Montford Lakes Estates Inc. v. The Queen, 79 DTC 5467, [1980] CTC 27 (FCTD)

Dube, J:—The issue to be resolved here is whether the profit realized by the plaintiff from the sale of the Montfort Lakes Development Property for $1,200,000 was income from a business or a capital gain.

The plaintiff is a Quebec corporation incorporated in 1962 for the purpose of real estate development. From its inception it was controlled by Ludovic Diez d’Aux and his family and it acquired the business formerly carried by them. Diez d’Aux, a master watchmaker by trade, his wife Elizabeth and their young son Robert, then aged five, came to Canada from Rumania in 1952.

Both husband and wife are descendants of landed European nobility. He from Austria, she from Rumania. Her father was a baron tracing his ancestry back to the fifth century in Spain. His father was an Austrian intellectual who had inherited considerable family wealth based on land, timber and cattle. Following the dismantlement of the Austro-Hungarian Umpire, both families were stripped of their land and titles and lived through critical times. Post war inflation was ravaging the Rumanian currency. The young couple decided to move to Montreal with all the family possessions they could carry, including jewels, numismatic coins, objets d’art and other valuables.

Diez d’Aux opened up a store on St Catherine Street for the sale and repairs of watches. Not long thereafter the couple went searching for Suitable land for a summer home in the Laurentians. In 1956 they came about a very alluring parcel of land outside the Village of Montfort near Morin Heights. The coveted oasis nested in scenic surroundings, with clear water lakes, green mountains, majestic trees and exclusive wilderness.

The owner, James McGibbon, would not sell a smaller parcel but offered to convey the whole 2,000 acres for $120,000. The offer seemed to be prohibitive, at first. The Diez d’Aux were looking for a much more modest summer lot. But they were taken by the beauty of the estate, found it irresistible. They decided they could afford it, bargained the price down to $100,000, sold their valuables, and completed the purchase.

Both spouses testified that they went ahead with the purchase for many reasons. Being issues of landed aristocracy, they attached considerable importance to the ownership of land. To them, land meant “security, a dream come through’’. Land was also a hedge against inflation, the unforgotten nightmare. Moreover, it was expensive to keep their jewels and objets d’art insured in Montreal, whereas local taxes at Montfort were almost insignificant. Obviously, land could not be stolen. And it was in the family tradition to bequeath land from generation to generation: the Montfort estate would be for their son and his children.

Those were the motives behind the purchase, according to the evidence of both witnesses at the trial. Their credibility was not impaired throughout the long hours of examination and cross-examination.

In 1957 Diez d’Aux proceeded to clear the land in order to build their cottage. He applied to Gatineau Power for electricity. There being a distance of three miles from the last electric pole in the Village of Montfort to the proposed summer home, the power company wanted a deposit of $30,000 to cover the cost. He also wanted to bring in the telephone. A road had to be built. Gravel had to be purchased.

To raise the money, Diez d’Aux decided to sell sub-divided lots. The estate contains three larger lakes and several smaller ones. His intention was to sub-divide a number of lots around Lake Notre-Dame and Lake Bigras, but to maintain the balance of the estate undevelopped. Most specially Lake St-Victor, which was to be preserved in its pristine beauty, it being the most scenic of the group. Lots were to be sold gradually, as money was needed to develop the estate.

In May 1962 the Diez d’Aux family formed the plaintiff company to carry on the business of Montfort Lakes Development. Eventually the road was built, electricity and telephone were brought in, a sixteen mile long trail for cross-country skiing was cut, downhill slopes were blazed for alpine skiing, steps were taken to organize a fishing club. The last two projects, however, were never brought to completion.

The company was progressing very cautiously, resisting increasing demands for land in areas other than the sub-divided lots around the two lakes mentioned. It proceeded to cut trees, erected a small sawmill, sold lumber to bring in additional revenues.

There were two breaches of the rule against selling land elsewhere in the estate. Due to pressures from the bank to pay up outstanding loans incurred in the development of the estate, the company sold in 1969 two larger parcels of land for $35,000 and $37,000 respectively. Apart from those two isolated sales, it appears that all other potential purchasers, some of whom testified at the hearing, were invariably informed that only lots along the shores of the two lakes would be sold. The purchasers of sub-divided lots were also routinely informed that land back of their cottages would remain in its virginal state. By 1974 some 200 lots had been sold, representing about seven to eight per cent of the total acreage of the estate.

Throughout the years plaintiff had received unsolicited offers for the purchase of large sections, or all of the estate, which were declined. In 1974 Diez d’Aux was approached by an agent of Zurich Realties Inc of Montreal for the sale of the entire estate. He turned it down. Shortly afterwards he was approached again, this time by the president of the real estate firm, Joseph Seiterle, who was searching for this very type of property for European clients. Diez d’Aux informed him that the estate was not for sale. Then Seiterle made him an offer he could not refuse: $1,200,000. After some discussions with his wife, Diez d’Aux signed the company standard exclusive listing agreement authorizing Zurich Realties Inc to sell within a specified time for the above amount, less 8% commission for Zurich.

Diez d’Aux explained to the court that he finally accepted the offer because the amount was way beyond his expectations. Both his wife and himself were sick at the time, about to undergo medical operations. Moreover, their son was now a physician, no further [s/c] interested in the estate.

His evidence was confirmed by Joseph Seiterle who also testified. He Stated that Diez d’Aux had never approached them, was very reluctant to sell. He added that Diez d’Aux appeared extremely surprised at the high amount of the offer, that he discussed his illness and personal problems with him before deciding to accept. According to both men there was no discussion as to the price. The standard exclusive listing agreement was signed in order to afford Zurich some time in which to have the purchase approved by the European principles. Eight percent commission is normal for that type of transaction with European clients.

It should be noted at this point that plaintiff’s accountant (not a chartered accountant but the same public accountant who was looking after Diez d’Aux’ jewelry store book-keeping in Montreal) had entered in the company book all the land of the estate as being inventory, without making any distinction between the sub-divided lots to be sold and the balance of the property. According to the expert evidence of Jean N Picard, an engineer and professional appraiser, which I accept, of the total acreage of the estate at the time of the 1974 sale (1820.18 acres), only 34.93 acres were sub-divided.

At the trial counsel for the plaintiff admitted that the Minister’s assessment was valid insofar as it applied to the sub-divided lots transferred in the 1974 sale, but maintained his position that it was invalid with respect to the remainder of the undivided estate.

Plaintiff submits that its financial statements are not properly to be relied upon in determining the nature of the assets. He argues that they are not to be used as an admission that all the lands were the subject of an adventure in the nature of trade. Learned counsel for the defendant agrees that book-keeping, by itself, is not conclusive, but is still an element to be considered. As Cartwright, J said in Dominion Taxicab Assn v MNR, [1954] CTC 34; 54 DTC 1020, at 37[1021 ]:

It is well settled that in considering whether a particular transaction brings a party within the terms of the Income Tax Act, it substance rather than its form is to be regarded.

It should be pointed out, as counsel for the Minister did, that the object clauses of the plaintiff company, as appear in the letters patent, empower the plaintiff, not only to develop and deal with immovable properties in the Montfort Lakes area as provided in Clause I, but also to acquire and develop immovable property for investment purposes (elsewhere) as provided under Clause 7. However, such clauses of incorporation are not decisive as to the intentions of the company. Judson, J stated at 907 [390, 1272] of Regal Heights Limited v MNR, [1960] SCR 902; [1969] CTC 384; 60 DTC 1270:

Nothing turns upon such a statement in such a document. The question to be determined is not what business or trade the company might have carried on but rather what business, if any, it did in fact engage in.

The real intention of Diez d’Aux when he purchased the Montfort estate in 1957, and indeed the intention of the plaintiff company when it was formed by him in 1962, must be determined, not only from the expressed intentions of the purchaser, but also from the surrounding circumstances.

Diez d’Aux, and abviously the company he formed, had never dealt in land before the acquisition of the Montfort estate. A man in his state would be looking for long term security in a new country. The quiet and peaceful Montfort environment would verily loom in his mind as a most solid and secure island of tranquility in a troubled world.

I accept therefore the evidence of Diez d’Aux and his wife that their intention at the moment of purchase was not to resell at a profit, but on the contrary to hold unto the estate for a very long time. The mere fact that they were induced to sell for a small fortune some seventeen years afterwards does not lead to the conclusion that the transaction was an adventure in the nature of trade. To paraphrase Noël, J from his often quoted decision in Racine, Demers and Nolan v MNR, [1965] CTC 150; 65 DTC 5098: Every person buying a property would be obliged to admit that if he were offered a sufficiently high price a moment after the purchase, he would immediately resell it.

A standard test to determine whether profit is income from business in the sense of a commercial undertaking is whether the subject transaction is of the same kind and carried on in the same way as the usual operations of the taxpayer (see Irrigation Industries Limited v MNR, [1962] SCR 346; [1962] CTC 215; 62 DTC 1131. In my view, the 1974 transaction wherein plaintiff sold the remainder of its estate is very different from the earlier sales of small sub-divided cottage lots. The lot sales were carried out to maintain the company in operation, whereas the final sale transferred the whole estate and concluded plaintiff’s operations.

That the same taxpayer can be at one time a trader in some aspects of its sales and at other times a non-trader with respect to other sales has been well established in the recent decision of my brother Walsh in Clemow Realty Ltd v The Queen, [1976] CTC 129; 76 DTC 6094. An Ottawa company acquired a parcel of land in that city in 1958 from which it sold a small portion in 1959 and treated the profit as income. It sold a substantial portion of it in 1971, the profit from which sale was held by the court to be capital gain. The intention of that company at the time of the initial purchase was to develop the major portion of the land, but that intention was changed as a result of an unsolicited offer arriving after a long period of frustration due to the dilatoriness of the city in dealing with zoning regulations.

In my view, while the plaintiff in the instant case was a trader with reference to the sub-divided lots which it sold throughout the years, and on which it paid business income tax, it was not a trader with reference to the sale of the remainder of the undeveloped estate.

The mere fact that the plaintiff acquired the estate as a hedge against inflation does not lead to the conclusion that the expected rise in value must be income. Lord Buckmaster said in Leeming v Jones, [1930] AC 415 at 420.

An accretion to capital does not become income merely because the original Capital was invested in the hope and expectation that it would rise in value; if it does so rise, its realization does not make it income.

I would therefore allow the appeal, with costs, and refer the assessments back to the Minister for reconsideration and reassessment on the basis that the profit from the plaintiff’s sale was partly income from a business with respect to the sub-divided lots, and partly capital gain with respect to the remainder of the property. All assessments are to be based on the expert appraisal of Jean N Picard aforementioned.