Tax Court of Canada Judgments

Date: 19991027

Dockets: 96-3381-IT-G; 96-4113-IT-G; 96-4115-IT-G; 96-4116-IT-G; 97-117-IT-G

BETWEEN:

GÉRALD M. HARQUAIL, JEAN-PIERRE HUDON, GEORGE SCANLAN, DENYSE FRANK GIRARD, BERNARD GIRARD,

Appellants,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for judgment

Garon, A.C.J.T.C.C.

[1] These are appeals brought by five taxpayers[1] from income tax assessments made by the Minister of National Revenue (“Minister”) for the taxation years listed below with respect to each of the aforementioned appellants:

Taxation years Appellants

1990 Gérard M. Harquail

1991

1989 Jean-Pierre Hudon

1990

1989 George Scanlan[2]

1990

1989 Denyse Frank Girard

1990

1989 Bernard Girard

In the assessments for the 1989 taxation year, the Minister disallowed the deduction that each of the appellants had claimed in computing taxable income in respect of taxable capital gains resulting from the disposition of qualified small business corporation shares, within the meaning of subsection 110.6(1) of the Income Tax Act (“Act”), on February 24, 1989. That deduction is provided for by subsection 110.6(2.1) of the Act. The appeals for the 1990 and 1991 taxation years relate to consequential assessments in relation to the assessments for the 1989 taxation year.

[2] At the hearing of these appeals, argument was heard on only one issue: whether or not either Arnaud Properties Limited (“Arnaud Properties”) or the Hall River Power Corporation (“Hall River”) carried on a business during the 24 months immediately preceding the sale of the shares in question. The Court was informed at the beginning of the hearing that the other issues raised in the Notices of Appeal and Replies to the Notices of Appeal were no longer in dispute.

[3] The appellants Harquail and Girard were the only people who testified at the hearing of these appeals. The appellant Harquail was one of the shareholders, managers and directors of Arnaud Properties from 1973 until the shares were sold to Développements Hydroméga Inc. (“Hydroméga”) in February 1989. He described himself as a businessman, and he was also a lawyer. The appellant Girard was also a shareholder and director of Arnaud Properties. At the time when he acquired the shares in issue here, he was a branch manager of a bank. The directors of Hall River were the same people as the directors of Arnaud Properties at the time in question.

[4] The parties agreed, for the purposes of this case, that Arnaud Properties owned two classes of assets. It directly owned immovable assets, consisting of land and buildings, and indirectly, through a wholly-owned subsidiary, Hall River, owned hydro-electric assets, which included capital assets consisting of a dam, production equipment and hydro-electric development rights on the Rivière Ste-Marguerite. The parties also admitted that the hydro-electric assets owned by Hall River represented during the period in issue 100% of that company's assets and 90% or more of the overall assets of Arnaud Properties.

[5] From 1902 to the late 1960s, Gulf Pulp and Paper Inc. (“Gulf Pulp”), which was originally known as the North Shore Power Railway Navigation Company, operated a pulp mill and owned forest concessions, rights to develop the hydro-electric potential of the Rivière Ste-Marguerite, a dam on the river and 1,500 hectares of adjacent land. Its capital assets are located in Clarke City, Québec; Clarke City is midway between Port Cartier and Sept-Îles.

[6] In 1969, Gulf Pulp transferred all of its assets to Arnaud Properties, including hypothecs totalling about $500,000, but excluding the rights to develop the river's hydro-electric potential which, because of certain legal requirements, were transferred to Hall River.

[7] The objects of Arnaud Properties, which was incorporated in May 1969, are described as follows:

. . .

To carry on the business of an investment company and of a real estate holding and development company . . . .

The objects of Hall River, which was incorporated by letters patent in July 1969, are as follows, in part:

a) To produce, generate, manufacture by any means and to supply, sell and dispose of electricity and electric current for heat, light and power and for any other purposes for which the same may be used . . . .

[8] In 1973, the appellants Harquail and Girard and Pierre Duchesne, a notary, purchased all the shares of the capital stock of Arnaud Properties. They then developed a business plan for the company.

[9] At the outset, the plan involved the sale of lots, and specifically of building lots. The company then began to sell lots largely for residential construction. Some forty lots were sold between 1973 and 1975, and a few sales took place after that, at unspecified times.

[10] In this connection, Arnaud Properties reported profits of $281, $24,974 and $105,410 for 1973, 1974 and 1975, respectively, and declared dividends of $29,300 for 1973 and $36,000 for 1975.

[11] Arnaud Properties did nothing other than sell lots; it did not build on the lots. It believed that it could dispose of the lots more easily if it supplied electricity to the residents at a low price. However, it had to have customers to make the development of “First Falls” profitable. One of the potential customers was Hydro-Québec. However, Hydro-Québec had a policy of not purchasing electricity from independent producers. Arnaud Properties had several other possible customers, including the Iron Ore Company (“Iron Ore”), but it did not enter into agreements with any of them.

[12] Numerous efforts were made at the time and in subsequent years by Arnaud Properties and Hall River to promote the development of the hydro-electric potential of the Rivière Ste-Marguerite.

[13] In October 1978, Hall River commissioned a study to determine whether it could proceed with developing First Falls. The purpose of the study was stated as follows by the appellant Harquail in his testimony[3]:

A. The purpose of the study was to determine the technical and economic feasibility of bringing the First Falls development from a standby basis into an active producing basis.

The study was done for $10,000 by Montreal Engineering Company, Limited. The initial report, entitled “HALL RIVER POWER CORPORATION ASSESSMENT OF HYDRO POTENTIAL AT FIRST FALLS, RIVIERE STE.MARGUERITE, P.Q.”, is dated December 1978. It estimated the cost of the development to be $7,000,000 and concluded that developing First Falls on the Rivière Ste-Marguerite was technically feasible, but that it would not be profitable to do so, given the inefficiency of the existing generators. Particular mention was made of three problems: (1) the technology of certain facilities was obsolete; (2) the falls produced an irregular current; and (3) it was Hydro-Québec’s policy that any electricity produced by an independent producer had to be used by the producer for its own purposes and could not be resold to third parties.

[14] In 1978, Mr. Duchesne, the notary, sold the shares he held in the capital stock of Arnaud Properties to Charles E. Couture, Mario Isacco and the appellant Jean-Pierre Hudon. These three individuals lived in Sept-Îles, and they became directors of Arnaud Properties.

[15] On November 10, 1979, in the course of a meeting, the shareholders of Arnaud Properties instructed the appellant Harquail to examine three options:

1. expropriation of the development site by Hydro-Québec;

2. sale of rights and property connected with the hydro-electric project to Iron Ore; and

3. operation as a joint venture with Iron Ore and Hydro-Québec.

[16] Fifteen thousand dollars was made available to enable the appellant Harquail to carry out these instructions. The money was to be used to cover expenses that might be incurred in the course of his assignment. In addition, the shareholders of Arnaud Properties agreed to pay the appellant Harquail a fee based on the scale set out in the minutes of the above-mentioned meeting of Arnaud Properties on November 10, 1979. That scale took into account various possibilities, including a joint venture.

[17] The third option would have enabled Arnaud Properties to circumvent Hydro-Québec’s policy, since the company could have resold, so to speak, the electricity to one of the proposed partners: Iron Ore or Hydro-Québec.

[18] In April 1980, the appellant Harquail, in his capacity as agent of Arnaud Properties, took part in a meeting with representatives of Iron Ore and Hydro-Québec to discuss the work and costs associated with this hydro-electric project. Following a meeting held in June 1980, Hydro-Québec undertook a study relating to the temporary regulation of the Rivière Ste-Marguerite, in response to a request by Hall River and Gulf Power, a subsidiary of Iron Ore. According to the appellant Harquail, the study recommended that Hydro-Québec undertake the project. Despite the study’s conclusions, Hydro-Québec decided not to pursue the project, and instead to develop the Grande-Baleine project. The appellant Harquail was supposed to have completed his assignment on June 30, 1980, but he continued to work on it after that date.

[19] Since a joint venture operation with Hydro-Québec was no longer possible, Arnaud Properties turned to Iron Ore, which had just built a new plant in Sept-Îles. Representatives of Arnaud Properties and Hall River held discussions on this subject with representatives of Iron Ore in 1981 and 1982. The appellant Harquail stressed that at that time Arnaud Properties was examining the matter of the development of First Falls very carefully.

[20] In 1987, the cost of the project to develop First Falls was estimated to be $17,000,000, but the appellant Harquail testified that he had foreseen no problems obtaining the necessary financing.

[21] The minutes of a meeting of the directors of Arnaud Properties held on July 2, 1987 indicate, in a paragraph entitled “DEVELOPMENT OF HYDRO-ELECTRIC POTENTIAL AT FIRST FALLS, RIVIERE MARGUERITE”, that the appellants Harquail and Girard were authorized to do the following: “to forthwith open discussions with all interested parties with a view to advancing the development as expeditiously as possible”. In passing, the minutes mention the possibility of Arnaud Properties selling a lot to the city of Sept-Îles.

[22] A meeting of the directors of Hall River was held on July 2, 1987, as can be seen from the first paragraph of the summary of a report dated August 4, 1987, which will be discussed later. The minutes of that meeting indicate that the appellants Harquail and Girard would be representing Hall River in its negotiations with Hydro-Québec.

[23] On July 7, 1987, the appellant Harquail, in his capacity as vice-president of Hall River, sent a letter to a vice-president of Hydro-Québec. One paragraph of that letter should be noted:

. . .

It is our understanding that the recently adopted policy of Hydro-Québec envisages the purchase of power from small hydro-electric enterprises to a maximum production level of 25 MW. To this end, we respectfully seek a meeting with representative [sic] of Hydro-Québec at the earliest possible moment to discuss the procedures and requirements to enable a comprehensive agreement to be entered into between Hall River and Hydro-Québec. This would enable the Company to go forward, in an expeditious manner, with the planning/development and construction envisaged in a rehabilitation [sic] the First Falls facility at La Ville de Sept-Iles Ouest.

[24] On August 4, 1987, the appellant Harquail wrote a detailed five-page report referred to above for the president and directors of Hall River concerning the meetings and other activities that had taken place in July 1987. The report provides a good idea of the options being considered by Hall River at that time in terms of pursuing the project to develop the company’s hydro-electric assets.

[25] On August 20, 1987, Hydro-Québec sent the appellant Harquail, in his capacity as vice-president of Hall River, its new “policy for purchasing electricity produced by small power plants owned by third parties in Québec” which had been adopted on February 18, 1987,[4] after a new provincial government came to power. After lengthy and difficult negotiations, Hydro-Québec said that it was prepared to purchase electricity at 2.86 cents per kilowatt/hour, while Hall River wanted to sell electricity at 4.2 cents per kilowatt/hour.

[26] On August 24, 1987, the appellant Harquail, in his capacity as vice-president of Hall River, wrote to the Minister of Energy and Resources of Québec to tell it that the company [TRANSLATION] “is interested in developing a hydraulic site and is requesting the necessary permits to enter into an agreement with Hydro-Québec for the purchase of energy”. The first two paragraphs of the letter are perfectly clear on this point. They read as follows:

[TRANSLATION]

The Hall River Power Corporation owns the rights to use a dam and rights to the hydraulic power at First Falls on the Rivière Ste-Marguerite. That site, which is in the city of Sept-Iles, 7.5 km. upstream from the mouth of the river, offers a gross head of 17.4 m. The Corporation wants to install a hydro-electric power plant there. Preliminary discussions have been held with Jean-Claude Richard from the office of Jacques Guevremont, Executive Vice-President, Hydro-Québec.

In accordance with the terms and conditions set out in Resolution HA-347-54/87 of Hydro-Québec’s board of directors, dated February 18, 1987 and entitled “policy for purchasing electricity produced by small power plants owned by third parties in Quebec” (copy attached), the Hall River Power Corporation, an independent developer, hereby gives notice that it is interested in developing a hydraulic site and is requesting the necessary permits to enter into an agreement with Hydro-Québec for the purchase of energy.

[27] This letter to the Minister of Energy and Resources of Québec dated August 24, 1987 was followed by another letter dated September 14, 1987, also to the Minister of Energy and Resources of Québec, from the appellant Harquail in his capacity as vice-president of Hall River. The second letter also referred to a meeting between the appellant Harquail and a vice-president of Hydro-Québec, this one held on September 8, 1987. The letter addressed two matters: the first was the source of Hall River’s rights as owner of the hydraulic resources at First Falls on the Rivière Ste-Marguerite, while the second was a suggestion to the Minister that the production capacity of these hydro-electric resources be increased.

[28] On the same day, September 14, 1987, the appellant Harquail, as vice-president of Hall River, sent the Minister of the Environment of Québec a letter, the body of which was identical to that of the letter of August 24, 1987 to the Minister of Energy and Resources of Québec. The two main paragraphs of the earlier letter are set out in paragraph 26 of these reasons for judgment.

[29] On November 13, 1987, the vice-president of SNC Hydro Inc. (now SNC Lavalin) contacted the industrial commissioner of the city of Sept-Îles and stated the following: [TRANSLATION] “In the event . . . that negotiations with Hydro-Québec resulted in an acceptable rate [for the sale of electricity], SNC would be in a position to provide financing, construct the project and operate the project in conjunction with the Hall River Power Corporation.” [Words in brackets added.]

[30] On November 27, 1987, following a telephone conversation with one Jacques Painchaud of the Ministère de l’Énergie et des Ressources of Québec, the appellant Girard, on behalf of Hall River, contacted that government department by letter to complain about the price set by Hydro-Québec for the sale of electricity, stating that [TRANSLATION] “this policy has shut the door on our business”. He said that he did not understand Hydro-Québec’s attitude, since there [TRANSLATION] “are very few independent power plants that are able to produce electricity in Québec”.

[31] On January 13, 1988, the political assistant to the Minister of Energy and Resources of Québec replied to the letter of August 24, 1989 from the appellant Harquail by inviting him to [TRANSLATION] “contact the regional office of the Ministère de l'Environnement in Sept-Îles” and obtain a permit from the Régie de l'électricité et du gaz. The letter also, as the appellant Harquail pointed out in his testimony, recognized “prior rights under the original grant to James Clark at First Falls” and indirectly recognized the rights of Arnaud Properties and Hall River, to the exclusion of Hydro-Québec. A letter sent by the office of the Minister of Energy and Resources of Québec to the appellant Girard on the same day in reply to Mr. Girard’s letter of November 27, 1987 suggested that he [TRANSLATION] “contact the Associate Deputy Minister for Energy . . . to schedule a meeting to try to find some common ground”. That meeting was held in Québec on February 29, 1988.

[32] The “Avis de projet” form was sent to the Ministère de l’Environnement of Québec on January 22, 1988, by the appellant Harquail acting on behalf of Hall River. That “Avis de projet” comprised an application for environmental permits. Paragraph 4 of the “Avis de projet” sets out the “primary objectives” as follows:

[TRANSLATION]

- to expand development of the hydro-electric resources of the Rivière Ste-Marguerite;

- to use the watercourse of and First Falls on the Rivière Ste-Marguerite for the production of clean, usable energy.

The “Avis de projet” form includes a table entitled “Preliminary Project Schedule”. The appellant Harquail explained it as follows[5]:

A. We had entered into very intensive negotiations with both the SNC group on general contracting and construction, and Dominion Bridge, Sulzer who were really going to supply all the equipment, and they had prepared a project schedule which envisaged the construction starting at the First Falls in January of 1988, and being concluded in January of 1990.

[33] In a letter to the Minister of Energy and Resources of Québec dated January 29, 1988, the appellant Harquail, on behalf of Hall River, requested that three leases held by Gulf Power be cancelled, since Iron Ore, [TRANSLATION] “the owner of Gulf Power”, had informed Hall River [TRANSLATION] “of its intention not to pursue the development of the hydro-electric potential of the First and Second Falls, Rivière Ste-Marguerite”. Hall River also asked that it be given leases by the Minister's department for eight lakes specified in the letter.

[34] Hall River wanted to have those leases so that it could regulate the flow of the watercourse while waiting for the Mile 56 project to be completed by Hydro-Québec.[6]

[35] A study was also conducted in early 1988, at the request of the appellant Harquail, by a Toronto economist, Percy Macfaney in which he provided explanations regarding the concept involved in the theory known as “Marginal or 'Avoided' costs”. This study was to be used in the discussions that Hall River representatives were to have with Hydro-Québec. That study cost approximately $1,500.

[36] On February 22, 1988, the director of environmental assessment of the Ministère de l'Environnement of Québec replied to the “Avis de projet”, stating that in the near future Hall River would receive the Minister’s directive [TRANSLATION] “indicating the nature, scope and extent of the environmental impact assessment statement” that Hall River would have to prepare.

[37] On February 29, 1988, at a meeting with the appellant Girard, the Associate Deputy Minister for Energy of Québec explained that there was [TRANSLATION] “a very complicated process” for changing the price proposed by Hydro-Québec for supplying electricity.

[38] On July 20, 1988, the Ministère de l'Environnement of Québec sent the appellant Harquail of Hall River the “draft directive” concerning the First Falls project and invited the appellant Harquail to submit his comments regarding it.

[39] On September 15, 1988, the Minister of Energy and Resources of Québec replied to the letter from the appellant Harquail dated January 29, 1988, informing him that [TRANSLATION] “only the lease-holder may request cancellation of the leases” and his department was in the process of preparing [TRANSLATION] “a bill to revise the Watercourses Act to simplify the process of managing and granting rights to use the hydraulic resource”.

[40] In a letter dated August 18, 1988 sent by the appellant Harquail on behalf of Hall River to the president of Lavalin Hydro Inc., he referred to a most productive meeting they had had and said that he was sending him certain material described in Schedule “A” to the document entitled “Confidentiality Agreement” between Lavalin Hydro Inc. and Hall River.

[41] On October 19, 1988, the Ministère de l'Environnement of Québec provided the appellant Harquail with a revised version of the “draft directive” and invited Hall River’s [TRANSLATION] “environmental consultant” to submit comments to the appropriate branch of that Ministère. The appellant Harquail acknowledged that Hall River had not retained the services of an [TRANSLATION] “environmental consultant”, but stressed that it was making representations to the cabinet (Government of Québec) to seek an exemption from the requirement that it conduct an environmental impact assessment. He thought that this approach was worthwhile since the facilities were already in place, there would be no flooding and no people would be required to move.

[42] During the fall of 1988, the appellant Girard was informed that Hydroméga was interested in developing Hall River’s hydro-electric assets. He met with representatives of Hydroméga to discuss strategy and the possibility of developing the river's hydro-electric potential as a joint venture. In the course of that meeting, Hydroméga’s representatives indicated to the appellant Girard that they wanted to [TRANSLATION] “buy Arnaud”.

[43] An agreement in principle was entered into on October 23, 1988, between Hydroméga and the shareholders of Arnaud Properties, including all the appellants, except the appellant Harquail, under which Hydroméga agreed to acquire [TRANSLATION] “the shares, advances and rights of the shareholders” of Arnaud Properties for $2,000,000, payable as set out in paragraph 6(F). Paragraph 6(G), however, stipulates that Hydroméga:

[TRANSLATION]

G) . . . shall have the option of not acquiring the said shares, advances and rights if:

i) its studies and analyses do not establish profitability;

ii) it does not obtain permission to develop SMI from the appropriate government authorities; and

iii) agreements cannot be entered into with Hydro-Québec.

Paragraph 12 of that agreement is also of some interest:

[TRANSLATION]

12.. The shareholders inform HMD [Hydroméga] that their agreement is conditional on Gérald Harquail also agreeing to sell, and authorizing them to sell. HMD [Hydroméga] consents to this.

[Words in parentheses added.]

[44] On December 12, 1988, Mr. Richard, a vice-president of Hydro-Québec, sent the appellant Harquail, in his capacity as vice-president of Hall River, the directive respecting the [TRANSLATION] “requirements establishing the terms and conditions for the purchase of electricity from independent producers for projects to be incorporated into the primary Hydro-Québec grid”. This directive was dated November 1988. The appellant Harquail had continued his discussions with Hydro-Québec during the period preceding the establishment of the directive with the intention of resolving the question of the sale price of electricity.

[45] On February 24, 1989, all the shareholders of Arnaud Properties sold all their shares in the capital stock of that company to Hydroméga for a price of $2,000,000.

[46] The appellant Harquail testified that he did not really want to dispose of his shares, but that he had no choice, given that he was a minority shareholder and the other shareholders wanted to sell. At the examination for discovery, Mr. Girard said that the project [TRANSLATION] “would have taken a lot of the shareholders’ money”. He estimated the amount to be $5,000,000. He testified that because of the need to borrow the money and the very low price offered by Hydro-Québec for the sale of electricity, the project was [TRANSLATION] “not feasible”.[7]

[47] The appellants included the capital gains resulting from that transaction in their income tax returns for the 1989 taxation year. As was mentioned at the beginning of these reasons, each of the appellants is claiming the deduction for the disposition of qualified small business corporation shares provided for in subsection 110.6(2.1) of the Act.

[48] In Hall River’s income tax returns for the 1986, 1987, 1988 and 1989 taxation years, and in the tax returns filed by Arnaud Properties for the 1989 taxation year, the word “inactive” was inserted in the space relating to [TRANSLATION] “major business activities”. Hall River’s financial statements, which were attached to its 1986 and 1987 income tax returns, indicate that [TRANSLATION] “the company, which was incorporated under Part I of the Québec Companies Act, has been inactive for several years”. The sales contract dated February 24, 1989 mentions in Articles 3.1.10 and 3.1.13 that the two companies Arnaud Properties and Hall River had not carried any activity since December 31, 1988 and had not had any employee for the past five years.

[49] After the sale on February 24, 1989, Hydroméga began the hydro-electric development that had been planned by Arnaud Properties and Hall River. The appellant Harquail testified that Hydroméga was able to sell electricity at 4.5 cents per kilowatt/hour in 1990 or 1991.

Appellants’ argument

[50] For the appellants, the Court was first referred to the decision of the Federal Court of Appeal in The Queen v. Rockmore Investments Ltd., 76 DTC 6156. Counsel for the appellants clearly stated that it was not the facts in Rockmore Investments that were important for the purposes of the case at bar, but rather the principles stated by Chief Justice Jackett, specifically in the following passage, at p. 6157:

In considering whether there is an "active business" for the purposes of Part I, the first step is to decide whether there is a "business" within the meaning of that word. Section 248 provides that that word, when used in the Income Tax Act, includes "a profession, calling, trade, manufacture or undertaking of any kind whatever" and includes "an adventure or concern in the nature of trade" but does not include "an office or employment". Furthermore, the contrast in section 3(a) of the Act between "business" and "property" as sources of income makes it clear, I think, that a line must be drawn, for the purposes of the Act, between mere investment in property (including mortgages) for the acquisition of income from that property and an activity or activities that constitute "an adventure or concern in the nature of trade" or a "trade" in the sense of those expressions in section 248 (supra). Apart from these provisions, I know of no special considerations to be taken into account from a legal point of view in deciding whether an activity or situation constitutes the carrying on of a business for the purposes of Part I of the Income Tax Act. Subject thereto, as I understand it, each problem that arises as to whether a business is or was being carried on must be solved as a question of fact having regard to the circumstances of the particular case.

[51] The next case cited was the decision of the Supreme Court of Canada in Marconi v. The Queen, 86 DTC 6528. In Marconi, the Supreme Court confirmed the English case law, which established the rule that in the case of a corporation there is a rebuttable presumption that income received from an activity relating to an object set out in the corporation's letters patent or articles is income from a business.

[52] The appellants then attempted to demonstrate that when a corporation undertakes activities with a view to future operations, it is carrying on a business. In support of that proposition, counsel for the appellants referred to three decisions of the Federal Court–Trial Division: E.R. Squibb & Sons Ltd. v. M.N.R., 73 DTC 5140; Esar et al. v. The Queen, 74 DTC 6062; and The Queen v. Dorchester Drummond Corp. Ltd., 79 DTC 5163.

[53] Squibb, supra, dealt with a corporation that had deducted municipal and school taxes on certain land, only 16% of which had been used, in computing its income. The Minister disallowed a deduction for property taxes other than on the part that had been used, on the ground that the rest of the land was not used in carrying on a business. Mr. Justice Cattanach therefore had to determine whether the expenses relating to property taxes for the unused part of the land had been incurred in carrying on a business. At page 5142, he stated:

It is not a condition of the deductibility of a disbursement or expense that it may have been made in vain. Rather, the question is whether the expenditure was in the course of the current operation of the business as part of the policy of the taxpayer in conducting its operations in a businesslike way.

[54] Counsel for the appellants also drew the Court’s attention to the following passages from that decision, at pages 5143–44:

Those sales and purchases are consistent with the avowed purpose of the appellant that it intended to use the entire area for the business although the use of a portion might be delayed.

. . .

It is not realistic that the appellant should be considered in isolation. It was part of a larger overall organization. Its shares were wholly owned by the parent corporation and the policy of the whole organization was necessarily that of the appellant. The pragmatic or practical approach clearly points to the policy and intention of the parent corporation as relevant to the policy and intention of the appellant. In fact they were coincidental.

[55] Cattanach J. concluded that the expenses had been incurred with a view to future expansion of the corporation's facilities, and were therefore deductible. He did not specifically say that owning land was part of the carrying on of a business, but that is the logical conclusion, given the manner in which he addressed the question.

[56] The facts in Esar, supra, are a little closer to the facts of the instant case. Esar also involved taxpayers who had claimed a deduction for their property taxes. They had purchased a piece of land with the intention of erecting a commercial or industrial building on it. Since they did not have the financial resources at that time to construct such a building, they rented out a run-down house on the land, for minimal rent. After a few years, the municipal authorities determined that the house was unfit for human habitation and ordered its demolition. The land was then left vacant for several years. The Minister disallowed the deduction for property taxes on the land because of the fact that the land had produced no income for several years and the income that it had produced in certain years was minimal. Mr. Justice Heald concluded that since the land had been retained in the reasonable expectation that a building would be erected on it, the property taxes were deductible. The Court’s attention was drawn to the following passage from the judgment, at page 6065:

In view of the foregoing facts, I have concluded that the plaintiffs have discharged the onus cast upon them of establishing that subject land was retained in the reasonable expectation that they would be able to utilize the land for the construction of a commercial or industrial building which they would rent out for income. That being so, it follows that the payment of property taxes was an expenditure on revenue account and as such was laid out for the purpose of gaining or producing income within the meaning of section 12(1)(a) of the Income Tax Act.

[57] Dorchester Drummond, supra, also dealt with a corporation which wanted to deduct its property taxes. The taxpayer had acquired a piece of land in downtown Montreal for the purpose of erecting a building on it. The corporation had retained architects and plans had been drawn up, but after the land was acquired the office rental market in Montreal deteriorated and the corporation decided to wait for the market to improve. In the meantime, the corporation operated a parking lot for several years, but the city of Montreal then prohibited the operation of a parking lot, and the taxpayer was obliged to stop doing this. The corporation in question had also negotiated with some other companies with a view to obtaining tenants for the future building. The negotiations were unsuccessful. The Court’s attention was drawn to the following paragraphs of the judgment by Mr. Justice Walsh, in which he set out his conclusion, at pages 5168–69:

It cannot be contended that the company was not carrying on a business during the years in question. This was established in the case of M.R.T. Investments Limited et al. v. The Queen, 75 DTC 5224 (confirmed in appeal [76 DTC 6158, F.C.A.]) which dealt with what constituted an "active business" within the meaning of Section 125 of the new Income Tax Act. It was held that business activities need be neither extensive nor profitable in order for the taxpayer to be considered as carrying on an active business. Gibson, J. reached the same conclusion in Her Majesty The Queen and Cadboro Bay Holdings Limited, [77 DTC 5115], 1977 C.T.C. 186; after carefully reviewing the jurisprudence. Defendant was therefore undoubtedly carrying on business during the years in question.

. . .

I have concluded that on the facts of this case the better view is that the deduction of these taxes should be permitted.

[58] Counsel for the appellants also commented on the decision of the Supreme Court of Canada in Ensite Limited v. Her Majesty The Queen, 86 DTC 6521, in which the issue was the withdrawal of property that could have a decidedly destabilizing effect on the operations of the taxpayer in question. The Court’s attention was drawn to the following passage from that decision:

. . . The threshold of the test is met when the withdrawal of the property would “have a decidedly destabilizing effect on the corporate operations themselves”: March Shipping Ltd. v. M.N.R., supra, at p. 374. This would distinguish the investment of profits from trade in order to achieve some collateral purpose such as the replacement of a capital asset in the long term (see, for example, Bank Line Ltd. v. Commissioner of Inland Revenue (1974), 49 T.C. 307 (Scot. Ct. of Session)) from an investment made in order to fulfil a mandatory condition precedent to trade (see, for example, Liverpool and London and Globe Insurance Co. v. Bennett, [1913] A.C. 610 (H.L.) and Owen v. Sassoon (1951), 32 T.C. 101 (Eng. H.C.J.). Only in the latter case would the withdrawal of the property from that use significantly affect the operation of the business. . . .

[59] Counsel for the appellants submitted, relying on Ensite, that in the case at bar, [TRANSLATION] “without the hydro-electric assets, there would have been no business”.

Respondent’s argument

[60] A number of decisions submitted by the respondent addressed the question of the deductibility of certain expenses that the taxpayers characterized as “start-up costs”.

[61] The first decision dealing with that question is Craddock et al. v. M.N.R., 86 DTC 1014, in which two taxpayers had purchased a farm with the intention of breeding cattle. They spent several years improving the soil and facilities before purchasing any cattle. The taxpayers argued that they were entitled to deduct the cost of the improvements together with interest and property taxes. Judge Rip concluded that the expenses were not deductible because the taxpayers were not carrying on a business when the expenses were incurred. The following passages, at page 1016 of the decision, are of particular interest:

In my view Messrs. Giffen and Craddock were not in the business of carrying on farming in 1980 and 1981. What they were doing during those years was preparing the property for use as a farm at some time in the future. These were not "start-up" costs of a business because in the years of the appeal the property could not support a business enterprise. . . . What the taxpayer is really saying is that his business operations cannot start until such time as there is sufficient capital available to support the business. In 1980 and 1981 Messrs. Giffen and Craddock were working to get the property to a condition which would support what they wanted to do with it. But they were not yet carrying on a business.

In these appeals Messrs. Giffen and Craddock are in effect saying that the business they wished to carry on could not start until the barn was rebuilt, the shed repaired, the house was in a proper state of repair and the arable land was susceptible of giving proper crops. In other words capital assets must first be improved to bring the farm property to a point where a business may be carried on.

[62] The respondent also referred to Rolland v. M.N.R., 87 DTC 341, in which the taxpayer planned to carry on the business of operating a hot air balloon. He had purchased a balloon and the necessary equipment, and taken lessons. He decided to get a few years’ experience before carrying passengers. He deducted the expenses he incurred during those years. Judge Bonner concluded that they were not deductible since the taxpayer had not started to carry on a business. The following passage appears at page 343:

In my view the losses in issue were not, during the years in question the losses of a business because during that period no business had yet commenced.

[63] The respondent also cited Bancroft v. M.N.R., 89 DTC 153, in which the taxpayer had spent considerable sums of money in an attempt to set up a tourist resort. He had purchased a piece of land that included certain facilities, which he had then renovated extensively. He then encountered difficulties in obtaining additional financing and had to abandon the project. In computing his income, he claimed a deduction for the expenses in question. Judge Lamarre Proulx concluded that he was not carrying on a business. At page 155, she stated:

On the evidence that was before me, I can only conclude that the Appellant's activities do not meet the threshold required for him to be considered as "carrying on a business". Put differently the Appellant never passed the stage of capital expenditure. The walls and foundations were there, but there was nothing which resembled a tourist resort. There was no kitchen, no washrooms. The inside was never finished. There had not been any training of personnel, needless to say no hiring, no promotion, no advertising. The Appellant, during all the years under appeal, was quite far from the operational phase of his plan.

. . .

The Appellant was in the process of creating a business structure. He never finished creating it. He never commenced his proposed business of a year-round country retreat. I am of the view that the evidence disclosed that the Appellant never carried on a business nor did he commence a business.

[64] Brief mention was made of Hilts et al. v. M.N.R., 91 DTC 633, the facts of which are similar to those in Craddock, supra.

[65] Counsel also mentioned Samson et Frères Ltée v. The Queen, 96 DTC 1559, in which the taxpayer had deducted certain expenses that it had incurred after a fire destroyed its business. It had prepared a plan and purchased land and equipment with the intention of starting a new business. Judge Dussault concluded that the taxpayer’s business had ceased to exist and that the activities it had undertaken were merely preliminary efforts. The following passage appears at page 1562:

[TRANSLATION]

. . . I find that all the steps taken to purchase lands, buildings and equipment in various locations were merely preliminary and intended to bring together the basic elements or structure of the new business, which structure moreover was never concretely put into place and always remained at the planning stage, the materialization of that plan being contingent upon obtaining outside financing. To the extent that the very structure of the business the appellant wished to operate was never put into place, it is hard to see how the expenses relating to preliminary efforts to establish a business that does not exist – which efforts did not go beyond the planning stage – can be claimed to be deductible.

[66] The respondent submitted that as in Samson, supra, Arnaud Properties had undertaken only preliminary efforts. In the respondent’s submission, Arnaud Properties (through its subsidiary) owned hydro-electric assets and had initiated negotiations, but the structure of the business was not in place.

[67] The respondent commented briefly on the decisions of Mr. Justice Rothstein in Heinze v. The Queen, 97 DTC 5219, of Judge Bowman in Goren v. The Queen, 98 DTC 1963, and of Judge Lamarre in Sidawi et al. v. The Queen, 98 DTC 1775.

[68] Counsel for the respondent concluded that in the case at bar, the essential and important elements of the business structure were not in place, which made it impossible to find that a business was carried on. The efforts that were made were not, in the respondent’s submission, sufficient to support the argument that the business existed at the time in question.

Analysis

[69] The issue in this case — stated in general terms — is whether the shares of Arnaud Properties, the disposition of which by the appellants in February 1989 resulted in capital gains, were qualified small business corporation shares. The expression “qualified small business corporation share” is defined in subsection 110.6(1) of the Act. The relevant portion of that subsection, for the purposes of this case, is as follows:

110.6(1) For the purposes of this section,

. . .

“qualified small business corporation share”. — “qualified small business corporation share” of an individual (other than a trust that is not a personal trust) at any time (in this definition referred to as the “determination time”) means a share of the capital stock of a corporation that,

(a) at the determination time, is a share of the capital stock of a small business corporation owned by the individual, the individual’s spouse or a partnership related to the individual,

(b) throughout the 24 months immediately preceding the determination time, was not owned by anyone other than the individual or a person or partnership related to the individual, and

(c) throughout that part of the 24 months immediately preceding the determination time while it was owned by the individual or a person or partnership related to the individual, was a share of the capital stock of a Canadian-controlled private corporation more than 50% of the fair market value of the assets of which was attributable to

assets used in an active business carried on primarily in Canada by the corporation or by a corporation related to it,

(ii) . . . .[8]

As can be seen, this definition lays down three requirements that must be met for a share to be considered a “qualified small business corporation share”.

[70] First, paragraph (a) of the definition requires that a share owned by, inter alia, an individual be a share of the capital stock of a “small business corporation” at the time of disposition of the share. The expressions “small business corporation” and “business” are defined in subsection 248(1) of the Act:

“Small business corporation”. — “small business corporation” at any particular time means a particular corporation that is a Canadian-controlled private corporation all or substantially all of the fair market value of the assets of which at that time was attributable to assets that were

(a) used in an active business carried on primarily in Canada by the particular corporation or by a corporation related to it,

(b) shares of the capital stock of one or more small business corporations that were at that time connected with the particular corporation (within the meaning of subsection 186(4) on the assumption that such small business corporation was at that time a “payer corporation” within the meaning of that subsection) or a bond, debenture, bill note, mortgage, hypothec or similar obligation issued by such a connected corporation, or

(c) assets described in paragraphs (a) and (b),

and, for the purposes of paragraph 39(1)(c), includes a corporation that was at any time in the 12 months preceding that time a small business corporation . . . .

“business” includes a profession, calling, trade, manufacture or undertaking of any kind whatever and, except for the purposes of paragraph 18(2)(c), section 54.2 and paragraph 110.6(14)(f), an adventure or concern in the nature of trade but does not include an office or employment . . . .

[71] One of the various conditions set out in the definition of “small business corporation” is that “all or substantially all of the fair market value of the assets . . . at that time was attributable to assets” that were “used in an active business carried on primarily in Canada by the particular corporation or by a corporation related to it”.

[72] The second requirement is that the share in question not be owned by anyone other than the taxpayer in question (or certain specific persons) throughout the 24 months immediately preceding the disposition of the share.

[73] The first provision of the third requirement (which includes a number of alternatives), set out in subparagraph (c)(i) of the definition of “qualified small business corporation share”, requires that more than 50% of the fair market value of the assets of the corporation in question be used in “an active business carried on primarily in Canada by the corporation or by a corporation related to it” throughout the 24 months immediately preceding the time of disposition of the share. The expression “active business” is defined in subsection 248(1) of the Act as follows:

“active business”, in relation to any business carried on by a taxpayer resident in Canada, means any business carried on by the taxpayer other than a specified investment business or a personal services business . . . .

[74] Bearing in mind both (1) the requirement set out in paragraph (a) of the definition of “qualified small business corporation share” that the share be a share of a “small business corporation” together with the condition set out in paragraph (a) of the definition of “small business corporation” that the assets be used “in an active business carried on primarily in Canada by the particular corporation or by a corporation related to it”, and (2) the requirement set out in subparagraph (c)(i) of the definition of the expression “qualified small business corporation share” that “throughout that part of the 24 months immediately preceding” the disposition of a share, a specified percentage of the assets be “used in an active business carried on primarily in Canada by the corporation or by a corporation related to it”, the result is that the assets of a particular corporation must be used in an active business that the corporation in question or a corporation related to it carries on throughout the 24 months immediately preceding the disposition of a share. This is the only requirement in the definition of “qualified small business corporation share” that is in dispute.

[75] The question in issue can be defined even more precisely. Having regard to the definition of the expression “active business”, the parties acknowledge that Arnaud Properties and Hall River were not carrying on a specified investment business or a personal services business. It follows, then, that the only question to be decided — reduced to its simplest expression — is whether Arnaud Properties and Hall River were carrying on a business during the 24 months immediately preceding the date on which the shares of the capital stock of Arnaud Properties were sold: February 24, 1989. The parties agreed at the hearing that the only point in issue relates to the question as I have just stated it.

[76] Having regard to the facts of the case at bar and the nature of the issue, I am of the opinion that the comments of Mr. Justice Walsh in his decision — affirmed by the Federal Court of Appeal — in M.R.T. Investments Ltd. et al. v. The Queen, 75 DTC 5224, are worth examining. The issue in that case was whether the income concerned was income from an active business carried on in Canada. It should be noted that at that time the Act did not define the term “active business”; the definition of “active business” that appears in subsection 248(1) of the Act was added by subsection 66(1) of chapter 5 of the 1979 Statutes of Canada. However, the issue was very similar to the one before the Court in the case at bar. At page 5239, Walsh J. stated:

A consideration of the course of conduct over an extended period of time is relevant in determining the extent of the activity of a company's business. Certainly, a company could be incorporated but not actually commence operation on any extensive scale until some years thereafter. Similarly, a company that has been active could become dormant or nearly so, merely holding annual meetings and filing its returns in order to avoid the forfeiture of its charter. In neither event could it be considered as carrying on an "active business". Except for such extreme situations, however, I do not believe that the question of whether a company is carrying on an active business or not in any given year should be determined by looking at its activity in that year alone, or that mortgage lending companies, such as the present companies, should be considered as being inactive in any given year merely because they have made relatively few new loans in that year, although they have made a substantive number in the immediately preceding or succeeding years. . . .

[77] The decision of the Federal Court of Appeal in M.N.R. v. M.P. Drilling Ltd., 76 DTC 6028, is relevant to the case at bar, although in that case the Federal Court of Appeal had to consider a different issue: whether or not certain expenses were capital expenditures and whether they were deductible even though they did not produce any income. In examining those questions, Mr. Justice Urie, writing for the Federal Court of Appeal, thought it necessary to comment on the point at which a taxpayer begins to carry on a business. The following passages from his decision, at pages 6031–32, shed some light on this matter:

As I understand it, it is basic to the Appellant's submissions that the expenditures incurred by the Respondent in 1964, 1965 and 1966 were for the purpose of creating or acquiring a business structure. In Appellant Counsel's submission its activities during those years were preparatory to or for the initiation of a business and were not outlays made for the purpose of gaining or producing income from a business. If this submission were accepted the payments would have been on account of capital, falling within paragraph (a) of Jackett, C.J.'s test propounded in the Canada Starch case (supra).

In my view this argument does not withstand scrutiny in that it ignores the fact that the business structure per se came into existence in late September when the Respondent commenced its business operations by continuing the marketing negotiations, supply negotiations and technical studies through its consultants until June of 1964 when it opened its own office and engaged the services of its first employees, utilizing for such purposes funds advanced by its principal, Mr. Bawden, or other companies controlled by him.

. . .

. . . Counsel [for the Minister] took the position that, in substance, all of the expenditures were for a like purpose, i.e., to ascertain the feasibility of going into the business of purchase and sale of liquified natural gas to certain Pacific rim countries and this was so whether the work involved in such studies was carried out by the Respondent's own personnel or by outside consultants. He argued that none were made as part of the operation of the profit earning process of an existing business but were made as part of the formation of the structure necessary to engage in that process.

In my opinion, that argument is not supported by the evidence and, in fact, there is evidence which points in the opposite direction. Not the least important of that kind of evidence was the fact that negotiations undertaken by the Respondent's officers had culminated in some expressions of intent by potential customers to buy the gas and some by producers of the gas to sell it to the Respondent for the purpose of resale. Quite clearly then, the Respondent was in fact in business and was not simply bringing the business into existence. . . .

. . . I cannot agree that because the Respondent had not generated any revenue, let alone profit, makes it any less "the process of operation of a profit making entity".

[78] I must therefore determine whether, having regard to the evidence, the efforts and activities undertaken by Arnaud Properties or Hall River during the 24 months immediately preceding the disposition of the shares on February 24, 1989 were sufficient to amount to carrying on a business.

[79] To answer this question, it is necessary to examine the major activities of Arnaud Properties and Hall River during the 24 months immediately preceding February 24, 1989 and even during the years prior to the period in question, as suggested by Walsh J. in M.R.T. Investments.

[80] As background, it should be noted that Arnaud Properties sold some forty lots between 1973 and 1975. It subsequently made other sales, the times of which were not specified. As appears from the pleadings, the profits made by Arnaud Properties on the sales of lots between 1973 and 1975 were included in its income. It therefore cannot be denied that Arnaud Properties carried on a business during the three years in question. Of course, Arnaud Properties could have ceased carrying on its business after that time.

[81] In 1978, Hall River commissioned a study to determine whether it would be profitable to develop First Falls on the Rivière Ste-Marguerite. The preliminary report completed that year concluded that the operation would not be profitable.

[82] In November 1979, the shareholders of Arnaud Properties instructed the appellant Harquail to examine three options. One option was for Arnaud Properties to develop the hydro-electric resources at First Falls on the Rivière Ste-Marguerite as a joint venture with another company. In carrying out his assignment, the appellant Harquail initiated negotiations with Hydro-Québec and Iron Ore. Hydro-Québec itself conducted a study relating to the profitability of the development in question. Despite the positive conclusion of the study, Hydro-Québec then decided to give priority to another project.

[83] During 1981 and 1982, after being informed of Hydro-Québec’s decision, representatives of Arnaud Properties and Hall River held discussions with Iron Ore aimed at pursuing a project to develop First Falls.

[84] In 1987, the estimated cost of the project to develop First Falls had risen to $17,000,000. The appellant Harquail testified that obtaining the financing needed for the development would have caused no problems.

[85] The minutes of a meeting of the shareholders of Arnaud Properties on July 2, 1987 mention that the appellants Harquail and Girard were authorized to hold discussions with all interested parties with a view to developing the river’s hydro-electric potential as soon as possible.

[86] In light of a new Hydro-Québec policy which allowed Hydro-Québec to purchase energy from small hydro-electric enterprises, the appellant Harquail, as vice-president of Hall River, contacted Hydro-Québec with the stated objective of entering into an agreement between Hall River and Hydro-Québec for the sale of energy. As the appellant Harquail pointed out in his letter to Hydro-Québec, an agreement of that nature would enable Hall River to proceed with rehabilitating and redeveloping the facilities at First Falls.

[87] In November 1987, in response to Hall River’s approaches, SNC Hydro Inc. told the industrial commissioner of the city of Sept-Îles that it was prepared to do what was necessary — including arranging financing — to proceed, in conjunction with Hall River, with the development of the hydro-electric facilities at First Falls on the Rivière Ste-Marguerite if the negotiations with Hydro-Québec led to an acceptable rate for the sale of energy.

[88] Three letters dated August and September 1987, from Hall River to the Ministère de l'Énergie et des Ressources of Québec and the Minister of the Environment of Québec, were produced by the appellants. The purpose of the letters was to have Hall River’s rights in relation to the right to use a dam and certain hydraulic resources at First Falls on the Rivière Ste-Marguerite recognized and to obtain the necessary permits to develop Hall River’s hydro-electric assets.

[89] In November 1987, the appellant Girard, on behalf of Hall River, contacted the Ministère de l'Énergie et des Ressources of Québec and forcefully stated Hall River’s objections to the price proposed by Hydro-Québec at that time for the purchase of electricity produced by independent producers. A few months after that letter was sent, on February 29, 1988, the appellant Girard met with the Associate Deputy Minister for Energy of Québec to discuss the matter. He was then informed that the process relating to changing the sale price of energy was a complicated one.

[90] In January 1988, the appellant Harquail had sent a letter to the Ministère de l'Énergie et Ressources of Québec seeking the cancellation of three leases held by Gulf Power (a subsidiary of the Iron Ore Company), which Gulf Power had abandoned, and the preparation of leases in favour of Hall River for eight lakes referred to in the letter.

[91] At about the same time, a study dealing with a matter that was likely to be discussed with representatives of Hydro-Québec was conducted by an economist on instructions received from the appellant Harquail.

[92] A few days after receiving a letter from the Ministère de l'Énergie et des Ressources of Québec dated January 13, 1988 in which he was told that the government implicitly recognized Hall River’s rights to the hydro-electric potential of a portion of the Rivière Ste-Marguerite, the appellant Harquail sent the Minister of the Environment of Québec a request for environmental permits to develop the hydro-electric resources of the Rivière Ste-Marguerite and to use that river’s watercourse and First Falls.

[93] In the summer of 1988, in early August, as can be seen from a letter from the appellant Harquail to the President of Lavalin Hydro Inc. dated August 18, 1988, the representatives of Hall River and Lavalin Hydro Inc. had a most productive meeting concerning the project to develop Hall River’s hydro-electric resources. The meeting resulted in a confidentiality agreement between Hall River and Lavalin Hydro Inc.

[94] In July 1988, Hall River received a draft directive from the Ministère de l'Environnement of Québec concerning the hydro-electric development of First Falls on the Rivière Ste-Marguerite, and the Ministère invited the appellant Harquail to submit comments on the draft directive upon the conclusion of a consultation with interested government agencies and departments.

[95] Following those consultations, an amended preliminary directive was sent to Hall River in October 1988, before the environmental impact assessment procedure was formally initiated. Hall River then approached the Government of Québec, at the cabinet level, seeking to be exempted from conducting an environmental impact assessment.

[96] Lastly, in the fall of 1988, the appellant Girard, on behalf of Hall River, met with representatives of Hydroméga to discuss the possibility of developing the river’s hydro-electric potential as a joint venture with that company. At that time, Hydroméga’s representatives expressed their interest in acquiring the shares of Arnaud Properties. As mentioned above, those discussions led to the sale of all the shares of Arnaud Properties to Hydroméga in February 1989.

[97] At the same time as Hall River’s discussions with Hydroméga’s representatives in the latter months of 1988, the appellant Harquail was pursuing his discussions with Hydro-Québec to obtain an acceptable price for the sale of energy by Hall River. Following those discussions, a vice-president of Hydro-Québec sent the appellant Harquail a directive dated November 1988 concerning the terms and conditions for the purchase of electricity from independent producers.

[98] What conclusion must be drawn from this examination of the principal activities and initiatives of the managers of Arnaud Properties and Hall River?

[99] First, it seems clear from the case law that the fact that there was no income in a particular year or over a longer period is not a basis for concluding that a person or a corporation was not carrying on a business. Second, it is clear from the numerous efforts and initiatives undertaken by the managers of the two companies, in particular during 1987 and 1988, that the companies were not inactive during the 24 months in question and were not simply holding annual meetings and producing the reports needed to avoid dissolution.

[100] The situation of the two companies in question in this case seems to me to be different from the situation in Bancroft (cited by the respondent) in which, as a result of difficulties the taxpayer had in obtaining additional financing, he had to abandon the plan for the business he had intended to carry on. In the present case, there was no abandonment of the project involving the development of the hydro-electric ressources in question.

[101] The instant case seems to me to have more in common with the facts in M.P. Drilling, supra, in which the Federal Court of Appeal concluded that there was a business. However, I believe that the situation of the companies in the case at bar during the 24 months immediately preceding February 24, 1989 did not involve activities relating to the carrying on of a business at a stage as advanced as in M.P. Drilling. On this point, I would again quote the following passage from the judgment in M.P. Drilling, supra:

In my view this argument does not withstand scrutiny in that it ignores the fact that the business structure per se came into existence in late September when the Respondent commenced its business operations by continuing the marketing negotiations, supply negotiations and technical studies through its consultants until June of 1964 when it opened its own office and engaged the services of its first employees, utilizing for such purposes funds advanced by its principal, Mr. Bawden, or other companies controlled by him.

[102] The facts mentioned in the passage quoted above contrast with the facts in the instant case. Here, the managers of the two companies in question had not succeeded in making satisfactory arrangements with Hydro-Québec in respect of the sale price of energy. In fact, Hydroméga was unable to reach an agreement concerning the sale price of energy until a year or two later, after it had acquired the shares of Arnaud Properties. According to the evidence, the directors of Hall River considered the negotiation of an adequate price for the sale of energy to be a sine qua non if the project being planned by the managers of Arnaud Properties and Hall River in 1987 and 1988 were to be profitable. Without an agreement as to the sale price for energy, Hall River did not intend to proceed with the plan to develop the hydraulic resources it owned at First Falls on the Rivière Ste-Marguerite. That is why, despite the reservations expressed by the appellant Harquail, the managers of the two companies decided to sell all the shares they owned in the capital stock of Arnaud Properties.

[103] I therefore conclude that the evidence does not establish that Arnaud Properties was still operating the business it had carried on from 1973 to 1975, inclusive, during the 24 months immediately preceding February 24, 1989. For example, it was not shown that the company had sold any lots throughout the 24 months immediately preceding the sale of the shares of its capital stock on February 24, 1989. There is no evidence either that Arnaud Properties would have embarked on a new business during the 24 months in question. Nor was it established that Hall River had started to carry on a business consisting of the sale of electrical energy. Hall River had taken quite a number of steps preparatory to exploiting the river’s hydro-electric potential at First Falls, but it had not actually started to carry on a business of that nature. As a matter of fact, it is clear from the evidence that the carrying on by Hall River of a business involving the sale of energy would never have commenced if no agreement could be reached with Hydro-Québec on an acceptable price for the sale of energy.

[104] The shares of Arnaud Properties were therefore not qualified small business corporation shares within the meaning of subsection 110.6(1) of the Act.

[105] For these reasons, the appeals from the assessments for the taxation years listed in paragraph [1] of these reasons are dismissed, with costs.

Signed at Ottawa, Canada, this 27th day of October 1999.

"Alban Garon"

A.C.J.T.C.C.

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