Highland-Young Associates Limited v. Minister of National Revenue, [1981] CTC 2526, 81 DTC 531

Guy Tremblay:—This case was heard in Toronto, Ontario, on March 31, April 1 and April 30, 1980.

1. The Point at Issue

The only point at issue is whether the conversion of a piece of land (called “Young-Highland” located in the township of Brantford, Ontario) from capital to inventory was on April 29, 1974 (the date of the final approval of the plan of subdivision by the Ontario Ministry of Treasury, Economics and Inter-Governmental Affairs (OMTEIA) rather than on March 24, 1972 (the date of submission of the plan of subdivision to the Brant County Planning Department, a first step among others before arriving at the decision of the OMTEIA). If the conversion was on April 29, 1974, it is admitted by the respondent that the piece of land was worth $7,300 per acre at that date, and the appeal must be allowed. However, if the date of conversion is on March 24, 1972, it is admitted that the fair market value of the piece of land was then $1,600 per acre, ($1,600 is the same amount the parties also agreed was the value as of December 31, 1971) and the appeal must be allowed in part because the respondent reassessed it at $850 per acre in computing the profit on the sale of the parcel of lots sold in 1974.

2. Burden of Proof

2.01 The burden is on the appellant to show that the respondent’s assessment is incorrect. This burden of proof results particularly 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 assumed facts on which the respondent based the assessment or reassessment are also deemed to be correct. In the present case the assumed facts are described in the Amended Reply to Notice of Appeal, paragraph 9, subparagraphs (a) to (h):

9. The Respondent in assessing the Appellant to tax for its 1974 taxation year relied upon the following additional facts to those hereinbefore admitted:

(a) in May 1970, the Appellant purchased 872 acres of land adjoining the Appellant’s farm implements business in Simcoe previously acquired from Charles Young. The Appellant subsequently leased this adjoining acreage;

(b) in February 1970, the Grand River Conservation Authority appraised lands being considered for expropriation. Such appraisal was apparently the first step by the Authority in a forthcoming expropriation of lands in the area, aimed at making way for the proposed Whiteman’s Creek Dam. Of those lands appraised, the farm acquired by the Appellant from Charles Young (“Young” farm) — referred to in paragraph 3 of the Notice of Appeal and lands immediately adjacent to it comprising the “Moreland” farm — referred to in paragraph 4 of the Notice of Appeal — were included. The appellant subsequently purchased the “Moreland” farm in September 1970;

(c) On March 21st, 1972, the appellant submitted a plan of subdivision of the “Young-Moreland” properties (hereafter renamed “Royal Highland Estates”) to the Brant County Planning Department; it reached the Ontario Ministry of Treasury, Economics and Inter-Governmental Affairs on March 24th, 1972. The plan included the mapping out of a large area of land for a proposed golf course, and provided in addition for development of numerous residential lots;

(d) on March 21, 1972, the “Royal Highland Estates” property became inventory of the Appellant; the fair market value of that property as at March 21, 1972 was $850.00 per acre;

(e) in September 1972, the Appellant severed and sold some 272 acres together with a house from the “Young” farm; further, on July 27th, 1973 the Appellant sold the Simcoe farm implement business;

(f) the development of the golf course was abandoned after final approval was given the plan for subdivision on April 29th, 1974. Upon registering the plan on May 28th, 1974 the Appellant commenced to sell the individual residential lots in “Royal Highland Estates” for which it had gained approval in its plan. Lots were sold throughout the Appellant’s 1974 taxation year;

(g) in filing its income tax return for its 1974 taxation year, the Appellant assumed that the date upon which lots sold should be treated as having been converted from capital property to inventory was May 28, 1974, the date the Appellant registered the plan for subdivision. The Appellant therefore claimed a Capital gain on lots sold based on an $850.00 per acre V-Day value and a $3,500 per acre fair market value on what it alleged to be the date of conversion, May 28th, 1974;

(h) in reassessing the Appellant the Respondent concurred with the $850.00 per acre V-Day value arrived at by the Appellant but rejected the Appellant’s choice of “conversion” date. The Respondent established that a more appropriate

“conversion” date was March 21st, 1972.

3. The Facts

3.01 At the trial, the parties admitted some facts. They are described in paragraph 1 in giving “The Point at Issue”.

3.02 The appellant, Highland-Young Associates Limited, is a corporation duly incorporated in 1969 under the laws of the Province of Ontario, having its head office in the Township of Brantford, in the County of Brant, Ontario.

3.03 The declared objects of the articles of incorporation of the appellant included transactions in the nature of purchase, sale, lease, improvements, exchange and mortgage of otherwise acquired lands or interest therein (Exhibit A-1).

3.04 The main shareholders of the appellant’s company are Mr Charles Young (president), his wife Joyce and their son Neil Young (vice-president and secretary-treasurer).

A. The testimony of Mr Waterous

3.05 The first witness for the appellant was Mr Waterous, counsel who was called to the bar in Ontario in 1955 and practised in corporate and commercial law. He had known the Young family (the grandfather Neil, the father Charles, his wife Joyce and their son Neil William, called SKIP) for many years before the incorporation of the appellant company. The witness has acted, and his father before him, as solicitors for the Young family.

3.06 The grandfather had been a farmer and implement dealer; Charles was a farm implement dealer who was carrying on business with his two brothers under the name of Neil Young & Sons in Simcoe.

Then in 1969 Charles wished to bring his son, Neil, into the business. The witness suggested incorporating a company which “could then be used as a vehicle for ownership interest transfer to introduce his son to the business”.

3.07 Concerning the incorporation of the appellant, Mr Waterous said he had not received specific instructions with regard to the objects:

No, I was told to incorporate a company and to do what I knew that they were doing. I had already been their lawyer for thirteen or fourteen years. I knew what they had and I knew what their activities were and as a matter of fact, I have with me the precedents on which the objects clauses were based and I think if you check them, you will find they are almost verbatim. They are taken from the De Boo Corporate Manual. (S.N. 1, pages 9 and 10)

3.08 According to Mr Waterous:

. . .there had been other discussions even before the company was incorporated of selling the business.

The business itself had a substantial piece of land with it and I knew that and I knew it might be difficult to sell the business and I included that on my own volition because I recognized that it might be a useful clause to include as part of the wind-up of the business. (S.N. 1, page 11)

3.09 Mr Waterous testified that Mr Charles Young and his son did not voice any objections to the letter patent.

3.10 Mr Waterous finally testified that from June 1973 to early spring 1974 the appellant retained his services to try to get approval to a plan of subdivision of the piece of land owned by the company.

B. The testimony of Mr Charles Young

3.11 Mr Charles Young, who was 70 years old in 1980, had been brought up on a farm and since 1940 he had been mainly in farming. He then started with the farm equipment business in Colborne Village near Simcoe and continued to farm. He was an implement dealer of John Deere Plow. He then bought a piece of land (2 acres) to install the business. His father had started from his farm the farm implement business in 1934. In 1946 he was behind Charles’ brothers when they started business in Burford.

3.12 The family farm, where he was brought up, was located in Brantford. Simcoe, where he purchased a piece of land to install the business, was about 20 miles from the home farm.

3.13 In 1952, Charles Young bought a farm (lot 3, concession 7) of 79 acres in the township of Brantford. It was about 20 miles from the home farm. The witness said he bought the farm because he wanted something “to fall back on if John Deere did not renew” the one-year contract deal.

This farm adjoined the tobacco farm that his brothers operated. In fact, his brothers used it and they paid the taxes.

3.14. In 1958, Charles acquired the 200 acres of family farm where he was already living. In fact, his parents wanted to have Charles buy the 79 acres in 1952. “I paid my parents the difference between the price of the tobacco farm (79 acres) and the two hundred acres on the home farm” (SN 1, page 19). 1n 1957 and 1958, the witness grew crops on the home farm. Then he rented out the farm until 1972. A fall wheat crop was harvested the next year. During the summer, he planted a crop of corn (SN 1, pages 11 and 112).

3.15 In 1967, his son Neil joined him in Simcoe as an associate and implement dealer to continue the business.

3.16 In February 1970, Charles Young entered into an agreement to purchase the property next door to the home farm which was known as Verity Farm (120 acres). The owner was Mrs Ruth Verity. The transaction was completed in October 1970 for $130,000. The purchase was financed by a loan of $95,000 from the Bank of Nova Scotia. The amount of $35,000 was paid in the fall of 1972 after selling the ranch house on the Young Farm for $38,000. Another amount of $40,000 was paid in the fall of 1973 after the sale of the farm equipment business.

3.17 The witness said that one of the reasons for buying that property was the fact there was a house on it. His son indeed had rented one in Simcoe and “I did not feel that it was right for him to be renting, that rent in my opinion was wasting money and he was looking for a place, a property that would have a house on it.. (SN 1, page 24). In fact on Verity farm, there were two houses and other buildings (barns). Charles moved to the Verity Farm and his son Neil to the home farm. The second house on Verity Farm was rented to a doctor. In 1972, Neil moved to Verity Farm.

3.18 In 1970, the appellant’s company purchased another piece of land (9 acres) adjoining the back of the property in Simcoe. They paid around $1,300. They purchased it because it was needed by the business (SN 1, page 28) for the storage of equipment (SN 1, page 29 and Neil Young, SN 1, page 53).

3.19 In 1971, John Deere refused to sign another contract in Simcoe. On March 12, 1971, they signed a listing agreement for the sale of the business and the entire property (Exhibit A-3). The required price was $49,000. It was sold in September 1973, but not as a going concern. The real estate was sold. The unsold merchandise was kept and stored (SN 2, page 7).

3.20 According to Charles Young, in 1971 and the following years he had been farming corn and wheat with his son on the home farm and on Verity Farm. He testified that at that time, his son was the driving force.

3.21 Charles Young testified that in the winter of 1968 or spring of 1969, he had a discussion with his son about developing a golf course on his farms “because we had farm equipment and tractors and everything there which we could do quite a bit of the work on a golf course in preparation for it” (SN 1, page 30).

3.22 In spring 1969, according to the witness, Neil Young made enquiries to know whether a golf course was feasible in conjunction with the farming (SN 1, page 32). In cross examination, he admitted that his son attempted to get approvals for the golf course and the portion of the property that was going to be developed for subdivision.

C. Testimonies of Neil William "SKIP” Young and C E Robinson

3.23 The witness, who was 38 years old, graduated from Waterloo Lutheran University in 1964 with a bachelor of arts in economics. Until 1967, he worked for Massey-Ferguson Industries in Brantford as property accountant. In 1967, he joined his father in the farm equipment business in Simcoe.

3.24 Neil Young affirmed that “the reason for incorporation was to allow me to acquire an interest in both the farm equipment business and the farm and for estate planning purposes'* (SN 1, Page 47).

3.25 Concerning the project of the golf course, the witness said that he discussed it with his father in the fall of 1969. They felt it was possible to devote 45 to 50 acres of the 200 acres of the Young farm. He wrote several letters in February 1969: to the Metropolitan Toronto Parks Board, to Westview Golf Course and to the Golf Course Superintendent (USA) requesting information about golf courses (SN 1, page 55). He also phoned the Ontario Golf Association and the Royal Canadian Golf Association for more information. When he called the latter he was put in touch with a Mr Robbie Robinson who was a well known golf course architect in North America. In April 1969 he phoned him and met him at his home in Clarkson on April 5. Together they visited five golf courses (Mississauga, Brampton, Hawthorne Valley, St George’s and Bayview). He met him several times again during the following year. He discussed the matter with his father. In summer 1970, he again met Mr Robinson. They made a verbal agreement which was confirmed by a written contract dated July 10, 1970 (Exhibit A-6) to prepare golf course plans. The agreement is contained in a letter sent to Skip Young by C E Robinson & Associates Ltd dated July 10, 1970, and giving the conditions of the agreement. Mr Young signed the same document on August 7, 1970 accepting the said agreement. The architectural fees covering the plans (Exhibit A-7) and specifications (Exhibit A-15) were fixed at $4,500 and the fee for the supervision of the golf course construction was fixed at 5% of the construction costs.

3.26 In the first paragraph of Exhibit A-6 one can read:

I am pleased to confirm the arrangement we agreed upon in connection with the design of an integrated golf course and housing project and the development of the golf course.

In his testimony, Mr Robinson explained what he meant by “housing concept”:

Q. Can you explain what you meant in the letter that I assume you drafted for integrated golf course and housing concept?

A. Well, this is the type of a development where you have certain fingers of land running into the golf course or certain fingers of the golf course projecting out into different pieces of land with some intercellular spaces or pods in there which lends itself to housing.

Q. And is there a reason why these pods would lend themselves to housing as opposed to an alternative use?

A. Well, it was a very interesting property, very scenic and it had a nice, quiet, relaxing environment which is really one of the main reasons people play golf. It is not entirely for exercise or just because they love the game. It’s to get out and enjoy a beautiful piece of property in the country and enjoy that atmosphere. You cannot take better exercise that would be more beneficial to you than when you are in a very relaxed situation.

Q. Do you know how much land you had available to you for the purposes of designing a golf course?

A. As I recall, it was roughly two hundred acres.

Q. And was there — was the area that was to be used for the golf course ever changed or expanded for you by Mr. Young?

A. Yes, later he bought an adjoining property which fitted into the whole picture very well.

Q. And when you ultimately prepared your plan of the golf course design, did that include both properties?

A. Yes

Q. It was based on an eighteen hole golf course?

A. Yes

Q. And how much land would you normally need to work with to produce an eighteen hole golf course?

A. We usually recommend a hundred and fifty acres on land where you haven’t any waste pieces. (SN 1, pages 138 and 139)

Q. And when you visited the site, what was Mr Neil Young’s interest in doing?

A. His prime interest was putting a golf course together. I think in subsequent conversations I said that he might be interested in some of the land that was left over, there were plots of land left over between the golf course fairways that he might be interested in building some houses on them, otherwise they wouldn’t be very useful. (SN 1, page 137)

3.27 Eight exhibits (A-7 to A-13-1) of drawing plans and maps concerning the property, the 18-hole golf course, the 48 numbered housing lots (which became later a 9 hole golf course) and 56 housing lots (Exhibits A-12 and A-13)) were filed. Aerial plates of subject property (Exhibit A-14) and Specifications for the Golf & Country Club (Exhibit A-15) were also filed.

3.28 In September 1970, the appellant paid to C E Robinson & Associates Ltd $4,500 for the plans.

3.29 On September 9, 1970, they also received the report of Kenneth C Sid- dall Limited concerning an irrigation system for the golf course (Exhibit A-16).

3.30 In the fall of 1969, the Grand River Conservation Authority (GRCA) proposed to acquire an important part of the subject property called Whiteman’s Creek for a dam project. In January 1971, the witness received the plan of this project. It was filed as Exhibit A-26.

Mr Neil Young testified:

A. In 1969, the fall of 1969, we became aware via a newspaper article that the Grand River Conservation Authority had a possible interest in making use of certain lands along Whiteman’s Creek that might have involved some of our lands. They eventually made a proposal at a later date which indicated that in fact if their proposal was accepted by the various municipalities involved, it would result in parts of our land being taken over by the Grand River Conservation Authority.

There were changes that were made in various ways to the plans in discussions that I had with the Conservation Authority and I guess the odd battle with them where the particular line of acquisition might occur.

The plans for the golf course itself also suffered changes as a result of additional golf courses that opened up in the area, that is between the time we first had our plans to do our own golf course and 1972.

In that period there were three additional golf courses opened up in and around the area and I have those marked somewhere and they caused the plans to change somewhat.(SN 1, pages 81 and 82)

A map of the County of Brant (Exhibit A-19) shows that in 1970 there were three existing golf courses in the northwest corner of Brantford, and that there were three new golf courses “which came on stream after 1970 in the Township” (SN 1, page 83).

Between 1970 and 1972 an additional three golf courses opened up adding an additional 27 holes, which was an increase in the amount of holes available in our vicinity by 33%. (SN 2, pages 62 and 63)

The map of the County of Brant (Exhibit A-19) shows the golf courses. As a result of the competition, it was decided in 1972 to change the 18-hole golf course project to a 9-hole golf course project (SN 2, pages 76 and 78).

An application was made on March 29, 1972 to the Ontario Water Resources Commission (Exhibit A-20) to “Permit To Take Water for a proposed 9-Hole Golf Course”:

For the purpose of taking water for the purpose of irrigating the golf course. It was necessary to receive a pool from the Ontario Water Resources Association for any water to be taken from Whiteman’s Creek for the irrigation of a golf course and I made application for that purpose.

We were hoping to be in the position to take water in 1973 and get the construction of the golf course in 1973. (SN 1, page 85)

In fact, it was in February 1973 that the appellant company was informed by the GRCA that “they had no interest in our lands and that the dam had been shelved” (SN 1, page 102).

3.31 Concerning the acquisition from Mrs Ruth Verity of the piece of land joining the Young Farm, Neil Young testified:

Q. And why were you interested in purchasing the Verity property?

A. For reasons already explained to the court. It was already adjacent to our own farm. It was in fact going to be able to provide us with another house with additional land. It was a farm that was comprised of about one hundred twenty- three acres of land, a proportion of which, a large proportion of which was unsuitable for farming but was extremely suitable for recreational purposes, having a section of land in the valley and adjacent to the creek. We had felt, my father and myself had felt that in the discussions that we were in the process of having with Mr. Robinson, we could see that he had some thoughts about making use of some of the farmlands as a golf course. We had an interest in farming, the balance of our lands that wasn't used as a golf course. We felt further the acquisition of the Verity farm would allow in our opinion, would allow Mr Robinson to make use of more of the valued lands for the golf course and not reduce so much of our farmland. So for that purpose, it was going to be useful for us.

It was going to increase our supply in farmland and increase our supply of recreational land and it was going to give us additional houses that we in fact needed. (SN 1, page 74)

3.32 In July and August 1970, Neil Young prepared two estimates: the first one (Exhibit A-17) with regard to the cost of the proposed golf course (the lowest and highest figures varied between $130,600 and $189,100); the second one (Exhibit A-18) with regard to costs and revenues of the four first years:

3.33 In the fall of 1972: “at about the same time we were planting a fall wheat crop, I was interested in becoming more knowledgeable in the operation of a restaurant and business as eventually that would be in the plans for the golf course in the clubhouse to operate a snackbar, restaurant, . . .” (SN 1, page 79). Neil Young worked in different Ponderosa Steak Houses from September 1972 to April 1973 (SN 2, pages 4 to 6).

3.34 Also in 1972, 3,000 trees were planted and another 3,000 to 4,000 in 1974. “The purpose was for planning, to transplant them in various areas around the golf course where Mr Robinson had indicated tree area” (SN 1, page 81).

3.35 In March 1970, the appellant’s company made a request (Exhibit A-21) to Mr R J Thurgood, secretary of the Brantford Township Planning Board: “To have the property we owned or were in the process of acquiring designated for estate residential development on the official plan’. The letter starts as follows: “Pursuant to our meeting in your office on Thursday, 26 March, concerning our proposal for Estate Residential Development . .A copy of the preliminary plan (Exhibit A-22) was sent with the letter to the Township Planning Board. This plan, however, filed as Exhibit A-22 in fact was not the actual plan sent with the letter (Exhibit A-21). The actual preliminary plan sent with this letter was filed by the respondent as Exhibit R-1.

This plan was entitled: “A preliminary plan drawing of proposed land use for recreational & estate residential purposes on a 260 acre parcel of land in the Township of Brantford”.

According to the witness, it was on the suggestion of the architect, Mr Robinson, that they considered planning a housing lot development with the golf course development.

On October 17, 1970, Mr Neil Young wrote to Mr R J Thurgood of the Brantford Township Planning Board and sent him a copy of the plan (Exhibit A-7) prepared by C E Robinson & Associates Ltd, received in September 1970 by the appellant company. The final approval for the township official plan would have been given by the Ontario Ministry of Treasury, Economics and Inter-Govermental Affairs on December 27, 1973.

On December 31, 1973 an agreement (Exhibit A-25) was signed by the appellant company and the Corporation of the Township of Brantford (CTB) according to which the CTB approved. . . the said subdivision and its zoning for Estate Development and the passing of a restricted by-law for this purpose”. Moreover, the CTB “shall not be obliged to assure either the development or continued operation of a golf course. ..”.

3.36 According to Neil Young, from the fall of 1972 to the fall of 1975, they planted on the farm (Young and Verity) a fall wheat crop which was harvested in the next year. During the summer, they planted and harvested a crop of corn (SN 1, pages 111 and 112). The gross farming income from 1969 to 1977 is as follows (Exhibit A-27):

3.37 Neil Young also explained that in 1970/1971 he obtained a licence for and operated a snowmobile sports ranch. It was not re-opened the next year.

3.38 The witness also testified that:

In October, ’73, in fact,our company received draft plan approval of the plan of subdivision and along with that approval came a list of twenty-two conditions that our company had to fulfil in order to receive final approval and it was after we received the draft plan approval that I discussed further with Mr. Marsh and also with the Township what some other requirements might be in terms of servicing. (SN 1, page 124)

A letter dated October 19, 1973, issued by the Ministry of Treasury, Economics and Inter-Governmental Affairs (MTEIA) was filed as Exhibit R-7 (SN 2, page 55). This letter described the 22 conditions Mr Neil Young spoke of above.

3.39 On January 17, 1974, an agreement (Exhibit A-29) was signed with P J Harvey Realties Limited as an exclusive real estate agent for the marketing of the lots to be sold and as the one who had to play the major role in the creation of any sales brochure or signs that would be required on the subdivision.

3.40 On January 21, 1974, an agreement (Exhibit A-28) was signed with J D Lee Engineering Limited concerning:

— consultation services for pre-engineering and negotiations with the Township, etc;

— engineering survey, preparation of drawings and contract calling for tenders and general supervision of contract for roads;

— resident supervision and inspection of construction of contract called by the engineer

3.41 On April 29, 1974 the final approval by the Ontario Ministry of Treasury, Economics and Inter-Governmental Affairs was given for the planning of the subdivision.

For the road, services and the Township Hydro Electric System, the cost figures ranged in the neighbourhood of $425,000 according to Mr Neil Young.

In December 1973, the appellant received assurance from the Bank of Nova Scotia that it would provide a letter of credit in the amount of $150,000 to satisfy a commitment in the subdivision with the Township of Brantford. However, it was only in May 1974 that the said bank issued a letter indicating that credit was available. However, final negotiations with the said bank did not come to fruition. Ultimately, the appellant obtained its financing from the Toronto Dominion Bank in September 1974, one month and a a half after commencing construction. (SN 2, page 86)

3.42 In spring 1974, a brochure was published entitled “Royal Highland Estates” (Exhibit R-12). It was published by P J Harvey Realties Limited on behalf of the appellant.

As introduction of this brochure one can read:

For people of discriminating taste, we proudly present an exclusive estate development overlooking miles of gently rolling countryside. Here you can enjoy your own private country home in an environment that will reflect your own good taste.

The concept of Royal Highland Estates revolves around gracious living in a planned community where everything is designed to engender a high quality of living in the tranquility of a country atmosphere.

At the bottom of the map of the subject piece of land divided in different areas was written:

Areas A AB C & D are zoned to allow use as Bridle Paths, Golf Links, Country Club, Tennis Courts, Park Land and Green Area.

In his testimony, Mr Neil Young in cross-examination affirmed that:

By 1974, there appeared to be much less of an opportunity to construct and operate a golf course.

Q. By what year?

A. By 1974, absolutely the plans were at a standstill and also at the same in 1974 a strange thing had occurred, a strange occurence had taken place in the housing lot market.

There had been a run-up in lot prices, in house prices in 1974 or during 1973 I guess and going into 1974 and to have made any commitment to build a golf course and a proposal was not something we were about to do. (SN 2, page 63)

3.43 The construction of the road and services were completed in 1975. The first sales of lots were made in the fall of 1974. Special permission was given by the Township to the appellant to sell lots prior to the completion of servicing.

3.44 According to Mr Robinson, the architect of the golf club, a population of 25,000 within 10 to 15 miles of the golf course may support an 18-hole golf course (SN 1, page 145).

In the case of the Highland Young Golf Club, he said that his requirement was not met in its entirety because of the distance:

. . . but when you have an excellent piece of land on a site like this, on a scenic site, you can draw, you can provide golf, golfers will travel miles to play on.

I did one down at Cobourg, Port Hope about four years ago and they draw golfers from Peterborough, from Belleville, from Oshawa and Toronto. They had a full membership before the course was completed. (SN 1, page 145)

3.45 During the cross-examination of Neil Young, the respondent filed what was described on Exhibit R-1 as:

A preliminary plan drawing of proposed land use for recreation & estate residential purposes on a 260 acre parcel of land in the Township of Brantford, prepared by

N. Young, March 1970.

On the plan was also printed the following:

Phase I — Royal Highland Estates — 40 lots (min. size — 2 acres) begin 1971 — 100 acres

Phase II — Royal Highland Golf & Country Club — 18 hole course — begin 1973

— 160 acres

Mr Neil Young testified on the one hand that he personally prepared the plan, and on the other hand that he did not know what the inscription concerning “Phase I” and “Phase II’’,, and even the figure of “260 acres” meant. It was in fact 300 acres.

A. I believe that this plan was prepared and as I mentioned before which is Similar to the plan that you have there as a result of the conversations that I had, conversations that I had with Mr. Thurgood in I believe February of 1970 and those conversations were requesting the Township Planning Board to designate our property for estate residential development. Mr. Thurgood probably suggested that I put on paper how something like that might look and when something like that might happen. (SN 2, page 26)

Later in his testimony he said:

I suggest that in a plan that would have been submitted to the Township Planning Board would have for some reason or other have possibly emphasized estate development and not have emphasized golf course development. (SN 2, page 29)

Concerning the figure “260 acres” he said:

_.. I still don’t know where the 260 comes from because it wasn’t 260 acres. It was in fact 300 acres. (SN 2, page 26)

3.46 It was admitted that this plan R-1 was transmitted to Mr R J Thurgood with the letter (Exhibit A-21) dated March 28, 1970. The first sentences of this letter read as follows:

Pursuant to our meeting in your office on Thursday, 26 March, concerning our porposal for Estate Residential Development, lot size minimum 2 acres, and an 18 Hole Golf Course Development in Parts of Lots 3, 4, 5 & 6, Concession 4, in the Township of Brantford, 5 miles to the west of the City of Brantford, I am now pleased to provide you with a copy of our Preliminary Plan Drawing of the above described area. As mentioned, this is a preliminary plan only and therefore is subject to architectural improvement and regulation requirements.

On the second page one can read:

In closing I wish to thank you for the opportunity to meet and discuss this proposed Development with you and also for the opportunity to have it made available at this time for consideration and discussion by the Members of the Planning Board. If there are any aspects of this proposal which are not entirely clear, or if you wish any further dissertation, please contact me at any time and I shall be pleased to meet with you on the matter.

Mr Young said that “the intent of the exercise was to receive estate residential designation in the official plan”:

Q. Why? Why did you want estate residential development designation?

A. The official plan was in the process of being developed. I have already pointed out that the concept of housing lots on a golf course was a possibility or not necessarily a possibility or was a recommendation by the golf course architect. I had no knowledge of it being a possibility in our particular case, but the request was made to the Township Planning Board was a request that I feel anybody might have made if they knew that their property was being — if some type of controls might be placed on it by a municipal body, I suggest that it was a prudent move on our part to have our property receive that designation just to have it.

THE WITNESS: The exercise was gone through for the purpose of having the Township Planning Board consider our property for estate residential development at any time in the future for the existence of a future plan. I believed that the township of Brantford were having some difficulties, I don’t know for sure, but my recollection says they were having some difficulties in developing the official plan. It might have been with regards to problems they were having with the City of Brantford. I suggest that Mr Thurgood or the Township Planning Board suggested to me that if we were going to be requesting our property to receive estate residential designation, that (a), they would like some idea as to what it might look like on a piece of paper and possibly whether it would be practical. My ability to show whether it was practical or possible probably resulted in the explanation at the base of the plans and that was it.

MR MACGREGOR: Q. Do I understand that really this was not a proposal the Appellant was making?

A. The proposal that the Appellant was making to receive estate residential designation. (SN 2, pages 30, 31 and 32)

3.47 As Exhibit R-2, the respondent filed a letter dated April 20, 1970 which reads as follow:

Re: Estate residential development,

Part Lots 3, 4, 5, 6, Concession 4.

Your letter of March 28th was referred to the Board at its meetings on April 2nd and 8th.

The proposal to create an estate residential development of a limited number of estate residential building lots (for larger type homes) with an adjoining 18 hole golf course has been accepted in principle, whilst the area upon the proposed draft Official Plan will be so indicated.

As your plans progress the Board would be please to view them.

3.48 The respondent filed as Exhibit R-3, a letter from the witness dated May 7, 1970 to Brantford Township Planning Board.

The main paragraph of this letter reads as follows:

. . . advising us of the consideration at meetings and the approval in principle given by the Brantford Township Planning Board to our proposal for estate lots and golf course development in the Township of Brantford area as described on our preliminary plan drawing.

As our plans progress we shall be in contact with your office and the Planning Board for review concerning this development.

In cross-examination, Mr Young testified about this document:

Now, what development are you talking about? I suggest as you have mentioned a development of estate lots and golf course. Is that not right?

A. Well, I refer you to a reason for communication with the Township Planning Board and the Township Council. That reason being to receive assurance that our property would receive estate residential designation on the official plan. I say to you that the means by which that request could be supported was by means of showing how in fact it might look on a piece of paper and what it might comprise of. It would have seemed I don’t know how I could have requested the Township Planning Board to have designated our property estate residential development without having shown that there might have been some possibility at a time in the future to do so.

Our proposal and the reasons for the communications were to receive assurance that our property received the designation on the official plan.

Q. The proposal that you have kept referring to in your letters to the Board, were you misleading the Board?

A. No, I was pointing out to the Board how a proposal might occur. We had no intention — I don’t believe it is impossible to have considered that if a residential development was going to occur, that from our point of view, we were not interesting [sic] in having anything to do with it. We did not intend — the plan doesn't say that we intended to build or service that plan. That plan outlines our proposal as to how it might occur. It doesn’t suggest that part of it could have been let go. (SN 2 pages 36 and 37)

3.49 A letter (Exhibit A-24) dated February 9, 1972, addressed to the Township Planning Board by the appellant, reads as follows:

We wish to advise you that we would like to proceed this spring with the development and construction of the first nine holes of our proposed golf course as well as proceed with the development of the estate residential housing lots. If you will recall, this project has been planned by us for a considerable period and we discussed the matter with you in General Committee Meeting on March 23, 1970.

3.50 In re-directing examination of Mr Neil Young, the Board has permitted the filing of Exhibit A-31, an estimate of the cost of operating a golf course, made by Mr Young in 1969.

3.51 Also in re-directing examination, Mr Neil Young filed a letter dated September 11, 1972 written to the witness by Grand River Conservation Authority (Exhibit A-32). In the second paragraph, one can read the following sentence:

We cannot of course give approval for you to start construction since the Golf Course is an integral part of the Subdivision Plan, and approval for this plan must come from the Plans and Administration Branch of the Ministry of Treasury, Economics and Intergovernmental Affairs.

3.52 Concerning the time of developing the estate business, Mr Neil Young testified as follows:

The first time that we believed we were in the business of developing a subdivision is when we filed a plan of subdivision and committed ourselves to commence the installation of the roads and streets.

Q. Was it the registration of the plan that committed you?

A. I believe the terms of the subdivision agreement put a time limit on the completion of the services for the subdivision. Now, the subdivision agreement was in fact assignable if we could have been successful in finding a land developer to have done that. As I pointed out the land speculation tax eliminated that possibility and we had to make a decision and by registering the plan of subdivision, that started a clock ticking, the twenty-four month clock that we had to complete the servicing. (SN 2, page 102)

3.53 In reassessing the appellant, the respondent had considered that the value of the subject property on March 24, 1972 was $850 per acre. Before the Board, however, the parties agreed that the subject property was worth $1,600 per acre on December 31, 1971, Valuation Day and at the date of Submission of the plan of subdivision to the Brant County Planning Department, ie on March 24, 1972. They also agreed that the subject property was worth $7,300 per acre on April 29, 1974, which was the date of the final approval of the plan for the subdivision by the Ontario Ministry of Treasury, Economics and Inter-Governmental Affairs.

4. Law - Authorities - Analysis

4.1 Law

The main provisions of the Income Tax Act involved in the present case are sections 3 and 9(1).

4.2 Authorities

The counsel for the parties referred the Board to the following cases of law:

1. John Lloyd McGuire v MNR, [1956] CTC 98; 56 DTC 1042;

2. Harry Moluch v MNR, [1966] CTC 712; 66 DTC 5463;

3. Lars Willumsen v MNR, [1967] CTC 13; 67 DTC 5022;

4. Robert D Tate et al v MNR, [1974] CTC 731; 74 DTC 6559;

5. Regal Heights Limited v MNR, [1960] CTC 384; 60 DTC 1270;

6. Morev Investments Limited and Louis Burnstein v MNR, [1972] CTC 513; 72 DTC 6421;

7. Morev Investments Limited and Louis Burnstein v MNR, [1973] CTC 429; 73 DTC 5353.

4.3 Analysis

4.3.1 Golf Course: original intention

The analysis of the evidence is to the effect that in 1968 and 1969, the intention of the appellant was to develop and 18-hole golf course on the subject land (paragraphs 3.21, 3.22 and 3.25 to 3.50 incl).

The fact that circumstances changed the plans in 1972 from an 18-hole to a 9-hole golf course (paragraph 3.30) and that even if in 1974 the plans of the golf course “were at a stand still” (paragraph 3.42), it is the Board’s opinion, according to the evidence, that the original intention concerning the subject property was to develop a golf course.

4.3.2 In 1969, on the suggestion of the golf architect, Mr Robinson, a housing concept was added to the intention of developing a golf course. Despite the fact, that it was on the suggestion of Mr Robinson, it is the Board’s opinion that this intention of a housing concept became a firm decision of the appellant. So many documents indeed issued by the appellant or ad-

dressed to the appellant confirmed this firm decision: R-1 dated March 1970, paragraph 3.45; R-2 dated April 20, 1970, paragraph 3-47; R-3 dated May 7, 1970, paragraph 3.48; A-7 dated September 1970; A-21 dated March 28, 1970, paragraphs 3.45 and 3.46; A-25 dated December 31, 1973, paragraph 3.35; etc.

Therefore, in 1970 and at least by March 24, 1972, the date of submission by the appellant of the plan of subdivision to the Brant County Planning Department, the decision had been made to develop a housing concept. The evidence is to the effect that when the appellant completed the purchase of the Verity Farm (which is part of the subject property) in September 1970, the decision to develop a housing concept had been made.

Crux of the matter

4.3.3 The crux of the matter is whether the intention and decision to develop a housing concept are sufficient to transfer the subject property from capital to inventory. The contention of the appellant is that until one “is in the business it cannot be conversion from capital to inventory in that business”. The appellant contends he was not in business before April 1974.

The contention of the respondent is that the intention and the whole course of conduct of the appellant from 1972 to 1974 proves that the appellant was in business from April 1972 at least.

4.3.4 The counsel for the appellant referred the Board to John Lloyd McGuire v MNR, and to Harry Moluch v MNR cases, both rendered by the Exchequer Court of Canada. They are summarized as follows in the Canada Tax Cases:

John Lloyd McGuire v MNR:

The taxpayer purchased a farm in 1940 near the city of Hamilton and lived on it with his wife and family for a number of years. The taxpayer operated the farm but was not able to make a financial success of his farming operations. He received an offer for the purchase of a lot on the upper part of the farm but found that he was unable to give clear title because The Planning Act which requires that a plan of subdivision of the land must be filed and approved by the Planning Board before he could register the plan and sell the land. He therefore obtained a plan of subdivision and sold the lot desired by the above-mentioned purchaser and later sold additional lots in 1949, 1950, 1951 and 1953. Twenty lots out of the 54 were sold in this manner during the four years. The taxpayer was assessed for tax on the profits made on the sale of his lots and the Income Tax Appeal Board dismissed his appeal.

On appeal to the Exchequer Court,

HELD:

(i) That there was no intention in the taxpayer’s mind when he purchased the property in 1940 to sell it as soon as he could and make a profit;

(ii) That there should be no distinction between selling the land as a whole or selling parts of it and the sale by the taxpayer of his own property did not constitute a business;

(iii) That the appeal should be allowed.

Harry Moluch v MNR:

In 1937 the appellant purchased 50 acres of uncleared land with a dilapidated old house within the municipal limits of Sault Ste. Marie for $2,300. Over the years, in the time available after his hours of employment, he gradually cleared this land and made increasing use of it to grow garden crops and fodder for his family and farm animals. By the 1950’s, however, family illnesses forced him to seek better living accommodation. He borrowed $4,000 to help finance the construction of a better home on another part of his land fronting on a street where water and other services were available. Faced with a need for more funds, he nevertheless rejected an offer of $18,000 for his property and commenced to subdivide it himself. Municipal ordinance required him to install roads, water and other services and this involved additional outlay, although the appellant himself did as much of this work as he could. Between 1959 and 1962 the appellant sold 40 lots, without the help of agents and with very little advertising, and the Minister sought to treat his profits as income from a business. Although conceding that the land had not been acquired with the intention of resale at a profit, the Minister contended that when the appellant later became involved in his subdividing activities, he embarked on a business operation. At that moment the Minister considered the fair market value of the land to be $35,000 which, instead of its historical cost of $2,300, was the amount on which the assessment were based.

HELD:

Whether steps taken to place a capital asset in a more suitable condition for favourable sale could be construed as a commencement of a trading operation was a question of degree dependent on the amount of business-like activity and enterprise displayed. If a change were effected in the character of the property it would imply the introduction of an element of carrying on a trade and that is what took place in the present instance in changing raw land into serviced lots, a transformation not found in the McGuire case referred to by the appellant. Appeal dismissed. (Italics are mine.)

Mr Justice Cattanach at page 721 said:

As is indicated in the extract from the decision of Thorson, P in the Cragg case (supra) the question in each case is the proper deduction to be drawn from the taxpayer’s whole course of conduct reviewed in the light of all the circumstances and the conclusion in each case is one of fact.

I have carefully read the reasons for judgment in the McGuire case (supra) as well as later decisions when similar conclusions were reached. The facts in the McGuire case are distinguishable from those in the present appeal in that there the effect of filing a plan of subdivision was merely to divide the land into a number of smaller parcels which were sold piecemeal without effecting any physical change in the land, whereas in the present appeal, the character of the raw land was changed to that of serviced lots by the expenditure of considerable effort and money, in addition to the land being divided into a number of smaller parcels.

4.3.5 The counsel for the appellant also referred to the case of John Cragg v MNR, [1951] CTC 322; [1952] Ex CR 40; 52 DTC 1004, a decision which Mr Justice Thorson, P cited in the Harry Moluch v MNR case:

In Cragg v MNR, [1952] Ex CR 40; [1951] CTC 322, Thorson, P said:

“. . . the Court must be careful before it decides that a series of profits, each one of which would by itself have been a capital gain, has become profit or gain from a business. Such a decision cannot depend solely on the number of transactions in the series, or the period of time in which they occurred, or the amount of profit made, or the kind of property involved. Nor can it rest on statements of intention on the part of the taxpayer. The question in each case is what is the proper deduction to be drawn from the taxpayer’s whole course of conduct viewed in the light of all the circumstances. The conclusion in each case must be one of fact.

4.3.6 In the cases of John Lloyd McGuire and Harry Moluch, it is clear that the original intention of the taxpayers in buying their property was not to sell it. It is only many years after the acquisition and because of financial needs that the pieces of land were sold.

In the present case the evidence is to the effect that in March 1970, Mr Neil Young “the driving force of the appellant”, prepared a plan (Exhibit R-1) on which a housing project of 40 lots was provided with the 18-hole golf course project.

This means that Mr Robinson had spoken to Mr Young of this housing project in April 1969. Mr Young indeed had seen Mr Robinson only once in April, 1969. (paragraph 3.25)

The appellant was incorporated in June 1969. At first glance, it is difficult not to think that the object of the appellant to purchase and sell lands (paragraph 3.03) was not provided in view of the housing project.

According to Mr Waterous who incorporated the appellant’s company: “. . . I was told to incorporate a company and to do what I knew that they were doing.” (paragraph 3.07) The Board thinks that it is normal that Charles and Neil Young had spoken of their project to their lawyer who was to incorporate the company.

In February 1970, the appellant made an agreement to buy Verity Farm. The plan made in March 1970 (Exhibit R-1) provided that a part of Verity Farm would be used for a golf club and residential lots. The plan (Exhibit R-1) indeed includes at least 260 acres which: “It was in fact 300 acres” said Mr Young (paragraph 3.45). The Young Farm, however, had an area of only 200 acres (paragraph 3.25). Therefore a part of Verity Farm (paragraph 3.31) was needed. It is clear to the Board that when the sale of Verity Farm was completed in September 1970, the original project was confirmed on Plan R-1 and on Plan A-7, the latter also having been prepared by Mr Robinson in September 1970.

All the actions carried out by the appellant company after September 1970 to April 1974, were only a logical continuation of the original intention born in 1969 and early 1970.

In the [board’s opinion, the business started with the original intention of the housing project completed by the plan of the 40 lots (Exhibit R-1) which was changed to 42 lots (Exhibit A-7) to 44 lots (Exhibit A-9), to 53 lots (Exhibit A-11), to 56 lots (Exhibit A-12) and finally to 55 lots (Exhibits A-13 and A-13-1) when the plan of an 18-hole golf course was changed to a 9-hole golf course and when other events occurred. All those changes, however, did not change but rather confirmed the original intention. This is the substance of the operation. The final approbation of the plan of the subdivision by the Ontario Ministry of Treasury, Economics and Inter-Governmental Affairs (OMTEIA) was not the first step which changed the nature of the operation. It is only one of the numerous steps which materialized the original intention that had existed since 1969.

4.3.7 In the case of Morev Investments Ltd given by Mr Justice Kerr of the Federal Court of Canada (Trial Division):

Their intentions in acquiring the land were, in my appreciation of the evidence, equivocal and flexible and I am not satisfied that there is a balance of probability that the land was acquired primarily or predominantly for the purpose of providing a site for the scrap iron and/or the foundry business, or that the profit realized by the appellants from the sale of the land was essentially an enhancement of the value of an investment, or was not made in the operation of a speculative business adventure in the nature of trade.

(Appeals dismissed)

In the present case, the preponderance of the evidence is to the effect that when the appellant acquired the Young Farm and Verity farm, the intention was not equivocal. The intention was that an important part of those pieces of land would be used for a golf curse and a housing concept. The golf course was not materialized, but the housing concept was materialized.

4.3.8 Therefore the Board maintains the contention of the respondent that the piece of land provided for the housing project became part of the appellant’s inventory at least on March 24, 1972. According to the admission, the fair market value of the piece of land was then $1,600 per acre. However, as the respondent has reassessed the appellant on the basis that the fair market value was $850 per acre, therefore the appeal is allowed in part.

5. Conclusion

The appeal is allowed in part and the matter is referred back to the respondent for reassessment in accordance with the above Reasons for Judgment.

Appeal allowed in part.