Her Majesty the Queen v. Edmund Peachey Limited, [1978] CTC 606, 78 DTC 6411

Maguire, DJ:—The plaintiff has appealed from the decision of the chairman of the Tax Review Board, holding that the gain obtained by the defendant on the sale of certain lands was not income to the defendant subject to the income tax levy imposed by the Minister of National Revenue on or about February 24, 1974, for defendant’s 1972 tax year.

The defendant, an Ontario incorporated corporation, was engaged in the business of acquiring tracts of land and constructing thereon residential homes for sale by it.

In 1956 the defendant purchased approximately 100 acres of farm lands, termed and herein referred to as the Coglin farm, for future use in its residential house building operations. The land was situate in the Borough of Etobicoke. At the time of purchase, water and other services for the land were approximately two miles distant.

Tracts of land, such as the Coglin farm, were purchased from time to time in advance of immediate requirements in an area considered Suitable for residential expansion.

Following this purchase, defendant with an intended developer of adjacent lands, planned an extensive development for residential purposes, including a shopping centre and other facilities.

In 1961 these intended developers made application to the Planning Board of the Borough for a change in zoning of these lands from “agricultural” to residential. The application was refused. Later that year when the Board and Council were giving consideration to rezoning as “Industrial”, Edmund Peachey and others made representations opposing such change in zoning, but this change was affected in November, 1961.

Edmund Peachey, President of defendant corporation, died prior to this appeal being heard. His evidence given before the Tax Review Board was taken as read in on the appeal.

Peachey’s evidence is that on the zoning change to “Industrial” his plans for use of this land were frustrated. His company had no experience in industrial construction and he did not intend to enter that field. Defendant had not been in the business of trading in lands as such. A few sales of vacant lots, in what was clearly “clean up opera.ions” of a tract or tracts under development, and such lots not being suitable or required for house construction, did not make the defendant a dealer in lands.

Defendant’s decision following such frustration was to cease further residential construction, save completion of developments then in progress, thus gradually phasing out all such type of construction. Such phasing out was not completed until 1965, with one remaining house being sold in 1966.

Peachey’s evidence further is that having made this decision, the corporation would hold the Coglin Farm land as a capital investment for later disposal. No actual company minutes, nor record was entered or made to this effect. I accept this evidence, which is not contradicted, and confirmed by certain portions of Peachey’s examination for discovery, put in evidence by the plaintiff.

In February, 1963, a portion of said acreage was expropriated. Defendant treated this as a return on capital. Subsequently Income Tax Department officials took a different view, nameiy that proceeds received were income. Following discussions, and Peachey’s view that little in tax would result, he concurred in the department’s ruling. I do not consider this as conclusive against defendant on the position it has taken relevant to proceeds of a later sale of about 40 acres of said land.

A small yearly revenue was obtained from rental of a house on the land, and some hay cropping. The annual costs of taxes, interest on mortgage for part of the purchase price and other incidental costs were capitalized.

The evidence does not support any finding of a secondary intent at the time of purchase of the land as referred to by Walsh, J, in Clemow Realty Limited v Her Majesty the Queen, [1976] CTC 129; 76 DTC 6094 and other cases.

In the corporation’s yearly financial statements this land was included in “assets” under “Land, plus improvements, less sales and additions during year”.

Additions during the years in question consisted substantially of costs incurred for utilities, sidewalks, etc., relevant to a development in progress and commencing in 1961 or 1962 being phased out.

Plaintiff’s witness Gutmacher referred to this asset entry as “Inventory” and assumed from its continuance over the years that defendant’s home building operations were only suspended, with anticipated re-engagement in house building operations at some later date. Certainly the defendant could have so re-engaged but his stated intent and actual change in motel construction negatives this.

Plaintiff's contention, in part, is that the land acquired for defendant’s business was inventory and the proceeds of sale thus income to the defendant.

The Letters Patent of the corporation are broad, enabling it to trade and deal in land as such. This power was not used and thus does not, in itself, determine the question in issue.

Defendant at no time advertised the land for sale, nor endeavoured to find a purchaser for same.

In 1961, prior to the rezoning referred to, and in connection with a proposal for extensive development of this and other land, probably requiring a large, well financed developer, defendant did advise one Hanson, a town planner, that he could deal with his, Hanson’s, English interest on a possible purchase but no terms or bases were set.

Counsel for the defendant argues, in part, that ownership of the land until 1972, eleven years subsequent to frustration of its intended use, and other relevant facts referred to, establishes the decision to hold it as a capital asset. It is also submitted that continued ownership for seven years after commencement of phasing out of house building operations, the land cannot be deemed to be inventory carried forward.

In 1963, 40 acres of said land were sold realizing a gain or profit of some $871,721.32. This sale resulted from an unsolicited offer. As earlier stated, defendant had not sought a purchaser, nor in any way advertised the land for sale.

It is the Minister’s contention that this gain was obtained in the operation of defendant’s business and thus income, not a capital gain; an acquisition of land as a trader or speculator with a view to dealing in, trading in, or otherwise turning the land to account for a profit.

Several decisions by trial judges in cases where the facts are very similar to the facts here, have held that the gain was a capital gain, not income. These decisions include Clemow Realty Limited v Her Majesty the Queen, (Supra); Bead Realties Limited v MNR, [1971] CTC 774; 71 DTC 5453; Her Majesty the Queen v Stanfold Investment Corporation, [1974] CTC 19; 74 DTC 6035.

Thurlow, J (as he then was) giving the decision of the Court of Appeal in Fredericton Housing Limited v Her Majesty the Queen, [1975] CTC 537; 75 DTC 5367, held:

(1) That land acquired as raw material in the corporation’s operation of building and selling dwelling houses was stock in trade or inventory as opposed to capital assets of the business.

(2) That appellant was not in the course of being wound up. It was still capable of carrying on business, and still had on hand a stock of unserviced and undeveloped land which it had acquired for the purpose of turning it to account for profit by ultimately using it in its business.

In result the Court held that profit obtained on a sale of such land was income.

Three facts distinguish the present case from the above, namely: (1) Fredericton Housing Limited was not frustrated in its planned use and development of its land; (2) It had actively sought a sale of the land, and (3) The land had been held by the appellant for a short period of time.

I cannot construe the mere holding of land for a number of years, as, by itself, being conclusive on the owner’s contention that it had thereby become a capital asset.

The search for a purchase of such land is only one factor to be considered in determining the owner’s position re taxation.

The decision of Jacketl, CJ, in Les Entreprises Chelsea Limitée v MNR, [1970] CTC 598; 70 DTC 6379, is of importance on one point, in my consideration of the issue here involved.

Jackett, CJ states:

In my view, where one finds such a business, as long as there continues to be land of the original inventory of the business on the ownership of the company, it is reasonable to assume that the business has not been brought to an end in the absence of some evidence that something has been done to bring the business to an end, as, for example, where the corporation takes the land out of the business and dedicates it to the creation of some structure to be used as the capital asset of another business.

This example is undoubtedly only one of possibly several acts which can be interpreted as showing a definite change of position following which land so acquired can be deemed to have become a capital asset. It, however, requires some positive step or act to effect such change. No such step or act is found here.

In result I am of the opinion the appeal must be allowed with costs and the assessment by the Minister restored.

The plea of the defendant that if the gain made on the sale of this land was not a capital gain, the defendant should have been permitted to carry back into 1972 a loss of about $108,577 and claim capital cost allowance was not advanced in argument on the appeal, and I therefore make no further reference to it. The defendant may or may not be now entitled to submit this claim to the Minister.