Food City Limited v. Minister of National Revenue, [1971] CTC 325, 71 DTC 5211

Kerr, J.:—These two appeals were heard together on the same evidence.

The first appeal (B-3484) is from the assessment under the Income Tax Act for the appellant’s 1964 taxation year. The second appeal (B-3485) is from the assessment for the appellant’s 1967 taxation year.

The first appeal is in respect of land in Halifax, N.S., which will be referred to as the ‘Bayers Road property’’. The second appeal is in respect of land in Halifax referred to as the ‘ ‘ Piercey property ’ ’.

Each of the properties was purchased by the appellant and subsequently sold at a profit. The respondent included the profit in each instance as a profit from the appellant’s business in the year concerned, within the meaning of Sections 3, 4 and 139

(1) (e) of the Income Tax Act.

The appellant says that each of the properties was purchased for a store, supermarket or shopping centre* [1] development, without any intention to sell at a profit, and that each was sold when it became unsuitable for such development; that the appellant was not in the business of buying and selling properties, because it was never its intention to make a profit on the properties it sold; and that at no time did the company form any secondary intention sufficient to classify either of the transactions as an adventure in the nature of trade. The appellant says, also, that it was merely a vehicle by which its parent company, Sobeys Stores Limited, could conveniently deal with properties purchased for the latter’s supermarket development, the relationship between the two companies being such that for the purchase and sale of land such land when purchased was in effect a capital asset of Sobeys Stores Limited, which was not trading so far as the two subject properties were concerned.

It is essential to consider the relationship between the two companies and the objects and activities of Food City Limited in that relationship.

Sobeys Stores Limited had its origin in a small grocery store in Stellarton, N.S. Frank H. Sobey, a son of the owner of the store, caused Sobeys Stores Limited to be incorporated, and from its humble beginning the company has developed into a large supermarket chain in the Atlantic Provinces, with by now about 60 stores. Frank H. Sobey master-minded the expansion of the company for many years, being its president until 1960, but in the more recent years the time he has been able to devote directly to the company has become more limited, because of other extensive business activities, for he became president of Industrial Estates Limited (a Nova Scotia Crown Corporation) some 14 years ago, and he is also a director of Dominion Steel and Coal Corporation, The Nova Scotia Trust Company, and other large corporations. In 1960, his son, William MacDonald Sobey, became president of the company and he is carrying on the family tradition and enterprise. Frank H. Sobey is chairman of the Board of Sobeys Stores Limited and of Food City Limited.

In the course of its expansion the time came when Sobeys Stores found it advisable to issue debentures, and in that connection it entered into a Deed of Trust and Mortgage (Exhibit A-9) with The Nova Scotia Trust Company, as trustee, to secure the debentures and thereby mortgaged and gave a floating charge on all its real and personal property and assets, then owned or thereafter acquired. Sun Life Assurance Company was a debenture holder at all relevant times.

As its business expanded Sobeys Stores sometimes found it advantageous to have a supermarket constructed and developed on its land by some other company and to that end would transfer its title to the land to the developer, which in turn would erect buildings and then lease back to Sobeys Stores whatever Sobeys Stores wanted. A difficulty in this arrangement was the necessity, delay and expense of getting the property released from the Trust Deed and substituting other property for the property so released.* [2] This difficulty was avoided in certain cases by an arrangement under which a property for a prospective Sobeys Stores’ site would be initially purchased, not by Sobeys Stores but by Foord. Construction Limited, with money advanced by Sobeys Stores. Foord Construction is a wholly-owned subsidiary of Sobey Leased Properties Limited. The latter company had a rental agreement to lease stores to Sobeys Stores, but it is not a wholly-owned subsidiary of Sobeys Stores. Sun Life indicated its dislike of this arrangement in a letter of October 20, 1961 (Exhibit A-1). This led to a decision to form a subsidiary company to be wholly owned by Sobeys Stores. Food City Limited was accordingly incorporated in January 1962, principally to take title to prospective supermarket sites in its own name, but always under the direction of and for the purposes of Sobeys Stores and with money provided by Sobeys Stores, which had a line of bank credit that it used to put the other companies in funds to buy and develop properties.

All the issued shares of Food City are beneficially owned by Sobeys Stores. The same persons are officers and directors of both companies. They have the same auditors, accountants, solicitors and insurance consultants. They use the same banks. Food City has no permanent employees, no telephone listing, no office, cars or furniture; it makes use of Sobeys Stores’ offices, supplies and secretaries. Sobeys Stores’ staff keeps Food City’s books and performs other services at no cost to Food City. Apart from occasional revenues from rentals of properties while being held prior to development, sufficient only to take care of small expenses, Food City obtains all its needed money, including money to purchase properties, from Sobeys Stores without payment of interest. It has only a nominal bank account. Its principal expenses are taxes, insurance, and depreciation on its properties. Book and bank accounts, as between the two companies, are reconciled when money is paid or received. Food. City ffias never developed any property. All its purchases have: been for supermarket developments in which it was intended that Sobeys Stores would be a major occupant. Most of the properties subsequently sold by Food City were sold to Sobey Leased Properties for supermarket development and were sold at cost. The two subject properties and some others were exceptions to that rule. Food City’s purchases, sales and related business activities are planned, decided, determined and kept under review at executive meetings of Sobeys Stores.

The objects for which Food City was established, as set forth in its Memorandum of Association, include the purchase, sale, lease and disposal of land and buildings and the turning of them to account as may seem expedient.

The Bayers Road property consists of a block of land measuring 100’ x 150’, bounded on the north by a used car lot, on the east by Canadian National Railways land, on the south by a Petrofina Service Station, and on the west by the boundary of a proposed Kenneth Street. A parcel of land lies between it and Bayers Road, but there is a 30’ right of way running northerly from Bayers Road and along the western boundary of the subject land, giving access to it from Bayers Road.

Foord Construction bought the property in 1961, for Sobeys Stores with the latter’s money and obtained also a lease of a parcel of the C.N.R. land for parking purposes. The subject land is adjacent to the Bayers Road Shopping Centre, which by that time had been developed by a Mr. Butler. Dominion Stores had the first store there, and other stores followed. The area was residential. Zoning was commercial.

The subject land was regarded by Sobeys Stores as a good location for one of its stores, and although the Dominion Store would be a competitor it was thought that the Sobeys store would live off the overflow of customers from the shopping centre.

Butler and Dominion Stores disliked the prospect of a Sobeys store coming and Butler soon erected a makeshift wooden fence, made from packing cases or some such material, along the right of way adjacent to the subject land. Whether the fence actually crossed the right of way is not clear, but in any case it was unsightly and would be detrimental to the proposed Sobeys store. Sobeys took no action to have the fence removed and made no protests or representations to Butler about it. The reason given for not taking any action was that the Sobey people thought it preferable to get along on good terms with Dominion Stores and avoid trouble with Butler and his Shopping Centre. Sobeys Stores hesitated, in the circumstances, to proceed with its plans for that site, and did not reach the stage of applying to the City of Halifax for a permit to build on the land. There was evidence that some very preliminary drawings of the proposed development had been made by John Scott, a draughtsman in Sobeys Stores’ real estate department. Eventually the property was sold to the Butler interests.

F'oord Construction originally purchased the Bayers Road land in 1961 and transferred title to Food City in April, 1962. It was sold to Bayers Road Shopping Centre Limited in June, 1963. The appellant was in the field earlier to sell the property, for Food City and Foord Construction gave an option in the summer of 1962 to one Forbes MacDonald, of Glace Bay, to purchase the property for $50,000. A Halifax real estate firm was the go- between. The option was not exercised.

Food City purchased the property at a cost of $25,500 and a commission of $1,500 paid to one McKeage, and sold it for $50,000, realizing thereby a net profit of $23,000, which the respondent included in the appellant’s income as a profit from its business in its taxation year ending May 2, 1964.

The Piercey property is at the northwest corner of Almon and Robie Streets in Halifax. In May, 1959, when it was bought by Foord Construction, it consisted of several parcels of land known as 125-127-129 Almon Street and 710 to 724 Robie Street, with a 20’ wide right of way from Almon Street to the rear of the parcels fronting on Robie Street. It was purchased by Foord, with Sobeys Stores money, for $68,000 and transferred to Food City in September, 1962, for $72,000 after expenses of $4,000 had been incurred for demolishing buildings on the land.

When the property was acquired in 1959 the main highway entrance to Halifax was Kempt Road, which led into Robie Street near the Piercey property. The property was at a busy intersection and Sobeys thought that there were good prospects of an increase in residential population in the area and that it would be a good location for a food market store. William Sobey hoped to be able to acquire an adjoining property owned by McLellan sisters, for he favoured a shopping centre rather than a single store. Frank H. Sobey felt that a single food store would be good business and that the Piercey land would be adequate for such a store even without the McLellan land. There was a division of opinion between them as time went on regarding the value of the site for a Sobeys Stores’ development, and the matter was discussed at executive meetings from time to time. A sketch plan (Exhibit A-16) of a store for the Piercey property was prepared by John Scott in December, 1963. It was one of several sketches.

There were buildings on the Piercey property when it was purchased in 1959. The buildings were demolished in 1960 to free the land for store construction. Foord got rents from the buildings meanwhile. One of the buildings was attached to the McLellan home and its removal left an unsightly wall, which the McLellans complained about. Foord re-shingled the wall in response to the complaint. Sobeys Stores tried to buy the McLellan property. Sobeys’ real estate dealer in Halifax, J. G. DeWolf, was active on Sobeys’ behalf in that respect as early as 1960 and on into 1963. Sobeys’ solicitor in Halifax also tried. Their efforts were not successful.

Charles G. MacLellan, President and General Manager of A. E. Fowles Limited, which had a Ford Motor Dealership, testified that his company had property on Almon Street, near the Piercey land and the McLellan sisters’ land, and had built a showroom and service department on it in 1962, and also had other land a short distance away. His company tried hard to get the McLellan sisters to sell their land and also tried in various ways to get Sobeys Stores to sell the Piercey land, as the Fowles Company needed more land. In 1964 he wrote to Sobeys Stores asking if they would sell the Piercey property and he had a discussion with Donald Sobey in that respect. He got the impression that Sobeys still wanted to hold on to it in order to develop it. He also got friends to make overtures to Sobeys to sell to his company. The Fowles Company obtained the McLellan land in 1967 on a sealed tender bid after the death of one of the sisters. Meanwhile Foord Construction had leased the Piercey property, in January 1963, to Atlantic Renault Limited, automobile dealers, for a 3-year term, with an option to the lessee to renew the lease for 2 additional periods of 2 years each, subject to the following proviso :

PROVIDED HOWEVER that the Lessor may terminate this lease at the end of the three year term herein granted or at the end of the first two year renewal term (1) by giving to the Lessee a notice in writing respectively at least three months prior to the expiration of the three year term or three months prior to the expiration of the first two year renewal of its bona fide intention to sell the demised premises which intention is already evidenced by a bona fide agreement of sale or (2) gives notice that it will be erecting a permanent substantial building on the demised premises and has already. entered into bona. fide agreements for the construction. of the said building.

(Exhibit A-15).

The Fowles Company bought an assignment of the lessee’ Ss interest in the lease, and, having acquired also the McLellan sisters’ property, renewed its efforts to obtain the Piercey prop- erty and eventually was successful in. doing so, in the appellant’s 1967 taxation year, for $100,000.

Both William and Frank H. Sobey confirmed that the Fowles company had repeatedly tried from 1961 to 1962 on to purchase the Piercey land from Sobeys; and that both companies were trying to obtain the McLellan sisters’ property.

For various reasons Sobeys Stores delayed development of the Piercey property. A new highway, Centennial Drive, was constructed subsequent to the purchase of the property, and it provided another major entrance to Halifax and attracted passenger traffic and shopping trade from Kempt Road and Robie Street. By 1963 the area had also become more industrial and the residential construction that Sobeys had expected did not materialize. Dominion Stores were making an extensive enlargement of one of their stores about 4 mile away from the Piercey site, which would mean more competition for a Sobeys store on that site. There were also the efforts, unsuccessful, of Sobeys to obtain the McLellan sisters’ property; and indecision on the question whether a single store or a shopping centre should be built, somewhat dependent upon success or failure to obtain the McLellan property. Also, in 1963 and 1964 there was much talk about building a second bridge across Halifax Harbour. City Council favoured construction of the bridge in the north end of the city and the widening of Robie Street in that connection. Such widening would take part of the Piercey land and make the remaining land too small for a Sobeys store. Eventually Sobeys Stores abandoned its plan to develop the Piercey property and sold it to A. EK. Fowles Limited, as already stated.

Charles H. Vaughan, who was Mayor of Halifax for the terms 1957-60 and 1963-66 and who also was manager of the Halifax Shopping Centre, in which Sobeys Stores had a financial interest as well as a store, confirmed that in 1964 the city was seriously considering’ a scheme involving the construction of a second bridge across the harbour and related street improvements that would involve a widening of Robie Street and the taking of part of the Piercey land, and that he had discussed the matter with William Sobey and told him of the proposed scheme in that year. The proposal was not carried into effect and there was no expropriation of land or widening of Robie Street for that purpose, but City Staff had drawn plans for the street: improvements.

Exhibit A-45 is a list of some 40 properties sold by Food City in the period January 12, 1962, to May 3, 1969, and a further list of 8 properties sold in the period May, 1969, to March, 1971. As appears from the exhibit, most of the properties were sold at cost to Sobey Leased Properties Limited or Foord Construction for shopping centre and store developments. Several properties were sold at cost to other parties, including a property in the Town of New Glasgow sold to the Town for street purposes; one in Port Hawkesbury for a school; and one to James Houston, an employee of Sobeys Stores. The two subject properties, namely, the Bayers Road and Piercey properties, are shown there as sold at a profit. Also shown as sold at a profit were other properties, including one in Charlottetown purchased by Food City for $38,391 and sold for $55,000 to M. F. Schurman Co., which developed a shopping centre there and rented a store back to Sobeys Stores; one in Fredericton, bought for $196,025 and sold to the City of Fredericton for $375,000 as a site for a new City Hall, after plans for development of a shopping centre were frustrated; one in Halifax, bought for $31,786, as one of several parcels that Sobeys Stores hoped to obtain and combine, and sold to Olands for $43,000; one in Dartmouth, bought for $26,500 for stores development and sold after being held for some years for $41,360 to Toulon Construction after it became of no use to Food City for a store, other competing stores having come into being and the fronting street having been made a one-way street ; one in Hansport, bought for $6,423 and sold for $9,000 after it became surplus to Food City’s needs. There was also a sale of a property in Truro at cost, $60,000, to Zellers, which developed the property and rented a store back to Sobeys Stores; a sale in St. Johns at cost, $60,000, to Gelinas & Dabbin, for stores construction; and a sale in Halifax at cost, $17,000, to Capital Realties.

The profits of $23,000 on the sale of the Bayers Road property and $28,000 on the Piercey property were shown in Food City’s income tax returns as capital gains.

I accept fully, as correct and true, the evidence given by F. H. Sobey, W. M. Sobey and Merritt Crawford, who were the witnesses most actively concerned in the operations of Sobeys Stores and Food City, as well as the evidence of the other witnesses.

The evidence, as I appreciate it, establishes that in the relevant years Sobeys Stores was developing stores and shopping centres in various places and in accordance with its plans and requirements in that respect took steps to acquire lands as sites for such developments. The sites were being acquired for the sole purpose of constructing stores on them that would serve Sobeys Stores’ revenue-earning activities. Sobeys Stores had built-in financing resources through a line of bank credit and furnished the funds for acquisition of the sites and construction of stores on them by companies associated with Sobeys Stores in the latter’s scheme. To facilitate its said purpose Sobeys Stores caused Food City to be incorporated to be used as a means or instrument to acquire and hold the lands in its own name pending their development. All of the activities of Food City were directed and controlled by Sobeys Stores. Food City’s decisions, purposes and intentions were those that Sobeys Stores formed for it. Food City had no funds to acquire sites, except the funds that Sobeys Stores provided for that purpose by interest-free loans. The sites that Food City acquired were purchased, held and sold pursuant to Sobeys Stores’ directions.

The Bayers Road property and the Piercey property were acquired by Food City, as part of Sobeys Stores’ purpose and scheme, with the intention that Sobeys Stores would cause stores to be constructed on them as revenue-producing investments in the interests of Sobeys Stores. Buildings on the Piercey property were demolished to make way for development of the site. There was trouble with Butler in connection with the Bayer’s Road site. Events were such that development was delayed, and eventually Sobeys Stores decided, for reasons which in its business judgment it considered prudent and which I cannot hold to have been imprudent, that the lands would not usefully serve Sobeys Stores’ scheme and that the investments should be realized by sale of the lands to parties outside the Sobeys Stores’ organization.

It is true that Food City’s business was to buy and sell lands, which were not to be developed by Food City itself, and that a profit was made in its name on each of the Bayers Road and Piercey transactions. On that view, the respondent says that the profits were taxable income from a business of Food City and that the subject transactions were adventures in the nature of trade. In my opinion that view fails to appreciate the true nature of the matter. The view I have is that from beginning to end the two transactions were ventures by Sobeys Stores, using its wholly-owned subsidiary Food City as an instrument or machinery to carry out particular parts of such ventures. There can, of course, be trading or ventures in the nature of trade without an intention to make a profit. However, in the present cases there was no element of speculation in the purchase of the lands or in Sobeys Stores’ plans to develop them; there was a firm intention to develop them as revenue-producing investments and there was no intention to dispose of them, for profit or otherwise, other than in Sobeys Stores’ overall scheme for development of the lands by construction of stores and shopping centres in which Sobeys Stores would operate its own retail outlets and otherwise derive revenue from the developments. I do not think that the essential nature of the transactions as ventures of Sobeys Stores is negatived by the fact that implementation of the scheme involved purchase of the lands by Food City and an intention to sell them subsequently to one of the other companies that would carry out the construction and development of stores and related facilities.

Neither of the subject properties was purchased by Food City with a view to selling it at a profit. Neither was bought as part of a scheme for profit-making. Neither Food City nor its parent Sobeys Stores was carrying on a business of trading in lands for profit-making. In my opinion, neither transaction was an adventure or concern in the nature of trade, as contemplated by Section 139(1) (e) of the Income Tax Act, and the profits made on the ultimate sales of the properties were not income from a business within the applicable provisions of that Act, but were capital gains.

Therefore, the appeals will be allowed and the assessments made upon the appellant for its 1964 and 1967 taxation years will be referred back to the respondent for re-assessment on the basis that the profits arising on the sales of the Bayers Road property and the Piercey property were not profits from a business.

The appellant will be entitled to be paid by the respondent its costs of the appeals, to be taxed.