,000 down and $40,000 on completion of the titles, and then transferred it for the same price to the appellant company.
Mr Lemery testified that he and his brother had been in the motel business in Seattle for a number of years — operating between 15 and 20 motels. The said enterprise was eventually liquidated, and the money he lost therein was regarded as a capital loss. After this unfortunate experience he went to Vancouver and worked on a ferry. Because of his experience and his knowledge of the motel business, a Colonel Kerr, who was an heir of the estate of Christopher Spencer which owned the Victoria Harbour property, sought to interest him in a 500-room hotel project to be erected on the said property. This waterfront parcel of land of approximately 115,000 square feet was well situated in Victoria and was only five blocks from the courthouse. Mr Lemery was not interested in such a project, but this proposal made him aware of the property for the purpose of erecting thereon a larger development which would include apartment and office buildings, a shopping centre with the necessary parking facilities, and which would be spearheaded by a major hotel. With this in mind he approached Mr Davis who had the capabilities for this type of project, as well as Mr Siddall and Mr Morrison who agreed that this parcel of land as well located and sufficiently large for such a development. Before deciding to purchase the property, they rented a helicopter and took movies of the said property, tested the nature of the soil by depth-sounding, and had Mr Davis prepare a feasibility study. They also agreed that the construction of a marina in the project would considerably improve the development. As previously stated, the aforementioned persons purchased the property and transferred it to a company which was already in existence but which had never been used. It was less expensive and more expedient to use this company and change its name rather than incorporate a new one.
After this acquisition by the company many meetings took place; plans were drawn up by Mr Siddall and Mr Morrison, and the real estate company of Mr Davis was appointed to look after the land and rent it as a parking lot. Many discussions were held with important hotel enterprises and finance companies. Mr Lemery met with representatives of Western International Hotels which operates the Vancouver Bayshore Inn, the Calgary Inn and the Montreal Holiday Inn. Following some correspondence with the said enterprise (Exhibits A-5 and A-6) he felt that they were interested and he contacted a number of finance companies as well as important businesses such as Simpsons. Some correspondence (Exhibits A-7 and A-8) was filed to show the work done in that respect. At that time another factor increased their chances of realizing the said alleged project — a convention centre having accommodation for a maximum of 1,500 people was to be erected near the appellant’s proposed development. Following discussions and correspondence with Western Hotels, the latter sent some people to the proposed site to study the feasibility of the project but the appellant was told that it was too costly and that they would not be prepared to do it until after the appellant obtained the mortgage money. According to an agreement among themselves, each participant had a precise task to accomplish: Mr Morrison was to look after the money and Mr Siddall the preparation of the plans.
After Mr Lemery’s first attempt to realize his project with Western Hotels, he contacted many other representatives of large enterprises and finance companies such as a Mr Anderson from Standard Life Insurance Company, a Mr Adams from Holiday Inns, a Mr Tom Hill from Hyatt Houses (a chain of hotels in the United States), but none of them was interested in financing such a project for various reasons. Mr Anderson replied that his company was not accustomed to financing motel projects; Mr Adams and Mr Hill stated that money was too expensive to go ahead with such a project. Other companies, such as Canadian Pacific, Dominion Construction, Block Brothers, were contacted but to no avail. Mr Lemery also testified that Western Hotels was not interested in the project because an announcement was soon to be made to the effect that Western was going to operate a major complex to be erected on CPR property near the Empress Hotel, the latter to be completely renovated for that purpose and many apartment buildings were to be built within the development. Apparently, this project had been approved in principle and it was impossible for the appellant, in the circumstances, to pursue its own project. Mr Lemery, on that occasion, approached the mayor of Victoria and stated that he was prepared to give the city one acre of the appellant’s property, but it was then too late to enter into any arrangement with the city.
After two or three years of negotiations, at a meeting held in Victoria, Mr Morrison proposed that either he buy all the shares of the appellant company or sell his own shares so that he would become the sole owner or get out completely. As Mr Lemery did not want to be a minority shareholder, he decided to purchase all the shares. After he became the sole owner, he took additional steps to realize his project. He had some discussion with a representative of Western Hotels and also with a Mr Hall who represented an important development company. He testified, however, that it “became a kind of dead issue at the last” and on September 26, 1968 he advertised the property for sale and one Mr Reid, a well-known developer, agreed to buy the property in the name of his company (Blue Mountain Properties, Ltd) for the amount aforementioned.
Upon cross-examination, Mr Lemery further stated: that the property under review had been advertised for sale for years and that a lease the owner of the property had with a company using the wharf for boat docking was about to expire; that in 1967 the parking lot business lost $2,500 and in 1968 made about $5,000 which amount was not sufficient to pay the interest of $12,000 a year on the balance of the sale price of the property; and that later on they tried to increase the income by tearing down some warehouses and obtaining more parking space.
Mr Robert Siddall, an architect, testified that he was invited by the real estate agent, Mr Davis, to join the development. According to him, their original intention was to build a three-tower building for mixed usage such as a hotel complex, an office building and a marina, but no design was prepared for such a development — only a sketch to interest people in the project. A pamphlet indicating two circular towers was also prepared for the same purpose and was entitled “Victoria Harbour Development”. He corroborated Mr Lemery’s testimony and added that he went into the project with the idea that it would be a long-term investment; that Mr Davis did most of the negotiating to promote the project and cooperate with the city; that he advanced the sum of $12,500 for the purchase of the land; and that he sold his interest because of the ultimatum given by Mr Morrison to the effect that he wanted to sell his shares or buy all the shares of his associates.
Mr Davis testified that Mr Lemery approached him in connection with the downtown waterfront property under discussion which was then under the management of another real estate firm, and asked him if he would be interested in buying and developing the property. He agreed to go into the project because of the prospective old age retirement in- come to be derived therefrom. He sold his shares as a result of Mr. Morrison’s intention to become the majority shareholder and he did not wish to be in the position of a minority shareholder in the company.
Mr Calvert, a real estate salesman for Block Brothers Realty Ltd, testified that as soon as he saw the site he was struck by the fact that this waterfront property was ripe for development. He went to City Hall, obtained the owner’s name, and wrote a letter to Mr Lemery in which he intimated that one of his company’s developer clients might be interested in buying the property which he understood was for sale (Exhibit A-17). Following this letter, Mr Lemery went to Vancouver where figures for the sale were discussed and agreed upon, and Mr Calvert received a commission in the amount of $17,500 on the said transaction. This commission was paid by the vendor although he did not list the property with any real estate agent.
Counsel for the appellant argued that the express intention of the participants was not to buy and sell the property but to develop it for the purpose of a long-term investment and that a perfect team composed of an architect, an industrial designer, a real estate agent and a businessman was put together to erect the said project on a perfect site, namely, the downtown waterfront area. He went on to say that in that respect they carried out a large number of investigations such as water and soil testing, checking the zoning by-laws, verifying the aesthetic values of the site by hiring a helicopter and taking movies. He referred the Board to a Supreme Court judgment — Thomas Campbell v MNR, [1953] 1 SCR 3; [1952] CTC 334; 52 DTC 1187 — to say that even though the express intention is important it is not conclusive and the course of conduct should also be examined. According to him, the individuals’ course of conduct was consistent with their development plans which had been approved by the city, but after efforts to obtain the necessary financing failed and also after the tight money situation in the country became apparent, Mr Davis, Mr Siddall and Mr Morrison agreed to sell their interests in Simodale to Mr Lemery. A document prepared by Mr Morrison and filed by the respondent reads in part as follows:
All shareholders remain “in” with the knowledge that the property will probably keep as a long term investment. If this is the case, I am prepared to stay “in” as an inactive shareholder, but I would suggest the eventual selling price of the property should be in the million dollar figure.
Control of the property be transferred to a maximum of two of the existing shareholders. This I feel would provide a more flexible arrangement to promote and develop the property. That is to say, one or two of the existing shareholders would agree to immediately buy out for cash the other two or three shareholders for their actual investment to date.
Counsel for the appellant claimed that the foregoing was not a suggestion to sell for a million dollars, but simply a statement to the effect that the participants were going to stay in and the eventual selling price should be a million dollars; that both Mr Davis and Mr Siddall indicated in their testimonies that there was never at any time any suggestion that Mr Morrison would buy the property for a million dollars. He also argued that Mr Morrison did not buy but agreed, within a 24-hour period following the date he arranged the meeting, to sell his interest for a few thousand dollars’ profit despite his suggestion that it was worth a million dollars. He suggested that Mr Morrison was inconsistent in his comment regarding the selling price of a million dollars since, three years later, he along with the others agreed to sell for the amount of money invested plus a small bonus of $5,000 each. He argued that Messrs Davis and Siddall knew that it was a very interesting piece of property and that it had been on the Victoria market for ten or twelve years and consequently was not the sort of thing you buy for a quick turnover; and that if the aforesaid persons disposed of their interests it was because they did not want to stay in in a minority position.
Counsel for the appellant further argued that, as suggested in the Supreme Court judgment (supra), it is not only the express intention but also the course of conduct that should be looked at and, according to the appellant’s course of conduct in the case under appeal, there is no real estate history because the participants were not speculators but professional men who were planning for their estates even though, after deciding that the complications involved in having the children own the shares were too great, they agreed to accept the suggestion that they buy a shelf company with general objects to suit their project.
After buying the interests of Messrs Davis, Siddall and Morrison in July 1968, Mr Lemery continued to make efforts to obtain financing. He discussed the problem with Mr Earle Larson of Western International Hotels, the prime principal hotel development company in Western North America, and learned about the $14 million complex to be erected in the same area in association with the Empress Hotel in Victoria. The said city could not absorb two such important hotel developments and shortly after this announcement Mr Calvert approached Mr Lemery in the circumstances already mentioned.
Finally, counsel for the appellant stated that the company objects are not important and what counts is not so much what the company has the power to do but what it does.
Counsel for the respondent argued that the waterfront piece of land of three acres in dimension in downtown Victoria was a unique piece of property because to obtain anything similar in that area would necessitate the demolition of existing buildings. He stated that all the testing that was done to establish its development potential had to be done because it was not a property that could stand undeveloped because of property taxes and the parking lot business was not sufficient to earn a reasonable income for the money involved.
Regardless of whether this property was to be developed by its owner or the owner contemplated the alternative of selling it, it had to be developed and counsel for the respondent submitted that the sale itself was indicative of the alternative possibility because after the announcement of the $14 million complex, the Simodale development potential did not die but the property which was acquired for $290,000 was sold for $600,000 and the new owner was going ahead with something similar to the proposed Simodale development. He also suggested that the association with Mr Davis provided the real estate know-how, and he referred the Board to Regal Heights Limited v MNR, [1960] SCR 902; [1960] CTC 384; 60 DTC 1270, to say that the frustration in that case was similar to the case at bar. He also referred the Board to Inland Resources Co Ltd v MNR, [1965] 1 Ex CR 313; [1964] CTC 393; 64 DTC 5257, and claimed that the obvious potential of the asset acquired in that case was similar to the potential of the asset under review.
Referring to the reply of one of the witnesses to the effect that there was no great risk in buying the property because it had potential, counsel for the respondent concluded by saying: “Exactly, it had potential for its development, for sale to somebody else to develop.”’
The present case is typical of the many real estate transactions made for a profit under the guise of a development which the promoters have no means, financial or otherwise, of realizing. It may have been a perfect team with respect to technical abilities, but there is no evidence to show that they had the financial means to realize such a project. They made many efforts to secure the necessary financing but it is entirely understandable that these well-known companies would not lend the required sums for the realization of such a project.
All participants in the project were people conversant in their own fields of endeavour and, therefore, knew the risks involved. It has to be noted that the lease (aforementioned) for this property was coming to an end and that something had to be done to make it once more conducive to producing income. In other words, this property was due for development on short notice. What really happened was that four individuals, each relying on his own abilities, made the land that much more attractive for an eventual buyer by making tests, carrying out research, advertising, etc, and then it was only a matter of waiting for a prospective buyer.
Furthermore, as is evident in the aforementioned document, one of the participants foresaw the procedure that was to follow and, accordingly, one or two of the shareholders were to buy the others’ interests in order to provide a more flexible arrangement to promote and develop the property — and is that not what really happened? A company cannot be judged by the frequency of its transactions but by its course of conduct and, in the present case, the appellant held the property for a very short period of time, ie the time needed to improve or enhance the value of the site and take the necessary steps to present it under the most favourable local conditions. Therefore, the said transaction was not in the nature of a long-term investment but was carried out for the purpose of realizing a profit at the earliest convenience.
The participants in this transaction, because of their respective professions, were well able to foresee a frustration in their project because they had no financial means of their own with which to realize the project and could not provide sufficient collateral from the land or other means to secure the necessary loan. The so-called “perfect team” knew for a certainty that they were going to be frustrated in their so-called “long-term investment” and that somebody else would have to develop the land after buying it at a much higher price.
The Board concurs in the respondent’s arguments and for the above reasons the appeal is dismissed.
Appeal dismissed.