Breakell v. The Queen, 91 DTC 5419, [1991] 2 CTC 77 (FCTD)

Reed, J.:—This is an appeal, by four partners, of assessments by the Minister of National Revenue classifying profit arising from the sale of certain lands as business income and not a capital gain.

The land in question is a rectangular tract on the north edge of the town of Brooks, Alberta. It comprises four parcels. Two are very small: 0.33 acre (the "semicircle") and 2.34 acres (the "triangle"). The small parcels face Cassils Road and are surrounded on three sides by the two large parcels which make up the bulk of the rectangular area. The larger parcels had a common owner (Lily Wolfman) and are referred to in the evidence as the Wolfman property. They comprise 22.98 acres.

The Wolfman property was bought by the partnership on November 15, 1974 for $92,000. (An agreement to purchase was signed as of that date; the transaction was not closed by deed until February 28, 1975.) The semicircular parcel was bought on April 2, 1975 for $12,000. The triangular parcel was bought on February 6, 1976 for $70,000. The rectangular tract thereby assembled was sold by the partnership on February 11, 1976 to Venture Realty Ltd. for $750,000.

The legal test for determining when profit from a sale of property should be classified as income rather than a capital gain is well known: what was the taxpayer's intention when the property was purchased. If the property was acquired with either a primary or secondary intention (should the primary intention fail in execution) that it be resold, then, the profit therefrom is income. (Racine, Demers and Nolin v. M.N.R., [1965] 2 Ex. C.R. 338; [1965] C.T.C. 150; 65 D.T.C. 5098 (Ex. Ct.) at 158 (D.T.C. 5103).) Another way of framing this test is to ask whether the possibility of reselling was a motivating factor inducing the purchase. If on the other hand the land is purchased to be used as a capital asset for the purpose of producing income then profit arising on its disposition is a capital gain.

When the taxpayer is a corporation or a group, such as a partnership, the intention of the group will be determined by that of the directing mind(s). (Kit- Win Holdings (1973) Ltd. v. The Queen, [1981] C.T.C. 43; 81 D.T.C. 5030 (F.C.T.D.); Mohawk Horning Ltd. v. The Queen, [1986] 2 C.T.C. 89; 86 D.T.C. 6297 (F.C.A.).) In the present case the directing minds were clearly Messrs. Breakell and Smigarowski. Mr. Rivelazione relied on their advice and left decisions in their hands. It is also clear that Mr. Dorohoy did not have any direct or active participation in the decision-making process.

There seems little doubt that the land in question was obtained primarily for the purpose of resale for development. There is practically no objective evidence to the contrary.

The land at the time of purchase was situated in an area which was known to be in the path of development. When the Wolfman property was bought it was bounded on the east by residential development which had been established there for some time. Immediately to the south was Cassils Road, a main thoroughfare, and on the other side of Cassils Road, from the Wolfman property, was a strip shopping mall, and to the south again a residential development which had been established for some time. The long side of the rectangular tract bordered this road (approximate dimensions are 2250' x 500'). To the west of the property was a new subdivision development.

On the north boundary of the Wolfman property was a farm of 65 acres owned by Mr. Smigarowski. He purchased the property in 1973 (taking posses sion in 1974) for $150,000. The farm, previous to its purchase had been a dairy operation supporting approximately 70 seventy head of cattle. Mr. Smigarowski can be described as a self reliant entrepreneur who engaged in a number of business enterprises (he was until sometime in 1975 also a regional manager for Electrolux, Canada). He never lived on the 65-acre farm which he had bought north of the Wolfman property but as of 1974, Mr. Breakell together with his family had moved into the larger of two houses located thereon. The smaller house was occupied by a hired man.

Mr. Breakell is a chartered accountant who operated a private practice in the town of Brooks. In that capacity he knew Dr. Evans who was a veterinarian. Dr. Evans at the time wanted to establish an exotic cattle breeding operation but was undercapitalized. The term exotic cattle is used to refer to purebred European breeds such as Charolais, Simmental and Marchigiana. It was the last of these which particularly interested Dr. Evans.

Messrs. Breakell, Evans and Smigarowski entered into a partnership agreement in January of 1974. The formal documentation was not signed until February 21, 1975. The firm name and style of the partnership was "Alberta Marchigiana Cattle Co.”. Dr. Evans travelled to Italy for the purpose of selecting one purebred Marchigiana heifer for import. It was hoped that through a process of artificial insemination and the transplanting of embryos into Holstein cows a fair sized herd of Marchigiana could be established from the one heifer within a fairly short period of time. In addition to the importation of the purebred Marchigiana heifer, the partnership purchased, in 1974, approximately 35-40 head of half-blood Simmental and a similar number of either half or three-quarter blood Marchigiana from the United States.

With the arrival of the cattle, Messrs. Smigarowski and Breakell became aware that the fencing on the 65-acre property was not adequate. The cattle were escaping to the road. There was some difficulty fencing just the Smigarowski property because the area to the south, where it bordered on the Wolfman property, was marshy. A fence was constructed along Cassils Road to the south of tne Wolfman property as well as along its sides fencing in property not owned by Mr. Smigarowski. Once the fence was built the cattle belonging to the cattle partnership could roam on the Wolfman property although whether they did so to any great extent is unclear. The cattle were not kept on the Smigarowski property at all during the summer and fall of 1975. Part of the Wolfman property was leased during all of the time in question to a third party who kept horses on the eastern portion.

In November 1974, Messrs. Breakell, Smigarowski and Mr. Dorohoy signed an agreement to purchase the Wolfman property. Around this time it was agreed that these three together with a Mr. Rivelazione would enter into a partnership to purchase the property. A deed was finally signed by Lily Wolfman conveying the property to the four plaintiffs on February 28, 1975. A formal partnership agreement between the four was finally signed on August 13, 1975 although its effective date was March 1,1975. The partnership agreement stated that Messrs. Breakell, Smigarowski, Dorohoy and Rivelazione were “to become partners in the business as land developers". The declaration of partnership which they all signed states: ”. . . we intend to carry on the business of land developers at Brooks, Alberta, under the firm name of 'Cassils Road Properties' commencing the 1st day of March 1975."

On February 27, 1975, the day before the Wolfman property was conveyed to the four plaintiffs, an application was filed with the Medicine Hat Regional Planning Commission seeking permission to sever 1.43 acres from the property so that it might be used for commercial development. The land at the time was zoned agricultural. This application showed Lily Wolfman as the registered owner and Mr. Breakell as the land developer. The application had been triggered by a tentative agreement between Mr. Breakell and National Farmway Stores whereby the latter would purchase a 1.43-acre portion of the Wolfman property for $30,000 if the required approvals could be obtained. The evidence does not indicate that Mr. Breakell took the initiative in seeking this offer. Rather the overture would seem to have been unsolicited on his part.

The application for severance and rezoning of the 1.43 acres was turned down on April 4, 1975. It was thought to be premature pending adoption of a general outline rezoning plan for the entire area. In addition, the Eastern Irrigation District was opposed to the application because a drain (the Marshall drain), which was part of the local irrigation system, ran along the edge of and through the property. The letter refusing the application contained the following comment: "The Commission & the Town are not opposed to development of this area as such but . . . await comprehensive replotting scheme . . . which at a minimum would include lots 2 & 3 as well.” At about this same time, that is on April 2, 1975, the plaintiffs purchased the semicircular 0.33-acre parcel.

In the spring of 1975, Messrs. Evans, Smigarowski and Breakell became aware that their exotic cattle enterprise was not likely to be viable. The bottom was dropping out of the beef cattle market and the market for exotic breeds was plummeting as well. The cattle were eventually all sold at a dispersal sale in October of 1975. Significant losses were incurred by the three partners.

The land partnership was not so unfortunate. A general outline plan for the development of 309 acres on the northern edge of Brooks, which included the property owned by the plaintiffs, was submitted to the Medicine Hat Regional Planning Commission on May 27, 1975. This plan was submitted on behalf of four landowners in the area. Mr. Breakell (presumably as the representative of the partnership) was listed as one of them. The Wolfman property was designated commercial in that outline. On June 2,1975 a reapplication was filed for severance of the 1.43 acres to allow National Farmway Stores to construct and operate a store on the land. The outline plan was not approved because it was judged to be incomplete. The application of rezoning and severance of the 1.43 acres was also not approved. The Commission and the Town did not wish to see piecemeal development of the area. In any event, the interest of National Farmway Stores in the property waned for business reasons particular to that organization.

Efforts were made through the fall and winter of 1975-76 to sell the property. On November 28, 1975 Venture Realty made an offer to purchase but by February 9, 1976 this offer had been withdrawn; Venture could not meet some of the conditions contained in that offer. On February 6, 1976 the partnership bought the 2.34 triangular parcel thereby obtaining title to the whole rectangular tract. On February 11, 1976 a sale to Venture Realty of the rectangular tract was signed for $750,000.

In reporting on the distribution of the sale proceeds to the partners, Mr. Breakell included the following notes:

Cassils Road Properties Brooks, Alberta

Listing of Efforts to Support Commissions to Lloyd and Bob

November 1974: Negotiations completed with Wolfman through Couch to purchase

22.93 acres for $92,000. ($4,000 per acre with no commission).

App and Demet introduced to split proposed sale to National Farmway Store for 1.43 acres for $30,000 and retain balance of land. Each put up $23,000 to finance one-half to Wolfman which was to be paid out on sale to National.

Numerous meetings were held with the National people, Brooks and Medicine Hat Planning Boards on proposed sub-division.

January 1975:	Contracted legal earthmovers, etc. to improve site by removing
	willows and filling swamp.
	Cleaning up the site enhanced getting approval from the E.I.D.
	and town to re-route the Marshall Drain.
April 1975:	Purchased small house and semi-circle parcel "A" (.33 acres) for
	$12,000 on recommendations from Planning Board to straighten
	out frontage along Cassils Road. Again being locally available
	Lloyd and Bob acquired this property without commission and
	sold small house for $1,000. The house was removed and the site
	cleaned up at no cost.
Fall 1975:	After advertising the property for sale we were offered $6,200 per
	acre from Can-Way Development Corporation Ltd. (M.E. Halwa)
	and we came back to sell for $6,850 per acre. This required
	various meetings at Calgary and Brooks prior to our advising
	Halwa the deal was off.

November 1975: Lloyd and Bob entered into an offer to sell 8.71 acres for $379,408

subject to a 6% commission payable to Wilcox. This deal fell through and Lloyd and Bob had the partnership released of all future responsibility for any commission to Wilcox on a pay-out of $2,500.

February 1976:	Further meetings with the Venture people by Lloyd and Bob
	brought out the fact that if we acquired the triangle parcel "B"
	they would be interested in looking at the intire [sic] parcel.
	(Reason: No sub-division would be required on transfer of entire
	parcel per Planning Board's advice to Lloyd and Bob.)
February 1976:	Lloyd and Bob successfully completed the purchase of parcel
	"B" (2.34 acres-686 front footage) for $70,000. No commission
	was paid on acquisition of this property and foundation and site
	was cleaned up at little cost.
	Venture were advised that we now owned the entire parcel and
	negotiations were entered into with Kuffler and Awid and an
	offer of $750,000 total to us was made by then. This was subject
	to our getting the property re-zoned commercial.

The plaintiffs argue that the Wolfman property was originally acquired for use in connection with the exotic cattle operation which was being established by Messrs. Evans, Smigarowski and Breakell. The plaintiffs assert that this was the focus of their attention. None state that the property was purchased for resale. It is argued that these statements of intention are supported by the fact that the Wolfman property had been fenced by Messrs. Smigarowski and Breakell and was being used for purposes connected to the cattle operation before it was purchased by the plaintiffs. It is argued that the stated intention is consistent with the fact that the property was adjacent to the Smigarowski farm and that there would be a natural desire to see it obtained for use in conjunction with the cattle breeding operation. All plaintiffs as well as Dr. Evans gave evidence that there was great excitement in late 1974 and early 1975 over the prospect of establishing a successful, and potentially highly profitable, exotic cattle breeding operation.

The declared statements of intention of the plaintiffs together with these few indicia simply cannot outweigh all the evidence which leads to a contrary conclusion. Firstly, as has been noted above, the land was in an area which was known to be a prime candidate for development. This would particularly have been known by Mr. Breakell who had considerable knowledge, as a result of his vocation, of the trends and prospects of development in Brooks.

Secondly, the price paid by the plaintiffs ($4,000 an acre for the Wolfman property) is inconsistent with what one would expect a purchaser who was looking for land for farm purposes to pay. Farm land in the vicinity was available for $300 to $500 an acre. While Dr. Evans gave evidence that if he had the money he would have purchased the Wolfman land himself, this does not prove that he would have purchased it solely for use as farm land. His evidence is quite consistent with the conclusion that he would have purchased it with a view to resale at a profit because of the anticipated expansion of the town of Brooks.

The fact that the Wolfman property was adjacent to the Smigarowski property and was being partly used in conjunction with the cattle operation simply is not strong enough reason to conclude that sensible business people would pay such high prices for land if it was being purchased primarily tor use as part of the cattle operation. The Smigarowski farm may have been ideal for the kind of cattle breeding operation which Messrs. Evans, Smigarowski and Breakell wished to establish: a supply of pure water was constantly available from a well and there was no need to rely on irrigation and stock ponds. It is not normal however, for a businessman to pay a huge premium for an ideal location when a viable alternative exists at much less cost. Dr. Evans gave evidence that the exotic cattle breeding enterprise could have operated on his farm. It was a mile west of the Smigarowski and Wolfman properties. He had bought it after Mr. Smigarowski brought his acreage and paid approximately $500 an acre.

Thirdly, the partnership agreement entered into by the plaintiffs expressly refers to the partners as land developers. While I can accept that all of the plaintiffs may have signed the documents without reading them in detail, I cannot accept that the lawyer who prepared them made a mistake or misconstrued his instructions. It is clear from the evidence that he knew at least Mr. Breakell personally and socially and it is reasonable to conclude that he was generally aware of the type of endeavour in which the partners were engaged. In addition, the reference to land developers, in the declaration of partnership, is at the very beginning of that document and the document is very short. It seems likely that at least one of the four would have read this portion of the document.

Fourthly, while the plaintiffs asserts that their purchase of the Wolfman property was for use in the exotic cattle breeding business, there was no attempt made to have Messrs. Dorohoy and Rivelazione included in the Marchigania cattle partnership. Dr. Evans was not invited to participate in the land partnership, nor was he asked about the possibility of including Messrs. Doronoy and Rivelazione in the cattle breeding operation. It may be reasonable to expect that if, by the spring of 1975, the plaintiffs knew the cattle breeding venture was not viable they would not pursue with Dorohoy and Rivelazione the possibility of involving them in that business (Breakell, Smigarowski, Dorohoy ana Rivelazione were all friends). It is not reasonable, however, to find that their involvement in the business was not extensively and thoroughly discussed by all parties prior to that time, for example in the fall of 1974. One must conclude, as counsel for the defendant argues, that the cattle breeding partnership and the land partnership were two separate enterprises.

On the basis of the evidence it is simply not possible to conclude that the probability of resale at a profit was not an operating motive for the purchase by the partnership of the Wolfman property. Given that conclusion it is not necessary to consider the argument that while the purchase of the small parcels might be said to have been for the purpose of resale this was only to maximize profit on the sale of a capital asset. (McGuire v. M.N.R., [1956] C.T.C. 98; 56 D.T.C. 1042 (Ex. Ct.); Moluch v M.N.R., [1966] C.T.C. 712; 66 D.T.C. 5463 (Ex. Ct.); Holmes v. M.N.R., [1981] C.T.C. 3062; 82 D.T.C. 1010 (T.R.B.); Hayes v. M.N.R., [1989] 2 C.T.C. 2008; 89 D.T.C. 334 (T.C.C.).) It is conceded that the purchase of the triangular piece was clearly for resale. It was purchased at a cost of $30,000 per acre ana was sold two days later.

The defendant tendered in evidence a report prepared by a Mr. Lee, a real estate appraiser with the Department of National Revenue. That report is entitled “A Feasibility Study on A 25.65 Acre Parcel of Land Located in Brooks, Alberta". It addresses four questions: (1) the highest and best use of the property during the January 1, 1974-December 31, 1976 period; (2) the land value trends of small acreages in or near the Town of Brooks, Alberta in the mid-1970s; (3) the value of farm land in the Brooks area between January 1, 1974 and December 31, 1976; (4) the feasibility of purchasing the subject property for the purpose of raising cattle during the period of January 1, 1974 to December 31, 1976. I held that Mr. Lee was qualified to give evidence with respect to the first three points. I expressed some doubt about his qualifications with respect to the fourth but decided to hear the evidence.

It was argued that although Mr. Lee might be qualified to give evidence respecting the first (highest and best use) this was not relevant. I decided to hear the evidence and reserve my decision on its relevance until later. (The authorities on this issue are divided: Irwin v. M.N.R., [1989] 2 C.T.C. 2115; 89 D.T.C. 386 (T.C.C.) and Ung v. M.N.R., [1987] 1 C.T.C. 2246; 87 D.T.C. 176 (T.C.C.).)

After hearing the evidence, I agree with Mr. McKenzie that the evidence respecting highest and best use is not relevant. It is not relevant unless one can conclude that consideration was somehow part of the taxpayer's intention when purchasing the land. The taxpayer's intention may or may not coincide with the land's highest and best use. Also, as Mr. McKenzie argued, facts respecting the cost per acre for which other properties were sold in the area at the time the plaintiffs were purchasing the Wolfman property are relevant but this is not opinion evidence with respect to which an expert need be called. After hearing the evidence with respect to the economic feasibility of using the Wolfman property for cattle grazing purposes, I am confirmed in my tentative opinion that Mr. Lee is not qualified to give evidence in that regard.

For the reasons given the appeals from the Minister's assessments will be dismissed.

Appeals dismissed.