Roseland Farms Ltd. v. Minister of National Revenue, [1986] 1 CTC 2163, 86 DTC 1086

Brulé, T.C.J.:—The appellant which is appealing its assessment for the 1980 taxation year is a corporation which came into existence in May of 1976. In the same year it purchased 634 acres of farm land and an additional 2,201 acres in 1977. The objects of the incorporation were:

. . . to carry on in any or all its branches the business of farming and gardening and to breed, raise, keep, develop, train, show, purchase and sell or otherwise deal in and with cattle and livestock of all kinds.

The incorporation was carried out by members of a Winnipeg law firm on behalf of two unknown and unidentified Europeans who, according to evidence of the Canadian president, wished to carry on the business of farming.

The land purchased in 1976 was leased in that year and then custom farmed from 1977 to 1980 inclusive. The second parcel was leased during the 1977 to 1980 years. In 1980 both properties were sold and a profit of $420,630 was realized. The appellant treated this as a capital gain in its 1980 taxation year but it was characterized as income by the Minister.

At the time of sale the appellant had a grain inventory as a result of the custom farming of the one parcel of land. The Minister included the value of this in the appellant’s 1980 taxation year on the basis that the appellant was not in the farming business at the end of its 1980 taxation year and for that reason was not entitled to make an election in accordance with the provisions of subsection 28(1) of the Income Tax Act. The consequence was that the appellant was required to continue to report its income on an accrual basis as it had done previously.

It was related in evidence that the appellant had two beneficial shareholders who lived in Europe. Only one of the two came to Canada, at least when the first property was purchased, but perhaps not again. The Court was told that the person who was to run the first farm could not get proper immigrant status and so another was hired as a farm manager. This property was then custom farmed through contracts with neighbouring farmers. The larger farm was only rented after it was purchased. Very little work was done to improve the farms other than the demolition of some buildings and some ditching.

The Court was told, although hearsay, that one of the two shareholders encountered some difficulty and there seemed to be no solution to the problem other than to sell the property and dissolve the company. Apparently, an unsolicited offer for both parcels was made, accepted, and a profit resulted.

Issues

The matters for the Court to determine are whether or not the profit realized on the sale of the lands was on income or capital account, and whether or not the appellant was entitled to file its grain inventory on a cash basis.

Taxpayer's Position

Counsel for the appellant stated that the intention was to farm the properties but when the problem arose with one of the shareholders it became necessary to sell and fortunately a profit resulted. He set forth that a solu- tion had been sought to keep the property but this failed and when the time for sale arrived the price was not a factor. It was suggested that this type of land was not such that one would expect to turn a gain in a short period of time and hence as a result of events the outcome should be treated as a capital gain.

With respect to the grain inventory counsel stated that the appellant’s treatment of this was normal in sales of farm land in Western Canada. Grain is sold when allowed by the Canadian Wheat Board. It is sold in the following year and the sales are then reported.

Minister's Position

Counsel for the Minister in dealing with each of the matters which were the subject of the reassessment had the following comments. As to the grain inventory being added to the appellant’s income in 1980, it was pointed out by reference to the various corporate balance sheets that certain items were shown by the accrual method, such as receivables, and that this had been the practice since the inception of the company. The Income Tax Act by subsection 28(1) permits either the accrual or cash method but does not permit splitting. The method chosen in this case, the farm corporation, by its annual statements, was the accrual method, and also when reporting the 1980 taxation year, the property was sold and the company was no longer in any business of farming.

Dealing with the sale of the property it was argued that the proceeds should be classified as active business income of the corporation. In support of such position, several cases were put to the Court. I do not intend to deal specifically with these.

In summing up, counsel pointed out a number of matters from the evidence presented that would characterize this sale transaction as an adventure in the nature of trade. These are:

1. the land was the only asset of the company, which was incorporated to hold the property;

2. the property was acquired with a large amount of borrowed funds;

3. the company had no surplus funds, which is inconsistent with an investment activity;

4. the amounts received from the rental of land and the grain sales fell far below the cost of maintaining the lands; the only profit realized was on the sale of the farms;

5. the company did not have any farm equipment or livestock;

6. the larger farm was purchased and leased back immediately for three years, and then the lease was renewed; such action is not consistent with an intention of farming;

7. the land was only held for a period of up to four years;

8. the sale in such a short time was inconsistent with the intention to farm;

9. if the majority shareholder intended to farm the land he could have made other arrangements after the alleged trouble took place with the minority shareholder;

10. the annual carrying costs and income derived was inconsistent with the intention that the land was bought to carry on a farming business. Analysis

Dealing first of all with the property gain it is well established that each case must be considered according to its facts. Certain guidelines have been established to assist in a determination and these have been well set out in the case of James A. Taylor v. M.N.R., [1956] C.T.C. 189; 56 D.T.C. 1125, referred to by counsel for the Minister. In that case the Exchequer Court of Canada in a judgment pronounced by Thorson, P. set out some propositions of a negative nature. At 210 (DTC 1137) he said . . that the singleness or isolation of a transaction cannot be a test of whether it was an adventure in the nature of trade.” but that. . it might be a very important. factor?" It was also stated that it was not essential that an organization be set up to carry the transaction into effect.

Further it was stated that a transaction may be an adventure in the nature of trade.

. . . even although nothing was done to the subject matter of the transaction to make it saleable ... Likewise, the fact that a transaction is totally different in nature from any of the other activities of the taxpayer and that he has never entered upon a transaction of that kind before or since does not, of itself, take it out of the category of being an adventure in the nature of trade.

Finally in his propositions of a negative nature, Thorson, P. said, “. . . a transaction may be an adventure in the nature of trade although the person entering upon it did so without any intention to sell its subject matter at a profit?"

As to a positive guide, Thorson, P. pointed out at 214 (D.T.C. 1139),. . There is, in the first place, the general rule that the question whether a particular transaction is an adventure in the nature of trade depends on its character and surrounding circumstances and no single criterion can be formulated?"

There are two factors which can be helpful in determining cases similar to this. One is what the appellant does and the other is what he says in evidence. The only oral evidence was given by the president of the company and the accountant. Neither of the shareholders was present. Both witnesses did little to help clarify the situation.

The company president was a practising lawyer who caused the incorporation. He made statements such as it would have been more profitable to run the farm than sell. He said that one section was not very good land. These statements were his opinion and he was not an expert in this area. He mentioned that the company spent five to six months trying to solve their problem of absentee management, but did not outline what attempts or matters were considered. When the land was sold, the president did not even know if the land was advertised formally. This seems hardly consistent with someone in charge of a valuable asset.

As far as the accountants evidence, he could only state that he dealt with the company's president, and in cross-examination did nothing to clarify the situation between the accrual and cash methods of accounting with reference to the company's annual statements and the problem of the grain inventory.

Even counsel for the appellant gave his opinion without any evidence, saying that the taxpayer had no intention of making a gain in the sale of the land and that the company lost money on the rental property because it was not farmed. He mentioned the sale was necessary to get rid of the association with the minority shareholder, but no evidence was presented as to this. In summary the oral evidence was of little help to the Court.

Taking a look then at what the appellant did, it is found that the best it could achieve was to custom farm the small property and lease the larger one. It had no equipment and no capital to conduct a proper farming business. There is no indication that would lead me to believe that the company seriously embarked on a farming program, and I can only conclude that this operation was an adventure in the nature of trade.

As to the grain inventory, an examination of the company's annual statements reveals that certain items show as “receivables” but in the 1978 year when grain sales showed, it was the same year that fertilizer, seed and chemicals were purchased. This continued during 1979 and 1980. If the company had been reporting on a cash basis it should have been consistent, and if at the end of the year there was grain inventory, this should have been shown in some manner in the corporate statements, even though not as the subject of inclusion in an income tax return. If not shown, the corporate statement is inaccurate. By subsection 28(1) of the Income Tax Act one method or the other must be used. The result is that the Minister properly included this item in the 1980 taxation year.

The appeal is hereby dismissed.

Appeal dismissed.