John Irwin v. Minister of National Revenue, [1989] 2 CTC 2115, 89 DTC 386

Christie, A.C.J.T.C.:—The dispute is whether gains realized by the appellant on the sale of real estate in 1981 and 1984 are capital in nature or are taxable as ordinary business income. Other issues were raised regarding the loss carry forward allowed in 1982 and the cost to the appellant of property sold in 1981. At the hearing counsel agreed that those amounts should be $29,744 and $388,211 respectively leaving^only the capital gain versus business income issue to be determined.

The appellant was born on his father's farm about 12 miles south of Gleichen, Alberta, on December 14, 1915. He was one of eight children. He achieved grade 11 in school, leaving when he was 19. He then worked for his father and in 1939 was employed by the Alberta Wheat Pool as a grain buyer. In that year he married Frances. He worked for the Wheat Pool for three years then for his father for a few months until he purchased a 700-acre farm at Arrowwood, about 3 /2 miles from his father’s farm. He carried on mixed farming there from 1943 to 1950, when he sold the 700 acres and rented what had been his father's farm from his mother. The father died in 1946. He farmed there until 1954 when he bought another farm from his brother, Loren Irwin, located 2 to 2 /2 miles north of what was then Calgary and near Balzac consisting of 292 acres for $18,500 ("the Balzac farm"). Initially he raised hogs but after six or seven months switched to dairy cattle. He carried on this business until 1968 when he sold the cattle and related equipment to Mr. Karl Desmond, to whom he also rented the Balzac farm.

At this time the appellant was having marital difficulties and went to British Columbia alone and resided there. A divorce followed in 1970 and under the terms of an agreed settlement Mrs. Irwin received a 40 per cent interest in the Balzac farm. All of the proceeds of the sale of the real estate comprising the Balzac farm were divided on a 60-40 basis.

In 1970 or 1971 an 80 acre portion of this property was sold for $25,000. The appellant and his former wife were in need of funds and the appellant used part of his share of the proceeds to return to the Balzac farm and establish himself in the business of raising, showing and selling horses. When he returned to the farm in 1971 he was married to Barbara, the marriage having taken place in British Columbia on May 1, 1971. He rented the 80 acres that had been sold for 1 /2 to 2 years. By 1974 he had 75 to 80 horses and was attending shows in Calgary, Red Deer, Regina and later in British Columbia. In 1974 and 1975 real estate agents were showing interest in the remainder of the Balzac farm. The appellant could not recall whether he had listed that property for sale in 1974. The evidence moves to 1976 when on September 13 of that year the appellant agreed to sell to the City of Calgary a 26.76 acre parcel of the Balzac farm for the purposes of a power line right-of-way, a substation site and an access roadway. The purchase price was $5,000 per acre or $133,800. He personally negotiated this agreement after having been approached by the City. This was followed by the sale of a further parcel that came about in this way: the appellant was approached by a Mr. Michael Lobsinger, a real estate salesman with Cowley & Keith Ltd. of Calgary and it was agreed that if he could produce an acceptable offer to purchase land included in the Balzac farm, the appellant would assure payment of his commission. Lobsinger secured an offer to purchase 80 acres for $425,000 or $5,312.50 per acre. The offer is dated July 26,1977 and signed by Mr. David H. McDermid, who was acting on behalf of himself and other purchasers. The offer was accepted by the appellant on the same date. The transaction was to close on September 30, 1977 and on that date an agreement of sale and purchase was entered into. By this time Beddington Industrial Park Ltd. ("Beddington") had been brought into existence by McDermid and his colleagues and it was the purchaser under the agreement. The remaining 105 acres comprising the Balzac farm was also sold on September 30, 1977. The purchaser was Vancor Holdings Ltd. ("Vancor") and the purchase price was $560,000 or $5,333.33 per acre. The same procedure involving Lobsinger was followed in this transaction. The appellant was granted entitlement to continue farming on the 80 and 105 acres for one year.

At the time these sales were being negotiated and consummated the appellant had 70 to 75 horses and it was his wish to continue farming. He had been advised of the roll-over provisions affecting tax on capital gains on the acquisition of a replacement property. On November 22, 1977 he acquired title to 160.83 acres from the Bank of Nova Scotia for $440,000 or $2,735.80 per acre ("the subject property"). This property was in very close proximity to the Balzac farm. Part of it was across a road from that farm and the remainder was contiguous to it. The previous owner of the subject property had mortgaged it in favour of the Bank of Nova Scotia and it acquired title through foreclosure proceedings. The purchase price was negotiated on the appellant’s behalf by Lobsinger.

The appellant gave a somewhat detailed description of the topography of the subject property, its pastures, cultivation, buildings, water system and fencing to show its suitability for what he intended. The reasons he gave for purchasing the subject property are, first, he required a place to move his horses and, second: “I wanted to take the money from the first farm and roll it over into new land on account of the capital gains tax.” The horses were transferred to the subject property in November 1977 and they included four mares and a six-month old Appalloosa colt he purchased in New Mexico the previous September. Three of the mares were bred to the first son of Secretariat. The appellant’s 1978 return of income was placed in evidence to show that it records an expenditure for the purchase of horses in 1978 of $26,249. On December 1, 1978 he took up residence on the subject property. He said that he had looked at other farms four or five miles to the north of the subject property, but all things considered he regarded it as more suitable to his needs.

On June 12, 1978, which is 10 days short of seven months after he acquired the subject property, the appellant signed an acceptance of an offer of the same date to purchase that property for $1,975,000. The offer is addressed to Cowley & Keith Limited, as agent for the appellant, and it is signed by R. A. Sayko for Bar K Holdings or Nominee. Clause 7 reads:

The vendor warrants that the subject property is included in the annexation to the City of Calgary Corporate Limits and will enter into the City Limits of Calgary prior to closing of this transaction.

By an amendment dated June 14, 1978 the appellant agreed to execute the agreement for sale on or before July 14, 1978. Again Lobsinger delivered the offer to purchase to the appellant for his signature. On July 26, 1978 the appellant signed articles of agreement for the sale of the subject property to four corporations for $1,975,000. On September 12, 1978 he signed similar articles of agreement only this time the purchaser was Raymond A. Sayko. He was unable to give an intelligible explanation of why this was done, but it is clearly inferable from what followed that the agreement of September 12, 1978 replaced the agreement of July 26, 1978. The above cited warranty regarding annexation is included in the agreements of July 26 and September 12, 1978. When asked about the presence of the annexation warranty in the offer to purchase that was accepted by the appellant on June 12, 1978, he said: "I had no right to guaranty because I had no knowledge of annexation." Nevertheless he signed when assured by Lobsinger that if the land was not annexed the consequence would simply be to refund the $50,000 payable on the acceptance of the offer to purchase. Earlier the appellant had testified that when he was selling off the Balzac farm and acquiring the subject property during the period July to November 1977, the only thing he knew about annexation was what he heard on the radio, "but I did not know where they were going.” Before he signed the agreement of July 26, 1978 the appellant sought and obtained advice from a lawyer which he said was that the agreement had to comply with the offer to purchase and the clause could not be changed.

By Order in Council 15/79 dated January 4, 1979 and Order in Council 49/79 dated January 16,1979 made by the Lieutenant Governor in Council of Alberta under paragraph 20.1(3)(c) of the Municipal Government Act of that province a very substantial annexation of land to the city of Calgary was made effective January 1, 1979. All of the subject property except about 60 acres in the northern portion was brought into the city of Calgary by this annexation. That there would be a significant annexation of property into Calgary had been announced by the Minister of Municipal Affairs in the Legislature on May 11, 1978.

Because the 60 acres was not included in the annexation Sayko instituted proceedings against the appellant in the Court of Queen's Bench of Alberta. This action was settled by agreement dated March 17, 1981 that implemented an earlier agreement to settle that was confirmed by letter of November 6, 1980. The settlement had reference to an offer to purchase the property for $2,800,000 made by Daon Development Corporation ("Daon") on March 16, 1981 that was accepted the following day. Under the terms of the settlement Sayko received $50,000 plus three-elevenths of the balance of the purchase price, subject to certain adjustments the details of which are unnecessary for present purposes. A mortgage was executed by Daon in favour of the appellant and Sayko as mortgagees (8/11ths-3/11ths) for $ 2,000,000. Daon defaulted and the mortgagees commenced a foreclosure action. On June 27, 1984 the appellant and Daon entered into an agreement, clauses 2 and 3 of which read:

2. Irwin and Raymond A. Sayko are the plaintiffs in the foreclosure action on that mortgage on the Lands and Daon is the Defendant in that action, which is Court of Queen's Bench Action #8301-16304 in the Judicial District of Calgary.

3. If by reason of the foreclosure action Irwin becomes the registered owner as tenant-in-common of an undivided 8/11 interest in the Lands, Daon wishes to purchase and Irwin wishes to sell to Daon his undivided 8/11 interest In the Lands.

The consideration for the real estate was to be $542,000. On August 22, 1984 an order issued out of the Court of Queen's Bench in relation to the foreclosure proceedings that, inter alia, provides:

5. That the Plaintiff, Irwin, has settled his claim with the Defendant and it is the desire of these parties that an undivided 8/11ths interest in the lands be vested in the name of John R. Irwin, as tenant in common, and that the Defendant (Daon) stand absolutely debarred and foreclosed of and from all their estate, right, title, interest and equity of redemption in the said undivided 8/11 ths interest.

The purchase and sale specified in clause 3 of the agreement dated June 27, 1984 was made in that year.

As previously stated the appellant commenced residing on the subject property on December 1, 1978 and this continued until September 1979. In December 1978 his second wife left him and after a failed attempt at reconciliation this marriage ended in September 1979. In early June or July of that year the appellant sold all his horses and rented the subject property on September 1, 1979. This arrangement terminated with the sale to Daon in 1981. The appellant lived in Banff and Calgary and in March of 1985 he married his third wife Betty. The appellant testified that he also bought and sold two apartment buildings and three houses in Calgary. These transactions were summarized at the hearing in this way:

At the time of the hearing the appellant was residing with his wife at 119 Lake Wapeta Rise, Calgary. He carries on farming on 80 acres located about 14 miles south of Calgary that he acquired in 1985 for $365 ,000. He described the farm as a thoroughbred training center. He has 15 or 16 horses and there are facilities including a one-half mile training track for rent. He lives part time on the farm, but when residing in Calgary he commutes to the farm. The principal residence on the farm is rented to a Dr. Brooks.

Mr. Michael E. Lobsinger is a commercial real estate agent in Calgary. He has a Bachelor of Commerce degree from the University of Saskatchewan and he joined the Calgary real estate firm of Cowley & Keith in July 1976. In May or June of 1977 he was introduced to the appellant by Rosemary Pacquette, another employee of Cowley & Keith. The 80 acres that was sold to Beddington on September 30, 1977 had been listed for sale by the appellant with Lobsinger as was the 105 acres sold to Vancor on the same date. At the time the sales to Beddington and Vancor were being negotiated there was a lot of interest in the area where those properties were located by developers and speculators because of the potential for annexation to Calgary.

By letter dated September 20, 1977 the appellant gave instructions to Lobsinger regarding the acquisition of the subject property. While the negotiations for this property were under way it was Lobsinger's belief that the appellant was acquiring it because he "felt" it would be annexed to Calgary. From the time the appellant acquired the subject property until it was sold to Daon, Lobsinger had numerous conversations with the appellant about what was going on in the area. One day the appellant called Lobsinger to inform him that a city surveyor was working in the 105-acre parcel that had been sold to Vancor and that street signs were being erected. The appellant regarded this as a good indication that the subject property would be annexed.

On June 8, 1978 the appellant signed an exclusive listing agreement in relation to the subject property addressed to Cowley & Keith, Attention M.

E. Lobsinger. Prior to delivering to the appellant on June 12, 1978 the offer to purchase the subject property made by R. A. Sayko for Bar K Holdings or Nominee, there was communication by telephone between the appellant and Lobsinger on two items that were regarded as critical to the bargain. One related to the amount of the vendor carry-back and the interest rate thereon. The other was the clause warranting annexation that was being insisted on by the potential purchaser. The appellant told Lobsinger he wanted time to consider the matter of the warranty. Later Lobsinger received a call from the appellant or the appellant's lawyer approving the clause. Lobsinger is unequivocal about this. He said the warranty was make or break of the deal.

Lobsinger was to have received a commission in consideration of arranging the purchase price of the subject property from the Bank of Nova Scotia. When the appellant was presented with this account right after the subject property was acquired, the appellant told Lobsinger that the property was going to be resold and that he would be paid then. Later there were law suits over commissions payable by the appellant that were eventually resolved.

Counsel for the respondent called Mrs. Judith A. Crumb, a real estate appraiser employed by Revenue Canada, to give her expert opinion regarding the highest and best use of the subject property as of September 20, 1977 which, as already stated, is the date that the appellant directed Lobsinger to take steps towards the acquisition of the subject property. Counsel for the appellant objected to the admission of Crumb's evidence on the ground that it is irrelevant to the matter in issue. After hearing argument on this point I ruled that the evidence would be heard subject to a later decision regarding it. On reflection I have concluded that the evidence should be excluded. This appeal can be easily determined without resort to it. Further it strikes me that the evidence regarding highest and best use could only be germane if the expert's knowledge could be attributed in some way to the appellant and thereby be placed in the balance to determine his operating intention at the time of acquiring the subject property. I do not believe that this can properly be done. The conclusion in disposing of this appeal has, therefore, been arrived at without the benefit of the expert opinion regarding highest and best use. In R. v. Fisher, [1961] O.W.N. 94 [1] Aylesworth, J.A. who wrote the reasons for judgment for the majority of the Ontario Court of Appeal said at pages 94-5:

In the reported decisions various reasons have been given for the exclusion of particular opinion evidence. It is trite to say that a witness may not give his opinion upon matters calling for special skill or knowledge unless he is an expert in such matters nor will an expert witness be allowed to give his opinion upon matters not within his particular field. Finally, opinion evidence may not be given upon a subject-matter within what may be described as the common stock of knowledge. Subject to these rules, the basic reasoning which runs through the authorities here and in England, seems to be that expert opinion evidence will be admitted where it will be helpful to the jury in their deliberations and it will be excluded only where the jury can as easily draw the necessary inferences without it. When the latter is the situation, the intended opinion evidence is superfluous and its admission would only involve an unnecessary addition to the testimony placed before the jury. Over 60 years ago Thayer, Evidence, p. 525 wrote:

There is ground for saying that, in the main, any rule excluding opinion evidence is limited to cases where in the judgment of the Court, it will not be helpful to the jury. Whether accepted in terms or not, this view largely governs the administration of the rule.

In some cases where opinion evidence has been rejected, the ground given is that the giving of the witness's opinion usurped the function of the jury. In other decisions it is said that the evidence tendered constituted an opinion upon the very point or issue which the jury had to decide. An examination of these authorities, however, discloses, in my view, that the jury or the Judge, in cases tried without a jury, would have had no difficulty in arriving at a proper conclusion in the absence of the tendered opinion and that this was the true ground for its rejection.

A great deal has been said and written regarding tests to be applied or matters to be considered in determining whether the proceeds of the sale of real estate are a capital gain or ordinary income. See, for example, Leonard Reeves Inc. v. M.N.R., [1985] 2 C.T.C. 2054; 85 D.T.C. 419 at 421-22 (T.C.C.); Happy Valley Farms Ltd. v. The Queen, [1986] 2 C.T.C. 259; 86 D.T.C. 6421 at 6423-24 (F.C.T.D.) and First Investors Corporation Ltd. and Associated Investors of Canada Limited v. The Queen, [1987] 1 C.T.C. 285; 87 D.T.C. 5176 at 5179-81 (F.C.A. - leave to appeal to S.C.C. refused). It is unnecessary to repeat here what is said in those authorities.

Not only has the appellant failed to discharge the onus that rests upon him to establish on a balance of probability that the reassessments are in error, but the evidence affirmatively satisfies me that the appellant's operating motivation in acquiring the subject property was for the purpose of selling it as soon as he received an offer that would give him a profit that he regarded as acceptable and he anticipated that such an offer would not be long delayed. It follows that the gains on the sale of the subject property are ordinary business income and taxable as such.

His evidence regarding the paucity of his knowledge about or interest in potential annexation is not at all convincing in the face of other evidence. To the extent that there is conflict between the appellant's evidence and that of Lobsinger on points of significance, I accept the testimony of the latter. I am satisfied that the falling-out over the appellant's failure to pay commissions did not colour Lobsinger's evidence.

The appellant does not lack in intelligence and the potential financial significance to him arising out of the burgeoning of the city of Calgary could not have escaped his notice. In summary the appellant’s history in that regard is that in 1954 he bought the Balzac farm consisting of 292 acres for $18,500. In 1970 or 1971, 80 acres or 27 per cent is sold for $25,000. In 1976 he sells 26.76 acres or 9.2 per cent to Calgary for $133,800. On September 30, of the following year he sells another 80 acres or 27 per cent for $425,000. The remaining 105 acres or 36 per cent is sold on the same date to Vancor for $560,000. This is to say that the appellant bought the Balzac farm for $18,500 in 1954 and between 1970 or 1971 and September 30, 1977 it is sold for $1,143,800 or 61 times what he paid for it. On November 22,1977 he buys the 160.83 acre subject property which is right next to the Balzac farm ostensibly for the purpose of farming it for $440,000 and in less than seven months he agrees to sell it for $1,975,000. These dates and figures speak for themselves and, when taken in combination with the other evidence, point directly to business income.

The appeal is dismissed.

Appeal dismissed.