Elwood F Holmes v. Minister of National Revenue, [1981] CTC 3062, 82 DTC 1010

John B Goetz:—This is an appeal by the appellant with respect to his income tax assessments for the 1974, 1975, 1976 and 1977 taxation years.

Issues

There are before me possibly two issues to be decided. (1) Whether 23 transactions involving sales of building lots by the taxpayer during the years 1974 to 1977 inclusive should be treated for tax purposes as transactions on capital account or transactions giving rise to business income; (2) If the above issue is decided by me that the transactions were of a capital nature, then that decision gives rise to my responsibility to determine the V-Day value of each transaction involved in this appeal.

Facts

The respondent, in the reply to notice of appeal, asserted as follows: 2. In computing income for his 1974, 1975, 1976 and 1977 taxation years, the Appellant reported as capital gains or losses arising from the disposition of certain lots as follows:

Year	Lots	Proceeds	Net Gain/(Loss)
1974	6	$32,000	$ (1,622.14)
1975	4	29,500	9,500.00
1976	4	63,500	11,743.91
1977	3	32,000	12,325.86

3. By Notice of Reassessment dated April 12, 1979, the Respondent treated the sales of the lots on income account and included in computing the appellant’s income the following amounts as income from business:

Year	Amount
1974	$51,687.57
1975	20,188.22
1976	30,482.46
1977	24,664.77

In assessing the appellant, the respondent relied, inter alia, upon sections 3 and 4 and subsections 9(1 ) and 248(1 ) of the Income Tax Act, SC 1970-71- 72, C 63, as amended.

The appellant is a farmer and has farmed all of his life. The farm was acquired in 1878 by his grandfather and consisted of 200 acres. In 1924, at the age of 14, he left school to work on the farm where he has lived ever since. In 1935 his father passed away and he ultimately acquired the property after paying out his brothers and sisters. This necessitated the taking out of a Farm Credit Corporation mortgage. He would gradually withdraw from his farming operations and sell his property.

In 1968 he sold approximately three acres in the southeast boundary of his farm to a Mr R Hamilton, for $3,500, Hamilton having advised him that he wished to purchase the said land for the construction of a home. The farm was located on the southeastern edge of the town of Meaford and about one mile from Georgian Bay, with an excellent view. The appellant’s farming activities consisted of mixed crops, beef cattle and sheep raising. After Mr Hamilton had purchased the three acres from the appellant, he learned that there was an interest in the acquisition of land in the general area. This came about as a result of two ski resorts having been constructed in the area.

In 1968 and 1969, subsequent to the Hamilton sale, approximately 27 acres were subdivided into 37 building lots and four access roads were put in as described in Registered Subdivision Plan RD-57, registered on November 19, 1968 and Plan RD-106, registered on August 26, 1969. Thirty of these building lots were sold as arm’s length transactions and gifted or sold to the appellant’s children during the period between 1969 and 1977. He still held seven building lots as of 1977. In 1976 he sold 77 acres as one parcel for farming purposes to a neighbour on an adjoining piece of farm property for the sum of $22,500. In May 1981 he sold 50 acres located in the north part of his farm, including all his farm buildings. This also was sold for farming purposes, for the sum of $66,000.

At the time Hamilton subdivided his three acres into six lots, the appellant was not aware of this subdivision at the time of the deposit of Plans RD-57 and RD-106. It was as a result of strangers coming to him that he learned of an interest of people acquiring land in the area for recreation purposes, and this resulted in the two subdivision plans filed by the appellant. The portions that were subdivided were the least productive and even after subdivision and sale, the appellant continued to farm the land and take hay therefrom for feeding his cattle. In order to get the subdivisions filed he was required to construct access roads with a 66-foot road allowance, 22-foot road surface and and the installation of culverts. Bulldozing and scraping were done in 1969 and the gravel base was placed in 1970. This was contracted out for others to do while the appellant continued his farming operations, he sold all the lots as raw land.

The two subdivisions became known as the “Holmes Subdivision’” and prior to 1971 he sold six lots without any services and the prices therefor averaged approximately $1,500.

In the period between 1971 and 1973 the appellant encountered problems with The Grey-Owen Sound Health Unit which took the position that the soil conditions on the subdivision lots were unsuitable for the use of a conventional private septic tank. This unit, in spite of efforts on the part of the appellant to have them change their mind, refused to grant approval for proper sewage facilities which then precluded the appellant or any purchasers of the lots from obtaining building permits. It was the view of the civil servants in this Health Unit that no lot should be less than two acres in size, although in fact the Health Unit did enter into agreements with other persons to acquire lots of one acre in size provided they entered into certain terms and conditions and safeguards with the Health Unit. The Unit had no authority whatsoever to restrict the sale of lots, but the delay in granting sewage facilities approval precluded the granting of building permits.

Mr Holmes, the appellant, being a farmer to the core, could not tolerate the bureaucratic intransigency of the local Health Unit and gave up any attempts to satisfy what he considered unreasonable terms and conditions and, in particular, their suggestion in breaking up his registered subdivision into two-acre lots. Fortunately, the regulations to the Environmental Protection Act (Ontario) were revised in April 1974, whereby the conditions on the taxpayer’s building lots were considered acceptable for the installation of conventional private sewage systems.

Having overcome the bureaucratic roadblock, the appellant resumed sale of subdivision lots during the years 1974 to 1977 inclusive and disposed of 23 lots in those years, as shown in Exhibit A-9 which reads as follows:

ELWOOD F HOLMES — TAX APPEAL

RD-53 and	Lots Sold Prior	Lots Sold 1974-	Lots Still
RD-106	to 1974/Year	1977 Year	Owned
Lot numbers Sold/Price		Sold/Price	After 1977
1		1/76/$10,000
2		2/77/$11,000
3			3
4		4/75/$10,000
5		5/74/$ 7,500
6		6/74/$ 4,500*
7			7
8	8/69/$1,500
9	9/69/$1,500
10	10/69/$1,500
11	11/69/nil*
12		12/74/$ 4,500
13		13/74/$ 5,000
14	14/69/nil*
15		15/74/$ 4,500*

RD-53 and	Lots Sold Prior	Lots Sold 1974-	Lots Still
RD-106	to 1974/Year	1977 Year	Owned
Lot numbers Sold/Price		Sold/Price	After 1977
16			16/present home
17		17/75/$ 8,000
18		18/75/$10,000
19		19/77/$10,000
24			24
25		25/76/$10,000
26		26/77/$ 11,000
07			27
28			28
29			29*
30		30/76/$ 11,000
31		31/76/$10,000
32	32/70/$2,000
33		33/74/$ 5,000*
34		34/74/$ 5,000
35		35/74/$ 5,000
36		36/74/$ 5,000
37		37/74/$ 5,000
38		38/74/$ 5,000
39		39/74/$ 6,000
40		40/74/$ 6,000
41	41/69/$1,300
37 lots	7 lots	23 lots	7 lots

In June 1975 the appellant entered into an agreement with the Corporation of the Township of St Vincent, which was a Township within which his property was located, whereby building permits would be granted on certain conditions, some of which were as follows: (1 ) the obtaining of a septic tank permit and an agreement, if required, as a condition precedent to issuing a building permit to potential buyers. The conditions of this agreement would apply to all persons who also had purchased property from the appellant.

(2) Potential purchasers would have to obtain permission from the Ministry of the Environment to install the sewage disposal system. (3) The drilling of wells to a depth of at least 75 feet was required, and if no water was found, a suitable water reservoir was to be provided. All conditions and terms of this agreement, which I need not go into, had to be accepted by potential purchasers. Exhibit A-9 shows that 13 lots were sold in 1974; 3 lots in 1975; 4 lots in 1976; and 3 lots in 1977. This, of course, covers the taxation period for which the assessments thereof are under appeal.

The agreement of June 1975 with the Township of St Vincent took over a year to negotiate with the help of his lawyer. As mentioned before, the subdivided portion of his farm consisted of trees and gullies but was extremely scenic. It was not good farmland as such. The only work performed on the subdivision was to set up access roads throughout the subdivision but did not include access roads to each lot. No other services were provided by the appellant to the lots contained in the subdivision. The ski resort was only 20 miles south of Meaford and, as mentioned earlier, the whole area became viable for recreation homes, and people as far away as Toronto would purchase lots and hold them with a view to building at a later date. The appellant did not install telephone lines, hydro or water facilities, sewage facili- ties, street lights, etc. No services of any kind were provided and all of the lots were-sold as raw, completely underserviced building lots.

His potential purchasers were completely unknown to him; he did not retain the services of a real estate agent; he did no advertising and the only sign that he had was a 4' X 8' piece of plywood indicating that lots were for sale and this sign was located at one corner of his property. In 1972 a Toronto developer approached him with the view of buying the whole of the subdivisions, even though at the time the developer knew that it was impossible to get building permits in face of the opposition of the local Health Unit, and he offered $2,025 a lot. I am sure that the aggregate price for the whole of the two subdivisions was attractive to the appellant, but being of an independent heritage as a farmer, the appellant declined this offer.

During the period under appeal the appellant continued to act as a full- time farmer, and I do not accept the allegations of the Minister that the property had been changed from raw farming to serviced residential lots. They were raw unimproved building lots with no services whatsoever. The appellant was a farmer and had no experience or expertise in the real estate field. It was only his condition of health and age that prompted him to dispose of the lots contained in his two subdivisions (although the respondent alleged that there were three) and the availability of the lots for purchase became a generally known fact in the area and as far away as Toronto.

The mere filing of the subdivision plans and the selling of lots thereunder do not in themselves affect the status of the gain, notwithstanding that such Subdivision may have enhanced the value of the land. If the appellant had gone beyond the minimal service he performed, namely access roads, I believe he would have been in a different position.

I place great emphasis on the decision of the Exchequer Court in John Lloyd McGuire v MNR, (1956), CTC 98; 56 DTC 1042. I have also perused the following cases cited to me by the appellant:

Kenneth E Cameron v MNR, 15 Tax ABC 291; 56 DTC 348;

Arthur Levasseur v MNR, 18 Tax ABC 321; 58 DTC 72;

No 562 v MNR, 20 Tax ABC 174; 58 DTC 551;

T Teilman Skov v MNR, 25 Tax ABC 70; 60 DTC 460;

Edward McLachlan v MNR, 25 Tax ABC 382; 61 DTC 17;

William M Mattick v MNR, 40 Tax ABC 74; 66 DTC 29:

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

Leslie O Parnell v MNR, [1978] CTC 2357; 78 DTC 1271;

Raymond Schumph v MNR, [1979] CTC 2850; 79 DTC 723;

Ross Brown v MNR, [1979] CTC 2248; 79 DTC 227;

Roselawn Investments Limited v MNR, [1980] CTC 2316; 80 DTC 1271;

Kit-Win Holdings (1973) Limited v Her Majesty The Queen, [1981] CTC 43; 81 DTC 5030.

All of the above cases were decided in the taxpayer’s favour (with the exception of Moloch) and the facts of this case, as presented to me, have convinced me that all of the reassessment transactions were capital in nature.

Counsel for the respondent cited to me the case of Moluch (supra), a decision of the Exchequer Court of Canada in which the McGuire case (supra) was discussed, but in that case the taxpayer effected a subdivision ending up with fully serviced residential lots for sale. In other words, he was in the business of selling real estate, whereas the appellant in the present case remained a full-time farmer throughout.

I therefore hold that the transactions in question in the assessments for the 1974 to 1977 taxation years inclusive were of a capital nature.

I am therefore faced with determining the V-Day value of the land.

The appellant called as an expert witness, Dr D W Egerton, who gave what I considered a full and excellent appraisal report, and whose qualifications as an appraiser as well as his appraisal report were, in my opinion, considerably superior to that provided by Mr Grant, the appraiser for the Crown. It was Mr Egerton’s view that the subdivision lots in total, located in Part Lot 10, Concession 3, Township of St Vincent, County of Grey, Province of Ontario, as of December 31, 1971, were worth $120,000. As part of his appraisal report were included certain transactions which took place in 1971 where purchasers of property in the general area entered into an agreement with The Grey-Owen Sound Health Unit whereby, subject to certain conditions, they would be allowed to construct septic tanks and thereafter obtain building permits on similar types of land.

Mr Egerton says that in the late 1960’s the Beaver Valley-Collingwood area experienced a tremendous growth as a result of the rising popularity of downhill skiing for which the area is well suited. This fact, combined with the proximity to Toronto (roughly 100 miles) and Southern Ontario, led to a boom in seasonal residential development throughout the area. He disagreed with the government appraiser who criticized Mr Egerton’s appraisal report relating to comparable sales of land in the area. On pages 18 and 19 of his appraisal report, Mr Egerton shows the comparable sales and the years the sales were made:

VALUATION

In this approach to value, the property under appraisement is compared with other similar properties in the neighbourhood which have sold of recent date. In the comparison process, consideration is given to and adjustments made for such factors as:

(a) time element

(b) location

(c) lot size, shape, improvements, etc.

(d) motivational involvements (if any)

Following are a number of market transactions which have been selected for comparison purposes.

Sale Location Location		Sale Sale Lot Lot			Selling
#		Date Date	Size Size		Price
St Vincent Township
1	Part Lot 3, Cone. 1	1970	.46 acres		$ 2,995
2	Part Lot 3, Cone. 1	1970	.46 acres		$ 2,695
3	Part Lot 10, Cone. 1	1970	.05 acres		$ 3,320
4	Part Lot 10, Cone. 2	1971	.05 acres		$ 3,100
5	Part Lot 10, Cone. 2	1970	.46 acres		$ 2,845
6	Part Lot 10, Cone. 2	1970	.68 acres		$ 2,695
7	Part Lot 10, Cone. 2	1972	2	acres	$10,000
8	Part Lot 11, Cone. 2	1970	.09 acres		$ 2,500
9	Part Lot 11, Cone. 2	1969	.09 acres		$ 2,000
10	Part Lot 11, Cone. 3	1972	.67 acres		$ 7,750
11	Part Lot 11, Cone. 3	1973	.67 acres		$ 8,500
12	Part Lot 2, Cone. 4	1969	1.03 acres		$ 2,500
13	Part Lot 10, Cone. 5	1969	.57 acres		$ 2,700
14	Part Lot 10, Cone. 5	1970	.57 acres		$ 2,700

VALUATION
Sale Location Location		Sale	Lot Lot		Selling
		Date	Size Size		Price
15	Part Lot 18, Cone. 11	1970		.46 acres	$ 2,000
16	Collingwood Twp.	1971	1.67 acres		$ 5,000
17	Collingwood Twp.	1971	1	acre	$ 6,000
18	Collingwood Twp.	1970		.96 acres	$ 5,300
19	Collingwood Twp.	1972		.09 acres	$ 7,500
20	Collingwood Twp.	1970		.84 acres	$ 3,695
21	Collingwood Twp.	1972		.84 acres	$ 5,500
22	Collingwood Twp.	1972	1.36 acres		$ 6,000

The above referenced sales represent vacant residential building lots located throughout St Vincent Township, as well as the north end of Collingwood Township. With the exception of sale 7, all are less than two acres in size and in fact, are predominately less than 1 acre in size.

Sales 1,2, 3, 5, 6, 13 and 14 are interior lots, situated on improved road allowances.

Based on an analysis of the available market data, after making the necessary adjustments for factors of dissimilarity and further based on your appraiser’s knowledge of the market generally, the Subject Property is estimated to have a Market Value as follows.

Lots 6, 7, 11, 12, 13, 14, 16 and 36

1 4,500.00 per Lot or:

8 Lots @ 4,500.00	$ 36,000
Lots 1-5, 15, 17-19, 24-31, 33-35, 37-40
$ 3,500.00 per Lot, or:
24 Lots @ 13,500.00	$ 84,000
TOTAL	$120,000

Respectfully submitted,

D W Egerton, A.I.M.A., A.A.C.I.

The government appraiser, Mr Grant, made the statement that in the relevant subdivisions there was no access to lots and consequently the value should be downgraded. This is not a fact. And further, Mr Egerton states that his comparable sales lots had no access roads whatsoever, whereas the appellant’s roads were all in place.

Mr William Albert Grant was an engineer surveyor and worked for six years for the Department of Highways and ultimately as an appraiser. His approach to evaluation of the property on V-Day was, to say the least, extraordinary in that he produced a configuration and change of the two subdivisions into two-acre plots, which would have necessitated a completely new subdivision plan and was totally unrealistic and unnecessary. Attached to Mr Grant’s appraisal report was an addendum based on this appraiser’s word “configuration” wherein he grouped hypothetical parcels of land and then turned over his appraisal report and new and unfeasible subdivision plan to the Department of National Revenue where someone prepared calculations whereby the 23 lots sold by the appellant would be only worth $1,449 as of V-Day. As Mr Egerton pointed out, the lots were selling for a lot more than this price in 1968 and 1969. I should here like to cite Exhibit A-12 which was filed by the appellant which clearly sets forth the Revenue Canada V-Day values, Mr Egerton’s V-Day values and the year and price each lot was sold:

Notes:

1. Approximately $22,000 was expended by taxpayer in 1975 on road development costs.

2. Five (5) lots (8, 9, 10, 32 and 41) were sold by taxpayer to arm’s length buyers in1969 and 1970 at average sale price of $1,560.

Mr Egerton was quite adamant that the lots could not have been sold on the basis of Mr Grant’s configuration of the land for sale and that Mr Grant’s approach was totally unrealistic and wrong. It was purely theoretical. The lots were saleable without the approval of the Health Unit or the obtaining of the building permits and this indeed had been done prior to 1971. Grant says that Egerton’s appraisal had a completely wrong approach whereas it is my view that Grant’s appraisal was done with total disregard to extraneous information. It seems to me that if anyone approached the appraisal for the two subdivisions, it was the Revenue appraiser who took an unrealistic theoretical approach. Further, on his strange suggested new configuration of the subdivisions, an individual in the Department of National Revenue attempted to calculate the V-Day value. I therefore accept without hesitation the evidence and the appraisal report of Egerton Associates Limited as opposed to Mr Grant’s.

There is another factor that I should mention — that is, even though I have dealt with the V-Day value in spite of the fact that although the respondent had the opportunity to amend his reply to notice of appeal, he did not do so. The matter first came before the Tax Review Board on October 20, 1980. At that point in time, counsel for the respondent sought to introduce a new issue to be raised in his pleadings concerning the amount of the taxpayers capital gains in respect of the lots which were in issue. The presiding Member of the Board at that time refused to deal with the two issues, as I have done, and adjourned the matter sine die until it was heard before me. Although the Government’s appraisal report was turned over to counsel for the appellant prior to the hearing, V-Day values were not raised in the reply to notice of appeal despite the fact that the adjournment was set up for that purpose. On this ground alone, I think it would be proper for me to accept the appellant’s appraisal report at its face value without commenting further on Mr Grant’s appraisal. Nevertheless, I believe I would have allowed an application to amend the reply to notice of appeal at the time of the hearing before me, but the ultimate result of the hearing would have been the same, namely, that the whole appeal is allowed and the matter referred back to the respondent for reconsideration and reassessment.

Appeal allowed.