Atwater Western Corp. v. MNR, 70 DTC 6312, [1970] CTC 472 (Ex Ct)

JJACKETT, P.:—This is an appeal from a judgment of the Tax Appeal Board, rendered on February. 20, 1969, dismissing the appellant’s appeal from its assessment under Part I of the Income Tax Act for the 1965 taxation year.

The facts as revealed by the evidence in. this Court do not differ in any material respect, with one important exception, from the facts as they are fully set out in the Reasons for Judgment of the Tax Appeal Board. I shall content myself, therefore, with making only such reference to the facts as seems to me to be necessary in order to explain the reasons for the conclusion to which I have come.

The sole question in issue in this appeal is whether a profit of $399,800 made by the appellant in 1965 on the sale of 200 shares in a company called West End Plaza Inc. was a profit from a "‘business'' within the meaning of that word as defined for the purposes of the Income Tax Act.

Very briefly, the basic facts are as: follows:

1. Two individual real estate men, Bernard Kogan and Moishe Katz, having conceived the idea of creating a very large multiple purpose building development in downtown Montreal, obtained an option for an emphyteutic lease of an appropriate site in 1959, which option they assigned to the appellant company, of which company they were the main Shareholders.

2. Having obtained satisfactory evidence: of the feasibility of the proposed building project, but not having succeeded in obtaining the financing necessary to carry it out itself, the appellant entered into an arrangement, in February. 1961, with two other companies—referred to in the evidence as ‘‘Property and General Investments’? and ‘‘ Anglin-Noreross’’

—under which a new company, West End Plaza Inc., was incorporated to construct and operate that project on the basis that

(a) the appellant would transfer the lease for the site to West End Plaza,

(b) Property and General Investments and Anglin Noreross would have the responsibility for the financing and construction of the proposed project,

(c) the appellant would be employed as manager of the project, when completed, and

(d) the appellant would subscribe for 200 shares in West End Plaza at $1 per share, and Property and General Investments and Anglin-Norcross would each subscribe for 400 shares at $1 per share.

3. In 1965, having already bought out the shares in West End Plaza belonging to Property and General Investments, Anglin- Norcross foreed the appellant to sell its 200 shares for $400,000 by threatening to ‘‘abort’’ the whole project if the appellant did not sell.

In these circumstances, the appellant was assessed for income tax on the basis that the amount that the appellant received for its shares in West End Plaza over and above what it paid for them was a profit from a business and this assessment was upheld by the Tax Appeal Board.

The one additional finding of fact that I have to make on the evidence in this Court, and that may not have been established by the evidence in the Tax Appeal Board, is that Katz and Kogan, and through them the appellant, had the unswerving purpose, from the time they first embarked on the task of obtaining the lease for the site until they were finally forced to sell the shares in West End Plaza, of creating and operating a large building development or at least participating in the creation and operation of such a development.

In these circumstances, the question to be decided is whether the sale by the appellant of its shares in West End Plaza was an operation in the carrying on of a business or of a venture in the nature of trade.

In the first place, one must recognize that we are not here concerned with a profit made on the disposition of the lease of the site. Prima facie, an acquisition of a long-term lease of a site for a project that is to be operated by the acquirer as an income-producing property is a capital transaction. Nevertheless, having regard to the many problems that Katz and Kogan, and the appellant, still had to solve at the time that they acquired the lease, and having regard to their history in real estate transactions, if, having failed to solve those problems, they had subsequently disposed of the lease at a profit, one could not escape the conclusion that this possible use of the lease was something that must have been a factor in their decision to acquire it. We are not here concerned, however, with the profit, if any, that the appellant made on the disposition of the lease to West End Plaza.

What we are concerned with here is the acquisition by the appellant of the shares in West End Plaza and the subsequent disposition of those shares at a profit.

The arrangement whereby the appellant and the two other companies each agreed to put part of what was necessary for a proposed business into a company to be formed and to take shares in that company to represent their respective interests in it and the proposed business is a typical example of how a new business is launched. Prima facie, subscribing for shares in such a company is a capital transaction. In my view, it does not become any the less a capital transaction when the real consideration for the shares is a contribution to the company of property required as a capital asset for the proposed business of the company.

I have no doubt that there may be circumstances in which a subscription for shares in a new company, while prima facie a capital transaction, may be a mere step in the carrying on by the acquirer of a profit-making business or venture. If, for example, the acquirer made a business of taking over old busi- nesses, giving them new images and corporate identities and then selling the shares in the new companies, a profit from the overall enterprise would be a profit from a business even though, looked at more narrowly, that profit were a profit from the sale of shares acquired by subscribing for the capital of a new company. However, I find no such enterprise here. Katz and Kogan, and through them the appellant, had a single-minded purpose of owning "‘all’’ or a “‘piece’’ of the company that was to operate the building project that they had promoted.

In coming to this conclusion, I have not overlooked the various bits of evidence on which the respondent put considerable emphasis. Katz and Kogan had been and were engaged in land speculations. Nevertheless, the evidence convinces me that this particular project was one that, from their point of view, was of an entirely different character. It is also true that they could have been persuaded to sell the lease for the site after the appellant acquired it, but only at a price that would persuade any sensible person to depart from his established purpose. Finally, there is the fact that the appellant did have an "‘escape’’ clause in its agreement with the other two companies concerning the operation of West End Plaza. That clause was, however, a clause that any sensible junior "‘partner’’ in a closely held company would have, if he could get it, against the event that the other ‘‘partners’’ should use their strength to his detriment.

It is my conclusion, therefore, that the appeal should be allowed with costs and that the assessment should be referred back to the respondent for re-assessment on the basis that the profit in question was not a profit from a business within the meaning of that word in the Income Tax Act.