Jarvie Holdings Ltd. v. The Queen, 80 DTC 6395, [1980] CTC 525 (FCTD)

Maguire, DJ:—This appeal is from the judgment of Mr Guy Tremblay, a member of the Tax Review Board, dated June 1,1979, upholding a notice of re-assessment by Revenue Canada—Taxation Number 349165, which held that a profit obtained on the sale by plaintiff of part of a parcel of land earlier acquired by it was income and not a capital gain.

Plaintiff was incorporated in March, 1971, as Jarvie Farm Equipment Ltd. The name was changed in 1976 to Jarvie Holdings Ltd. Its business included sale, servicing and repair of industrial, automotive and farm machinery and equipment, tools, implements and supplies, with storage and sale of parts to purchases in a large area.

Plaintiff’s business expanded rapidly. By 1973 it required space and accommodation for its several departments in five locations in the City of Saskatoon. Plaintiff decided that it should centralize its operations in one location—an advisable move. It determined that it required some five to eight acres for this purpose. One Claxton, an experienced realtor, was engaged to locate an appropriate acreage in the north-west area of Saskatoon.

No such acreage could be located in the desired area. Some time later Claxton advised plaintiff of a property containing some 18.7 acres, located in the desired area, which was for sale by Wellsask Construction Limited. Plaintiff instructed Claxton to submit an offer for 8 acres of this land, which was refused as Wellsask would only sell the entire parcel. In December, 1973, plaintiff submitted an offer for the 18.7 acres, on terms of a deposit of $5,000, with a date for closing and payment of the balance of purchase price set for April 1, 1974. This date was set to give time to plaintiff to arrange for financing said purchase. Sale and purchase was completed on March 29, 1974.

In May 1974 plaintiff received an unsolicited offer from Saskatoon Cooperative Association Limited to purchase part of this land. The offer was refused. The Co-operative continued its effort to purchase with the result that on June 14, 1974, plaintiff accepted an offer for the purchase of 13.7 acres. The sale of 13.7 acres gave an over all profit of $48,510. Plaintiff in its 1974 tax return showed a capital gain of $48,000. The re-assessment claimed this as taxable income to the company.

Plaintiff did not seek a purchaser of any part of said 18.7 acres, by any advertisement or otherwise.

Development of the purchased land, or part thereof, did not immediately take place. One reason was that municipal services to the area were not installed, and for plaintiff to do so more or less immediately following purchase would have added substantially to required capital outlay. On one parcel of land then in use, plaintiff held a lease with two years of term remaining and with right of renewals. I do not consider a one year renewal, continued use of the properties on which the business was being carried on, as a factor in determining plaintiff’s position tax wise.

I accept the evidence of Jarvie, that the sole purpose of purchasing the acreage was to obtain space for the necessary consolidation of the Steadily, indeed rapidly, growing business. Coupled with this is the fact that over some period of time the real estate agent had been unable to find any other acreage in the suitable area desired with good road access, an essential.

The required financing was substantial and a large part was obtained from Roynat Ltd under a mortgage etc. At plaintiff’s request a clause of said mortgage gave plaintiff a right, within six months, to prepay without penalty a sum of $50,000. Plaintiff asked for this clause in the hope that a Sale of all or some of the unrequired acreage would enable it to reduce its outstanding indebtedness.

Plaintiff’s evidence frankly given by Jarvie is that prior to and at purchase of the land he had no idea of what could be done with the excess acreage. Plaintiff had no use for the entire acreage; to his, Jarvie’s, knowledge there was then no market for the excess acreage; that money was needed in the business and that hopefully the excess could be sold to meet this need.

In 1975 plaintiff acquired as a purely speculative purchase, a property in said City of Saskatoon, which shortly thereafter it sold realizing a substan tial profit. Plaintiff set forth the profit as income in its appropriate income tax return. There is no evidence of any other such trading in land.

I cannot accept this purchase and sale as establishing that plaintiff was generally engaged in adventures or concerns in the nature of trade, or in a business of that nature.

Assumption A of the Minister of National Revenue as set forth in the defence is:

(a) The plaintiff because of insufficient resources to acquire the land at the time of purchase intended to immediately resell at a profit the land in excess of its own requirements.

It is clear that plaintiff required financing in the purchase and that he intended to sell surplus acreage as soon as possible to reduce his debt load and meet business requirements. I find no evidence that sale of sales would be at a profit either certain or expected. In evidence Jarvie did say that if sales produced a profit OK—but that is not indicating a plan or expectation to obtain profit at time of purchase.

I have not overlooked the fact that some time after the purchase, plaintiff gave consideration to how the excess acreage could best be subdivided for sale at profit. This later consideration does not change plaintiff’s position as at the date of purchase.

Assumption (b) reads:

(b) The property was acquired with that knowledge (see (a)) and that expectation was realized.

See my comments re (a).

Certain issues raised by the defence appear in part B, paragraph 6, reading:

He (Deputy Attorney General) submits that the sale of the property by the plaintiff was a sale of a trading asset and the purchase and sale was done in the course of carrying on a business being an adventure or concern in the nature of trade, the property being acquired, dealt with and disposed of as part of a speculative venture entered into by the plaintiff.

The clearly established purpose in the purchase of the acreage was to permit consolidation of plaintiff’s business activities thereon. This in itself is nothing in the nature of trade or speculative venture. The known necessity of selling excess acreage, existing at the time of acquisition, but with no then existing plan for profit excludes the land from being classed as a trading asset or the purchase and sale of acreage as being done in the course of carrying on a business being an adventure or concern in the nature of trade.

I do not read the evidence in this case as being open to an inference that a prospect of resale at a profit was a motivating reason for the purchase. I adopt the words of Jackett, CJ, in giving the judgment of the Court of Appeal in Hiwako Investments Limited v Her Majesty The Queen, [1978] CTC 378 at 380; 78 DTC 6281 at 6282:

I do not read the evidence in this case as being open to an inference that a prospect of re-sale at a profit was a motivating reason for the purchase . . . .

and again at 381 [6283]:

What is the line which separates the two classes of cases may be difficult to define and each case must be considered according to its facts; the question to be determined being—is the sum of gain that has been made a mere advancement of value by realizing a security, or is it a gain made on the operation of business in carrying out a scheme of profit making.

Addy, J, set forth the test to be applied in determining when the term “adventure in the nature of trade” applied in Glacier Realties Limited v Her Majesty the Queen, [1980] CTC 308; 80 DTC 6243, as follows on 311 [6246]:

All purchases of land bought in the hope of making a profit are not necessarily adventures in the nature of trade (see Minister of National Revenue v Muzly Lawee and Naima E. Lawee, [1972] CTC 359; 72 DTC 6342). It is seldom indeed that an asset is not purchased with the hope of ultimately making a profit should the time come to dispose of it. But what is important is whether selling at a profit was the main or one of the main purposes of acquiring the asset in the first place.

Since the plaintiff could not be characterized as a trader, it is of course very important to determine whether or not it could be considered as having been engaged in an adventure or concern in the nature of trade . . . . In such cases the actual intention at the time of acquisition is of paramount importance. Evidence of what was actually done following the purchase is really useful in such cases only to determine what the original intention was except possibly where subsequent actions might tend to indicate a substantial change of intention or orientation.

In summary I repeat:

1. The sale of the land was a sale of the part that was excess to plaintiff’s requirements and constituted a recouping of part of the capital cost of the acquisition of this asset and therefore was not part of a transaction that should be characterized as an adventure in the nature of trade. (See Gibson, J in Rudolph P Cohen, Liquidator of GMG Building Corporation v MNR, [1970] CTC 386; 70 DTC 6244)

2. The purchase of the total acreage, less not being attainable, nor any other suitable acreage found, was primarily to meet the needs of a rapidly expanding business. The original plan or intention did not include nor visualize sale of excess acreage at a profit. Profit was not a motivating reason in purchasing.

3. Plaintiff was not engaged in a trade when dealing with this acreage.

4. The purchase of the acres cannot be classified as an adventure or concern in the nature of trade.

The burden rests on the plaintiff to meet and satisfy the Court that the assumptions by the Minister were in error. I think this burden or onus has been fully met.

The appeal is allowed with costs and the matter is referred back to the Minister of National Revenue for re-assessment in accordance with these reasons.