H Loyens v. Minister of National Revenue, [1983] CTC 2601, 83 DTC 535

Tremblay, TCJ:—This case was heard in London, Ontario on November 2, 1982.

1. The Point at Issue

Pursuant to the pleadings there are, however, over ten points at issue. The main point is whether the appellant is correct in considering as capital gain the profit made in 1978 in selling a farm purchased in 1974 with two partners, two construction firms.

2. The Burden of Proof

2.01 The burden is on the appellant to show that the respondent’s assessments are incorrect. This burden of proof results especially from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

2.02 In the same judgment, the Court decided that the assumptions of fact on which the respondent based the assessments are also deemed to be correct. In the present case, in paragraph 5(a) to (x) of the reply to the notice of appeal, the respondent described the facts on which he based his assessment:

5. In reassessing the Appellant and confirming the same the Minister of National Revenue relied upon the following assumptions of fact:

(a) at all material times the Appellant was manager of Walloy Excavating Company Limited (“Walloy”), a corporation owned by the Appellant as to 25%, the Appellant’s brother as to 25% and William Wosko as to 50%;

(b) during the taxation years 1975, 1976, 1977 and 1978 Walloy paid on behalf of the Appellant, the cost of OHIP and other personal insurance and during the years 1975, 1976, 1977 the cost of personal clothing expenses, in the amounts as follows:

	Insurance	Clothing
1975	$ 866.00	$351.65
1976	$1,012.00	$398.26
1977	$ 563.00	$573.90
1978	$ 901.90

(c) the payments by Walloy of the expenses set out above in subparagraph (b) were benefits or advantages conferred on the Appellant because he was a shareholder of Walloy;

(d) at all times the Appellant was aware or should have been aware the amounts of such benefits or advantages should have been included in reporting his income for the respective taxation years;

(e) the Appellant knowingly or under circumstances amounting to gross negligence did not include the amounts of such benefits or advantages in reporting his income for the respective taxation years;

(f) at all material times the Appellant’s employer, Walloy owned and made available to the Appellant an automobile for his personal use;

(g) reasonable standby charges for such use of an automobile were not less than the following amounts:

1975	$1,031.76
1976	$1,361.40
1977	$1,746.00
1978	$1,739.74

(h) the Appellant reported $600 as “other income” in each of the 1975, 1976 and 1977 taxation years in respect of the use of an automobile and did not report any amount in respect thereof in 1978;

(i) the Appellant was aware or should have been aware that as reasonable standby charges for the use of an automobile the following additional amounts should have been reported as income:

1975	$ 431.76
1976	$ 761.40
1977	$1,146.00
1978	$1,739.74

(j) in the taxation year 1978 the Appellant knowingly or under circumstances amounting to gross negligence did not report the amount of $4,877 paid to him as a bonus by Walloy;

(k) the Appellant was aware or should have been aware the amount of such bonus should have been reported as income in 1978;

(l) the Appellant deducted as carrying charges amounts for interest on moneys borrowed to earn interest income as follows:

1975	$1,200.00
1976	$6,378.69 (as amended)
1977	$6,375.65

(m) none of the interest so claimed by the Appellant was on money borrowed or on amounts payable for property acquired to earn income from a business or property except to acquired lands or on amounts payable for lands which were not used in, or held in the course of, carrying on a business by the Appellant other than a business in the ordinary course of which land was held primarily for the purpose of resale or development, nor held primarily for the purpose of gaining or producing income from the land;

(n) at all material times the Appellant and his brother, William Loyens, were equal owners of a property known as the Dykyj Farm;

(o) in 1976 the Appellant and William Loyens granted an option to Fred Lewis at a price of $20,000 to acquire the Dykyj Farm;

(p) the Dykyj Farm was not sold to Fred Lewis;

(q) the Appellant’s share of the gain on the granting of the option was $10,000;

(r) the Appellant did not report any amount as income on account of the option in 1976;

(s) in 1974 the Appellant purchased, in equal shares with Wasko Construction Company Limited and William Loyens Incorporated, property described as Part of Lot 15, Concession 6, Township of London and known as the Harrison Farm;

(t) the Appellant and the two other owners were motivated to acquire their interests in this property and to hold these thereafter by the prospect of trading in, speculating in or turning the same to account for profit;

(u) in 1978 the Appellant and the two other owners sold their interests in the property for total proceeds of $250,000.00;

(v) the Appellant’s share of the gain on the sale of this property was $33,039.91 and his share of the allowable reserve was $24,772.37;

(w) the Appellant’s gain on the sale of the property was profit from business or

an adventure in the nature of trade or a profit-making undertaking or concern;

(x) in reporting income for 1978 the Appellant reported a taxable capital gain

of $16,945.50 on the sale of the property and claimed a reserve of $10,167.

3. Partial Admission and Settlement

According to the pleadings many points are involved concerning the taxation years 1975 to 1978. However, at the beginning of the hearing the counsel for both parties informed the Court that they had reached a partial admission and settlement on the following points:

3.01 The appeal is allowed in part for each of the following years, referring to the T7W-C form attached to the reassessments:

1975

The penalty must be levied only on $1,217.65, and not on $1,649.41.

1976

(a) the penalty must be levied only on $1,410.26, and not on $3,022.55;

(b) the granting of option of $10,000 must be considered as down payment; and

(c) the standby charges of $1,612.29 which were omitted were reduced to $850.89.

1977

The penalty must be levied only on $1,136.90, and not on $2,282.90.

From 1975 to 1977 the reassessments are maintained except on the points above.

1978

(a) the penalty must be levied only on $901.90, and not on $7,518.64;

(b) the following point is in dispute: should the profits made from the sale of the Harrison farm be considered as a capital gain or not?

4. The Facts

4.01 Concerning the purchase and sale of the subject property, the Harrison farm, involved in the point at issue, the appellant admitted subparagraphs (s), (u), (v) and (x). Subparagraphs (t) and (w) are denied.

4.02 At all material times the appellant, who is 45 years of age, was manager of Walloy Excavating Company (Walloy), a corporation in which the appellant owned 25%; the appellant’s brother another 25%, and William Wasko 90%. He has been working for this company since 1960.

4.03 Walloy was involved in gravel, excavating and ready-mix concrete.

4.04 From 1960 to 1974, the appellant had been living in the Township of London (RR #2) in a home built on a one-acre piece of land, one mile away from his employer’s office.

In 1974 he moved into his father’s house, which was two houses further east of the former one. He is still living in that home.

4.05 From 1960 to 1979, the appellant purchased and sold the following properties as it appears from Exhibit A-1:

HENRICUS LOYENS

RECORD OF SALES

1972 — 1979

					Gain
Property	Year	Proceeds ACB Expenses (Loss)
Harrison Farm
Concession 6	1978	$83,333	45,067	4,375	33,891
Highway 23 Property	1973	34,900	28,413	2,395	4,092
Maguire Property	1973	6,750	5,000	—	1,750

4.06 The two properties, disposed of in 1973 (Highway 23 and Maguire), had been purchased the same year with the intention to make money in selling them later. The profit on both was taxed as income.

4.07 He bought the Harrison farm in 1974 with two othe associates: Wasko Construction Limited and William Loyens Incorporated, each owning one- third of the property. The property was described as Part S /2, Lot 15, Concession 6 in the Township of London.

4.08 Wasko Construction Limited was a house builder and not a developer. It was the same for William Loyens Incorporated.

4.09 His personal intention in purchasing the subject property was to move there and live there. The whole farm was 90 acres; he owned 30 acres. In cross-examination, he said that Bill Loyens through a real estate agent negotiated the farm transaction. “He negotiated it without asking me about it” (SN P 34). He did, however, give his consent later. There was a mortgage on the property and they assumed it.

4.10 In 1978, the two other associates wanted to sell the property:

I didn’t want to sell it because I wanted to live there. So I said well you sell yours and do what you want and I will keep mine. So I went to the township to see If I could get it severed and I found out that I couldn’t get it severed. (SN P 20)

4.11 As Exhibit A-2 was filed a letter dated October 18, 1982 signed by a Mr A F Bannister, Administrator and Clerk for the Township of London. This letter reads as follows:

TO WHOM IT MAY CONCERN

RE: Part 81/2 Lot 15, Concession 6, Township of London

Dear Sirs:

This letter will serve to advise that Mr Harry Loyens made enquiries of this office in the summer of 1978 with respect to severing a parcel of land for his own uses for the purposes of building a residence on part of the above-noted lands.

Mr Loyens was advised that a severance from the above-noted lands would be contrary to the Official Plan which had been approved by the Township of London and adopted on May 16th, 1978.

The 1978 Policy of the Official Plan discouraged severing of smaller parcels from larger holdings and required that retained and severed parcels be viable agri- cultural units. As Mr Loyens would not be able to create a viable unit any application that may have been made to the Committee of Adjustment would have been contrary to the Official Plan Policy.

I note from our records that the property was subsequently sold as one parcel based on correspondence in our files dated November 1978.

4.12 Mr Fred A Lewis is Reeve of London Township (former council member and former warden), and said that before the new official plan passed in 1978, it would have been possible to have severed the Harrison farm pursuant to the 1960-61 official plan. He confirmed the letter signed by Mr Bannister, his clerk administrator.

4.13 Concerning the fact that since 1974 he did nothing in terms of arranging for a severance prior to 1978, the appellant said:

No, I hadn’t done anything because there was no rush. The property was there and I figured that when I got ready I could go and actually I couldn’t even get a mortgage until I had the original mortgage paid off that was on the property from anybody else to build my own house. (SN P 32)

4.14 After 1978, with Bill Wasko and Bill Loyens, the appellant bought a property by the name of Herbert Farm. It was located at the edge of the City of London. The purpose of buying it was to resell it. In fact, it was resold a few years later.

5. Law — Cases at Law — Analysis

5.01 Law

Sections 3, 9 and 248 of the Income Tax Act are the main provisions involved in this case. They shall be quoted in the analysis if it is required.

5.02 Cases at Law

The following cases at law were referred and studied by the Court:

1. H M O V Guy Dumas, [1981] CTC 1; 80 DTC 6398;

2. Regal Heights Limited v MNR, [1960] CTC 384; 60 DTC 1270;

3. Racine, Demers and Nolin v MNR, [1965] CTC 150; 65 DTC 5098;

4. Don nerfield Construction Limited et al v MNR, [1982] CTC 2428; 82 DTC 1409;

5. Brian McKinney et al v MNR, [1978] CTC 2675; 78 DTC 1490:

6. Martin A Bitz v MNR, [1981] CTC 2426; 81 DTC 382;

7. John Alvin McDonald v MNR, [1981] CTC 2869; 81 DTC 739;

8. MNR v Clifton H Lane, [1964] CTC 81; 64 DTC 5049;

9. Mary Boychuk v MNR, [1981] CTC 2098; 81 DTC 107:

10. Warnford Court (Canada) Limited v MNR, [1964] CTC 175; 64 DTC 5103;

5.03 Analysis

5.03.1 The crux of the matter is to determine the actual intention of the appellant in purchasing the Harrison farm. Was it to resell as the respondent contends, or was it to keep his part (30 acres) to build a home on it?

5.03.2 First, it is not easy to give worthy evidence concerning the intention at a certain date. As said above, the appellant has the burden of proof.

In this case, it is not sufficient for the appellant to give effective evidence by saying in Court that his intention in buying the Harrison farm was to keep it and to build a home on it. Better evidence must be given.

His own testimony must be confirmed by something else. He is certainly the best person to know what is the “something else” which can confirm his testimony.

5.03.3 Moreover, there are some points in the evidence which seemed to confirm the respondent’s contention that the intention was to resell:

(a) the appellant made some commercial transactions (para 4.05, 4.06 and 4.14);

(b) the two co-purchasers of the Harrison farm were two companies involved in construction. With the main shareholders of those companies, he made at least one other commercial transaction after 1978. In the Harrison farm transaction, one of the associates negotiated it “without asking me about it.” (para 4.09);

(c) the evidence shows that there is a ready market for farms in the area;

(d) if the appellant was interested in building a home on his part of the Harrison farm why did he wait four years? The reason given, that there was no rush (para. 4.13), may be true. However, it is difficult to think that the appellant, in construction for many years, was not aware of changes that would occur with the new official plan in 1978.

The burden of proof was on the appellant’s shoulders. The appellant did not reverse this burden. The reassessment on this point must be confirmed.

6. Conclusion

The appeal is allowed in part and the matter referred back to the respondent for reassessment in accordance with the above reasons for judgment.

Appeal allowed in part.