Richard Gilmour v. Minister of National Revenue, [1989] 2 CTC 2454, 89 DTC 658

Taylor, T.C.J.:— This is an appeal heard in Vancouver, British Columbia on July 26, 1989 against an income tax assessment for the year 1985 in which the Minister of National Revenue disallowed, as a deduction from other income, an amount claimed as an "inventory write down". There were no witnesses, but the following document was presented to the Court by the parties as the basis for the trial:

Statement of Agreed Facts

1.1 On March 6,1982 Mr. Richard Gilmour (the "Taxpayer") purchased a vacant lot on Vancouver Island, British Columbia (the "Property").

1.2 The Taxpayer's sole reason for purchasing the Property was to resell it quickly as a vacant lot at a profit.

1.3 The purchase and intended resale of the Property was not connected to any other of the Taxpayer's businesses.

1.4 The Taxpayer attempted to sell the Property throughout 1982 to the end of 1985 but did not in fact sell the Property by the end of 1985.

1.5 At the beginning of 1985 the appellant's cost of the Property was $54,630.84, derived as follows:

Purchase Price	$39,500.00
Interest on Mortgage	14,172.07
Property taxes	958.77
Total	$54,630.84

1.6 At the end of 1985 the appellant's cost of the property was $58,799.58 derived as follows:

Opening Cost	$54,630.84
Interest on Mortgage	4,168.74
Total:	$58,799.58

1.7 At the end of 1985 the Taxpayer estimated the fair market value of the Property to be $22,000.

1.8 In computing his income for his 1985 taxation year the Taxpayer treated the Property as "inventory"; he therefore deducted as a business loss $36,799, the difference between his cost of the Property at the end of 1985 and the estimated fair market value of the Property at the end of 1985. The Taxpayer made this deduction as required by subsection 10(1) of the Income Tax Act (Canada) (this paragraph shall not be interpreted to mean that the respondent concedes that such a deduction was required by subsection 10(1) of the Act, but only that the Taxpayer made such a deduction pursuant to that subsection).

1.9 In 1986 the Taxpayer disposed of the Property through a bank foreclosure.

1.10 By Notice of Reassessment dated July 6, 1987 the respondent reassessed the Taxpayer and disallowed the afore-mentioned deduction.

In this case, according to counsel for the appellant, this "adventure in the nature of trade" remained as part of the “business” definition in section 248 of the Act since his client had not attempted any current deduction under subsection 18(2) of the Act, and therefore Mr. Gilmour qualified to use the "inventory write down" provision of subsection 10(1) of the Act.

It was the position of the respondent that the purchase and intended resale of the property did not constitute carrying on of a business, and therefore the property was not inventory.

The explanation provided by Revenue Canada for the disallowance was:

The Department's position is that an inventory write down under Subsection 10(1) of the I.T.A. is not available for land held as an adventure or concern in the nature of trade. Any gain or loss will be reported in the year of disposition.

Analysis

As I see it, the taxpayer had always treated the land as a capital asset not a trading asset, by adding to its original cost the carrying charges of interest and taxes, permitted under section 53 and 54 of the Income Tax Act ("the Act"). Inventory is not a capital item, as that term “capital property" is used in the Act, in my comprehension of it. The detailed review of the case law by the learned judge in Jellaczyc [1] validates the assessment at issue in this appeal. That treatment of the carrying charges permitted the appellant to consider the prospect of reporting any gain on capital account, not on income account irrespective of the comment in Point 1.4 of the statement of agreed facts, supra. Whether he would have been successful in such an assertion is not a point which needs to be considered by the Court at this time. I would refer to M.N.R. v. James A. Taylor, [1956] C.T.C. 189; 56 D.T.C. 1125 at pages 211-12 (D.T.C. 1137),

The intention to sell the purchased property at a profit is not of itself a test of whether the profit is subject to tax for the intention to make a profit may be just as much the purpose of an investment transaction as of a trading one. Such intention may well be an important factor in determining that a transaction was an adventure in the nature of trade but its presence is not an essential prerequisite to such a determination and its absence does not negative the idea of an adventure in the nature of trade. . . .

Before finishing, I should like to note that the dismissal of this appeal does not signal necessarily an acceptance on my part of the explanation of Revenue Canada, or of the assertions of the respondent, supra, on any of the following.

— that an inventory write down under subsection 10(1) of the Act is not available for land held as an adventure or concern in the nature of trade,

— that any gain or loss will be reported in the year of disposition,

— that the purchase and intended resale of the property did not constitute a carrying on of business,

— that the property was not inventory.

In my opinion, a proper presentation and argument on those points and the correct determination could only arise under a set of circumstances wherein, for whatever reason, a taxpayer had treated the asset at issue as inventory — a trading asset, rather than a capital asset.

The appeal is dismissed.

Appeal dismissed.