Nonico Investments LTD v. Minister of National Revenue, [1984] CTC 2696, 84 DTC 1624

Goetz, TCJ:—The appellant appeals from an assessment of income tax for its 1977 taxation year. The issue resolves itself to one of whether the sale of certain lands on the perimeter of the city of Winnipeg could be regarded as a trading transaction or as a capital transaction. The Minister has assessed on the basis that the sale of the property in question was a trading transaction.

Facts

Nonico Investments Ltd (“Nonico”) is wholly owned by one Richard Hugh Hooker (“Mr Hooker”). In 1954 he graduated as a pharmacist and apprenticed with McKnight Drug Stores in the city of Winnipeg, which at the time operated two drug stores. He married Mr McKnight’s daughter and subsequently acquired the two drug stores operated by McKnight by borrowing $25,000. Mr Hooker has now a partner who operates the drug stores and they have expanded their drug-store operation to four stores. In 1965 he built Westminster Motor Hotel in the city of Winnipeg for approximately $800,000. His investment was only $75,000, as he stated he had good tenants. Nevertheless, in 1968 he sold the hotel for $1,200,000, on which he made a profit of $300,000. In 1968 he purchased the shares of Manitoba Cold Storage for the sum of $1,000,000 and within four months sold Manitoba Cold Storage to Winnipeg Cold Storage and made a profit thereon of $300,000. He had incorporated Westminster Hotels Ltd changed to Nonico Investments Ltd and the objects of the company changed to: “to carry on the business of an investment company”.

In 1967 Mr Hooker and his brother acquired 800 acres of farmland at Poplar Point, a distance of about 40 miles from Winnipeg. This was operated by a tenant farmer. As of December 31, 1967, the inventory of the farm consisted of three riding horses worth $2,000, 700 laying hens worth $416, and cattle worth $4,915. Total assets amounted to $7,331. In the summer of 1968, through a friend, W Lamb, who was a realtor, Mr Hooker attempted to buy 520 acres of land on the edge of the city of Winnipeg. The owners who were ready to retire asked $1,000,000 for the property. Mr Hooker was able to acquire the property for $260,000 on the basis of a $100,000 cash payment and the balance of $160,000 secured by a mortgage on the land. Buildings on the property consisted of one large home in which the vendors had lived and two small tenant houses, one of which was extremely run down. Mr Hooker stated that his purpose in buying the property was that it was an ideal place to live on and he moved onto the land in April 1960, selling his home in Winnipeg. He had converted the large home into an extremely comfortable residence by adding three bedrooms, constructed above an adjoining garage. He installed a swimming pool and had all the amenities of a country gentleman. By this time he had remarried and his new wife (Elizabeth Ann Hooker) bore him three children and left him in 1980. The property was purchased in the name of Nonico but a trust agreement was entered into between Nonico and Elizabeth Ann Hooker whereby she became the nominal owner, holding the property in trust for Nonico. Mr Hooker said he acquired the land for the purpose of farming and he brought with him his tenant-farmer from Poplar Point and moved cattle worth $28,378 onto the land. In 1971 he acquired an interest in a hog farm at Dugald, Man, and said that he operated the newly acquired 520 acres of perimeter Winnipeg land as a farm at the same time. He did, however, sell all his cattle in 1971. After selling the cattle, he broke the land and seeded it to barley and farmed for one year. Since that time the property has been leased to a neighbour. In 1969, the property in question, as a farm, operated at a loss. In 1970, the total farm income was $3,390. In actual fact he derived no income from his so-called farming operation. The 520 acres were purchased on December 4, 1968 by Nonico. After the sale of all of his cattle for $35,783 in 1971, there was no farming operation carried on by Mr Hooker.

In 1973, Mr Hooker purchased a commercial property on Dublin Avenue, in the city of Winnipeg, for $235,000 which he rented and sold in 1974 for $250,000. In 1970 he acquired commercial property on Panet Road in Winnipeg for $47,000, which he sold in 1973 for $80,000. On July 30, 1973, Elizabeth Ann Hooker sold, to the Manitoba Housing and Renewal Corporation (“Manitoba Housing”), lots 12 to 15 inclusive composed of 235 acres for $211,000. This was done through Mr Lamb’s company. On August 12, 1974, after overtures from Qualico Developments Ltd (“Qualico”), Mr Hooker sold an undivided one-half interest in the balance of the land at $4,000 per acre, totalling $570,680. He excluded from the purchase his beautiful home and one acre surrounding it.

William Lamb, the real estate broker, had been commissioned by the Manitoba Housing and Renewal Corporation to acquire perimeter land around the city of Winnipeg. He had acquired a good amount of perimeter land for the province of Manitoba before he was able to effect the sale of the 235 acres from Mr Hooker. At this point in time the Manitoba government was aware of the fact that Qualico owned 1,100 acres very close to Hooker’s land. Lamb stated that he had set up W Lamb Realty Limited in 1969 and, at that time, an employee of his by the name of Jack Hatten went to Qualico. Lamb also stated that he spoke to Jack Hatten of Qualico to see if they were interested in buying more land and while he was away on a trip to Hawaii, a Mr Friesen, president of Qualico, entered into a partnership deal with Mr Hooker. Lamb, in cross- examination, said that Manitoba Housing initially offered $900 an acre but eventually offered $1,100 an acre. He also stated in cross-examination that "as farm land, it would have sold for $300 per acre".

Elizabeth Ann Hooker, on October 30, 1973, signed an offer to purchase real estate in connection with the balance of the land, namely lots 24, 26 and 27 on Wilkes Avenue, and this was handled through W Lamb Realty Limited. The offer was for $210,500. On February 26, 1974, Elizabeth Ann Hooker signed another offer to purchase real estate through W Lamb Realty Limited, for lots 24, 26 and 27. This offer was made by the Royal Trust on behalf of the Manitoba government for $735,000. Nothing appears to have happened as a result of this offer. There was also filed an undated offer to purchase by Royal Trust, indicating that adjustments would be made as of May 1, 1974, for the same lots, namely lots 24, 26 and 27. The offer was for $490,000 but was not accepted by Mr Hooker. The appellant filed a further document, namely an agreement for purchase and sale, for lots 24, 26 and 27 for $600,000. Mr Hooker refused to accept this offer which amounted to a price of approximately $4,000 per acre. The ultimate sale to Qualico was consumated on August 12, 1974, with respect to lots 24, 26 and 27 and the purchase price was $570,680, with Mr Hooker retaining complete ownership of his residence and the one acre encompassing it.

On January 5, 1972, Mr Hooker obtained an appraisal of lots 12 to 15 inclusive, indicating that the appraised value was $905 per acre. The financial statements show that from the time of acquisition of the 520 acres by Mr Hooker (known as the Wilkes property), his farm income was virtually nil, although the overall financial picture of Nonico was very sound as a result of the business acumen of Mr Hooker. Mr Hooker stated that the agreement for purchase and sale of lots 24, 26 and 27 was for $4,000 per acre, less 40 acres, plus buildings. This was presented on behalf of Qualico which Mr Hooker refused. However, Mr Friesen followed through, paying the same price per acre for an undivided one-half interest in the property, with the responsibility of developing the land. Mr Hooker said that he had been assessed as a trader in real estate with respect to the Dublin Avenue property and the Panet Road property and that he objected, and ultimately it was deemed a capital transaction by Revenue Canada.

William Lamb did not impress me as a truly credible witness, although parts of his evidence, of course, are relevant. For instance, he stated that when he learned that Qualico, through Mr Friesen, had dealt directly with Mr Hooker, he asked for his full commission of $28,000, but Mr Hooker refused. Since he threatened court action, Mr Hooker weakened and gave him “$3,000 or $4,000”’.

A Mr Robert Brink, an auditor employed by Revenue Canada, commenced to give evidence concerning his dealings with Mr Lamb. Counsel for the appellant objected to the evidence going in unless Lamb was recalled. He was asked whether he remembered talking to representatives of Revenue Canada, in May 1979, in connection with the sale of the perimeter property. In answer, he stated he did not remember and I find this most difficult to believe that an individual could forget being questioned carefully about a fairly recent transaction with two representives of Revenue Canada. Robert Brink was then recalled and stated that he had spoken to Mr Lamb on May 17, 1979, on the telephone, and then in company with his supervisor, Mr Connors, followed Mr Lamb’s car to Lamb’s brother’s farm. He stated that Lamb told him that he had had an option to purchase the 520 acres, that he had a listing to sell, and that Mr Hooker had tried to cheat him out of his commission. He was unable to locate the Hooker file where he kept his old files in his brother’s garage, but did show them a letter whereby Lamb’s lawyer had started legal action against Hooker for Lamb’s commission on the sale to Qualico. Lamb stated that when his option expired, Mr Hooker asked him to sell the 520 acres less the house, plus 40 acres. As a result, Lamb approached the Manitoba government and sold lots 12 to 15 inclusive to Manitoba Housing. Hooker asked Lamb to sell the balance of the property and to contact as many developers as he could. It was at that time he contacted Jack Hatten of Qualico with an asking price of $1,100 per acre, with Qualico countering with an offer of $900 per acre. Then, Hooker decided he wanted $1,100 per acre. Lamb told the investigators that when he returned from his trip to Hawaii, Hooker told him that the land was no longer for sale, but he became suspicious and searched the title and found that the land had been sold to Qualico. He then approached Mr Hooker, demanding his full commission, and court action was instituted and settled out of court for $8,500 which is double what Lamb stated he received in his initial evidence, prior to being recalled to the witness box. It was Brink’s conclusion, after his conversation with W Lamb, that the acquisition of the property in 1969 was for the purpose of resale. This, he said, was supported by the previous auditors’ report, suggesting that Mr Hooker was a trader in real estate and, undoubtedly, referring to the Dublin and Panel sales.

Findings

Mr Hooker impressed me as an extremely bright, astute businessman and was very plausible in the witness box. He seemed most sincere about his avowed intention of acquiring the 520 acres for the purpose of farming and building a residence on that land, as it was adjacent to the city of Winnipeg. The validity of this avowed intention of farming gradually evaporated as evidence was adduced throughout the hearing. In determining the issue before me, it is necessary to consider antecedent and subsequent events to the purchase of the land in question.

In 1977, Nonico acquired a commercial hotel in Kenora, Ont, and paid $950,000 for it, which was merely a carrying on of the purpose and business interest of the appellant. The avowed purpose of acquiring the land for farming does not stand up in face of the sale of all of the cattle within a year and a half after the purchase of the property, the lack of farm revenue thereafter, and Mr Hooker’s close relationship with W Lamb from the time of the purchase of the property to the time of sale. Every case must be determined on its own facts and, in considering whether a transaction was a trading or capital transaction, I refer to Californian Copper Syndicate (Limited, and Reduced) v Harris, Court of Exchequer (Scotland), Second Division, Part III Tax Cases 159, at 165 and 166, where Lord Justice Clerk stated:

It is quite a well settled principle in dealing with questions of assessment of Income Tax, that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit in the sense of Schedule D of the Income Tax Act of 1842 assessable to Income Tax. But it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable, where what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business. The simplest case is that of a person or association of persons buying and selling lands or securities speculatively, in order to make gain, dealing in such investments as a business, and thereby seeking to make profits. There are many companies which in their very inception are formed for such a purpose, and in these cases it is not doubtful that, where they make a gain by a realisation, the gain them make is liable to be assessed for Income Tax.

What is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts; the question to be determined being — Is the sum of gain that has been made a mere enhancement of value by realising a security, or is it a gain made in an operation of business in carrying out a scheme for profit-making?

It is not so much what the taxpayer says his intention was in acquiring the property, it is what he did that must be considered, and all factors antecedent and subsequent to the transaction in question must also be carefully considered. Though there may have been a series of sales and a series of profits which might individually be considered capital gains, the whole course of conduct of the taxpayer must be considered and his avowed intention at the time of acquisition must be tested against all of the surrounding facts. The so-called grain-growing activities of the appellant on the land are not reflected in any way in the financial statements of Nonico. The land never made any return as a farm and the only time that Nonico got a return from its investment was when two sales were made. It must be remembered that the vendors of the property were retired, and their asking price was $1,000,000. I am sure that was a result of their knowledge of the intensive real estate activities and growth of residential areas in and adjacent to the city of Winnipeg. I cannot conceive Mr Hooker paying the price he did for the 520 acres for the purpose of farming when, as Mr Lamb stated, as farmland it was only worth $300 per acre in 1969.

The case of Albrumac Oils Ltd v The Queen, ([1977] CTC 29; 77 DTC 5041) appears to be somewhat similar in nature to this appeal whereby land was acquired in 1966 adjacent to the city of Edmonton and the company purchasing the land was in the oil business and, in the ensuing years, it turned down a number of unsolicited offers. The company never did any work related to its business objectives and, in 1969, granted an easement for a pipeline over the land for $6,805 and sold the land for $535,000. In this case, the land was acquired for the purchase price of $160,000. The Court held that the land was situated in a speculative area (which is indeed the situation in this appeal). At 31 and 5043, respectively, Mr Justice Décary states:

Notwithstanding this I am of the opinion that the profits realized from the sale and from the grant of easement must be regarded as having been profits from a venture or concern in the nature of trade. There was never any plan on the part of the Plaintiff to use the land in an oil or gas producing operation. Nor was it suited to any revenue producing operation of the company. It could serve only to produce rental revenue which at some $1,480 per year bears little relation to a reasonable return on an investment of $160,000. The company could not take pride in its possession or experience esthetic pleasure from owning farm land. And the company itself, as events have in fact demonstrated, would not necessarily remain indefinitely, or for many years, in the ownership of Mr A B McLean or his family.

The fact is that the property was a highly speculative piece of real estate. The numerous inquiries on behalf of prospective purchasers make this plain. It was in a highly speculative area on the outskirts of a rapidly growing city. It was acquired by the Plaintiff because of this characteristic not because of any virtues it possessed making it preferable to cheaper farm land elsewhere and it was sold at a greatly enhanced price for considerations directly concerned with its prospects, not as farm land, which presumably would not have been adversely affected, but its prospects for sale at an enhanced value. In the hands of the Plaintiff company this land never had prospects of yielding a reasonable return on the investment except by sale at an enhanced price and it thus resembled the cases of the large quantities of toilet paper and whiskey which were purchased and later sold in the cases of Rutledge v CIR (1924) 14 TC 490) and Fraser v CIR (1942) 24 TC 498) respectively.

On the evidence as a whole, in determining the motivating factor of the acquisition of the property in 1969, it would appear that the conduct of the appellant prior to and after the purchase of the property in 1969 establishes that the appellant was engaged in a trading transaction in purchasing and selling the property, and I dismiss the appeal.

Appeal dismissed.