Supreme Court Judgments

Supreme Court of Canada

Vaughan Construction Co. v. Minister of National Revenue, [1971] S.C.R. 55

Date: 1970-06-26

Vaughan Construction Company Limited Appellant;

and

The Minister of National Revenue Respondent.

1970: June 8, 9; 1970: June 26.

Present: Martland, Judson, Ritchie, Pigeon and Laskin JJ.

ON APPEAL FROM THE EXCHEQUER COURT OF CANADA

Taxation—Income tax—Profit on expropriation of property—Capital gain or income—Proper taxation year—Income Tax Act, R.S.C. 1952, c. 148, s. 139(1)(e).

The appellant, incorporated in 1943 with broad powers embracing dealing in land, was wholly owned by its president, V, a trader in real estate. In 1954, in exchange for a property which it had acquired in 1953, the appellant received from M the Bellevue property and a sum of $33,000. The Bellevue property had been purchased by M from the city of Halifax and was subject to an affirmative obligation to build or to reconvey to the city in default of building. On August 4, 1955, this property was expropriated by the province of Nova Scotia. In 1957, the Court before which the claim for compensation came, fixed the total compensation in the sum of $280,000 and held that the appellant was at once entitled to at least $87,520 and interest. This amount was received by the appellant the same year. (The final apportionment was made by this Court in 1961 but that sum remained undisturbed.) The Minister contended that the profit realized as the result of the expropriation was taxable income for the year 1957. The Exchequer Court, contrary to the view taken by the Tax Appeal Board, held that the profit was a profit from a business within s. 139(1) (e) of the Income Tax Act for the year 1957. The taxpayer appealed to this Court.

Held: The appeal should be dismissed.

The unchallenged starting point was that V was a trader in real estate and the interposition of the appellant company, as title holder of the property, could not subtract from this feature of the situation. The appellant made no move to subdivide the property, did not develop any building plans, did hot employ any architect or seek out a builder or

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contractor, did not seek out any prospective occupant for a building on the property, and did not try to arrange any financing of possible buildings, its own assets being inadequate. One or more of such steps would have been more consonant with an avowed investment purpose than the mere assertion thereof; and the five-month period which elapsed before expropriation loomed was ample time within which to give some objective indication of the alleged purpose. Having regard to the onus on the appellant, there was no ground upon which to impugn the conclusion of taxability reached by the Exchequer Court.

Applying the principle of M.N.R. v. Benaby Realties Ltd., [1968] S.C.R. 12, no amount of the compensation became receivable until the order made in 1957, and, therefore, the gain was properly assessable to tax in 1957.

APPEAL from a judgment of Thurlow J. of the Exchequer Court of Canada[1], in an income tax matter. Appeal dismissed.

E.D. Fulton, Q.C., and E. Beaudin, for the appellant.

G.W. Ainslie, Q.C., and M. J. Bonner, for the respondent.

The judgment of the Court was delivered by

LASKIN J.—This tax appeal by the corporate appellant is a chapter, probably the last chapter, in the saga of its Bellevue property in the City of Halifax which was expropriated by the Province of Nova Scotia on August 4, 1955. Earlier proceedings touching the expropriation and the apportionment of the expropriation compensation are detailed in the judgment of the Nova Scotia Supreme Court in banco in Vaughan Construction Co. Ltd. v. Halifax[2] and in the judgment of this Court in Halifax v. Vaughan Construction Co. Ltd.[3], allowing an appeal from the Supreme Court of Nova Scotia in banco[4]. The present appeal concerns primarily the taxability of the

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profit realized as a result of the expropriation and, subsidiarily (if the profit is taxable income), the proper taxation year or years to which any assessment to tax should be attributed.

A third point was raised by the appellant by alleging improper exclusion by Thurlow J. of certain portions of the examination for discovery of Bernard J. Vaughan, the president of the appellant, which it sought to have read into the record as being integral to other portions which counsel for the Minister was putting in as evidence on his behalf. The submissions on this point were to the effect that the excluded portions were necessary to a fair appraisal of the discovery evidence and illumined the position of the appellant that the property was being held as an investment. This Court was of the opinion at the hearing of this appeal that these contentions were without merit since no basis was established upon which this Court should review the discretion of the trial judge. Accordingly, I need say no more on this matter.

Thurlow J. held, contrary to the view taken by the Tax Appeal Board, that the profit realized from the forced disposal of the Bellevue property was profit from a business within s. 139(1) (e) of the Income Tax Act. He also held that the Minister had properly re-assessed the appellant for the taxation year 1957 by adding $2,980.50 to its income for that year. I agree with both of these conclusions for the reasons that follow.

The appellant, incorporated in 1943 with broad powers embracing dealing in land, was wholly owned by its president, Bernard J. Vaughan. It acquired the Bellevue property, consisting of 2.19 acres, through an agreement of October 30, 1954, with Maritime Telegraph and Telephone Company Limited under which the latter paid the appellant $33,000 and also received in exchange the appellant’s Howe Street property consisting of 12.3 acres which the appellant had acquired in 1953. There was a reassessment of the appellant’s income for 1954 in respect of the profit on the Howe Street property, and no appeal was taken to this Court from the

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conclusions of both the Tax Appeal Board and of Thurlow J. adverse to the appellant.

The Bellevue property had been purchased by Maritime from the City of Halifax, and the transaction involved certain affirmative building covenants by Maritime in favour of the City, with an obligation to reconvey in default of building, and, additionally, a covenant not to convey or lease the property prior to the completion of the contemplated buildings without the consent of the City. This consent had to be obtained, of course, to enable the appellant to acquire the property; and the City made it a condition of giving its consent that the appellant enter into a deed of covenants similar to those which had been given by Maritime. There was one important difference between the range of covenants as between the City and Maritime and as between the City and the appellant. The requirement of the City’s consent to a transfer or a lease of the land was not included in the deed of covenants given by the appellant to the City.

Any argument that a transfer of the Bellevue property by the appellant was beyond its power is untenable, and especially so when the covenants were by the appellant, “its successors and assigns”. Whether a transferee would be bound by the covenants need not be considered here in view of the fact that it had previously been determined by this Court[5], that as between the appellant and the City the latter was entitled to share in the expropriation compensation. It is hence sufficient to say that the land was marketable, even if cum onere.

In support of the contention that the land, having regard to the affirmative building covenants, was bought as an investment, it was submitted that (1) the appellant had not traded in land from 1947 until the transactions for the Howe Street and Bellevue properties; (2) the expropriation as a compulsory acquisition by the Province could not be considered a disposal; (3) the appellant had a continuing intention to construct buildings for revenue on the property and the expropriation frustrated this intention; (4) the Province made

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its expropriation intention known within five months after the appellant acquired the Bellevue property so that there was no such lapse of time to support an inference that the land was being held for a favourable sale; (5) the appellant had, in fact, commenced demolition of structures already on the property (before becoming aware of possible expropriation) in order to prepare it for the construction of new buildings; and (6) it rejected certain overtures made to it by others for purchase of the property. In fine, it was contended that Thurlow J., unlike the Tax Appeal Board, failed to give sufficient weight to the conjunction of the foregoing factors with the affirmative obligation to build, or, failing that, to reconvey the property to the City.

The unchallenged starting point on the main issue in this appeal is that Vaughan, as Thurlow J. found, was a trader in real estate; and the interposition of the appellant, as title-holder of the Bellevue property, could not subtract from this feature of the situation. The Bellevue property was in a choice commercial area, and although it was not formally acquired until October 30, 1954, the basis of ultimate acquisition was laid down in the early part of August 1954 in a letter from Maritime to the appellant. In the deed of covenants between the appellant and the City, bearing the same date as the exchange agreement with Maritime, the appellant undertook (1) to construct a building or buildings on the property of the “first class” type under the Halifax City Charter; (2) to commence the construction as soon as practical after effective execution of the deed of covenants; and (3) to submit to the City, prior to actual construction, the general plans of any proposed building and a plan of its location on the property. Notwithstanding these undertakings, the appellant made no move to subdivide the property, did not develop any building plans, did not employ any architect or seek out a builder or contractor, did not seek out any prospective occupant for a building on the property, and did not try to arrange any financing of possible buildings, its own assets being inadequate.

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Some one or more of such steps would have been more consonant with an avowed investment purpose than the mere assertion thereof; and the five month period which elapsed before expropriation loomed was ample time within which to give some objective indication of the alleged purpose. Moreover, the evidence before Thurlow J. did not show the firm resolve, as alleged in argument, to hold the property as a source of income. I refer to the Case on Appeal, at pp. 107 and 108, where Vaughan affirmed that subdivision would hinder the sale of the land; that the purpose of acquisition was as a kind of speculation; that what he had in mind as development was the sale of lots and possible development of part of the property by the appellant; and that in view of the developments in the area, it would not take long to dispose of the property in lots.

In view of the foregoing, and having regard to the onus on the appellant, there is no ground, despite some assertions of investment intention by Vaughan, upon which to impugn the conclusion of taxability reached by Thurlow J. It is perhaps superfluous to add that the taxability of a gain is not affected merely because the gain arises upon a forced taking of land.

The subsidiary point respecting the proper taxation year or years arises in the following way. Judge Pottier, before whom the claim for compensation came, in a decision dated November 28, 1956, fixed the total compensation at $280,000 plus interest at five per cent from June 18, 1956, the date of possession, and he also made a five per cent allowance for compulsory taking. However, he (to use his own words) “refrained from indicating in this decision to whom the compensation is payable”; adding that “I will hear the parties on this point before any order is signed”. After such a hearing, the judge handed down a decision on April 1, 1957, in which he referred to a pending action of the City with respect to the Bellevue property (it concerned the City’s claim to an interest under the deed of covenants and a consequent right to share in the compensation), and went on to say that there could be no question of the appellant’s right to $87,520 and that he

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would sign an order for payment of that amount with proportionate interest and payment for compulsory taking. The balance of the compensation was left to future decision.

Accordingly, an order was made on June 4, 1957, for payment of the sums indicated to the appellant, and its books for 1957 showed receipt from the Province of the sum of $96,415.27, paid in pursuance of the order. As a result of subsequent judicial proceedings, the determination of the City’s share, if any, of the compensation was remitted to Judge Pottier. Neither in his consideration of the matter, nor in appeals therefrom culminating in the judgment of this Court, already referred to, was the overall sum of $280,000 disturbed nor was there any question of the appellant’s right to at least $87,520 and interest. The Province did not appeal from the order of June 4, 1957; and in the final apportionment by this Court of the compensation, as between the appellant and the City, the only variations from the final decision made in that connection by Judge Pottier on April 27, 1959, were to award the City $96,240 rather than $50,000 allowed by Judge Pottier, and to strike out the allowance for compulsory taking. Arithmetically, this Court protected the interim award of $87,520 to the appellant as representing the equivalent of the land transferred to Maritime in exchange for the Bellevue property; and it was half of the balance of the total compensation of $280,000 that was awarded to the City.

The appellant ordered its financial affairs on an accrual basis, and its argument in sum was that whatever be the proper year to assess to tax the gain reflected in the receipt of $96,415.27 (be it 1955, when the expropriation occurred, or 1956, when the total compensation was assessed, or 1961, when the final apportionment was made by this Court, or 1962, when the order of this Court was entered), it was not 1957. The significance of the matter lies in the fact that the Minister, in addition to re-assessing for the 1957

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taxation year, re-assessed for the 1961 taxation year by adding as income the sum of $86,140 as being the balance of the profit realized on the expropriation. Both of the re‑assessments were made after the judgment of this Court on the apportionment of the compensation was settled and entered.

Applying the principle of Minister of National Revenue v. Benaby Realties Ltd.[6] to the different facts in the present case, I am of the opinion that no amount of the compensation became receivable until the order of Judge Pottier of June 4, 1957. What was then directed to be paid (and which was in fact paid in that year) was, so far as it represented in any portion thereof a gain arising out of the appellant’s business, properly assessable to tax in 1957. Since the sum in question remained undisturbed in the final disposition by this Court in 1961, I need not be concerned with a situation where there was such a variation as to reduce what had been ordered to be paid in 1957. The 1961 reassessment is not before this Court, and I say nothing about it.

I would dismiss the appeal with costs.

Appeal dismissed with costs.

Solicitors for the appellant: Fulton, Gumming, Bird & Richards, Vancouver.

Solicitor for the respondent: D. S. Maxwell, Ottawa.