Martin a Bitz v. Minister of National Revenue, [1981] CTC 2426, 81 DTC 382

D E Taylor:—This is an appeal heard in the City of London, Ontario, on April 9, 1981 against an income tax assessment for the year 1975 In which the Minister of National Revenue added an amount of $28,912.72 to the taxable income of the appellant as profit on the sale of a certain parcel of real estate. The appellant considered the transaction to have been on capital account, the respondent assessed it on revenue account. The respondent relied, inter alia, upon sections 3, 9 and 248 of the Income Tax Act, SC 1970-71-72, c 63, as amended.

In 1969, the taxpayer and three other persons acquired a parcel of farm land (approximately 48 acres) on the easterly limits of the City of London, for a consideration of $75,000, the respective interests being in the proportion of 6, 6, 4 and 4. In 1975, the property was sold to the City of London, Ontario, for a sum of $188,400.

Contentions

For the appellant:

— The taxpayer, at the inception of and prior to acquisition, took the initi- ative and procured an agreement between the co-owners, in writing, maifestly designed to preclude sale.

— The taxpayer has a demonstrable history of procuring real estate, with partners, and eventually acquiring the total interest, and never with the intention of resale.

— The taxpayer had a consistent portfolio of investments in realty since 1956 (which continues to now) obviously not intended for resale, and has never engaged in speculation in retail, even up to the present time.

— No effort had ever been made to sell the property notwithstanding inordinately attractive circumstances for sale (if acquisition and sale for profit was intended) by reason of development relating to proposed Highway 401, widely publicized in or about April, 1971.

— The property was only sold once expropriation become imminent.

— Investment in realty as a hedge against inflation is the antithesis of an adventure in the nature of trade. To hold the present investment an adventure in the nature of trade is to hold that eventual sale, regardless of circumstances, is conclusive proof of intent of acquisition for purposes of resale, with a view to making a profit in the nature of trade, it would then follow that the acquisition of any asset in anticipation of an increase in value in real dollars or inflated dollars is a venture in the nature of trade. That would mean that there is no area left for capital investment since, if at some future date gain results, whether real or inflated, it is then by definition established as a venture in the nature of trade. That should come as something of a surprise to persons investing in land with a view to passing it on to their heirs. To so hold would be, in effect, to hold that, to protect oneself against inflation is, by its very essence, an adventure in the nature of trade. And inflation then inescapably becomes formally a form of taxation. If that is so it is for the legislature, not the assessors, to enact.

For the respondent:

— The appellant at all material times was a lawyer practising in the City of London, whose practice included real estate transactions, and as a result thereof the appellant was very knowledgeable with respect to land values and speculation in land in and about the City of London;

— in purchasing the property in 1969, the appellant had three partners, one of whom being a real estate agent, and another being a trader in real estate;

— the appellant and his partners did nothing to improve the property or to convert it into an income-producing asset.

Evidence and Argument

The appellant presented details and documentation to support his contention that he had used all property acquisitions, prior to the subject one, for income-producing purposes. Another internal document (Exhibit A-4) signed by all four partners in the subject property was interpreted by the appellant as providing him with the right to acquire additional shares in the property, thereby eventually gaining control and complete ownership. The appellant also interpreted the internal agreement as precluding the sale of the property to outside parties. A general map of the area showed that the subject property had been zoned as “agricultural” at acquisition, but was not being farmed at that time. It was also noted that it was within the municipal boundary limits of the City of London, and nearby to property already zoned industrial or commercial. He rejected any suggestion that he should be taxed merely because of his association with a real estate speculator (a Mr Hazelwood) in this venture. His intention had always been to use the property for income-producing purposes (just as he had done with his previous holdings) and he had never shared any other intention with his partners.

The position of counsel for the Minister was basically that while the appellant might have been content to hold the property and earn income from it, he had little if any leverage with which to bring that about, and that there was no basis upon which to distinguish his intention from the others. Any view that the appellant was entitled to capital gain treatment merely by holding the land and realizing on its increased value without an evident and demonstrable income-producing purpose was rejected by counsel.

Findings

I am not persuaded that the “internal agreement” noted above can be interpreted to show either of the points seen therein by the appellant. While the appellant may have had some right to acquire additional proportional holdings (and did so), this was equally available to Hazelwood, and he also acquired additional proportions. It was common ground between the parties to this appeal that Hazelwood was the “driving force” behind both the purchase and the sale of the subject property, and that Hazelwood’s intention for the property had always been to sell it at a profit. To whatever degree Hazelwood had been aware of a contrary intention by the appellant, he effectively prevented the appellant from gaining control and exercising that intention.

While “taxation by association” is a procedure which should be delicately and discreetly applied, the appellant in this case cannot separate himself from it merely because his previous record had been different, or because he proposes a different intention. Mr Bitz knowingly participated in a venture which was designed and designated to be in the nature of trade. Once it was consummated and a profit realized, he cannot dissassociate himself from the taxing results which should follow, simply on the basis that he would have done differently had he reached a position of control of its use.

With regard to the “capital appreciation” point of view, I would refer to David Chin et al v MN R, [1980] CTC 2296; 80 DTC 1246. The jurisprudence lends only very meagre support to the perspective advanced by this appellant, and only under specific and almost unique circumstances.This case does not fit within those narrow boundaries.

Decision

The appeal is dismissed.

Appeal dismissed.