Robert J Turnbull v. Minister of National Revenue, [1984] CTC 2800, 84 DTC 1720

Taylor, TCJ:—This is an appeal heard in Edmonton, Alberta on July 12, 1984 against income tax assessments for the years 1975 through 1979, in which the Minister of National Revenue taxed as on income rather than capital account the gains realized on sales of certain real property, after allowing appropriate reserves as provided for in the Income Tax Act; and in addition the Minister changed the “adjusted cost base” of the property as reported by the appellant. The notice of appeal reads in part as follows:

— For many years, Robert J Turnbull (hereinafter called “the taxpayer’’) was the owner of the certain lands, being legally described as the West /2 of Section 13, Township 54, Range 23, West of the 4th Meridian, in the Province of Alberta, upon which lands the taxpayer had built his residence and which the taxpayer farmed.

— At some time prior to 1971, the taxpayer determined to sell a portion of the said lands but to retain the remainder thereof in order to continue his said farming activity. In order to sell a portion and retain the remainder it was necessary that the existing title to the land be subdivided and, in 1971, the taxpayer applied to the appropriate subdivision authority and was granted permission to subdivide the said lands, which permission was conditional upon certain improvements being effected to the lands. The taxpayer carried out the improvements required by the said authority in order to obtain separate titles to the lots created by the subdivision and to render the lots saleable.

— The taxpayer says that the gains realized from the lands sold by him during the taxation years 1975 to 1979 inclusive and referred to in the preceding Statement of Facts were capital gains from the disposition of real estate and were not business income.

— The taxpayer says that the adjusted cost base of the said lands as reported by the taxpayer reflects the fair market value of the said lands on valuation day and that the cost of land sold as calculated by the Minister are based on unrealistically low land values and do not reflect the actual cost of such lands nor the true value of such land on valuation day, or in the alternative, if the land was at some time converted from the capital property of the taxpayer to inventory property in a business operated by the taxpayer, which is not admitted but is specifically denied, then the value of the land at the time of such conversion was greater than the valuation calculated by the Minister in determining the cost of the said land.

And for the respondent, from the reply to notice of appeal;

— . . . the Respondent admits that the land was subdivided by the Appellant and that improvements were made upon the lands, and states that the lands were approved as a country residential subdivision on November 26, 1971, comprising the following parcels, registered as Plan 752-1001:

Block A:	— 63.27 acres
Block B:	— 10.25 acres
Block C:	— 27.49 acres
Block D:	— 34.45 acres
Reserve land:	— 26.06 acres

and further states that Block C was further subdivided into 22 residential lots,

— . . . the lands the subject of the within Appeal were converted from farm land to business inventory of the Appellant at the time of approval of subdivision, November 26, 1971;

— . . . the Appellant was in fact in the business of selling the said lands from the time of approval of subdivision, November 26, 1971;

— . . . the cost of the residential lots sold from Block C (in the years 1975, 1976, 1977 and 1979) was not more than $5,129.23 per acre;

— .. . the cost of the parcel of land sold in the Appellant’s 1978 taxation year (Parcel “D”) was not more than $1,450.00 per acre.

Mr Turnbull testified on his own behalf, and filed (among others) two documents which the Court considers critical — Exhibit A-2, a plan of subdivision dated in 1974; and Exhibit A-7, a copy of a Provincial Planning Board order dated December 30, 1971. Both of these are reproduced: [Note: Exhibit A-2 is not reproduced.]

BOARD ORDER

FILE: 71-E-165

FRIDAY, THE TWENTY-SIXTH DAY OF NOVEMBER, 1971

BEFORE: IN THE MATTER OF “The Administra The Provincial Planning Board of the tive Procedures Act, Statutes of Alberta, Government of the Province of Alberta 1966”,

AND IN THE MATTER OF “The Planning Act, Statutes of Alberta, 1963, as amended”, (hereinafter called the Act)

AND IN THE MATTER OF “The Subdivision and Transfer Regulation, Alberta Regulation 215/67, as amended”, (hereinafter called The Regulation)

AND IN THE MATTER OF an appeal by C H Weir, on behalf of Mr R J Turnbull, 9912 - 109th Street, Edmonton, Alberta (hereinafter called the appellant)

from a decision by the Edmonton Regional Planning Commission whereby the proposed subdivision of the W!4 of Section 13-54-23-W4th, County of Strathcona, was refused.

THE PROPOSAL is to subdivide the subject quarter section into 22 approximately 1.1 to 1.4 acre parcels with three blocks of varying acreages for the purpose of disposal as country residential parcels.

MOVED BY N Dant and carried, that C W Youngs be appointed to act as Chairman for the purpose of this hearing.

UPON HEARING submissions at a public hearing held in Edmonton, Alberta, on November 5, 1971, from the appellant, a representative of the Town of Fort Saskatchewan, and a representative of the Edmonton Regional Planning Commission, the Board ascertained that the subject land is located southwest of the Town of Fort Saskatchewan and immediately east of the North Saskatchewan River and about one-half mile west of Highway No 55. The subject half section has a treed valley area extending from the south boundary of the half section northwards and then westwards and it is along the eastern side of this valley that the appellant proposes to locate the subject residential lots, all of which, excepting the southernmost three will be located in the NW 1/4 of Section 13. The three blocks would consist of the areas in the northeast corner of the quarter, north and east of the proposed lots; the area in the northwest corner of the quarter to the south and west of the proposed lots; the southwestern sector of the quarter which is to the south and west of the valley. The application is opposed by the Town of Fort Saskatchewan because it is contrary to Section 50(a) of The Regulation in that it is within two miles of a city, town, village or hamlet, and also because the residents on the proposed parcels would tax the town’s recreational and other facilities. The County of Strathcona also opposes the application because of its contravention of Section 50(a) of the Regulation, and the Edmonton Regional Planning Commission refused the application for the foregoing reasons and also because it is contrary to the commission’s policy regarding the location of a Country Residential “A” subdivision in relation to the North Saskatchewan River Valley. This policy requires that such residences be located on tributary ravines only, and by grouping the lots as opposed to placing them in a “ribbon” arrangement as is proposed by this application.

BOARD ORDER: 366-S-71

FILE: 71-E-165

— 2 —

BOARD DECISION:

Under authority vested in the Board pursuant to Section 20 of The Planning Act, Statutes of Alberta, 1963, as amended, and Section 10 of The Subdivision and Transfer Regulation, Alberta Regulation 215/67, as amended, the Board has decided that, because:

the proposed lots are located along a valley which is wooded and the area therefore does have scenic attributes for country residential holdings; ,

(2) it is not likely, because of the location of the Federal Goal that the Town of Fort Saskatchewan will expand into this area for some time;

(3) the valley area extends across and encompasses a large portion of the subject land and it therefore has limited potential for any other use or development; and

(4) the size of the proposed lots is adequate and the numbers proposed is not significant and therefore the demands on the Town of Fort Saskatchewan recreational facilities should also not be significant;

the decision of the Edmonton Regional Planning Commission be reversed and the appeal upheld subject to:

(1) the subdivision being effected by a plan of survey;

(2) the appellant constructing, at his own expense and to the standards required by the County of Strathcona, all internal roads, approaches and accesses, including the installation of culverts, as required;

(3) the appellant paying all outstanding taxes on the land both current and any that may be in arrears;

(4) dedication as public reserves, pursuant to Section 25(3) of The Act, the areas designated as 11-R Reserve (29.6 acres) and R-24 Reserve (4.3 acres) as shown on the proposed plan; and

(5) deferral of the decision of public reserves pursuant to Section 25(2) of The Act, on Block D by means of a caveated agreement;

and, futher, that Section 50(a) of the Regulation is waived.

AND IT IS SO ORDERED

THE PROVINCIAL PLANNING BOARD

C W YOUNGS — CHAIRMAN

The appellant noted for the Court that during the period 1971 to 1975 he had engaged in the process of providing the necessary road allowances, access, hydro lines etc, which would be needed for the construction of houses on Parcel “C”. It was also brought out that he had commenced the efforts leading toward the subdivision at a time considerably earlier than 1971.

While both parties took the view that all sales (Blocks “C” and “D”) were on capital account (appellant) or on income account (respondent), in my opinion the relative transactions out of Blocks “C” and “D” should be examined separately.

I repeat the precise words of counsel for the appellant above:

At some time prior to 1971, the taxpayer determined to sell a portion of the said lands but to retain the remainder thereof in order to continue his said farming activity. In order to sell a portion and retain the remainder it was necessary that the existing title to the land be subdivided and, in 1971, the taxpayer applied to the appropriate subdivision authority and was granted permission to subdivide the said lands, which permission was conditional upon certain improvements being effected to the lands. The taxpayer carried out the improvements required by the said authority in order to obtain separate titles to the lots created by the subdivision and to render the lots saleable.

The prime argument of counsel for the appellant is in effect, that the appellant sold farm land — a capital asset. As I see it he did not do so. Simply put, if a subdivider or developer (or in like circumstances almost anyone) had purchased Block “C”, (supra), in 1971, only to concurrently or subsequently, subdivide it and resell it as residential lots, would that party be reselling farm land? The answer is clearly no. Just so, with Mr Turnbull. With regard to Block “C” he became a subdivider first and a vendor second. He did not retain farm land, he committed the farm land to a different use. The claim to capital gain on the sale of Block “C” cannot be supported, and I find it not to be a relevant, certainly not a reversing factor, that Mr Turnbull continued to use the land for some farming purposes during the period when he was completing and finalizing plans and proposals for use of the land as residential lots. There remains with regard to Block “C”, one other question. At what date (1971 or 1975) did Mr Turnbull “convert” the farm land from investment asset to inventory asset? His proposition essentially is that it did not become so converted until at least 1975 — in effect when he had all the approvals needed, he had met various subdivision conditions, and finally sold some lots. I do not believe that proposition holds up either. He pursued his goal of subdividing and selling Block “C” for residential lots as assiduously as circumstances (money, health, and permits) would allow. Also, I would think it fair comment, that he did so with the full knowledge that Block “C” would thereby, as residential lots, be far more valuable and profitable than under its continuation as sheep pasture. While either the determination to sell — as other than farm land, or actions to bring that determination into fruition, could well provide the basis for a judgment that conversion to another use had taken place, as I see it when both factors occurred whether concurrently or sequentially then there can be no doubt as to the intention and thrust of the taxpayer’s conduct. Therefore, the “disposition” and “acquisition” referred to in section 45(l)(a)(ii), (iii) and (iv) of the Act are deemed to have taken place “prior to 1971” (appellant’s notice of appeal — (supra)), and the various gains on sales made in the years 1975, 1976, 1977 and 1979 (all from Block “C”) are determined to be on income account.

Now we turn to Block “D”. As noted above, I am not persuaded at all, that in order to dispose of a portion of his farm land, Mr Turnbull had any requirement to subdivide the subject land to the degree evident in the identity and availability of the residential lots in Parcel “C”. Parcel “C” was simply, by his own testimony, the prime portion of his land for purposes of large rural residential lots with a commanding view of the river area below. However I have some doubt that in doing so with regard to Parcel “C” he gave any such serious thought or consideration to the usefulness or value of Parcel “D”. I would agree that the possibility of further subdivision or disposition would have been a prospect he might have entertained. And there are two portions of Exhibit A-7, (supra), which add a further cloud to his protestation:

THE PROPOSAL is to subdivide the subject quarter section into 22 approximately 1.1 to 1.4 acre parcels with three blocks of varying acreages for the purpose of disposal as country residential parcels.

. . . deferral of the dedication of public reserves pursuant to section 25(2) of the Act, on Block “D” by means of a caveated agreement.

Certainly the first quote above is ambiguous, but I am prepared to read it in the sense that the term “for the purpose of disposal as country residential parcels” refers only to the 22 lots in Parcel “C”. With regard to the second quote, I am also prepared to give the appellant the benefit of the doubt and accept that some questions might have been raised about Parcel “D” by the Provincial Planning Board, and that the inclusion of the restriction was to ensure that nothing could or would happen to Parcel “D” similar in nature to Parcel “C” without additional application being made. Any other interpretation of that clause leaves unanswered the question of why there is no similar reference to Parcels “A” and “B”. I am not convinced that it can be said with any reasonable degree of certainty that the appellant had changed the use of Parcel “D” as he had done with Parcel “C”. I am inclined to accept that Parcel “D”, at the time critical to this appeal — November 26, 1971 remained farm land, and while it must have developed a substantial attraction for a third party (the purchaser) as a result of the development of Parcel “C”, there is no indication in the evidence that the appellant either did or could have done anything to enhance the saleability as residential land during the years of this appeal.

Before concluding, I feel constrained to comment on one of the several cases of jurisprudence brought forward at the hearing, and discussed by the parties — Elwood F Holmes v MNR, [1981] CTC 3062; 82 DTC 1010. In my opinion the favourable conclusion reached by the Board in Holmes, (supra), must be viewed with considerable caution, in light of the adverse decision reached in Dorothy Mae Hughes v MNR, [1980] CTC 2173; 80 DTC 1157, upheld in its essential parts on appeal at [1984] CTC 101; 84 DTC 6110. Therefore in the end analysis, the appeal is allowed in part in order that the gain on Parcel “D” realized in 1978, be taxed on capital account. That gain is to be calculated on the basis of a V-Day value of Parcel “D” in the amount of $1,750 per acre as the Court had been informed at the start of the hearing was agreed by the parties in the event that such a determination should be made. With regard to the other years under appeal, and the gains realized therein on Parcel “C” sales, the appeal is dismissed. However because of a further agreement between the parties, the V-Day value of the property in Parcel “C” is determined at $6,438.88 per acre, rather than at $5,129.23 per acre as previously assessed. The entire matter is referred back to the Minister for reconsideration and reassessment.

Appeal allowed in part.