O’Connor J.T.C.C.:—These appeals were heard on common evidence, pursuant to the informal procedure of this Court, in Edmonton, Alberta on August 30, 1994 and relate to the appellants’ 1989 taxation year.
Issue
The only issue in these appeals is whether the appellants’ total profit of $55,000 ($27,500 for each appellant), realized on a disposition of real estate in 1989 was on capital or income account.
Facts
On or about November 21, 1985 the appellants, as joint tenants, purchased from the estate of John P. Loh in two contiguous parcels of land, each containing 80 acres and known as the north half of the north east quarter 25-51-26-W4 (the "north half") and the south half of the north east quarter 25-51-26-W4 (the "south half”). The price for each parcel was $105,000. The parcels were located just outside the city limits of Edmonton. The south half was vacant farmland with grade one soil, excellent for grain crops. A small cottage was located on the south half.
In 1984 the appellants were residing together on a 160-acre property in Wildwood, Alberta (the “Wildwood property") and they also owned another property not far from the Wildwood property. On the Wildwood property they grew crops, mainly hay, and raised llamas and quarter-horses. This Wildwood property was sold in August of 1989.
On or about November 1, 1989 the appellants conveyed the south half to J. Chorney Consulting Ltd. (the "corporation"). This Corporation was controlled by the appellant, James R. Chorney. This was, in effect, an exchange rather than a sale and the appellants received in exchange a 95-acre parcel of the corporation.
There was agreement between all parties that the proceeds of the disposition of the south half was equivalent to $160,000, that the adjusted cost base of the south half was $105,000 thus producing a gain or profit of $55,000.
None of the transactions with respect to the north half or the Wildwood property are in issue here. The only issue relates to the $55,000 gain realized in 1989 on the disposition of the south half.
Mr. Chorney testified that
1. he acquired the north half and the south half because he eventually wished to use one of those parcels as the site of a future residence for his wife and himself;
2. that both parcels had to be acquired because the vendor, being an estate, insisted on selling the two parcels together;
3. that both appellants desired to establish their residence closer to Edmonton. The Wildwood property was approximately a one and one-half hours' drive from Edmonton and the south half and north half were approximately 45 minutes from the centre of Edmonton;
4. that the appellants, in 1989, changed their minds and decided that for their residence they preferred the 95 acres of the corporation and thus, in 1989 the exchange described above of the south half for the corporation's 95 acres took place;
5. since the appellants only required one of the two 80-acre parcels, they listed the north half in 1986 and sold it to the corporation on December 14, 1986;
6. there was some discussion as to when the south half was listed. Although counsel for respondent was able to produce a copy of the sales advertisements for the north half which were placed in 1986 and again in 1989, nothing was produced for the south half except the listing in 1989. On this point the Court reviewed the transcript of the questions of counsel for the respondent and the answers of Mr. Chorney. It reads as follows:
MR. HAYMOUR: Q. And would you also say that although only the north half is listed here, was the south half ever listed for sale as well?
A. Yes.
Q. Okay, and it would have been listed in ‘86 through 89 as well?
A. I'm not positive of that. I’m not positive, but it would have been listed some time in there, yeah.
MR. HAYMOUR: Q. Mr. Chorney, in 1986 the north half was listed, in April of 1986. I believe we showed you a copy of a document listing the north half of the property for sale.
A. Yeah.
Q. Was the south half of the property listed for sale in 19862
A. I really don't know, if it was listed. I really don't know.
7. although 80 acres can be considered large for a residential property, the testimony was that the appellants intended to use the excess land for grain crops to aid in feeding the quarter-horses and llamas as was done on the Wildwood property.
Testimony was also given by one Jerry Hutton, a contractor. He testified that he and one or both of the Chorneys "walked" the south half on two occasions to determine the best location for the residence. Mr. Chorney's evidence was to the same effect.
Position of the appellants
Appellants submit that the acquisition of the south half was not for speculative purposes. Their main purpose was to acquire land for a future home closer to Edmonton.
Position of the respondent
Respondent submits that the gain is on income account because the appellants were engaged in an adventure or concern in the nature of trade. He refers to the listings for the north half and the description therein referring to the proximity of that property to Edmonton and to the West Edmonton Mall. The submission was that there was speculation at least with respect to the north half and presumably also with respect to the south half.
Counsel quoted the definition of business in subsection 248(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") which reads:
"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;
Respondent further submits that even if the primary motivation was not one of speculation, it was certainly a secondary intention of the appellants.
Analysis
On the aspect of an adventure or concern in the nature of trade, counsel for the respondent referred to the decision of the Exchequer Court in M.N.R. v. Taylor, [1956] C.T.C. 189, 56 D.T.C. 1125. In that case, the general manager of a Canadian subsidiary of a U.S. company, after the parent company refused his recommendation to import foreign lead (because of a domestic shortage), decided himself to take a risk and personally bought 1,500 tons of lead which he later sold to the Canadian company at a substantial profit. This profit was taxed as arising from an adventure in the nature of trade even though there was only one transaction and the Court agreed.
The comparison of the facts in the Taylor case to those in the present case is tentative at best. In Taylor, the Court was dealing with a commodity, the price of which fluctuated wildly over short periods of time. The experienced general manager decided to take a risk and it paid off. There was no question of using the lead for some other purpose. In the present case, the testimony is that the land was acquired principally for purposes of a future residence.
Counsel for respondent also referred to the decision of the Tax Review Board in Ravida v. M.N.R., [1977] C.T.C. 2598, 78 D.T.C. 1030. The Ravida decision is distinguishable from the present case on the principal ground that the taxpayer in Ravida was a real estate trader and the purchase and sale of the subject land took place almost simultaneously.
Counsel also referred to Happy Valley Farms Ltd. v. Her Majesty the Queen, [1986] 2 C.T.C. 259, 86 D.T.C. 6421. The headnote in that decision, in part, reads as follows:
Since the primary business of the taxpayer was the development of real estate for resale and the taxpayer had made 17 similar transactions between 1968 and 1976, it appeared that the sale of land was business income. Further, the lack of evidence of the taxpayer's farming activity and the virtually non-existent likelihood that the land would produce income without being sold indicated that the land was acquired with the intention that it would be disposed of at the best opportunity. The profit on the sale was therefore properly assessed as business income.
The Happy Valley Farms decision in the Court’s opinion is also distinguishable from the facts in the present case. The only other real estate transactions of the appellants or the corporation were the acquisition and subsequent sale of the Wildwood property, which was their residence, and the acquisition and sale of the north half. This would certainly not seem to be sufficient real estate activity to have the appellants considered as traders experienced in real estate.
On the aspect of secondary intention, counsel for the respondent referred to Racine et al. v. M.N.R., [1965] C.T.C. 150, 65 D.T.C. 5098. At page 157 (D.T.C. 5103) and following, the Court analyzed the doctrine of secondary intention in the following manner:
In examining this question whether the appellants had, at the time of the purchase, what has sometimes been called a “secondary intention” of reselling the commercial enterprise if circumstances made that desirable, it is important to consider what this idea involves. It is not, in fact, sufficient to find merely that if a purchaser had stopped to think at the moment of the purchase, he would be obliged to admit that if at the conclusion of the purchase an attractive offer were made to him he would resell it, for every person buying a house for his family, a painting for his house, machinery for his business or a building for his factory would be obliged to admit, if this person were honest and if the transaction were not based exclusively on a sentimental attachment, that if he were offered a sufficiently high price a moment after the purchase, he would resell. Thus, it appears that the fact alone that a person buying a property with the aim of using it as capital could be induced to resell it if a sufficiently high price were offered to him, is not sufficient to change an acquisition of capital into an adventure in the nature of trade. In fact, this is not what must be understood by a “secondary intention” if one wants to utilize this term.
To give to a transaction which involves the acquisition of capital the double character of also being at the same time an adventure in the nature of trade, the purchaser must have in his mind, at the moment of the purchase, the possibility of reselling as an operating motivation for the acquisition; that is to say that he must have had in mind that upon a Certain type of circumstances arising he had hopes of being able to resell it at a profit instead of using the thing purchased for purposes of capital. Generally speaking, a decision that such a motivation exists will have to be based on inferences flowing from circumstances surrounding the transaction rather than on direct evidence of what the purchaser had in mind.
When a man purchases a large expanse of land for the avowed purpose of building on it, for example, a shopping centre and of renting stores to yield an income from rent, but at the moment of the purchase he does not make any arrangement at all to obtain the permanent financing of a considerable amount of money that he must invest or which will be required for the purposes of his project, or any arrangement at all to obtain tenants, and he has not obtained any information at all concerning the question of learning if the site in question possesses the characteristics necessary and adequate for such a project, or when this plot of land is situated in a sector which is adjacent to another sector which is growing and which is in full expansion on the periphery and where the value of these lands has already begun to rise or where the purchaser possesses experience in the realm of real estate which allows him to anticipate the changes which may arise in real estate values, there arises an almost irresistible inference that this man had the idea when he made the purchase that if he did not succeed in making the necessary arrangements to establish a shopping centre, he would indubitably be able to resell this land at a profit.
On the basis of all of the testimony and the documentation produced, the Court is of the opinion that the appellants, in acquiring and disposing of the south half were not engaged in a speculative activity—were not engaged in an adventure or concern in the nature of trade.
Further, although some of the elements discussed in the Racine case were present, principally that the south half was close to Edmonton where values were likely to rise, many of the other elements were not, principally all of the comments relative to the taxpayer doing nothing to plan for a shopping centre, his alleged reason for acquiring the land. In the present case, although no plans were drawn for a house on the south half, the appellants intended to use the south half for a residence and it had been "walked" over by the contractor to determine the best location for their residence.
On balance, the Court has not found the evidence sufficient to bring into play the secondary intention doctrine.
Consequently, the appeals are allowed, with costs, and the matter is referred back to the Minister of National Revenue for reconsideration and reassessment accordingly.
Appeals allowed.
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