Thomas Hertel v. Her Majesty the Queen, [1990] 2 CTC 1

Jerome, A.C.J. (orally):— Mr. Steven, I’m sorry, I can't find—I don't need to call you, Mr. Kennedy. I can't find in favour of the taxpayer in this case. My reasons are as follows.

In these cases of secondary intention it is fundamental that the taxpayer claims to have had one intention in mind when the transaction in issue was entered upon, while the Minister, obviously, takes a different position.

In the present case Mr. Hertel says that he acquired this property in furtherance of his cattle operation for the purpose of additional grazing land. The Minister's assumptions are identified in the agreed statement of facts, and in the pleadings.

The Minister takes the position that the property was never used as part of a farming operation, was never acquired for that purpose and was, in fact, acquired for the purpose to which it was put: subdivision and resale at a profit.

Only the taxpayer knows all of the factors that went into the decision to acquire this property. We can't go inside the taxpayer's mind, and so we really have to rely on two sources of information to make the judgment as to whether the taxpayer is right or whether the Minister is right. We have to rely on what the taxpayer tells us, and we have to rely as much as possible on external factors.

The taxpayer tells us that he acquired this land in an oral agreement as early as 1971. He said that his intention was to use it as grazing land, but by the time he had acquired it he was out of the cattle business because of a downturn in prices.

I note counsel's cross-examination to the effect that both of these were raised for the first time during this proceeding. While that may have an effect on the witness's credibility it's not the determining factor.

The witness troubled me in the vagueness about the size of the herd. In answer to my questions he indicated that he had 26 cows for breeding and as many as another 100 or so of feeders bringing his total to 120. My impression was that he had only 26 head. In answer to counsel in cross-examination he reclarified that with the feeders at any given time that might have been as high as 120.

His plans, he said under cross-examination, would have run as high as 400. That is a huge variance particularly since his future in the cattle business is what the taxpayer says motivated him to acquire this piece of property. In any event, that uncertainty or that vagueness about the size of his herd is not the determining factor either.

I am troubled more by the fact that there has never been any indication that the property at Beaver Creek, a huge acreage now in the range of 400 acres, would not have been more than adequate to graze all of the cattle that the taxpayer had in the past and even his wildest ambitions for the future.

The acquisition of a piece of property some distance from the Beaver Creek home farm, which provided that kind of acreage for such a small herd, on the basis that it was required for additional grazing land simply is not reasonable in the circumstances.

In addition, we have the objective fact that nothing was ever done with the land in any way to further the purpose of grazing cattle on it, and nothing was done to increase the size of the herd so that such a requirement would be more reasonable, more believable. In fact, the opposite occurred.

Against the taxpayer's contention that this transaction was only for farming and that the later disposal of the property or disposition of the property was a secondary intention, there are several other significant objective factors.

The nature of the land, a very short distance from the town of Port Alberni, heavily surrounded by subdivided land which is already in use for permanent homes, part of a peninsula that is on McCoy Lake says to me that the land is far more likely to wind up in development and residential sales than it is in grazing or pasture land.

One of the witnesses called by the taxpayer, Mr. Thomson, makes much of the fact that it took him six months to persuade Mr. Hertel to sell him 30 acres of the property. Six months is not a great deal of time in real estate sales. There are many properties that are listed longer than that before they are ever sold in a very active market.

Quite clearly the taxpayer began selling the property very soon after he acquired it.

Equally with zoning, I note at Tab 12 of the agreed book of documents the consultants in August of 1974 are corresponding about rezoning. Now, whether they are acting on behalf of the municipalities or whatever, the point is that this is obviously not the earliest activity concerning possible rezoning or changes in the taxpayer's ability to dispose of the property. That seems to me to verify a too quick change of plans or change of heart on the part of the taxpayer.

The taxpayer testified to his acquisition of a machine with which he cleared some of his own property and then went on to rough-out a road into the acquired property, the property that is in issue here, the McCoy Lake property. Why would that be done at all in support of any intention to use it as farm land? It is far more consistent with plans to develop and resale [sic]than it is to plans to farm.

Similarly with clearing. Why go on in a hurry with clearing of land if in 12 months' time, it's in ‘74, the taxpayer knew that he was never going to use it for grazing? It invites the conclusion that he was always planning to sell it in the manner that he did.

In addition to the Thomson sale there were others. And there were changes of zoning and there have been sales of five-acre lots, as I understand it. Not only did the taxpayer plan to resell, he's done so and done so very successfully.

In addition I note from the jurisprudence put forward by counsel for the taxpayer, it’s a common factor in cases of this sort that there is an element of frustration.

And certainly there's an element of some considerable time period involved where there's at least a reasonable explanation that over time and over some adverse decisions, sometimes zoning, sometimes restrictive legislation, but almost always there has been time. And I note particularly in one of the cases relied upon in argument, the Caponecchia case where the owner of the property was under the impression that he could get a building permit very quickly. After four and a half years of trying without getting a building permit he finally made another disposition of the property. That's typical.

Here there was no time of that nature and never any frustration from outside forces which might have frustrated the taxpayer's plans. Quite the opposite. He was able to move quickly and successfully, and all of the zoning changes acted in his favour. None of the factors that are commonly in play in these secondary intention cases are in play here.

All of those objective considerations and the concerns that I expressed about the vagueness and indefiniteness of the taxpayer's evidence concerning his plans to continue in the cattle business lead me to conclude that the property was acquired by this taxpayer with the intention of changing the zoning and selling it at a profit, which he did. The Minister’s conclusion and reassessment supported by that conclusion, or by that assessment of the taxpayer's intention was entirely correct.

Accordingly, the appeal is dismissed. The endorsement will be then for reasons given orally from the Bench this appeal is dismissed.

Are there any concerns about costs? What happens here, gentlemen? I always leave that to be addressed. But in any event, the endorsement will be for reasons given orally from the Bench the appeal is dismissed. Written reasons will be filed if requested by the parties.

Now, what about, is there any concern about costs here, gentlemen?