Happy Valley Farms Ltd. v. The Queen, 86 DTC 6421, [1986] 2 CTC 259 (FCTD)

Rouleau, J.:—This is an appeal commenced by way of statement of claim pursuant to section 172 of the Income Tax Act, S.C. 1970-71-72, c.63 as amended, against a decision of the Tax Review Board (now the Tax Court of Canada) dated June 8, 1982 dismissing the plaintiff’s appeal of a notice of reassessment issued by the defendant on October 29, 1979 with respect to the plaintiff’s 1977 taxation year. The plaintiff now seeks to have the notice of reassessment set aside and vacated.

The facts are not in dispute and are set out in an agreed statement of facts, filed on April 11, 1986. The plaintiff company was incorporated under the laws of British Columbia on May 21, 1964. In January 1968 the shares of the plaintiff company were purchased by Mr. Louis F. Lindholm who was the controlling shareholder of the plaintiff company from the date of the purchase of the shares until October 6, 1980 at which time the plaintiff was amalgamated with Hotchpot Holdings Limited, under the name Lindholm Land and Investment Corporation.

Mr. Lindholm is a solicitor, practising in the City of Victoria, in the Province of British Columbia. He was born in a farming community and spent considerable time as a young man on a farm. After completing his formal education, he entered into a partnership and commenced practising law in Victoria. Some time in the early to mid sixties he was contacted by a Mr. Kamiled who represented a number of Swiss interests desirous of acquiring land on Vancouver Island. Mr. Lindholm, acting as counsel, incorporated a number of companies and acted on their behalf in acquiring some 6,000 acres of land, various parcels being acquired by these newly incorporated holding companies. One of the parcels in question that was acquired was known as the Field Farm. The Field Farm was located some 10 to 14 km from Victoria and was made up of approximately 600 acres. Mr. Lindholm was familiar with the farm and had some acquaintance with the owner.

Two of the newly incorporated companies were Happy Valley Farms Ltd. and Mount Newton Logging Ltd. On May 27, 1964 the plaintiff company acquired 150 acres of the Field Farm on which was located the farm house and accessory buildings; Newton Logging Ltd. purchased the remaining 450 acres. This constituted the total of the original Field Farm. When acting for Mr. Kamiled in the purchase of this farm, Mr. Lindholm suggested that if the companies ever wished to dispose of the property he would like to acquire it. As a result, in 1968 Mr. Lindholm acquired all of the outstanding and issued shares of Happy Valley Farms Ltd. which owned 150 acres of Field Farm, for a consideration of $76,000.

In March, 1968, two months after acquiring control of the plaintiff company, Mr. Lindholm, on behalf of the plaintiff company, wrote the Industrial Development Bank (see Exhibit A-4 of Tax Review Board exhibits) seeking a loan of $75,000 which was to be secured by a first mortgage on the realty. In his letter he proposed that a plan of subdivision be registered on approximately 23 acres which fronted on Happy Valley Road. This acreage was lying between a Canadian Northern Pacific Railway right-of-way and Happy Valley Road and had immediate potential for development as a residential subdivision. The zoning in the area permitted two-acre parcels. The area fronting Happy Valley Road was supplied by power and there was also a district water line extending the length of this road. All services being available to the property, the costs of the registration of a plan of subdivision would be minimal. Mr. Lindholm suggested that he would be able to sell these lots for approximately $5,000 to $5,500 each and could expect to realize some $50,000. He also advised in this letter that the Victoria Motorcycle Club was anxious to purchase 12 acres lying along the northern boundary of the property since they required access to a section which was landlocked and was contiguous to the Field Farm. The Club was willing to pay $10,000 for the parcel of land bringing the total amount received from the sale of land to $60,000. This would leave approximately 100 acres of the farm remaining. In his letter to the Industrial Development Bank, Mr. Lindholm stated that it was his intention to put the farm back into working condition and that he proposed to conduct a cattle-raising operation on the farm. Although the loan application was approved, the loan was, in the end, not required by the plaintiff.

Between June 1968 and December 1969, 11 lots in the subdivision were sold, for an amount totalling approximately $43,000. These sales were reported as income of the plaintiff for its respective taxation years. In 1968 the Victoria Motorcycle Club acquired from the plaintiff company the parcel that Mr. Lindholm originally planned to sell to it for $9,000 and a further parcel lying immediately contiguous to the motorcycle property was sold in 1968 for $17,000. Both of these sales were reported by the plaintiff as a capital gain. By a notice of reassessment issued on July 23,1971 the Minister of National Revenue assessed these sales and treated the profit derived therefrom as business income. The plaintiff filed a notice of objection but the defendant confirmed the assessment by a notice of confirmation issued on July 21, 1972. The plaintiff appealed the notice of assessment to the Tax Review Board which dismissed the plaintiffs appeal by judgment issued on May 17, 1973. Although the plaintiff filed a statement of claim in this Court appealing the decision of the Tax Review Board, that action was discontinued on August 10, 1978.

On July 14, 1969, the plaintiff purchased the remaining 450 acres of Field Farm from Newton Logging Ltd. for $100,000. In December of 1969 a small parcel of this acreage was disposed of for $6,250 and this was declared as income for the plaintiff’s 1972 taxation year. Two other sales totalling approximately $18,000 were also made in 1972 and 1974 respectively and were also declared to be income on the plaintiffs income tax returns.

On July 28, 1976 Mr. Lindholm granted an option to purchase the shares of the plaintiff company to a corporation known as Glenview Developments Ltd. for $10,000. The purchase price was set at $1,289,150, however the option was not exercised.

In December, 1976 the plaintiff received a second offer from Glenview Developments Ltd. to purchase approximately 400 acres of the Field Farm property for the sum of $1,008,175. The plaintiff accepted the terms and covenants of the offer to purchase and a deed of land transferring the property was executed on February 24, 1977. In its income tax return for its 1977 taxation year, the plaintiff reported a capital gain of $700,175 on the sale of the property and further reported after deduction of reserves, a taxable capital gain in the amount of $83,339.50. By notice of reassessment issued on October 29, 1979 the defendant reassessed the sale of the property by treating the profit on the sale as business income of the plaintiff with the result that after a deduction for reserves and the previously reported capital gain, the plaintiffs 1977 active business income was increased by $124,406. On January 7, 1980 the plaintiff filed a notice of objection to the said reassessment and by confirmation issued on February 29,1980 the defendant confirmed the said reassessment. The plaintiff appealed the notice of reassessment to the Tax Review Board and by judgment issued on June 8, 1982, the Tax Review Board dismissed the plaintiffs appeal. It is this judgment which the plaintiff is now appealing.

The issue before me is whether the profit realized by the plaintiff from the sale of the Field Farm property to Glenview Developments Ltd. is of an income or a Capital nature. This determination will depend on whether the transaction whereby the plaintiff sold the property to Glenview Developments Ltd. constituted an adventure in the nature of trade or rather was a disposition of capital property.

The plaintiff maintains that the farm property was acquired for the purpose of carrying on a farming operation and for personal use such as horseback riding, picking apples and visiting the property with his family. However, as a result of two heart attacks suffered by Mr. Lindholm, the plaintiffs only shareholder, in 1974 and 1976 and due to his familial obligations and responsibilities, the plaintiff company was unable to continue to pursue the farming operation and accordingly the plaintiff sold a large portion of Field Farm to Glenview Developments Ltd. in 1977.

The defendant's position is that the motivating reason for the acquisition by the plaintiff of the Field Farm property, in particular the second acquisition of the 450 acres of the property from Newton Logging Ltd. in 1969, was the expectation that it could be sold for a profit and that the sale of the property was part of the ordinary business of the plaintiff in developing real estate for resale. In other words, the plaintiff had at all times the motivating intention to sell the property at any time, whenever circumstances so warranted.

Since income tax was introduced in Canada, a considerable amount of jurisprudence has arisen from the use of the phrase "adventure or concern in the nature of trade” used in the extended definition of business in subsection 248(1) of the Income Tax Act. This legislative provision states the "business" 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." The most comprehensive analysis of the meaning of “adventure in the nature of trade" is found in M.N.R. v. Taylor, [1956] C.T.C. 189; 56 D.T.C. 1125 (Ex. Ct.) where the Court set out a number of tests to be applied to determine when a transaction, which is not itself a trade or business, can be held to be "an adventure or concern in the nature of trade". The decision makes it clear that the question to be answered, in cases of this nature is, was the asset acquired by the taxpayer as an investment or was it not. If not, then any gain realized by the taxpayer upon the sale of the asset is taxable as income. Whether an asset was acquired as an investment is to be determined by all the facts of a particular case including, the course of conduct of the taxpayer, the nature of the subject property, the probability of the asset producing income without the need to be turned over and the similarity of the transaction in question to a trading transaction.

Several tests, many of them similar to those pronounced by the Court in the Taylor case, have been used by the courts in determining whether a gain is of an income or capital nature. These include:

1. The nature of the property sold. Although virtually any form of property may be acquired to be dealt in, those forms of property, such as manufactured articles, which are generally the subject of trading only are rarely the subject of investment. Property which does not yield to its owner an income or personal enjoyment simply by virtue of its ownership is more likely to have been acquired for the purpose of sale than property that does.

2. The length of period of ownership. Generally, property meant to be dealt in is realized within a short time after acquisition. Nevertheless, there are many exceptions to this general rule.

3. The frequency or number of other similar transactions by the taxpayer. If the same sort of property has been sold in succession over a period of years or there are several sales at about the same date, a presumption arises that there has been dealing in respect of the property.

4. Work expended on or in connection with the property realized. If effort is put into bringing the property into a more marketable condition during the ownership of the taxpayer or if special efforts are made to find or attract purchasers (such as the opening of an office or advertising) there is some evidence of dealing in the property.

5. The circumstances that were responsible for the sale of the property. There may exist some explanation, such as a sudden emergency or an opportunity calling for ready money, that will preclude a finding that the plan of dealing in the property was what caused the original purchase.

6. Motive. The motive of the taxpayer is never irrelevant in any of these cases. The intention at the time of acquiring an asset as inferred from surrounding circumstances and direct evidence is one of the most important elements in determining whether a gain is of a capital or income nature.

While all of the above factors have been considered by the courts, it is the last one, the question of motive or intention which has been most developed. That, in addition to consideration of the taxpayer's whole course of conduct while in possession of the asset, is what in the end generally influences the finding of the court.

This test has been carried one step further by Canadian courts into what has generally been referred to as the "secondary intention” test. This has meant, in some cases, that even where it could be established that a taxpayer's main intention was investment, a gain on the sale of the asset would be held taxable as income if the court believed that, at the time of acquisition, the taxpayer had in mind the possibility of selling the asset if his investment project did not, for whatever reason, materialize. In Racine, Demers and Nolan v. M.N.R., [1965] C.T.C. 150; 65 D.T.C. 5098 (Ex. Ct.), Noel, J. provided the following summary of the secondary intention test at 159 (D.T.C. 5103):

.. . the fact alone that a person buying a property with the aim of using it as capital could be induced to resell it if a sufficiently high price were offered to him, is not sufficient to change an acquisition of capital into an adventure in the nature of trade. In fact, this is not what must be understood by a “secondary intention” if one wants to utilize this term.

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.

In Armstrong v. The Queen, [1985] 2 C.T.C. 179; 85 D.T.C. 5396; (F.C.T.D.) I had an opportunity to consider this “secondary intention” test as laid down by Noel, J. in the Racine case. As I pointed out in the Armstrong case, the notion of secondary intention is nowhere enshrined in the Income Tax Act. In Hiwako Investments Limited v. The Queen, [1978] C.T.C 378; 78 D.T.C. 6281 (F.C.A.), the Chief Justice of the Federal Court stated at 384 (D.T.C. 6285) that the term “secondary intention”:

. . . does no more than refer to a practical approach for determining certain questions that arise in connection with “trading cases” but there is no principle of law that is represented by this tag. The three principle, if not the only, sources of income are businesses, property and offices or employments (section 3). Except in very exceptional cases, a gain on the purchase and re-sale of property must have as its source a “business” within the meaning of that term as extended by section 139 [now section 248(1)].

The ultimate purpose therefore, of applying the tests set out above to the facts of this case, including the test of intention, is to determine whether the purchase and eventual sale of Field Farm was a business or an adventure in the nature of trade.

Where the nature of the property in question is such that it cannot produce income but must be sold to produce profit, the inference is that the transaction is an adventure in the nature of trade. The Taylor case (supra) is one such case in point where the subject matter was led. In two United Kingdom cases, Rutledge v. C.I.R., 14 T.C. 490 the subject property was toilet paper and in C.I.R. v. Fraser, 24 T.C. 598 where it was whiskey. In David C. McDonald v. The Queen, [1974] C.T.C. 836; 74 D.T.C. 6644 (F.C.A.), vacant land was held to fall into this category.

Another test developed by the jurisprudence is the frequency of similar transactions engaged in by the taxpayer. Although profit from an isolated transaction may or may not be found to be taxable, a large number of similar transactions will generally lead to the conclusion that a taxpayer is carrying on a business. In addition, the length of time an asset is held is an indicative element, with the presumption being that the longer the taxpayer held on to the asset, the more likely it is to be in the nature of an investment.

The plaintiff argues that the intention of Mr. Lindholm in buying the Field Farm property was to pursue a hobby farm, an interest which he developed in his early years because of the farming community where he was raised and the time he had spent on farms as a youth. The evidence clearly indi- cates, according to the plaintiff, that the intention was to dispose of part of the property in order to satisfy the original purchase price. In addition, Mr. Lindholm's evidence is that he wanted to have the property for personal use; the farm was a personal retreat where he could take his family on the weekends. The property was also, according to the plaintiff, a legacy. Mr. Lindholm testified that although a large part of the property has been sold, his will provides that the part remaining will pass to his children and his brother. Mr. Lindholm testified that from 1969 to 1974 he had a series of tenants occupying the property and various improvements were made to the property; the house was improved, fences were built and reservoirs were constructed for irrigation. In January of 1974 Mr. Lindholm suffered his first heart attack, and in 1976 he suffered another more serious heart attack. It was during his recuperation period from this second attack that he received an unsolicited offer to purchase the farm from Glenview Developments Ltd. and it was because of his health and his family responsibilities that Mr. Lindholm accepted the offer to purchase and sold the 400 acres of Field Farm.

I have carefully considered the arguments put forward by the plaintiff and the testimony of Mr. Lindholm offered during the course of the hearing before me. Although the evidence of the witnesses is of some assistance in determining their intentions, it is their actual conduct during the time they owned the property in question which is the most reliable indication of the intention of the taxpayer at the time of acquisition. As stated by Walsh, J. in Pierce Investment Corp. v. M.N.R., [1974] C.T.C. 825 at 831; 74 D.T.C. 6608 at 6612:

Without intending to cast any aspersions on the credibility of the witnesses in the present case it is nevertheless evident that in any case where a distinction must be made between a transaction which constitutes an adventure in the nature of trade and one which leads to a capital gain, one must expect the witnesses to insist that their intentions were solely to make an investment and that the idea of reselling the property at a profit had never occurred to them even as a secondary intention at the time of making the original investment, but was merely forced on them subsequently by some event beyond their control.

In this case, the plaintiff company was subdividing and selling lots of the subject property from 1968, the year in which Mr. Lindholm acquired all outstanding shares of the company until 1976 when he sold 400 acres to Glenview Developments. Over that period of time there were 17 such transactions, the majority of the sales resulting from the advertising of the lots for sale. The sale of 400 acres of the property to Glenview Developments Ltd. (the transaction in issue in this case) was unsolicited. In my opinion, the evidence is clear that from the moment Mr. Lindholm bought the shares of the plaintiff corporation, an extensive part of the business of the company, as stated in its income tax returns, its financial statements and as admitted by Mr. Lindholm himself, was the development of real estate for resale. From these circumstances the only reasonable conclusion one can reach is that the intention of Happy Valley Farms Ltd. was to sell property at a price which would ensure a profit. Even if Mr. Lindholm's intention was to retain a portion of the subject property for his own personal use, it was not his only intention. In this regard the following statement of Joyal, J. in Mars- ted Holdings Ltd. v. The Queen, [1986] 1 C.T.C. 436 at 447; 86 D.T.C. 6200 at 6208, is equally applicable to the case at bar:

With these findings, I conclude that the plaintiffs, in their remarkable adventure in real estate purchases, were in the business to make profits out of them. I do not wish to discount their professed intention to buy secure property investments for the long haul but the reasonable conclusion is that such was not their only inten- tion. I must infer on all surrounding circumstances that they were prepared to sell if the price were right. Such an intention is consonant with the kind of investments which were made, with the singular field of operation in which the plaintiffs concentrated their efforts and with the experience of the real estate trades in which the plaintiffs, or their guiding hand, were involved.

There is little question that the primary business of the plaintiff company, for the years it was owned by Mr. Lindholm, was land development. In its 1965, 1966, 1967 and 1976 income tax returns the plaintiff described its business as “farming”, in the returns for its taxation years from 1968 to 1975 inclusive, the plaintiff’s business was described as “‘farming and land development”. In the 1977 taxation year, the plaintiff's business was described simply as “land development”.

Plaintiff's counsel relies on the letter sent by Mr. Lindholm to the Industrial Development Bank in March 1968, two months after he had purchased the original 150 acres of Field Farm, where in Mr. Lindholm stated that it was his intention to put the farm back into working order and to conduct a cattle-raising operation, as evidence that the intention of the plaintiff in buying the property was not land development but farming. However, I agree with the defendant in this regard; this stated intention to farm was made prior to the purchase of the remaining 450 acres from Mount Newton Logging Ltd. and those 450 acres cannot be taken to be part of the same intention, even if there was an intention to farm the original 150 acres.

Many other surrounding circumstances in this case support the proposition that the intention of the plaintiff in acquiring the Field Farm property was to develop the land and sell it at a profit and that the transaction under review constituted an ordinary business activity of the plaintiff.

First, there is little doubt that Mr. Lindholm was knowledgeable in real estate matters and possessed a measure of expertise concerning land values and the real estate market as it existed in and around Victoria at the time of acquiring and disposing of the subject property. Although plaintiff's counsel maintains that conducting a farming enterprise was the primary motivation for acquiring the property, the evidence is clear that there was in fact, very little farming activity carried on by Mr. Lindholm on Field Farm. The expenses incurred for a farming operation and the income from farming were negligible and it is questionable whether the 450 acres of Field Farm purchased by the plaintiff from Mount Newton Logging Ltd. were amenable to farming at all. Although the plaintiff maintains that Mr. Lindholm's health problems were a major contributing factor to the decision to sell, I must confess that I fail to see the relevance of that evidence as there was little activity being carried on on the property in any event and certainly none that was so strenuous as to lead to the conclusion that the plaintiff was forced to sell because of its controlling shareholder's health.

Upon examination of all the circumstances surrounding the transaction under review including the nature of the subject property and in particular the virtually non-existent likelihood of the land producing income without being sold, the conduct of the plaintiff company while it owned the property, especially the number of similar transactions before and after the transaction under review and the minimal farming activity engaged in by Mr. Lindholm, I can come to no other conclusion than that reached by the Tax Review Board; the land was acquired by the plaintiff as a revenue producing investment to be disposed of at the best opportunity. The motivating reason for the acquisition by the plaintiff of Field Farm was the expectation that it could be sold for profit. The transaction under review was, in my opinion, part of the ordinary business of the plaintiff in developing real estate for resale. The profits from the sale of the subject property were profits from the business of the plaintiff and were properly included in the plaintiff’s income by the Minister of National Revenue.

Further, I am not persuaded by the plaintiff’s alternative argument that the subject property was acquired as a capital asset in 1969 and held as a Capital asset until July 1974 when a change of use occurred and the property became the inventory of the plaintiff. There is simply no evidence to support such a proposition.

For the reasons expressed the plaintiffs action is dismissed with costs.

Action dismissed.