Lucretia Moubray, Phillip R Moubray v. Minister of National Revenue, [1981] CTC 2971, 81 DTC 865

D E Taylor:—These appeals, heard on common evidence in Vancouver, BC, were against income tax assessments for the years 1973, 1974, 1975 and 1976 in which the Minister of National Revenue reclassified certain reported profit arising out of real estate transactions, as on income rather than on capital account. Phillip Moubray is presently a retired businessman living in Kelowna, British Columbia. In 1963, for $8,500, he acquired 160 acres of land on Finch Road, near Kelowna, and in 1972 he acquired an adjacent 10 acres of property for $10,000 (Finch). In 1975 he sold Finch for $170,000, realizing a profit thereon of $142,000, after proper allowance was made for relevant costs. Lucretia Moubray is the wife of Phillip Moubray and, in 1965, she acquired a one-half interest, at a cost of $21,500, in an orchard property near Peachland, totalling some 38 acres, 20 of which were in production. In 1973, she sold that one-half interest in Peachland for $47,000, and after costs realized a gain of $22,210 thereon. In 1971 Phillip Moubray transferred to Lucretia Moubray at a stated selling price of $17,000, some 269 acres of land on McKinley Road (McKinley) which he himself had acquired in 1961. In 1974 Lucretia Moubray sold McKinley for $269,000, realizing thereon a total gain of some $235,860.

The point at issue in these appeals is the characterization for income tax purposes, either as on income or capital account, of the relevant gains realized on the above properties, after appropriate reserves against amounts not received were allowed during the years in question. The respondent in assessing has relied upon sections 3, 4, 9, 12, 20 and 248 of the Income Tax Act, S.C. 1970-71-72, c. 63, as amended.

Contentions

For Phillip Moubray

— Finch was acquired as a location for a vineyard. Substantial work was carried out by the appellant for the purpose of establishing a vineyard. The property was sold when the appellant realized that the proposed vineyard was not economically feasible.

For Lucretia Moubray:

— Both Peachland and McKinley were acquired as farm investments.

For the respondent:

— The sale of all three properties (Finch by Phillip Moubray; Peachland and McKinley by Lucretia Moubray) were culminations of schemes for profit making;

— A motivating reason in each case for the acquisition was the expectation that it could be sold at a profit.

Evidence

Both appellants testified with regard to the circumstances surrounding the properties. Phillip Moubray had a lengthy and admirable history going back to 1947, of farming in the area and the acquisition of other parcels of land, culminating during the relevant years in the transactions recited earlier. He was knowledgeable and recognized in the fruit tree growing business. In 1963, about the time of the sale of some of the property he owned and farmed (some 44 acres) and the acquisition of 160 acres of Finch, he applied for and received a real estate agent’s licence. He tried selling real estate for a short while, did not like it, and decided to go back to farming — Finch was considered appropriate for that purpose. The record of some other private real estate transactions from 1963 to the present time, including some subdivision work, was entered as evidence. He had sold McKinley to Lucretia Moubray for $17,000 as part of estate planning.

Lucretia Moubray had assisted her husband in the early farming endeavours, and also was knowledgeable about the geography and topography of the area. She had quite expected that Peachland would continue to be a good producing orchard, although it was in an area that was building up residentially. She and her partner therein had planned to plant all of it in fruit (some further 18 acres), but bad growing conditions, damage by animals, and the difficulty of obtaining and retaining good managers had resulted in her decision to sell the property. Her husband, as he had noted in his own testimony, had made serious efforts to make viable use of McKinley before he sold it to her and while she felt it could have been further developed, she had not done a great deal with it before she, in turn, sold it in 1974.

Considerable testimony and evidence were introduced by both appellants regarding climate, growing conditions, soil, alternative possible uses of the two properties (Finch and McKinley), as well as the general use being made of other properties in the area. Efforts were also made to provide some background information which might be relevant to the nature of the properties at various times, in relation to the alleged values and comparability of other properties in the area known to the appellants.

In addition, the respondent introduced evidence from Mr Douglas Hayward, a real estate appraiser, who provided some aerial photographs and certain testimony regarding physical characteristics which he considered relevant to the utilization or potential utilization of the properties.

Argument

The relevant points highlighted by counsel for the appellants, which had been brought out in evidence, were:

(For Finch)

— Phillip Moubray knew the orchard business;

— He had some indication that the land would be suitable;

— He acquired some equipment;

— He cleared about 25 to 30 acres;

— Soil tests were done;

— The climate was good;

— The irrigation costs discouraged him from continuing in the grape business;

— He planted some 4,000 Scotch pine trees;

— He fenced the property;

— He ran some cattle on it;

— There was little speculation on land going on in the area at the time of acquisition;

— He wanted to try something different that selling real estate, and going back into the vineyard business was natural;

— The land still remains undeveloped.

(For McKinley)

— Purchased a farm and potential orchard;

— It had substantial timber on it;

— Some limited logging was done;

— Property was fenced;

— Some cherries were planted as an experiment;

— Irrigation was improved;

— Ran some cattle;

— Property held for some 14 years;

— The land still remains to this day in its same undeveloped condition.

(For Peachland)

— Thirty-eight (38) acre operating farm;

— Two thousand fruit trees;

— Of three (3) managers, only one had been satisfactory;

— Trees were being destroyed by animals;

— The land and farm remain relatively unchanged since the sale.

In summary, counsel concluded that even though Mr Moubray had shown an interest in real estate (acquiring a licence), this should not be a negative factor to be considered — there was considerable available jurisprudence on this. The properties had all been held for long periods of time, there had been proper business reasons for acquiring them, and the reasons for selling had all been understandable. There was no evidence of speculation in any of the transactions. The primary intention of the taxpayer in each case had been legitimate, and there was no evidence of secondary intention.

Counsel for the respondent stressed the fact that while Phillip Moubray had indicated a lack of interest in a career as a real estate salesman, he had remained very active in the real estate field during all the material times. Little if any real work was done to develop Finch or McKinley toward the stated goals of using them as working fruit farms. A combination of the background and experience of the appellants in the fruit business, some exposure to land transactions and values in the early years, together with Phillip Moubray’s acquisition of a real estate licence, led counsel to the conclusion that the prospects for profit rested in the land business rather than in the fruit-growing business, as the appellants saw it. Peachland fell into the same category, it was only different to the degree that some fruit farming was going on at acquisition. In essence, the purchases were strategic, and all the properties were for sale at the right opportunity. Neither the development nor the use of these properties as farms had been demonstrated.

Findings

The appellants sold their own 44-acre fruit farm in 1963, allegedly wanting to change direction, and Lucretia Moubray acquired a one-half interest in a new 38-acre fruit farm (Peachland) only two years later — somewhat of a contradiction. In addition, I would expect that Phillip Moubray, the experienced man that he was, could have seen at acquisition, that Peachland was not the most viable operation available, and would have so advised his wife. Certainly they would have known that it was unlikely such a farm could be run by a manager, when their own hard work and experience had been only modestly rewarding financially on their own 44-acre farm. Finally, Phillip Moubray already owned substantial tracts of land — Finch and McKinley — allegedly being held for farming. Had he (or his wife) really intended long range fruit farming, it could have been started there rather than by the acquisition of Peachland — if indeed either property was suitable for such farming. Nevertheless, Peachland was and remains an operating fruit farm, and that is a fact which must be taken as critical under the particular circumstances of this case, and seen in the appellants’ favour. The evidence does not clearly support a conclusion that Lucretia Moubray intended at the time of acquisition to hold Peachland primarily for the purpose of selling it at a profit. That such a prospect (of sale) would be a consideration I do not doubt, but it should not in this case detract from the inherent characteristics and use of Peachland before, during and after the involvement of Lucretia Moubray, and the fact that she owned only a fifty per cent interest. At least in theory she could not dispose of the entire parcel of property at will. The amount of profit on Peachland is to be considered on capital account.

With regard to both Finch and McKinley, the situation is quite the reverse. In my view the evidence provides no assurance that the appellants had serious intentions regarding the use of those properties. The physical characteristics of the properties and the limited use made of them during tenure support that view. I am quite satisfied that the appellants tried out a few things which might make a limited use of the properties, and even might improve the properties while they held them — or their potential as saleable assets — but the prospect of committing themselves physically, financially and emotionally, to the alleged farming utilization of the properties on a personal basis has not been demonstrated. In particular, I am not impressed by the acquisition of Finch in 1963 for an alleged purpose not dissimilar from that held out for McKinley, when McKinley was already acquired in 1961. The profit on these properties is on income account.

Decision

The appeal of Phillip Moubray is dismissed.

The appeal of Lucretia Moubray is allowed in part in order that the profit on the Peachland property be taxed on capital account. In all other respects her appeal is dismissed.

The entire matter is referred back to the respondent for reconsideration and reassessment in a manner not inconsistent with these reasons.

Appeal of Phillip Moubray dismissed.

Appeal of Lucretia Moubray allowed in part.