Cullen, J.:—This is an application by way of statement of claim appealing the Minister of National Revenue's reassessments of the plaintiff's 1984 and 1985 taxation years.
The plaintiff is a businessperson and farmer who resides in Matsqui, British Columbia. The plaintiff's son, Cornelius J. Van Dongen (Casey) was at the relevant time a businessperson who resided in Kamloops, British Columbia. In August 1982, the plaintiff loaned his son $400,000 for business purposes. It was agreed that the loan would be repaid by 1983, with interest. In 1983 the plaintiff sought repayment of the loan. At that time his son could not repay the loan and the plaintiff instead received a cheque for $15,000 and the transfer of Irving Place and Happyvale condominium, two properties owned by Casey.
In his 1984 tax return, the plaintiff claimed a business loss of $122,456 arising out of the loan transaction with his son, representing the difference between the cost of the properties to him, and their purported fair market value:
Cost of properties $422,456 Fair market value of Irving Place $175,000 Fair market value of Happyvale $125,000 Total fair market value $300,000 Profit (Loss) ($122,456)
In claiming the loss, the plaintiff characterized the two properties as "inventory". The plaintiff then deducted the loss by means of an inventory "writedown" from the purported $422,456 cost to the claimed $300,000 fair market value pursuant to subsection 10(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am.S.C. 1970-71-72, c. 63) (the"Act").
The Minister disallowed the deduction for three reasons:
(1) the properties in question are not business inventory within the meaning of subsections 10(1) and 248(1) of the Act, and section 1801 of the Income Tax Regulations;
(2) in claiming a loss, the amounts used by the plaintiff to compute the loss did not represent the fair market value of the properties; and
(3) the properties were not acquired in an arm's length transaction. The Irving Place property was the personal residence of the plaintiff's son, who continued to live there after the transfer of the property to the plaintiff.
The defendant reassessed the plaintiff for the amount of $100,556, which was determined by disallowing the $122,456 business loss and allowing a deduction for interest expense of $21,900 not previously claimed by the plaintiff.
The primary issue is whether the plaintiff has incurred a loss from a transaction that could be properly classified as a "business" activity, which, if so, would result in the loss being characterized as non-capital in nature. A supplementary issue is the valuation of the properties in question depending on whether or not they are considered to be“ " inventory".
The plaintiff has characterized the Irving Place and Happyvale properties as " inventory"." Inventory" is defined in subsection 248(1) of the Act as "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 characterization of these properties as inventory is significant, because any gain or loss from the disposition of the inventory will be treated as business income or loss rather than a capital gain or loss. Pursuant to subsection 3(d) of the Act, all non-capital losses may be deducted from all income subject to tax. In contrast, only a portion of capital losses is deductible, and only against the taxable capital gain for the year. This is a result of the wording of subsection 3(c) and the definitions of "taxable capital gain" and "allowable capital loss" found in section 38 of the Act. Due to the different tax treatment accorded to non-capital losses and capital losses, a taxpayer will attempt to classify the transaction from which the transaction arose as being business, or otherwise non-capital, while the Minister will likely characterize the loss as capital in nature and non-deductible.
(a) Inventory write-down:
After having classified the two properties as business inventory, the plaintiff "wrote down" the value of the properties from their purported cost to the purported fair market value pursuant to subsection 10(1) of the Act. Subsection 10(1) reads as follows:
10. (1) For the purposes 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 manner as may be prescribed by regulation.
It should be noted that both the definition of inventory in subsection 248(1) and the valuation provision in subsection 10(1) refer to inventory in the context of business. In order for the plaintiff to qualify for the inventory write-down in subsection 10(1), it must be established that the write-down loss was incurred in the course of carrying on a business.
(b) Identifying income of loss from business:
The question of whether a particular loss was a business loss is a mixed question of law and fact which must be resolved by reference to both statute and the particular circumstances of the case. The term "business" is broadly defined in subsection 248(1) as follows:
"business"—"business" includes a profession, calling, trade, manufacture or undertaking of any kind whatever and, except for the purposes of paragraph 18(2)(c), section 54.2 and paragraph 110.6(14)(f), an adventure or concern in the nature of trade but does not include an office or employment.
The case law on the issue of whether a particular gain or loss is in the nature of business or capital generally hinges upon whether the profit or loss in question was the result of an investment, in which case it is capital, or if the transaction was speculative in nature, with the property having been acquired with the intention of reselling it at a later date. If the property was acquired with the intention of reselling it at a profit, any gain or loss will probably be considered to be a business gain or loss. If the property was acquired as an investment, any gain or loss on resale will probably be considered as capital in nature.
A demonstrated intention to resell at a profit, however, while very relevant in the characterization of the transaction as business or capital, is not conclusive of the issue. As was held in M.N.R. v. Taylor ,  C.T.C. 189; 56 D.T.C. 1125 at 211-12 (D.T.C. 1137):
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 intention to make a profit may be just as much the purpose of an investment transaction as of a trading one. Such intention may well be an important factor in determining that a transaction was an adventure in the nature of trade but its presence is not an essential prerequisite to such a determination and its absence does not negative the idea of an adventure in the nature of trade.
Therefore, it is useful and necessary as well to examine the evidence for any of the "badges of trade" generally associated with land trading.
A classic statement of the business/capital distinction is found in the case of Californian Copper Syndicate Ltd. v. Harris (1904), 5 T.C. 159 at 165-66:
It is quite a well settled principle of dealing with questions of assessment of Income Tax, that where the owner of an ordinary investment chooses to realize it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit in the sense of Schedule D of the Income Tax Act of 1842 assessable to Income Tax. But it is equally well established that enhanced values obtained from realization or conversion of securities may be so assessable, where what is done is not merely a realization or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business. The simplest case is that of a person or association of persons buying and selling lands or securities speculatively, in order to make gain, dealing in such investments as a business, and thereby seeking to make profits . . .
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 enhancement of value by realizing a security, or is it a gain made in an operation of business in carrying out a scheme for profit making?
The most important factor to be established in such cases is the intention of the taxpayer at the time the property was acquired: Sutton Lumber and Trading Co. v. M.N.R.,  2 S.C.R. 77;  C.T.C. 237; 53 D.T.C. 1158 (S.C.C.); Becker v. The Queen ,  C.T.C. 11; 83 D.T.C. 5032 (F.C.A.). Evidence of intention is not limited, of course, to the taxpayer's sworn testimony, but can be deduced objectively from the taxpayer's whole course of conduct viewed in light of all the circumstances: Cragg v. M.N.R. (1952), 3 Tax A.B.C.203; 52 D.T.C. 1004.
Adventure in the Nature of Trade
The plaintiff, a farmer, is not involved in a business that would normally trade land and thus require an inventory of land,and this is an isolated transaction. Generally, a trade involves some continuity of business operations. As was stated in C.I.R. v. Livingston (1926), 11 T.C. 538 at 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.
However, it is not necessary that one operate a business in the traditional sense of a going concern to qualify a loss as a business loss. The definition of business in subsection 248(1) includes the concept of an "adventure in the nature of trade". An adventure in the nature of trade involves an isolated transaction only: Ward v. The Queen,  1 C.T.C. 336; 88 D.T.C. 6212. However, the isolated nature of the transaction by itself is not enough to conclude that it is an adventure in the nature of trade: M.N.R. v. Taylor, supra. In a number of cases in which an inventory write-down of real estate was claimed, the deduction was allowed on the basis that the transaction was an adventure in the nature of trade. The general principles used in characterizing a transaction as an adventure are found in Interpretation Bulletins IT-459 and IT-218. (See also M.N.R. v. Taylor, supra, and Tara Exploration and Development Co. v. M.N.R.,  C.T.C. 557; 70 D.T.C. 6370 at 563-64 (D.T.C. 6374-76).)
The Evidence at Trial
The two key witnesses at the trial were the plaintiff's son, Cornelius J. Van Dongen (Casey) and the plaintiff himself. It was a treat to hear evidence straightforwardly given and lacking in any evasiveness. Also, it was very clear that there was much trust, respect and affection between these two men.
Unhappily, however, their evidence did not make the case alleged in the statement of claim, namely that the properties qualify as inventory and there is a business loss within the meaning of the Income Tax Act.
Casey at all material times was a general contractor, building houses and apartments. He built his own home at 955 Irving Place, Kamloops, B.C. and had resided there since 1978. Also, Casey built a condominium project known as 1616 Happyvale (Happyvale) in Kamloops. This latter property was to be a 10- unit MURB townhouse which he started in 1981. Casey's company was Total Concept Developments Ltd., which company was to build the Happyvale building and sell it as a completed development for a profit. It was hoped that Happyvale would be started in December 1981 and completed in May 1982 pursuant to a sale made in December 1981. This project was to be sold to a Kamloops businessman, Ron Fawcett, for $750,000. Casey had trouble getting interim financing, "was forced to abandon the deal" and had to relinquish the down payment. (Casey blames this on the fact that he and Fawcett dealt with the same branch of the Royal Bank, Fawcett wanted out making it impossible for Casey to get the financing). He was forced to abandon construction in about February 1982. At page 37 of the transcript he states:
A. At the end of February we had some of the foundations in. We had started some of the framing and we had sub-trades working on the project in anticipation of meeting the May completion. As part of releasing the purchaser, I had been promised some interim financing from the Royal Bank in the amount of $50,000, and this was given by my local account manager in Kamloops.
Q. Okay. Were those funds in fact advanced?
A. No. In the middle of March, when I started pressing for these funds, and I was informed that Vancouver turned down any request for further funds on this project.
Casey then followed several avenues to sell or unload on an "as is" basis, plus working on several other houses. He also sought alternate sources of interim financing. There is no question on the evidence that Casey was what he purported to be—a "business that bought lots, built houses and selling them on a completion basis". This was not, however, his father's business. A proposed trade for the Belchum Ranch in Merritt (the ranch) would have involved Happyvale and Irving Place and provided his father (the plaintiff) and the rest of the family an improved opportunity. The deal fell through but even if it had succeeded it was clearly Casey's deal, an attempt to get out from under the problem chiefly with the Happyvale project and not just the fact it would produce a "compatible operation" (page 39 of the transcript). Casey wanted to refinance with some other bank and pay off the Royal Bank. At page 40 of the transcript he states:
Q. Okay. Just pausing for a moment then. You're referring to titles and that that the Royal Bank had. What titles did they have?
A. They had a mortgage on the condominium property of $85,000. They had the title to what was then my personal residence as collateral for a line of credit, and they had numerous other personal guarantees and I'm not exactly sure what I all signed over the years with the Royal Bank.
Casey did not have the benefit of the Fawcett deal that would have grossed $750,000 and so was left with the debts. One source of funds would have been the ranch if that deal had gone through. Page 41 of the transcript:
We worked with the Bank of Montreal on that until just about the end of August, and because it involved a ranch, which I was, you know, hoping to gain some income off through my father and things like this, . . .
Thus Casey was dealing to get the ranch for himself with his family leasing and giving him income. This was not the plaintiff's deal in anyway. When Casey heard that the Royal Bank was going to garnishee moneys he had earned on government contracts, he "felt I had no other choice but to get out of Royal Bank . . (page 41 of transcript).
Under this financial pressure Casey asked his father "if he would lend me the money to get out of Royal Bank”. The plaintiff loaned Casey $400,000 and $50,000 was advanced to clear some liens on the condominium property, plus giving Casey a little working capital. The $350,000 was to be used to pay off the Royal Bank. With the payment to the Royal Bank all title documents and personal guarantees were sent to Casey's lawyer. The $350,000 or the $400,000 was borrowed by the plaintiff from the Bank of Montreal at an interest rate in excess of 15 per cent. This money was loaned to Casey by the plaintiff at an interest rate of ten per cent.
Of significance also is the fact that the plaintiff apparently had every confidence that his son would repay the loan and never sought or received any security nor even a promissory note. It was the Bank of Commerce, sometime later, that" advised" the plaintiff that he should get title to the properties as security for his loan to Casey. Transcript at page 42:
The Court: The bank wanted security for . . . wanted the properties for security. Was this money that your father had got from them and advanced to you, or was this money-... .
A. Yeah, this was money that my father had got from the Bank of Commerce and they felt he should have some security from me.
and later, at page 44:
Q. Okay. And did you have any discussion with your father as to what you were going to do about that?
A. Yes. Well, we were continuing to try to sell it and that was always my intent. We felt that the only way to handle it then was for us to sell him the properties that we had and transfer the title and, you know, then he would be fully secure.
And so we took a look at, you know, what we had to offer in satisfaction of the debt, and the two main components at that time were my house and the condominium . .
And on and on it goes because this was not really a transfer of title to the plaintiff but a means of securing Casey's debt while Casey, as he describes it at page 44 of transcript,
A. And we felt that with that 100,000 that I could finish some of the units in the condominium complex and the common site work in satisfaction of that debt, and that's what we did. That's what was agreed on.
What could be clearer, and all this evidence was given in chief by Casey. The plaintiff's evidence provides no contradiction of Casey and in fact supports his son's testimony right down the line. The plaintiff did not seek security and even when he had received "title" he was simply waiting for Casey to be in a position to pay off the loan at ten per cent interest and whatever deals Casey made were of little or any interest to the plaintiff. He just wanted to get his money back and was not interested in owning either Happyvale or Irving Place. It's true that Casey paid $400 a month rent for Irving Place but even that figure was established by Casey.
In the case at bar, the plaintiff did not acquire the real property in question with the intention of reselling it for a profit. Rather, he acquired the property to protect the investment he had in the loan he had made to his son. A similar issue was considered in Bailey v.  1 C.T.C. 2450; 90 D.T.C. 1321 (T.C.C.). In that case, the taxpayer was an investor in real estate. The taxpayer and his wife purchased an unfinished MURB in 1981. Due to problems in construction, however, the property was totally unsatisfactory for their purposes and had to be sold. The property was sold, with a mortgage back to the taxpayers. However, in order to close the deal, it was necessary for the taxpayer to purchase a piece of farmland from third parties who had dealings with the purchasers of the MURB. The purchasers of the MURB defaulted on their mortgage payments to the taxpayer and his wife, and the taxpayer reacquired the property upon foreclosure. The taxpayer testified at trial that their intention upon foreclosing on the MURB was to resell it for a profit and not to retain it as an investment. After they had reacquired the MURB the taxpayer was still unable to sell it or the farmland, and thus in 1983 decided to deduct, as a business loss, an inventory write-down on the MURB and the farmland. The Minister disallowed the deduction and the taxpayer appealed.
The appeal was allowed in part. With respect to the MURB, it was held that the property had been acquired for the purposes of capital cost allowance and as a general investment. It was not, as the taxpayer asserted, a business or an adventure in the nature of trade. This was clearly demonstrated by the fact that the profit on the original disposition of the MURB had been reported as a capital gain. Rip, T.C.J. was also not convinced of the taxpayer's assertion that the MURB had been reacquired by foreclosure with the intention of reselling the property. Rather, the motivation of the taxpayer in foreclosing was the protection of his economic interest in the property. While a sale may have been necessary upon reacquisition, the Court held that the property had not been acquired for resale in a trade or an adventure in trade.
An analogy could be drawn between the taxpayer in Bailey foreclosing to protect his economic interest, and the plaintiff in the case at hand acquiring the properties to protect his exposure to his son's default. It could be persuasively argued that in neither case were the parties acquiring the property with an intention to resell, but only to protect their investments. In so holding in the Bailey case, Rip, T.C.J. put considerable emphasis on the fact that the MURB was heavily mortgaged and the taxpayer was personally liable on the mortgage. In the case at hand the transfer of the properties was the only realistic chance of the plaintiff recovering his investment. Clearly the judge in the Bailey case was influenced by the previous treatment of the MURB as a capital asset by the taxpayer, which is a distinguishing factor from this case. However, any lack of capital treatment of the two properties in this case does not change the likely intention of the plaintiff in acquiring the property.
The judge also noted that there was no evidence before the Court as to what price the MURB would have commanded in the period after the foreclosure, when the taxpayer claimed he wanted to sell the property, and thus could not conclude that there was any reasonable likelihood of a profit on any sale. In Gillis v. The Queen ,  C.T.C. 44; 78 D.T.C. 6103 (F.C.T.D.), it was held that in order for an undertaking to be considered a business, it must be carried on with a reasonable expectation of profit. Evidence of this type had to be looked at during the trial to substantiate any claim that the plaintiff might make of holding the property for resale as an adventure in the nature of trade. None was forthcoming.
With respect to the farmland, however, the deduction was allowed. The farmland, unlike the MURB, had not been acquired as an investment, but rather to facilitate the sale of the MURB. Furthermore, the farmland was located in an area that was the focus of a great deal of land speculation. Rip, T.C.J. accepted the testimony of the taxpayer that they did not intend to hold the farmland as a capital asset, but rather had acquired the property on speculation for resale at a profit. The judge accepted that the acquisition of the farmland constituted the first step of an adventure in trade, with the final step of disposition yet to occur. Rip, T.C.J. made these findings without evidence of the intention of the taxpayer to subdivide or otherwise market the land, or evidence of whether the taxpayer would sell if a certain price could be obtained. I had listened very carefully for any evidence in this case which might strengthen any claim of the plaintiff to have been involved in a business venture. There was none.
Having concluded that the farmland was acquired in an adventure in trade, Rip, T.C.J. concluded, after a detailed examination of the statutory provisions, that property which is the subject of an adventure in trade could also be considered inventory. The judge dismissed the arguments of the Minister who argued that in interpreting subsection 10(1), Parliament could only have intended inventory to describe property held for sale in the course of carrying on a business, i.e., where there is a continuity of operations and not an isolated transaction. The judge noted that the definition of business in the Act includes an adventure in the nature of trade, except for certain specific exceptions. Presumably, if Parliament had intended that inventory not be covered with respect to adventures, it would have included subsection 10(1) in the list of statutory exceptions. Thus, there was no reason why the farmland could not be described as inventory, for subsection 10(1) directs that a property be valued "for the purpose of computing income from a business".
In Weatherhead v. M.N.R.,  1 C.T.C. 2579; 90 D.T.C. 1398 (T.C.C.), the taxpayer acquired three pieces of real estate. The taxpayer attempted to deduct an inventory write-down with respect to the property in his returns for 1982-84. The Minister disallowed the deductions, and tne taxpayer appealed. Teskey, T.C.J. held that each piece of property had been acquired as an adventure in the nature of trade. The properties had been acquired on the facts with the intention of making a profit upon resale, with particular emphasis laid on the speculative nature of the transactions, the fact that the taxpayer was an experienced real estate speculator, and the detailed plans that the taxpayer had for the development and resale of the properties. The judge cited Bailey, supra, in support of his conclusion that the taxpayer was entitled to inventory the properties at the lower of their cost or fair market value.
In Gilmour v.  2 C.T.C. 2454; 89 D.T.C. 659 (T.C.C.), the taxpa er purchased a vacant lot with the sole intention to resell it as quickly as possible, as stated in the agreed statement of facts. He attempted to sell the property, but was unsuccessful for three years. In 1985, the property had a fair market value of $22,000, but the total cost to the taxpayer, including mortgage interest, was $58,799. Rather than deduct the mortgage interest under subsection 18(2) on a current basis, the taxpayer attempted, by way of inventory writedown, to deduct the difference of $36,799. The deduction was disallowed. On appeal, the case was dismissed. Taylor, T.C.J. held that by adding to the original cost the carrying costs of interest, the taxpayer treated the land as a capital asset and not inventory. The judge further held, citing M.N.R. v. Taylor, supra, that the intention to sell at a profit is not by itself sufficient to conclude that a transaction has a business as opposed to a capital nature, although its presence can be an important factor in concluding that a transaction was an adventure in the nature of trade.
An interesting aspect of this case was the Minister's position that an inventory write-down under subsection 10(1) is not available for land held as an adventure in the nature of trade. In dismissing the appeal, Taylor, T.C.J. stressed that the dismissal did not signal approval of the Minister's position. The later Bailey case appears to have settled the issue that land held as an adventure in the nature of trade is eligible for inventory write-down.
The plaintiff has clearly been unable to establish that the properties qualify as inventory, giving a business loss within the meaning of the Act. No evidence along the lines. of what was pointed out in Bailey, supra, was presented to substantiate the claim. It was obvious from the plaintiff's own evidence and that of his son Casey that there was no intention by the plaintiff to resell the properties or otherwise deal with them in a business-like manner. The properties held by the plaintiff were held to secure a loan, and if the plaintiff got his money back at ten per cent interest the paper title would revert to the son or to a purchaser, and Casey would keep any profit.
Accordingly, the action is dismissed with costs to the defendant.