Abram Friesen v. Minister of National Revenue, [1984] CTC 2343, 84 DTC 1317

Cardin, TCJ:—The appeals of Dr Abram Friesen are from assessments of tax with respect to the 1976, 1977 and 1978 taxation years. The issue for 1976 is the amount of capital gain realized from the disposition of a parcel of land owned by the appellant. For 1977 and 1978, the issues are the determination of the amount of business income and the capital gains realized by the appellant for the disposition of certain other building lots.

Facts

In 1968, the appellant, a retired university professor, purchased a 180-acre farm in Kingsclear Parish, York County, New Brunswick for $12,000. The appellant’s declared intention was to operate a farm thereon. The farm was originally divided into sections, parcel A — 12 acres subdivided into 13 lots as of December 31, 1971 and parcel B consisting of some 168 acres (Exhibit A-1).

In 1969, the appellant subdivided 12 acres of land into 13 building lots registered on June 5, 1969 as plan #1711 (Exhibit A-2).

In 1974, the appellant combined lots 8, 9 and 10 of plan #1711 into one lot referred to as lot #8. This plan was registered on August 27, 1974 as plan #4060 (Exhibit A-3).

In June 1976, lot #8 of plan #4060 (Exhibit A-3) was sold to John Allison Monteith. The proceeds of disposition were $19,500 and the related expenses were $200.

In his tax return for 1976, the appellant computed his income on the basis that the land (lot #8) on V-Day had a fair market value of $6,000 an acre and that the adjusted cost price of lot #8 was $19,500.

On March 17, 1981, the Minister of National Revenue assessed the appellant on the basis that as of December 31, 1971, the fair market value of the 12-acre portion was not more than $3,250 an acre; the V-Day fair market value of lot #8 (Exhibit A-3) was not more than $10,562.50 and the capital gain realized by the appellant from the disposition of lot #8 (Exhibit A-3) was at least $8,737.50. The issue for the 1976 taxation year is the determination of the fair market value of said lot #8 on December 31, 1971 for purposes of computing the appellant’s capital gain in 1976.

With respect to the 1977 and 1978 taxation years, the appellant on June 1, 1976, converted 30.1 acres of the remaining 168 acres from capital assets to inventory.

On March 17, 1971 [sic] the Minister assessed the appellant on the basis that the gains made on the disposition of certain lands in 1977 and 1978 were on income account. On March 1, 1982, the Minister reassessed the appellant for the 1977 and 1978 taxation years and added a taxable capital gain to the appellant’s business income for those years.

The appellant contended that the land was acquired for the purpose of farming and the gains from the disposition of the lands are capital gains. The appellant further submitted that the fair market value of the said lands was $6,000 an acre on December 31, 1971. In the alternative, the appellant submitted that if the gains on this land transaction are ordinary income, this could only have come about by the conversion of capital property into inventory which took place on the date of registration of the pertinent subdivision, ie January 4, 1977.

The facts that existed with respect to the 1976 taxation year referred to above apply to the background for the Minister’s reassessment for the appellant’s 1977 and 1978 taxation years as well.

The appellant, having commenced trading in real estate on June 1, 1976, converted 30.1 acres of the remaining 169 acres from a capital asset to a trading asset. The Minister of National Revenue estimated the V-Day value of the 30.1 parcel of land to be not more than $1,000 an acre.

On July 28, 1976 a subdivision known as Old Mill Road Subdivision was prepared, and approved on December 17, 1976, and filed in the registry as plan #5247. The 30.1 acre portion of the farm was subdivided into 23 building lots (Exhibit A-4).

On this property the appellant built a road, installed culverts and made other improvements. Easements for Hydro and telephone services were also granted. The cost of the road was $17,800 and the cost of other improvements was about $545. In 1978, the municipal taxes on the property were $1,510.99.

The issues for 1977 and 1978 are the business income and the capital gains realized by the appellant from the disposition of certain lands within the Old Mill Road subdivision plan #5247 (Exhibit A-4).

Subparagraphs 8(i) to (1) of the reply to the notice of appeal read as follows:

8. In reassessing the Appellant as described in paragraph 7, the Respondent assumed, among others, the following facts:

(i) In 1977 the Appellant sold four (4) lots (a total area of 4.29 acres) from the subdivision referred to in paragraph 8(g). The proceeds of disposition were $39,800 and the expenses were $200. The value of the inventory was $8,424 which was calculated as follows:

Value of 30.1 acres on 1 July 1976
30.1 X $1,000 an acre			$30,100
Add: Road construction		$17,800
Improvements		545	18,345
			$48,445
Divide by 23 lots = $2,106 a lot
Multiply by 4	$8,424
His business income from the sale of the 4 lots was therefore $31,176.

(j) In addition, the Appellant realized a capital gain of at least $3,603.60 from the

sale of the 4 lots referred to in paragraph 8(i), which was calculated as follows:

Value on 1 July 1976
4.29 acres X $1,000 an acre	$4,290.00
Less V-Day value
4.29 acres X $160 an acre	686.40
Capital gain	$3,603.60

(k) In 1978 the Appellant sold 3 lots (a total area of 3.09 acres) from the subdivision referred to in paragraph 8(g). The proceeds of disposition were $35,200 and the expenses were $650. The value of the inventory was $6,557.67, which was calculated as follows:

Value of 30.1 acres, road and improvements		$48,445.00
Less 1977 sales		8,424.00
		$40,021.00
Add property taxes		1,510.99
		$41,531.99
Divide by 19 lots = $2,185.89 a lot
Multiply by 3	$6,557.67

His business income from the sale of the 3 lots was therefore $27,992.33.

(1) In addition, the Appellant realized a capital gain of at least $2,595.60 from the

sale of the 3 lots referred to in paragraph 8(k), which was calculated as follows:

Value on 1 July 1976
3.09 acres X $1,000 an acre	$3,090.00
Less V-day value
3.09 acres X $160 an acre	494.40
Capital gain	$2,595.60

The appellant’s position is stated at paragraphs 10, 11 and 12 of the notice of appeal which read as follows:

10. An appraisal of the property by D Harold Moore, AACI valued the property at $10,000 per acre as of July 1, 1976 and the taxpayer submits this valuation as being accurate for January 4, 1977.

11. In the alternative the taxpayer submits his gains on disposition of property in 1977 should be calculated as follows:

Business income (subsection 9(1))

Proceeds of Disposition		$39,800.00
Less: cost of the property (fair market value at the date of conversion)
4 lots (approximately 1 acre each) X $10,000	$40,000 plus cost
of servicing and selling the property $5597.56		$45,597.56
Loss		($5,797.56)
Capital gains
(i) Gain on disposition of the property
Proceeds of Disposition		$39,800.00
Less: Adjusted cost base of the property (calculated in accordance
with the Income Tax Application Rules, 1971) 4 lots
(approximately 1 acre each) X $6000.00 = $24,000 plus cost
of servicing and selling the property $5597.56		$29,597.56
		$10,202.44
(ii) Capital Gain on the disposition (as determined above)
Less: amount of business income		($5,797.56)
Capital Gain on disposition		$16,000.00

12. In the alternative the taxpayer submits his gains on disposition of property in 1978 should be calculated as follows:

Business Income (subsection 9(1))

Proceeds of Disposition	$35,200.00
Less: Cost of the property (fair market value at the date of conversion)
3 lots (approximately 1 acre each) X $10,000 = $30,000 plus cost
of servicing and selling the property $4762.59	$34,762.59
Business Income	$	437.41
Capital Gains
(i) Gains on disposition of the property
Proceeds of Disposition	$35,200.00
Less: Adjusted cost base of the property (calculated in accordance
with the Income Tax Application Rules, 1971) 3 lots
(approximately 1 acre each) X $6000 = $18,000 plus cost
of servicing and selling the property $4762.59	$22,762.59
	$12,437.41
(ii) Capital Gain on the disposition (as determined above)
Less: Amount of business income	$	437.41
Capital Gain on disposition	$12,000.00

Findings

There can be no doubt that in 1977 and 1978, the appellant was trading in real estate. Even though his declared intention in acquiring a 180-acre property was for the purpose of farming, the appellant’s testimony and his comportment with respect to the property do not support his intention of farming the full 180 acres. Indeed, I believe the appellant was fortunate that the Minister did not consider the appellant to have been in the real estate business prior to 1977 and 1978.

In summary, the issues therefore are the fair market values on V-Day of lot #8, plan 4060 (Exhibit A-3) with respect to the 1976 taxation year; the fair market value on December 31, 1971 of the four lots (4.29 acres) from the Old Mill Road subdivision disposed of in 1977; and the fair market value on V-Day of three lots (3.09 acres) from the Old Mill Road subdivision disposed of in 1978, and the appellant’s business income for 1977 and 1978.

With respect to the 1976 taxation year the appellant in contending that the fair market value of his lands on December 31, 1971 was $6,000 an acre, relied on a linear projection of sales of lots that had taken place between 1969 and 1971 as reflected in graphic Exhibit A-5. It is alleged that the rising trend continued after December 31, 1971 and eight further sales that took place between 1971 and 1978 are referred to in paragraph 8 of the notice of appeal.

The appellant also relied on the evaluation report of Mr Harold Moore who estimated a V-Day value of $5,000 an acre for lots 1 to 23 of the registered plan #5247 (Exhibit A-1); and a value of $10,000 an acre for the same lots on June 1, 1976, the date of conversion.

Mr Moore who became an accredited appraiser in 1973, was presented and accepted as an expert witness. Mr Moore’s evaluation was based on a form-type evaluation report which Mr Moore admitted on cross-examination was less informative and contained less details than the narrative reports.

For the appellant to be successful in his appeals, he must establish that the fair market value of his property on V-Day used by the Minister in his assessments is wrong. Mr Moore’s appraisal report does not do that.

There are two distinct parcels of land in the appellant’s 180-acre farm. Parcel A, containing 12 acres and parcel B consisting of 168 acres. On December 31, 1971, parcel A was divided into 13 lots and a few of the lots were already sold. Parcel A is closer to Trans-Canada Highway north of parcel A and some residential development had already started to take place in that area in 1971. In 1969, the highest and best use for parcel A was residential. Parcel B however, was undivided land on December 31, 1971 and consisted of 168 acres of some cleared land, woodland and bush on which no development existed.

In his form-type report, Mr Moore attempted to arrive at a V-Day value of lots #1-23 shown on registered plan #5247. To do so, Mr Moore chose at random lot #20 as the parcel whose V-Day value was to be obtained by the market data and applied to the other 22 lots. However, subdivision plan #5247 did not exist on December 31, 1971. The resulting figure of $5,000 an acre cannot, in my opinion, be a realistic value of the property on V-Day, not only because no consideration was given to the distance of each lot to the Trans-Canada Highway and to the fact that the parcel of land was undeveloped rural land, but also because lot #20 did not even exist on December 31, 1971.

In his appraisal report dated December 19, 1980, Mr Moore described the property:

The neighbourhood is mainly rural with a number of large family properties. Development to date has been above-average single family dwellings. A large number of lots are available for sale: however, over the foreseeable future, little new construction will occur.

Mr Moore also stated:

Development is stable as new construction is minimal and has been so for several years.

For the V-Day value of the property lot #20, Mr Moore used as comparable four sale transactions which were all dated in 1972 and situated on Carriage Hill, a developed area east of the subject property and closer to Fredericton. In Mr Moore’s opinion, the fair market value of the subject property as rural land on December 31, 1971 was $5,000 an acre. With respect to his appraisal, Mr Moore made the following comments:

Carriage Hill Estates was the first major subdivision to develop in this area. The four (4) sales above were the first to occur near the date of appraisal . . .

and further in his comments, Mr Moore stated:

As mentioned, prior to these sales little market activity was present in this area and in all probability, had the subject lots been available for sale at the date of appraisal, they would have sold for somewhat less than the price of the above lots.

On the basis of his appraisal report, Mr Moore’s calculation that the value of the said lots on December 31, 1971, was $5,000 an acre is not at all convincing.

For the value of lot #20 of plan 5247 on July 1, 1976, Mr Moore arrived at a figure of $10,000 an acre. His four comparable sales were situated (two in Valley View, a development adjacent to the subject and two in its Carriage Hill development situated east of the subject. In his report, Mr Moore states in part

It was during the middle 70’s the value of lots in rural subdivisions reached their peak. The last several years had seen a stabilized trend, up to the current time, as a large of number of lots, similar to the subject, are available for sale in numerous areas surrounding the City.

In examining Mr Moore’s comparable sales and comments with those chosen by the respondent’s appraiser, I question whether Mr Moore chose the most comparable sales in his attempt to arrive at an evaluation of the subject. I am not convinced that a fair market value of $10,000 an acre for the land on June 1, 1976, as suggested by Mr Moore, is realistic.

Mr Stillwell, the respondent’s appraiser, prepared two narrative reports. For the V-Day valuation of 180 acres of the appellant’s land (Exhibit R-l), the appraiser took into account the division of the farm into parcel A and parcel B whose data and pertinent characteristics differed considerably on December 31, 1971. For parcel A the appraiser used five comparable sales, three of which sales were made by the appellant from parcel A on the subject property in 1970 and 1971. As a result, after adjustments which appeared to me to be proper and reasonable, Mr Stillwell’s appraisal of the subdivided land consisting of 12 acres (parcel A) was $25,000 on December 31, 1971.

Parcel B (the remainder of the 180 acre farm, i.e. 168 acres of undivided land) was also evaluated by the market data of five comparable sales in the area and a V-Day value of the back portion of the appellant’s farm was estimated to be $160 an acre or $26,900. The value of the appellant’s farm on December 31, 1971 therefore was $51,900.

The second appraisal report by Mr Stilwell is the value of 30.13 acres of the 168-acre farm on June 1, 1976, the date of conversion of land from capital assets to inventory. In this market data analysis, Mr Stilwell used as comparables, similar sales that were transacted from May 3, 1976 to December 1976, and arrived at a fair market value of $30,000 for the 30.1 acres of the appellant’s farm as of June 1st 1976. This figure is in keeping with Mr Stillwell’s analysis of the land market in the immediate area on June 1 1976.

Although the appellant stated that the farm was acquired in 1968 for the purpose of farming — indeed he in fact did some farming on 16 acres of his property — the number of land transactions effected by the appellant prior to and after 1976 confirms in my mind that the appellant was indeed trading in real estate.

The appellant has not succeeded, in direct or in cross-examination, nor in argument, in establishing that the fair market value of his farm on December 31, 1971, was $6,000 an acre or even $5,000 an acre (the figure arrived at by the appellant’s appraiser). Furthermore the appellant has not established that the value of 30.1 acres of the remaining 168 acres was $10,000 an acre on June 1, 1976.

A cursory examination of Mr Moore’s form-type appraisal and Mr Stilwell’s well-documented appraisal of the fair market value of the appellant’s farm as of December 31, 1971, and the fair market value of the 30.1 acres of land (parcel B) as of June 1, 1976, will lead anyone to the conclusion I have reached.

To my knowledge there is no provision in the Income Tax Act or in the generally accepted accounting principles, as suggested by counsel for the appellant which, for tax purposes, distinguish the retail value from the wholesale value of property in defining a fair market value.

To summarize: The appellant was trading in real estate at least since June 1, 1976; the fair market value of the appellant’s 180-acre farm was $51,900 as of December 31, 1971; the fair market value of 30.13 acres of parcel B of the appellant’s farm (168 acres) as of June 1 1976 was $30,100. The Minister, on the basis of these figures, properly assessed the appellant for the 1976, 1977 and 1978 taxation years.

The appeals are therefore dismissed.

Appeals dismissed.