WALSH, J.:—These two actions in which the facts are identical were joined for hearing and the same Reasons for Judgment apply to both.
At the commencement of the hearing an Agreed Statement of Facts was filed together with the Tax Appeal Board record and the Examination for Discovery of both appellants which was taken as read into the record in its entirety. No further proof was made, The issue arises out of an appeal by the two appellants from a judgment of the Tax Appeal Board dismissing their appeals against assessments made by the Minister for the taxation year 1961 whereby $35,000 was added to the income of each of the two appellants arising out of a gain realized by them jointly in the amount of $70,000 from the sale of 190 common shares of D. & D. Holdings Inc., the assessments being made pursuant. to Sections 3, 4, and 139(1) (e) of the Income Tax Act.
The Agreed Statement of Facts admits the following :
1. Advance Holdings Inc. is a company duly incorporated and known as being the Dubrovsky family holding company.
2. On March 7, 1949, D. & D. Holdings Inc. was duly incorporated, with a capital stock of 300 common shares, held as follows:
Donolo group : 190 common shares Dubrovsky group : 110 common shares
Subsequently, a certain number of preferred shares were also issued and all of them were redeemed before 1959, so that at the beginning of 1960 there were only 300 common shares issued and held as mentioned above.
8. On March 25, 1949, Louis Donolo sold to Harry and Louis Dubrovsky two undivided fifths of a land, having an area of 4,500,966 square feet, which was located at the corner of St- Laurent and Crémazie Boulevards, in Montreal.
4. On March 25, 1949, Louis Donolo, Harry Dubrovsky and Louis Dubrovsky sold to D. & D. Holdings Inc. the said land having an area of 4,500,966 square feet.
5. On December 5, 1952, Harry and Louis Dubrovsky transferred their 110 common shares of D. & D. Holdings Inc. to Advance Holdings Inc., their family holding corporation.
6. From 1949 to 1954, D. & D. Holdings Inc. sold most of the land, after having subdivided it in lots, so that in 1955 the only portion of the said land remaining in the stock-in-trade of D. & D. Holdings Inc., was a parcel of land having an area of 31,477 square feet which Was located right at the corner of St-Laurent and Crémazie Boulevards.
7. By Agreement dated July 29, 1960, Marc Donolo, duly authorized, sold to Harry and Louis Dubrovsky the 190 common shares of
D. & D. Holdings Inc., held by the Donolo group.
8. By Agreement dated July 29, 1960, Advance Holdings Inc. sold its 110 common shares of D. & D. Holdings Inc. to Caracas Investment Corporation.
9. By Agreement dated October 30, 1961, Harry and Louis Dubrovsky sold their 190 common shares of D. & D. Holdings Inc. to Caracas Investment Corporation, so that, at this date, all the common shares of D. & D. Holdings Inc. were owned by Caracas Investment Corporation.
10. The gain realized by Harry and Louis Dubrovsky from the sale of the said 190 common shares of D. & D. Holdings Inc., being an amount of $70,000, has been taxed 50/50 in the hands of Harry and Louis Dubrovsky and it is this amount we are concerned with in these appeals.
The issue to be decided is whether the transaction whereby the appellants sold 190 common shares of D. & D. Holdings Inc. to Caracas Investment Corporation on October 30, 1961 for $146,000 which shares they had acquired by agreement dated July 29, 1960 from Mare Donolo for $76,000, thereby realizing a profit of $70,000, constituted a venture in the nature of trade or whether the gain so made was capital gain in the hands of the appellants as they contend. Other considerations. entered into the purchase and subsequent sale of the shares but we need not go into these details as the parties have agreed that the gain realized was $70,000.
It is necessary, however, to go in some detail into the background of the two Dubrovsky brothers, the appellants, their relationship. with the Donolo family, and to Edward Reichman and the nature of the business of D. & D. Holdings Inc. and Advance Holdings Ine.
On March 7, 1949 D. & D. Holdings Ine. (hereinafter referred to as “D. & D.’’) was incorporated with 190 common shares being issued to the Donolo family group and 110 common shares to the Dubrovsky family group which included the two appellants. Immediately thereafter, Louis Donolo and the two appellants sold to the company a large area of land amounting to 4,500,966 square feet at the corner of St. Laurent and Cré- mazie Boulevards in Montreal for preferred shares, all of which preferred shares were redeemed before 1959. While the company was intended to be an operating company and did put up some duplexes and planned some industrial buildings in the initial stages of its operation, it found this unprofitable and gradually sold off most of the land, being taxed on these sales. The shareholders received substantial dividends from time to time, and capitalization of surplus and redemption of preferred shares took place.
On December 5, 1952 the Dubrovsky shares in D. & D. were transferred to Advance Holdings Inc. which was a family holding corporation to the Dubrovsky family in which the six brothers and sisters all had an equal interest. Their interests in other companies as well as D. & D. were put into Advance Holdings Ine. By 1955 the only land remaining in the stock-in- trade of D. & D. was a parcel of land covering an area of 31,447 square feet located at the corner of St. Laurent and Crémazie Boulevards, which corner property was of key significance in what eventually became a $15,000,000 development, the Place Crémazie.
By 1960 the area was developing rapidly and, according to appellants’ version, some discussion took place as to what to do with this valuable parcel of land. They allegedly wished to put up a building of modest size on it, perhaps costing in the vicinity of $700,000 or $800,000, which would involve a cash outlay of about $200,00 above the mortgage. The Donolo family was not interested in constructing a building and wished to dispose of its interest. Furthermore, according to the appellants, the other members of the Advance Holdings Inc. group were not interested in building.
Appellants claim that lengthy discussions had been taking place for about a year between them and Mare Donolo with respect to the purchase of his 190 common shares of D. & D. but the only written agreement produced is that of July 29, 1960 whereby they purchased these shares for the price of $76,000 including all loans payable to Mare Donolo in the amount of $12,942.04. On the same date, July 29, 1960 Advance Holdings Inc. of which appellant Harry Dubrovsky was Vice-President and Director and with which both appellants clearly had an intimate association, this being their family holding corporation, sold its 110 common shares in D. & D. to Caracas Investment Corporation, a corporation allegedly controlled by Edward Reichman, of whom more will be said later, for the price of $80,000, including 11/30ths of all loans payable by the company, for the price of $80,000.
It is clearly no coincidence that these two agreements were executed on the same date and were drawn in the light of each other. For example, both agreements refer to a liability of $1,963.75 for commissions payable appearing in the balance sheet as not being owing and that should the company be forced to pay same, the vendor will reimburse the purchaser accordingly. The sale of 110 shares to Caracas Investment Corporation contains a clause whereby the vendor (Advance Holdings Inc.) declares that it has caused to be advanced by way of loans to the company the necessary funds to pay the liabilities appearing on the balance sheet as follows:
| Mare Donolo | $6,942.04 | |
| Accounts payable | I | 5,675.90 |
which loans constitute part of the sum of $25,000 referred to (11/ 30ths of which were included in the sale), and similarly, the sale from Mare Donolo of 190 shares to appellants contains a statement that he has advanced by w ay of loans to the company, in addition to what appears in the statement of May 31, 1960, the sum of $6,000 and that the said sum together with the sum of $6,942.04 constitutes the amount of the loans transferred thereunder.
It is of interest to note that Advance Holdings Inc. obtained more for the 110 shares which it sold to Caracas Investment Corporation than the appellants paid for the 190 shares they purchased the same day from Mare Donolo, allegedly as the result of a previously arranged agreement. It is also of some interest to note that Edward Reichman testified that when he purchased the 110 shares he had no knowledge that on the same day the appellants with whom he had dealt in his purchase from Advance Holdings Ine. were themselves purchasing the other 190 shares of the company from Mare Donolo acting on behalf of the Donolo family.
It is necessary. to go to some extent into the relationship between the appellants and Edward Reichman. They had, apparently, before the sale transactions, some discussions with him about developing the property. Harry Dubrovsky in his examination before the Tax Appeal Board indicated that there had originally been’ no discussions with Mr. Reichman on the sale of shares. He said (at p. 115) :
. . . It was always on a participation basis, if we could develop this particular property, the same that we had originally in mind with the D. & D. Holdings.
It appears, however, that Mr. Reichman had more ambitious plans than their idea of putting up a building worth $700,000 or $800,000 on the property. He visualized the Place Crémazie, which eventually cost some $15,000,000 and for which, in addition to other property, it was necessary for him to acquire control of this particular parcel of land owned by D. & D. The appellants had known him since about 1954 when he first came to Canada. He was an experienced builder and constructed between 150 and 200 buildings in the Montreal area. He had rough sketches prepared of the Place Crémazie development but had another series of sketches for public consumption showing the development as about one-third of its final size as he was afraid that he would be unable to persuade anyone that the property’s development was practical at that time. In his evidence he explained (at p. 126) :
. I had it in sketches at the same time for public consumption, I printed half or one-third of its final size because I felt that if I will show my whole dream, it would be completely dismissed. So, I presented to the public as a reduced one and I presented for Mr. Dubrovsky even a smaller one, you see.
He explained further that in order to obtain potential tenants, the bigger you show a project to be the better, but investors are more cautious and have to be sold on the basis of a smaller project, so he does not always disclose to parties with whom he is dealing what he, as a developer, has in mind. He said that. Louis Dubrovsky was practically a neighbour of his so. they met quite. frequently . and on many occasions we spoke about this, I was definitely interested, they had the key to my development which I was not disclosing to them that it is the key to my development, ..,.’’: (examination of Edward Reichman, p. 128). He was President of Caracas Investment Corporation though he did not. have a controlling interest in it and, in addition to the land owned by D. & D., he also had to, acquire property from the Toronto Dominion Bank, the Dominion Stores, the provincial Government and the federal Government and was negotiating individually with all of them to complete his land assembly. At the same time he was trying to interest participants in his projected development which would cost about $15, 000, 000. He testified (at Pp. 132) :
. . ., so I have a two-way or three- -Way negotiations with Dubrovsky; one was concerning the land and the other negotiations which I also had is to get them interest in my project. So, let us say, I would have been prepared to take in this land and exchange it for participation in a new project and they showed interest in my development.
Q. Did you offer to buy the piece of land only? A. Yes.
Q. What did Mr. Dubrovsky tell you? A. That he wouldn’t sell because he is rather interested in the development of it. This is a detail which . .
Q. . . . Would you say that the purchase of the Advance Holdings shares was one of the steps you took to get what you wanted to have, primarily the land? A. Of course.
He explained later that he jumped at the opportunity of acquiring part of the shares because he felt that eventually he would be able to convince the Dubrovskys either to sell the balance or to participate in his development: When he had offered to buy the whole land they did not want to sell but suggested that he come to them with some other ideas.
While this evidence is interesting, the intentions of Mr. Reichman, whatever they were, cannot affect the taxability of the present appellants whose intentions we must examine, but it can tend to refute or corroborate their evidence as to their own intentions. Louis Dubrovsky in his Examination for Discovery insisted that their negotiations with the Donolo family resulted in their acquisition of the Donolo shares a year before they commenced negotiating with Reichman for developing the property and that they had actually acquired the whole of the Donolo family stock before the actual deed confirming the agreement was executed. They sold the Advance Holdings shares to Reichman because the family did not want to go into the development of the property but he and his brother, who did, retained the Donolo family shares. When Reichman started talking about a fifteen storey building on the corner instead of a four to six storey building which they had discussed with him in the beginning, they said that they did not wish to invest in a project of that size. He was not interested in a smaller development so they agreed to sell him the rest of their shares. This witness seemed to feel that even though he and his brother held the majority of the shares, they could not force Reichman to. proceed with the sort of project they had in mind. His evidence is very confused as to whether Reichman had first offered to buy the land before eventually buying the shares or whether he and his brother would have been willing to sell the land rather than the shares to anyone (pp. 57-64, Examination for Discovery).
While it may well be that the appellants originally had some intention of inducing Reichman to go in with them in the joint construction of a small building on the property in question, it is evident that they never came anywhere near a meeting of the minds with him. He was very interested in a major development for which he had to acquire the land in question in one way or another, and, while he would have been happy to take them into his major development with him in order to obtain the land, they had no interest in such a development. Moreover, although they retained control of D. & D. up to the time of their sale of the 190 shares to him, they apparently did not wish to proceed with their smaller development alone, nor had they at any time during the eleven-year period from 1949 to 1960 while the company held the property, attempted to develop it.
The appellants are very experienced real estate developers and have been involved in many different corporations even though their principal business is that of lumber dealers, and it appears to me inconceivable that they would not be aware of the fact that an asset such as land owned by a corporation can be disposed of by direct sale of it by the corporation, but that the same end can be attained, and frequently with different taxation consequences, by disposing of all the shares of the corporation of which this property is the sole asset. It also seems inconceivable that such experienced businessmen would not be well aware of the important advantage of owning the controlling block of shares in a closely held company and the difficult position in which this puts the minority shareholder or shareholders. They may well have had a perfectly sincere intention of developing the property in conjunction with Reichman by putting up a small commercial building on same, but I cannot conceive that they did not appreciate that if this plan fell through (and it was certainly not sufficiently advanced at the time of their acquisition of the 190 shares from the Donolo family to indicate this to be an unlikely possibility) they could still always sell these 190 shares to Reichman (or Caracas Investment. Corporation through whom he dealt) at a substantial profit as his holding of 110 shares, which they arranged for him to acquire at the same time as they acquired their 190 shares, placed him in the position of being forced to acquire their shares in order to get control and proceed with his development plans in the event that he would not go along with theirs. They were also well aware of his desire to acquire control of this key parcel of land, and that if they refused to sell same to him as such, he could only obtain it by acquiring control of the stock of the corporation which owned it.
Many of the arguments raised by the parties are, I consider, irrelevant to the determination of the present issue and, hence, I need not go into the jurisprudence cited in support. of these arguments. The respondent is not seeking to tax appellants on this transaction because of a long background in dealing, through corporations, with real estate, so there is no question of confusion of their personal background with that of these corporations, which have a separate corporate personality. Neither are they being taxed as dealers in stocks or securities. Nor is this one of the category of cases where a corporation was specifically formed for the purpose of selling its shares and thus attempting to avoid taxation on the land held by the corporation.
D. & D. had been in existence since 1949, selling real estate and being taxed on the profits of such sales and normally the sale of its shares by the shareholders would not attract taxation as a venture in the nature of trade. No attempt was made by the Minister, apparently, and I believe very properly so, to claim any tax from the sale of the 110 shares by Advance Holdings Inc. to Caracas Investment Corporation, nor on the sale of the 190 shares by Marc Donolo to the appellants. In both cases the shares had been held for some time and there was nothing to indicate that they had been originally acquired with the intent of reselling them at a profit. The cases holding the gain on disposal of shares under such circumstances not to be taxable would seem to apply to these sales.
The only question that we are concerned with is whether at the time the appellants acquired the 190 shares in D. & D. from Mare Donolo they had any intent whatsoever that if they could not develop the property owned by the company which they now controlled, they would nevertheless be able to resell these shares at a profit. One of the negative criteria set out by Thorson, P. in M.N.R. v. James A. Taylor, [1956] C.T.C. 189 at 190, was: “The singleness or isolation of a transaction cannot be a test of whether it was a venture in the nature of trade . . . it is the nature of the transaction, not its singleness or isolation that is to be determined.”
Noël, J. in dealing with the doctrine of secondary intent stated in Demers, Racine and Nolin v. M.N.R., [1965] D.T.C. 5098 at 5103:
To give to a transaction which involves the acquisition of capital the double character of also being at the same time an adventure in the nature of trade, the purchaser must have in his mind, at the moment of the purchase, the possibility of reselling as an operating motivation for the acquisition; that is to say that he must have had in mind that upon a certain type of circumstances arising he had hopes of being able to resell it at a profit instead of using the thing purchased for purposes of capital. Generally speaking, a decision that such a motivation exists will have to be based on inferences flowing from circumstances surrounding the transaction rather than on direct evidence of what the purchaser had in mind.
In the case of Ralph K. Farris v. M.N.R., [1963] C.T.C. 345, which dealt with the disposal of certain oil permits. which had been acquired by the appellant who, having disposed of 80% of his interest had retained 20% which he claimed he intended to retain but for a very generous offer received from a prospective purchaser. Kearney, J. held, at p. 356 :
I do not doubt that the appellant had some intention of retaining a 20% interest, but I think this is a case where the doctrine of alternative intention which has been followed in this Court as a result of Regal Heights Ltd. v. M.N.R., [1960] S.C.R. 902; [1960] C.T.C. 384, must prevail.
A person may have, I think, different degrees of intent which may vary from wishful thinking to a firm resolve.
In the case of Ben Arthur Shuckett v. M.N.R., [1965] C.T.C. 196, Jackett, P. stated at p. 200:
Having. regard to his background in real estate transactions and to his vague and evasive way of answering many of the questions put to him on cross-examination, as well as my conviction, having regard to the evidence as a whole, that the appellant recognized in the situation that faced his builder-clients a very favourable opportunity to acquire properties that, having regard to his experience, he must have known would almost certainly become more valuable with the passage of time, I am of opinion that one of the reasons that moved the appellant to acquire these lots in 1951 was a hope and expectation that he could resell them at a profit. In any event, I am not persuaded by the evidence that the appellant has discharged the onus of showing that such was not one of such reasons.
In the leading case of Regal Heights Limited v. M.N.R. , [1960] S.C.R. 902; [1960] C.T.C. 384, where a group of persons formed a partnership and purchased certain lands for the purpose of developing a shopping centre and later incorporated the appellant company, transferring the property to it, but subsequently, being unable to negotiate a lease with a major department store, abandoned the shopping centre idea and disposed of the holdings of the company at enhanced prices resulting in profit for the company, it was held by the majority judgment (p. 390) that, as found by the trial judge:
[the promoters and the company] failed to promote a shopping centre and they then disposed of their speculative property at a profit. This. was a venture in the nature of trade and the profit from it is taxable within the meaning of Sections 3, 4 and 139(1) (e) of the Income Tax Act. . _. there is no analogy between the sale of long-held bona fide capital assets . . . and the realization of a profit from this speculative venture in the nature of trade. . . .
Judson, J., in rendering judgment, said at p. 905 [388] :
There is no doubt that the primary aim of the partners in the acquisition of these properties, and the learned trial judge so found, was the establishment of a shopping centre but he also found that their intention was to sell at a profit if they were unable to carry out their primary aim. It is the second finding which the appellant attacks as a basis for the taxation of the profit as income. The Minister, on the other hand, submits that this finding is just as strong and valid as the first finding and that the promoters had this secondary intention from the beginning.
In the case of Hill-Clark-Francis Limited v. M.N.R., [1963] S.C.R. 452; [1963] C.T.C. 337, where the company, in order to protect its sources of supply of lumber, got an option to purchase the shares of a supplier which was in financial difficulties for $50,000 and two months later when it received an offer of $160,000 for these shares from a third party it exercised its option and resold the shares, it was held that this was not simply a purchase and sale of shares since the company had not carried out its plan to make the supplier a subsidiary, so that both the purchaser and sale of shares acquired a trading character. In this case the appellant had given up its right to receive further lumber from its supplier in reselling the shares, thereby frustrât ing its original intent of purchasing them to maintain its source of supply.
In the case of Ronald K. Fraser v. M.N.R., [1964] 8.C.R. 657 ; [1964] C.T.C. 372, some experienced real estate operators bought four parcels of-land to build a shopping centré and apartment houses for investment purposes and sold the land for the apartment houses to one company which they formed and that for the shopping centre to another. The construction of the store was started but, before it was finished, they sold all their shares of this corporation and subsequently sold all their shares in the other corporation. It was held that their intent was to make a profit, and if they could not make it in one way they would then make it in another way and that the sale of shares rather than the sale of land was an alternative method for putting through a real estate transaction. This case goes quite far in that the construction of the shopping centre had already actually been commenced, whereas in the present case nothing had taken place to advance the appellants’ alleged intention of constructing a building for investment purposes on the property in question, other than some preliminary discussions and negotiations.
I do not consider that appellants can successfully contend that this was an isolated purchase and sale of stock by them as an investment since the significance of acquiring 190 shares of D. & D. on the very same day that they arranged for Advance Holdings Limited, in which they each had a one-sixth interest, to sell 110 shares of D. & D. to a third party, Edward Reichman, knowing at that time of his great interest in the property owned by the company, cannot be overlooked. Unless we accept their evidence that their one and only purpose was to enter into development of the property with Reichman and that they had no alternative intention, and this I do not accept for the reasons given, then this purchase of the shares and the sale of them some 15 months later at a substantial increase in price constitutes a venture in the nature of trade and hence is taxable.
I have read the judgment of the Tax Appeal Board in this matter and agree not only with its conclusions but with the reasons given therein and see no reason to set it aside. The appeal ‘will therefore be dismissed with costs and the assessments of the two appellants for the year 1961 confirmed.