Jacobson Holdings Ltd. v. The Queen, 85 DTC 5634, [1986] 1 CTC 87 (FCTD)

Strayer, J.:—These two appeals were, by order, tried together on common facts. They involve appeals by the same plaintiff with respect to reassessments by the Minister of its income in respect of its taxation years of 1980 (T-2005-83) and 1981 (T-2006-83). The appeals are with respect to the Minister's reassessment of proceeds from the sale of property in 1980 in the amount of $659,075, the Minister regarding this as income and the plaintiff regarding it as capital gain.

The basic facts are as follows. A company called Tenoaks Farms Ltd. was incorporated in British Columbia in 1959. Its shareholders were a number of businessmen in and around Abbotsford, B.C. including Eldon T. Jacobson. The purpose of this corporation, according to Mr. Jacobson, was the acquisition of land for development and/or resale. Shortly after its creation, the company acquired, in 1959, 135 acres two and one-half miles east of Abbotsford, the land lying both north and south of the Old Clayburn road, for the sum of $55,000. In 1960 it subdivided 12 acres north of the road into 48 residential building lots and put them on the market. In 1961 and 1962 the company sold off approximately 61 acres of other land within the original parcel for $43,500. In 1965, a majority of the shareholders in Tenoaks Farms Ltd., being disappointed with the rate of sales, voted to dispose of the remaining land. Eldon Jacobson, opposed to such a move on the grounds that he thought the land still had good development potential, bought out the interests of the other shareholders in the company. He then proceeded to subdivide and sell lots on the south side of Old Clayburn road. A further 15-acre parcel on the south side of the road was fenced and used by him as pasture for a few years and then he sold it to developers in 1977 for $450,000. In the meantime he and his son had been using a 16-acre undeveloped parcel north of Old Clayburn road, immediately adjacent to the east of the original 48-lot Tenoaks subdivision. They were using this land to keep horses for recreation and show purposes, and to feed a few beef cattle for sale. In 1979 Tenoaks Farms Ltd., whose sole shareholder by that time was Eldon Jacobson, was amalgamated with Jacobson Holdings Ltd. which was wholly owned by Mr. Jacobson. In 1980 Jacobson Holdings Ltd. sold the 16-acre parcel for $670,000 and it is the proceeds of that sale which are in question. While Tenoaks Farms Ltd. had reported proceeds of all other sales of land from the 135-acre parcel as income, its successor reported the proceeds of sale of the 16-acre parcel as capital gains. The Minister reassessed those proceeds as income. The Minister takes the position that the land was Originally acquired for speculative, resale purposes which never changed; therefore it remained part of the inventory of the original purchaser and its corporate successor. The plaintiff takes the position that with respect to this particular 16-acre parcel the intention under which this land was held changed in 1965 when Eldon Jacobson acquired control of Tenoaks Farm Ltd.; that it was his intention to dedicate the land to farming or related personal use for himself and his son; and thus the parcel became a capital asset and was no longer part of the stock in trade of its corporate owners.

There is no dispute that the 135-acre parcel was originally acquired for resale at a profit, that is for income purposes. There is a strong presumption that land acquired for such a purpose retains the character of inventory in the absence of very clear evidence of dedication to another purpose: see, e.g., Sura v. M.N.R., [1967] C.T.C. 363; 67 D.T.C. 5250 (Ex. Ct.); Fredericton Housing Ltd. v. The Queen, [1975] C.T.C. 537; 75 D.T.C. 5367 (F.C.A.); The Queen v. Randall Park Development Ltd., [1978] C.T.C. 826; 78 D.T.C. 6545 (F.C.T.D.); Edmund Peachey Ltd. v. The Queen, [1979] C.T.C. 51; 79 D.T.C. 5064 (F.C.A.).

In the Peachey case, supra, Heald, J. with whom Urie, J. and Kelly, D.J. concurred, said at 55 (DTC 5067):

. . . I agree with the learned trial judge that a clear and unequivocal positive act implementing a change of intention would be necessary to change the character of the land in question from a trading asset to a capital asset — and that on the facts here present, there was no evidence of such a positive or overt act. There was no documentary evidence to indicate that the new intention had been carried into reality, there was no dedicating of the land for another purpose. . . .

I can find in this case no “clear and unequivocal positive act” of the dedication of the 16-acre parcel for a purpose other than speculation. I accept that the intention of Mr. Jacobson, who was the controlling, and later the sole, shareholder of Tenoaks Farms, and the sole shareholder of Jacobson Holdings Ltd. must be taken to be the intention of the respective companies after his acquisition of control of Tenoaks in 1965. Further, I accept that he sincerely wished to have some land in the country upon which his son, Barrie, who was 11 years old in 1965, might keep a horse and upon which they might become more involved with the raising and training of horses. The fact that he took an option on neighbouring farm land shortly before he decided to acquire control of Tenoaks, and did not take up the option after taking steps to acquire that control, corroborates this evidence as does the fact that the Jacobson family was then living in Kamloops where Barrie had a horse for which space would be needed if and when they returned to Abbotsford which they expected to do. But I do not find in this evidence, nor in the evidence as to the use by the Jacobsons of the 16-acre parcel from 1967 (when they returned from Kamloops) until 1980 (when the land was sold) an unequivocal intention or act to dedicate this land indefinitely to farming or recreation and to withdraw it from the corporate owner's inventory.

One cannot take very seriously the contention of the plaintiff that this parcel had been converted into a farm. The main activity on the land was that of keeping horses, particularly quarter-horses, for show purposes. There is no evidence of any revenues ever having been received from this activity and Mr. Jacobson quite frankly admitted there was no serious prospect of revenue from it except perhaps through the sale of foals born to two quite valuable mares which he owned. Such proceeds never materialized because, as he said, the “product” was not good enough. There were a few head of beef cattle purchased, fed, and sold in each of several years for a small return. In fact, however, the “farm” showed a consistent and substantial loss which was offset against the income of Jacobson Holdings Ltd. Even at that I can find no mention, in the financial statements of Jacobson Holdings Ltd. concerning “farm” costs, with respect to the costs of rental of the land (which remained the property of Tenoaks Farms Ltd. until 1979 when that company was amalgamated with Jacobson Holdings Ltd.). It is difficult to see how a viable farming operation could have been contemplated on 16 acres. The Jacobsons did use another 15-acre parcel south of the Old Clayburn road for pasture and hay until 1977 but sold that parcel when an offer for $450,000 presented itself. The only significant building erected on the 16-acre parcel was a barn which cost some $2,200 plus the labour of the Jacobsons. No other building was put up prior to 1969 when a change in the zoning bylaw caused all of this land to be zoned as residential. From that time onward, according to Mr. Jacobson, they could not put up other farm buildings because the farm was a “non-conforming use” under the bylaw. This limitation did not seem to deter the Jacobsons from continuing to use it for what they say to be farm purposes.

Counsel for the plaintiff referred to the decision of the Tax Court of Canada in Hawrish v. M.N.R., [1984] C.T.C. 2005; 84 D.T.C. 1752 where it was said that acceptance by the Minister of expenses incurred in connection with the use of land as a “restricted farming loss” amounted to an admission that the land in question was being used as a capital asset in a business. With respect I do not accept that position. The fact that the expenses incurred by the Jacobsons in carrying on a rather expensive hobby were accepted for a number of years by the Minister as a basis for “farm losses” to be offset against the real estate rental income of Jacobson Holdings Ltd. does not imply a characterization by the Minister of the “farm” land as a Capital asset. In the first place, for most of the years in question the land here was owned by a company other than the company operating the farm. Further, while land employed in farming would normally be a capital asset it is not inconceivable that land bought and held for purposes of speculation may be used temporarily for farming. Indeed, it is an ideal temporary use for land held for speculation just as the urban parking lot provides a good temporary use for prime downtown land held for speculative purposes. In both cases some benefit may be derived from the land without much investment in structures that would have to be removed upon resale.

It is not, of course, essential to the plaintiff’s case that it prove that the land had been permanently dedicated to farming in order to establish that it was withdrawn from the inventory of its corporate owner. It would be more accurate in this case to say that the land was being used for the current recreational purposes of the Jacobson family with small amounts of revenue being generated from time to time by feeding cattle. This does not, however, amount to a withdrawal of the land from the inventory of a company essentially engaged in sale of land. Both Mr. Jacobson and his accountant, Mr. Fribance, stressed the main purpose of use of this land was for the betterment of the son, Barrie Jacobson; first, to provide a place where he could keep a horse and later to promote his growing interest in the training and showing of horses. This purpose is underlined by the fact that when Barrie reached the age of 21 in 1975, according to his father, he wanted to earn a living and they gave up the showing of horses. It appears that the horse operation was gradually decreased thereafter and Mr. Jacobson started buying larger, working, farms for Barrie, of which more will be said later. It is hard to believe that Mr. Jacobson saw this operation on the 16-acre parcel as more than a transitory activity.

I am reinforced in this view by the fact that Mr. Jacobson had been in the real estate business in one form or another since about 1948. He was not averse to buying and selling property including his homes. For example, the Jacobson family moved from Abbotsford to Kamloops in 1963 and built a motel in which they lived and from which they operated the businesses. By 1965 they had decided to return to Abbotsford and did so finally in 1967, selling the motel at a substantial profit. They built a house on one lot owned by Tenoaks adjacent to the 16-acre parcel in 1967 but by 1969 they had built another house on another Tenoaks lot across the road from the 16-acre lot and had moved into it. This house was sold in 1975. In 1974 Mr. Jacobson bought a farm at Armstrong where he planned to move with Barrie. The latter having declined, he sold the farm again in 1975 at a profit. In 1978 he bought two other farms for Barrie, the first one being resold in 1979 at a profit with Barrie eventually living on the other farm. Having regard to Mr. Jacobson’s undoubted capacity as a dealer in real estate, his willingness to move, and the necessarily temporary nature of any establishment designed for the recreational interests of a teenage son, it is difficult to see in this situation clear evidence of an unequivocal dedication of this land to a purpose other than resale for development at an opportune time.

The plaintiff has endeavoured to reinforce Mr. Jacobson’s evidence as to his intention in 1965, when he acquired control of Tenoaks, with proof of activities carried on on the land during the 19705. It could instead be argued that the activities during the 1970s were equally, if not more, explicable on the basis of a speculative purpose. From 1969 onward this land was zoned for residential purposes which distinctly limited its potential use as a farm. Moreover it must have been apparent to Mr. Jacobson by 1970 that this land was too valuable for use as a farm. An appraisal done for him in 1980 with respect to the value of the land on Valuation Day, December 31, 1971, indicated its probable value at that time as being $10,000 per acre. Mr. Jacobson said he would have estimated in 1971 that the property might have been worth $7,000-$8,000 per acre. Certainly the appraisal showed sales of comparable land in the area for $10,000 per acre and more during that general period. It is hard to believe that a man of Mr. Jacobson’s acumen and contacts in the real estate/development field would not have had a fairly precise idea as to the value of this land and it is equally difficult to imagine that he planned to continue indefinitely farming the land at a chronic loss or using it for recreational purposes so remote from its highest and best use. To the extent, then, that the events of the 1970s are relevant they are, to say the least, as consistent with a temporary alternative use of land being held for resale as they are of a dedication to a capital purpose.

It was emphasized by the plaintiff that when the 16-acre parcel was sold it was the result of an unsolicited offer and not the result of an active sales Campaign. I note however that according to Mr. Jacobson's evidence various other parcels of the original 135 acres had been sold by him by the same means, even though these transactions were treated as part of the ordinary business of the corporate owner and the proceeds were treated as income. This included the sale of 15 acres in 1977 for $450,000. This practice of waiting for an eager buyer to present himself seems to have worked well. It is significant that there was no evidence of Mr. Jacobson having turned down attractive offers for the 16-acre parcel because of his dedication of the land to farming.

It is also interesting to note that in the financial statements, first of Ten- oaks Farms Ltd. from 1968 to 1979, and then of Jacobson Holdings Ltd., until the sale of the land in 1980, this parcel of 16 acres was shown on the balance sheet as “land for future development". Mr. Fribance who was the chartered accountant responsible for all of these statements graciously admitted that this was an error on his part. Nevertheless, he said that he had discussed the financial statements with Mr. Jacobson when they were prepared, and it is difficult to imagine that during the whole of that period this description of the land as being held for development did not ever attract the attention of either of them if it were patently wrong.

I am therefore satisfied that the purpose or intent with which this 16-acre parcel was originally acquired and held by Tenoaks Farms Ltd. was not clearly and unequivocally altered, and it remained therefore part of the inventory of Tenoaks and its corporate successor, Jacobson Holdings Ltd. I would accordingly dismiss the appeals.

Appeals dismissed.