Randall Park Development Limited v. Minister of National Revenue, [1977] CTC 2462, [1977] DTC 332

Delmer E Taylor:—These appeals are in respect of income tax reassessments for the years 1973, 1974 and 1975. There are two points involved, the first deals with the $284,118 realized by the appellant on the sale of certain land in 1973, a part of which was received in instalments of $71,104, $71,104 and $71,105 during the three years in question, and treated by the appellant as a non-taxable capital gain; the second point is an amount of $750 disallowed by the respondent as an expense for appraisal of properties. The respondent relied, inter alia, upon sections 3, 9, paragraphs 12(1)(e), 18(1)(a), 20(1)(n) and subsection 248(1) of the Income Tax Act, RSC 1952, c 148 as amended by section 1 of SC 1970-71-72, c 63.

Facts

The appellant (hereinafter referred to as “Randall Park’’) was incorporated under the Companies Act of Nova Scotia in 1964, and has since that time engaged in the business of ownership, development and rental of certain properties in and around the City of Halifax. In 1966 the appellant purchased, for $42,210, 400 acres of land in a suburban area of Halifax, then called Spryfield. During subsequent years, costs of approximately $73,372 were incurred related to the property, and in 1973 it was sold for $400,000, giving rise to the gain taxed by the Minister in the reassessments.

Contentions and Evidence

The appellant asserted that the property had been acquired in conjunction with its normal business of servicing, dividing into residential lots and selling parcels of land. At the time, the purchase appeared to the appellant to be reasonable and have good potential. No impediments were foreseen for the plans which were admittedly long term but the amalgamation of the rural Spryfield area with the urban area of the City of Halifax in 1969 produced a change in municipal planning and designation for the property. The appellant was unable to obtain subdivision and development permits and agreements; it could not visualize the completion of its program there and sold the land after an unsolicited offer.

For the respondent, the position was that in 1966 the appellant, in acquiring the property, had the primary or secondary intention of turning the land to account, thereby realizing a gain from a venture in the nature of trade.

With regard to the $750 amount for appraisal, the respondent claimed it was a capital not operating expenditure since it had been incurred for the express purpose of determining the Valuation Day value of certain other properties (not Spryfield) owned by the appellant.

Argument

Counsel for the appellant argued that the only purpose for the purchase of the Spryfield property was in the course of continuing the appellant’s regular business and that only after every effort had been made to accomplish that objective, but without success, did Randall Park accept an offer to sell. It had previously received an offer for $600,000 which had not materialized, and even after the sale in 1973 the property as yet remains undeveloped by the new owners.

Counsel for the respondent put forward that the intention of the appellant to sell the property had been admitted, and that this intention was sufficient to support the assessment.

Findings

To dispose of the $750 expense amount, the Board simply points out that the limited evidence on this point which has been brought forward supports the position of the respondent. The expense was incurred for the purpose of establishing the value of land against the prospect of any proceeds therefrom in any sale, being on account of capital.

With regard to the larger issue, the Board has given little detail in this judgment, either of evidence or argument, since the appeals seem to devolve into a simple point of difference. The respondent has held that since the acknowledged purpose of the purchase at Spryfield was for sale, the profit from the eventual sale was regular business income to the appellant. The appellant maintained, however, that Randall Park was not in the business of selling parcels of land en bloc, and that no such intention can be construed from either the circumstances at the time of purchase or any efforts subsequent to that date up to the sale in 1973.

My reading of the case law available does not lead me to the respondent’s conclusion that the mere fact a taxpayer’s business is acquisition, servicing, subdividing and selling building lots should render it impossible for that taxpayer to realize a capital gain on the sale of a capital asset which he has purchased in the normal course of business, but has been required, due to external circumstances, to leave essentially in its state of acquisition. At the same time, it is not my view that the so/e point for consideration is that apparently held by counsel for the appellant—the stated intention of the taxpayer at the time of acquisition. Counsel for the appellant, to support this contention, referred to the decision in Clemow Realty Ltd v The Queen, [1976] CTC 129; 76 DTC 6094, a decision of the Federal Court—Trial Division, and he quoted from page 135 [6098]:

In all cases of this sort the ultimate decision must rest from a finding of fact as to what was the real intention of the taxpayer. . . .* [1]

I would suggest that the learned Judge Walsh in giving this judgment took a somewhat wider view than that adduced from the passage by counsel and it would appear to me that only scant comfort can be found therein for his assertion.

To establish the basis for my review of this matter, I would refer counsel to excerpts from the decision in Arthur E Kruger, Elmer D Bassani and Pantel Holdings Ltd v MNR, [1977] CTC 2311; 77 DTC 208, where I made the following observations at page 2321 [215]:

In my opinion, to determine a question of the kind posed at this hearing, particularly dealing with the purchase and sale of land and considered against the background just described, requires the following:

(a) an examination of the appellants’ personal and business circumstances at the time of acquisition, as such circumstances conflicted with, or complemented, the probable fulfilment of their stated intention-

(b) a review of the efforts made and the progress demonstrated toward such stated intention as an objective;

(c) a critical consideration of the reasons advanced for the eventual abandonment or the frustration of the stated intention.

I accept that there might be consideration in any acquisition to some course of action which could be termed a secondary intention but it is not merely the fact that it was this consideration which eventually came to fruition, rather than that held as the primary intention, which should alter the nature of the transaction with regard to the liability for income tax—it is the process by which this result was obtained or attained that seems most significant to me. I have reservations that simply selecting a certain course among or between available options would, of itself, render the totality of any particular transaction taxable or non-taxable. Merely changing one’s mind regarding primary purpose or intention after acquisition would not impress me greatly. In such a case, it could be argued that it should rest with the taxpayer to support conclusively that the income tax result to which he claimed entitlement was not, in fact, just the consequence of changing his mind, rather than the consequence of the acquisition itself. The degree and impact of external influence as opposed to internal motivation regarding the course of events is of major significance to me in reviewing the final outcome.

In the instant case, it is my view that the primary purpose for which the appellant purchased the subject property was in conjunction with its regular business operations. It appears to have been experienced, and financially in a position to subdivide the property and sell the developed lots in the usual manner; its conduct after acquisition seems adequate and consistent with that objective; and there is sufficient evidence of external frustration of its plans to warrant a receptive attitude on its part to an offer to sell the property in one parcel rather than to continue its efforts to subdivide. The evidence generally, therefore, fulfils the criteria indicated in the Kruger and Bassani decision (supra). The final result—the sale of the property in its undeveloped state—arose not from design but from desperation.

Decision

The Board holds that the appeals be allowed in part to permit the gain realized on the sale of the Spryfield property to be treated on account of capital as it relates to the taxation years in question; but the amount of $750 in respect of the 1974 taxation year for a real estate appraisal is held to be on capital account, and that part of the appeal is dismissed.

Appeal allowed in part.