Van Lathing & Holding Co. v. R., [1996] 2 CTC 2008, [1997] DTC 129

Mogan J.T.C.C.: — In November 1987, the Appellant agreed to sell to Pan West Financial Inc. for $750,000 a 13-acre portion of Lot 7 (a parcel of land which will be described in greater detail below) in Langley, B.C. On April 29, 1988, the agreement was completed when the Appellant transferred title to the 13-acre portion of Lot 7.

On December 21, 1988, the Appellant purchased from Sultan Karim for $340,000 a property near Langley of approximately 60 acres (the “Karim Property”). On February 21, 1989, the Appellant purchased from John and Wanona Morgan for $121,000 a property near Langley of approximately 25 acres (the “Morgan Property”) which adjoined the Karim Property.

In June 1989, the Appellant filed its income tax return for its 1988 taxation year (the calendar year) claiming a deferral of the capital gain from the disposition of the 13-acre portion of Lot 7 on the basis that Lot 7 was a “former business property” and the Karim Property and the Morgan Property were “replacement properties” within the meaning of subsection 44(1) of the Income Tax Act. The relevant portions of subsection 44(1) and the definition of “former business property” are set out below:

44(1) Where at any time in a taxation year (in this subsection referred to as the “initial year”) an amount has become receivable by a taxpayer as proceeds of disposition of a capital property (in this section referred to as his “former property”) that is either

(a) or

(b) a property that was, immediately before the disposition, a former business property of the taxpayer,

and the taxpayer has

(c) ...and

(d) ...before the end of the first taxation year following the initial year,

acquired a capital property (in this section referred to as his “replacement property”) as a replacement for his former property...notwithstanding subsection 40(1), if he so elects under this subsection in his return of income under this Part for the year in which he acquired the replacement property,

(e) the gain for a particular taxation year from the disposition of his former property shall be deemed to be the amount, if any, by which

(i) where the particular year is the initial year, the lesser of

(A) ... and

(B) ...

248(1) “former business property” of a taxpayer means a capital property that was used by him primarily for the purpose of gaining or producing income from a business, and that was real property ... of the taxpayer, ...

The formula in subparagraph 44(l)(e)(i) for determining the amount of the deemed gain is omitted because the parties agree on the application of the formula to the facts herein. The parties also agree that certain conditions contained in subsection 44(1) of the Act have been met: (i) Lot 7 was a capital property of the Appellant; (ii) the election was duly made; and (iii) the Karim Property and the Morgan Property are “replacement properties” if Lot 7 is held to be a “former business property”. The only dispute between the parties is whether Lot 7 was a “former business property” of the Appellant “immediately before the disposition” within the meaning of paragraph 44(1 )(b). The relevant period of time to examine the Appellant’s use of Lot 7 is the calendar years 1986 and 1987.

Upon filing its income tax return for the 1988 taxation year, the Appellant used the election and deferral under subsection 44(1) to report a capital gain of $245,478 from the disposition of the 13-acre portion of Lot

7. The reported gain was computed as follows:

Proceeds of disposition 13-acre portion:$750,000

Selling costs: 38,823

Net proceeds: $711,177

Cost of replacement property: $465,699

Cost of 13-acre portion (ACB): $ 40,000

Subparagraph 44(1)(e)(i)

Deemed gain on disposition is lesser of:

A: Gain otherwise determined

($711,177 - 40,000): $671,177 A

B: Amount by which:

Proceeds of disposition: $711,177

Exceed: Cost of replacement property: 465,699

Formula: Amount:$245,478 B

Deemed gain under S. 44(l)(e)(i)

(the lesser of A and B): $245,478

Upon reassessment, the Minister of National Revenue denied the deferral of any part of the capital gain and assumed that the Appellant’s gain in 1988 from the disposition of the 13 acres was $671,177. The parties agree that if the Appellant is successful, the above computation of the deferred gain is correct.

Counsel for the Appellant acknowledged in his opening statement that in order to succeed, the Appellant must establish the following three facts for the years 1986 and 1987 being the period “immediately before the disposition”: (i) there was farming activity on Lot 7; (ii) the farming activity constituted a business; and (iii) the business was that of the Appellant and not that of its shareholder (Mr. Van Vugt). Although Lot 7 is the most important parcel of land in deciding this appeal, it is only one of seven properties which are relevant to the decision. I will refer to the four properties which were owned by the Appellant or its shareholders (Mr. and Mrs. Van Vugt) before 1980 as the old properties, and the three properties which were acquired by the Appellant or Mr. and Mrs. Van Vugt after 1980 as the new properties.

The four old properties are adjoining and are shown as a diagram in Schedule B to the Partial Agreed Statement of Facts (Exhibit A-15). The three new properties are also adjoining and are shown as a diagram in Schedule C to Exhibit A-15. The new properties are about 20 miles distant from the old properties. The four old properties are Lot A, Lot 47, Lot 46 and Lot 7.

Lot A is 5.5 acres on the west side of 213th Street in Langley.

Lot 47 is 6.5 acres on the west side of 213th Street adjoining and immediately south of Lot A.

Lot 46 is one acre taken from the south-east corner of Lot A. Lot A plus Lot 46 equal the area of Lot 47.

Lot 7 is a 20-acre rectangle running east and west touching the south-west corner of Lot 47. The road allowance for 212th Street (running north and south) forms the common border between Lot 7 and Lot 47 but the road itself was not there until after 1987.

The new properties are the Zaklan Property, the Karim Property and the Morgan Property. Schedule C to Exhibit A-15 shows the Zaklan Property on the south side of 240th Street but some of the oral testimony indicated that 240th Street runs north and south, and that the Zaklan Property was on the west side of 240th Street. It is not material but I will assume that 240th Street runs north and south consistent with 213th Street.

The Zaklan Property (40 acres) is on the east side of 240th Street.

The Karim Property (more than 40 acres) adjoins and is immediately east of the Zaklan Property but a narrow panhandle of the Karim Property runs along the north border of the Zaklan Property.

The Morgan Property (less than 40 acres) adjoins and is immediately south of the Karim Property.

The shares of the Appellant corporation are owned equally by Mr. and Mrs. Arie Van Vugt. Mr. Van Vugt was the principal witness for the Appellant. He grew up on a farm in Holland and came to Canada in 1952. His first job in Canada was on a farm and he then worked as a labourer in construction building houses, schools and shopping centres. Later, he started his own business doing lathing under the name “Van Lathing”. While operating this business, he was advised to incorporate the Appellant company and transfer the business to the company. When the lathing business went into decline, the Appellant commenced other types of construction like steel-stud framing. The appellant also carried on some farming activities. This brings me to the first four properties.

Mr. and Mrs. Van Vugt started farming in 1959 on Lot A (5.5 acres). Their principal residence was on Lot A along with three barns and an additional house. In 1968, they purchased for $9,000 Lot 47 (6.5 acres) which adjoined Lot A. Lot 47 was agricultural land except for one small house. In 1970, Mr. Van Vugt purchased for $19,000 Lot 7 (20 acres) which adjoined the south-west corner of Lot 47. On Lot 7, there have never been any barns or a source of water. In 1971, Mr. Van Vugt transferred Lot 7 to the Appellant. And lastly, in 1976 Mr. and Mrs. Van Vugt purchased Lot 46 which is a small one-acre parcel taken from the south-east corner of Lot A and lying between Lot A and Lot 47. In summary, Lot A, Lot 47 and Lot 46 were owned by Mr. and Mrs. Van Vugt but Lot 7 was owned by the Appellant. It is Lot 7 and the activities on Lot 7 which are the subject of this appeal.

Mr. Van Vugt did not farm personally between 1971 and 1981. It was only the Appellant that had a farming business from 1971 to 1981. The first two years (1971 and 1972) there were no fences around Lot 7 and so it was used for growing hay. After the fences were up, Lot 7 was used for grazing cattle along with Lot A and Lot 47. During the 1970’s, the Appellant purchased most of the hay needed for the cattle. The appellent owned or had the use of two of the three barns on Lot A. The appellant’s financial statements for the years ending December 31, 1977 and 1978 (Exhibits A-2 and A-3 respectively) show the following gross revenues:

Construction: $46,680 (1977) I $29,043 (1978)

Farming: $5,375 (1977) / $149 (1978)

The 1977 farming revenue was from the sale of livestock but the small 1978 farming revenue was from the sale of hay. Using those two years as a guide, I conclude that the Appellant’s farming operation in the 1970’s was small compared to its construction business. It must be remembered, however, that the total area available to the Appellant for farming from 1971 to 1981 was less than 33 acres (Lot 7, Lot A, Lot 47 plus Lot 46) because the northern and western borders of Lot 7 (beyond the ravine) were not farmed and there were four houses on Lot 7, Lot 47 and Lot 46.

In August 1980, the Appellant and Mr. and Mrs. Van Vugt agreed to sell to Len Morin Homes Ltd. (referred to herein as “Morin Homes”) Lot 7, Lot A, Lot 47 and Lot 46. It was an all-or-nothing transaction in the sense that Morin Homes wanted all four properties or none at all. The sale price of Lot 7 alone was $600,000 and was satisfied by the granting of a mortgage in that amount to the Appellant. As a condition of the sale, the Appellant and Mr. and Mrs. Van Vugt were required to remove all the barns and fences from the four properties. It was the intention of Morin Homes to develop the properties for housing. Title to the properties was actually transferred in March 1981. From 1981 to 1984, Lot 7 was assessed as residential property for municipal tax purposes.

In April 1981, Mr. and Mrs. Van Vugt purchased from Steven and Hazel Zaklan for $610,000 approximately 40 acres (the “Zaklan Property”) in South Langley about 20 miles from the properties sold to Morin Homes. In 1981, the Zaklan Property became their principal residence. After they moved from Lot A to the Zaklan Property, they purchased their own cows and began to farm for themselves. They grew some hay at times but their personal farming activity was mainly in cattle.

Morin Homes was not successful in its attempt to develop the four old properties and it defaulted on the mortgage which was held by the Appellant. In October 1982, the Appellant commenced foreclosure proceedings and, in November 1983, the Appellant obtained a foreclosure order with respect to Lot 7. Mr. Van Vugt stated in evidence that he did not want any of the old properties back because all the fences had been removed and he could not graze cattle there. Although the foreclosure order was obtained in November 1983, there was an on-going dispute with the Canadian Imperial Bank of Commerce which also held mortgages with respect to the four old properties. The dispute was resolved only in 1985 when Mr. Van Vugt settled with the Bank on the basis that the Bank would obtain clear title to the three old properties which had been owned by Mr. and Mrs. Van Vugt (Lot A, Lot 47 and Lot 46) and the Appellant would obtain clear title to its old property (Lot 7). Mr. Van Vugt was so reluctant to take back any of the old properties that he referred to Lot 7 as being “dumped in his lap” by the Bank.

From 1981 when the Appellant sold Lot 7 to Morin Homes (along with the sale by Mr. and Mrs. Van Vugt of Lot A, Lot 47 and Lot 46) until December 1988 when the Appellant purchased the Karim Property, the Appellant did not own any land at all except for the period from 1983 to the end of 1987 when the Appellant took back Lot 7 through the mortgage foreclosure. Lot 7 lay idle from 1983 to 1985 while Mr. Van Vugt resolved his dispute with the Bank.

When the Appellant took back Lot 7 in 1983, Lot A and Lot 47 (to the east) had already been developed along with the land north of Lot 7. As a result of that development on adjoining lands, debris had been dumped on Lot 7 - drywall, concrete, blacktop, construction waste, etc. The appellant hired a contractor to remove the debris and some of the bushes and small trees from Lot 7. Also, Lot 7 had been reclassified from “farm” to “residential” for municipal tax purposes and the taxes had increased from $200 per year in 1981 to $9,000 in 1985. Mr. Van Vugt went to the municipal authorities and had the classification of Lot 7 changed back from “residential” to “farm”. The taxes were accordingly reduced from $9,000 per year to about $200 for 1986.

Approximately 13 acres of Lot 7 (south and east of the ravine) were used to grow hay in 1986 and 1987. The haying was a family affair. The crop Was taken off by Mr. and Mrs. Van Vugt and their two sons and a neighbour. Mr. Van Vugt had hoped to sell the hay right off Lot 7 but the price of hay fell and he ended up taking it home to the Zaklan Property where he had a huge barn in which to store it. The hay which was taken off Lot 7 in 1986 and 1987 was used by Mr. Van Vugt in connection with his personal farming on the Zaklan Property. Mr. Van Vugt testified that he paid $4,000 to the Appellant in 1986 and again in 1987 for the hay but the payment was not in cash or by cheque. The payment was to be effected by an adjustment to his “shareholder’s loan” in the books of the Appellant.

The evidence described in the preceding paragraph with respect to the hay grown on 13 acres of Lot 7, the harvesting of that hay, and its sale each year to Mr. Van Vugt for $4,000 is crucial to the outcome of this appeal because the Appellant relies on that particular evidence to prove that it carried on a farming business on those 13 acres in 1986 and 1987. For reasons which I shall set out below, I find that the evidence with respect to the purported sales of hay in 1986 and 1987 by the Appellant to Mr. Van Vugt is not believable. Before considering that evidence, however, I shall describe the Appellant’s ultimate disposition of Lot 7.

On April 30, 1987, the Appellant entered into an interim agreement with Pan West Financial Inc. (“Pan West”) for the sale of all of Lot 7. The sale price in that agreement was $1,000,000 but the agreement was never completed. On September 3, 1987, the Township of Langley wrote a letter (Exhibit R-20) to the Appellant offering to purchase 6.35 acres of Lot 7 at a price of $190,500 (based on $30,000 per acre) for use as a park. There were further negotiations with the Township and on December 31, 1987, the Appellant sold approximately 7 acres of Lot 7 to the Township at a price of $301,251.

On October 7, 1987, the Appellant received a second offer from Pan West to purchase the remaining 13 acres of Lot 7 at a price of $750,000. The appellant accepted Pan West’s second offer on November 25, 1987. This agreement was subject to the condition that Pan West obtain medium density zoning for the 13 acres. On December 28, 1987, an application to deposit a subdivision plan for all of Lot 7 was filed by Pan West on behalf of the Appellant because it was still the registered owner of Lot 7. On April 11, 1988, Pan West obtained the medium density zoning for the 13 acres which satisfied the condition in the agreement; and on April 29, 1988, the Appellant transferred to Pan West title to the 13 acres. It is the capital gain realized by the Appellant from the sale of these 13 acres to Pan West which the Appellant hopes to defer by making an election under subsection 44(1) of the Act.

I turn now to my reasons for finding that the evidence with respect to the purported sales of hay in 1986 and 1987 is not believable. There is no contemporary document in 1986 or 1987 to prove that the Appellant sold any hay to any person including Mr. Van Vugt. There is no bill of sale; no cancelled cheque; no receipt for a cash payment; and most important, no entry in the books or records or financial statements or income tax returns of the Appellant which indicates that the Appellant sold any hay at all in 1986 or 1987. Also, Mr. Van Vugt filed with each of his income tax returns for 1986 and 1987 a Revenue Canada Form T2042 being a “Statement of Farming Income and Expenses”. In neither one of those Forms was there any indication that Mr. Van Vugt (as a farmer) had purchased hay for $4,000 from any person including the Appellant.

The only evidence in any documents of the alleged sales of hay in 1986 and 1987 by the Appellant to Mr. Van Vugt is adjustments to the reported incomes of the Appellant and Mr. Van Vugt for those years, and an adjustment in 1989 to the shareholder’s loan in the books of the Appellant. It must be remembered, however, that those adjustments were made in June 1989, long after the returns for those years had been filed and, more importantly, after Mr. Van Vugt and his accountant knew that it was necessary for the Appellant to prove that it had used the remaining 13 acres of Lot 7 in 1986 and 1987 as a “former business property” (within the meaning of section 44) if it was to defer at least part of the 1988 capital gain from the sale of those 13 acres.

In the years 1986 to 1989, Mr. R.C. Bergen was the accountant who advised the Appellant and Mr. Van Vugt with respect to their income tax returns. On June 6, 1989, Mr. Bergen wrote two letters to Revenue Canada Taxation. In one letter (Exhibit A-8), Mr. Bergen requested that the Appellant corporation be reassessed for 1986 and 1987 to include additional farming income of $4,000 for each year. In the other letter (Exhibit A-16), Mr. Bergen requested that Mr. Van Vugt be reassessed for 1986 and 1987 to deduct additional farming expenses of $4,000 for each year. These two letters are important and I shall set out the relevant parts.

Exhibit A-8 concerning the Appellant corporation:

We respectfully request that you reassess the 1986 and 1987 taxation years for the above-named taxpayer to include additional farming income of $4,000 for each of those taxation years.

1986 Taxation Year

The additional farming income of $4,000 decreases the loss for income tax purposes from $4,127 to $127....

1987 Taxation Year

The additional farming income of $4,000 increases net income for tax purposes from $116,525 to $120,525....

Exhibit A-16 concerning Mr. Van Vugt:

We respectfully request that you reassess the 1986 and 1987 taxation years for the above-named taxpayer to deduct additional farming expenses of $4,000 for each of these taxation years.

1986 Taxation Year

The additional farming expense of $4,000 relates to hay purchases. The additional expense increases the farming loss to $4,000....

We enclose an amended T2042 - Statement of Farming Income and Expenses for your information.

1987 Taxation Year

The additional farming expense of $4,000 increases the farming loss to $4,000....

We enclose an amended T2042 - Statement of Farming Income and Expenses for your information....

Mr. Van Vugt’s personal income tax returns for 1986 and 1987 are not in evidence but his two forms T2042 (Statement of Farming Income and Expenses) for those years as amended by Mr. Bergen are part of Exhibit A-16. For 1986, Mr. Van Vugt’s only farm revenue was $18,000 from the sale of cattle. His expenses as amended to include $4,000 for hay purchases were $15,920.83; and capital cost allowance of $6,079.17 produced a loss of $4,000. Before the cost of feed was increased from $3,077.50 to $7,077.50 to include the alleged purchase of hay, it appears that Mr. Van Vugt’s original form T2042 as filed with his tax return would have shown a profit or loss of nil from farming in 1986. After the cost of feed was increased by $4,000, the amended T2042 showed a loss of $4,000. If it was Mr. Van Vugt’s intention in 1986 to pay $4,000 to his company (i.e. the Appellant) for hay, there was nothing in his original T2042 to show that intention. This is surprising because an additional $4,000 for the cost of hay would have more than doubled the original declared cost ($3,077.50) of feed.

For 1987, the only farm revenue shown on Mr. Van Vugt’s T2042 is $1,465 from “hay sales” and $20,000 as the optional value of livestock at year end. His expenses as amended to include $4,000 for hay purchases were $24,564.23; and capital cost allowance of $900.77 produced a loss of $4,000. Before the cost of feed was increased from $327.29 to $4,327.29 to include the alleged purchase of hay, it appears that Mr. Van Vugt’s original form T2042 as filed with his tax return would have shown a profit or loss of nil from farming in 1987. After the cost of feed was increased by $4,000, the amended T2042 showed a loss of $4,000. Again, if it was Mr. Van Vugt’s intention in 1987 to pay $4,000 to his company for hay, there was nothing in his original T2042 to show that intention.

In my view, Mr. Van Vugt’s amended T2042 for 1987 in the Appellant’s Exhibit A-16 contains damaging evidence against the Appellant. The farm expenses for 1987 are listed as follows:

Property taxes: 634.24

Automobile repairs, etc.: 1,668.32

Cattle purchased: 16,162.81

Feed: 4,327.29

Veterinary fees: 182.00

Insurance: 623.35

Telephone: 313.00

Electricity: 558.22

Trucking: 95.00

Paid Expenses: 24,564.23

CCA: 900.77

Total Expenses: 25,465.00

The only item among the above expenses which could include the alleged purchase of hay is “feed” at $4,327.29. Without the amendment to include the $4,000 for hay, the cost of feed in the original T2042 must have been only $327.29. If Mr. Van Vugt intended to pay $4,000 to his company for hay, how could he overlook such a significant purchase when his cost of feed otherwise was only $327.29? There was no reason for Mr. Van Vugt to overlook or forget an expense of $4,000 for hay in 1986 or 1987 when many smaller expenses were recorded. He appears to have had many head of cattle because in 1986 his cattle sales were $18,000 and in 1987 his cattle purchases were $16,162. If the only expense for “feed” in his original T2042 filed with his 1987 tax return was the amount $327.29, I conclude that he regarded the hay grown on Lot 7 as his own and not that of his company (the Appellant). He planted the hay; he and his family harvested it; he took it back to his barn on the Zaklan property where he had a cattle operation; and he used it as feed for his cattle. Also, as noted above, the Appellant corporation did not own any other land in 1986 or 1987 where it might have had cattle to use the hay in question.

There is another item in the amended T2042 for 1987 which makes the Appellant’s case less believable. It shows revenue of $1,465 from “hay sales”. Why would Mr. Van Vugt pay $4,000 to the Appellant for hay in 1987 if in his personal farming operation he was selling hay for $1,465? Again, I am led to the conclusion that he regarded the hay grown on Lot 7 as his own and not that of the Appellant. He appears to have used most of the hay grown on Lot 7 as feed for his cattle and to have sold any excess hay for $1,465.

I will review the circumstances in which the two letters (Exhibits A-8 and A-16) were written. The basic circumstances is the fact that the Appellant’s corporate income tax returns and financial statements for 1986 and 1987 gave no indication that the Appellant sold any hay in either year or carried on any other kind of farming activity. And as already noted, the original forms T2042 attached to Mr. Van Vugt’s personal income tax returns for 1986 and 1987 gave no indication that he purchased any hay for $4,000 in either year from any person including his company. The appellant entered Exhibits A-17 and A-18 to prove that Revenue Canada acted upon Mr. Bergen’s letters of June 6, 1989 to reassess Mr. Van Vugt and allow additional farm expenses of $4,000 in 1986 and in 1987. I assume that Revenue Canada also reassessed the Appellant for 1986 and 1987 to include additional farm revenue of $4,000. Such response by Revenue Canada to Mr. Bergen’s letters of June 6, 1989 is relevant but it does not operate as an estoppel and it does not change my conclusion that the Appellant was not engaged in any kind of farming business in 1986 or 1987. Mr. Bergen’s letters were totally self-serving.

Mr. Van Vugt was the principal witness for the Appellant and, in cross- examination, he was asked about the time when he and Mr. Bergen discovered that the Appellant had not reported any farming income for 1986 and 1987. The relevant part of his testimony appears as follows at pages 125-28 of the transcript:

Q. In your direct evidence you said that you told Rod Bergen that you took hay from Lot 7 and that it was usually taken off as a shareholder loan. Now, when did you tell him that?

A. I think each year as it went along if I remember right but it’s so long ago I can’t remember, Your Honour, exactly. But I am sure I told him every year, but maybe not Rod Bergen, it could have been his secretary.

Q. Mr. Van Vugt, you recall being examined for discovery in this matter.

A. Mm-hmm.

Q. And during this discovery I asked you to advise me who discovered the fact that the hay sales were not reported in the 1986 and 1987 —

A. That’s correct, yeah.

Q. - returns of the appellant and when that was discovered.

A. It was discovered when I went to Rod and I knew for sure that Lot 7 was going to be sold, and I went to Rod and asked him if I could roll them over to Karim and Morgan property and he asked me, “Were you a farming it?” and I says, “You know.” And he says, “Well we’ve got no record of it.” I says, “Well it was reported.” And then he became aware of it and he amended the tax forms at that time so far as I know.

Q. That was the conversation that you had in 1989. Is that right?

A. No, no. That was when — when I found out that they were going to go through with the sale of the land. That’s when I went to Rod Bergen.

HIS HONOUR: The sale of what land?

A. Pardon me? Of Lot 7, Your Honour.

MS. YOSHIDA:

Q. Mr. Van Vugt, the answer to that discovery question as set out in a letter from your lawyer dated November 29th, 1994 says:

“Mr. Bergen advises that he and Mr. Van Vugt, discovered the appellant’s failure to report farming income for 1986 and 1987 during a conversation they had in 1989 in the course of preparing the appellant’s 1988 tax return.”

A. I don’t really understand it.

The answer to the discovery question set out in the lawyer’s letter of November 29, 1994 is reasonable and believable because (i) the fiscal period of the Appellant is the calendar year; (ii) the Appellant’s 1988 corporate income tax returns was not required to be filed until June 30, 1989; (iii) it was only in the 1988 tax return that the Appellant was required to report the capital gain from the 13 acres of Lot 7 sold in April 1988; and

(iv) it was only in the preparation of the 1988 tax return when it became important to think of some way to defer the tax on that capital gain. These facts are consistent with Mr. Bergen’s recollection that the Appellant’s failure to report farming income was discovered “in the course of preparing the Appellant’s 1988 tax return”. These facts also explain why Mr. Bergen’s two letters to Revenue Canada (Exhibits A-8 and A-16) are dated June 6, 1989.

Mr. Bergen appeared as a witness for the Appellant. He qualified as a chartered accountant in 1979 and joined the Vancouver office of a national accounting firm. In December 1984 he moved to the Langley office of that firm to practice in the area of taxation. In his examination-in-chief, Mr. Bergen was asked when he was first told about the Appellant’s farming activities on Lot 7 in 1986 and 1987 (transcript pages 187-89):

Q. And do you recollect, or what were your recollections, more properly, with respect to the circumstances that gave rise to the $4,000 omissions that Mr. Van Vugt spoke of earlier?

A. Mr. Van Vugt had told me about the $4,000. Actually what he told me is there were 2,000 bales of hay taken off and then I asked him what was the price and he said $2 a bale. That’s probably, you know, because he used the — personally I - then later on Mr. Van Vugt came in to discuss with me, I would say this is some time in 1987 prior to the sale of Lot 7, or prior actually to the purchase of the Morgan and Karim properties more correctly, to discuss the roll over area or the application of the replacement property rules.

At that time I went back over the tax return and recognized the error that had happened and informed Mr. Van Vugt that we would have — it would have to be corrected.

Q. And may I just ask you a number of questions before we go on to talking about the correction just so we clarify this given the uncertainty I gather that has come up earlier today. When did Mr. Van Vugt first discuss this 2,000 bales of hay with you?

A. I don’t recall exactly but it was some time in 1987.

Q. And when did he come in to discuss this matter again such that you went to review the returns?

A. It would have been in 1988 at some point in time.

Q. And when you did these things did you send out any correspondence to Revenue Canada or what correspondence did you send?

A. Well, I guess what happened to the best of recalling these events is we - I had a chat with John Peters. The financial statements for 1988 were prepared and were reviewed by Ann Holman who was another person who was assisting me in the area of taxation.

Ann reviewed the returns and came to see me because she said, “I don’t understand. I thought you had told me there was some farming income in here.” and I said, “Well there is supposed to be. Let me see the financial statement.” So Ann and I went through them and discussed it.

And I went back and saw John Peters and he said, “Oh, I forgot about it.” So we at that point in time which I believe was May - the latter part of May, ’89 and we, at that point in time, corrected the financial statements prepared on

— or introduced in the financial statements something called a prior period adjustment which is done to correct errors that have been discovered. And at that point in time I sent the letter in to Revenue Canada.

John Peters was a partner of Mr. Bergen and was responsible for the preparation of financial statements. In response to a specific question from Appellant’s counsel as to when Mr. Van Vugt first discussed the 2,000 bales of hay Mr. Bergen said: “I don’t recall exactly but it was some time in 1987”. If he does not recall exactly, how can he state in Court seven years later that it was in 1987 when he kept no memorandum of the discussion? In my opinion, Mr. Bergen’s earlier answer (quoted above) is more revealing as to when he first heard about the $4,000 or the 2,000 bales of hay:

then later on Mr. Van Vugt came in to discuss with me, I would say this is some time in 1987 prior to the sale of Lot 7, or prior actually to the purchase of the Morgan and Karim properties more correctly, to discuss the roll over area or the application of the replacement property rules.

When Mr. Bergen uses words like “prior actually” and “more correctly”, he is referring to the purchases of the Karim Property in December 1988 and the Morgan Property in February 1989 which could be replacement properties under section 44 if Lot 7 could be a “former business property”. The capital gain from the 13 acres of Lot 7 had been realized when the sale was completed in April 1988. And Mr. Van Vugt was familiar with the “replacement property rules” in section 44 because he had used them in 1981 to defer part of the capital gain on the original sale to Morin Homes.

With respect to earlier taxation years, the Appellant entered Exhibits A-13 and A-14, two letters from Revenue Canada to Mr. Bergen concerning the Appellant and Mr. Van Vugt. These letters are interesting because they describe an arrangement between Revenue Canada and the two taxpayers which appears to be a clear departure from reality. Exhibit A-14 is a letter dated August 14, 1986 in which Revenue Canada proposes various adjustments including: (i) that the Appellant corporation be permitted to use section 44 to defer part of the gain realized in 1981 upon the sale of Lot 7 to Morin Homes; and (ii) that certain farm losses reported by Mr. Van Vugt in his personal income tax returns for 1982, 1983, 1984 and 1985 be allocated to the Appellant corporation. Exhibit A-13 is a letter dated January 22, 1987 in which Revenue Canada confirmed the adjustments in Exhibit A-14 which are described above. The first adjustment is surprising because the Appellant corporation is permitted to use the sec- tion 44 deferral even though after the 1981 sale to Morin Homes, the Appellant had not purchased any “replacement property” up to and including 1987. It has always been a requirement in section 44 that the taxpayer wanting to defer a capital gain must acquire a replacement property within one or two years after realizing the gain.

The second adjustment is also surprising because Mr. Van Vugt’s personal farm losses are “allocated” to the Appellant corporation for the years 1982 to 1985 when the Appellant did not report one cent of farming revenue or farming expenses in the years 1983, 1984 or 1985. See Exhibits R-11, R-12 and R-14. And for 1982, the Appellant reported cattle sales of $12,913 and only a few farm expenses. It appears that the 1982 items are the winding down of the Appellant’s farming operation which was carried on from 1971 to 1981 until the four old properties were sold to Morin Homes.

In Exhibit A-14, Revenue Canada proposed the transfer of farm losses from Mr. Van Vugt (i.e. the shareholder) to the Appellant corporation in the following words:

As per our discussion, it has been determined that the company is in the business of farming, therefore, the above farm losses are being allocated from the shareholder’s T-1 returns to the corporation.

The losses were respectively $8,000; $9,408; $28,753 and $33,560. In argument, counsel for the Appellant relied on the Exchequer Court decision in Admiral Investments Ltd. v. Minister of National Revenue, [1967] C.T.C. 165, 67 D.T.C. 5114 in which Cattanach J. stated at page 174 (D.T.C. 5120):

It is well settled that while a decision reached by the Minister in one taxation year may be a cogent factor in the determination of a similar point in a following year, the fact that a concession may have been made to a taxpayer in one year, does not, in the absence of any statutory provisions to the contrary, preclude the Minister from taking a different view of the facts in a later year when he has more complete data on the subject matter. There is nothing inconsistent with the Minister altering his decision according to the facts as he finds them from time to time. An assessment is conclusive as between the parties only in relation to the assessment for the year which it was made.

Appellant’s counsel acknowledged that he was not relying on any kind of estoppel with respect to the determination made by Revenue Canada in Exhibit A-14. He did argue, however, that his client was being whip- sawed because, for the years 1982 to 1985, Revenue Canada decided that the Appellant was “in the business of farming” but, in the present appeal for 1988, Revenue Canada maintains that the Appellant was not engaged in any kind of farming during 1986 or 1987. In my view, it is possible that Revenue Canada is being whip-sawed if it bent over backwards to give the Appellant corporation the benefit of a section 44 deferral in 1981 when the Appellant had not acquired any property that could be regarded as a replacement property. Allocating Mr. Van Vugt’s personal farm losses to the Appellant for the years 1982 to 1985 may have been Revenue Canada’s rationalization for permitting the Appellant to use section 44 in 1981 on the basis that the Appellant was continuing to farm on the Zacklan Property even though that property had been acquired by the Appellant’s shareholders.

In any event, I cannot determine why Revenue Canada made the adjustments in Exhibit A-14 which are described above and appear to be a clear departure from reality. I have reviewed Exhibit A-14 at length only because Appellant’s counsel placed such reliance upon it. Referring to the passage quoted above from Admiral Investments Ltd., I repeat the following words:

...the fact that a concession may have been made to a taxpayer in one year, does not, in the absence of any statutory provisions to the contrary, preclude the Minister from taking a different view of the facts in a later year when he has more complete data on the subject matter.

The Minister certainly had more complete data on the Appellant’s purported farming activity in 1986 and 1987 when he was assessing the 1988 taxation year to determine whether the Appellant could make an election under section 44. For example, even though the Minister had allocated to the Appellant all of the farm losses for 1982, 1983, 1984 and 1985 which Mr. Van Vugt had reported in his personal income tax returns, the Appellant and Mr. Van Vugt went right back to their former pattern in 1986 and 1987 when the Appellant reported no farming activity at all and Mr. Van Vugt reported extensive farming activity. It is worth pointing out that Exhibits A-14 and A-13 are dated August 14, 1986 and January 22, 1987 respectively. If the Appellant really was selling hay to Mr. Van Vugt for $4,000 in 1986 and 1987, why were those sales not shown in the financial statements and tax returns of both the Appellant and Mr. Van Vugt when the letters from Revenue Canada (Exhibits A-13 and A-14) were, in effect, a contemporaneous invitation from Revenue Canada for the Appellant to show some farming activity.

In deciding this appeal for 1988, I give no weight at all to the adjustments which the Minister made to the Appellant’s reported income for the years 1982 to 1985. I am concerned only with the question of whether the Appellant was engaged in farming part of Lot 7 in 1986 and 1987.

Returning to the oral testimony of Mr. Van Vugt and Mr. Bergen concerning whether Mr. Van Vugt said anything to Mr. Bergen before 1989 about the Appellant’s alleged sales of hay to Mr. Van Vugt during 1986 and 1987,1 find that such oral testimony was inconclusive and certainly not supported by any contemporaneous document. The best evidence concerning the point in time when Mr. Van Vugt informed Mr. Bergen that he was or had been purchasing hay from the Appellant during 1986 and 1987 is Exhibit A-8, Mr. Bergen’s letter of June 6, 1989 to Revenue Canada asking that “additional farming income of $4,000” be included in the Appellant’s income for each year. And of course, by June 1989, Mr. Van Vugt and Mr. Bergen were fully aware of the need to prove that the Appellant was farming on Lot 7 during 1986 and 1987 if the Appellant was to achieve the benefit of an election under section 44 for 1988. The oral testimony of Mr. Van Vugt and Mr. Bergen concerning any early disclosure by Mr. Van Vugt (1.e. before 1989) of the Appellant’s purported farming income in 1986 and 1987 was no more than wishful thinking on the part of Mr. Van Vugt and professional empathy on the part of Mr. Bergen.

When the Appellant took back Lot 7 on the foreclosure, the municipal taxes on the land had been increased to $9,000 per year because Morin Homes had the land classified as “residential”. There is evidence that the Appellant paid in 1985 the cost of removing construction debris and some small bushes and trees from Lot 7. This evidence is offered as proof of the Appellant’s intention in 1985 to grow hay on Lot 7 in 1986 and 1987. In my opinion, the removal of the debris in 1985 and the growing of hay in 1986 and 1987 is more consistent with Mr. Van Vugt’s desire to justify to the municipality his request that Lot 7 be reclassified from “residential” to “farm”. His request had been granted. Although Mr. Van Vugt wanted to sell Lot 7 from the time it was taken back on foreclosure because it was too far (20 miles) from his Zaklan Property, he did not know in 1985 how long the Appellant would have to hold Lot 7 waiting for the right purchaser. Therefore, it was important to have the municipal taxes reduced from $9,000 per year to $200 per year. Growing hay on Lot 7 in 1986 and 1987 proved that the land was being used for farming. Whether the hay belonged to the Appellant or to Mr. Van Vugt would be a matter of indifference to the municipality. I find that the hay on Lot 7 in 1986 and 1987 belonged to Mr. Van Vugt at all relevant times.

In the Respondent’s pleading, the “Amended Reply to Notice of Appeal”, there is set out in paragraph 6 a number of facts which the Minister of National Revenue is alleged to have assumed when issuing the reassessment for 1988. There are 20 subparagraphs of those alleged assumptions of fact identified as 6(a) to 6(t) inclusive. Charles Pruit is the auditor from Revenue Canada who actually reviewed the Appellant’s 1988 income tax return and issued the reassessment which is under appeal. Mr. Pruit was examined on discovery by the Appellant before trial and he testified as a witness for the Respondent at the hearing of this appeal. Mr. Pruit acknowledged on discovery and at trial that when issuing the reassessment for 1988, he did not rely on some of the “assumed facts” set out in paragraph 6 of the Respondent’s Reply.

The Appellant attempted to shift the onus of proof back to the Minister with respect to those “assumed facts” which were not known to or relied on by Mr. Pruit when making his assessment. According to the oft-quoted statement of Cattanach J. in Minister of National Revenue v. Pillsbury Holdings Ltd., [1964] C.T.C. 294, 64 D.T.C. 5184, at pages 301-03 (D.T.C. 5188), the onus of proof may very well shift to the Respondent concerning facts which are alleged in the Respondent’s pleading but were not known to or relied on by the assessor when issuing the assessment under appeal.

Notwithstanding Mr. Pruit’s admission that he did not rely on a number of the “assumed facts” in the Respondent’s Reply, there is no doubt that he relied on the facts set out in subparagraphs 6(h) and 6(r). See the transcript at pages 412-14 and 428. Those facts are as follows:

6(h) from the time of repossession until the Property was resold, the Appellant itself carried out no farming activity on the Property;

6(r) however, the Property was not a former business property within the meaning of subsection 44(1) of the Income Tax Act as it was not, immediately before the disposition, used by the Appellant primarily for the purpose of producing income from a business;

By way of explanation, the word “Property” in the Reply is defined to mean Lot 7. In my view, if Mr. Pruit did not rely on any facts other than the facts set out in subparagraphs 6(h) and 6(r), the onus would be and was on the Appellant to prove that it (and not Mr. Van Vugt) carried out some farming activity of Lot 7 in 1986 and 1987. This onus was obvious and recognized by the Appellant because Appellant’s counsel stated at the commencement of the hearing (transcript page 6):

To succeed the appellant must establish in the years immediately prior to the disposition, namely, 1986 and ’87, that three events occurred or three facts occurred: First, there was farming activity on Lot 7; second; that the farming activity constituted a business; and third, that the business was the business of the appellant and not that of its principal, Arie Van Vugt.

The question of onus of proof in this appeal is complicated by the Respondent’s style of pleading. The basic rule is to plead material facts but not to plead evidence. In my opinion, some of the so-called “assumed facts” in paragraph 6 of the Reply are matters of evidence. Although Appellant’s counsel went to some lengths to establish which of the 20 facts alleged to have been assumed were really relied on by Mr. Pruit, I am not deciding this case on the basis of which party had the onus of proof. The Parties are in agreement that the basic issue is whether the portion of Lot 7 sold to Pan West was a “former business property” of the Appellant immediately before the sale within the meaning of subsection 44(1) and 248(1). Having regard to all of the evidence in this case, and without regard to the onus of proof, I have no hesitation in finding that the portion of Lot 7 sold to Pan West was not a “former business property” of the Appellant immediately before the sale because it was not used by the Appellant in 1986 or 1987 primarily for the purpose of gaining or producing income from a business. The appeal is dismissed with costs.

Appeal dismissed.