William C Johnson v. Minister of National Revenue, [1978] CTC 2006, 78 DTC 1001

Delmer E Taylor:—These are appeals from income tax assessments for the years 1971 and 1972 in which the Minister of National Revenue included in the taxable income of the appellant amounts calculated to be the profit, less appropriate reserves, on certain sales of real estate. The respondent relied, inter alia, upon sections 3, 9 and subsection 248(1) of the Income Tax Act, SC 1970-71-72, c 63. The Board notes that both the notices of appeal and the replies to notices of appeal dealt with the nature of the dispute, giving no mention of the amounts involved and that, even after two days of hearing, there was still no readily identifiable reference to such amounts. A subsequent detailed review by the Board and correlation of the original and amended income tax returns filed, the financial statements attached, the assessments and reassessments and relevant notices of objection have established, to be the best of the Board’s ability, that the amount in dispute for 1971 would appear to be $35,000, and that for 1972 the amount would be $134,545.59.

Facts

The appellant was at all material times engaged in the trucking business in the Province of Ontario, and was the president and sole beneficial shareholder of Johnson Bros Trucking Limited (hereinafter referred to as “Johnson Bros’’). In 1960, the appellant purchased a parcel of land described as one-half of Lot 2 Concession 2 in the Town of Milton, in the Province of Ontario, comprising some 86 acres (hereinafter referred to as “the subject property’’). The vendor was the Francis John Chisholm Estate. The appellant used some 6 acres (hereinafter referred to as the “business property’’) in connection with the trucking business. In 1963 the appellant acquired an 11-acre parcel of land adjacent to the subject property. In 1961 he sold approximately one acre of the subject property to Imperial Oil Limited (hereinafter referred to as “Imperial”); in 1971 he sold a further 1 /2 acres to one Norman T Coulter (hereinafter referred to as “Coulter”) and, except for a small portion which had been expropriated, he sold the balance to Alliance Building Corporation Limited (hereinafter referred to as “Alliance”) in 1972. The gains on the sales to Coulter and Alliance have given rise to this appeal.

Contentions

From the notices of appeal, the position of the appellant was that:

—in acquiring the subject property he had no intention, secondary or otherwise, to sell the property at a profit and did not have the possibility of reselling at a profit as an operating motivation for the acquisition; accordingly, any gain realized constitutes a non-taxable capital gain and may not be properly included in income;

—if any such gain could be properly included in income, which is not admitted but is expressly denied, in computing such gain the purchase cost and other costs of disposition must be deducted from the gross proceeds of sale in determining taxable income.

The respondent asserted that:

—the appellant acquired the subject property and the additional 11 acres with the intention at the time of acquisition of utilizing approximately 6 acres thereof in his trucking business and of turning the remainder to account for profit at the first favourable opportunity;

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

Evidence

The appellant detailed his requirement in 1960 for a proper site for his expanding trucking business. This business had commenced in about 1957 as an operation with one truck related to the farming business in which he had been engaged with his father in the same general area. An interim rented location had served until about 1959 by which time he had a fleet of some 30 trucks, engaged in a very substantial operation. A major part of his operation at that time was in connection with the construction of Highway 401 east of Toronto, Ontario. He had considered the trucking requirements to be 4 acres immediately, but he had been unable to find any such parcel of property in a location that would serve his purposes adequately and efficiently. After noticing the “For Sale” sign on the subject property and determining that the Chisholm Estate would not sever any part of it, he decided to purchase the entire parcel. The property was on Highway 25, about one mile north of the town of Milton and about the Same distance south of the intersection of Highway 401 and 25. The purchase price was $500 per acre. He proceeded to establish the trucking business first on a 4-acre, then on a 6-acre site close to Highway 25. This site, because of its topography, was the most suitable and he leased it back to Johnson Bros. A house and a barn were on the property originally, and he intended to move into the house and raise cattle on the balance of the land which was not being used for the trucking business. Substantial financing was required during the period of growth and by 1963, Johnson Bros owned about 100 trucks and was doing well in excess of $1,000,000 business per year.

By 1965, although the total business remained high, due to substantially increased costs very severe losses of about $200,000 per year were being incurred. He sold 50% of the business in 1965 and in 1967 sold out completely, realizing nothing for himself. He had managed small efforts at farming the property, but since first the house on it and then the barn burned down, he and his family had never moved there. The 1-acre site purchased by Imperial in 1961 for $25,000 has never been used even to this date, and his own attempts to establish a service station or a car dealership adjacent to his trucking business prior to 1967 had not materialized. In 1962 he had listed the subject property for sale at $1,600 per acre and again in 1965 and 1967, for amounts of $5,000 and $3,900 per acre respectively, on all occasions because he needed funds for the trucking business. Nothing had come from those attempts to sell the property, but the appellant agreed that people in the real estate field in the area were always aware that he would sell if a proper offer were made. Under cross-examination he acknowledged certain other property purchases during 1962 through 1965 which he had attempted to farm. His success in farming had not been great, and he agreed that after the sale of the Johnson Bros trucking business he had become a land speculator and had indeed made very handsome profits. He recognized it as a business from 1968 through to the present time. He now does own a farm which is in active production.

Mr Francis John Greenwood, lawyer, corroborated the evidence given by the appellant to the extent of his knowledge of; and involvement with the events. At the time of the purchase of the Chisholm Estate property there was no evidence of or potential for early development in that general vicinity at all.

Mr Kenneth Johnston, engineer and now a real estate agent, recalled the efforts of the appellant to interest some oil company in establishing on Highway 25 near his trucking business, even after Imperial had purchased the adjacent 1-acre site from him.

Mr James Lloyd Chisholm, farmer, described the circumstances leading up to the sale of the Chisholm Estate property to the appellant. The property had been for sale for some time, and there had been little or no interest in it. He himself owned a farm about 3 or 4 miles from it, and he did not want to keep it; neither did the farmer who occupied the property immediately adjacent to it. In 1958 he had been paid $200 per acre by the Province of Ontario Highways Department for some property expropriated from his farm and although he had tried to obtain about $800 per acre for the subject property, he had been satisfied that the price received of $500 per acre was the best he could have done. There was no interest in land in that area, and no sign of development in 1960.

Argument

Counsel for the appellant argued that there was no operating motivation leading to a venture in the nature of trade which could be attributed to Johnson at the time of acquisition of the property. I could not summarize the salient points more adequately than did counsel in his argument:

—The taxpayer did in fact have a trucking operation before the acquisition, did have a substantial business and a substantial number of trucks, and was required for business reasons to shift the location of his trucks.

—The taxpayer did investigate alternative sites, did see the real estate signs on the subject property, and contacted the brokers shown on the sign.

—Mr Chisholm said the property had been listed for some time. A transaction was closed. Mr Johnson testified, and so did Mr Chisholm, that there was an excellent barn on the property.

—Mr Johnson had ambitions to move his family on to the property and carry out a form of farming operation. I think he mentioned beef cattle. Those ambitions were delayed, if not destroyed, as a result of the barn being burned before the closing of the transaction for which there was an abatement in the purchase price.

—Mr Johnson did in fact farm the property in conjunction with other properties he had, as the financial statements disclose, acquiring substantial farm equipment in late 1963 and doing some fall ploughing in 1963, and then having stripped the property. of hay the previous year or so, and then carrying on in 1964 and thereafter a more ambitious farming operation.

—We did determine that in 1962 there was a listing of the property which I mentioned before in argument, for which, Mr Johnson explained, he had been approached by Mr MacLeod or Mr Woods, I forget which one of them approached him with a suggestion that there was a buyer in the area for the property and it should be listed, which Mr Johnson did. Nothing came of that transaction. . . .

—Subsequent listings were motivated, as Mr Johnson has stated in evidence, for financial reasons, sound financial reasons.

—Mr Johnson noted that he did have ambitions for a service station development on the property, pointing specifically to the southeast corner. . . .

—There was the discussion with Mr Johnson, Ken R Johnson, and Mr Johnson’s letter to Canadian Oils with respect to long-term lease of the property; there were also two, I believe in ’63 and ’64, dealership plans, diagrams prepared at Mr Johnson’s request by Canadian Oils with a possible view of Mr Johnson obtaining a Ford dealership to occupy that property.

—We have also heard Mr Johnson testify that in terms of the topography, soil conditions, creeks, that sort of thing, his trucking operation and the buildings associated with that, which were expensive in terms of financial requirements, were put on the most desirable location on the property, set back from Highway 25 or the right- of-way access road to the property or to the highway.

—We saw one plot plan which showed some of the topography and quite a dip in the grade as well as the creek running through the immediate frontage.

—There is one property which perhaps is a little more troublesome and I refer to the 11 acres, the 11-acre triangular shaped portion just to the north of the property.

—Mr Johnson has testified that upon the completion of Highway 401, the Department of Highways, as one would expect, would have expropriated properties in excess of its immediate requirements, presumably expropriating entire farms, and there would be chunks and triangles left over on the peripheries. Once the highway was completed, those portions would no longer be needed.

—In the case of a land-locked piece of property just to the south of the 401, as we all know, there are limited access highways. There is only one exit from that triangular portion and that would be through Mr Johnson’s property.

Although counsel for the appellant relied extensively upon the decision in Racine, Demers and Nolin v MNR, [1965] CTC 150; 65 DTC 5098, he also noted with approval, among others, the decisions in Thibodeau Express Limited v MNR, [1972] CTC 2493; 72 DTC 1424, Hans Reicher v The Queen, [1975] CTC 659; 76 DTC 6001, and MacFarlane v MNR, [1977] CTC 2184; 77 DTC 122.

Counsel for the respondent quoted from the decisions of James A Taylor v MNR, [1956] CTC 189; 56 DTC 1125, and Kruger et al v MNR, [1977] CTC 2311; 77 DTC 208. His basic position was that the evidence in support of the appellant’s stated intention to farm the excess land acquired (the subject property) was minimal, that the land had been for sale as early as 1962, and that the appellant’s record up to and including the present time was one of dealing to some degree in real estate. The location of the subject property made it ideal to hold for development and the appellant, having no immediate use for more than perhaps 6 acres of the property, intended to sell it at a profit. Although this did not occur until some 12 years later, there should be no doubt of his constant efforts in that direction.

Findings

The Board has referred to the documentary evidence presented rather than quoting from it or providing great detail since the evidence supports extensively the position taken by the appellant, and it would serve no purpose to repeat it other than to add emphasis. There is no evidence that the appellant even entertained thoughts of real estate sales or development at the time of acquisition of the subject property or that, if he had given any such consideration, it would have been other than the wildest speculation. He needed a location quickly for his burgeoning trucking business and having considered all the other alternatives, he settled on this location. Surely he intended to make whatever use he could of the excess property and planning to farm it was perfectly natural. That this did not develop, under the circumstances, does not appear to the Board as significant. There should be no relationship attempted between the sale to Imperial and the subsequent sales. It is recognized that the current business of the appellant—a speculator in land—does tend to cast some shadow over the events during the years in question but there is little, if any, substantial evidence that up until the sale of Johnson Bros in 1967 he engaged at all in such an endeavour. Owning and managing a trucking business of the size described in the mid-1960’s left the appellant little time or funds for farming, let alone serious land speculation.

Decision

The appeal is allowed both for the years 1971 and 1972 in order to permit any gain on the sale in 1971 of the portion of the subject property to Norman T Coulter, and any gain on the sale in 1972 of the balance of the subject property to Alliance Building Corporation Limited both to be considered on account of capital and not income. The matter is referred back to the respondent for reassessment accordingly.

Appeal allowed.