The
Chairman:—The
appeals
of
Mr
Paul
R
Stone
and
Mr
Gene
Hartman
from
assessments
in
respect
of
the
1974
taxation
year
were
heard
on
common
evidence,
the
issue
being
whether
the
profits
realized
by
the
appellants
from
the
sale
of
a
certain
property
are
on
income
account
or
on
capital
account.
Summary
of
Facts
The
statement
of
facts
as
set
out
by
the
appellants
in
their
Notice
of
Appeal
reflects
quite
accurately
and
completely
the
evidence
adduced
at
the
hearing.
The
appellants’
statement
of
facts
reads
as
follows:
1.
The
taxpayers
were
employed
at
all
relevant
times
by
the
Waterloo
Regional
Health
Unit,
Hartman
as
a
Public
Health
Inspector
and
Stone
as
a
Deputy
Chief
Inspector.
2.
In
October,
1971,
the
Waterloo
Regional
Health
Unit
received
a
complaint
regarding
the
sanitary
and
unsafe
living
conditions
which
existed
on
the
property
located
at
206
Doon
Valley
Drive,
Kitchener,
Ontario
(the
‘property’).
The
house
on
the
property
was
inspected
by
Hartman.
He
concluded
that
it
violated
public
health
regulations
because
the
following
conditions
were
present:
(i)
no
drinkable
running
water
or
hot
water;
(ii)
no
bathroom
or
washroom
facilities
in
house.
(Although
an
outside
toilet
existed
it
was
usually
inaccessible
during
winter);
(iii)
rodent
infestation;
(iv)
obnoxious
odour
throughout
the
house;
(v)
fire
hazard
caused
by
holes
in
base
of
wood
stove
pipe
and
adjoining
wall;
(vi)
fire
hazard
caused
by
sparking
under
elements
of
electric
stove;
(vii)
accumulated
rubbish,
garbage,
old
clothing,
boxes
and
newspapers
throughout
the
house;
(viii)
bat
infestation
in
attic;
(ix)
unsafe
anchoring
of
stair
railings;
(x)
cracked
and
missing
window
panes;
and
(xi)
a
leaking
roof.
Photographs
of
a
number
of
these
conditions
are
available.
The
inhabitants
of
the
house,
Susannah
and
Paulina
Eshleman
(the
‘sisters’),
were
two
elderly
sisters
who
had
lived
there
for
many
years.
3.
Stone
and
Chief
Inspector,
George
Stubbs,
inspected
the
house
and
agreed
with
Hartman’s
conclusions.
They
asked
Hartman
to
seek
a
solution
to
the
problem.
Because
of
the
age
and
physical
disabilities
of
the
sisters,
he
was
reluctant
to
condemn
the
house
as
unfit
for
human
habitation
pursuant
to
The
Public
Health
Act.
The
sisters
had
rejected
several
suggestions
advanced
by
Hartman
that
they
be
transferred
to
a
nursing
home.
Hartman
felt
that
to
move
the
sisters
against
their
wishes
would
be
to
hasten
their
deaths
and
accordingly
he
approached
their
friends
and
relatives
to
obtain
financial
assistance
to
improve
the
house
for
their
use.
The
friends
and
relatives
of
the
sisters
refused
to
help
or
to
financially
assist
them.
4.
The
taxpayers
discussed
the
matter
between
themselves
and
found
that
they
were
becoming
personally
concerned
about
the
welfare
of
the
sisters.
Hartman
came
to
know
and
like
the
sisters
and
the
concern
felt
by
the
taxpayers
obviously
went
beyond
the
bounds
of
their
obligations
as
public
health
inspectors.
The
failure
of
the
sisters’
family
to
render
any
kind
of
assistance
led
the
taxpayers
to
believe
that
if
they
did
not
help
the
sisters,
no
one
would.
5.
Because
the
property
was
composed
of
a
house,
orchard
and
picturesque
surrounding
land,
the
taxpayers
also
felt
that
the
property
would
make
an
ideal
site
for
them
both
to
live
in
a
country
setting.
It
was
located
near
Lower
Doon
Village,
which
is
a
unique
quiet
village
in
which
many
older
buildings
have
been
preserved.
The
entire
Doon
area
was
composed
of
rolling
countryside,
attractive
wooded
areas
and
valleys
with
streams.
The
property
itself
was
bounded
on
all
sides
by
green
and
open
areas:
the
Grand
River
to
the
north;
wooded
Pinnacle
Hill
to
the
south;
the
village,
Willow
Lake
and
County
Forest
to
the
west;
and
Doon
Valley
Golf
Course
to
the
east.
The
taxpayers
believed
they
would
be
able
to
purchase
the
property,
sever
it
into
two
parcels
and
settle
with
their
wives
upon
it.
They
accordingly
discussed
the
method
of
dividing
the
property
and
decided
that
Hartman
would
obtain
the
2
acres
surrounding
the
house
and
Stone,
the
2
Z?
acres
containing
a
fruit
orchard.
It
was
agreed
that
at
the
time
of
severance,
Stone
would
be
paid
$5,000
by
Hartman
as
compensation
for
the
absence
of
a
dwelling
on
Stone’s
portion.
This
was
eventually
reduced
to
$2,500
and
was
paid
by
Hartman
to
Stone
at
the
time
of
the
sale
of
the
property
to
Terra
Nova
Holdings
of
Kitchener
Limited.
6.
Stone,
in
particular,
had
a
yearning
for
country
living.
He
spent
much
holiday
time
as
a
youngster
with
his
grandfather
in
Sutton
West,
a
small
village
on
Lake
Simcoe
and
at
the
family
cottage
in
Jackson
Point.
In
addition,
he
worked
during
high
school
in
the
summers
for
the
Department
of
Lands
and
Forests
in
Abitibi,
Obo
Lake,
Sault
Ste
Marie,
Cochrane,
and
other
locations
in
the
north.
When
he
was
21
years
old
he
went
to
St
Paul,
Alberta
to
work
as
a
public
health
inspector.
St
Paul
was
a
town
of
1,000
people
and
was
located
150
miles
northeast
of
Edmonton.
While
there,
Stone
continued
his
hunting
and
fishing
activities
and
his
general
enjoyment
of
rural
life.
The
property
of
the
sisters
also
appealed
to
his
wife
who
is
from
the
city
and
who
looked
forward
to
remaining
close
to
Kitchener
and
Waterloo
once
they
had
built
their
country
home
on
the
property.
Together
Stone
and
his
wife
actively
investigated
the
attributes
of
the
property
as
a
home—its
proximity
to
shopping
areas,
its
accessibility
to
public
schools,
and
the
like.
7.
The
taxpayers
concluded
that
the
only
way
to
help
the
sisters
would
be
to
purchase
the
property,
improve
it
and
permit
the
sisters
to
live
in
the
house
as
long
as
the
sisters
wished.
Once
the
sisters
had
either
died
or
were
no
longer
able
to
live
in
the
house,
Hartman
would
acquire
a
home
for
future
occupancy,
an
idea
about
which
both
he
and
his
wife
had
expressed
enthusiasm.
In
addition,
at
that
time,
Stone
would
obtain
a
building
site
of
approximately
2
acres
on
which
to
build
a
home
where
he
would
be
able
to
live
in
the
rural
style
which
he
enjoyed.
8.
Hartman
then
approached
the
sisters
on
behalf
of
himself
and
Stone
with
a
proposal
to
buy
the
property
and
to
make
the
necessary
renovations.
Stone
obtained
an
unwritten
opinion
of
the
fair
market
value
of
the
property
from
Sidney
Smithers,
an
acquaintance
of
his
who
was
a
real
estate
agent.
Based
on
this
opinion
of
value,
Hartman,
on
December
14,1971,
made
an
offer
to
purchase
the
property
for
a
price
of
$30,000.
The
offer
was
reviewed
by
the
sisters’
solicitor,
Peter
R
Sturdy,
and
their
physician,
Dr
A
D
C
McLagan.
In
order
to
verify
the
fairness
of
the
offer,
Sturdy
obtained
a
written
opinion
of
value
(attached
as
Schedule
la)
from
J
W
Donnelly,
Vice-President,
Wiebe
Realty
Limited
which
stated
that
his
opinion
of
the
value
of
the
land
was
$30,000.
When
Sturdy
and
McLagan
found
the
offer
to
be
acceptable,
the
sisters
signed
it.
A
copy
of
this
agreement
of
purchase
and
sale
is
attached
as
Schedule
I.
Pursuant
to
the
agreement,
the
taxpayers
agreed
at
their
expense
to
provide
connections
to
the
municipal
water
supply,
to
install
a
septic
tank,
to
provide
plumbing
for
at
least
one
toilet,
hot
and
cold
running
water,
a
bathroom
and
kitchen
sink
and
a
hot
water
tank
and
bathtub.
They
also
agreed
to
install
all
necessary
partitions
and
comply
with
all
ventilation
requirements
as
required
by
municipal
building
standards.
Further,
they
agreed
to
be
responsible
for
all
repairs
and
maintenance
of
the
property.
In
return
for
this,
the
sisters
were
allowed
by
the
agreement
to
live
in
the
house
as
long
as
they
wished
without
payment
of
rent.
9.
The
purchase
and
sale
of
the
property
was
closed
on
or
about
January
6,
1972
and
a
deed
was
registered
in
the
names
of
Hartman
and
Stone,
as
tenants
in
common,
to
uses.
10.
Because
it
had
been
decided
by
the
taxpayers
that
Hartman
would
eventually
become
the
owner
of
the
house,
the
responsibility
for
making
the
renovations
became
his.
He
went
far
beyond
his
obligations
under
the
agreement
of
purchase
and
sale
with
the
sisters
in
performing
these
renovations.
This
was
done,
not
only
because
of
his
concern
for
the
sisters’
welfare,
but
also
because
of
his
intention
to
use
the
house
as
his
future
residence.
Kitchen
renovations
included
new
knotty-pine
cupboards
with
a
10
foot
rolled
arborite
counter
top
and
double
stainless
steel
sink,
high
quality
vinyl
flooring,
washable
wall
paper
coordinated
with
the
colour
and
pattern
of
the
flooring,
attractive
wood
wall
panelling,
a
new
ceiling,
and
the
painting
of
all
existing
wood
work.
Photographs
of
these
renovations
and
of
the
pre-existing
condition
of
the
kitchen
are
attached
as
Schedule
II.
Bathroom
renovations
included
replacement
of
cracked,
broken
and
missing
windows,
installation
of
a
three
piece
bathroom
with
safety
grab
bars
beside
the
bathtub
and
toilet,
a
special
shower
head
for
the
use
of
a
VON
nurse,
a
vinyl
floor,
a
new
Ceiling,
new
wall
tiles
around
and
above
the
bathtub,
high
quality
wallpaper,
a
vanity
and
the
painting
of
all
existing
woodwork.
Photographs
of
these
renovations
are
shown
on
Schedule
III.
For
his
own
future
use,
he
also
installed
washer
connection
piping
although
at
the
time
of
the
installation
a
washer
was
not
required
by
the
sisters.
A
photograph
of
this
installation
is
shown
as
the
top
middle
picture
in
Schedule
IV.
In
addition
to
these
renovations,
Hartman
and
his
wife
assisted
the
sisters
in
buying
a
new
bed,
a
new
stove,
a
sewing
machine
and
a
radio.
Mrs
Hartman
also
arranged
for
the
sisters
to
receive
sewing
lessons
and
assisted
them
with
general
housekeeping
duties
and
grocery
shopping.
11.
While
the
renovations
to
the
house
were
taking
place,
Stone
began
to
improve
his
future
portion
of
the
property
so
that
it
would
eventually
provide
a
useful
building
site.
Most
of
his
weekends
in
February
and
March
of
1972
were
spent
tending
the
fruit
trees
so
that
they
would
be
able
to
bear
good
fruit
in
the
future.
He
also
maintained
the
landscaping
around
the
house.
Grass
and
weeds
on
the
remainder
of
the
property
were
cut
by
a
City
of
Kitchener
works
crew
because
the
size
of
the
property
(4.7
acres)
made
difficult
the
controlling
of
weeds
with
the
equipment
available
to
Stone.
12.
In
April,
1973
one
of
the
sisters
was
hospitalized
after
an
accidental
fall.
At
the
suggestion
of
Dr
McLagan,
the
other
sister
was
also
admitted
to
the
hospital
and
shortly
afterward
both
sisters
were
transferred
to
St
Raphael’s
Nursing
Home.
Hartman
paid
a
number
of
visits
to
the
sisters
while
they
were
hospitalized
and
in
the
nursing
home.
Hartman’s
concern
for
the
sisters’
welfare
caused
him
to
make
a
number
of
attempts
in
May
and
June
of
1973
to
have
them
returned
to
the
house.
By
this
time
the
state
of
their
health
made
it
necessary
for
someone
to
live
with
them.
Several
friends
and
the
sisters’
religious
counsellor,
Pastor
Darrel
Jantzi,
were
approached
by
Hartman.
Advertisments
were
placed
in
the
local
newspapers
also,
but
these
efforts
failed
to
locate
anyone
willing
to
live
in
with
the
sisters.
An
offer
by
Hartman
to
personally
provide
the
assistance
by
living
in
the
upper
floor
of
the
house
was
rejected
by
one
of
the
sisters.
In
late
July,
1973
Hartman
was
advised
by
Peter
Sturdy,
the
solicitor
for
the
sisters,
that
there
was
no
hope
of
their
returning
to
the
house.
By
a
letter
dated
September
27,
1973
Hartman
was
advised
that
the
sisters’
furniture
and
belongings
had
been
removed
from
the
house
and
that
it
was
vacant
and
ready
for
his
possession.
In
paragraph
13
of
the
statement
of
facts,
Mr
Hartman
is
alleged
to
“have
lived
in
the
house
to
the
present
day”.
The
evidence
given
by
Mr
Hartman
at
the
hearing
was
that
he
moved
into
the
house
in
October
of
1973
and
was
permitted
by
the
purchasers
to
live
there
for
some
two
years
subsequent
to
the
closing
of
the
sale.
Contentions
The
appellants
contend
that
the
profits
realized
by
the
appellants
from
the
sale
of
the
property
should
be
considered
as
a
capital
gain
and
submit:
1.
that
although
the
property
was
owned
by
them
only
for
a
period
of
two
years,
the
taxpayers,
at
the
time
of
purchase,
knew
virtually
nothing
about
the
value
of
land,
and
methods
of
land
speculation;
2.
that
their
primary
intention
in
buying
the
property
was
to
benefit
the
sisters;
3.
that
their
secondary
intention
in
buying
the
property
was
to
provide
future
residence
sites
for
each
of
them;
4.
that
only
after
the
acquisition
of
the
property
and
after
the
clear
frustration
of
their
secondary
intention,
two
years
after
they
had
bought
the
property,
did
they
take
steps
which
eventually
led
to
the
sale
of
the
property
to
Terra
Nova.
Counsel
for
the
respondent
contends
that
the
property
was
acquired
for
the
purpose
of
trading
or
otherwise
turning
it
into
account
and
that
the
profits
realized
on
the
sale
are
income
from
a
business
or
adventure
in
the
nature
of
trade.
Findings
of
Facts
I
am
satisfied
that
the
facts
as
stated
above
were
corroborated
by
oral
and
documentary
evidence
and
that
counsel
for
the
respondent
did
not
succeed,
in
cross-examination,
in
contradicting
any
of
the
truly
pertinent
facts.
The
witnesses—Mr
Hartman
and
Mr
Stone
(the
appellants),
Mrs
Hartman
(the
appellant’s
estranged
spouse),
Mr
Sturdy
(the
sisters’
lawyer),
Dr
McLagan
(the
sisters’
physician)
and
Mr
Donnelly
(a
realtor
who
had
given
an
opinion
of
the
value
of
the
subject
property)—were
all,
in
my
opinion,
credible
witnesses.
Counsel
for
the
respondent
contends
that
the
possibility
of
resale
was
an
operating
motivation
for
the
appellant’s
acquisition
of
the
property
and
he
bases
his
contention
on
three
distinct
points:
1.
Counsel
refers
to
the
Deed
of
Partnership
between
Mr
Hartman
and
Mr
Stone
executed
on
January
23,
1973
(Exhibit
A-9)
and
submits
that
the
wording
and
purport
of
the
document
confirms
that
the
appellants
purchased
the
property
with
the
intention
of
selling
it
at
a
profit.
The
evidence
given
by
both
Mr
Hartman
and
Mr
Stone
was
that
a
verbal
agreement
for
the
purchase
of
the
subject
property
had
been
reached
between
themselves
in
1972,
but
was
formalized
in
January
1973
after
the
Doon
planning
report
was
made
known
and
after
offers
of
purchase
had
been
made
to
Mr
Hartman.
The
document
itself
refers
to
a
partnership
agreement
deemed
to
have
been
made
on
January
1,
1972,
and
also
refers
to
a
mortgage
dated
January
6,
1972,
in
which
both
Mr
Hartman
and
Mr
Stone
were
the
mortgagors.
The
provisions
of
the
agreement,
envisaging
a
possible
sale
and
dated
January
23,
1972,
do
not,
in
the
circumstances,
necessarily
constitute
evidence
that
the
appellants
had,
at
the
time
of
acquisition,
the
intention
of
selling
the
property;
2.
The
respondent
placed
considerable
importance
on
Mr
Hartman’s
testimony
that
he
did
not
seek
to
ascertain
that
severance
of
the
land
could
be
obtained.
Mr
Hartman’s
testimony
was
that
the
land
was
on
the
outskirts
of
town
and
there
were,
in
the
immediate
area,
several
properties
built
on
one-acre
parcels
of
land
and
that
he
had
felt
that
there
would
be
no
difficulty
whatever
in
severing
the
subject
property
into
two
parcels.
It
is
my
understanding
that
the
division
of
the
land
in
a
manner
where
Mr
Stone
would
have
the
orchard
land
and
Mr
Hartman
would
be
left
with
the
house
and
the
surrounding
land,
would
result
in
two
parcels
of
land,
both
of
which
would
be
considerably
more
than
one
acre
in
size.
I
cannot
accept
that
the
lack
of
effort
on
the
part
of
the
appellants
to
seek
permission
to
sever
the
land
prior
to
purchase
is
in
any
way
significant
under
the
circumstances,
in
determining
whether
the
property
was
acquired
for
purposes
of
resale;
and
3.
While
admitting
that
the
valuation
of
the
land
was
not
crucial
and,
indeed,
the
price
paid
by
the
appellants
was
not
in
issue,
counsel
for
the
respondent
contended
that
the
appellants
had
not
seriously
sought
to
obtain
a
true
estimate
of
the
value
of
the
property.
Counsel
submits
that
the
$30,000
paid
by
the
appellants
for
the
property
(Exhibit
A-2)
being
much
lower
than
the
fair
market
value
and
the
fact
that
the
vendors,
the
Eshleman
sisters,
were
elderly,
were
both
motivating
factors
in
the
appellants’
acquisition
of
the
property.
Even
if
the
purchase
price
was
lower
than
market
value,
which
indeed
was
not
proven,
and
even
if
the
Eshleman
sisters
were
elderly,
who
according
to
Dr
McLagan
were
very
lucid
and
active,
it
does
not
follow
that
the
appellants
took
advantage,
if
indeed
they
did,
of
both
those
factors
for
the
purpose
of
acquiring
the
property
for
resale
as
a
primary
or
even
a
secondary
intention.
The
appellants’
declared
intentions
were
dual—one
was
to
help
the
elderly
sisters
since
no
one
else
would
or
could,
and
the
other
was
to
acquire
what
presumably
was
an
interesting
property
where
both
the
appellants
wished
to
live
after
the
demise
of
the
sisters.
The
evidence
confirming
these
intentions
is
strong.
The
necessary
repairs
effected
on
the
property
by
Mr
Hartman
and
the
decorating
and
physical
work
done
by
Mrs
Hartman
while
the
sisters
still
lived
in
their
home,
go
well
beyond
the
kind
of
repair
that
would
have
been
effected
by
a
trader
whose
intention
was
to
Sell
the
property.
The
kind
of
repairs
effected
by
Mr
Hartman
after
the
sisters
had
left
and
the
fact
that
he
lived
there
for
two
to
three
years
after
the
sale,
tend
to
confirm
his
intention
of
occupying
the
house.
On
the
basis
of
the
evidence,
I
must
conclude
that
the
appellants’
primary
intentions
were
first
to
help
the
elderly
sisters
remain
in
the
house
as
best
they
could
and,
ultimately,
for
Mr
Hartman
to
live
in
the
house
and
for
Mr
Stone
to
build
his
residence
on
the
orchard
land.
There
is
not,
in
my
view,
sufficient
evidence
to
conclude
that
the
appellants
had
a
secondary
intention
of
selling
the
property.
Both
Mr
Stone
and
Mr
Hartman
testified
that
they
had
no
knowledge
of
the
Kitchener
Planning
Department
report
dealing
with
the
preliminary
zoning
and
master
plan
proposals
of
Doon
community
(Exhibit
A-7)
at
the
time
of
the
purchase
of
the
property
on
December
14,
1971.
The
uncontradictory
evidence
is
that
a
copy
of
the
Doon
report
addressed
to
Susan
and
Paulina
Eshleman
with
a
post-mark
dated
January
20,
1972,
came
to
the
attention
of
Mr
Hartman
sometime
in
February
of
1972.
Since
neither
of
the
appellants
has
any
history
of
trading
and
both
were
credible
witnesses,
their
declared
intentions
are
credible,
plausible
and
even
admirable,
and
their
whole
course
of
conduct
during
the
pertinent
period
supports
and
confirms
their
declared
intentions.
Decision
The
appeals
are
therefore
allowed
and
the
matter
referred
back
to
the
respondent
for
reassessment
in
accordance
with
the
above
reasons.
Appeals
allowed.
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