Jones v. MNR, 90 DTC 1849, [1990] 2 CTC 2406 (TCC)

Taylor, T.C.J.: —This is an appeal heard in Thunder Bay, Ontario, on July 5, 1990, against an income assessment for the year 1978, in which the Minister of National Revenue increased the income of the appellant as follows:

The taxpayer has been re-assessed for 1978 on the basis that land used for his personal residence for many years was converted to inventory in 1973 and disposed of in 1978.

The taxpayer contends that the conversion occurred in 1977 and reported it as such in that year as well as its disposition.

In the event that the court disagrees with the taxpayer as to the date of conversion, the taxpayer contends that the valuation placed on the land by Revenue Canada is too low.

And from the reply to notice of appeal :

(a) The appellant, a building contractor, acquired 4.990 acres of raw unserviced land on Part of Lot 7, Concession "A" in the City of Port Arthur on August 15, 1967, for his personal use, (hereinafter “the property").

(b) Four acres of "the property" was subject to a five year lease with the Province of Ontario. This lease expired on September 30, 1973.

(c) By 1972, the City of Thunder Bay had installed water and sewage services along Dawson Road.

(d) Once water and sewage services were available, the appellant and Mr. Matt Dawd, an adjoining landowner, explored the possibility [of] developing their respective properties under a plan of subdivision.

(e) From August 15, 1967 until January 1, 1973, the appellant used the entire 4.990 acres of "the property" for his personal use.

(f) By January 1, 1973, the appellant had decided to sever 4 acres of "the property" and to subdivide and develop this land in conjunction with the adjacent landowner, Mr. Matt Dawd.

(g) During the 1973 taxation year, the combined land of the appellant and Mr. Dawd available for subdivision was approximately 11 acres.

(h) By January 1, 1973, the appellant had changed the use of the 4 acres of land from a personal asset to holding the 4 acres of land as inventory.

(i) The 4 acres of land held as inventory, had a fair market value of $20,000 on January 1, 1973.

(j) In January 1973, Kembur Engineering Consultants Ltd., (hereinafter "Kembur"), on behalf of the appellant and Mr. Dawd, drew up three preliminary layouts of a subdivision for the Dawd-Jones properties which were called "Sketch Plan—Jones Subdivision”, (hereinafter "Jones Subdivision").

(k) On January 9, 1973, "Kembur", on behalf of the appellant and Mr. Dawd, contacted the Lakehead Catholic School Board regarding the “Jones Subdivision” and in this letter suggested exchanging the appellants property for property owned by the Lakehead Catholic School Board.

(I) On August 3, 1973, a draft plan of the proposed subdivision for the Dawd-Jones property, (hereinafter "Draft Plan of Subdivision”), was prepared by Ontario land surveyor T.L. Wilson on behalf of the appellant and Mr. Dawd.

(m) On August 24, 1973, the "Draft Plan of Subdivision” was submitted to the Ontario Ministry of Treasury, Economics and Inter-Governmental Affairs, (hereinafter “Ontario Ministry”), for approval.

(n) On December 19, 1973, the "Ontario Ministry” advised the City Planners for the City of Thunder Bay that it had approved the “Draft Plan of Subdivision”.

(o) On February 26, 1974, the appellant granted an option to purchase on "the property" to the Canadian Tire Corporation.

(p) On May 14, 1974, the City of Thunder Bay rezoned the property from R.1 to R.U.1, thus allowing single family dwellings on "the property".

(q) An unsuccessful application was made by the Canadian Tire Corporation to the City of Thunder Bay to change the zoning on "the property" from R.U.1 to Commercial Zoning.

(r) The Canadian Tire Corporation allowed their option to "the property" to lapse when it could not obtain the Commercial Zoning from the City of Thunder Bay.

(s) During the 1975 taxation year, the appellant and Mr. Dawd were approached by Mr. Srigley, a representative of Uni-Ram Developments Inc., (hereinafter "UniRam"), which held an interest in lands to the north of the appellant.

(t) During the 1976 taxation year, the appellant, "Uni-Ram" and Mr. Dawd entered into a joint venture to facilitate the development of their respective properties as a residential subdivision, (hereinafter called "Dawson Woods Subdivision Agreement").

(u) The appellant and one other member of the joint venture, namely "Uni-Ram", entered into an additional Financing Agreement, (hereinafter “Financing Agreement"), to allow the appellant to assist "Uni-Ram" in financing its share of the cost of the "Dawson Woods Subdivision Agreement".

(v) The appellant and "Uni-Ram" were not acting in a partnership capacity in the development of the Dawson Woods Subdivision.

(w) Notwithstanding the “Jones Subdivision” plan or the "Dawson Woods Subdivision Agreement" or the “Financing Agreement", the appellant was legally and beneficially the owner of the property from 1967 until it was ultimately sold by way of severed lots in 1978 and 1979.

— The respondent relies, inter alia, on the provisions of 3, 9(1), 45 and 248 of the Income Tax Act, R.S.C. 1952, c. 148 as amended by S. 1, c. 63, S.C. 1970-71-72, as it applied to the 1978 taxation years.

— The respondent submits that by January 1, 1973, the appellant had converted 4 acres of "the property" from his personal use to that of holding this 4 acre parcel of land as inventory for the eventual development of a subdivision.

— The respondent further submits that the fair market value of the 4 acre parcel of "the property" on January 1,1973 was $20,000, and that this sum accurately represented the cost base of this 4 acre parcel from which to determine the revised net gain of the appellant.

— The respondent further submits that the appellant was the legal and beneficial owner of the 4 acre parcel of land without interruption from 1968 to 1978, when portions of the parcel were sold pursuant to the subdivision plan.

— The respondent further submits that the appellant was not acting in partnership with "Uni-Ram" in any dealings with the Dawson Woods Subdivision.

The parties agreed that for the purposes of this hearing, the only matter to be determined was that of the date of “conversion” of a certain parcel of land from personal to business use. Any question of "valuation" would be left for a further hearing—if necessary— but only if the parties were unable to resolve that point after determination of the basic question. Therefore, the only matter in issue in this judgment is the dispute regarding the date of "conversion".

Reference was made at the start of the trial to an earlier judgment of this Court—Dawd v. M.N.R., [1981] C.T.C. 2999; 81 D.T.C. 888, which dealt with a similar appeal by the Mr. Matt Dawd referred to above. I would quote significant comment from that reported case, to be found at page 3003 (D.T.C. 891) thereof:

The appellant's recollection of dates is, understandably, not exact. The documentary evidence filed is therefore the more accurate guide in fixing the time when the development business commenced. It would appear from the second and third sketches filed as part of Exhibit R-4 that it commenced on or about January 1, 1973. It was then that the appellant appears to have abandoned a course of action involving simple disposition of those parts of the land which he owned, and which were surplus, and to have embarked with Mr. Jones on the more complex process leading to the joint subdivision of the lands belonging to both.

[Emphasis added.]

In essence, the Court was informed that the thrust of the evidence and testimony to be put forward by counsel for the appellant was that—irrespective of the record and result of the Dawd case, supra, this appeal must be judged on the basis only of the facts available now and at this trial and in particular events, transactions and conduct as they would be recalled by Mr. Jones himself. I do not disagree. I do not wish to minimize in any way the efforts and contributions of either counsel or the several witnesses presented from both sides, but the passage of time alone has made extremely difficult the task before the parties. Every possible way was explored and examined by counsel to make the data available to the Court as complete and comprehensible as possible over a period of almost two days at the hearing. In the end, it is the testimony of the appellant himself which I find crucial. My view of that evidence was that Mr. Jones was certainly aware of the plans and ideas of Mr. Dawd and that he, Mr. Jones, did nothing to impede those objectives—but that is not in itself determinative against Mr. Jones in this appeal.

Mr. Jones was a local contractor and a municipal alderman during the years relevant and had lived on the subject property since he was five years old. Several of the assumptions of the respondent (reply to the notice of appeal above) were shown to be ill-founded, or at least seriously questioned during the trial, in particular—(a) the land was really not "unserviced" totally; (b) the "lease" was for one part of a small shed, not for four acres of property; (c) the date of installation was left a bit uncertain; (d) there was no evidence this appellant authorized the preliminary plans, also referred to in subparagraphs (h), (I) and (n) of the reply to notice of appeal as far as any of the work being done on behalf of the appellant. With respect to subparagraph (n) of the reply to notice of appeal, counsel for the respondent did introduce testimony and evidence regarding just such a preliminary approval. It was not established, however, that either the appellant or anyone acting directly for him had specific knowledge of this draft plan of subdivision approval—strange as that may seem. I would also note that earlier reference by the appellant to show that there had been some form of "partnership arrangement" (subparagraphs (s), (t), (u) and (v) of the reply to notice of appeal above) were quite unsuccessful in my view and do not warrant further serious comment. However, it was agreed by counsel for the appellant after completion of the evidence that Exhibit A-7, dated May 28, 1975, and Exhibit A-8, dated September 1, 1976, detailing certain meetings and arrangements described in the above (s), (t), (u) and (v) subparagraphs were significant and strongly suggested a commitment on the part of the appellant by that time, rather than later in 1977 as originally proposed.

While he would have preferred to rely on Exhibit A-8 above, dated September 1, 1976, in argument, counsel for the appellant modified the original "conversion" year of 1977 to 1975 and agreed to Exhibit A-7 as representing the appropriate date at which it could be said Mr. Jones had decided to go ahead with subdivision plans.

Exhibit A-7 reads as follows:

Kembel-Ward

& Associates Limited

Consulting Engineers

May 28, 1975

Mr. M. Dawd,

Mr. T. Jones,

Mr. B. Srigley, Ram Realty.

Re: Dawson Heights Proposed Subdivision

Dear Sirs:

At a recent meeting held at our office between Matt Dawd, Tom Jones, and Bill Srigley it was agreed to jointly develop an area of land as a residential subdivision, parts of which are presently owned or controlled as follows:

(A)	Matt Dawd	—	Part of Lot #6 Concession "A"
	owns		Instrument #125812
			Part of Lot #7 Concession “A”
			All within McIntyre Township
(B)	Tom Jones	—	Instrument #124897
	owns		Being part of Lot #7, Concession “A”
			All within McIntyre Township
(C)	Bill Srigley for	©—	Holding option on Instrument #7405
	Ram Realty		being part of Lot #7, Concession “A”
			All within McIntyre Township

All lots form a singular parcel bounded directly to the north by Dawson Road and located between Fassina and Sidney Streets, now being the City of Thunder Bay.

It was agreed that the firm of Kembel-Ward & Associates Ltd. be retained to prepare working drawings, specifications, tender documents and call tender on the services, (field inspection or work after tender call not included), all for the sum of $6,000. The cost is to be shared equally by the three parties concerned.

It was further agreed that Phillips, Wilson and Milton be retained as Ontario Land Surveyors to prepare a draft plan of the proposed Subdivision and circulate the required number of copies to the various Governmental Departments for approva's. The cost of this service is also to be shared equally. Final staking of the lots for registration of the plan would take place only after the tender call and a firm decision was made to proceed with the project.

Although some discussion took place regarding a suitable formula which might be utilized to determine the respective parties construction cost distribution, nothing firm was established. Certain points are however pertinent in implementing an equitable arrangement.

(A) Land areas of the respective ownership or options are unequal.

(B) Length of road, services etc., within any ownership (option) is not proportional with land areas.

e.g. The amount of servicing in part of Lot #6, Concession "A" and

Instrument 125812 is proportionately more than the services located on Instrument 7405

(C) Lots facing Fassina and Sidney Streets, contained in areas held by two of the three parties will require no servicing as such.

(D) Jurisdiction requires that 5% of the total area must be deeded for recreational purposes or as otherwise specified. In this instance the suggested 5% consists of two Parcels, the location of which is not proportioned with respect to ownership.

Yours very truly,

Kembel-Ward & Associates Ltd.

W.W. Kembel, P. Eng.

The relative final dates used in argument for such conversion for personal property to “subdivision inventory" for the appelI ant were May 28, 1975 and for the respondent, January 1, 1973.

Analysis

I do not suggest that in any way Mr. Jones was naïve or innocent regarding developments in or around Thunder Bay, or that he was unaware of the activity of Mr. Dawd in pursuing some form of subdivision development on both parcels—Mr. Dawd's and Mr. Jones's properties. He was not disinterested in capitalizing when and where possible on the value (one could even say rapidly escalating value) on the subject property. His evidence is, however, that at no time prior to the meeting described in Exhibit A-7 above, did he personally or through any authorized or appointed agent, participate in the program pursued by Mr. Dawd, nor did he give his agreement or consent to Mr. Dawd to any extent what could be termed a "commitment" to development before that date. It was really Mr. Jones' view—on a personal basis, (clearly not finally shared by his counsel)—that only the registration of a subdivision plan for the three parcels of property—Dawd's, Jones's and Uni-ram's, on June 28,1977, was the date at which it could be said that he had agreed to the contested "conversion". I do not agree with that view and Mr. Jones was informed during the trial, that actions and conduct by a taxpayer long in advance of actual registration of a subdivision plan may well be sufficient to establish a date or time at which a commitment to a change in use can be determined for a property. In this case it is certainly no later than the date of Exhibit A-7, May 28, 1975 (see above). The only question then that remains is whether the evidence supports a conclusion that the date of January 1, 1973 used by the respondent is a more appropriate date than May 28, 1975 now referenced by the appellant's counsel.

Looking at that question in light of the evidence provided both by witnesses and by exhibits, it is clear that something was being done to explore the prospects of development during the year 1972 but there is no evidence that this was being done from a basis of an active commitment by Mr. Jones. At best the evidence suggests a form of passive acquiescence by Mr. Jones for programs pressed by Mr. Dawd—during 1972. Mr. Jones paid lip service to the possibility that Mr. Dawd, as he understood it, originally could have considered the construction of his own personal residence on the Dawd property from 1967 through 1972. That view was accepted by this Court in the Dawd appeal, supra, to reach a conclusion that the property had not been acquired in 1967 for development purposes and resulted in the January 1, 1973, selected date for conversion for Dawd. However, regardless of the intentions of Mr. Dawd, it is my view that any plans he may have had—no matter how early in the period 1967 through 1972—to develop his own property, such plans were virtually unrealizable without the agreement and active co-operation of Mr. Jones. It turned out eventually that the inclusion of the Uni-Ram property made the development program even more viable, and what is more, even more acceptable to Mr. Jones. It must be realized that Mr. Jones still lives in the same house on the same property, one of the lots finally subdivided (where he has lived since he was five years old) and he had always, according to his testimony, made it known to Mr. Dawd that to remain there was his firm intention no matter what happened —if anything—to his property. Certainly some interest was being shown by January 1, 1973, by Mr. Jones in the project, but there is no clear evidence to link him to that date for conversion as there apparently was Mr. Dawd.

One point which assists me in that conclusion is, as noted earlier, even though a draft plan of subdivision had apparently been approved on December 19, 1973 (note subparagraph (n) in the reply to notice of appeal), on February 26, 1974, the appellant granted an option to purchase to Canadian Tire (note subparagraph (o) in same reply). It is difficult to imagine that even a draft plan of subdivision could be approved without something more than a passing knowledge of that endeavour which Mr. Jones proclaims. But it is understandable in the circumstances of this case, as I follow the testimony, that Mr. Jones was under no pressure at all to do anything with his property and was content to let Mr. Dawd explore the possibilities. I realize the view of Mr. Jones is slightly at variance with the evidence provided to this Court in Dawd, but I have heard no reason to substitute the recollections of Mr. Dawd therein for those of Mr. Jones as far as this position is concerned. Mr. Jones had the contacts with Canadian Tire, not Mr. Dawd, and the fact that he not only gave such an option but persuaded Mr. Dawd to participate in that option leads me to believe that the prospects of development were still an open question in the mind of Mr. Jones. In fact at the time, February 26, 1974, Mr. Jones and his property were the vital elements in any possible plans, and the evidence to support a conclusion that he was committed to any plans of Mr. Dawd are weakened by this Canadian Tire option.

Therefore, I cannot agree with the respondent's selected date of conversion, January 1, 1973, for Mr. Jones. With respect, it is my view that this date is based largely on the result of the Dawd judgment above, which while quite appropriate for Mr. Dawd—as determined by the Court earlier—the same circumstances do not obtain for Mr. Jones, when the evidence presented at this hearing is taken into account. It was suggested to the Court by the respondent's counsel in argument that some date other than January 1,1973 or May 28, 1975 could be chosen by the Court based on the evidence at the trial. After some consideration I have decided to decline that option. In my view, the only burden on the appellant in this matter was to cast serious doubt on the date of conversion selected by the respondent, January 1, 1973, and that was accomplished by the appellant establishing a more acceptable date, May 28, 1975. I see no reason for the Court to select some even more arbitrary date, particularly since the parties in this appeal did not give to the Court the same latitude to do so provided in the appeal of Mr. Dawd (see footnote on page 889 of that judgment) and I am not aware of jurisprudence that would clearly confer on me either the right or the responsibility to do so in the circumstances of this case. I do say, though, that a date which does commend itself to me, but which was not specifically argued by the respondent, would be May 14, 1974, as an indication of such change in use, even for Mr. Jones (see (p) from reply to notice of appeal above). It is quite clear from such a result (the rezoning) that even while the option to Canadian Tire was in effect from February 26, 1974, efforts continued unabated to pursue the subdivision opportunity by someone. Whatever Mr. Jones may have known or may not have known about the draft plan of subdivision in December of 1973 or even earlier, it is difficult to imagine that the rezoning of the subject property itself for “single family dwellings" could have been consummated without the express knowledge, consent and co-operation of Mr. Jones, owner, contractor and local alderman that he was. However, as stated, I do not choose to substitute my own view for the determination made by competent counsel after all the evidence has been presented at the trial.

The appeal is allowed and the matter referred back to the respondent for reconsideration and reassessment. The appellant is entitled to costs.

Appeal allowed.