Fred E. Trach v. Minister of National Revenue, [1987] 1 CTC 2127, 87 DTC 63

Christie, A.C.J.T.C.:—This issue is whether the proceeds from the sale of 158 acres of real estate in the southwest portion of the city of Prince Albert is a capital gain or business income. The appellant's 1980 taxation year is involved.

He was born on a farm on February 18,1927. He left school when 14 years of age, having completed grade 5. He held the office of municipal councillor for eight years and that of reeve for the same period. This terminated in 1974. He has been continuously engaged in farming since childhood.

In 1976 he farmed these properties that he owned: one section (640 acres) at his residence which is located 16 miles northeast of Prince Albert ("the residence"); one half section in the Paddockwood area 19 miles northwest of the residence; one half section ten miles south of the residence and one quarter section 6 miles southwest of the residence. In addition he leased 360 acres, the precise location of which was not given. This in total is 1,800 acres.

The appellant has three children: Larry, 35, who practises law in Saskatoon; Linda, a nurse with a university degree who is married to a member of the federal public service and Marilyn, who is also a university graduate. Marilyn is employed at the Victoria Hospital in Prince Albert and is married to a medical doctor. There was another child, Paul. He was born on May 28, 1961 and unfortunately died in an aircraft accident on August 5, 1977. At this time he was a high school student and an air cadet. When the fatal accident happened he was learning to fly.

The appellant’s wife is employed in Prince Albert at the laboratory of the community clinic. She went there in 1977 or 1978 from the Land Titles Office where she had worked for three years. Prior to her employment with the Land Titles Office she had worked for the community clinic for about three years. She commutes to and from work by automobile. At the time of the hearing and at any time relevant to this appeal the appellant and his wife have continuously resided at the residence.

The appellant testified that in 1976 he was looking for land close to the city so that his wife could avoid commuting the 32 miles which can be very hazardous in bad weather. He said that he intended to build a new home there and Paul would, in due course, get into the farming business and take over the residence.

While in the Husky coffee shop in Prince Albert, the appellant heard that a farm owned by Messrs. Albert and Heinz Blank was for sale. Two days later he met the Blanks at the coffee shop. They confirmed the appellant's information, but informed him that the farm would not be available for possession for about a year. That evening the appellant and his wife examined the property. The next day he and Paul did the same thing. All agreed it should be bought. It consisted of 125 acres. The asking price was $125,000. Although within the city limits, it was zoned agricultural and still is. At that time urban development was about one-quarter of a mile away. There was an old brick dwelling house and a number of farm buildings on the land. The appellant described this portion of the 125 acres in glowing terms. He referred to 100 year old trees, a view overlooking the city and to a nearby “beautiful dug-out and a great big large pond along side it”. Albert Blank described it as "just a little slough really”. The appellant indicated that it was to the south of this body of water that he intended to build the new home.

In order to assist in financing the acquisition the appellant obtained $15,000 from Mr. Leonard “Bud” Wasserman. The appellant said he told Wasserman he would be repaid from funds realized on the sale of land he owned in Paddockwood. He secured an additional $10,000 from his brother-in-law, Mr. Jerry Chambul. He was also told he would be repaid from the proceeds of the sale of land.

On April 30, 1976 the appellant signed an agreement to purchase the 125 acres for the stipulated price. The terms were $15,000 down and the balance of $110,000 to be paid within 30 days after notification in writing was given by the vendors to the appellant requesting the $110,000. Interest was fixed at six per cent per annum payable at 90-day intervals. The vendors were entitled to reside on the real estate rent free for two years and to farm the land and take all of the profits therefrom in 1976.

Two certificates of title were issued in favour of the appellant. One is dated October 1,1976 and pertains to 67 acres. The other is dated October 19, 1976 and pertains to 58 acres. Endorsed on both titles is notice that each is subject to a mortgage dated November 10, 1976 in favour of the Bank of Montreal for $100,000 “at int. as therein stated”. The mortgage is not in evidence, but the appellant said the rate of interest was prime plus two.

A few weeks after this purchase a realtor, Mr. Paul Garand, offered the appellant $140,000 for the land. The offer was refused.

The entire cultivated portion of the 125 acres was left to summer-fallow in 1977. Pastures were ploughed during this time. Farming commenced in 1978 and in that year the land produced $19,500 worth of rapeseed. In 1979 income was $10,000 and in 1980, $15,000. No evidence was given with respect to the expenses incurred to produce this income.

In 1978 the Prince Albert Public School District No. 3 invited tenders for a 33-acre parcel of land contiguous to and immediately north of the 125 acres. This parcel is also within the city of Prince Albert. It was described in evidence as virgin land with trees and brush. By letter dated November 21, 1978 the appellant offered $103,033 or $3,122.21 per acre. Discussion followed and on December 6, 1978 the secretary-treasurer of the school district wrote the appellant, in part, as follows:

This will confirm our telephone conversation and your office visitation re the sale of the above mentioned property. The condition of sale of this land is as follows:

You will deposit $5,000.00 with the school system today, December 6, 1978.

$5,000.00 with the school system on January 2, 1979.

Balance to be paid on February 1, 1979 ($93,033.00).

A certificate of title dated February 8, 1979 was issued in favour of the appellant. It is endorsed with notification of a mortgage in favour of the Bank of Montreal for $90,000. This mortgage is in evidence. It is dated February 8, 1979 and is payable on demand. The interest clause reads:

That I will pay interest to the Mortgagee in like money at the same place on the principal sum remaining from time to time unpaid at the rate of Fourteen (14%) percentum per annum to be determined from time to time by applying a variance of two (2%) percentum over the Bank of Montreal’s prime interest rate, present prime interest rate is Twelve (12%) percentum.

Also endorsed on the certificate of title is notification of a caveat in favour of Fred Brown*. [1] The instrument is dated March 2, 1979. Brown is a civil engineer employed by the Government of Saskatchewan and a friend of the appellant. He acquired an undivided one-eighth interest in the 33 acres for $13,000. The appellant said Brown wanted to be “partly involved in farming”. Based on the appellant’s evidence, Brown's relationship to farming cannot be placed higher than that of a dabbler.

By 1979 nothing had been done by the appellant in fulfillment of his stated intention to move from the residence to a new home on the 125 acres. This appears to have been permanently abandoned. He said:

I don't think I could leave my farm, my home place. I didn't think — it didn't matter how nice the land was. I would not be happy there because I still feel for my home place.

Later he said:

There's certain things I can’t part with and I can’t let go. I thought I could let it go. I can’t let my home place go.

Q. Your home place being the one northeast of Prince Albert?

A. Yes. I know it is treacherous for the wife to drive and things like that, but for some reason we seem to always come back to it.

He added:

I found out as time went I couldn't sell my home place. There was too many memories there that I could not go.

The appellant, aided by Brown and a contractor, cleared the 33 acres. This continued from 1979 to 1981 when ploughing got under way.

In 1979 the appellant found himself in financial difficulties. He was being pressed by his banker. This continued into 1980. He was in arrears in respect of a number of debts regarding both principal and interest. The appellant gives this as the reason for his decision to sell the 125 plus the 33 acres (“the 158 acres”).

At the commencement of 1980, a prominent Prince Albert realtor, Mr. Louis Receveur, and the appellant negotiated for the sale of 67 acres of the property which included the residence and other buildings for slightly in excess of $1 million. Receveur had a developer for a client who was interested. These negotiations however did not come to fruition.

In the spring of that year the appellant went to Kelowna, B.C. where he met an old friend, Mr. Walter Semchuk. He told Semchuk he was in financial difficulty and Semchuk referred him to his son, Mr. Richard Semchuk, a realtor located in Edmonton. Upon returning home the appellant communicated with Richard Semchuk who showed interest in the 158 acres. A few weeks later, he and a partner arrived in Prince Albert. They spent three days researching. An offer to purchase followed. The parties agreed to accept as the purchase price of the 158 acres the amount fixed by an appraiser chosen by mutual agreement. On June 19, 1980 the appellant and Richard Semchuk, who represented himself and a group of other Edmonton investors, signed an offer to purchase and interim agreement. The purchase price was $1,579,400. This was followed by an agreement for sale dated Sep- tember 8, 1980 between the appellant and Brown as vendor and Ken Christiansen, Richard Semchuk, Don Rudko, Daniel G. Leversedge, Don Dziaba and Eliza Bosky as purchaser. Before September 8, 1980, $25,000 had been paid in trust. On or before September 15, 1980, an additional $290,880 was payable. The balance of the purchase price ($1,263,520) bore simple interest at 12 per cent per annum. The first payment of principal and interest in the sum of $200,000 was due on January 1, 1982 “with nine annual payments on the 1st day of January thereafter, together with a balance of FIVE HUNDRED AND THIRTY-SEVEN THOUSAND, SIX HUNDRED ($537,600.00) DOLLARS to be paid to the Vendor on January 1, A.D. 1991.” The agreement also provided, inter alia, that the north 33 acres would be transferred to the purchaser subsequent to the vendor receiving $491,250 net after the ten per cent real estate commission was paid. The vendor was given an option to rent the land in 1981 on a one-third for the purchaser and two-thirds for the vendor crop sharing basis. Transfer of the 33 acres is evidenced by certificate of title dated February 11, 1985. The appellant continues to farm the 158 acres under an arrangement of the kind pertaining to 1981.

The agreement of September 8, 1980 is in default. At the date of the hearing, these payments had been made: as of September 15, 1980 — $315,880 ($25,000 plus $290,880); January 1982 — $200,000; January 1983 — $139,500; January 1984 — $83,205.25; January 1985 — $31,684.16 and January 1986 — $29,925.

Albert Blank testified on behalf of the appellant. The substance of his evidence is that, while discussing the matter of selling the 125 acres, he was left with the clear impression, from what the appellant said, that the appellant was interested in the land as a place to build a new home and to continue farming in conjunction with his son Paul.

Another who testified is the previously mentioned Mr. Leonard Wasserman. He is a retired clothing merchant. He had known the appellant for some years prior to 1976. They were friends. The appellant sought $15,000 from Wasserman telling the latter that the money was needed to purchase land. The appellant also told him that the land was to be sold to a developer who would construct houses on it. Wasserman said that he lived nearby and agreed that this was a good prospect. A document was prepared in respect of the transaction. It is on the letterhead of “ROYAL CLOTHING LTD. "The Workingman's Headquarters'”, Wasserman's former business. It is dated June 1, 1976 and signed by both the appellant and Wasserman. Their signatures are witnessed by O.L. Harrison, an employee of Royal Clothing. The body of the document is in the handwriting of Wasserman. It reads:

I, Bud Wasserman agree to lend Fred E. Trach 15,000.00 @ 12 /2% per annum for 18 mos., interest payable every 90 days to Bud.

After 18 mos. I Bud Wasserman have the option of taking 15 acres of land or 15,000.00.

There is no question regarding the authenticity of this document. Wasserman regarded it as an unqualified option in his favour for 15 acres. If he had thought it was otherwise the money would not have been paid to the appellant. In the spring of 1977 Wasserman returned from a visit to California and the appellant came to his office and offered him a cheque for $15,000. Wasserman rejected it outright because that was not the agreement. “It says right there I have the option to have the land.” After a heated exchange Wasserman tore up the cheque. A few days later the appellant returned with a cheque for $17,000. It received the same treatment. A few more days passed and the appellant arrived with a cheque for $20,000. In the mean- time Wasserman had sought legal advice. He rejected the $20,000, but added: “You come back here with a cheque for $30,000, double what I gave you, and if I don't see you again, that's fine.” By cheque dated May 26, 1977 the appellant paid Wasserman $30,000. The former had also sought legal advice. The appellant wrote “Cancelled” across the face of the document of June 1, 1976 and “Paid May 26th 77 in full” at the foot of it.

During the course of cross-examination counsel pressed the appellant regarding what he told Wasserman with respect to his purpose in acquiring the 125 acres. The bottom line of the appellant’s testimony in this regard is: “I forget. To tell you the exact truth, I forget.”

Evidence was adduced by both parties of other real estate transactions or negotiations. In summary they are: May 2, 1977 appellant sells 320 acres of farmland to Dennis & Constance Zbaraschuk for $95,000; March 6, 1978 appellant sells 158 acres of farm land to Bronald Chestolowski for $61,000; June 6, 1978 appellant sells 80 acres of farm land to Stanley Kowal for $40,000; June 15, 1978 appellant and Fred Brown purchase 15 acres, which includes a dwelling house, in Prince Albert from George Weir for $151,500; September 8, 1980 appellant purchases a parcel of land, the size of which is not established by documentary or oral evidence, in Prince Albert from Canadian Co-operative Implements Limited for $44,000 that is subject to an undivided one-third interest in favour of his son-in-law and daughter Edward and Linda Palibroda; October 8, 1980 appellant purchases two parcels of land adjacent to Prince Albert (acreage again not in evidence) for $91,000; April 1, 1981 appellant offers to purchase ten quarter sections of farm land and buildings from Everett and Lillian Glass for $993,750 which proposed transaction was not consummated; February 6, 1981 a proposal is reduced to writing whereby the appellant is to purchase the Las Rocas Apts. in Prince Albert from Caros Investments Ltd. for $1,450,000, which project was later abandoned by the appellant, and some time in 1982 the appellant purchased a 72 per cent interest in a mall in Prince Albert for $1,675,000 of which $195,000 was paid down and the balance of $1,480,000 was secured by a mortgage. The appellant, his wife and three children each have a 20 per cent interest in the 72 per cent share. I do not regard it necessary to expand on these additional matters because the view I take of the evidence, apart from them, is sufficient to dispose of this appeal and they do not detract from the conclusion that follows.

The appellant adhered tenaciously throughout to the position that at the time of entering into the agreements to purchase the 158 acres it was his long-term intention to farm the property. Nevertheless, on the whole of the evidence, I am satisfied that, at those times, his motivating intention was to sell the property to a developer for urban development as soon as he received what he regarded to be a financially satisfactory offer. In relation to this statement I focus in particular on these things. First, I believe the evidence of Wasserman and that what the appellant told him was a revelation of the latter's true intention regarding the 125 acres. This intention was simply carried forward a fortiori in relation to the 33 acres. To this day Wasserman unquestionably regards himself as the victim of business treachery at the hands of the appellant. He was quite frank in this regard at the hearing. Nevertheless, I am satisfied that this did not result in his distorting evidence regarding what passed between him and the appellant. While Wasserman's recollection of some details of his dealings with the appellant was vague or faulty, e.g. when the $15,000 was paid to the appellant in relation to the time of the preparation of the document of June 1, 1976, this was no more than could reasonably be expected of a witness endeavouring to honestly recall particulars of what had occurred a decade earlier. Second, the nature of the involvement of Wasserman and Brown is incompatible with the notion that the land was being acquired for the business of farming. There is nothing to suggest that Wasserman had any interest in engaging in farming when he handed over the $15,000. Further, even assuming Brown did have an interest in farming, it unduly strains credulity to accept the notion that he would seek to engage in the farming business via investing in an undivided interest in four acres of a 33 acre parcel of trees and brush costing $3,122.21 per acre. There is not an iota of evidence to show on what basis it was intended that Brown would realize on his investment out of the business of farming. Third, the appellant was expressly invited by counsel to explain how he expected the 158 acres to be a financially feasible farming operation having regard to the cost of the property and the debt assumed in respect of it. Nothing persuasive was forthcoming.

Without reflecting adversely on Albert Blank’s reliability as a witness, I cannot give his evidence any significant weight because I would not expect the appellant, in the course of the discussions leading to the sale and purchase of the 125 acres, to have disclosed his anticipated realization of far in excess of $125,000 by selling the land to a developer. Finally, I do not regard what the appellant and Brown did to clear the 33 acres prior to its sale as inconsistent with the intention to sell it to a developer for urban housing.

The appeal is dismissed.

Appeal dismissed.