Happy Valley Farms LTD v. Minister of National Revenue, [1982] CTC 2624

Roland St-Onge:—The appeal of Happy Valley Farms Ltd came before me on June 2, 1982 In Vancouver, British Columbia, and it concerns a real estate transaction with respect to the 1977 taxation year.

The facts of this appeal are well spelled out in paragraphs 3 to 8 of the Reply to the Notice of Appeal which reads as follows:

3. In 1964, the Appellant company purchased property known as the “Field Farm” consisting of approximately 150 acres, which property was described as:

Section 13, Metchosin District

Section 14, Metchosin District

Parcel “A” of section 15,

Lot 1, Section 14, Metchosin District

for the amount of $45,000.

4. On July 14, 1969, the Appellant obtained by way of Deed, the balance of the “Field Farm” from Mount Newton Logging Ltd, which property consisted of approximately 450 acres, which property is described as:

Section 103, Metchosin District

Section 105, Metchosin District

Section 111, Metchosin District

5. In February of 1977, the Appellant sold approximately 400 acres of the “Field Farm” to a Corporation known as Glenview Developments Ltd for $1,008,175.

6. In the Appellant’s 1977 Income Tax Return, the Appellant reported a capital gain in the amount of $700,175 on the sale of the property described in paragraph 5 herein, and further reported after deduction of reserves, a taxable capital gain in the amount of $83,339.50.

7. By way of an assessment dated October 29, 1979, the Respondent assessed the Appellant by treating the profit on the sale of the property described in paragraph 5 herein in the amount of $871,423 as business income with the consequence that after a deduction for reserves and the previously reported capital gain, the Appellant’s 1977 active business income was increased by $124,406.

8. In so assessing the Appellant for his 1977 taxation year by including as income all the gain realized by the Appellant, after deduction of reserves, on the sale of the subject property, the Respondent assumed, inter alia, as follows:

(a) in 1964, the appellant company purchased property known as the “Field Farm” consisting of approximately 140 acres, briefly described as:

Section 13, Metchosin District

Section 14, Metchosin District

Parcel “A” of Section 15

Lot 1, Section 14, Metchosin District

for $45,000.

(b) In January of 1968, Mr Lewis Lindholm, Barrister and Solicitor, of the City of Victoria, Province of British Columbia, acquired all the shares of the Appellant and retained the same at all material times in this appeal.

(c) In May of 1968, the Appellant divided a portion of the “Field Farm” into fourteen 2 acre lots, which were advertised for sale and sales of $25,500 in 1968 and $17,200 in 1969 were reported by the Appellant in its returns of income for those years, as income from sales of subdivided land.

(d) In August of 1968, the Appellant further subdivided approximately 11 acres from the said “Field Farm”, which acreage was sold to the Victoria Motorcycle Club in 1968 for a gain to the Appellant of $6,816.27.

(e) In November of 1968, the Appellant further subdivided the said “Field Farm” to a parcel of approximately 12 acres, which parcel was sold in November of 1968 to Mr and Mrs Cook for a profit of $12,930.93.

(f) On July 14, 1969, the Appellant purchased the balance of the “Field Farm” from Mount Newton Logging Ltd, which parcel of land consisted of approximately 450 acres and is briefly described as follows:

section 103, Metchosin District

Section 105, Metchosin District

section 111, Metchosin District

(g) In December of 1969, the Appellant subdivided a portion of the acquired section 105, which parcel of land is briefly described as:

Lot “A”, section 105, Metchosin District

(h) In December of 1970, the Appellant further subdivided the portion of the “Field Farm” owned by him into 3 parcels described as follows:

Lot “A” of Section 14, Metchosin District, Plan 23719

Lot “B” of Section 14, Metchosin District, Plan 23719

Lot “C” of Section 13 and 14, Metchosin District, Plan 23719.

(i) On November 27th, 1971,, the Appellant sold a parcel of land previously subdivided by him and described as:

Lot “B” of Section 14, Metchosin District Plan 23719

(j) On January 12, 1972, the Appellant sold a parcel of land previously subdivided by him and described as:

Lot “A” Section 105, Metchosin District Plan 22858

to Mr and Mrs Peter Brook for $6,250.

(k) On December 10, 1973, the Appellant sold a parcel of land previously subdivided by him and described as:

Lot “A”, Section 14, Metchosin District Plan 23719,

to Mr and Mrs Lamont for $10,250.

(l) In February of 1977, the Appellant sold approximately 400 acres of the remaining “Field Farm” owned by him to Glenview Developments Ltd, which acreage was described as follows:

Sections 103 and 111, Metchosin District

Lot “C” of Sections 13 and 14, Metchosin District, Plan 23719 Parcel “A” of Section 15, Metchosin District

for $1,008,175.

(m) The Appellant realized a profit of $871,423 on the sale of the property described in subparagraph 8(1) herein, which profit was active business income to the Appellant.

(n) The motivating reason for the acquisition by the Appellant of the “Field Farm”, particularly that property described in subparagraph 8(a) and 8(f) was the expectation that it could be sold for a profit and the subsequent sale of same was part of the ordinary business of the Appellant in developing real estate for resale.

(o) In its corporate Income Tax Return for the years 1968, 1969, 1971, 1972 and 1974 taxation years, the Appellant described the business of the Appellant as being “farming and land development”.

(p) At no time in the years 1964 until 1978 did the Appellant carry on the business

of farming on any of the properties described in paragraphs 3 and 4.

At the hearing, four witnesses were heard:

1. Mr Lindholm, Barrister in Victoria since 1953, member of a 16-lawyer firm and the majority shareholder of the appellant company;

2. Mr Wood, Chartered Accountant at the time of the incorporation of the appellant company and present when Mr Lindholm acquired the shares;

3. Mr Patrick James Kelly, Certified Chartered Accountant and supervisor in 1971 for the Income Tax Department;

4. Mr Gesberger, Appeal Officer for Revenue Canada.

Mr Lindholm testified as follows: As a lawyer he has represented many clients from overseas who were interested in buying land on the Island. One of them acquired some 6,000 acres of land in British Columbia and Mr Lindholm was the lawyer who incorporated the company and the agent to purchase the land therefor.

In 1968, he purchased all the shares of the appellant company which had 150 acres of land in the Metchosin area. In the same year, the company subdivided 28 acres into 14 lots. In July 1969, the appellant company acquired 500 acres adjacent to the original 150 acres.

The appellant company then disposed of land in the following manner:

1. on November 22, 1968, the company sold 12 acres to the Cooks because it needed some capital;

2. on September 18, 1968, the company sold 11 acres (Lot “B” of Section 14) to a Motorcycle Club because the soil was rocky and hilly;

3. in January 1972, the company sold Lot “A”, Section 105 to Mr Peter Brooks for $6,250 in order to pay a bank loan and also because the lot was not part of the family holding;

4. in December 1973, the company sold Lot “A”, Section 14 to Mr and Mrs Lamont for $10,250 in order to pay a bank loan;

5. in February 1977, the company sold to Glenview Developments Limited, 400 acres at a gain of $871,423.

Mr Lindholm explained that he purchased the shares of the appellant company as a family holding because land has an enduring value and if he could hold it, the land would be a good legacy for his family since he had no intention of developing the farm.

In 1977, he then sold 400 acres because of his health condition. He suffered a first heart attack in 1974, a second one in 1976 and he underwent open heart surgery in 1978.

He also explained his farming operation which cannot be considered as very substantial and could not justify the addition of 500 acres of land that did not seem, according to the evidence, to be very appropirate for farming.

Upon cross-examination, he admitted that from 1974 to 1978, he took sabbatical leaves and made a cruise on his own sailboat across the ocean which lasted nine months and on various occasions, he participated in some boat racing.

Counsel for the respondent filed the following exhibits:

R-1: An option to purchase dated July 28, 1976 given by Mr Lindholm to Glenview Developments to purchase all the shares of the appellant company for $1,089,150.

R-2: An Offer to Purchase dated December 10, 1976 signed by both companies to the effect that the appellant company offers to sell 400 acres of land for $1,027,500.

R-6: Numerous income tax returns of the appellant company to show the nature of business which was declared in those years:

1965-66-17 farming

1968-69-70-71-72-73-74-75 farming and land development

Mr Lindholm terminated his testimony by saying that (when the market became crazy) he sold everything he could and now that the property value is down, he regrets not having sold everything.

Mr Wood testified that at the time of the transaction, Mr Lindholm discussed the transactions with him and his stated intention was to acquire a family asset to be held by his children and his children’s children.

Mr Kelly testified that in 1971, he was the supervisor and assigned the file to one Mr Demstedt who left the Department six years ago.

In that year, Mr Demstedt interviewed Mr Lindholm in his presence and Mr Lindholm declared that the land was not economical to carry on farming operations and it was just good for trail riding, that the purpose for buying was to develop the property and to sell it at a profit but he had been caught by a ten-acre freeze.

Called in rebuttal, Mr Lindholm testified that he never made that statement, but he admitted that there may have been a ten-acre freeze in exist- ence enacted by the capital region district before the date of his meeting with the officials of Revenue Canada.

Mr Gesberger filed the following exhibits:

R-11: Analysis of Net Income which shows losses from $7,000 to $2,000 from 1965 to 1968, an income of $20,500 in 1968, $21,000 in 1969, $13,000 in 1970, $46,777 in 1973 and almost $3,000 in 1977.

R-13: Shows the expenses associated directly with land from 1965 at $2,000 up to $16,738 in 1970 and $10,000 in 1971.

R-14: Expenses associated with farming, in 1965, field expenses $1,800 and then in 1972, cattle feed $964 and 1973, cattle feed $1,371.

R-15: Assets of the company, mostly land and buildings from $47,500 in 1965 to $138,500 in 1972.

In 1972 there was also cattle $4,417 and fencing $892.

Exhibit R-12, which is an analysis of gross income before expenses, reads as follows:

Counsel for the appellant argued that the key factor in this appeal is the intention which has been substantiated by the testimony of Mr Lindholm, Mr Wood and the letter filed as Exhibit A-4. This letter is an application made by Mr Lindholm to the Industrial Development Bank for a loan of $75,000.

One of the stated purposes was to operate a horse farm and riding academy and also to build a residence. When the sale of land constituted income, the appellant reported as such, so the profit on the sale of the subdivided area as well as that of some $20,000 on two other sales in 1968 were reported as income.

He kept the remainder of the land for nine years and if he sold, it was because he wantd to assure security for his wife and five children by accepting a very attractive offer.

With his experience in land transactions, he could have subdivided and sold the lots by himself and realized four to five times the gain he made, but he did the natural thing by accepting cash in the event of his death.

He referred the Board to the following cases:

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

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

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

Counsel for the respondent argued that the Board must not look only at the stated intention, but also at the course of conduct to see if the stated intention is carried out.

A letter written on March 28, 1968, mentions only the tract of land that was acquired when Mr Lindholm acquired the appellant company shares. It follows that the stated intention mentioned in the letter has nothing to do with the 400 acres which were not acquired at that time.

Mr Lindholm signed an agreement to sell on July 28, 1976, which is prior to his serious heart attack and which means that he had already decided to part with the 400 acres before his attack.

The appellant’s course of conduct shows that there were numerous transactions before and after the transaction under review; that he was highly knowledgeable on sale of land and he dealt in no other way with respect to the sale at bar than those he labelled as income sales.

In the boom he sold everything he could because the price was right and he was sorry that he did not sell everything he had.

Counsel for the respondent referred the Board to the following cases:

1. Harvey Clark Smith v MNR, [1960] CTC 391; 60 DTC 1282 — in this case the appellant was a farmer and the appeal was dismissed. In the case at bar, Mr Lindholm cannot be called a farmer. He had a foreman on the farm, a stable but had no horses;

2. Rosslynn Estates Limited v MNR, [1972] CTC 65; 72 DTC 6051 — the appeal was dismissed because the income derived from land for agricultural purposes did not justify its purchase as a revenue-producing investment and the justification for the purchase by a company incorporated to deal in land could only be found on the prospect of a future sale at profit. Herein, the appellant company’s farming activities never amount to an economical farm property. The land has been left the way it was when it was acquired.

According to the evidence adduced, it is obvious the appellant company did not carry on any serious farming operations and that its main and sole shareholder was much more knowledgeable and interested in land transactions than in farming business.

Before acquiring its 400 acres, the appellant company had already sold the subdivision areas and another 23 acres for some $26,000. Then, after the acquisition of 400 acres, it sold Lot “A”, Section 105 to Mr Brook for $6,250 and Lot “A”, Section 14 to the Lamonts for $10,250.

The sales to the Motorcycle Club and to the Cooks were reported as capital gains, but the Minister reassessed, the appellant company appealed and my late colleague Mr Prociuk dismissed the appeal because he was unable to distinguish between these transactions and those effectuated in the subdivision areas.

Counsel for the appellant argued that the case at bar was quite different from the one decided by Mr Prociuk in the sense that Mr Lindholm was compelled to sell due to his health condition and in order to provide some capital for his family.

According to the evidence adduced, it is not so obvious that his reason was the only one to sell, but assuming that it was, the fact remains that, at the time of the acquisition, the land was acquired to be disposed of at the best opportunity.

The appellant company never carried on any serious farming operations and nothing was done to improve the situation and to produce some farming profit.

On the contrary, the evidence shows more strongly that the land was acquired as a revenue-producing investment to the extent of a future sale at profit.

The appellant company’s course of conduct shows numerous transactions before and after the transaction under review.

After the sale of 400 acres at a profit of $871,423 the appellant company sold:

1. Lot 1 of Section 23869 after two years of holding at $200,000 profit;

2. Strata Lot 8 after 20 months of holding for a profit of $21,000;

3. Lot “A”, Section 74 after five months of holding for a profit of $100,000.

Mr Lindholm sold personally:

1. some properties after 16 years and 7 years at a profit of some $800,000;

2. Strata Lots 1-24 after 9 months of holding for a profit of $300,000.

As may be seen, the appellant company’s course of conduct, as well as that of its main and sole shareholder, indicates that they have been quite active in the domain of real estate transactions which can easily brand them as trade in land rather than farmer.

The evidence is crystal clear the acres owned by the appellant company were stock in trade and whether they were sold one by one or in bulks of 400 acres when sold, they became income to the company.

For these reasons the appeal is dismissed.

Appeal dismissed.