Ross Brown and Audrey Brown v. Minister of National Revenue, [1979] CTC 2248, 79 DTC 227

Delmer E Taylor:—These are the appeals of Ross Brown against income tax assessments in which the Minister of National Revenue added to his taxable income the amounts of $31,706.86 and $3,651.00 for the taxation years 1973 and 1974 respectively. These appeals were heard at the City of Toronto, Ontario, on November 7, 1978, on common evidence with the appeals of Audrey Brown. The matter at issue is whether the profit realized by the appellants on the sale of certain real property should be classified for income tax purposes as on income or on capital account. The respondent relied, inter alia, upon section 3, subsection 9(1) and section 248 of the Income Tax Act, SC 1970-71-72, chapter 63, as amended.

Facts

Ross Brown and Audrey Brown, his wife, were born in the Town of Port Dover, Ontario. They were married in 1951 and have two children, Randy, born in 1952 and Cheryl, born in 1953.

On or before March 15, 1968, Ross and Audrey Brown entered into an agreement for the purchase of a 53-acre farm near Port Dover, in the Township of Woodhouse, for a price of $36,000. On July 11, 1973, they executed an agreement to sell the farm for $555,000.

Contentions

It was contended by the appellant that:

—during the years 1962 to 1965, he worked as a car salesman. In the fall of 1965, he obtained a licence and began working as a real estate agent.

—There were a house and three barns on the farm at the time of purchase, and the (then) owners were actively farming the property. The farm had been listed for sale for more than one year prior to this time.

—The farm was not subject to any zoning restrictions when the agreement to purchase was made. On March 14, 1968, the Township Council passed a holding by-law, freezing the use of land in the Township until zoning by-laws and an Official Plan could be implemented. The holding by-law made no reference to the possible future zoning applicable to any land in the Township.

—On August 27, 1969, the Official Plan for the Woodhouse planning area and a comprehensive zoning by-law were passed. The land comprising the farm was zoned “D” for future development, with the only permitted use being agriculture. The farm was included in neighbourhood “F” under the Official Plan and section 7.1(c) of the Plan provided that before any substantial residential development was permitted to take place there, an amendment to the Plan, in the form of a Secondary Plan of the neighbourhood, had to be approved by the Minister of Municipal Affairs or the Ontario Municipal Board.

—Sometime after January 1971, Ross and Audrey Brown and their children moved to the farm and lived there until it was sold in 1973.

—While they lived on the farm, Ross Brown engaged in limited farming activities. He received a small sum of money for allowing the use of some of the land to grow corn, purchased and sold 12 beef cattle and sold top soil from four acres of the land.

— Ross Brown agreed to participate in the engagement of a firm of consulting engineers to draft a plan of subdivision covering the farm.

—At no time did Ross and Audrey Brown list the farm for sale.

—At the time of the sale of the farm, no plan of subdivision for the farm had been either approved by the Government of Ontario or registered on title, and no Secondary Plan of neighbourhood “F” under the Official Plan for the Woodhouse Planning Area had been approved by either the Minister of Municipal Affairs or the Ontario Municipal Board.

— It was the intention of Ross and Audrey Brown, when they purchased the farm, to use it for their personal enjoyment as a home and to earn income by farming the land. At the time of the purchase, they had no intention to have a plan of subdivision drafted for the farm. There was no secondary intention at the time of the purchase to resell the farm at a profit.

—The fact that Ross Brown was a real estate agent was not relevant with respect to the purchase of the farm.

The position of the respondent was that:

—during 1968, construction had begun on an Ontario Hydro four million kilowatt thermal generating station at, Nanticoke, Ontario, an area close to the farm.

— During 1967 and 1968, the Steel Company of Canada acquired, by way of options, approximately 6,600 acres in the area of the farm, and in an official announcement on or about April 24, 1968 the Steel Company of Canada was indicated as the optioner of the 6,600 acres in the area of the farm.

— At the time the farm was acquired, the appellant was employed as a real estate salesman.

—Several attempts were made by the appellant to subdivide the farm into residential housing lots.

— Prior to the appellant having moved onto the farm to occupy it and undertake a small degree of farming activity, representations had been made to the Woodhouse Township Council to subdivide the farm at a special meeting of that Council held on November 12, 1970.

— Further representations were made to the Township on March 1, 1971 and April 1, 1971.

—The farm was acquired for the purpose of trading or otherwise turning it to account by way of sale.

—The profit realized by the appellant on the sale of the property was income from a business or adventure in the nature of trade.

Evidence

Evidence was provided by the appellant, by Audrey Brown and by a Mr Charles Powell, brother-in-law of the appellant. In summary the evidence of this appellant and Audrey Brown was that Ross Brown, from 1952 until 1962, had been employed as an automobile salesman in Hagersville, Ontario, a town not too far from Port Dover, Ontario. While continuing to live and work in Hagersville, the appellant and Audrey Brown purchased a summer resort called Buck Lake Lodge near Huntsville, Ontario in 1962. Ross and Audrey Brown operated Buck Lake Lodge but realized little income from the operation and finally they listed the property for sale. It was in anticipation of the proceeds from this sale in early 1968, that Ross and Audrey Brown had entered into the agreement for purchase of the farm property in question.

Mr Charles Powell testified that he had originally entered into the agreement to purchase the farm on February 15,1968 but when he was unable to raise the necessary funds, he had notified his brother-in-law, the appellant in this case, that he could not proceed with the purchase and had received back from his brother-in-law the $1,000 he had paid as a deposit. The appellant in this case had acted as the real estate agent for Mr Powell in the aborted attempt at purchase. Mr Powell’s reason for his original interest in the property was that he also, together with his wife, had come from the Port Dover area and they wished to return there and retire after completing his employment with the Canadian National Railroad. The property originally had been, in fact, his wife’s family farm.

Ross Brown indicated that his involvement as a real estate salesman had been very small, the sale of a few houses, that he had not engaged in the sale or purchase of farm property and had no more than passing information with regard to any major industrial or commercial developments which might affect the area. He had acted for his brother-in-law as he would have done for any other client, and then realizing that the farm might serve the purposes of his wife and himself as a residence, he continued with the original offer on being notified by Mr Powell that he (Mr Powell) could not complete the purchase of the farm.

Argument

Counsel for the appellant summarized the case in the following way:

. . . the critical matter for the Board to determine on this appeal is the intention of Mr and Mrs Brown when they purchased the farm in 1968.... That intention was to live on the farm as their place of residence and to farm it. The evidence is also clear that their intention was not to buy the property for purposes of resale or subdivision or for any other purpose . ..

. . . it is open to the Board to look at all of the facts and events to determine whether or not they are consistent or inconsistent with the stated intentions of the taxpayer at the relevant time.

. . . some (time) you can infer a secondary intention and that may be so in proper cases, but there is absolutely no evidence here on which you could form a basis for secondary intention.

I say that the evidence here discloses that there was only one intention.

If (it is) suggested that Powell is a speculator and that, therefore, Brown is a speculator, I simply say that there is absolutely no evidence in support of that proposition.

. . . he bought a property to live on and he was lucky enough to find that the value of that property appreciated substantially and in my submission in those circumstances he’s entitled to sell it and treat it as a capital gain . .

In support of the position taken for his client, counsel referred the Board to the following case law:

Arthur E Kruger et al v MNR, [1977] CTC 2311; 77 DTC 208;

Hiwako Investments Limited v Her Majesty the Queen, [1978] CTC 378; 78 DTC 6281;

Wilbert House v MNR, [1971] Tax ABC 887; 71 DTC 562;

Donald Quon and Kee K Yuen v MNR, [1962] CTC 343; 62 DTC 1204;

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

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

Roy M Power v Her Majesty the Queen, [1975] CTC 580; 75 DTC 5388;

Benjamin G Davidson v MNR, [1967] Tax ABC 655; 67 DTC 439.

Counsel for the respondent conversely asserted that:

I would submit most strongly that that intention was not even carried out until long after, in fact, my submission is that it was never carried out. They didn't move onto the farm to live there or to do any work on it. They did not farm it per se and in any event, they did not do that until approximately two years after . . .

Now, I say that the intention must be an exclusive one. The reason is that in the case at bar, the only possible other purpose that the Browns could have had in ac- quiring the property was to turn it to account at a profit. There is no evidence that they intended to invest for other reason or that they intended to develop it in some way that would give rise to rental income or any other kind of investment. The only other alternative can be that they were trading in the property. Consequently, they have to establish that they bought with a purpose that excluded entirely the possibility of trade.

Now, Mr Brown has flatly and unequivocally admitted that within six months of buying the property, his exclusive purpose was to profit from resale, either by developing it or by just reselling. He went along to develop the property because he was advised ultimately that the potential for profit was greater in development than it would be from simply reselling it.

The first contact from people who might be prospective buyers came within six months of April, 1968, according to Mr Brown. . . . He unequivocally admitted that when this happened, he was out to profit to the maximum on resale, either through development or through simple sale. . . . He retained development consultants, Hatherton and Associates. They prepared plans of subdivision. We saw one that was submitted to the various authorities. Representations were made on behalf of Mr Brown to get a plan of subdivision. He subsequently retained another firm of developing consultants, CC Parker and Associates .. .

Now, the allegation is that that offer was unsolicited. In my submission, it is really irrelevant at best. Mr Brown was fully aware that there was a market for his property.

.. . all of the objective evidence and a good part of the direct evidence supports the inference that there was an inducement to buy the property for the purpose of resale and profit, beginning with the very agreement that bought the property.

If there was a huge profit to be made in this case, then the Browns certainly went after it and they made it.

In addition to comments on certain of the cases submitted by counsel for the appellant, counsel for the respondent relied on the following case law:

Hans Reicher v Her Majesty the Queen, [1975] CTC 659; 76 DTC 6001;

Paul Racine, Amédee Demers & François Nolin v MNR, [1965] CTC 150; 65 DTC 5098;

Regal Heights Ltd v MNR, [1960] CTC 384; 60 DTC 1270, (Taxpayer’s appeal dismissed (SCC));

Melcrete Construction Company Limited v Her Majesty the Queen, [1977] CTC 273; 77 DTC 5181.

Conclusions

It would seem to me that the points in these appeals which must be dealt with by the taxpayer are the following:

(1) his occupation as a real estate agent;

(2) the Township by-law on March 14, 1968, and purchase of the property at approximately the same time;

(3) his knowledge of the industrial development going on in the general area;

(4) the subdivision efforts conducted through and with the Township Council.

Dealing with these points in order, it is my opinion that there is nothing in the limited real estate work conducted by this appellant which would lead one to a conclusion that he thereby gained particular knowledge which would have made his decision to purchase this property based on an intention of turning it to account by the way of sale. There is no evidence that the appellant was even aware of the Township by-law passed on March 14, 1968, and any information the Board has on that subject would lead to a conclusion that the by-law was so general it would have been optimistic in the extreme for the appellant to have embarked on a programme of speculation based solely on the by-law. In addition, it would also be necessary to conclude that the appellant was in possession of certain confidential information of that nature which he did not transmit to his brother-in-law, since

it was Charles Powell who had originally intended to purchase the property. There is no evidence that this appellant was aware of plans or programmes which would have been affected by any industrial development contemplated in the area at the time he purchased the property. It would appear to me that any subdivision efforts conducted by the appellant were very much subsequent to his purchase of the property and the time that he States he intended to move to the farm and use it as his residence. Such Subdivision efforts appear to date from external interests in the property. I can think of no reason the appellant should not, under those circumstances, begin to view his acquisition somewhat differently than he had at the time of purchase.

In my opinion, this appellant has adequately and appropriately discharged the onus upon him to show to the Board that indeed his stated intention of using the property as his residence and as a farm was not only practical but also possible and reasonable. In addition, there is no evidence upon which to conclude that he could have had a secondary concurrent intention. His conduct, both during and after the purchase of the property, leads to only one conclusion—that he was fortunate enough to make a personal acquisition which resulted in substantial, unexpected and unintended profit.

The Board reaches the conclusion that the conditions demonstrated at this hearing, which are pertinent to the purchase and sale of the real property in question, should be viewed as falling squarely within the parameters of the Income Tax Act which permit such a transaction to be categorized as on capital account and makes reference to some recent judgments of this Board (see Sam Grossman v MNR, [1979] CTC 2132; 79 DTC 140 and Regin Properties Limited v MNR, [1979] CTC 2149; 79 DTC 156).

Decision

The appeals are allowed and the matter is referred back to the respondent for reassessment accordingly.

Appeals allowed.