David Froese v. Minister of National Revenue, [1976] CTC 2360, 76 DTC 6480

A W Prociuk (orally: March 19, 1976):—The appellant, David Froese, appeals from the respondent’s reassessment of his income for the taxation year 1972, wherein a net profit in the sum of $31,097, more or less, resulting from the sale of a parcel of land in the Abbotsford area, hereinafter referred to as the “McMillan Road property”, was assessed as income in the hands of the appellant.

The appellant appeals on the ground that this was a sale of a capital asset, the net profit of which ought to be treated as capital gain, as he himself sought to treat it in filing his income tax return for the said year.

The appellant, who is 49 years of age, testified on his own behalf. He grew up in the Abbotsford area in British Columbia. From 1946 to 1951 he worked for a firm dealing in builders’ supplies. In 1951 he moved to Winnipeg, Manitoba, where he farmed for two years and then went into the construction business in Winnipeg for a period of three years. In 1956 he moved to California, where he remained till the spring of 1970. During those 14 years he continued to operate as a builder-contractor, principally in the San Jose-Saratoga Districts and he constructed about 100 residences and twelve or so apartment blocks. He also assembled land for subdivision and development on which he constructed residential type units. He states that, in addition to the above, he also built one office building. I gathered from his evidence that he was successful as a builder-contractor and thereby prospered substantially during the 14 years.

In 1969 he and his family visited their friends and relatives in Abbotsford, British Columbia and at that time, for personal reasons, they decided to leave California and return to Abbotsford, which they did early in 1970. On his return, he decided to get into the commercial property business. At this point I shall not recite the several other dealings he had in real estate on his return, in respect of which he testified during the course of his evidence, except to say that he Struck me as a very credible and straightforward witness. As he seemed to be a builder and developer of some considerable experience and success, I paid particular attention to his manner of approach, his conduct of negotiations and his demeanour during the course of his testimony.

In June of 1971 he purchased the flat parcel of land of approximately 9.6 acres that is the McMillan Road property, with the intention, he states, of assembling and developing it as a shopping centre. This property appears in Exhibit A-1 as the area marked with a black line around it. He paid $68,500 for this parcel. He states that this was his first venture in the developing of commercial property. The property was in the Sumas Municipality, now Abbotsford. His information, he States, prior to purchasing same, was that it was expected that approximately 3,000 residences would be constructed around this property within a short time. At the time of purchase, this parcel was zoned as agricultural. Parts of the surrounding area were subdivided and zoned residential. He received some encouragement from a Mr Hynes of the Sumas Municipality in respect of his proposal to develop a shopping centre, but on contacting the municipality officially, and also several Dig firms with a view to having them locate therein, he discovered that no big firms were interested at that time, with the exception of one, which, I believe, was Standard Oil, that showed some interest in the project. The municipality advised him officially by letter that it had considered the property across the road as the proper area to be zoned commercial, but it was left to him to make a further application to the municipality with an amended proposal which he does not appear to have proceeded with.

By the end of the winter of 1972 he concluded that, if there was to be a shopping centre there at some future date, it would have to be on a much smaller scale than he had originally envisaged and take the form of what he termed a neighbourhood shopping centre, which would only require approximately 2%2 acres of land, more or less, as he had observed similar neighbourhood shopping centres in other smaller communities in that vicinity. He states in his evidence that the flow of people into the Sumas Municipality, now Abbotsford, was certainly not as rapid as was expected. In the fall of 1971 he had received inquiries and offers to purchase the entire parcel, which he turned down as he was still pursuing his plan to develop it into a shopping centre.

In the late spring of 1972 he also became interested in purchasing another parcel of land, being comprised of six different plots owned by private persons, the total area being approximately 4.3 acres, with the intention of assembling these six properties and developing them into a motor hotel-motel complex with a restaurant and a service station. The land appears on Exhibit A-2, marked in red, together with two pieces which are uncoloured. As of the date of the hearing, he still has not obtained title to those two portions out of the required six. He states he is hopeful of eventually persuading the two owners to sell the said two parcels to him. About the same time, he also became interested in the purchase of a 23 interest in a 40-acre parcel of land in Langley, British Columbia, for which project he would have to put up $80,000. His acquisition of the Langley property, the appellant states, was for the purpose of turning it to account as soon as he obtained title thereto. He ended up by buying the entire 40 acres himself for $100,000, which he shortly thereafter turned to account and on which he realized a profit of some $30,000, more or less, which he reported as income.

I should mention at this time that he traded the 40 acres of land for a one-half interest in Butler Wire Products Ltd, that is for one-half of the issued stock of that company. He is now both the manager and an Officer of Butler Wire Products Ltd. The amount of $30,000, more or less, represents the difference between the value of the shares received and the price he paid for the land. To effect these purchases he arranged and obtained bank loans from the Canadian Imperial Bank of Commerce, through its Abbotsford branch and a branch in Vancouver at Granville and Hastings Streets.

Once more taking an interest in the McMillan Road property, he decided to decrease his bank loans somewhat by selling the northern portion of the parcel, which consisted of approximately 7.3 acres of raw land marked “A” in Exhibit A-1, for $87,000. He received and accepted this offer in June of 1972. The net profit on this transaction was as Stated earlier, and he reported it, with adjustments, as capital gain. The remaining 2.2 acres, more or less, he still owns and he hopes to develop it into a neighbourhood shopping centre of suitable size.

Counsel for the respondent at the hearing urged me to find that, if there is no evidence of a primary intention to turn the McMillan Road property to account at the first available opportunity, then there was a secondary intention to do so.

I have reviewed all the documentary and oral evidence with care, and I am unable to infer from anything adduced before me that the appellant had this secondary intention at the time of the purchase.

I would refer to a quotation from the English translation of the Exchequer Court decision in the case of Racine et al v MNR, 65 DTC 5098 (reported in French at p 9106) (and also found in [1965] CTC 150, where it is reported in French only), where Mr Justice Noel, as he then was, stated at page 5103 (and at pages 159 and 5111 respect- tively in the French version):

To give to a transaction which involves the acquisition of capital the double character of also being at the same time an adventure in the nature of trade, the purchaser must have in his mind, at the moment of the purchase, the possibility of reselling as an operating motivation for the acquisition; that is to say that he must have had in mind that upon a certain type of circumstances arising he had hopes of being able to resell it at a profit instead of using the thing purchased for purposes of capital. Generally speaking, a decision that such a motivation exists will have to be based on inferences flowing from circumstances Surrounding the transaction rather than on direct evidence of what the purchaser had in mind.

In the instant case, it is clear that the appellant changed his mind 11 months later after he had thoroughly investigated the Situation, but this change of mind, in my humble opinion, does not make it a secondary intention at the time of the purchase of the property. It Seems to me that, had he had the secondary intention of resale at the outset, he would have applied for rezoning and for permission to subdivide the 7.3 acres as his purchaser appears to have done, and would have sold same as building sites at a much greater profit.

The evidence is clear that his intention was commercial development only. The sale of parcel or a portion of this land was therefore a capital disposition.

I am of the opinion that the appellant has amply discharged the onus the Income Tax Act places upon him and is entitled to succeed. The appeal is therefore allowed and the matter referred back to the respondent for reassessment accordingly.

Appeal allowed.