Glomin Farms LTD v. Minister of National Revenue, [1977] CTC 2567, 77 DTC 404

The Chairman:—This is the appeal of Glomin Farms Ltd from income tax assessments wherein income tax of $39,712.47 and $20,598.84 was levied on income from a business in respect of the appellant’s 1973 and 1974 taxation years whereas the appellant claims that the amount received was a capital gain realized on the disposition of Capital property.

At the commencement of the hearing, counsel for the appellant sought and was permitted to amend paragraph 6 of the notice of appeal so that paragraph 6 now reads:

The land was purchased by members of the families for the primary purpose of developing acreages for themselves, and secondarily earning income from the business of farming continually from the time of its acquisition until its disposition on June 1, 1973.

Counsel for the appellant also stated that he was prepared to accept a Valuation Day value of $475,000 for the subject land rather than the $504,000 value stipulated in paragraph 11 of the notice of appeal.

Issue

There is, therefore, no dispute between the parties as to the value of the land and the remaining issue is whether the gain realized from the disposition of the land is income from an adventure in the nature of trade or a capital gain.

Evidence

According to the president of Glomin Farms, M F Hannochko, who had been a school superintendent until 1967, the appellant company was incorporated on July 11, 1966 and its shareholders are members of five related families who had owned and operated a cleaning business known as Top Hat Cleaners which was sold before 1966. Mr Hannochko’s testimony is that the five related families were very closely knit and wished to continue being involved in a common project after selling Top Hat Cleaners. Mr Hannochko, who from the evidence was the instigator of the project, had a dream of having a /4 section of land which could be subdivided into six parts, one for himself and one for each of the five families which would be used by them as family rural estates away from the busy city.

Although most of the families may have been born and worked on farms when young, none of the families had lived on farms for many years.

Late in the autumn of 1965 Mr Hannochko was informed by his brother-in-law, Mr N L Plawiuk, a paraplegic, who managed and did bookkeeping for Scona Agency Ltd and who had some knowledge of real estate properties in the Edmonton area, that 160 acres of land might be available approximately one mile and a half from the outskirts of Edmonton. After visiting the land it was decided that the land be purchased and an agreement was entered into between Julius Treichel, the vendor, and North West Trust Company, the purchaser, who acquired the land on behalf of the shareholders of Glomin Farms Ltd. The purchase price was $75,000 with a down-payment of $18,756 with a balance of $56,250 to be repaid by annual instalments of $6,862.50 at a rate of interest of 4% (Exhibits A-1, A-2, A-3).

The down-payment of $18,756 was divided into four parts and Mr Hannochko and his wife contributed some $4,600 as their share of the down-payment, the balance being paid by the others of the related families. The appellant company purchased separately three granaries and the fence surrounding the land. The land which produced barley principally was leased by the appellant on a crop-sharing basis in which it received as yearly rental /3 of the total crop of grain (Exhibit A-5).

There is evidence that because of circumstances that made the subdivision into six 40-acre parcels legally impossible and because of high costs of servicing the land and the rising cost of building material, there was some dissension among the shareholders as to whether the land should be kept or sold. Mr Hannochko’s evidence is that the land was put up for sale in 1971 with an asking price of $560,000 through Scona Agency Ltd. There were no offers and the land was not sold. Although Mr Hannochko has no recollection of it, there are on file as Exhibit R-3 the minutes of an annual meeting of appellant’s shareholders dated February 11, 1973, which contain the following at paragraph 9:

New Business

Moved by Lillian Gregory and seconded by P J Smith that Scona Agency Ltd be given exclusive listing to June 30th, 1973 for the sale of Glomin Farms Ltd. for $560,000 with $160,000 down and the balance at 7% for 10 years.

The land was in fact sold on June 1, 1973 for $510,000 (Exhibit A-4).

Submissions

Counsel for the appellant contends that the respondent’s assumption is that the appellant company, in purchasing the land for $75,000 and selling it for $510,000 had speculated on urban shadow land and that the appellant’s primary or secondary intention was to purchase land for resale. He submits, however, that the appellant’s intention, as expressed by Mr M Hannochko, was to subdivide the land into six family estates, one for each shareholder of the company and that there was no secondary intention at the time of purchase of reselling the land. Counsel for the appellant stated that this testimony of Mr Hannochko was unshaken in cross-examination and that the answers given to the respondent’s questions were reasonable and credible confirming the appellant’s intention of developing six family estates on the land.

The appellant itself, or its shareholders, save one, had no history of real estate trading and were not considered to be knowledgeable in real estate. Counsel points out that the land had been kept for a period of seven years; that it derived some revenue from the crop- sharing lease; that nothing was done to enhance the value of the land for purpose of resale; that steps were taken by the appellant and moneys paid to an agent to stop municipal plans for building an interchange on the appellant’s property which would have destroyed the use the appellant wanted to make of the land. Counsel for the appellant suggests that it is doubtful that when the land was bought in 1965 the rise in the value of land could have been foreseen. Even when the land was sold in 1973, the appellant had not foreseen that the same land would be sold for $3,000,000 some three years later. Counsel concludes that the appellant did not speculate on a possible rise in the value of the land when it purchased it, and that its whole conduct was toward acquiring the land for the ultimate purpose of constructing the family estates, and until then farming the land to gain income. The sale of the land, according to the appellant, became unavoidable because of a Strathcona County by-law passed in 1969 which prohibited the subdivision of land into parcels smaller than 40 acres with the result that the 160-acre parcel could not be subdivided into the six planned rural estates. The rising cost of building materials, labour and the estimated cost of $100,000 for servicing the land made the project financially unsound. As a result of these circumstances some dissension grew among the shareholders of the company. Some wanted to sell the land, while others preferred to hold on to it. Eventually it was sold because the intended project could not, because of circumstances beyond the appellant’s control, be realized.

Counsel for the respondent, in argument, properly pointed out that a declaration of intention by itself is not sufficient for the Board to determine whether or not the transaction was in the nature of trade. However, it seems to me that a declaration of intention made under oath, supported by action consistent with the declared intention and unshaken in cross-examination cannot be ignored by the Board.

Counsel for the respondent considers the idea of purchasing land for the purpose of developing six rural family estates to be a very romantic vision. It may indeed well be, but it certainly is not unique and in my view it is irrelevant to the point at issue.

One of the points raised by counsel for the respondent was whether before purchasing the land inquiries had been made as to possible restrictions in subdividing land.

The evidence is that prior to the Strathcona County by-law restricting subdivisions to not less than 40 acres there were several parcels of land in the area where the subdivisions were smaller than 40 acres. Mr Hannochko’s testimony was that the company’s plan, after purchasing the land, was first to pay off the mortgage before anything else be done on it and there was some doubt as to whether the land could have been subdivided before having obtained a clear title to the land.

Counsel for the respondent questioned the company’s and the shareholders’ financial capacity to realize the construction of their individual rural estates. The answer was that all the shareholders were earning income, that once the land was paid for it would be relatively easy to finance the necessary construction, and that, in Mr Hannochko’s case at least, he would likely sell his residence which helped finance his urban estate. The fact that no architectural designs had been made of the estates is answered by the appellant’s policy of not proceeding with the plans to develop until the land was all paid for. While the absence of architectural plans might be interpreted as being equivalent to the absence of the intention of developing the estates, I see nothing wrong under the circumstances of this appeal for the appellant to proceed prudently in deriving income from a cropsharing lease and paying off the land completely before proceeding with a project and incurring expenses. I do not, however, see the absence of architectural plans as a proof that the appellant’s intention was to acquire the land for resale.

The role of Mr Plawiuk in the transaction is rather unclear. There is no doubt that he was manager of Scona Agency Ltd which company, according to its letterhead (Exhibit R-1) purportedly dealt with property management including real estate, residential, commercial and farms. Counsel for the respondent pointed out that Mr Plawiuk brought the subject land to the attention of the appellant and that Mr Plawiuk, through Scona Agency Ltd, was given the exclusive listing for the sale of the land early in 1973. It was admitted that Mr Plawiuk received a commission on both the purchase and the sale of the subject land.

Mr Hannochko, who was a credible witness, testified that Mr Plawiuk was a bookkeeper and made up tax returns for his clients and that Mr Treichel, from whom the appellant bought the 160-acre parcel of land, was a client of Mr Plawiuk and knew that Mr Treichel’s land might be for sale. Other than that there is no evidence that Mr Plawiuk himself was active in real estate and according to Mr Hannochko’s uncontradicted testimony the only commission Mr Plawiuk received from real estate was in the transactions concerning the subject land. Mr Hannochko testified that the transactions were purposely made through Mr Plawiuk because he was a relative and a paraplegic.

On the basis of the minutes of shareholders of Glomin Farms Ltd dated February 11, 1973, giving Scona an exclusive listing of the subject land to January 30, 1973, I cannot accept the appellant’s Statement that the sale of the land resulted from an unsolicited offer. However, having established that the appellant’s primary intention in acquiring the land was to develop the estates; having concluded that it had no secondary intention, at the time of purchase, of selling the land and having accepted that the decision to sell the land was because its plan had been frustrated by circumstances beyond its control, the fact that the land was listed for sale in 1973 after the decision to sell had been made cannot be considered by the Board as a valid indication that the appellant had acquired the land in 1965 speculatively with the intention of turning it to profit. In my view, no one should be expected to retain land once its intended use is no longer possible. Listing it for sale under such circumstances is not in itself a badge of trade which it might otherwise be under other circumstances.

Indeed, had the appellant been really speculating in land in 1965, and had it been knowledgeable in real estate, it would have kept the land a few years longer and sold it for some $3,000,000 rather than sell it for $510,000 in 1973.

On the basis of the facts before the Board I conclude that the gain realized by the appellant on the disposition of 160 acres of land in 1973 was capital in nature and that the value of the land on Valuation Day was $475,000.

The appeal is therefore allowed and the matter referred back to the Minister for reconsideration and reassessment in accordance with the reasons for judgment.

Appeal allowed.