Poul E Hansen v. Minister of National Revenue, [1983] CTC 2728, 83 DTC 655

Tremblay, TCJ:—This case was heard on December 1 and 2, 1982, at the City of Vancouver, British Columbia.

1. The Point at Issue

The point at issue is whether the appellant is correct in contending that the $304,367.82 of profit made on the sale of 40 acres of land in 1976 is capital in nature. The land was purchased in a partnership in 1968.

The respondent contends that the profit is of a business income nature. This decision is based, among others, on the fact that the appellant, an architect, his partner, Mr William Secora, a licensed real estate salesman, trader and speculator, and the appellant’s wife, also a licensed real estate salesperson, were fully knowledgeable in land dealings in the particular area of Burke Mountain near Port Coquitlam, BC which is the location of the Subject property sold by the appellant.

2. The Burden of Proof

2.01 The burden of proof is on the appellant to show that the respondent’s assessment is 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 assessment are also deemed to be correct. In the present case, in subparagraphs 3(a) to (s) of the reply to the notice of appeal, the respondent described the facts on which he based his assessment:

3. In assessing the Appellant in respect of his 1976 taxation year, the Respondent assumed, inter alia, that:

(a) 3 parcels of land which contained 40 acres each were purchased in 1968 by the Appellant and Mr Bill Secora as tenants-in-common for a total purchase price of $37,500.00. The land is located in the Burke Mountain area near Port Coquitlam in the Province of British Columbia; (admitted)

(b) in February, 1969, the property was transferred to Burke Mountain Properties Ltd, a company in which the Appellant and Secora had equal interests; (admitted)

(c) on July 16, 1969, the property was listed for sale by Block Brothers Ltd and the Appellant’s spouse, then an employee of Block Brothers acted as listing agent; (not admitted)

(d) 2 more attempts to sell the property for $3,000.00 an acre were made and interim agreements to that effect were signed in 1969 and 1970 respectively, with Foresthill Development Co Ltd; (not admitted)

(e) in September, 1970, Burke Mountain Properties Ltd transferred an undivided one-half interest in the property to Secora Holdings Ltd, a company owned by Secora who at or about the same time transferred his shares in Burke Mountain Properties Ltd to the Appellant. As a result, Burke Mountain Properties Ltd (now owned by the Appellant) and Secora Holdings Ltd each owned an undivided one-half interest in the property; (admitted)

(f) one of the stated objects of both Burke Mountain Properties Ltd and Secora Holdings Ltd was to buy, sell and deal in real property; (admitted)

(g) in March, 1971, the one-half interest owned by Burke Mountain Properties Ltd was transferred to the Appellant; (admitted)

(h) in October, 1971, a further attempt was made and an interim agreement for the sale of one 40-acre parcel for $120,000.00 to Savannah Construction Ltd was signed, the Appellant’s spouse again acting as listing agent; (admitted)

(i) also in 1971, the Appellant and Secora Holdings Ltd divided the property,

each obtaining separate title to one 40-acre parcel thereof; (admitted)

(j) the Appellant sold his one-half interest in the remaining third parcel (Lot 10) for $60,000.00 sometime between March 27, and May 1, 1973, under an option granted by the Appellant to Secora; resulting in a net gain of $48,659.12 which was added to the Appellant’s 1973 taxation year as business income which assessment the Appellant appealed; (admitted)

(k) on or about May 15, 1973, Secora Holdings Ltd sold its 80 acres (Lots 10

and 15) to Dawson Developments Limited for $400,000.00; (admitted)

(l) on July 11, 1974, the Appellant granted an option to purchase his 40 acres (Lot 16) to Daon Development Corporation for $20,000.00 and if the option was exercised the purchase price would be $330,000.00. The option ran for a period of 1 year. For a further sum of $30,000.00 paid before the anniversary date, the option could be extended for another 1 year period; (admitted)

(m) the Appellant received $20,000.00 from the proceeds of the option from Daon Development Corporation in the 1974 year; (admitted)

(n) the option to Daon Development Corporation was not exercised in 1975 and the Appellant received a further sum of $30,000.00 in 1975 to extend the option another year; (admitted)

(o) in 1976, Daon Development Corporation exercised its option and acquired the 40 acres (lot 16); (admitted)

(p) that the sale in 1976 to Daon Development Corporation gave rise to a gain of $304,367.82, less a 1976 reserve of $225,047.72, which resulted in a total adjustment being made to business income in the amount of $79,320.10; (admitted)

(q) the said William Secora was, at all material times, to this appeal, a licenced real estate salesman, the Appellant herein, an architect, his spouse Rita, a licenced real estate salesperson; and all 3 persons by virtue of their occupations were fully knowledgeable in land dealings in that particular area; (not admitted)

(r) the Appellant, in joining in partnership with William Secora who could be considered as a trader or speculator, was by that association, in no different position than that of Mr Secora, and that as a whole the partnership, and ultimately, the Appellant has the intention of turning the property to account by means of resale as part of an adventure in the nature of trade or a profit-making concern or undertaking; (not admitted)

(s) the Appellant, in acquiring the above-described lands, did so with the intention of turning the property to account by means of resale as part of an adventure in the nature of trade or a profit-making concern or undertaking and alternatively, if not acquired with the primary intention to sell for profit at least with the dual or alternative intention, ab initio, to do so. (not admitted)

3. The Facts

3.01 Only one point at issue

At the beginning of the trial it was underlined by the counsel for both parties that the V-Day value shall be the object of a new trial if the conclusion of the present trial is that the profit on the sale of the subject property in 1976 is a capital gain and not a business income.

3.02 Also at the beginning of the hearing, counsel for the appellant admitted all of the assumptions of fact of the respondent quoted above (para 2.02), except for subparagraphs (c), (d), (q), (r) and (s).

A Examination in chief of the appellant

3.03 The appellant was born in 1919 in Denmark and became an architect in that country in 1948. He practised his profession there until 1956. In June 1956, he immigrated to Canada and practised his profession in Vancouver with the architectural firm, CBK Van Norman & Associates until 1960. He then moved to New Westminster, BC, where he opened his own office. In 1980, he moved back to Vancouver.

3.04 Explaining how he became involved with the subject property, the appellant said that in 1963 he went to the Burke Mountain to visit it with his family:

... I Should say my family have always beer an outdoor family taking a great interest in nature, camping, hiking, and in ou .me from 1956 to, up to this day, of course, we have explored this country and .« so happened in, I think it was 1963, that I met Mr and Mrs Edward who live up on Burke Mountain. (SN p 14)

The Burke Mountain is roughly 30 miles from Vancouver.

Mr and Mrs Edward were the only persons who were living there. It was a very nice place. The Hansen family loved the property. However, the spot where the Edwards were living was the highest part of the area, the worst, precipitous, rocky and rugged part. There were no sewers, roads or power lines.

Two maps (Exhibits A-1 and A-2, showing elevations of 25 feet) were filed to show the whole of the Edward’s property: three parcels of land (subdivisions 10, 15 and 16 of section 17, township 40, New Westminster district) which contained 40 acres each. The Edward’s home was on lot 16. It is around 850 feet above the valley floor. From the Exhibits A-1 and A-2 it is easy to see that it is, at best, a very difficult place to develop.

3.05 The Hansen family became friends with the Edwards. Many times they visited them. It was only a few miles from Port Coquitlam and it was still in the wilderness. From the road, there is a trail (“a very rough trail”, the Edward’s trail) to go to the Edwards. The appellant liked the area and on many occasions “sitting around the campfire” he attempted to purchase one or two acres from the Edwards. The answer was always negative. “. . . You can use the property, but we will not sell it” (SN p 19).

The appellant and his son restored “a dilapidated cabin” located next to the Edward’s home “to the point where we could spend weekends in it” (SN p 20 and 21).

They went and spent weekends there from 1963. The appellant’s son was then going to university and was concerned with survival in nature. Mrs Edward was an expert on that: . . she has taught military people how to survive in nature”. The Edwards then were in their 50s (SN p 21).

3.06 In 1967, the Edwards .. due to our friendship, revealed they had some financial difficulties. They had a mortgage on the property which had become due and they were asking for my opinion as to what they could do”. The appellant suggested that they have it reappraised and remortgaged as security for the $25,000, which was due. It was not done because in 1968, the appellant received a telephone call from Mr Edward. He phoned from the Vancouver Courthouse. They were in Court because of the foreclosure action on the property. He talked to the Court clerk informing him he was prepared to pay the mortgage for the Edwards. “I committed myself at that point and I didn’t have any idea where and how I would get the money.” (SN p 24). The amount of money involved was about $37,000 or $38,000. The Court gave him 10 days to come up with the money.

3.07 He talked to one of his clients, Mr William Secora, a real estate salesman “a promoter type”, who introduced him to a Mrs Polkowski. They all decided together to finance the Edwards: Mrs Polkowski, $30,000; Mr Secora, $4,000; the appellant borrowed the other $4,000. They all loaned that money to the Edwards for 90 days to give them a chance to buy back the property. The $38,000 was paid to the Court and the Edwards were protected from the foreclosure action (SN pp 26 and 27).

3.08 After 90 days the Edwards did not repay the loans, the lenders gave them several extensions. Mr Secora and the appellant had to use the Edward’s property as security for the loan of Mrs Polkowski’s $30,000. It was on March 7, 1968 and the interest was 12 per cent (Exhibit A-7). Another document between the Edwards, Mr Secora and the appellant also dated March, 1968 was filed as Exhibit A-3 (SN p 29). The introductory paragraph and the numbered paragraphs 1 to 6 read as follows:

WHEREAS the Edwards are involved in legal proceedings with the Estate of the late Aeneas McBean Bell-Irving, deceased, with respect to the lands more particularly known as Subdivisions 10, 15 and 16, of Section 17, Township 40, New Westminster District (hereinafter called “the said lands”);

NOW WITNESSETH IT that the parties hereto hereby agree as follows:

1. The Edwards agree that in order to determine and settle the aforesaid lawsuit, the said lands shall be sold by the Estate of Aeneas McBean Bell-Irving to Hansen and Secora as tenants in common for a total purchase price of Thirty-seven Thousand Five Hundred Dollars ($37,500.00).

2. Hansen and Secora agree that the Edwards shall have an irrevocable license to live on the said lands for the remainder of their natural life.

3. The Edwards agree that should development of the said lands necessitate the moving or demolition of the dwelling thereon presently occupied by them they will agree to be relocated elsewhere on the said lands.

4. Hansen and Secora agree to give unto the Edwards an option (to be executed contemporaneously herewith) to purchase an undivided one-third interest in the said lands for a consideration of Thirteen Thousand Five Hundred Dollars ($13,500.00) of lawful money of Canada, such option to be exercised within six (6) months of the date hereof. Exercise of such option shall be effected by a notice in writing to such effect delivered or mailed by prepaid post addressed to Hansen and Secora at 513 Columbia Street, New Westminster, British Columbia. A notice mailed by prepaid post shall be deemed to have been delivered forty-eight (48) hours after posting.

5. Hansen and Secora agree that at all times in the development of the said lands they will consult and retain the services of Frank Edward with respect thereto.

6. It is understood and agreed that these presents contain the complete agreement between the parties hereto and the terms and conditions thereof and that the Edwards have no interest in the said lands other than is herein set forth.

3.09 On May 22, 1968 to complete the option to purchase the undivided one-third interest in the lands provided in paragraph 4 of Exhibit A-3, the parties signed another document (Exhibit A-4, SN pp 30 and 31). It reads as follows:

AGREEMENT

Reference: Edwards, Secora and Hansen.

Re: Legal Description for Burke Mountain Properties,

Sub 10, 15 and 16, Sec 17, Tp 40, NWD

This AGREEMENT, between WILLIAM LOUIS SECORA and POUL E HANSEN, is to certify that Secora and Hansen have on this date agreed not to interfere personally or by any other means with the agreement signed by Frank Edwards and whereby, Edwards by option on or before the 14th day of September, 1968, shall pay the sum of Thirteen Thousand, Five Hundred dollars, ($13,500.00) thereby becoming the eligible one-third ( owner of the properties.

If Edwards does not execute the option on or before the aforementioned date, Secora and Hansen shall become the sole Owners (by tenancy in common) of the properties and they each shall own and be responsible for one-half ( />) or sixty

(60) acres each in respect to mortgage, taxes and all incumbrances on the properties.

It is also agreed that each of the owners, Secora, Hansen and Edwards, shall have the first option or first refusal on the part of the other owners, and that no negotiations or sale shall take place without the knowledge of and full consent by each owner.

No transaction, applications or activities in regard to the sale, development or utilizations of these properties, shall take place without the full consent of each of the owners.

Since some discussions have already taken place, they shall hereby, be declared null and void, and it shall be agreed that whatever the owners intend to do shall be done by mutual agreement.

DATE: May 22nd, 1968

(signed)	(signed)
WILLIAM L SECORA	POUL E HANSEN

3.10 The Edwards did not meet the requirements of Exhibit A-4. On several occasions, attempts were made to make it possible for them to exercise the options. The appellant and his wife decided to help them to get the money. A document written by the appellant to Frank Edward on October 10, 1968 was filed as Exhibit A-5. It reads as follows:

Memo CONFIDENTIAL

Oct 10 ’68

Frank

Just to let you know that Ritta can borrow the $13,500 from her family and that we are prepared to lend you and Ann the money so that you may be able to at least own the land ( / that you live on.

We are arranging a meeting shortly with Ken Dearden as I told you. He will draw up the papers — at your expense.

I will phone you — or better you phone me, somehow I can’t get thru to your daughter’s line.

And Frank — Please don’t ever let Secora know where the money came from.

Regards Poul

Note — Meeting with Ken Dearden, Ann, Frank, PEH & Ritta/ — Ann was prepared to accept but Frank turned it down — he wants it all back! Ritta got mad.

3.11 On September 7, 1968, a modification to the mortgage (Exhibit A-6) in favour of Mrs Greta Polkowski was made increasing the interest rate from 12 per cent to 18 per cent, and in substance the capital from $30,000 to $31,800 taking into account the unpaid interest of $1,800. Mrs Greta Polkowski was paid in February 1969 after the Bank of BC loaned money to the appellant and Mr Secora. This is confirmed by two letters dated January 13, 1969 and February 14, 1969 received from Mrs Polkowski’s solicitor (Exhibits A-8 and A-9, SN p 38).

3.12 In the second part of 1968 and in 1969, Hydro BC authority approached the appellant and “suggested that there was a power line some 600 feet wide scheduled to come down over the property”:

Secora at times had been talking about the possibility of developing the property which, however, was far from my mind but when the BC Hydro approached us, I thought one way of trying to get them to change their mind was to see if we could get a high value onto the property so that they would proceed to relocate and for that purpose, knowing that if we didn’t co-operate with BC Hydro, we might be expropriated and in the process of being expropriated, it could cut down possibly the land value.

My thought at the time was that if we could indicate a much higher value on the property, then the BC Hydro would change their minds and they did eventually, through the efforts I might say, through our efforts and the efforts of the Ratepayers Association, through the efforts of the three surrounding municipalities, the BC Hydro line is now located a mile and a half, two miles further up the mountain. (SN p 41 and 42)

The appellant prepared the subdivision plan. However, the planning director of the district of Coquitlam suggested not to try to get it on record because it would not have much change. In fact, the council turned it down for many reasons:

(a) the property was located too far away from any of the existing utilities such as power, water, sewer;

(b) the Health Department, even though there were no sewers up there, objected to septic tank installation because it was very rocky (SN p 42 and 43);

(c) the nearest sewers and water supply were about 4 miles from the property (SN p 45).

3.13 The appellant said (SN p 47) that for the same reasons, they submitted a proposed division plan, the property was listed for sale with Block Bros asking $4,000 per acre. It was in 1968-69. They wanted to try and establish a higher value by getting the BC Hydro to change the location of their power line. They did not have any offers from the Block Bros listing.

3.14 Whereas Mr Secora actually sold the property and whereas, the appellant did not want to sell, the appellant said he sold his interest in lots 10 and 15 to Mr Secora and acquired Mr Secora’s interest in lot 16 (SN p 51). In fact, he received $60,000 from Mr Secora for 20 acres of lot 15.

Because of municipal regulations, it was not possible for the appellant to keep lot 16, and for Mr Secora to keep lot 15 and to divide the third lot (lot 10) in two parts. The municipal regulations indeed prevented to divide a lot in less than 20 acres. Lot 15 indeed was a little less than 40 acres. Therefore it was not possible to divide it. It was on May 1, 1973. A few days after, Mr Secora sold lots 10 and 15 to Daon Developments Corporation, a real estate and development company. The appellant said he was convinced that Mr Secora had: “already cooked up a deal” before he bought the said lots from the appellant (SN p 52). Mr Secora sold his 80 acres for $400,000 (SN p 55).

3.15 The profit made by the appellant in 1973 on the sale of 20 acres of lot 15 was considered as business income by the Department of National Revenue. On the appeal of the appellant, the then Tax Review Board maintained the position of the Department of National Revenue.

3.16 After the appellant became sole owner of lot 16 he continued to visit the Edwards and lived in the cabin during the summer weekends. He even planned to build a home on it. With Mr Edward he found a place “. . . reasonably suitable for a house near the creek which we could take water off the creek; and we were talking about maybe having a combined generator diesel plant to produce electricity. And we did stake out a site for the house”. (SN p 57, lines 9 to 12). It is about 200 feet from the Edward’s home.

3.17 In 1974, he received a telephone call from a Mr Wood representing Knowlton Realty Ltd in Vancouver. He wanted to know if lot 16 was for sale. The answer was negative. However, the appellant received a letter from Mr Wood stating he was representing a substantial client. It was on April 15, 1974 (Exhibit A-11). The said substantial client was, in fact, the provincial government:

A He kept coming back at me and approached me at times indicating to me that there was a potential development schedule for Burke Mountain by the BC Housing Authority under the New Democratic Government we had in 1973, and Mr Wood made many telephone calls and he visited with me in my office and he finally said “Look, you might be wise in selling rather than being expropriated”, so now once again, I had another fear hanging over my head.

I said at the time that I had absolutely no intention of selling and that would be it, and he persisted and finally came to the point where I thought well, there must be a way of getting rid of him, so I phoned him or he phoned me and I said look, unless you offer me $10,000.00 per acre, you might as well forget it. And I thought it was done and over with at that time.

Q What was Wood’s response?

A His response was, within a couple of days, he was back with a proposal offering to purchase the property for a price of some $8,500.00 per acre and stating again that I would be very wise to sell now rather than to receive a very meager amount under expropriation, so I did accept the offer on an option basis. (SN p 60-61)

Knowlton Realty Ltd was, in fact, the only agent of Daon Development Corporation and the latter, the agent of BC Building Corporation which was a crown corporation of the provincial government.

3.18 The land was located in the riding of the former Premier: .. it has been indicated many times that this is one of his political ploys that he was now going to do something real for his riding . .

The provincial government purchased, in fact, around 2,000 acres of land, the subject property being at the extreme east end of the development. In fact, the development never even started due to some engineering report which provided, it was not possible to build up there.

At the end of 1982, the area was the same as it was when the subject property was sold in 1976. The Edwards continue to live there and the appellant visits them and lives in the cabin during the summer weekends.

3.19 Twelve photographs of the subject property taken in the fall of 1982 were filed as Exhibit A-14. They show boulders and rock slides and in fact according to the appellant the evidence of the impossibility of a development. The steepness of lot 16 might be an average of 45 degrees. It is impossible to climb the south side. More than half of lot 16 consists of boulders from the mountain (SN p 67 and 68).

3.20 The appellant testified that in acquiring the subject property, it was the only time, he had acquired a large tract of land. He is an architect not a developer, he never purchased a “land with the intention of subdividing, building homes on them or whatever” (SN p 69).

B Cross-examination of the appellant

3.21 In cross-examination, the appellant testified that:

(a) the Edwards in a Volkswagen loaded with rocks can travel the trail and reach their home;

(b) after moving to New Westminster in 1960, the appellant’s family in 1964 moved to Coquitlam near the Port Mann Bridge about 6 to 8 miles from the subject property. His residence was midway between Burke Mountain and his office in New Westminster. In 1977, the appellant moved to Vancouver (SN p 73 and 74);

(c) in the late 1960’s and early 1970’s, he was involved in a partnership of three rental units in Coquitlam and Brunette. He got his one-third interest because he was involved as an architect;

(d) there are some mountains around Vancouver where houses are built, however, on the subject property his contention was that development was impossible (SN p 75 to 80);

(e) the $8,250 per acre received in 1976 “was a ridiculously high price for a piece of property that you couldn't develop” (SN p 82);

(f) he knew in 1968 that the municipality of Coquitlam and the provincial government were doing some surveys in the area of Burke Mountain. He had a copy of the survey. He also knew that real estate companies had submitted a proposed subdivision plan; but in fact they were turned down by the authorities;

(g) the lots 16, 15 and 10 were not zoned RS-2 — ie residential zoning minimum one acre — when they were transferred to them in March 1968. However, the appellant and Mr Secora asked for such zoning in November 1968, at the same time they submitted proposed development plans for condominiums. All this was related to the BC Hydro coming in with their proposal to install a high power line right across the property (SN p 83 to 85);

(h) in fact, the transmission line was located elsewhere because everybody including the appellant and Mr Secora (mayor Thom, taxpayer’s group, council of the district of Coquitlam, council of the city of Coquitlam, council of Maple Ridge) made an effort to have it located elsewhere;

(i) when he said to the Court clerk, he would assist the Edwards, he only wanted to help a friend, not to buy the property;

(j) he recognized an agreement signed on March 8, 1968 (Exhibit R-1) between John Darg Bell-Irving (representative of Bell-Irving Estates) and Poul E Hansen and Mr Secora with respect to the sum of $37,500 for the acquisition of lots 15, 16 and 10, each purchaser having one-half interest. This document was executed by Mr Hardy, the Edward’s lawyer. Bell- Irving Estates is the legal person who sued the Edwards. This deed (Exhibit R-1) was provided in the deed (Exhibit A-3, paragraph 1) between the Edwards, the appellant and Mr Secora.

(k) the basis of Exhibit A-4 was an attempt to get the Edwards back to their property, the 40 acres of lot 16 (SN p 97). In theory, Mr Secora was not in agreement with that despite the fact that he signed;

(l) Burke Mountain Properties Ltd was incorporated on October 23, 1968, the appellant and a Mr Secora being the main shareholders, each one owning half of it;

(m) in February 1969, lots 10,15 and 16 were transferred to the company;

(m.1) a purported agreement between Burke Mountain Properties Ltd and the Edwards, the latter never signed, was filed as Exhibit R-2. In substance, this document was effectively to replace Exhibit A-3;

(m.2) to give the Edwards the right to occupy the house and to use the one-acre cultivated land (rent: $100 per month);

(m.3) to give the opportunity to the Edwards to acquire one-third of the shares of the company, the appellant recommended to the Edwards not to sign the document. It was drafted by Mr Secora. The appellant did not agree with it, however, he tried to maintain a friendly relationship with Mr Secora on the one hand and with the Edwards on the other hand:

I could not see the Edwards sitting up there, I couldn’t see them paying $100.00 a month, I could not see them having to vacate the property for any reason, and I think they’re still up there today, and I would suggest that is due to my personal efforts. (SN p 107)

(n) a handwritten three-page document dated March 8, 1968 written and signed by the appellant was filed as Exhibit R-3. It was an internal memo concerning the Edwards Properties and, more particularly, a phone call to the lawyer, Mr Narley. It summarized the conversation. At the end of the last page one can read:

This shall also be in accordance with the Secora/Hansen agreement, that the properties not be sold or subdivided for at least 2 years.

Further Frank Edward and his wife shall be allowed to live for no cost and to the end of their days on the properties.

March 8th, 1968 — Poul E Hansen

(o) a letter dated December 6, 1968, from Aplin & Martin Engineering Ltd to the appellant was filed as Exhibit R-4: “Aplin & Martin is a registered land surveying company. It is a typical letter for them to try to obtain work.” (SN p 115) . they have checked with City Hall if there was an application for rezoning.” It is at that time that the appellant submitted proposed development plans for condominiums;

(p) a letter dated January 20, 1969, from the appellant to B C Hydro was filed as Exhibit R-5. The three first paragraphs read as follows:

We make reference to the land surveying and development research, together with the extensive architectural and engineering planning presently being carried out by Burke Mountain Properties Ltd, and others in the area referred to above.

The properties comprised of approximately 700 acres, administered by four companies who are in the process of planning, developing and preserving the beauty of the southern slopes of Burke Mountain for the benefit of the public and property owners, by initiating an exclusive, “single residential” area in a park-like setting, allotting one acre per residence.

On January 8th, 1969, the Principals for Burke Mountain Properties Ltd, were notified informally by Mr N L Buchanan, Land Representative for the B C Hydro & Power Authority, who outlined the intention of the B C Hydro Authorities; namely, to install a power line and a cleared right of way on the same southern slopes of Burke Mountain.

(q) another memo dated April 15, 1969 which summarized the arguments to be given to the city council to approve the subdivision was filed as Exhibit R-6;

(r) a letter dated May 22, 1969 written by the appellant to the Corporation of the District of Coquitlam was filed as Exhibit R-7. It is a letter transferring two copies of prints for the proposed subdivision of the above- mentioned development;

(s) two other memos concerning meetings, one dated May 30, 1969 and the other dated June 5, 1969, were filed as Exhibits R-8 and R-9: R-8 — a meeting of the appellant, Mr Secora and a Mr George Willox to prepare the meeting with the municipal planner, the municipal engineer, etc of the municipality of Coquitlam. The latter meeting is summarized in R-9 — it was a question of rezoning, water, requirements for schools, parks, roads, hydro lines underground, etc;

(t) Exhibit R-10 is a handwritten agreement between the appellant and Mr Secora. It is dated May 31, 1972. It concerns the division of the property. However, this agreement did not really apply;

(u) a letter dated July 30, 1969, from MacNaughton Realty Ltd (Exhibit R-11) informed the appellant that the property was listed at $500,000 with Block Bros which was approximately $4,000 per acre. It was obvious from the letter that it is listed in view of an “expropriation hearing”, or to establish a higher value on the property:

. . . if that evidence gets into any kind of expropriation hearing. In other words, the real test of value is what the market will pay, and if it is not listed, at least we are able to say that we feel the property to be worth $4,000.00 an acre in that area, and that we are not really interested in selling, but that we feel that we could, if we wanted to put it on the market.

(v) Exhibit R-12 is a memo summarizing a meeting of November 24, 1969, concerning a proposal from a Mr Taylor to buy the property for $360,000 which meant $3,000 per acre. It is underlined that Mr Taylor had full knowledge of the intention of the B C Hydro authority to obtain the right to install a power line on the property;

(w) Exhibit R-13 is a letter dated July 4, 1968, from the appellant to a Mr E Karu who had an adjoining property to Burke Mountain asking him if his property was for sale and the price. The appellant said that it was to obtain an idea of the price per acre;

(x) Exhibit R-14 is a letter of a legal firm to inform Mr Frank Edward of the intention of Mr Hansen and Bill Secora to subdivide lot 10 of the land, and not to interfere and to bother their employees in the performance of their duties as it was in the past. Legal action would be taken if interference occurred;

(y) the appellant explained that the lawyer was ordered by Mr Secora to send this letter. The latter indeed and Mr Edward “did not see eye-to- eye”. It was also true that on some occasions Mr Edward had interfered;

(z) the appellant confirmed that when he sold 20 acres to Mr Secora in May 1973 his intention was to build on lot 16, “even today I’d love to”;

(aa) he admitted that on August 6, 1973, he went down to Whatcom County in Blaine, northwestern part of Washington, USA and bought 38 acres of land for $44,000. The reason was to go there on weekends. There was a house on it. He also admitted that on August 1, 1974, he sold 10 acres to a Mr Wilson and shortly after sold 5 acres to a Mr Swanson with a house on it. Later, he purchased 28 other acres adjacent to the balance after selling parts to Messrs Wilson and Swanson. There was a house on this 28 acres where it was possible to live without repairing it, whereas the other one sold to Mr Swanson was not liveable. It had been built over 20 years ago. He was not prepared to restore it. Moreover, as a Canadian “.. . you cannot go down and perform work in Washington, it is illegal. You can get thrown, deported.” His son now owns the house. The appellant lost it through his divorce case (SN p 161);

(bb) the appellant also admitted that in August 1975 he purchased a “condominium for the sake of hiking, skiing” especially for their two daughters at Mount Baker in Whatcom County, Washington, USA. He sold it on July 16, 1974, because the two daughters got married and both lived in Edmonton.

C Redirect Examination

3.22 In redirect examination, the appellant testified that:

(a) the property he acquired in Brunette (para 3.21 c)) was because a client had given him a share in the said property as payment of his fees. This happens rarely, but sometimes happens. However, he lost on it when he sold it;

(b) on November 29, 1968, he wrote a letter (Exhibit A-15) to the municipality of Coquitlam referring to the applications submitted on November 5, 1968. The appellant contends that it was probably at city office, or in checking in the “Journal of Planners”, a semi-weekly

magazine that brings all of the municipalities happenings, the applications, etc, who intends to build, etc, that Aplin & Martin Engineering Ltd wrote the letter dated December 6, 1968 (Exhibit R-4) to offer their professional services;

(c) concerning the listing, he contends that it was an attempt to establish a value in case expropriation became a problem;

I was told by Mr Secora at the time that the best way of getting an evaluation of your property was to list the properties for sale, then try to obtain an agreement for sale and then kill the agreement for sale and he said that is by far the best way or even prove that other properties in the area were sold for a certain amount. (SN p 172)

(d) the prices of property in Washington are half of what they are in BC.

D Recross-examination

3.23 In recross-examination the appellant testified that the property located in Washington, USA was sold to a Mr Wilson for $27,000 (10 acres) and the one to Mr Swanson for $13,500 (5 acres). This means $40,500 and he had paid $44,000 for 38 acres.

He recognized the deed between him and Mr Secora dated March 27, 1973 (Exhibit R-16) pursuant to which he sold for $60,000, 20 acres of lot 10. It is stated that there were no provisions concerning an easement, or the right to have access through lot 10, and lot 15 to lot 16.

4 Law — Cases at Law — Analysis

4.01 Law

The main provisions of the Income Tax Act involved in the instant case are 3, 4(1), 9(1) and the definition of “business” in 248(1). The shall be quoted in the Analysis, if necessary.

4.02 Cases at Law

The cases referred to the Court by counsel for both parties were:

1. Roy M Power v The Queen, [1975] CTC 580; 75 DTC 5388;

2. Margaret Stroh et al v MNR, [1980] CTC 2508; 80 DTC 1457;

3. Mary Wladyka et al v MNR, [1980] CTC 2408; 80 DTC 1374;

4. South Shore Estates (Saltfleet) Limited v The Queen, [1981] CTC 252; 81 DTC 5181;

5. Sharkey & Wernher, [1955] 3 All E.R. 493;

6. Harry Moluch v MNR, 39 Tax ABC 428; 65 DTC 750;

7. Pinehill Investments Limited v MNR, [1967] Tax ABC 233; 67 DTC 204;

8. J Bert Macdonald and Sons Limited v MNR, [1970] CTC 17; 70 DTC 6032;

9. Matt Dawd v MNR, [1981] CTC 2999; 81 DTC 888.

4.03 Analysis

4.03.1 On the one hand, the preponderance of the evidence is in part in favour of the thesis of the appellant which is to the effect that the greatest part of the subject property (lot 16) cannot be subdivided for residential purposes (para 3.04; maps: Exhibits A-1 and A-2; para 3.19 and photographs: Exhibit A-14).

4.03.2 On the other hand, the preponderance of the evidence is in part in favour of the respondent’s thesis which is to the effect that when the appellant and his associates in March 1968 did not lend money to the Edwards, as the appellant contended (paras 3.06, 3.07 and first part of 3.08), but actually purchased the Edward’s property. Indeed from the deeds contracted by the appellant in March 1968:

(a) the agreement between the Edwards, the appellant and Mr Secora (Exhibit A-3, SN p 29 and see para 3.08);

(b) the mortgage between Mr Secora and the appellant, mortgagors and G Polkowski, mortgagee (Exhibit A-7, SN p 37 and see para 3.11);

(c) the agreement between John Darg Bell-Irving, the appellant and Mr Secora (Exhibit R-1, SN p 94 and see para 3.21 (j) );

It was obvious that Bell Irving Estates, the person who sued the Edwards, sold for $37,500 lots 10, 15 and 16 to the appellant and Mr Secora. From the said amount of $37,500, $30,000 was borrowed from Mrs Polkowski.

Moreover, if on Lot 16 it was not possible, obviously, to have residential development, however, it seems that on the other two lots it was possible because such development was provided in paras 3 and 5 of Exhibit A-3, also signed in March 1968.

It is true that the Edwards had the option of acquiring the one-third of the undivided part of lots 10, 15 and 16 (para 4 of Exhibit A-3). However, it remains obvious that the appellant and Mr Sicora were co-owners of the said lots. It seems to the Court that the original intention contended by the appellant was only to help a friend. However, very rapidly he changed his intention between the conversation with the Court clerk and the drafting of deeds a few days later, more specifically on March 8, 1968.

4.03.3 There is also a preponderance of the evidence on the point that the appellant already knew in March 1968 that the B C government and the municipality of Coquitlam were doing a survey on Burke Mountain and that subdivision plans had been proposed by real estate companies (see para 3.21(f)).

4.03.4 Because of the evidence described above in paragraphs 4.03.2 and 4.03.3, it is obvious that the profit made on the sale of $60,000, for his interest in lots 10 and 15, to Mr Secora in 1973, was business income. The intention of resale was an important part of the purchase.

4.03.5 The appellant contends that concerning lot 16, from 1968 to 1973, he sincerely tried to help Mr Edward to repurchase it. Therefore in 1973 there was at least a change of intention from business to capital. Therefore he suggested as an alternative argument that from the cost per acre in 1968 to $3,000 per acre (the price paid in 1973 by Mr Secora to the appellant for his share in lots 10 and 15) the profit be considered as business income. The profit from the said $3,000 per acre to $8,500 per acre (the price received in 1976 by the appellant for lot 16) be considered as capital gain.

In fact, this argument is based on the reverse position of the Court in the British case of Sharkey and Wernher which has been followed many times by Canadian tribunals (Pinehill Investments Limited, Harry Moluch, J Bert Macdonald and Sons Limited and Matt Dawd). In sum, the profit subject in dispute is computed from the time the property changed character from a capital asset to part of the appellant’s inventory. In the instant case, in sum, the appellant suggested that the profit be computed in the second part from the time the asset became a capital asset. In theory, the Court has no objections to apply this principle if it is pursuant to the evidence. Moreover, for such a change of intention ie, from business purpose or from inventory to capital asset, the evidence can be difficult.

4.03.6 The Court states that since the beginning, the appellant gave the opportunity to Mr Edward to repurchase one-third of the undivided share and even lot 16. On October 10, 1968, indeed he secretly offered to lend him money (para 3.10 and Exhibit A-5) to purchase lot 16. It seems that this would have been accepted by the owners rather than one-third of the undivided share.

4.03.7 To confirm his intention to keep lot 16 as a capital asset, the appellant testified that he planned to build a house 200 feet from the Edward’s home and to have a combined generator diesel plant to produce electricity (para 3.16). This, however, was not confirmed by document or other testimony.

Formally in the same testimony, the appellant said that they (himself, Mr Socora and Mrs Polkowski) had loaned money to the Edwards. The exhibits proved, in fact, that they had purchased the property which is not the same thing.

By saying that he planned to build a home, is this really a change from the former intention? When he sold the property in 1976, the home was not commenced — still to be built.

The Court thinks that, at first glance, the strongest argument in favour of the appellant’s thesis is the appellant’s first refusal in April 1974 to sell lot 16 to Knowlton Realty Ltd. However, the appellant did not ignore that the development of a large area including Burke Mountain, was one of “the political ploys” of the then “Premier” of BC (paras 3.17 and 3.18).

In fact, the appellant had nothing to lose by refusing. He still remembered when less than 12 months before he had sold for $3,000 per acre his interest in lots 10 and 15 which in turn Mr Secora resold a few days later for $5,000 per acre. It had been “already cooked up” (para 3.14). An important part of the evidence was to show that the listing of Burke Mountain and the objection to the B C Hydro plan to pass a power line “to come down over” the Burke Mountain was to try to establish the highest value possible to discour- age B C Hydro and to obtain the best price in case B C Hydro would decide to purchase it (paras 3.12, 3.13 and 3.21 (p), (q), (r) and (s)).

In July 1969, it was already provided that it could be expropriated and that it was important to establish the best value on the market (para 3.21 (u) ). It is normal to conclude that when in April 1974, the appellant refused to sell, it was in the same spirit ie to have the best price, despite the fact that $8,500 per acre can be qualified as “ridiculous” for that precipitous rocky mountain which was not good for debvelopment. This “ridiculous” price for lot 16 can be explained by the fact that probably it was considered as part of the whole of 2,000 acres purchased by the B C government (para 3.18). The appellant could not ignore that.

4.03.8 The Court cannot retain the secondary argument of the learned counsel and must maintain the reassessment issued by the respondent.

5. Conclusion

The appeal is dismissed in accordance with the above reasons for judgment.

Appeal dismissed.