Joseph C Williams v. Minister of National Revenue, [1983] CTC 2207, 83 DTC 186

M J Bonner:—The appellant appeals from assessments of income tax for the 1974 to 1977 taxation years. On assessment the respondent included in the computation of income:

(a) for 1974, payments made to the appellant for the grant of an option to purchase his interest in a parcel of land in Richmond, British Columbia;

(b) for 1975, the gain from the sale of that interest pursuant to the option;

(c) for 1976 and 1977, amounts previously allowed as reserves under subparagraph 40(1 )(a)(iii) of the Income Tax Act.

The appellant, at all relevant times, was a real estate salesman. His employment income consisted only of commissions. In 1968 he worked for Fraser Valley Lands Limited, a real estate broker.

The appellant testified that he and his wife had discussed the fact that his employment could not provide a secure income. They decided to build an apartment building with a view to obtaining a secure and steady source of income. The appellant said that it was with that objective in view that he approached a Mr Abercrombie and secured the listing on about five acres of land in Richmond, British Columbia.

The appellant then approached Irvin J Udy, the man who was the principal owner of Fraser Valley Lands Limited. Mr Udy was, as the appellant knew, a man who had considerable experience in the development of real estate, including the erection of apartment buildings. The appellant said that he wanted to have a building containing about fifty units. About one acre of land was required for that purpose. The area of the Abercrombie lands was, therefore, considerably more than he needed. It was also, he said, more than he could handle. There were, therefore, two good reasons from the appellant’s standpoint for purchasing the land in association with Mr Udy. The first was expertise, the second was to secure someone to take the land excess to the the appellant’s needs. The appellant and Mr Udy purchased the Abercrombie lands in 1968. They did so on the basis that each would have an undivided one-half interest at the outset and that the land would be divided between them after rezoning.

About two years after the purchase the appellant sold half of his one-half interest to a Mr Smith. The appellant explained that two and one-half acres was more than he needed and that his remaining one-quarter interest, which would yield a site of about one and one-quarter acres, would be sufficient to serve as a site for the building which he proposed.

The appellant’s commission on the sale to himself and Mr Udy was used for his share of the cash downpayment. The next instalment of the purchase price payable by the appellant was paid from funds generated by the sale to Mr Smith of a one-quarter interest. In the result, the appellant was left with clear title to his remaining one-quarter interest. The appellant stated that he was not forced to sell in order to meet the second instalment.

The appellant left it to Mr Udy to bring about the necessary rezoning. At the time of purchase the zoning classification was R-2. It permitted smallholdings and residential uses, but not multiple-unit buildings. At the time of purchase Mr Udy was aware, as a result of a feasibility study done previously, of the general location of future highways and high density residential development areas planned in the municipality, but he stated that he did not make the appellant privy to “this expensive information”. He checked with a municipal official as well and all indications being that the land in question and the surrounding area would become a high density residential zone, Mr Udy agreed to buy. To the appellant’s somewhat inexperienced eye the site was desirable for use as an income property because it was close to schools, parks and shopping.

In November of 1969 an employee of Mr Udy wrote to the municipality in a successful attempt to secure approval in principle for the necessary rezoning of the property. Little progress was made for about a year after that because Mr Udy was ill.

A municipal committee later reached the conclusion that servicing and traffic considerations dictated that a larger parcel which included the five acres had to be “done by one developer on an overall basis”. Later in 1972 or early in 1973 a formal rezoning application was submitted by Mr Udy in respect of the five acres which, by then, were owned by himself, Mr Smith and the appellant, and also in respect of adjacent lands. It was then discovered that the municipality wanted to impose a development levy before it would proceed further. It demanded a payment of more than $400,000 in offsite development costs for the total area in question, sixteen acres.

The municipality maintained its position that the development of the entire sixteen acres had to be coordinated. It would not consider any proposal permitting any single land owner in the development area to proceed alone. It would appear that the owners were not prepared to proceed in concert. The municipal planning director then suggested that the properties be sold and apparently went so far as to suggest to various developers that the property was available. Ultimately, Mr Udy and Mr Smith received an offer to purchase from a company called Imperial Ventures Ltd. After some bargaining the two were prepared to sell. Mr Udy testified that the appellant persisted in refusing to sell unti the planning director suggested that the municipality would put a park in the area to be allocated to the appellant. Reluctantly, the appellant joined in granting the option which, in due course, was exercised.

The appellant did not secure specific plans for an apartment building. However, the evidence was that he was able to use an adaptation of plans which had been prepared for and already used successfully by Mr Udy. It would appear, too, that financing was no obstacle to the erection of the proposed building.

It may be that Mr Udy was a person who carried on the business of a dealer in real property. However, even assuming that he was, the relationship between the appellant and Mr Udy was not one by which the appellant committed himself to any course of dealing with the land which happened to be chosen by Mr Udy. Certainly, the two were not partners, as found by the respondent. The arrangement, from the outset, was that the appellant was to get separate title to his own parcel. The association with Mr Udy was limited to one in which the appellant secured assistance with the purchase and with the rezoning process.

When all the evidence is examined, it is fairly clear that the intention which the appellant said led him to purchase was one which he was capable of carrying out, provided rezoning could be obtained. By associating himself with Mr Udy and seeking to secure rezoning the appellant minimized the risk of failure. Through Mr Udy, the appellant made persistent efforts to proceed with his plan. When the municipality adopted what, according to the uncontroverted evidence of Mr Udy, was the unprecedented course of levying a development charge and insisting on a unified redevelopment scheme, the appellant’s plans were frustrated. Even then, the appellant persisted until he was faced with a threat that would deter even the most determined man. Had his property been rezoned as park land his investment would obviously have been seriously diminished in value. In summary, the appellant’s whole course of conduct is consistent with the existence, as asserted, at the time of purchase of an exclusive intention of erecting an apartment building as an investment.

I recognize that the subject matter of the transaction is raw land and that there is some connection between the appellant’s ordinary occupation and the transaction in question. However, those factors are not conclusive. The evidence establishes, on the balance of probabilities, that the land was purchased as a first step in a process intended to lead to the creation of a capital asset and not with a view to turning it to account for profit. Counsel for the respondent indicated at the outset of the hearing that the Minister accepts the V-Day value of the land as set forth in the appellant’s returns of income. Accordingly, the appeals will be allowed and the assessments in question referred back to the respondent for reconsideration and reassessment on the basis that the gains in issue are on capital account.

There was a second issue raised by the pleadings. It related to the deductibility of capital cost allowance and other expenses of a motor vehicle owned by the appellant. No evidence was led on that issue. The appellant is entitled to no relief in this regard.

Appeal allowed.