October 11, 2011

Balstone Farms Ltd. (Appellant) v. Minister of National Revenue (Respondent)

68 DTC 5018
Supreme Court of Canada
January 23, 1968

Capital gain or income — Private company formed to dispose of farm land — Payments received when options forfeited — Profit on sale of part of land — Charter powers — Company as separate legal entity — Income Tax Act, R.S.C. 1952, ss. 3, 4 and 139(1)(e).

Several parcels of farm land had been owned by Mr. L and his wife for a long period and had been continuously farmed on a crop-share basis by tenants. In 1955 Mr. L and his wife, being of advanced age and in poor health, sought professional advice regarding the planning of their estates. As a result, the appellant company was formed in that year, its shareholders being trustees for the beneficiaries under Mr. L’s will and its stated objects being to carry on the business of farming. Upon its incorporation, the appellant bought the farm land from Mr. L and his wife, giving debentures and promissory notes in consideration. During the next few years, the appellant received payments when several options on parts of its land were forfeited and also made a profit on the sale of parts of its property, the proceeds of which were used to pay off the debentures. All of the amounts received by the appellant were taxed by the Minister as income in its hands. The appellant contended that the lands were acquired as a capital asset for the ultimate purpose of orderly and advantageous liquidation and that the receipts were capital gains. When the Exchequer Court (66 DTC 5482) dismissed its appeal, the appellant took the case to the Supreme Court of Canada.

Held: The appeal was dismissed (one dissenting). The appellant based its argument essentially on three cases which were concerned with the realization of assets and the incorporation of a company to serve as machinery for this purpose; however, in none of these realization cases was there an out-and-out transfer by former owners for a cash consideration. When Mr. L and his wife transferred the properties, they made a profit of $102,000 and their interest in the land ceased. The company was not “realizing” or selling these properties for the benefit of prior owners or the creditors of prior owners, but was selling on its own behalf to make a profit. The only way the company could produce anything for those who were beneficially interested in the shares was to produce a profit. The company was in business for this purpose and the profits were correctly taxed by the Minister.