Maurice Boisvert:—This appeal is from assessments dated June 27, 1968 involving profits realized during 1966 and 1967.
The appeal was heard at Quebec City, Province of Quebec on February 8, 1971 by the undersigned, at the time Assistant Chairman of the Tax Appeal Board as it was then constituted, and in accordance with the provisions of the Income Tax Act then applicable (RSC 1952, c 148).
The appellant is a company incorporated on May 21, 1963 under the Quebec Companies Act. Its capital stock was $400,000 divided into 6,000 common shares with a face value of $10 each, and 3,400 preferred shares with a face value of $100 each.
Four Quebec businessmen, each with an annual income of $100,000, subscribed respectively 500 common shares and 50 preferred shares which they paid; in addition, each of them agreed to advance the appellant $15,000. The four shareholders had therefore invested the sum of $100,000 in the company’s capital stock, and had advanced the sum of $60,000.
On June 25, 1963 the appellant bought 466,000 square feet of land in Charlesbourg parish, in the Quebec City suburbs, for $160,000 in cash. This land had been detached from a larger piece of land on which Steinberg’s grocery stores were carrying on their large-scale business. The land that had been purchased had been bought with the set intention of building a large housing complex; this would not have been detrimental to Steinberg’s operations — rather the contrary. The appellant’s representatives set to work, first to obtain a loan from the Central Mortgage and Housing Corporation, which viewed the planned housing development favourably; second, to enter into negotiations with the Saint-Rodrigue school board for the purpose of setting up a school and playground, as required by the CMHC; third, to have the Municipality of Charlesbourg plan the streets and necessary services; and fourth, to have a surveyor peg the boundaries of another tract of land with which to extend the project. Accordingly, plans were drawn up for the construction of dwellings, the laying of water mains and sewers and the grading of the land. Finally, there was a detailed study of construction costs, income, profits from rents, and everything proved satisfactory. The appellant had the means for carrying the project through but for a problem of surface water, which required the participation of the cities of Charlesbourg and Quebec, and the Quebec government. This put a stop to the project. Over a million dollars would have had to be spent to solve the problem.
As it was becoming clear that the project was falling through because of the surface water problem, the appellant signed a promise to sell on August 21, 1964. The sale was concluded on February 6, 1965, for the price of $257,000. The net profit realized was $85,649.20. This profit was taxed and is the subject of the present appeal. The appellant claims that the sum is a capital gain and consequently non- taxable, while the respondent adamantly contends that it is a business profit, the appellant having engaged in a business as defined by paragraph 139(1 )(e) of the Income Tax Act (RSC 1952, c 148).
There may seem to be some grounds for the respondent’s claim, since from the date of the appellant’s incorporation up to March 18, 1966 two sites were bought and sold, and one building, known as Edifice Ferland, was also bought in April 1964 and sold in October 1965. The three transactions, with the necessary details, are set out in the table below:
(TRANSLATION)
Statement of real estate transactions
Place Louisbourg
June 25/63—Purchase of land $160,529.20
Project plans 2,500.00
Surveying 90.00
Notarial costs 231.60 $163,350.80
Feb. 6/65 —Selling price 257,000.00
Less: Commission 8,000,00 249,000.00
Profit on sale of land $85,649.20
Terms of sale
Selling price 257,000.00
Cash 10,000.00
Balance 247,000.00 payable in 4 annual
instalments of 90,000.00 (200,000.00) payable in 1 annual
payment of 47,000.00 ( 47,000.00)
P.S. Promise of sale signed August 21, 1964
Calculation of reserve according to section 85-B
May 31/65— 85,649.20 x 247,000.00 = 82,316.54
257,000.00 =====
May 31/66 85,649.20 x 181,565.80 = 60,505.70
257,000.00 =====
May 31/67 85,649.20 x 150,000.00 49,989.80
257,000.00 == Confederation Life mortgage assumed
Un- Initial Cost Accumulated depreciated Edifice Ferland Land Building Depreciation Balance April 3/64—Purchase $8,500.00 $239,000.00 $239,000.00 Additions 877.90 877.90 239,877.90 239,877.90 May 31/64—C.C.A. 11,950.00 11,950.00 Balance $8,500.00 $239,877.90 $11,950.00 $227,927.90
May 31/65—C.C.A. 11,396.40 11,396.40 Balance 8,500.00 239,877.90 23,346.40 216,531.50 Additions 25,439.10 25,439.10 $8,500.00 $265,317.00 $23,346.40 $241,970.60 Oct. 5/65—Sale Selling price 450,000.00 Less: Commission 15,000.00 $435,000.00 8,500.00 426,500.00 Total profit $184,529.40 Recovered in C.C.A. 23,346.40 Surplus over initial cost 161,183.00 $184,529.40 Terms of sale Selling price $450,000.00 Cash 100,000.00 Balance $350,000.00 by the purchaser 350,000.00
Place des Chênes Shopping Centre
Un Un- Initial Cost Accumulated depreciated Land Building Depreciation Balance Aug. 9/63 Purchase $45,543.00 Construction 3,037.40 $305,007.65 305,007.65 48,580.40 305,007.65 305,007.65 May 31/64 C.C.A. $15,250.38 15,250.38 Balance 48,580.40 305,007.65 15,250.38 289,757.27 Additions 30,881.31 30,881.31 $335,888.96 $15,250.38 $320,638.58 May 31/65 C.C.A. 16,031.93 16,031.93 Balance 48,580.40 335,888.96 31,282.31 304,606.65 Mar. 18/66 Sale Selling price $375,000.00 48,580.40 326,419.60 Recovered in C.C.A. $21,812.95
If we analyse the statements made by the witnesses before the Board, we can see that no reliance can be put on appearances.
The witnesses have all said what their intentions were and there is no reason to doubt their testimony. Very active in business, they were deriving, from their occupations and investments, considerable incomes which they used to turn their original plans to good account. Their actions are not those of real estate speculators. Moreover, sale of the properties was not part of the appellant’s original intentions when the purchases were made. First, at the time of the purchases the properties and their surroundings did not lend themselves to speculation. There was no likelihood of rapid development. A person does not throw his money away just for the pleasure of doing so. Furthermore, nothing obliges a person who wants to invest in real estate, to buy more than one property or one building. The fact that the appel- lant bought more than one property does not change the nature of the transactions, unless there is proof that the properties were bought to be resold. Again, a person who speculates in real estate does not invest hundreds of thousands of dollars in construction for the mere pleasure of spending money. A person buys real estate either to resell with a profit, or for future rents and income. Place Louisbourg was purchased on June 25, 1963. It was a well-planned project. Everything was done to put it into effect. Because of unforeseen circumstances, the appellant was unable to pursue it. Was the appellant obliged to wait for years before seeing its project bear fruit? Once it became clear to the investors that they would have to wait for years Or pump a million or more dollars into the venture, the prospects of a profitable investment had vanished. The appellant had invested $265,- 317 in the Ferland building. After a period of operation this building also proved not very profitable because of the difficulty of finding tenants and because of a deterioration of the area where it was built. The money invested was largely becoming dormant, with the result that the appellant lost any hope of obtaining a return on its investment.
Moreover, when the insurmountable obstacles facing the Place Louisbourg project were discovered, the appellant had begun to build Place des Chênes. To convert the property into an income-yielding concern it spent $305,007.65 in order to purchase the land and build a shopping centre. The appellant kept this property for almost three years at a loss.
In these circumstances, what was the appellant to do with his properties? Refuse to sell them and let the invested capital stagnate from fear of the Tax Department? Offers for sale were not solicited ana there was no advertising campaign. Furthermore, the Place Louisbourg land was not subdivided with a view to sale or to attract development other than that envisaged by the promoters.
I am of the opinion that Place Louisbourg and Edifice Ferland were sold to realize capital which had been invested by the appellant with a specific end in view that had proved impractical. If the purchasers intended to use the properties purchased from the appellant for other purposes and using other means than those available to the appellant, that was not its concern.
To be caught between losing one’s money and recovering it at a profit does not constitute speculation, any more than the hope of profit cannot presuppose a venture in the nature of trade.
It should be kept in mind that the investments continued in the form of sales on credit, the interest on which was still a return on the capital originally invested.
Before concluding and allowing the appeal, I would like to cite Wheatcroft, in The Law of Income Tax, Surtax and Profits Tax, on page 1204, number 1-422:
It is, however, well established that a company is as capable as an individual of owning property without becoming a trader and it is the nature of its operations, and not its capacity, which finally determines whether it carries on a trade. Its capacity, as expressed in its memorandum, may, however throw light on the nature of its operations and it is therefore usual for a company, whose promoters do not desire it to be treated as a trade, to be formed with a memorandum which makes it clear that profits made on changes of investments are to be treated as capital and that capital profits may not be distributed. . . . The form of the memorandum is not, however, conclusive because the question is not what business the taxpayer professes to carry on but what business does he actually carry on.
The application of the principles set forth above has been recognized by Canadian courts. It will suffice to cite Regal Heights Ltd v MNR [1960] SCR 902; [1960] CTC 384; 60 DTC 1270, in which on page 907 [390, 1272] Mr Justice Judson stated:
Throughout the existence of the appellant company its interest and intentions were identical with those of the promoters of this scheme. One of the objects stated in the memorandum of association of the company was
“To construct and operate apartment houses, blocks, shopping centres and to otherwise carry on any business which may be conveniently carried on in a shopping centre.”
Nothing turns upon such a statement in such a document. The question to be determined is not what business or trade the company might have carried on but rather what business, if any, it did in fact engage in.
In the present appeal all the promoters were heard as witnesses and all swore as to their intentions, which were clearly defined and fully motivated. None of their intentions or motives suggest that they planned to engage in a business or undertake a venture of a commercial or speculative nature.
For the above reasons, I am of the opinion to allow the appeal.
Appeal allowed.