Marshall v. The Queen, 80 DTC 6357, [1980] CTC 475 (FCTD)

Grant, DJ:—This is an appeal from the decision of the Tax Review Board dated December 23, 1979 which dismissed the appeal of JNBT Developments Ltd, Helen Foster and the plaintiff Marshall heard on common evidence. None of the other parties have appealed except Marshall.

The plaintiff acquired a one-quarter interest in property consisting of 132.5 acres being part of Lot 13, Concession 1 in the Township of East Oxford, and County of Oxford close to the east limits of such city in February 1973. It was known as the Zilke Farm. In January of 1975 the plaintiff and the other owners thereof sold their interest therein to General Motors of Canada, at a total price of $463,599.50 realizing a total gain of $289,096.40. The plaintiff’s profit therein amounted to $72,274.10. In his 1975 income tax return he was shown one-half thereof namely the sum of $36,137.05 as a capital gain. The Minister of National Revenue took the position that such profit was income in the hands of the various taxpayers within the meaning of sections 3 and 4 of the Income Tax Act, SC 1970-71-72, c 63 as amended and within the meaning of “business” as defined in subsection 248(1) of the Act rather than capital gain.

Such lands had been owned by a man named Zilke who had ceased farming the same. He had given to a company named Eaton Yale Ltd, which was engaged in the manufacture of building equipment, an option to purchase the said lands for a total of $145,750 or approximately $1,100 per acre. Such property was zoned as industrial.

One J Norman Beatty was a public accountant. He had as a client and close friend one William Marshall who had been active in the construction of homes in the city of Woodstock. The latter learned in February 1972 that such option could be purchased at a bargain price and discussed it with Beatty who approached the Eaton Company and succeeded in securing an assignment of such option at a total sum of $9,500. The Eaton Company had paid Zilke on account of the purchase price under such option the sum of $60,000 and by the assignment thereof Beatty and the group for whom he was acting received the full credit for such payment when they came to exercise the option. In other words they made a gain of $50,000 at the time of the acquisition of such option. Archibald Marshall a brother of William Marshall also joined in the same venture. He was an active real estate agent. One J Ross McLean who worked for the plaintiff in the installation of water and sewer services in the city of Woodstock was approached and also joined in such venture and such four parties agreed to purchase such option with the property being taken in the name of Beatty in trust for them in equal shares. Beatty, on behalf of the others and himself, immediately gave notice of exercising the option and the purchase was closed in March 1972. A deed was given to Beatty in trust. On closing, he alone, as a trustee gave a mortgage on the said lands back to Zilke and his wife for the sum of $72,875 with interest at the prime bank rate and $2,000 on account of principle on March 1 in the years 1973 to 1976 with the balance becoming due in March 1, 1977. The mortgage contained the privilege to the mortgagor to pay additional sums of $1,000 off the principle without notice or bonus. The cash paid on closing such purchase was $12,875. Each party put up $6,000 cash making $24,000 to cover the cost of the option in the sum of $9,000 plus the balance on closing and other expenses.

After acquiring ownership Beatty rented the land at $2,400 per year respresenting $20 per acre of arable land. The rentals were not sufficient to cover taxes and mortgage payments with the result that each of the owners had to contribute sufficiently to make up the loss in each year. The lands had been farmed and were not serviced by sewers or water. The city of Woodstock made it known early in 1972 that it would not extend its sewer or water services to this property or any further to the east. This may have been the reason that the Eaton Company sacrificed the $60,000 that they had paid on the option.

Beatty and the plaintiff contend that at the time of the purchase of the said option and at the closing of the transactions the same was acquired by them with the sole intention of constructing an industrial site with buildings thereon and holding the same for the purpose of collecting rental therefrom and dividing the same equally among such four owners.

The Minister contends that at the time of such purchase it was acquired by such group with the intention of trading and turning the same to account at a profit whenever a favourable opportunity to do so would present itself and that the said intention remained the same throughout the ownership of the said lands under the said trust arrangement. In the alternative he contends that it was their alternative intention throughout to sell the said lands at a profit whenever an opportunity to do so occurred.

Shortly after acquiring the land Beatty made an application to the city of Woodstock’s Industrial Commissioner regarding the grant of an easement for a railway right-of-way over the subject lands. The Canadian National Railway wrote that it would have a suitable document and plan prepared to cover such arrangement but such documents were never completed. The right-of-way was never built because the city would not extend such services to such lands. The plaintiff relies upon this attempt to secure a spur line from the railway over part of the lands as some corroboration of the alleged intention of such group to retain the lands as an investment. I do not regard such fact as supporting such contention because such an addition to the industrial lands would serve to increase the value thereof no matter whether the plaintiff was seeking to sell lots therefrom to industrial purchasers at a profit or to retain the same as the plaintiff alleges.

The plaintiff has also presented Exhibit 8 which is a rough plan drawn by Foster indicating how the property might be divided. An expert in planning was never consulted by the group nor did they have meetings between themselves to discuss arrangements as to when or what development should be made. The development of such land would require a considerable sum of money. The evidence reveals that the only one in the group who had funds that might be available for such purpose was William Foster. J Ross McLean who is an employee of the plaintiff was without funds. He had to borrow from the Bank, the full $6,000 to secure his one- quarter interest thereon on September 21, 1972. Beatty prepared an agreement between the four parties acknowledging that they were equal investors and that he held the lands for them in trust. Included in such agreement was the following paragraph:

We also agree that the selling price of such lands should be $1,500 per acre, subject to negotiation until such time as a revised evaluation is determined by the investors.

On January 25, 1973, Beatty drew a form of lease to one John Yeaman who had rented the said lands for the year 1973. Such lease contained the following statement:

It is understood by both lessee and lessor that the herein mentioned land is for sale and also that the CNR are contemplating putting in a siding at the northwest corner of the property.

In December of 1973 Marshall dismissed his employee J Ross McLean. Later in February of the following year he entered into an agreement, whereby he sold to McLean all the issued shares in a company known as KWD Contracting Ltd, which was owned by the plaintiff and his family and which was engaged in the busines of sewer and water main construction. McLean was without funds to complete the purchase and it was arranged that he would transfer his one-quarter interest in the above lands to Marshall for the consideration that the latter should pay off the loan that McLean had with the bank in the approximate sum of $6,000. The proceeds thereof had been used in purchasing such share in such trust.

Shortly after Marshall had become such an owner Beatty drew up a further agreement dated February 23, 1973, Exhibit 12, which shows that the four parties namely, Beatty, William Foster, Archibald Foster and Marshall were equal investors in the ownership of such lands. That agreement also contained the following paragraph:

We also agree that the selling price of such lands should be $1,500 per acre subject to negotiation, until such time as a revised evaluation is determined by the investors.

Beatty in his testimony states that this paragraph and that of the proceeding similar agreement had relation only to a price that might be paid to a retiring partner by the others on the occasion of settlement between themselves. I do not think that it can be interpreted in such a manner. Such a withdrawal from the group would not be referred to as a sale but rather as a withdrawal. The withdrawing partner would only be conveying his one- quarter interest in the land and to pay him $1,500 per acre for such fractional share would put the full price at $6,000 per acre. Beatty acknowledged that the proper value at such time was between $1,100 and $1,500 per acre. Paragraph 4 of the agreement provides the procedure to be followed in the event of the withdrawal or death of one or more of the investors was by giving the remaining partners the first right of refusal of any offer that might be made for the purchase of such person’s share in such lands.

Both Marshall and his witness J Ross McLean, stated that the $1,500 per acre referred to in such trust agreements related to the price at which they should sell the lands.

Beatty acknowledged that the group had not held meetings to decide what should be done nor did they figure out the costs of roads or buildings or what type of buildings they would have. They did not contact any one who might be interested in renting a portion thereof for industrial purposes. The lands were in an advantageous area for resale to industrial enterprise as it was close to Highway 401 and other industrial sites were less than 1 mile away.

They did not consult a planner or surveyor to lay out a scheme for decision of the property nor to receive an estimate of development cost. McLean stated in evidence they all knew it would take 19 to 20 years to develop the property. Beatty first met Archibald Foster in June 1972. The latter was then ill and not able to do much business. He did not have capital to invest in development needs. He died in 1973. Beatty had never had discussions with him as to what would happen if the scheme fell through. On his death his wife Helen acquired his interest in the property but she brought no expertise to the alleged investment scheme. By an agreement dated December 15,1973 she with the other owners signed an agreement again prepared by Beatty which contained the similar clause with regard to the selling price of land at $1,500 per acre. The city of Woodstock did not pass a bylaw to restrict the extension of sewers and water conveniences eastward from the city until October 1977. Beatty acknowledges that he had never met with Marshall until after the sale of the property in 1975 when he gave the plaintiff his cheque as part of the sale price and that he had never spoken to the plaintiff Marshall about the alleged plan to retain and develop the property for the purpose of providing income. At the hearing before the Tax Review Board Beatty appeared on behalf of the plaintiff, Helen Foster, Marshall and also on behalf of BNPT Company Enterprises Ltd, a private company formed by Beatty which then held his shares as well as those of William Foster. Mr William Foster who was really the person who first heard of the opportunity of purchasing the option and came to Beatty to form such, syndicate was not called as a witness to give evidence herein. He was the one that had more knowledge as to the intention that existed at the time of the purchase of such lands than any of the others of the group except Beatty. Beatty and William Foster were knowledgeable businessmen who knew the location of these lands, their value and the potential that was associated with them. The offer to buy came from General Motors unsolicited by the co-owners and in fact was a surprise to them.

In determining the issue herein, I am guided by the statement of Cat- tanach, J in Willumsen v MNR, [1967] CTC 13; 67 DTC 5022 where he states at pages 18, 5026:

As I conceive it the correct approach to the solution of a problem of this kind of case in any given set of circumstances is first to examine the taxpayer’s acts and operations objectively, bearing in mind that the question is one of fact in each particular case and that the appellant’s statement at the trial is only part of the evidence and must be considered along with all the objective facts. If, after consideration of these facts, it should be concluded that the inference to be drawn is one of “trading”, then the matter must be considered to ascertain if there is some Satisfactory explanation, consistent with the facts as found, which would negative that prima facie inference. If from the facts that are proved it appears to the satisfaction of the Court that, at the time of acquisition, the purpose of the operation was exclusively to provide the taxpayer with a satisfactory investment and that there was not in contemplation at that time the possibility of sale, then the inference of trading would be rebutted.

The onus of disproving the Minister’s assumption, in assessing the appellant as he did falls on the appellant.

My next task is, therefore, to consider the appellant’s explanation as to the circumstances which prompted his decision to sell the apartment building and to determine whether, on the balances of probabilities, that explanation is a more acceptable explanation of what has happened than the assumption of the Minister.

and also by that of Noël, J in Racine et al v MNR, [1965] CTC 150 at 159; 65 DTC 5098 at 5103 where he states:

To give to a transaction which involves the acquisition of capital the double character of also being at the same time an adventure in the nature of trade, the purchaser must have in his mind, at the moment of the purchase, the possibility of reselling as an operating motivation for the acquisition; that is to say that he must have had in mind that upon a certain type of circumstances arising he had hopes of being able to resell it at a profit instead of using the thing purchased for purposes of capital. Generally speaking, a decision that such a motivation exists will have to be based on inferences flowing from circumstances surrounding the transaction rather than on direct evidence of what the purchaser had in mind.

It is my opinion that all the circumstances surrounding the acquisition of the option to purchase such lands from Eaton Yale Ltd, and the subsequent conveyance made pursuant thereto to Beatty in trust point unequivocally to an intention on the part of such purchasers to hold the same with the purpose of reselling the lands at a profit when a suitable occasion arose. I make this finding notwithstanding the testimony of the witness Beatty and McLean whose testimony I find unreliable in many respects.

Marshall contends that he never discussed the subject concerning these lands with any of his co-owners either before or after his acquisition of McLean’s share therein. If that were so it follows that he had no knowledge of their alleged intention to develop the same and hold it as income producing property. He does not claim to have considered any such plan himself in relation to the share in the lands that he acquired from McLean on February 23, 1973. He is a very capable and shrewd businessman. He knew the location and value of the lands. He pretends to have had no knowledge of such value at the time he acquired it but I doubt this very much. He says he purchased such interest in the lands without giving it a thought as he had entered into many transactions in the same way without worrying about it. He acknowledges that when he signed the trust agreement (tab 12) on February 23, 1973 which was the occasion on which he acquired such interest that he understood the land was for sale and the price was thereby fixed at $1,500 per acre.

I am convinced therefore that at the time the plaintiff acquired such interest in the subject lands that he knew the other co-owners had acquired the lands for a speculative purpose and at all times intended to sell the same or parts thereof at a profit when such opportunity arose and that he accepted and adhered to such intention.

The plaintiff’s total gain of $72,274.10 on the sale of such lands therefore was income from business within the meaning of the act rather than capital gain.

The plaintiff’s claim should therefore be dismissed with costs.