Snell Farms Limited v. Her Majesty the Queen, 90 DTC 6693, [1991] 1 CTC 5 (FCTD)

Cullen, J.:—This case, on appeal from the Tax Court of Canada, concerns whether the profit realized by the plaintiff/appellant in its 1976 taxation year on the sale of certain Alberta farmland constitutes a capital gain or income from business or property.

Facts

The plaintiff company was incorporated by Charles Snell on July 12,1967 to conduct, inter alia, the farming business carried on by Charles Snell near Oyen, Alberta since 1946. Among the other objects of the company were the purchase and sale of land. Charles Snell was the president and directing mind of the plaintiff, and was also an employee of the plaintiff, as were at various times his three sons, Rupert, Jim and Bill.

In January 1972, the plaintiff leased 17 quarter sections of land from Russell Cwicklewich for a five-year term. In February 1974, the plaintiff leased seven more quarter sections from Walter Cwicklewich, Russell's father, for a three- year term. Collectively these lands, which were located 20-25 miles away from the Snell's home farm, were known as the “ Chinook land”, and the land was farmed by Charles Snell and his sons as employees of the plaintiff until some time in 1974.

The lease agreement with Walter Cwicklewich contained an option to purchase the seven quarter sections at any time within the term of the lease for $68,000. On or about the same time as the lease and option agreement for the seven quarter sections was finalized, the plaintiff obtained an option from Russell Cwicklewich to purchase the 17 quarter sections of land for $175,000. The option for the 17 quarter sections was exercised in April 1974. The 17 quarter sections were sold by the plaintiff in three parcels, of which two parcels totalling 11 quarter sections were sold in its 1976 taxation year. The seven quarter sections were sold in two parcels, one quarter section of which was sold during the plaintiff's 1976 tax year. The transactions were as follows:

The sale on January 14, 1976, of six quarter sections resulted in a claimed capital gain of $52,719.68, based on proceeds of disposition of $109,300 minus a cost base of $51,265 and outlays and expenses of $5,315.32. The sales on March 2,1976 of seven quarter sections produced a claimed capital gain of $93,988.18, based on proceeds of disposition of $152,600 minus a cost base of $58,099.62 and outlays and expenses of $512.20. These transactions may be summarized as follows:

January 14, 1976:

Thus, in computing its income for the 1976 tax year, the plaintiff included the amount of $73,353.93 as a taxable capital gain based on the sale of the portion of the Chinook land sold during its 1976 tax year. By notice of reassessment dated April 3, 1978, the Minister reassessed the plaintiff on the ground that the gain from the sale of the Chinook land was income from business or an adventure in the nature of trade rather than a capital gain, and added $146,707.86 to the plaintiffs revised net income.

The plaintiff filed a notice of objection, and subsequently appealed to the Tax Court of Canada, where, by reasons for judgment delivered orally on May 4,1984, Goetz, T.C.]. dismissed the plaintiff's appeal. The plaintiff has appealed that judgment to the Federal Court.

Plaintiff's Position

The plaintiff states that when it acquired the options to purchase the Chinook land, it intended to exercise the options to expand its farming operations. Apparently, according to the Tax Court decision, Charles Snell exercised the options to acquire land for his sons to enter the farming business. After the options were exercised, however, Rupert Snell informed his father that he did not wish to farm any more. The other sons stated that they would not farm unless Rupert did. The plaintiff states that this was an unforeseen change which left it without sufficient reliable assistance or employees to continue farming the Chinook land, and thus the plaintiff determined that it would be in his best interest to sell the Chinook land. The plaintiff asserts that the profit realized from the sale of the Chinook land was a capital gain and an isolated transaction, and denies that the gain is income from business or an adventure in the nature of trade.

Defendant's Position

The defendant's position is that when the plaintiff acquired the Chinook land, the property was acquired with the primary intention of resale for profit, or at least with the concurrent secondary intention of selling the property for a profit if the primary plan for setting up his sons in the farming business did not succeed. The sale of the Chinook land was thus an adventure in the nature of trade and thus the proceeds were income from business and not a capital gain. Decision of the Tax Court of Canada

In dismissing the plaintiffs appeal, Goetz, T.C.J. took note of certain factors that cast doubt upon the plaintiff's claim that the land was not acquired with at least the secondary intention of resale. He found that at the time the options were exercised by the plaintiff, Charles Snell as the directing mind of the plaintiff knew of Rupert Snell's lack of interest in farming the Chinook land. Apparently, Rupert had told his father that unless he could take over all of the family farm, he would not farm at all, and the other sons stated that if Rupert would not farm, neither would they. In spite of the attitude of the sons on this point, the plaintiff acquired the Chinook land to set up his sons as farmers. Charles Snell said that the Chinook land had been bought by the plaintiff because he had committed himself to Walter Cwicklewich to buy the land.

Goetz, T.C.J. also noted that the properties had been sold very quickly after the options to purchase had been exercised. Goetz, T.C.J. did not doubt that the original intention of Charles Snell as the directing mind of the plaintiff was to provide land on which his sons could farm. However, the land itself was good farmland, and the plaintiff had reasonable alternative options to the sale of the land, such as employing hired hands or engaging a tenant farmer. There was thus no real necessity to sell the land, as the plaintiff had asserted was the case because of the lack of reliable assistance or employees to farm the land. The quick sales after the exercise of the options were taken as overt actions indicative of the secondary intention of resale at a profit.

In support of his reasoning, Goetz, T.C.J. quoted the decision of Dubé, J. in McDonald, J.A. v. The Queen, [1983] C.T.C. 211; 83 D.T.C. 5264 (F.C.T.D.); affd [1987] 2 C.T.C. 20; 87 D.T.C. 5276 (F.C.A.). In this case, the taxpayer/farmer bought four parcels of farmland and subsequently sold them for large profits. The taxpayer had explained that he had purchased the properties to assist his relatives. The Court, however took note of the fact that the land in question had been quickly flipped, that the financing used by the taxpayer to acquire the land was short-term, and that the relatives apparently did not have the means to buy the properties and were in any event not legally bound to do so. Goetz, T.C.J. acknowledged that these were distinguishing factors from the case at hand, but did adopt the following from Dubé, J.'s reasons as relevant in this matter (at 213 (D.T.C. 5265)):

I accept as true and sincere the expressed intention of the plaintiff to buy these farms for the benefit of his relatives. His primary intention to come to their assistance reflects an honest effort on his part to try to help them develop the land in the same general area where he himself lives and farms. That intention is quite believable and understandable since the plaintiff has no sons and wants to see his daughters and relatives established in the surrounding district.

But, however generous the primary intention be, was there not another major motivating factor behind the acquisition of the properties, namely the possibility of reselling them at a profit? There were four quick transactions, all clothed with the same characteristics: the overt intent to assist a relative, the absence of any written document or any oral promise binding the relative, the short term financing by the taxpayer, the lack of any apparent financial means on the part of the eventual purchaser, the preparatory clean-up and sowing of the land, the quick resell, the profit. Each one of these elements considered separately may not be determinant, but the repeated combination of the same factors in four successive transactions cannot but establish a clear secondary intention to resell at a profit.

Goetz, T.C.J. stated that if he could ignore the purported reason for the sale, namely the attitude of the sons, he would have considered the sale a capital transaction, but that it was insufficient reason for the sale given the presence of the other viable alternatives. He thus concluded that as the options were exercised at a time when Charles Snell knew of Rupert's intentions toward farming, there must have been a secondary intention to resell, a conclusion that was strengthened by the plaintiff's failure to pursue viable farming options in favour of a quick sale.

Issue

Are the proceeds of the sale of the Chinook land capital gains or business income?

Analysis

As a preliminary matter, it should be understood that appeals to the Federal Court of Canada, Trial Division are trials de novo: Smith v. M.N.R., [1965] C.T.C. 257; 65 D.T.C. 5145 (S.C.C.) Thus, the judge sits as a fact finder and is not bound by the findings of fact or credibility of the Tax Court judge. In Mel- Bar Ranches Ltd. v. M.N.R., [1989] 1 C.T.C. 309; 89 D.T.C. 5189 (F.C.T.D.), Strayer, J. held that while it may be appropriate, with the consent of both parties, to make reference to the Tax Court trial transcript as a source of basic facts not seriously disputed, or on issues which did not turn on credibility, seriously disputed issues and matters of credibility should not be resolved in this manner. I mention this because the final determination of this case essentially revolved around questions of fact and credibility as to the intention for which the land was acquired.

Primary and Secondary Intention

In determining whether a particular profit is a capital gain or a business revenue, the most important factor to be determined is the intention of the taxpayer at the time of acquisition of the property: Sutton Lumber and Trading Co. v. M.N.R., [1953] 2 S.C.R. 77; [1953] C.T.C. 237; 53 D.T.C. 1158 (S.C.C.); Becker v. The Queen, [1983] C.T.C. 11; 83 D.T.C. 5032 (F.C.A.) Evidence of intention is not limited, of course, to the taxpayer's sworn testimony, but can be deduced objectively from the taxpayer's whole course of conduct viewed in light of all the circumstances: Cragg v. M.N.R., [1951] C.T.C. 322; 52 D.T.C. 1004.

However, while determination of the taxpayer's primary intention towards the property is relevant in distinguishing between capital gains and business income, in certain cases a taxpayer's alternate or secondary intention to sell the property in the event that the primary intention is frustrated will also be relevant. (It appears that in the case at hand the secondary intention of the plaintiff towards the property was the main reason the Tax Court Judge ruled that the profit was not a capital gain, and was likely the main issue on this appeal.) The secondary intention doctrine was ratified by the Supreme Court of Canada in Regal Heights Ltd. v. M.N.R., [1960] C.T.C. 384; 60 D.T.C. 1270, and further refined by the Exchequer Court in Racine v. M.N.R., [1965] C.T.C. 150; 65 D.T.C. 5098, where the Court held (at 159 (D.T.C. 5103)):

[Translation]

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 circumstance arising he had hopes of being able to resell it at a profit instead of using the thing purchased for purposes of capital.

In the past few years, however, there has been a gradual retreat away from the secondary intention doctrine as a basis for imposing tax liability. The most recent word on the subject is the decision of the Federal Court of Appeal in Crystal Glass Canada Ltd. v. The Queen, [1989] 1 C.T.C. 330; 89 D.T.C. 5143. Mahoney, J. for the Court stated as follows (at 330 (D.T.C. 5143)):

The learned trial judge misstated the test of secondary intention propounded in Racine et al. v. M.N.R.. . .when he asked himself "did Mr. Bean have in his mind the thought that he might sell at a profit?" Secondary intention requires not only the thought of a sale at a profit but that the prospects of such a sale be an operating motivation in the acquisition of the capital property.

[Emphasis added.]

On the evidence, in the case at hand, there can be no question that the plaintiff's primary intention was to acquire the Chinook land as part of the farming process and with the intention that title would eventually be transferred to the son Rupert so that he might continue farming but on a farm of his own.

On the doctrine of secondary intention the Court must find that the objective evidence of the plaintiff's conduct is such that the prospect of resale was an "operating motivation” in the acquisition of the property. Certainly this places a significantly heavier burden upon the defendant than simply endeavouring to establish that the plaintiff had a possible resale in mind should the primary intention be frustrated. It is fair to say that the possibility of a resale would probably occur to any prudent businessman. Although the onus on the defendant is much heavier as a result of the decision in Crystal Glass, supra, it does not rule out that an operating motivation will be found. The learned Tax Court judge was certainly of the opinion that the options which were purportedly exercised to provide a farm for his sons were also exercised in the light of the knowledge that the sons did not intend to farm. On this point I feel the learned Tax Court judge erred. It was held in Thom v. The Queen, [1979] C.T.C. 403; 79 D.T.C. 5324 (F.C.T.D.), that the relevant time for determining the intention of the taxpayer was at the time the option was acquired, not exercised. See also The Queen v. Ginakes Brothers Ltd., [1977] C.T.C. 18; 77 D.T.C. 5023 and Western Engineering and Contractors Ltd. v. The Queen, [1977] C.T.C. 567; 77 D.T.C. 5398. Here it is not very material as the options were acquired not long before they were exercised. The issue is whether the hope he had for his sons to commence farming was sufficiently weak at the time of acquiring the options that the "operating motivation" for the acquisition became the resale of the property.

Case Law

There have been a number of cases in which the stated intention of the taxpayer in acquiring farmland was to use the land for farming only, with the property to be subsequently sold for a profit. One example, relied on in the Court below by Goetz, T.C.J. is the McDonald case, supra. Essentially, the cases boil down to issues of credibility and objective indications of intention.

In Kazakoff v. M.N.R., [1990] 1 C.T.C. 2203; 90 D.T.C. 1073, the married taxpayers purchased a parcel of farmland for $55,000 with the claimed intention of constructing a residence, and sold it one year later for $100,000. The Minister assessed the gain as income from business. At trial, the taxpayer claimed that the burden of carrying the mortgage to finance the original purchase had become too much for his health. Sarchuk, T.C.J. rejected this as totally lacking in credibility. The judge also noted that the transaction bore every stamp of an adventure in the nature of trade, with the transaction being highly leveraged with a high rate of interest, and the appellants having made no effort to sell their previous home, which was inconsistent with the stated intention to build a new residence. The assessment was therefore affirmed.

In this case, I am not aware of the nature of the plaintiff's financing to acquire the property, or whether the transaction bore any other "badges of trade”. The Chinook land was sold quickly after the exercise of the options, which would tend to indicate resale. On the other hand, it is clear that the Chinook land was farmed by the plaintiff, and it is stated in the reasons for decision of Goetz, T.C.J. that the productivity of the land improved markedly while under the care of the plaintiff, which would be indicative of a capital investment as opposed to a business venture.

In Brown v. M.N.R., [1979] C.T.C. 2248; 79 D.T.C. 227 (T.R.B.) the taxpayer, a real estate agent, purchased a farm intending to use it for personal enjoyment and to earn income from farming. At the time of purchase, the taxpayer was not aware of contemplated zoning law changes that would eventually zone the land for future development. The taxpayer lived on the land and farmed it for five years until it was sold. It was revealed that some time before the sale, but long after the original purchase, the taxpayer had made efforts to subdivide the land for development purposes. The Minister characterized the sale as an adventure in the nature of trade. On appeal, the taxpayer succeeded. The Board found that at the relevant time of purchase, the taxpayer was unaware of the proposed zoning changes, and that the property was acquired as a residence and a farm, with no concurrent secondary intention for resale. The profit was thus a capital gain.

Evidence

The plaintiff called two witnesses, Charles Snell and his son Rupert. To corroborate their evidence it had been the intention to call Mrs. Charles Snell but her state of health made that inappropriate. Charles Snell gave his evidence when his son Rupert was not present. Similarly, Charles was not present to hear Rupert's evidence. The two witnesses were credible, were never evasive on cross-examination, and their evidence rang true. It is clear from the evidence that at the time the options were secured it was still very much in the mind of Charles Snell that his son Rupert would farm the land and would eventually own it. Rupert was quite candid in his testimony that he was unhappy with this arrangement and wanted the property to be transferred immediately to his name. He was working extremely long hours seven days a week being assisted from time to time by his father and his brothers and with the use of old and new equipment. Some of the new equipment was bought specifically for the Chinook land. It was not until the crop was taken off in late 1974 that Rupert announced his dissatisfaction with the process and left. The other two sons were not interested in farming if Rupert was not going to farm and there was another consideration, namely, they were a little young to be given that kind of responsibility. However, had either son indicated an intention or desire to farm the property when they finished school, Charles Snell’s evidence is that he would still own the land.

Several things convinced me that Charles Snell did not have in his mind the thought that he might sell at a profit and as a matter of fact, all of the evidence actually pointed away from that prospect. Certainly, there was no secondary intention that a sale for profit was an operating motivation in the acquisition of the capital property. The evidence is clear that the plaintiff endeavoured to purchase other properties closer to the home farm but was unable to do so. According to the son Rupert, most people felt that the plaintiff owned sufficient land at the present time and there was really no inclination to sell more land to him. Secondly, it was quite clear on the evidence that most of the farms in the area of the home property were permanent farms and people had no intention at any time of selling but rather would pass on the farm from generation to generation. Next, the property actually purchased, i.e., the Chinook land, was some distance from the home farm, namely about 40 to 50 kilometres, and was located in an area where there were very few people and certainly no close neighbours, nor any community of any size just down the road. It was an isolated farm to the extent that Rupert's first wife was unable to stand the strains of loneliness which strains soon led to the dissolution of their marriage.

When it became clear that the property would have to be sold the plaintiff did not contemplate making a profit but in fact added about $20 per acre to the cost of the property whereas in his own mind the improvements they had made on it were more like $100 per acre. Another portion of the property which had to be sold presented considerable difficulty and it appeared to the plaintiff that it might very well have to be sold at a loss. With the intervention of a brother-in-law who was in the real estate business, the plaintiff was eventually able to make a profit. New farm equipment was purchased specifically for use at the Chinook land which is hardly in line with any intention to sell the property. One does not, for example, invest in a new tractor at a cost of approximately $25,000 nor a new combine in the amount of $150,000 if one has in mind the intention to sell property at a profit.

It is quite clear on the evidence that the sole and only motivation for purchasing the property was to provide farmland which ultimately would be conveyed to Rupert. The plaintiff took what his counsel called a long-term approach to the property and the planting was done in stages so that the earth could be treated in such a way as to permit larger crops in subsequent years and this in fact happened. Both the father and the son Rupert who worked on the property treated the land very much as their own and in fact one of the vendors, notwithstanding the lease and the option, demanded a handshake that the option would in fact be exercised before he consented to the sale of the land to the plaintiff.

Several cases cited indicated a good deal of activity in the purchase and sale of property and it was still afforded capital treatment. Here we have in effect two purchases to create the Chinook land and when Rupert determined to leave at the end of 1974 he did not leave his father with an opportunity but rather with a significant problem. As indicated earlier, it was not an easy sale although one portion did ultimately lead to a profit. It was suggested by the defendant that it would have been possible to secure help or labour to manage the Chinook land. The fact of the matter is the property was too far away from Oyen for proper supervision and then to find someone with the talent and ability to take on the operation was no easy task. Rupert, in his evidence, conceded that it might have been possible to find someone who could manage the farm but he thought it would be very difficult and most unlikely. Also, the two sons had indicated that if Rupert did not farm they were not at all interested in farming and certainly not the Chinook land. It is also interesting to note that the plaintiff used the proceeds of the sale of the Chinook land to purchase properties closer to the home farm which were more habitable and with better top soil and few rock problems.

Any fair-minded person reading the evidence of Charles and Rupert Snell could come to no other conclusion than that the property was purchased for the reasons indicated by them and that there was never any intention to sell this property at a profit, let alone an intention that could be called an operating motivation.

Conclusion

Based on the foregoing, in my opinion, the profit on the sale of the land is not income from an adventure in the nature of trade but does constitute a capital gain.

The plaintiff is entitled to its costs of this action.

Appeal allowed.