MACDONALD, C. J.B.C.:—The Hastings St. Properties Ltd. was incorporated with objects inter alia to buy and sell land. There were only five shareholders and the paid-up capital of the company was the sum of $5. Their principal transaction was the purchase of a piece of property on Hastings St., Vancouver, which was shortly afterwards re-sold at an advance of $30,000. To enable the company to buy this property each of the five shareholders advanced monies aggregating $40,000. the price of the property and the company entered into an undertaking with them in consideration thereof to pay to them the profits which should be realized on a re-sale. The assessor fixed the company’s income after the re-sale of the property aforesaid at the sum of $26,393. approximately the profits made by the resale of it and levied the tax complained of thereon. The Court of Revision held that the said profits were not income of the company which could be taxed under the Taxation Act, R.S.B.C. 1924, c. 254, and amendment thereto. The Court of Revision said that the question was whether the company should. be allowed as deductions from their gross income the amount agreed to be paid to the five shareholders as money expended in producing "'the income’’ and decided that after payment of the profits to the five shareholders there was no taxable income.
In my opinion the money supplied by the five shareholders as aforesaid to enable the company to buy the said property was a loan of capital ; that it was such is evidenced by a resolution (not amongst the exhibits but mentioned by witness R. Kerr) of the company authorizing the borrowing of it. If these profits are treated as equivalent to interest they fall within the provisions of the Taxation Act. This Act was amended in some respects by 1925 (B.C.), c. 54. Section 44 of the main Act, as so amended enacts that the expenses incurred in the production of the income may be deducted from the gross income but that no deduction by way of expenses shall be made for (b) any interest on capital. This subsection is re-numbered (e) in the amended Act.
Subsection (c) of the last mentioned Act allows to be deducted, "‘Interest on moneys borrowed from without the Province, either by way of loan, advance, or through a bond or debenture issue, unless a separate return is made therefor and income- tax paid thereon at the rates provided under sec. 52, except that the maximum rate shall not exceed four per centum.’’ Interest on money borrowed from without the Province therefore may be set off against the cost of producing the income conditionally upon the making of a separate return and if the income tax be paid by the person or persons to whom the interest was paid. Subsee. (f) deals with interest which shall not be set off against the cost of production of the income if advanced by a ‘‘parent, subsidiary, or associated: corporation. ‘
The Court of Revision thought that under said subsec. (e) capital was not to receive its widest signification because of the references to interest in other subsections, in other words sub sec. (e) was practically rescinded by construction of the other sections. Now the words of subsec. (e) are clear and explicit. Interest on capital is not to be set. off against cost of the production of the income. The other subsections, if indeed we may look at them at all for the purpose of cutting down the wording of subsec.
(e) refer it is true to interest and upon certain conditions being performed that interest may be set off against the gross income. But I think the proper construction is that interest other than interest on capital may be set off conditionally.
The Legislature having dealt specifically with interest on capital then proceeded to enact respecting other interest, not interest on capital. All these provisions are capable of being given effect to notwithstanding any suggested conflict. The Court if possible is to construe the statute so as to give effect to all its provisions and therefore if I am permitted to construe subsec. (e) by reference to other sections I am forced to the conclusion that the other sections are not in conflict with subsec. (e) and that therefore said subsec. (e) stands as a direct provision against the set-off of interest on capital. Subsec. (f) I think. has no real bearing upon the question at all and the fact that shareholders are not mentioned in it does not imply that because they are lenders of capital and are not mentioned in subsec. (f) the company shall be entitled to set off interest in contravention of the plain words of subsec. (e). Now while the profit may be looked upon as the consideration for the loan it is not at all events what is popularly called interest. It may therefore not be affected by subsec (e) of sec. 44. I must therefore enquire whether or not the transaction was an illegal evasion of the Taxation Act. It seems to me that if this transaction is legal that all companies by resorting to the like methods may evade the payment of income tax. They may carry on their business on borrowed capital under an agreement such as the one in question here and thus defeat the Act. They may claim the profit made by their company under such an agreement and thus leave nothing for the tax collector. I think a transaction which leads to this result must be regarded as an illegal evasion of the Act, and I hold this transaction to be such. The only object of the scheme as I see it is to evade payment of income tax. Instead of the shareholders supplying the company with capital and receiving their profits if any in dividends they-may set up a dummy company without capital and use it to buy property for itself with borrowed money under a scheme which defeats the revenue.
The assessment of the assessor should be restored.
Martin, J.A.:—This appeal should, in my opinion, and with all due deference to other opinions, be dismissed because, in. brief, I think the Court of Revision below took substantially the right view in holding that under the unusual circumstances of the special arrangement between the company and five of its shareholders, the deductions that should be made from the gross income of the proceeds of the particular adventure, or speculative plan, if you like, leave no net income subject to taxation against the company whatever may be the personal liability of the said five members.
It is no answer,-in my opinion, to this view to point out. truly, that the results of a number of such transactions might, or indeed would, lead to something unexpected; that often is so where there is a casus omissus, as herein. It might be otherwise if it could be held that the transaction was a sham one, but such is not the fact here : the most that can fairly be said is that it is peculiar but not illegal.. It really comes down to this that the company was, within its powers, permitting some of its members to make a profit out of a real estate speculation by using its name while putting up their own money. Now I know of nothing which prevents a company from so doing, in any honest business venture, just as a private person may, to, e.g., oblige a friend.
Gallagher, J. A :—I agree in allowing the appeal.
MCPHILLIPS, J.A.:—The Crown appeals from the decision of the Court of Revision for Vancouver Assessment District. The decision was that the company had no taxable net income for the period in question. To get a proper understanding of the ‘matter so as to apply the law to the relevant facts I will in a short manner state what the facts necessary to bear in mind are. The appellant is a company incorporated under the Companies Act, 1929 (B.C.), c. 11. The powers may be said to be shortly—to purchase and sell lands, erect buildings, to take mortgages, to manage lands and buildings, to borrow money for the purposes of the company. It was primarily a company to buy and sell lands and with powers to borrow moneys in the carrying out of its. business. There are only five shareholders each holding one share of the par value f $1. The share capital of the company authorized was 50,000 shares of $1 each—the total issued capital being the 5 shares of $1 each. In the course of carrying on its business the company it would seem embarked upon only one transaction in the exercise of its corporate powers and that was to purchase Lot 5, Block 22, D.L. 541, in the 700 block on Hastings St. in the City of Vancouver, the purchase-price was $40,000. Admittedly the company did not have the requisite money to make the purchase, it obtained the money by borrowing the sum from the shareholders, it being agreed with the shareholders that the net. proceeds made on the sale of the land should go to the shareholders making the advances. A sale was made of the land in 1928, the purchase having been made in 1926. The short question is whether the $30,000 profit realized by the company can be said to be income within the purview of the Taxation Act, sees. 4(1), 44(1).
The contention of the Crown is that the profit made is income within the meaning of sec. 4(1) of the Act, and the assessment made in respect of the profits so made on the sale as for the year 1928 was put at "‘Net taxable income $26,393. Tax thereon $2,111.44, less 10% $211.14—tax $1,900.30." The Judge of the Court of Revision in this judgment in the matter said in part as follows :—
"‘Under the definition of ‘Income’ in the Taxation Act, R.S.B.C. 1924, e. 254, there is no doubt in my mind that the moneys received by the company in payment for the sale of the property in question is income, and the question is whether or not deductions from this gross income should be allowed for the respective amounts owing and paid to the five shareholders under the agreements entered into by them as aforesaid.’’
Unquestionably it was income and being income is taxable as such; that the company made an agreement to pay the profits to the shareholders cannot meet the question and satisfy the demand of the Crown based upon the statute laid. The procedure adopted and the manner of carrying it out—if acceded to would be an illegal evasion of the Taxation Act in my opinion. It was advanced at this Bar that the moneys in question were in their nature assets not income or in other words to be treated as capital. Upon this point I would refer to what Lord Hals- bury, L.C., said in Dovey v. Cory [1901] A.C. 477, at pp. 486-7
"The mode and manner in which a business is carried on, and what is usual or the reverse, may have a considerable influence in determining the question what may be treated as profits and what as capital.”
Here it was the sole business transaction entered into by the company and in plain exercise of powers taken, viz., to buy and sell land—as the merchant sells goods over the counter that which is realized over and above the cost to the merchant must be said to be profit, such a proposition is unchallengable, and that is income within the meaning of the statute. I would refer to what Cozens-Hardy, M.R., said in Stevens v. Hudson’s Bay Co, (1909) 101 L.T. 96, at p. 97
"This is not a case where land is from time to time purchased with a view to resale.’’ That is exactly the present case and, applying the reasoning of the Master of the Rolls, in the present case the profit. made is liable to income tax. We find Farwell, L.J., saying in the above case (p. 98) :—
“But if, instead of dealing with his property as owner, he embarks on a trade in which he uses that property for the purposes of his trade, then he becomes liable to pay not on the excess of sale prices over purchase prices, but on the annual profits or gains arising from such trade, in ascertaining which those prices will no doubt come into consideration.”
Lord Dunedin in Com f r of Taxes v. Melbourne Trust Ltd., 11914] A.C. 1001, at p. 1010, said:—
"‘But it is equally well established that enhanced values obtained from realization or conversion of securities may be so assessable where what is done is not merely a realization or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business.”
And that was the case here. In Scottish Investment Trust Co. v. Surveyor of Taxes, 21 R. (Ct. of Sess.) 262, it was held (headnote) :—
" " that gains made by the company by realising investments at larger prices than those paid for them were to be reckoned as ‘profits and gains’ of the company in the sense of the Property and Income-Tax Act, 1842, Schedule D.’’
In Assets Co. v. Inland Revenue, 24 R. (Ct. of Sess.) 578, Lord Young said (p. 586) :—
“I should say that I have really no doubt that any person or any company making a trade of purchasing and selling investments will be liable in income-tax upon any profit which is made by that trade.’’
In my opinion the assessment is a valid one. The company made the profit not the shareholders who advanced the moneys and the company erred in making payment to the shareholders of all the profits so earned by the company without first deducting the income tax thereon, the profit was not earned by the ‘shareholders it was a profit of the company, in other words for the purpose of this enquiry—income under the Taxation Act. That the company obligated itself to pay to the shareholders all the profits cannot affect the question to be here determined. The profits on the transaction being the profits of the company, v.€., the income of the company the moneys were properly assessable as such—and the net taxable income as levied, viz., $1,900.30 was properly so levied and is due and payable in my opinion by the company. I would allow the appeal and reinstate the assessment as made.
Macdonald, J.A. :—Respondent company was incorporated inter alia ‘‘to purchase . _. . . lands and to sell’’ the same and although it had wide powers it was apparently formed to acquire and resell at a profit, if possible, the property in question. Of its authorized capital of 50,000 shares of $1 each five shares only were issued. It purchased Lot 5, Block 44, D.L. 541, Vancouver, for $40,000 in 1926, and sold it for $70,000 in 1928, and the Minister of Finance seeks to recover income tax on the $30,000 profit made, it is alleged, by the company. It had not, of course, sufficient subscribed capital to make the purchase in the ordinary way and proceeded to consummate the deal by obtaining proportionate parts of the purchase-price from its shareholders giving them letters of which the following is a sample.
" " In consideration of your having already advanced to the company the sum of $6,308.03 and contributing one-third of any further moneys required to finance the. purchase of Lot 5, Block 22, D.L. 541, the company hereby agrees to pay to you one- third of the net proceeds of the sale of said property as and when realized, which payment shall be accepted by you in full settlement of said advances.”
The proceeds of the sale were distributed to the shareholders as outlined in the letter quoted and the respondent company now submits that it did not make a profit on the transaction in the ordinary course of its business, but merely distributed to its. Shareholders a capital asset which appreciated in value in two years to the extent referred to.
If the company purchased the lot to enable it to carry on business within its powers from which profits might be derived the appreciation in value would not be income. That, it is suggested, is the true situation. As part proof of it, rentals, it was pointed out, were received during the two-year period. That however was merely incidental to the ownership of the property. If it had purchased a second tract of land for the purpose of re-selling at an advanced price such a profit would be regarded as income but the first purchase it is submitted should not be so regarded. It was however open to the respondent when it appealed against this assessment to the Judge of the Court of Revision to show that the purchase and sale in question was in the nature of an acquisition of capital and it did not do so. That burden was upon it: sec. 133 (3) of the Taxation Act.
We have to decide on a fair interpretation of the facts and the letters referred to whether or not the purchase and resale at an advance of $30,000 should be treated as the acquirement of, and disposal of a capital asset or as a profitable transaction from trading in land. I have no doubt that it bears the latter aspect.
It was submitted however that assuming the company received this profit it only earned it by procuring the purchaseprice from its shareholders upon the terms that it would pay them the net proceeds of the sale. It earned a profit of $30,000 but expended the full amount in doing so. That is the sug-
gestion. No profit was received by the company: it went to the shareholders. Expenses incurred in the production of income may be deducted from the gross income. To come within this exception respondent must show that it expended $30,000 in making a profit of a similar amount. It is a far fetched interpretation of sec. 8 of 1925 (B.C., c. 54, referring to deductions to say that occurred in this case. It is not a fair construction of the letters to hold that the methods disclosed reveal an expenditure by the company in any form, whether as interest on borrowed money or otherwise in the course of earning the income which reached the coffers of the company. It is "‘a very forced interpretation of the contract and position of the parties to put it down as part of the expenses of making the income:’’ Last v. London Ass’ce Corp., 10 App. Cas. 438 at p. 451.
I would allow the appeal.
Appeal allowed.