Walter Dombroskie v. Minister of National Revenue, [1981] CTC 2407, 81 DTC 364

The Chairman:—The appeal of Mr Walter Dombroskie is from an assessment in which the Minsiter of National Revenue included in the appellant’s income the amounts of $10,664.50 and $25,048.50 for the 1974 and 1975 taxation years respectively as income from a business or adventure in the nature of trade realized by the appellant from the disposition of certain lands.

The issue as to whether the said amounts are capital gains, as reported by the appellant in his tax returns, or income from a business as the respondent contends, is a question of fact. The onus of establishing that the profits were not realized as the result of business transactions lies with the appellant.

Summary of Facts:

The appellant was engaged in an auto body repair business and a logging business which he exercised on premises leased from Mr John Conway on Lakeshore Drive in the Village of Barry’s Bay, Ontario. In 1972 Mr Conway’s property, which consisted of 40 acres of land, was offered for sale through Mr Hilary Jones, a real estate agent.

The appellant testified that he wished to purchase from Mr Conway only the lands and commercial properties which he then occupied on the south side of Lakeshore Drive on which a garage was erected, and in which the appellant carried out his business (Exhibit A-2). Mr Conway, however, was unwilling to sell anything but the whole parcel of land. This evidence was corroborated by Mr Jones, a real estate agent through whom the transaction was effected. Mr Jones also stated that there was no question of subdividing the land at the time the property was being offered.

The appellant signed an offer to purchase the property for $40,000 and the sale of the property to the appellant and his wife was concluded in October of 1973 (Exhibits A-1 and A-3). The appellant sold his home in the Village of Barry’s Bay, Ontario, to his brother-in-law for $20,000 (Exhibit R-8), borrowed $8,000, paid Mr Conway $20,000 who took back a mortgage of $20,000 for the balance of the purchase price.

Three days after the purchase, the appellant and his wife purchased a mobile home and erected it on the property as a residence. The commercial premises, formerly leased by the appellant from Mr Conway, continued to be utilized in carrying on his business and the tractors, loaders and bulldozers belonging to the appellant, were moved from the Village of Barry’s Bay to the appellant’s newly acquired property.

In March of 1974, the appellant accepted an offer made by the real estate agent, Mr Hilary Jones, to sell for $7,000 a two-acre parcel of land, which I understand is not shown on the map (Exhibit A-2). The transaction was completed on April 8, 1974.

In April of 1974, the appellant accepted an offer to sell to Mr Leo Potvin a 200' X 220' lot for $15,000. The transaction, which had also been initiated by Mr Jones, was finalized on June 24, 1974 (Exhibits A-6 and A-7). With the proceeds of these two sales, the appellant paid off the mortgage on the Conway property.

On July 30, 1975, the appellant sold a parcel of vacant land to Extendicare Ltd for the construction of a nursing home for a total consideration of $30,000 (Exhibit A-9).

Again, on July 30, 1975, the appellant sold an acre of land to Mr Zigmund B Bloskie for $15,000 (Exhibit A-10).

The evidence of Mr Hilary Jones, the real estate agent who was also Town Reeve in 1975, was to the effect that Barry’s Bay was a small town of 1,400 population, with only 18 small businesses in operation. The Town was under some economic difficulties and there were no demands for additional lots — hence, no land divisions for which municipal services would have had to be provided were being considered by the municipal board. When the appellant did apply for a subdivision, some years after he had acquired the property, the application was turned down.

The land itself was described by Mr Jones as being commercial rather than residential, having considerable sand deposits. Mr Jones testified that there was no market for the land and it was very difficult to find a use for it. Indeed, Mr Conway’s property was listed six months before an offer to purchase was made. Mr Jones also stated in his testimony that the appellant had not listed the property for sale; that he himself had suggested to his clients the availability of the appellant’s property; that he had fixed the prices and that the appellant had simply accepted them without negotiations.

In cross-examination of the witness, counsel for the respondent was unable to undermine what, in my opinion, is the appellant’s crucial submission, ie that the appellant at the time he acquired the property had no intention and no plan for reselling it in any form.

I accept the appellant’s evidence that he wanted to acquire only those premises which he was leasing from Mr Conway and on which he carried on his businesses but that he was forced to purchase all the property. The evidence that Mr Conway would not sell a smaller parcel of land but insisted on selling the whole property has in no way been challenged.

Whether or not the appellant made a good business deal in paying $40,000 for the whole property when all he needed was a $10,000 garage is not for this Board to decide. What is of concern to the Board is the intention the appellant had in acquiring the property.

It is difficult to conclude on the basis of the evidence that the appellant purchased that part of the property which he did not need for his businesses, as speculation. At the time of purchase, the appellant had no plans for the surplus property; prior to the acquisition, he did not inquire of the municipal counsel as to the possibility of subdividing the property; there was no market for lots and no prospect of any development of property in Barry’s Bay in the foreseeeable future.

Although the appellant may not have been forced by circumstances to sell part of the surplus land, neither did he make any attempt to dispose of the said land. He did not list it for sale nor did he fix the prices for the land in the unsolicited offers the real estate agent brought to him. The appellant had never before traded in land and his comportment with respect to the surplus land in 1974-1975 was not, in my opinion, that of a trader.

I conclude therefore that the appellant did not acquire the subject property with either a primary or secondary intention of selling it at a profit; that the sales of part of the surplus land were fortuitous and were not the result of any planning or activity on the part of the appellant to dispose of the land and that the appellant in the 1974 and 1975 taxation years was not in the business of trading in land within the meaning of subsection 248(1) of the Income Tax Act SC 1970-71-72, c 63, as amended.

For these reasons, the appeal is allowed and the matter referred back to the respondent for reassessment on the basis that the profits realized by the appellant from the disposition of certain properties were in the nature of capital gains and were properly reported as such by the appellant in his 1974 and 1975 tax returns.

Appeal allowed.