Frederick L Marshall v. Minister of National Revenue, [1983] CTC 2664, 83 DTC 592

M J Bonner [ORALLY]:—The appellant owned an orchard. It was a capital asset in his hands. He subdivided the land into residential building lots, had municipal sewer, water, roads and other services installed and sold the lots in the 1975 and 1976 taxation years. The respondent assessed tax for those two years on the basis that:

(a) in the course of converting the orchard into serviced residential building lots the appellant converted the land from a capital asset to the inventory of a business; and

(b) in the course of the 1975 and 1976 taxation years as lot sales took place the appellant realized capital gains and business profit, the latter being income per se, one-half of the former being taxable capital gains.

The respondent assessed the 1977 taxation year on the basis that the 1976 reserves in respect of both classes of inclusion were to be brought in.

The appellant made a variety of attacks on the assessments under appeal. He bought the orchard during the 19403. The year was 1942, I believe. He contended first that the entire gain was on capital account, that is to say, that the lots when sold were capital assets. He contended further that the respondent’s figure for V-Day value was too low. He adduced no evidence as to V-Day value during the first part of the hearing.

He contended in the alternative that if the lots when sold were inventory then the respondent erred in his assumption that the date of conversion was October 10, 1973, a date which fell in the 1974 taxation year. The correct date was, he said, June 12, 1974, when government permission to sell the lots was first received, or, at the earliest, March 29, 1974, when the plan of subdivision was first registered.

The parties to the appeals were agreed that the hearing of the appeals should be split into two parts in order to save the expense of a possible misfire on valuation evidence. They agreed that the second branch of the hearing should be devoted to the reception of evidence on V-Day value and depending on the outcome of the conversion or not, and if so “when” issues, the reception of evidence as to the value of the land on the date found as that on which conversion took place.

I will say now that for the reasons which I will outline I have concluded that the appellant’s activities in subdividing and servicing the lands in question and, in effect, in transforming the lands into serviced residential lots constituted the conduct of a business or perhaps, more accurately, of an adventure in the nature of the trade of a land developer. Further, I find that the respondent did not err in his assumption that the conversion occurred not later than October 10, 1973.

Before expressing my reasons for this conclusion I must turn to an aspect of the assessments that, although not attacked, I find most peculiar. It concerns timing of the taxation of the capital gains. The conversion occurred, according to the respondent, and correctly as I have found, on October 10, 1973. It is therefore hard to see how the disposition and reacquisition deemed by section 45 of the Income Tax Act to occur upon change in use of land can fail to have resulted in the realization on that day of the capital gains. Although I have not had the benefit of argument on this point it seems to me that capital gains cannot be seen to have occurred, as it were, in bits and pieces during the two subsequent years as and when the subdivision lots were sold. It may be that the appellant’s 1974 taxation year is statute-barred, but even if so that cannot excuse the mistiming of taxation. I raise the point now so that the parties can, if so inclined, amend their pleadings before the second branch of the hearing to enable final disposition at that time of all remaining issues.

I turn now to my reasons for the finding that there was on October 10, 1973, a change in use or conversion of the land from a capital asset to inventory. This is not, as I see it, a case similar to John Lloyd McGuire v MNR, [1956] CTC 98; 56 DTC 1042; where the owner of land simply realized its value in the most advantageous way by registering a plan of subdivision and selling the resultant parcels. Rather, this is a case in which, as the evidence makes clear, the services of lawyers, surveyors, engineers and a construction firm were brought to bear so as to enable the appellant to sell a product. That product, a group of twenty residential building lots, was qualitatively different from the fruit orchard which the appellant held at the outset as a Capital asset. Actually, the twenty lots were not all completely formed from the block which comprised the orchard. There was, in effect, a swap of lands with an adjacent owner whose lands were jointly developed with the appellant’s in one plan of subdivision. An inconveniently placed boundary of the original land necessitated the swap.

The appellant testified that he was experiencing problems in farming a small block of land surrounded by subdivisions. He was contacted by the City in January of 1973. The City wanted him to permit the opening of a road through the orchard. That road was necessary for the development of the adjoining lands, sometimes called the Ogopogo lands. The appellant refused an offer from Ogopogo to buy his land as a block. He testified that he did so because, “You can make more money selling it in pieces than in one big piece”. The “more money”, whatever its quantum, in my view flowed not from the appreciation in value of the capital asset which was the orchard, but from the subsequent entrepreneurial activity which is indistin- guishable from that undertaken by a person carrying on the business of a land developer.

The appellant’s counsel made much of the fact that the appellant hired professionals such as lawyers, engineers, surveyors and a contractor who did most of the actual work involved in the development process. That factor, in my view, matters not a bit. It was the appellant who effected the development of his lands at his expense. The professionals and the contractor carried on-their own businesses in the course of which they did work for the appellant which assisted the appellant in the development process. They did not act as principals in the development process. The appellant carried on that process in so far as his own lands were concerned.

I turn next to the question when the change in use or conversion of the land to inventory took place. The October 10, 1973, date was chosen by the respondent on the basis that it was on that day that the contractor’s earthmoving machinery moved in and started on the installation of the various services. That the contractor did so on that date was clearly established by the evidence of Mr Blagbourne. Much of the work was completed within the next twelve days when a stop order was issued. Trees were cleared from the road allowances. Excavation operations carried on in connection with that work made future use of the land on which the fruit trees remained impractical because of access problems and, in fact, the appellant’s evidence was that later use of the lands as an orchard was not attempted. Although on October 10, 1973, the subdivision plan remained to be registered and the lifting of the provincial freeze remained to be effected, the appellant was then committed to a course of action which involved taking care of those matters and he in fact ultimately did take care of them. The arguments of counsel for the appellant in support of one or the other of the two later dates fly in the fact of actual on-site construction operations and rest on what I regard as the illogical premise that it cannot be said that use of the land for development purposes commences until the process is virtually complete and all possible obstacles to successful completion of the process are eliminated.

For the foregoing reasons I have reached the conclusions previously expressed on the points to be decided at this time. The hearing will now be adjourned until the parties indicate that they are ready to start the second phase.