A-674-80
Guy Dumas (Appellant)
v.
Minister of National Revenue (Respondent)
INDEXED AS: CANADA V. DUMAS (C.A.)
Court of Appeal, Pratte, Hugessen and Desjardins
JJ.—Québec, October 11, 1988.
Income tax — Income calculation — Income or capital gain
— Company created to carry on business as general contractor
and builder — Such activities pursued for seven years —
Appellant agreeing to sell land because of problems encoun
tered in attempts to develop it — Instead of selling land, all
shares in company, stripped of other assets, sold — Trial
Judge holding profit from sale of shares business income, as
sale of shares merely alternative method to achieve sale of
land — Appeal allowed — Trial Judge misunderstanding
Fraser v. Minister of National Revenue, [1964] S.C.R. 657 —
Existence of company not to be disregarded for tax purposes
— Company remaining liable for taxes on operations —
Nature of outlay involved in acquisition of company's shares
determinative — Appellant not intending to sell shares in
company when acquired shares.
CASES JUDICIALLY CONSIDERED
APPLIED:
Fraser v. Minister of National Revenue, [1964] S.C.R.
657; Minister of National Revenue v. Freud, [1969]
S.C.R. 75; McKinley v. M.N.R., [1974] DTC 6138;
[1974] CTC 170 (F.C.A.).
REVERSED:
The Queen v. Dumas (G), [1981] CTC 1 (F.C.T.D.).
COUNSEL:
André Lareau and Doris Savard for appel
lant.
Roger Roy for respondent.
SOLICITORS:
Pothier, Bégin, Delisle, Veilleux, Sauvageau,
Sainte-Foy, Quebec, for appellant.
Deputy Attorney General of Canada for
respondent.
The following is the English version of the
reasons for judgment delivered orally by
PRATTE J.: The appellant is appealing from a
judgment of Dubé J. of the Trial Division [The
Queen v. Dumas (G), [1981] CTC 1] which
allowed an appeal brought by the respondent from
a decision of the Tax Review Board and restored
the assessments vacated by that decision.
The only question at issue is whether the Trial
Judge was correct in finding that the profit of
nearly $200,000 made by the appellant by selling
the shares he held in Ville -Neuve Construction
Ltée ("Ville -Neuve") to Mr. Raymond Malenfant
on November 6, 1969 was business income rather
than a capital gain.
Ville -Neuve was created by letters patent on
November 22, 1961 for the primary purpose of
carrying on the business of a general contractor
and builder. The appellant was its sole sharehold
er, with his wife and accountant, who apparently
only held qualifying shares. From the time of its
creation the company carried on the activities for
which it was established. In early summer 1967
the Communauté des Frères des Écoles Chré-
tiennes agreed to sell it land located at the inter
section of Henri IV and Des Quatre Bourgeois
boulevards in Ste-Foy, in the suburbs of Québec,
where the appellant apparently planned to build a
shopping centre, office buildings and houses. The
deed of sale for this land was not signed until
March 17, 1969, because of a difference between
the seller and the buyer. That fall, when it proved
more and more difficult for the appellant to pro
ceed with his building projects, he agreed to sell
the land to Raymond Malenfant. However, Ville -
Neuve did not sell the land itself. Instead, the
appellant for tax reasons arranged for Malenfant
to buy at an agreed price all the shares in Ville -
Neuve, which had previously been stripped of all
its assets other than the land desired by Malen-
fant. It is the profit made by the appellant on the
sale of these shares which gave rise to the assess
ments restored by the judgment a quo.
The Trial Judge first held that at the time the
appellant's company bought the land he had at
least a "secondary intent" to resell at a profit. It
may be at once noted that it is not necessary for
this Court to rule on the validity of this first
finding. The Judge also found that the profit the
appellant made in selling his shares was income
because, in his view, it was immaterial that the
transaction had been concluded by a sale of shares
rather than sale of the land itself. He said the
following on this point [at page 6]:
Since the sale to Malenfant resulted in a profit and not a
capital gain, it matters little in the circumstances that the said
transaction was consummated by the sale of Villeneuve shares,
rather than by the sale of the land itself. This sale of shares was
in reality only an alternative method of obtaining the desired
result. This principle has already been established by Judson, J
of the Supreme Court of Canada in Ronald K Fraser v
M.N.R., [1964] CTC 372; 64 DTC 5224. It is true that in
Fraser the appellants formed the company for the specific
purpose of building their shopping centre and that the share
holders sold their shares two years later, whereas Villeneuve
was incorporated some seven years before the transaction in
question here. However, this distinction does not destroy the
principle, since the letters patent of Villeneuve, it will be
remembered, provide for the type of transaction that was
eventually carried out.
In our opinion, this passage from the Trial
Judge's reasons shows that he did not correctly
understand the meaning of Fraser [Fraser v. Min
ister of National Revenue, [1964] S.C.R. 657], a
judgment which this Court, following the Supreme
Court in Freud,' has had occasion to clarify in
McKinley. 2 We then said [at pages 6141-6142
DTC; 173-174 CTC]:
The decision of the Supreme Court of Canada in Fraser v.
M.N.R. (1964 S.C.R. 657, [64 DTC 5224]) on which the trial
judge relied, is not an authority for the proposition that, for
income tax purposes, the existence of a company as a separate
entity may be disregarded. That decision was explained by
Pigeon J. in M.N.R. v. Freud (1969 S.C.R. 75, at p. 80 [68
DTC 5279]):
On the first question, the decision of this Court in Fraser
v. Minister of National Revenue (1964 S.C.R. 657, [1964]
C.T.C. 372, 64 D.T.C. 5224, 47 D.L.R. (2d) 98) appears to
be in point. It was there held that where real estate operators
had incorporated companies to hold real estate, the sale of
shares in those companies rather than the sale of the land
was merely an alternative method of putting through the real
estate transactions and the profit was therefore taxable. This
decision does not in my view necessarily imply that the
existence of the companies as separate legal entities was
disregarded for income tax assessment purposes. On the
contrary, it must be presumed that the companies remained
' Minister of National Revenue v. Freud, [1969] S.C.R. 75.
2 McKinley v. M.N.R., [1974] DTC 6138; [1974] CTC 170
(F.C.A.).
liable for taxes on their operations and their title to the land,
unchallenged. 1 must therefore consider that the decision
rests on the view that was taken of the nature of the outlay
involved in the acquisition of the companies' shares by the
promoters.
It is clear that while the acquisition of shares may be an
investment (Minister of National Revenue v. Foreign Power
Securities Corp. Ltd. ([1967] S.C.R. 295, [1967] C.T.C.
116, 67 D.T.C. 5084), it may also be a trading operation
depending upon circumstances (Osier Hammond and Nanton
Ltd. v. Minister of National Revenue ([1963] S.C.R. 432,
[1963] C.T.C. 164, 63 D.T.C. 1119, 38 D.L.R. (2d) 178);
Hill-Clarke-Francis Ltd. v. Minister of National Revenue
([1963] S.C.R. 452, [1963] C.T.C. 337, 63 D.T.C. 1211).
Due to the definition of business as including an adventure in
the nature of trade, it is unnecessary for an acquisition of
shares to be a trading operation rather than an investment
that there should be a pattern of regular trading operations.
In the Fraser case, the basic operation was the acquisition of
land with a view to a profit upon resale so that it became a
trading asset. The conclusion reached implies that the acqui
sition of shares in companies incorporated for the purpose of
holding such land was of the same nature seeing that upon
selling the shares instead of the land itself, the profit was a
trading profit not a capital profit on the realization of an
investment. This principle appears equally applicable in the
circumstances of this case. If the respondent and his friends
had been successful in selling the prototype sports car, they
might well have done it by selling their shares in the com
pany instead of having the company sell the prototype, and
there can be no doubt that if they had thus made a profit it
would have been taxable....
The question to be decided in this case is, therefore, in my
view, whether the appellant's profit from the acquisition and
sale of the shares was a taxable profit of the same character as
that taxed in Fraser's case.
The evidence shows that the appellant sold at a profit shares
of Siebens Leaseholds Ltd. The profit he thereby made was a
trading profit, and therefore a taxable profit, if the appellant
was embarking on a venture in the nature of trade when he
acquired those shares. On the other hand, if the acquisition of
those shares by the appellant was an "investment" ilk the sense
in which Pigeon J. used that word in the Freud case, then the
profit made by him on the realization of that investment was a
capital profit. (See California Copper Syndicate v. Harris
(1904), 5 T.C. 159 (Ct. of Ex.), per Lord Justice Clerk at p.
165). Therefore, the sole question to be determined on this
appeal concerns the nature of the outlay made by the appellant
when he acquired, for $167.00, the 167 shares of Siebens
Leaseholds Ltd. that he later sold for a little less than
$200,000.00.
It is clear that in the case at bar the appellant
had no intention of selling his shares in Ville -
Neuve at the time he acquired them; he simply
wanted to carry on his business. It follows that the
appeal should be allowed with costs.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.