Mike Boychuk v. Minister of National Revenue, [1992] 1 CTC 2313, 92 DTC 1300

Christie, A.C.J.T.C.C.:—On December 22, 1986, the appellant transferred real estate located on 8th Street in the City of Saskatoon that is legally described as NW /419-36-4 W 3rd ("the Kosten property") to Boychuk Develop- ments Ltd. It is the contention of the appellant that this transaction is within the ambit of section 85 of the Income Tax Act , R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) ("the Act") [1] and in his return of income for 1986 he reported a capital gain on the transfer calculated in accordance with the election made under the provisions of section 85. Particular reference is made to paragraph 85(1)(a) of the Act. It provides:

85 (1) Where a taxpayer has after May 6, 1974 disposed of any of his property that was a capital property (other than real property, an interest therein or an option in respect thereof, owned by a non-resident person), a Canadian resource property, a foreign resource property, an eligible capital property or an inventory (other than real property) to a taxable Canadian corporation for consideration that includes shares of the capital stock of the corporation, if the taxpayer and the corporation have jointly so elected in prescribed form and within the time referred to in subsection (6), the following rules apply:

(a) the amount that the taxpayer and the corporation have agreed upon in their election in respect of the property shall be deemed to be the taxpayer's proceeds of disposition of the property and the corporation's cost of the property;

In reassessing the appellant's liability to tax for 1986 the respondent assumed that section 85 did not apply and he treated the proceeds of disposition of the Kosten property as ordinary business income. That part of the explanation accompanying the notice of reassessment that is relevant to the disposition of that property states:

Sale of property known as NW19-36-4 W3rd should be made at Fair Market Value and is considered a gain in the nature of trade rather than a capital gain. The rollover under subsection 85(1) is considered invalid as it is considered the land is inventory held for resale.

Consequently the respondent added $1,227,407 to the appellant's income, being the fair market value of the Kosten property as stipulated in the election of $1,520,000 minus cost of $17,643 and minus $274,950, being the taxable 50% of the reported capital gain of $549,900.

The second matter in issue is additions made by way of reassessments to the appellant's income for 1985, 1986, 1987 in the amounts of $100,000, $321,468, $12,034 respectively. The respondent says they were loans received by the appellant from Boychuk Construction Ltd. of the kind described in the opening words of subsection 15(2) [2] that do not fall within any of the exceptions thereafter enumerated in that subsection.

The appellant is 83 years of age and at the time of the hearing was confined to a wheelchair, having suffered the amputation of a part of his right leg several months previously. Although at times his evidence was fuzzy and somewhat difficult to follow, I am satisfied that this was not prompted by a wilful desire to be evasive.

He was born on a farm in Manitoba. The family moved to Saskatchewan in 1926. He worked on his father's farm until 1935 when he leased some 1,280 to 1,500 acres of farm land at Eatonia, some 125 miles south-east of Saskatoon. In 1945 he commenced residing in Saskatoon, but continued farming at Eatonia with hired help where in 1948 he purchased two sections. In 1959 and 1960 he rented 160 and 320 acres respectively near Saskatoon. Because of the time consumed in travelling, the two sections at Eatonia were sold, one in 1962 and the other in 1963. In 1964 the appellant purchased the 160 acres that is previously referred to in these reasons as the Kosten property. In 1966 he purchased 440 acres of the Ledingham farm. At the time of purchase both the Kosten property and the Ledingham farm were located to the east of the boundary of Saskatoon. Both came within the city by annexation effective May 17, 1976. Over the years he rented additional land near Saskatoon with the result that from 1948 to 1969 he was farming on purchased and rented land the acreage of which ranged from 1,280 to 2,950.

The appellant has continued farming to the present day, although since 1980 it has been in partnership with his wife and two corporations. The shares of one corporation are held by the appellant and the shares of the other by his wife. The Kosten property was not an asset of the partnership, but was rented to it for farming purposes. The magnitude and nature (grain cattle) of the operation has varied. In 1986 he purchased another 480 acres of what had been the Kosten farm that he had been renting and the following year he purchased about 320 acres, referred to in evidence as the Stewart property, that was within one-half mile of land he was farming. I say “about 320 acres" because the Stewart property was sold to a religious congregation. The appellant said it was alkaline land. Following this sale the appellant purchased 160 acres referred to

to a partnership of which the particular corporation or a corporation related thereto is a member, the amount of the loan or indebtedness shall be included in computing the income for the year of the person or partnership, unless

(a) the loan was made or the indebtedness arose

(i) in the ordinary course of the lender's or creditor's business and, in the

case of a loan, the lending of money was part of its ordinary business,

(ii) in respect of an employee of the lender or creditor or the spouse of an employee of the lender or creditor to enable or assist the employee or his spouse to acquire a dwelling for his habitation,

(iii) where the lender or creditor is a corporation, in respect of an employee of the corporation to enable or assist the employee to acquire from the corporation fully paid shares of the capital stock of the corporation, or to acquire from a corporation related thereto fully paid shares of the capital stock of the related corporation, to be held by him for his own benefit, or

(iv) in respect of an employee of the lender or creditor to enable or assist the employee to acquire an automobile to be used by him in the performance of the duties of his office or employment,

and bona fide arrangements were made, at the time the loan was made or the indebtedness arose, for repayment thereof within a reasonable time; or

(b) the loan or indebtedness was repaid within one year from the end of the taxation year of the lender or creditor in which it was made or incurred and it is established, by subsequent events or otherwise, that the repayment was not made as part of a series of loans or other transactions and repayments.

as the Creighton land. At the time of the trial the appellant was farming 2090 acres in partnership. All of the farm land owned by the appellant was in close proximity except for the Kosten property which was about one-half mile distant.

The only other acquisition of commercial property by the appellant personally was 80 acres of farm land that was known at the time as the Mitchell land. This land was purchased in 1965 by the appellant, Harry Cohen, the manager of one of his companies, and another individual. The appellant agreed that Cohen and the other investor should have control over the management and disposition of this property. It was farmed for a time then developed and sold 14 or 15 years after it was purchased.

The only farm lands sold at any time by the appellant that he owned are the lands at Eatonia, the Kosten property and the 95.5 acre portion of the Stewart property.

There is in evidence a document entitled "Mike Boychuk Farming Income Summary”. It is said to have been prepared from income tax returns. It shows that from 1961 to 1979 gross income varied from a high of $120,748 to $7,483. There was net income in ten of the nineteen years ranging from $15,278 down to $35. Losses for the other nine years varied from a high of $28,996 to $4,325. While the appellant farmed in the partnership from 1980 to 1990 inclusive, gross income ranged from $195,519 to $7,375. During ten of those eleven years net income varied from $90,773 to $21,325. There was a $3,167 loss in 1988.

At the time of the acquisition of the Kosten property it included a good home, two barns and a nursery. One of the appellant's sons lived there for a number of years. The circumstances surrounding its acquisition are that in the summer of 1964 the then owner, Paul Kosten, called on the appellant at his home and offered to sell him a full section and to rent another half-section if the section were purchased. It was good farm land. The appellant had received $50 per acre for his land at Eatonia and Paul Kosten wanted $200 per acre and the appellant was doubtful about making a commitment of that magnitude. In the result he purchased 160 acres and persuaded the City of Saskatoon to acquire the remaining three-quarters of a section in respect of which he received a commission of 6% of the selling price. The three-quarter section was later leased by the city to the appellant and the appellant leased the halfsection from Kosten.

When the Kosten property was purchased it was located to the east of the boundary line of Saskatoon and the nearest building activity was about two miles west. As already mentioned, in 1976 that property along with other real estate of the appellant was included in an annexation to the City of Saskatoon.

The immediate reason for the transfer of the Kosten property to Boychuk Developments Ltd. was explained by Mr. William A Bumphrey, C.A., who testified for the appellant. It pertained to financing by the Royal Bank and its desire to have the value of the transferee enhanced. This was not questioned by counsel for the respondent.

While the appellant was engaged in farming he was concurrently involved in the construction business. When he moved to Saskatoon from Eatonia in 1945 he secured employment in the winter delivering coal. He also commenced building a house that was sold in 1946 and a profit of $15,000 was realized. This was a good deal of money to the appellant at that time. This led to the construction of another house and another and so on. Corporations, shares of which were held by the appellant especially Boychuk Construction Ltd. (later Boychuk Developments Ltd. and then Boychuk Investments Ltd.), flourished in the building business and, alone or in conjunction with other developers, grew to considerable importance in that business in Saskatoon. Mr. Roland M. Cape, who is the City of Saskatoon Planner and General Manager of the Planning Department, said that Boychuk Construction Ltd. was one of the larger developers of land in Saskatoon. These companies also carried on business in other places in Saskatchewan. Prior to trial this had greatly diminished and the appellant, through corporate shareholdings, was interested in construction only in a relatively minor way.

The appellants evidence regarding the second issue about the loans made by Boychuk Construction Ltd. being within subsection 15(2) of the Act is very brief. It consists simply of entering in evidence copies of three documents all of which are dated December 20, 1979. The first is a" Development Agreement" the parties to which are the appellant and his two sons Gary and Frederick; the second is a" Shareholders and Agency Agreement" the parties to which are the three Boychuks and Pines Motor Hotel Ltd.; the third is entitled Pines Motor Hotel Ltd.—Declaration of Trust". It is unnecessary to delve into these documents beyond saying that they make it clear that Pines Motor Hotel Ltd. was incorporated for the purpose of acquiring a parcel of land in Prince Albert and establishing a motor hotel business thereon as agent of and trustee for the appellant and his two sons. Each of the three held one-third of the capital stock of Pines Motor Hotel Ltd. In the course of cross-examination it was established that the name Pines Motor Hotel Ltd. was changed to Boychuk Hotels Ltd. and that in 1985, 1986 and 1987 the majority shareholder of Boychuk Construction Ltd. was the appellant. The fact of the loans in question having been made by Boychuk Construction Ltd. is not in contention.

I shall dispose of the subsection 15(2) matter first. The position of the appellant in this regard is described by his counsel as founded on "a very narrow and singular argument". It is that the funds having been advanced by one corporate entity to another as loans these transactions cannot under subsection 15(2) give rise to liability to tax being incurred by the appellant as a shareholder of the corporation making the advance. Mr. McKercher said: Now, it's my submission, with respect, that if Parliament had wanted to tax this advance from corporation A to corporation B in the hands of the shareholders of either A or B it would have said so, but it didn't. As a matter of statutory construction, Parliament has not said so.” Later he added: "There can be no taxation in the hands of the individuals under the deeming provisions of 15(2), because 15(2) by virtue of the plain words of the section excludes (such liability on) any advance or loan between two corporations."

I disagree. The respondent reassessed on the basis that (paragraph 12(g) of the reply to the notice of appeal): “Boychuk Construction Ltd. advanced money to Boychuk Hotels Ltd. which Boychuk Hotels Ltd. received as agent for the three shareholders including the appellant.” There is nothing before the Court that refutes this assumption of fact and I find nothing in subsection 15(2) of the Act when read in its entire context that suggests that if a corporation receives a loan from another corporation this in itself precludes an individual shareholder of the corporation making the advance from liability to tax under the subsection. To my mind if an individual is a shareholder of a corporation that transfers funds by way of a loan to another corporation that is acting in the transaction as agent of that individual he or she is liable to tax under subsection 15(2) if none of the exceptions set out in paragraphs 15(2)(a) or (b) apply. In these circumstances the agent receives the funds on behalf of his principal and in law the loan is regarded to have been by the lending corporation to the principal. Neither the evidence nor argument suggests that Boychuk Construction Ltd. was not in law aware of the agency relationship through the appellant, its controlling shareholder. Also a corporation may be constituted the agent of a shareholder in commercial transactions: Stanley (Surveyor] of Taxes) v. The Gramaphone Typewriter Ltd. (1908), 5 T.C. 358 per Cozens-Hardy M.R. at 374; Denison Mines Ltd. v. M.N.R., [1971] C.T.C. 640, 71 D.T.C. 5375 per Cattanach, J. at 662 (D.T.C. 5388) and vice versa: Lee v. Lee's Air Farming Ltd., [1961] A.C. 12 (P.C.) per Lord Morris of Borth-Y-Gest at page 26. Agency is the basis on which the appellant was reassessed under subsection 15(2). This aspect of the appeal fails.

Turning now to the transfer of the Kosten property to Boychuk Developments Ltd. Counsel for the respondent contends that the acquisition of this property was an adventure in the nature of trade. These words are included in the definition of business in subsection 248(1) of the Act [3] . Premised on this it is further contended that the Kosten property was not a capital property in the hands of the appellant, but inventory consisting of real property and consequently the transfer was not a valid roll-over under subsection 85(1) of the Act. In support of his argument about adventure in the nature of trade the respondent invoked what is sometimes referred to as the doctrine of secondary intention [4] . That is to say even if at the time of acquiring property it is the taxpayer's intention to use it as a capital investment if there is additionally at that time, as an operating motivation in the acquisition, the intention of selling the property at a profit if propitious circumstances arise and this secondary intention is acted upon the profit on the sale is taxable as business income rather than as a capital gain [5] . Secondary intention does not exist in the context of trading cases merely because at the time of acquisition the taxpayer might have contemplated resale if an enticing offer were made. In Crystal Glass Canada Ltd. v. The Queen, [1989] 1 C.T.C. 330, 89 D.T.C. 5143 (F.C.A.), Mr. Justice Mahoney, speaking for the Court, said at page 330 (D.T.C. 5143): “Secondary intention requires not only the thought of sale at a profit but that the prospect of such a sale be an operating motivation in the acquisition of the capital property."

My appreciation of the evidence is that when the Kosten property was purchased the intention of the appellant was to retain it as a capital asset in his farming operations. There was no secondary intention of the kind just described. When the Kosten property was purchased in 1964 the appellant was engaged in the construction business in a very substantial way, but as well he had very important commitments to farming. It does not automatically follow that because a taxpayer is involved in the construction and sale of homes and commercial real estate that the acquisition by him of land that is or may become very suitable for that purpose is to be regarded as the acquisition of a trading asset.

In Hall v. The Queen, [1986] 1 C.T.C. 399, 86 D.T.C. 6208, Mr. Justice Collier said at page 405 (D.T.C. 6213):

But all these cases involving capital gain versus income, or adventure in the nature of trade, must depend on their own particular facts. This was pointed out by Judson, J. in Regal Heights Ltd. v. M.N.R., [1960] S.C.R. 902 at 907, [1960] C.T.C. 384 at 390, 60 D.T.C. 1270. I refer also to the comment of Kerwin, C.J. in McIntosh v. M.N.R., [1958] S.C.R. 119 at 121, [1958] C.T.C. 18 at 20:

It is impossible to lay down a test that will meet the multifarious circumstances that may arise in all fields of human endeavour . . . it is a question of fact in each case . . .

In Wolf von Richthofen v. M.N.R., [1968] C.T.C. 544, 68 D.T.C. 5346 (Ex. Ct.) the issue was whether the profit on the sale of land was from a transaction entered into in the course of the current operations of a business or from the sale of a capital asset. The appellant was engaged in the business of farming and simultaneously was in the real estate business in the area near the farm. The profit was held to be a capital gain. Jackett, P. said at pages 546-47 (D.T.C. 5348):

Putting the matter another way, where a person carries on business as a trader in real estate and some other business at the same time, if he buys a parcel of land for resale at a profit and does so re-sell it, the resulting profit is a profit from his trading business even though he found a use for the land in his other business during the period that he owned it; but, on the other hand, a profit that he makes upon the sale of land acquired for the sole purpose of being used, and that has in fact been used, as part of the capital assets of the other business is not, as such, a profit from his business as a trader in real estate, and the length of the period between purchase and sale of a parcel of land by such a person is not relevant except in so far as it is some indication as to whether the land was inventory of the trading business or a capital asset of the other business.

In Mintenko v. The Queen, [1989] 1 C.T.C. 40, 88 D.T.C. 6537 (F.C.T.D.), again the appellant was in the business of farming and dealing in real estate during the time relevant to the appeal. One of the questions to be decided was whether certain transactions in farm land were on capital account. It was held that they were. Martin, J. said at page 51 (D.T.C. 6544-47):

As well I can see no reason why the plaintiff could not be a speculator or trader in real estate and also be a farmer who acquires real estate with the sole intention of employing it in his farming operations. It is true that he runs the risk of an up-hill fight in having to convince a court that the two operations are separate and that his intention in acquiring farm land is completely different from his intention in acquiring land for re-sale particularly where the farm lands are acquired and resold several times. Although that is quite a risk to take, the plaintiff has satisfied me that he did keep his farming operations separate and apart from his real estate trading. Like Mr. Richthofen he has satisfied me that he acquired the several farm lands which he did to be used in his farming business and that the last sale was made because of the very high price that he was offered for the lands which convinced him that it was wise to sell them and to use the proceeds to replace them with other farm lands.

In Diamond Developments Ltd. v. M.N.R., [1984] C.T.C. 2992, 84 D.T.C. 1811, Judge Bonner of this Court said at page 2994 (D.T.C. 1813): “In trading cases the nature of the property sold and the length of time for which it was held are factors of considerable weight." [6]

I attach a great deal of importance to the fact that there was a lapse of some 23 years between the acquisition and disposition of the Kosten property. Further, when it was disposed of it was not by way of sale in an ordinary marketplace transaction, but as a roll-over under subsection 85(1) of the Act for the reason explained by Mr. Bumphrey. In answer to the length of the period of ownership by the appellant, the respondent cited Palnick and Rosenfeld v. M.N.R., [1985] 1 C.T.C. 2011, 85 D.T.C. 109 (T.C.C.) and FJ. Lamb Farming Ltd. v. M.N.R., [1985] 2 C.T.C. 2320, 85 D.T.C. 606 (T.C.C.).

In Palnick and Rosenfeld the appellants and another purchased 25 arpents of land at Chateauguay, Quebec, on October 29, 1953. Less than three months later they sold the house and two arpents and on July 9, 1966, purchased an additional adjoining 25 arpents. All of the remaining 48 arpents were sold on July 26, 1976. It was held that the profit on the sale was business income. Cardin T.C.J. described the manner in which the property was treated between acquisition and disposition at page 2013 (D.T.C. 111):

The appellants were involved in numerous transactions for the purchase and sale of properties and held two large properties which had not been divided or subdivided, nor improved or developed in any way and which had not been the object of any planning. Other than some insignificant revenue occasionally generated by the operation of Harry Palnick’s farm, no reasonable income was realized on this property and nothing was done to make it pay in the years when the appellants held the properties.

F.J. Lamb Farming Ltd. is also a trading case. Mr. F.J. Lamb is described as the "driving force behind the appellant. He carried on a large farming operation near Lloydminster that was established after World War II. In 1958 at the instigation of a real estate agent named Barnes he purchased 80 acres next to the airport at Saskatoon, which was far removed from the Lloydminster operation. He arranged for the tenant of the 80 acres to continue in that capacity in a 1 /3- 2 /3 crop sharing agreement. It was sufficient to pay taxes. This continued until the land was sold in 1979. Goetz, T.C.C.J. said at page 2321 (D.T.C. 607): “In itself and by itself that land is not and could not be considered a viable investment for a farming business or the capital investment for a farming business.” Shortly after the land was purchased an agreement was entered into between Mr. Lamb and Mr. Barnes that authorized the latter, with Lamb's approval, to take steps to have the property zoned and developed. "Somewhere in the 1960's" the 80 acres, along with Mr. Lamb's other lands, was transferred to the appellant. It was held that the profit on the sale of the 80 acres was business income.

I find that neither of these cases is of real assistance to the respondent. In the case at hand the Kosten property constituted an integral asset on a continuing basis in the appellant's farming business and that persisted until the partnership was established in 1980. There is no suggestion in the evidence that this land was not a viable investment for farming purposes. After 1980 the land was rented for farming purposes to that partnership of which the appellant was a member. These things cannot be said of Palnick and Rosenfeld or F.J. Lamb Farming Ltd.

The appeal is allowed and the matter is referred back to the respondent for reconsideration and reassessment on the basis that the conveyance of NW 1/4 19-36-4 W 3rd by the appellant to Boychuk Developments Ltd. on December 22, 1986, was a disposition of a capital property under subsection 85(1) of the Act. The appellant is entitled to no other relief.

Appeal allowed in part.