Bailey v. MNR, 90 DTC 1321, [1990] 1 CTC 2450 (TCC)

Rip, T.CJ.:—The appellant, Donald R. Bailey (“Bailey”), filed his income tax return for 1983 reporting a loss from a business. The business was said to comprise two real estate properties, a rental property and vacant land. The properties were described in the inventory of the alleged business and were valued in a schedule attached to the return of income at their fair market value at the end of 1983, amounts which were less than their costs. The Minister of National Revenue, the respondent, reassessed tax for 1983 on the basis that the properties were capital properties. The respondent also took the position in his pleadings that the provisions of subsection 10(1) of the Income Tax Act ("Act") do not permit the appellant to "write down" the value of the properties. The appellant appeals from the reassessment, as well as reassessments for 1982 and 1985 which disallowed him from carrying back to 1982 and forward to 1985 portions of the non-capital loss he reported in 1983.

Bailey has practised law in Edmonton since 1969. In 1977 he met his present wife, a real estate agent, land developer and an approved builder with Canada Mortgage and Housing Corporation ("CMHC"). At the time of the marriage Mrs. Bailey had an interest in two multiple unit residential buildings ("murbs") which qualified as Class 32 properties and which she acquired as investments.

Prior to meeting Mrs. Bailey the appellant owned no real estate. Upon meeting his future spouse, Bailey discussed with her investing in real estate. He described his wife as conservative in her economic views. As a result of these discussions Bailey made a decision to purchase income producing real estate which over a ten to twenty year period would assist in making him financially independent. The acquisition of murbs would allow him to defer tax and the deferred taxes could be used as a source of funds for investment. Since he had no money at the time he realized his investments would have to be 100 per cent financed. He purchased a 14-unit apartment block in Salmon Arm, British Columbia in December, 1977 and in December, 1979 acquired with Mrs. Bailey a 24-unit building in Enderby, British Columbia. This latter building was destroyed by fire in 1988 but the land is still owned by the Baileys.

By 1980 Bailey was encouraged with the results of his real estate investments and with Mrs. Bailey, purchased a 12-unit apartment building in Edmonton. This building was the fifth revenue property owned by them separately or together.

In the fall of 1981 Mr. and Mrs. Bailey evaluated their investment plans. They considered their investment equity reasonably managed and safe. They decided in late December, 1981 to acquire a multiple unit residential building to defer tax and to fit their goal for long term investment. Mr. and Mrs. Bailey became aware of an apartment building in Edmonton known as Gardenwood Apartments ("Gardenwood"), a 62-unit building which qualified as a Class 32 asset for capital cost allowance purposes.

Because the Baileys wished to utilize the tax advantage of the property for 1981, it was necessary to purchase the building before the end of the year. Unfortunately Mrs. Bailey was confined in bed with pneumonia during the last two weeks of 1981 and only Mr. Bailey inspected the property prior to executing the purchase agreement. In addition to the inspection, Bailey and his wife relied upon the vendor's warranties in the offer to purchase, Bailey's discussions with the first mortgagee which indicated it had not experienced problems with the property, and their knowledge the building was a CMHC project. The offer to purchase was executed on December 31, 1981. As with the 12-unit apartment, the Baileys’ participation in Gardenwood was 100 per cent financed. The purchase price was $2,600,000.

Mrs. Bailey's health improved and in mid-January, 1982, she inspected Gardenwood. She was shocked and disappointed. The property was not what she had expected. Mrs. Bailey did not like either the visual appearance of the building or its location. In her opinion, it had no redeeming features nor could she conceive how she could make it look better with only reasonable changes to its appearance. She testified the workmanship was shoddy. Construction defects had been hidden from Mr. Bailey during his inspection. The builder's history in constructing "murb" units in Toronto, she said, was "disastrous" and the builder had been placed in receivership and its principals convicted of fraud. The building's design was poor, she said. She did not like the unit mix of one, two and three bedrooms nor the layouts of the units. She was convinced the building would be difficult and expensive to maintain. Structural problems by mid-January, 1982 included problems with the roof, foundation, sewers, heat, insulation and paving. She also anticipated problems renting the units. In short Mrs. Bailey did not want this building as part of their investment portfolio and Mr. Bailey concurred. Legal action against the vendor was contemplated but because of costs none was commenced. The Baileys were concerned that they had an unsound project which was 100 per cent financed and represented approximately one-half of their entire holdings. Because of favourable market conditions in Edmonton in early 1982 they felt the building could be easily sold and so it was put up for sale. In the meantime, in order to reduce their overall financial exposure by taking out their equity, they decided to sell the 12-unit apartment building.

The 12-unit apartment building was selected for sale, Bailey said, because it was not a murb and its sale would generate very little recapture. The Baileys accepted an offer to purchase of April 3, 1982 for cash plus a mortgage back to the vendors on a three year term. Gardenwood was not yet sold.

After the Baileys were committed to sell the 12-unit apartment building, they received an offer on behalf of a Mr. and Mrs. Booth to purchase Gardenwood for $2,860,000. In order to finance the acquisition of the building, the purchasers had to sell a quarter-section of farmland for $450,000 to one Clare. At the same time the Baileys agreed to purchase from Clare another quartersection of farm land for $330,000. The evidence of Bailey was that the farmland they acquired was located near Marionville, at the time a "bedroom community" of Edmonton with land subdivision taking place around the property. Mr. and Mrs. Bailey assumed the farmland could be resold to a developer within the year at a profit because of the activity in the area. They thus acquired the farmland from the Booths for $450,000 and sold it to Clare for the same price, taking his farm property, valued at $330,000. At the end of the day the Baileys together owned a farm property worth $330,000 plus $120,000.

The Gardenwood property was sold by the Baileys to the Booths by agreement for sale dated May 1, 1982.

Gardenwood and the 12-unit apartment building were the only apartment buildings sold by either Mr. or Mrs. Bailey. The sales were reported on capital account. In his affidavit Bailey set out the reason for reporting the gains on account of capital:

The decision to sell these 2 apartment projects occurred very shortly before their actual sale. Therefore we assume that the value of the properties had not increased following our change of intention towards the sale of the properties. With hindsight it is possible the price may have even decreased as the Alberta economy had begun to decline. This was all discussed with our tax accountant Dan Block and based upon his being advised of the facts as set out above, his tax advice to us was to report the sales as capital dispositions and he prepared the tax returns accordingly.

Mrs. Bailey was of the view that since no real estate commission was paid on the purchase of Gardenwood in 1981 and the seller was in need of money, the purchase price was a "good deal" and any gain on the sale in 1982 “was in the original deal"; therefore she and Bailey concluded any gain took place while the property was capital.

In 1982 the Baileys acquired two additional apartment buildings for investment purposes in Edmonton, one containing 125 units and another 47 units. Subsequently three other properties were acquired. All these properties, said Bailey, had the qualities he and Mrs. Bailey desired to have in their investment portfolio.

Shortly after the two apartment buildings in Edmonton were acquired payments pursuant to the agreement for sale of Gardenwood stopped. The Baileys commenced foreclosure proceedings on February 18, 1983 and on March 25, 1983, the Court appointed Bailey as receiver of rents and profits from Gardenwood. The Baileys did not receive any rent for February and March. [1] On August 12, 1983 the interests of the Booths under the agreement for sale was determined by court order and the Baileys once again became legal and beneficial owners of Gardenwood, each as to an undivided one-half interest.

Bailey testified his and Mrs. Bailey’s intention in foreclosing Gardenwood was to clean up the title by foreclosing the Booth interest, to put the property back in good order and to sell it again at a profit. There was, he insisted, no intention to retain it as an investment. In the meantime, the state of the economy of Edmonton became further depressed. Bailey said that when he and Mrs. Bailey purchased Gardenwood the Edmonton economy was buoyant; however, the economy soon started into a decline. When he sold the property in the spring of 1982 he thought the decline was temporary.

The purchaser of the 12-unit apartment building had also defaulted in payments under the agreement for sale and its interest was also foreclosed by the Baileys. However, Bailey affirmed, the 12-unit property “still met all of our requirements as a long term income producing investment" and was held as a capital asset when taken back.

The appellant stated that he and his wife decided to take back Gardenwood because if they "didn't take the property back, the other mortgagees would take over. We thought there was a value between the amounts owing on the property and its market value”. This difference, he said, represented the profit he hoped to make on a sale. When the Baileys purchased Gardenwood in 1981 they assumed an existing mortgage. In answer to a question whether he and Mrs. Bailey were liable personally on their covenants on their mortgage, Bailey replied "at the end of the day, no, but that was not necessarily our knowledge at the time”. Later on in cross-examination he said an alternative to foreclosing would have been to "walk away and hope the mortgage company didn't know we existed". He explained that it was the practice of mortgage companies not to pursue personal covenants in Alberta. The mortgage company would have gone against the Booths, as owners. This, he recalled, was the practice and procedure of CMHC, although six months later CMHC changed its policy and started pursuing individuals on their covenants. He said he was of the view that to walk away from the property would be to walk away from a potential profit.

The Baileys were not in a position to sell Gardenwood until they received title and after the appeal period had expired. However, Bailey explained, when they were awarded legal and beneficial title, the value of the property "dropped so much we could not sell”. In Bailey’s view the value of the property in August 1983 was less than the amounts owing on it.

Bailey claimed capital cost allowance on Gardenwood for 1981; he did not claim any capital cost allowance for 1983, when the property was taken over, and subsequent taxation years.

The Baileys were unable to dispose of the farmland they acquired from Clare on the purchase of Gardenwood. Development in the area of the property dried up by the end of 1982 because of economic conditions. The land was rented for farming and over the years has garnered an average of $2,000 annual rent plus nominal charges for access for drilling for gas.

When discussing their income tax returns for 1982 with their tax advisors in April of 1983, the Baileys and their tax advisors considered a change of use of Gardenwood to have taken place in mid-January, 1982, when Mr. and Mrs. Bailey decided to sell the property; it was the view of all concerned that from that time on the property was inventory since it was held for sale. A conclusion was also reached that the farmland was also inventory because it was acquired for resale.

Bailey recalled that in April of 1984, real estate values in the Edmonton area were severely depressed and that he and his wife realized this was not a temporary thing. As a result of the conclusion that the properties were inventory, one of the tax advisors, Mr. Daniel John, C.A., a partner with Coopers & Lybrand, Chartered Accountants, in Edmonton, specializing in taxation, ad- vised Mr. and Mrs. Bailey that the value of the properties should be written down to the lesser of cost or fair market value, in accordance with subsection 10(1) of the Act. The properties were valued at the values the appellant believed the market value of the two properties to be at the end of 1983, namely $100,000 for the farm property and $1,334,000 for Gardenwood. [2] Bailey attached the following schedule to his 1983 income tax return:

BUSINESS INCOME

Property Received on Foreclosure

Held for Resale

Principle [sic] Outstanding at Foreclosure Date $2,500,000

Less: Section 40(1) reserve of

previous year (71,200 X 2) (142,400)

Add: Reacquisition costs 1,015

$2,358,615

Business Income NI.W. 24, 55, 25 Gardenwood Total

Rentals Received 2,800 154,903 157,703

Carrying Costs

Property Taxes	618	39,351	39,969
Interest		214,711	214,711
152 days xX $546.67		83,055	83,055
	$ 2,182	$ (182,214) $ (180,032)
Inventory Write Down
Lesser of: Cost	$330,000	$2,358,615	$2,688,615
Fair Market Value	100,000	1,334,000	1,434,000
	$(230,000)	$(1,024,615)	$1,254,615)
	$227,818	$1,206,829	$1,434,647
Allocate: Elizabeth Bailey			$ 717,323
Donald Bailey			$ 717,323
			$1,434,647

With the consent of the respondent, the appellant produced the affidavits of two chartered accountants, Daniel Block and Dale Frederick Robarts, both partners of Coopers & Lybrand in Edmonton. Counsel for the respondent agreed each of Mr. Block and Mr. Robarts qualified as an expert witness, the former in taxation and the latter in audit, accounting and taxation matters.

In his affidavit Mr. Robarts reviewed discussions he had with Mr. and Mrs. Bailey. He corroborated the testimony of the Baileys with respect to their tax returns for 1983 which were prepared by Coopers & Lybrand. In Mr. Block’s view the schedule entitled “Business Income” attached to Bailey’s 1983 tax return was not only in accordance with generally accepted accounting principles but also with the provisions of the Act and Regulations to the Act and accordingly, in his opinion, "no adjustments were necessary to the returns" of Mr. and Mrs. Bailey when he reviewed them. As a result of the discussion he had with his clients, Mr. Robarts concluded the two properties were inventory and their returns were prepared on that basis. In his opinion, "the 1983 income tax return of Bailey as originally filed and as originally assessed by the Minister of National Revenue is correct".

Both Mr. Block and Mr. Robarts expressed the opinion that it is the owner's intention which determines whether a property is being held for sale. However, Mr. Robarts did refer to the definition of inventory on page 83 of the manual Terminology for Accountants, 3rd edition, prepared by the Canadian Institute of Chartered Accountants ("CICA"). The manual defines "inventory" as follows:

1. Items of tangible property which are held for sale in the ordinary course of business, or are in the process of production for such sale, or are to be currently consumed in the production of goods or services to be available for sale. 2. An itemized list of goods, the annual or other periodic account of stock taken in a business; the articles that are inventoried.

Closing Inventory

Inventory on hand at the end of an accounting period.

Opening Inventory

Inventory on hand at the beginning of an accounting period.

Mr. Robarts also referred to page 204-1 of the publication Canadian Institute of Public Real Estate Companies Recommended Accounting Practices for Real Estate Companies (November 1985) which states that land currently held for sale and land held for future development and sale is inventory and generally accepted accounting principles require that it be stated at the lower of cost and net realizable value.

Mr. Robarts agreed with Mr. Block that the schedule of business income attached to Bailey's 1983 income tax return, which "wrote down" the cost of the properties to their current market value, was in accordance with generally accepted accounting principles.

As I understand it, the affidavits of Messrs. Block and Robarts were filed to corroborate various discussions between the appellant and his accounting advisors in preparation of the relevant tax returns and, as well, to give their opinion, as experts in tax accounting, whether the values of either of the properties may be written down. Such affidavits, however, ought only to render opinion on accounting principles and practice and ought not make any conclusion in law. Whether an income tax return is correct as originally filed, for example, is a decision for the Court. The opinion of experts is not admissible on matters of domestic law.

Counsel for the respondent inexplicably failed to cross-examine Messrs. Robarts and Block on their affidavits even though they were present in Court. No evidence was led by the respondent's counsel to refute the expert evidence of Messrs. Robarts and Block. I therefore accept their evidence in so far as it is admissible and only to the extent it is consistent with other evidence. Mrs. Bailey as well was not cross-examined and I therefore accept her evidence to the extent it is not inconsistent with other evidence.

Gardenwood was inventory in the appellant's view because sometime after its acquisition in 1981, the appellant and his wife decided to sell the property. He acknowledges that he and his wife originally purchased the property for purposes of investment only. Bailey also argues that when he and his wife reacquired Gardenwood in 1983, they did so with the intention of selling it at a profit. The farm property, on the other hand, was from the outset acquired for the purpose of selling at a profit. The appellant argued that in 1983 he was carrying on a business, or alternatively, he was engaged in an adventure in the nature of trade which in itself constituted a business, as defined in subsection 248(1) of the Act. That subsection defines “business” to include:

. . . a profession, calling, trade, manufacture or undertaking of any kind whatsoever and, except for the purposes of paragraph 189(2)(c), an adventure or concern in the nature of trade . . .

With respect to Gardenwood I cannot agree with the appellant. Bailey stated that the reason for acquiring Gardenwood was two-fold, for capital cost allowance purposes and as a long term investment. The property was held by the Baileys as a capital property in the year of acquisition. On its disposition in the next taxation year, the profit on its disposition was reported as a capital gain.

The property consisted of land and a building containing rental units. This property was no different from any other of the properties held by Mr. and Mrs. Bailey for investment purposes. There is no doubt in my mind Gardenwood was acquired for the same purpose as the other properties, that is, to obtain capital cost allowance to reduce taxable income and for investment. A Capital asset is not converted to inventory by virtue only of the discovery after acquisition of defects which, if known to the purchaser, would have dissuaded him from making the purchase. Equally, property is not converted to inventory by making a decision to sell.

The alternative submission of the appellant is that he and Mrs. Bailey acquired Gardenwood on foreclosure with the intent only to sell. Bailey's evidence was that in August, 1983, when the Court granted him the ownership of Gardenwood, there was an expectation that real estate values would soon start to increase; I have no reason to question Bailey's evidence with respect to real estate values in 1983. However, I am not convinced the property was reaquired with resale as the operating motivation of the Baileys. The property was heavily mortgaged and the Baileys were personally liable on their original mortgage. The amount of the mortgage is not in evidence. There was also evidence the written-down value of Gardenwood was more or less than the aggregate amount of the mortgages. Bailey also testified that he spent substantial amounts putting Gardenwood into shape so that it would be easier to sell. The amounts so expended are not in evidence. There is also no evidence as to what price the Baileys may reasonably have expected to fetch for Gardenwood in August, 1983, or at any period thereafter, when they claim they expected to sell the property. Mrs. Bailey testified the property was not a good investment property. However, there is no evidence which even suggests the improvements to the property made by the Baileys would cause a prudent purchaser to overlook defects which caused the Baileys to sell.

Consequently 1 cannot conclude that if Gardenwood had been sold in August, 1983, or within a reasonable time thereafter, it would have been sold at a profit. And even if the property was acquired to be sold at a profit, it does not necessarily assist Bailey. In M.N.R. v. James Taylor, [1956-60] Ex.C.R. 3; [1956] C.T.C. 189; 56 D.T.C. 1125, President Thorson wrote at pages 211-12 (D.T.C. 1137) that:

The intention to sell the purchased property at a profit is not of itself a test of whether the profit is subject to tax for the criterion to make a profit may be just as much the purpose of an investment transaction as of a trading one.

In my view the Baileys foreclosed on Gardenwood to protect their economic interests in the property. A sale may have been intended on reaquisition of Gardenwood and may have been necessary in the circumstances. The property, however, was not acquired for resale in a trade or an adventure or concern in the nature of trade. Gardenwood was held by Bailey as a capital asset.

The farmland property acquired in 1982 was not purchased for the purpose of investment although the Baileys received a nominal rent from the property. That property was different from any of the other properties owned by the Baileys for investment: it was raw land. The land was situated in an area that was rampant with land speculation, according to Mrs. Bailey, and was surrounded by land then being subdivided. Mrs. Bailey, a real estate agent and developer, affirmed she appreciated the farm property's profit potential on acquisition.

I cannot find however that the farmland property was used in a trade. As the Lord President (Clyde) put it in The Commissioners of Inland Revenue v. Livingston et al. (1926), 11 T.C. 538 at page 542:

. . a single transaction falls as far short of constituting a dealer’s trade, as the appearance of a single swallow does of making a summer. The trade of a dealer necessarily consists of a course of dealing, actually engaged in or at any rate contemplated and intended to continue.

The acquisition of raw land by the Baileys was an isolated transaction. As Lawrence, L.J. stated in Leeming v. Jones,[1930] 1 K.B. 279; [1930] A.C. 415; 15 T.C. 333, at page 354:

It seems to me that in the case of an isolated transaction of purchase and resale of property there is really no middle course open. It is either an adventure in the nature of trade or else it is simply a case of sale and resale of property.

The phrase "adventure or concern in the nature of trade" was considered by the Exchequer Court of Canada in M.N.R. v. James A. Taylor, supra. The President of the Court stated at page 199 (D.T.C. 1131) that:

It is, I think, plain from the wording of the Canadian Act, quite apart from any judicial decisions, that the terms 'trade' and ‘adventure or concern in the nature of trade’, are not synonymous expressions and it follows that the profit from a transaction may be income from a business within the meaning of section 3 of the Act, by reason of the definition of business in section 127(1)(c) (now subsection 248(1)), even although the transaction did not constitute a trade, provided that it was an adventure or concern in the nature of trade.

On pages 210-11 (D.T.C. 1137) Thorson, P. considered the circumstances in which a transaction may be "an adventure or concern in the nature of trade”:

But "trade" is not the same thing as “an adventure in the nature of trade" and a transaction might well be the latter without being the former or constituting its maker a "trader" . . . The very word “adventure” implies a single or isolated transaction and it is erroneous to set up its singleness or isolation as an indication that it was not an adventure in the nature of trade.

Jackett, P., as he then was, discussed the distinction between an adventure and carrying on of a business in Tara Exploration and Development Company Limited v. M.N.R., [1970] C.T.C. 557; 70 D.T.C. 6370 at pages 565 to 567 (D.T.C. 6374 to 6376).

There is no evidence whether the Baileys intended to subdivide the farmland and then engage in marketing the lots and continue in the trade or whether they would sell the property once it reached a certain value. They did not intend to hold the farmland as a capital asset. They testified they acquired the property on speculation for resale at a profit and concluded they carried on a business with respect to the property. The acquisition of the farmland was, in my view, the first step by the Baileys in an adventure or concern in the nature of trade. The final step, that of its disposition, has yet to take place.

The appellant, as stated, considered the farmland property (as well as the Gardenwood property) to be inventory and pursuant to subsection 10(1) and section 1801 [3] of the Regulations to the Act, valued the properties at their market value at the end of 1983.

Subsection 10(1) provides that:

For the purpose of computing income from a business, the property described in an inventory shall be valued at its cost to the taxpayer or its fair market value, whichever is lower, or in such other manner as may be permitted by regulation.

Subsection 248(1) states that:

"Inventory" means a description of property the cost or value of which is relevant in computing a taxpayer's income from a business for a taxation year.

The question before me, then, is whether property that is the subject of an adventure or concern in the nature of trade may be inventory.

Counsel for the respondent submitted that in interpreting subsection 10(1) the expression “carrying on" should be read to appear between the words "from" and "a" so that the provision would read “for the purpose of computing income from carrying on a business, the . . .”. Parliament, he argued, could only have intended inventory to describe property held for sale in the course of carrying on a business, that is, where there is a continuity of operations and not where there is an isolated transaction.

Counsel for the respondent relied on the reasons of in Jellaczyc v. M.N.R., [1985] 1 C.T.C. 2158; 85 D.T.C. 184 and Gilmour v. M.N.R., [1989] 2 C.T.C. 2454; 89 D.T.C.658. [4] In Jellaczyc the taxpayer failed to present any evidence whatsoever to support his position that the Act permitted him to “write down" property to fair market value.

In the Gilmour case, Taylor, T.C.J. found vacant land was held by the taxpayer as a capital asset and therefore was not eligible for valuation in accordance with subsection 10(1).

The definition of "business" in subsection 248(1) includes “an adventure or concern in the nature of trade". It is the word "business" so defined that is used in subsection 10(1). When Parliament does not intend an adventure or concern in the nature of trade to be included in the word “business” it provides for the exception in the substantive definition of business; for example, the word "business" used in paragraph 18(2)(c) does not include an adventure or concern in the nature of trade: subsection 248(1).

The definition of inventory in subsection 248(1) does not assist in determining whether a particular property, the farmland, that is the subject of an adventure in the nature of trade may be described in inventory. Evidence of accounting procedures and principles is relevant to the computation of income for purposes of section 9 of the Act. Jackett, P. (as he then was) explained in Associated Investors of Canada Limited v. M.N.R., [1967] 2 Ex.C.R. 96; [1967] C.T.C. 138; 67 D.T.C. 5096, at page 143 (D.T.C. 5098 and 5099), that:

Under the Income Tax Act, in determining the income tax payable by the appellant for a year, the first step is to determine the “income” from the appellant's business for the year (Section 3). Subject to any special provision that may be applicable, the “income” from a “business” for a year is the "profit" therefrom for the year (Section 4).

Profit from a business, subject to any special directions in the statute, must be determined in accordance with ordinary commercial principles. (Canadian General Electric Co. Ltd. v. M.N.R., [1962] S.C.R. 3, per Martland, J. at page 12; [1961] C.T.C. 512 at 520.) The question is ultimately "one of law for the court”. It must be answered having regard to the facts of the particular case and the weight which must be given to a particular circumstance must depend upon practical considerations. As it is a question of law, the evidence of experts is not conclusive. (See Oxford Motors Ltd. v. M.N.R., [1959] S.C.R. 548, per Abbott, J. at page 553; [1959] C.T.C. 195 at 202, and Strick v. Regent Oil Co. Ltd., [1965] 3 W.L.R. 636 per Reid, J., at pages 645-6. See also M.N.R. v. Anaconda American Brass Ltd., [1956] A.C. 85 at page 102; [1955] C.T.C. 311 at 319.)

My first task is therefore to determine the proper treatment of the amounts in question in accordance with ordinary commercial principles. Having ascertained that, I must consider whether any different treatment is dictated by any special provision of the statute.

Terminology for Accountants, supra, defines inventory as “items of property which are held for sale in the ordinary course of business". [I do not believe there is any significance to the fact the word "items" is plural.] In the case at bar the farmland in issue was an item of property held for sale in a business, as "business" is defined in the Act. I must consider whether it is held for sale “in the ordinary course of business”.

In Blok-Andersen v. M.N.R., [1972] C.T.C. 338; 72 D.T.C. 6309, Mr. Justice Cattanach held, at page 353 (D.T.C. 6321), the subsection 248(1) definition of “business”, previously paragraph 139(1)(e), permitted the substitution of the words "adventure or concern in the nature of trade” for the word “business” in paragraph 12(1)(b), previously paragraph 85B(1)(b), so that the section would read “in the course of an adventure or concern in the nature of trade". The substitution, said Cattanach, J., is logical and does no violence to the section so as to render it repugnant to the general scheme of the Act or leading to an absurdity. Cattanach, J. added at page 354 (D.T.C. 6321):

The phrase “in the course of" contemplates a succession of events in a regular order. It also contemplates a result which follows from an event being set in motion. Such a result will arise in the case of an isolated sale as well as in a continuous number of sales.

The definition of inventory in Terminology for Accountants modifies the expression "course of business” with the word “ordinary”. Amongst the definitions of "ordinary" in The Oxford English Dictionary, Second Edition, are:

Something ordinary, regular, or usual;

An ordinary thing or person; something of usual or commonplace character;

Phrases .. . of, for, in ordinary . . . in the ordinary course, as a regular custom or practice, ordinarily.

In the expression “in the ordinary course of business” the word "ordinary" restricts the rest of the phrase, "course of business”, to what is normal and usual for the business. A sale of tangible property held for sale outside the ordinary course of business, for example, for a special or exceptional transaction, is not to be described in inventory, according to the CICA publication. Thus in Re Bradford Roofing Industries Pty. Ltd., [1966] 1 N.S.W.R. 674, cited in Words and Phrases Legally Defined, vol. 4, Butterworth's, London, 1969, the Court was asked to consider the provisions of the New South Wales Companies Act, 1961, which prohibited an official manager from disposing of the company's assets save in the “ordinary course of the company's business”. In Sheet, J.'s view: "The transaction must be one of the ordinary day-to-day business activities, having no unusual or special features."

To determine what is "ordinary" in an isolated transaction the event being set in motion must be one that is considered ordinary in trade. If the isolated transaction is in the nature or concern of a particular trade, the transaction ought to be a transaction considered ordinary in that trade. Mr. and Mrs. Bailey testified that once they acquired the land they did nothing to it, waiting for an opportune time to sell which they believed would be sometime in the future. There was no suggestion the land was held for sale in any manner different from a trader of similar land.

Both a trade and an adventure in the nature of trade are activities included in the statutory definition of “business”. The tangible property in both cases is held for sale “in the ordinary course of business". In both a venture in the nature of trade and a trade the farmland and tangible property which is similar to the farmland, may be described in inventory for accounting purposes when that property is held for sale in the ordinary course of business; this is quite clear from the evidence of Mr. Robarts.

There is no reason why the farmland cannot be described in inventory for purposes of subsection 10(1) of the Act as well. Subsection 10(1) directs a property to be valued “for the purpose of computing income from a business”. The phrase does not contemplate computing income only from carrying on a business, as suggested by counsel for the respondent. The phrases "carrying on a business” and "carried on a business" are found in several provisions of the Act: see, for example, paragraph 2(3)(b), and subsections 115(1) and 219(1). "To carry on something," stated Jackett, P. in Tara Exploration, supra, page 567 (D.T.C. 6376), "involves continuity of time or operations such as is involved in the ordinary sense of a 'business'". When this expression "carry on” is used in the Act, Parliament describes a continuity of time or operations with respect to the factual situation contemplated by the particular provision. Such continuity is not required in subsection 10(1) and its addition to that provision would add nothing to that provision’s ordinance.

A continuity is not necessary to compute income from a business. The wording used in subsection 10(1) is natural and has the meaning contemplated by Parliament without the addition of any other words.

Mr. and Mrs. Bailey were engaged in an adventure in the nature of trade: he was in a business. As such he was required by the Act to compute income from the business and was required, as any other person who computes income from a business, to value property described in inventory at its cost to him or its fair market value, whichever is lower, or in such manner as may be permitted by regulation.

The appeal for 1983 is therefore allowed to permit Mr. Bailey to “write down" the value of the farmland only; the appeals for 1982 and 1985 will also be allowed to permit him to carry back to 1982 and forward to 1985 any non-capital loss incurred in 1983. Since his success in the appeal was not substantial, bearing in mind the total amount of tax in issue, he is not entitled to costs.

Appeal allowed in part.