Vaughn Theodore Neilson, Michael Melton, Edwin R Benbow v. Minister of National Revenue, [1976] CTC 2032, 76 DTC 1035

The Chairman:—These are the appeals of Vaughn Theodore Neilson, Michael Melton and Edwin R Benbow from income tax assessments in respect of the 1969, 1970 and 1971 taxation years. By agreement the appeals of these three appellants were heard and decided on common evidence.

The issue in these appeals (arising from reassessments dated October 31, 1973 in respect of Messrs Melton and Benbow and dated January 23, 1974 in respect of Mr Neilson) is common to each of the appellants, and concerns gains made by each of them as a result of the sale of certain lands. Counse! for the appellants claims that the gain so realized was on capital account whereas counsel for the respondent contends that the gains were income from a business.

The facts which have to be interpreted in order to determine the issue can be summarized as follows: Mr Michael Melton, one of the appellants herein, has been involved in real estate in Calgary,’ Alberta, since 1948 and was, in the pertinent years, sales manager of Melton Real Estate Ltd, a company beneficially owned by his brother.

On taking a short cut to work, Michael Melton noticed that a packing plant on property owned by Swift Canadian Co Ltd was being demolished. Melton considered the property to be well located and serviced with sewer lines and waiter, and he brought the property to the attention of Melton Real Estate Lid. That company not being interested in acquiring the property, Michael Melton decided to acquire the property himself in conjunction with other partners. In order to do so, he had to obtain the authority of his employer, Melton Real Estate Ltd, before acquiring the property because of that company’s policy of not permitting its employees to trade in property on their own account. Michael Melton alleges that the intention he had in mind in attempting to acquire the land was to develop it into a revenue- producing property and, for that reason, he was allowed by Melton Real Estate Ltd to negotiate for the land on his own account.

Michael Melton, in his capacity of real estate salesman, had recently been instrumental in selling a hotel for Mr V T Neilson, one of the other appellants in this matter. Mr Neilson at the time was not employed and, having capital on hand, was approached by Michael Melton with regard to the possible acquisition of the Swift Canadian Co Lid property for development purposes, a project which would, at the same time, also provide Mr Neilson with an occupation as manager of the development.

Mr Neilson then approached his brother-in-law, Mr Duane Evans, who had considerable means and who was interested in participating strictly on an investment basis.

Mr Neilson went to the head office of Swift & Co in Chicago to make an offer on this piece of property in Calgary, and as a result of this meeting, succeeded in purchasing the property, by Memorandum of Agreement dated March 28, 1969 for an amount of $100,000 payable on the following terms: a $5,000 deposit on signing; $30,000 in approximately one month; $32,500 within 2 Z? years; and $32,500 within 5 years. Neilson also assumed the obligation of demolishing the packing plant to the City of Calgary’s satisfaction, which apparently was an important consideration in so far as Swift Canadian Co Ltd was concerned (Exhibits A-1; A-2; A-3; A-4).

It was explained by Mr Neilson and by Mr Melton that a 5-year term was sought by them because the trailer park which was then contemplated as a development for the property could not be financed through the usual lending institutions and the available cash they had could, in their opinion, be better used for developing the trailer park than for paying off the balance of the purchase price.

The Swift property consisted of two parts, Parcel “A” and Parcel “B”, (see Ex A-1), totalling some 47 acres, and Swift would only consider the sale of the property as a whole.

The land on which the packing plant had been constructed (Parcel “A”) was separated from the main parcel of land by Nose Creek and, as I understand it, was some 30 to 40 feet lower than the rest of the property (Parcel “B”) on the other side of the Creek (Ex A-1).

The land on which the packing plant had been erected had been found to consist of unstable soil, and Swift Canadian Co Ltd had had to find a way to curcumvent that difficulty before constructing the packing plant. This portion of the land was therefore useless for purposes of developing a trailer park and was considered of no value to the purchasers, who had no plans for it but had been forced to acquire it as part of the package deal for the whole of the Swift property.

Mr William Gallelli, a client of Melton Real Estate Ltd, was seeking a property zoned for heavy industry on which to build an asphalt plant, and Mr Michael Melton suggested that he purchase the old Swift packaging plant site, which was zoned M-3 for heavy industry. Mr Gallelli, on April 25, 1969 purchased that part of the property from Mr Neilson for $88,000 (Ex A-6). The asphalt plant, however, was not proceeded with on that site, as the City of Calgary refused to allow the construction of an asphalt-batching plant in the area and eventually the City of Calgary purchased the site from Mr Gallelli.

At the time of purchase of the subject land, Mr Neilson, Mr Melton and others had heard that studies were being made by the City of Calgary with regard to selecting a route for the possible construction of the Blackfoot Trail Freeway, which, according to the City’s thinking at that time, was to pass on the westerly side of Nose Creek Valley. Mr Melton testified that, the subject property being on the East side of the valley and some 1,000 feet away, it would not be affected by the proposed freeway because, although it would have had a good exposure to the freeway, it could have no access to it.

As I understand it, the persons who held interests in the land at that time were: Mr Duane Evans, 14; Mr Michael Melton, 14 and Mr Theodore Neilson, 14. However, Mr Melton’s 13 interest was again divided into three equal parts: one held by Mr Melton; one by Michael Management Ltd, a company originally owned by Melton but transferred to a Mr McKinnon in settlement of an account in 1966; and one by Mr Edwin R Benbow, who was an old business friend of Melton's and who, although he was never called upon to put up any money, had agreed to back Melton financially for Melton’s share of the purchase of the land and its subsequent development.

For purposes of developing the land, a company named DMT Holdings Ltd was incorporated in the spring of 1969, in which Duane Evans, Michael Melton and Theodore Neilson were allegedly the trustees.

The original plan of building a trailer park on the subject property never got off the ground. Mr Melton testified that the City of Calgary seemed to want to upgrade the zoning of the subject land and that was why the municipal authorities did not allow the construction of an asphalt-batching plant on the site. It was then considered that the construction of town houses might be more appropriate, and plans and working papers for a town-house development were prepared for the site by Mr Milne, an architect (Ex A-7, 8 and 9).

Central Mortgage and Housing Corporation was consulted, and a firm price for the construction of 675 town houses was asked of Engineered Buildings Ltd, a firm which, for purposes of economy in prefab construction, redesigned the floor plans of the units and quoted a price (Ex A-9 and 10).

The financing of the project was allegedly discussed with the North American Life Assurance Company and with Central Mortgage and Housing Corporation.

An application for a permit to construct the town houses was made by Engineered Buildings Ltd to the City of Calgary on the basis of working drawings, the design stage not yet having been reached, and the City advised the contractors that it would object to the development of the town house project because the site was on the Calgary Airport flight path and the attendant noise would prohibit the development of a residential community in that area. The City also felt that the existing school-busing system in the immediate area would be totally inadequate to handle all the additional children from the town house development.

The Neilson group then decided to return to their original pian and develop the land as a Mobile Home Park, and advances were made to Engineered Buildings Ltd, who also constructed mobile homes, and subsequently, to United Trailers, who made the necessary studies, and an application was presented to the City of Calgary for approval (Ex A-11, A-12 and A-13). A Certificate of Compliance was issued by the City on two conditions: first, that the developers pay $100 per year per child to help defray the costs of busing the children to school; and, secondly, that the land would be rezoned as a Direct Control District (Ex A-14).

The City upgraded its trailer park regulations by increasing the requirements with regard to power, sewers, septic tanks and water supply, and by requiring the installation of larger stalls (Ex A-15, A-16, A-17, A-18, A-19, A-20, A-21 and A-22). Consequently, the trailer park project was not proceeded with. In the meanwhile, some interest was shown by a contractor in the construction of a warehouse on the southern part of the land, adjacent to the area zoned as industrial. An application for subdividing the land was made to the City of Calgary and, if my understanding is correct, some preliminary grading for an access road was done by the developers in connection with the proposed warehouse (Exs A-27 to A-35).

The Planning Commission of Calgary, in spite of very long delays, did not approve or disapprove the request to subdivide the land on which the warehouse was to be built, and the warehousing project was in fact never proceeded with.

By letter of August 13, 1970 Melton wrote to the City of Calgary Offering the land for sale (Ex A-34). By letter of September 9, 1970 Melton requested that the City either approve the plan of subdivision presented to it or buy the land from the owners (Ex A-38). The whole matter was again studied by the Planning Commission (Exs A-39 io A-45), and the City finally decided to purchase the subject land. The taxability of the profit realized by each of the appellants from the disposition of the subject land is the issue in dispute in these appeals.

I have set down the facts in considerable detail because we are faced here with a trading case, and there is no doubt that, though Mr Neilson and Mr Benbow may not have a previous history of real estate transactions, Mr Melton, who initiated the purchase of the subject land from Swift Canadian Co Ltd and was the principal agent in sub- sequent transactions, was very active in real estate, both as sales manager for Melton Realties Ltd and through companies which he had himself incorporated for the purpose. However, in my opinion, the fact that a taxpayer is very knowledgeable and active in the real estate field does not preclude him automatically from holding property on a long-term investment basis. In such cases, the transaction must be scrutinized closely, and the facts adduced are of the utmost importance in determining whether the transaction was entered into as part of the business of trading in land or whether it was meant to be a long-term investment with a view to realizing revenue from the property.

There are, in determining the nature of the transaction and the consequent profit realized, two important considerations in these appeals. The first is whether Mr Melton and/or the other appellants knew at the time of the purchase of the subject property that the City was proposing to build the Blackfoot Trail Freeway on that property and would therefore have to purchase it from the appellants.

The property was purchased from Swift Canadian Co Ltd on March 28, 1969. From the evidence, it seems very likely that Mr Melton knew, as early as 1968, that the City was contemplating the construction of a freeway in the general area of the subject property (Ex R-1). However, at that time the City had not decided exactly where the freeway would be built (Ex R-3). The DeLeuw, Cather Interim Report on the Blackfoot Trail Freeway prepared at the request of the City of Calgary is dated April 1969 (Ex A-47). This report made a study of four alternative routes for the freeway. The alignment of the Blackfoot Trail Freeway between Memorial Drive and the Alyth Yards proposed in the DeLeuw, Cather Report was rejected on September 15, 1970, and alternatives were to be recommended and studied by the City’s Commissioners (Ex A-48).

The sequence of these events and the correspondence between Melton and the City of Calgary already referred to, (particularly Ex A-36 dated September 3, 1970), indicates to me that the appellants did not know, and could not know, at the time they purchased the land that the Blackfoot Trail Freeway would eventually be built on their property. I am satisfied from the evidence that the land was not purchased for resale to the City.

The second important consideration is whether the facts substantiate the appellants’ contention that the reason for purchasing the land was for development purposes. In my opinion, based on the evidence, participation in a revenue-producing investment by Mr Neilson and Mr Evans, who had some capital and who were getting on in years, is credible. Mr Benbow’s participation in the investment, which was limited to a moral financial backing of Mr Melton, is also credible. Because of his activity in real estate, Mr Melton’s participation in the transaction as an investment can be questioned. However, the preponderance of the evidence, including the original plans for the construction of a trailer park, the reasons for which the plan was changed from a trailer park to a town house development, the estimate of costs, the designs of the development, the application to the City for permits, the City’s refusal to allow town houses to be built in the area, the appellants’ enforced return to their original plan of developing the land for mobile homes, the estimates and designs for the mobile homes, the eventual project for the construction of a warehouse, the appellants’ letter to the City asking that their development plans be approved and permission granted to proceed with the project or, alternatively, that the City buy the land, and the expenditure of some $28,000 by the appellants in an effort to develop the land, are all facts which have not been contradicted and which, in my opinion, are sufficient to establish that the intention of the appellants was to develop the land in one way or another as a long-term investment. In my opinion the appellants failed to develop the land only because of the City’s procrastination and its long-delayed decision to acquire the appellants’ land as part of the route of the Blackfoot Trail Freeway.

In the result, I hold that the profits realized on the sale of the subject land are on capital account and the appeals are therefore allowed.

Appeals allowed.