Georgina a F Darius v. Her Majesty the Queen, [1974] CTC 337, 74 DTC 6260

Kerr, J:—This is an appeal by the plaintiff from a decision of the Tax Appeal Board dismissing the plaintiff's appeal from assessments of income tax for her taxation years 1962 to 1965 inclusive. In making the assessments the Minister of National Revenue treated certain profits realized by the plaintiff on the sale of land as taxable income from a business within the meaning of sections 3 and 4 and paragraph 139(1)(e) of the Income Tax Act. The plaintiff contends that the profits were non-taxable capital gains.

At the trial the following facts were agreed to by the parties in a memorandum (Exhibit 1)

1. The amounts and figures appearing on the Notices of Appeal are accurate.

2. The Plaintiff and her husband were the sole shareholders in K J Darius Construction Ltd.

3. The Plaintiff advanced loans to the said Company which loans were accepted and a balance of $30,006.00 remained owing by the said Company to the Plaintiff in 1960.

4. The said Company purchased an undivided one-half interest in forty two (42) acres of land outside the City of Edmonton in 1956 for the sum of $29,287.51.

5. In 1960 the said Company transferred its interest in the said undivided half interest in the land to the Plaintiff.

6. The Plaintiff disposed of her interest by sale and at a profit (the word “profit” not necessarily meaning taxable. profit).

7. In April 1962 the Plaintiff sold an undivided six (6) acres in the said land to one Fekete Construction Co Ltd.

8. In 1963 the Plaintiff sold an undivided one-half interest in fifteen (15) acres in the said land to one Rock Investments Ltd.

9. (a) The City of Edmonton required this and other land for the purposes of a high school.

(b) The City of Edmonton entered into a replot scheme whereby the landowners in the area were required to exchange their holdings for other property—presumably property of approximately equal value.

(c) The Plaintiff held less than a forty (40) percent interest in the property.

(d) By virtue of the replotting sections of the Planning Act, being Chapter 43 of the Revised Statutes of Alberta 1963, the position of the Plaintiff was that as a minority landowner the City of Edmonton had the machinery to force her to submit to the replot as a “non-consenting owner”.

(e) This in fact was done.

(f) The Plaintiff would have had no choice but to submit to the replot.

10. The Plaintiff received fifty eight (58) lots in exchange for her interest in the property of which she transferred twenty-nine (29) lots to the said Rock Investments Ltd by virtue of the latter’s purchase of the one-half interest previously.

11. The balance of the twenty-nine (29) lots were sold by the Plaintiff as follows:

	1964	— 2 lots to LaBrenz Construction
	1964	— 6 lots to Goetz Construction
•J	1965	— 1:lot to W Assaf Construction
	1965	— 19 lots to McConnell Homes Ltd
	1965	— 1 lot to Darius Investments Ltd

The said K J Darius Construction Ltd, hereinafter called the “company”, was incorporated as a private company in 1954 or 1955 under the laws of the Province of Alberta. It then became engaged in the business of building houses for resale. In April 1955 the plaintiff, Mrs Darius, advanced $29,000 to the company by way of loan, out of an inheritance from her father’s estate. It appears that the company was active and improving its business during its early years, having in 1959, its peak year, sales of about $553,000 and a net profit of $28,612 after paying a bonus of $15,000 to Mrs Darius and $20,000 to her husband; but in 1960 its business declined, with sales of only about $34,713 in that year. The transfer of its interest in the 42 acres was made in that year. I will try to summarize the more prominent features of the evidence.

Mr Darius testified that early in 1960 the company had 10 unsold houses on its hands, and he noticed that the company was not making sales; as of March in that year it had assets of $225,000 to $230,000, mostly of land and houses, with liabilities of about $182,000; and by June he decided to get out of the building business; at that time his wife was still owed about $30,000 on her loan, in respect of which the company had given her a promissory note for $29,000 (Exhibit 3), and when he told her of his intention to get out of the business she asked what about her loan; he told her the company would, in partial payment of the loan, pay her $15,000 in cash, which was all the money it could then make available, and would also transfer to her the company’s equity in the undivided half interest in the 42 acres of land; his objective was to protect her, for the company’s prospects did not look good, and if it could not meet its commitments to pay the unpaid balance of the purchase price of the land as payments thereon became due it could lose the land, whereas Mrs Darius had financial means to meet such payments, and he thought it would be safer for her to have title to the land rather than to have only the company’s promissory note; the company could not raise money to repay the loan by mortgaging the land, for it had only an undivided half interest in it; he did not consider having the company make an assignment of its equity in the land as security for repayment of the loan, rather than the absolute transfer that was eventually made; he talked to the company’s solicitor and accountant in respect of the plan, and there was no mention of income tax considerations; the solicitor drew up the necessary documents; his wife was aware of the difficulty of selling the land, as there was no market for it at the time, but he hoped it could be sold, and she agreed to what he had suggested and didn’t question his judgment, and she told him to sell the land for her; he thereupon proceeded to ask several real estate agents to try to obtain offers to purchase it, the intention being to sell it as quickly as possible, but the realtors found no purchasers and received no offers until 1962; each offer, when it was received, was communicated to his wife, and each was accepted without seeking a higher price; he left it to the realtors to obtain offers; he didn’t, advise his wife what to do with the land or whether to accept any of the offers that came; his wife knew very little about the company’s business dealings, but she helped some with its books and office work; she was a shareholder because the law required that a company. have at least two shareholders; when the land was purchased in 1956 it was farm property outside the city limits; it continued thereafter unimproved, but by 1960 the city had extended its limits and moved about a mile closer to the property and later it became more saleable, particularly after the city’s replotting; prior to its transfer to Mrs Darius the land was inventory in the company’s business; the company was wound up in 1969.

There was evidence that Mr and Mrs Darius were shareholders in three other companies: Georgia Holdings Ltd, which had a warehouse in connection with the construction business; Buffalo Building Supply Ltd, a wholesale business dealing with newly marketed building supplies; and Darius Investments Ltd, a family company organized for estate planning purposes in which they and their five children were the shareholders. The evidence was that Mrs Darius did not take part in running any of those other companies. There were some intercompany dealings, including an advance of, as I recall, $27,000, by K J Darius Construction Ltd to Darius Investments Ltd in 1962.

Mrs Darius gave evidence complementary to and to much the same effect as that of her husband. She said that the company’s business was operated from their home in the years 1955 to 1958, and subsequently from an office, and she took phone calls in the absence of her husband and made general entries, e.g., invoices, in the company’s books, and ordered supplies on her husband’s instructions, and when the company had an office after 1958 she helped in the office when a girl employee was not there, but she had five children and consequently was not much involved in the company’s operations or business affairs; she received a bonus of $15,000 from the company in 1959 for her work and because interest had not been paid on her loan; when the company was newly incorporated she made the loan to help her husband in his new venture of house building, the money to be used as he saw fit; although she lent this money she was not in the money lending business, and she was not really acquainted with the company’s business or what was being bought or built or sold; she was a director, but did not ask her husband about the company’s affairs, she was content to leave such matters to him, their relationship being a happy one; she signed documents and minutes of directors’ meetings, but only as and when she was asked to do so by the company’s solicitor, and she didn’t inquire as to them; she had no experience in selling land, except to a minor extent in the settling of her father’s estate; when her husband told her in 1960 of his intention to go out of the house building business she asked what about her loan to the company* [1] and she accepted his offer that in partial settlement the company would pay her $15,000 in cash, which was paid by cheque dated June 7, 1960 (Exhibit 7), and transfer to her its equity in the land, and she would become liable to pay off the balance owed on its purchase price, which was about $18,500; she thought title to the land would be a better security than the promissory note for $29,000 which the company had given her in 1956 (Exhibit 3); she had left the matter of repayment of her loan more or less to her husband to look after; she told him to sell the land for her, hoping to thereby get her loan repaid; she did not get a valuation of the land, being content to leave the matter to her husband for him to look after it; she didn’t offer suggestions or inquire as to progress, and she accepted each offer for purchase of the land that came to her, she did not seek more than was offered, and she would have accepted any offer that would repay what she had lent, as what she wanted was to obtain repayment.

In April 1962 Mrs Darius sold an undivided 6 acres of the land to Fekete Construction Company for $30,000; and in 1963 she accepted an offer from Rock Investments Ltd to purchase an undivided half interest in the remaining 15 acres for $42,000. In 1964 there was the replotting of land by the City of Edmonton, referred to in paragraph 9 of the memorandum of agreed facts, which resulted in Mrs Darius receiving 58 lots in exchange for the land, one-half of the 58 lots going to Rock Investments pursuant to the said offer, leaving her with 29 of the lots. She sold the 29 lots in 1964 and 1965, as indicated in paragraphs 7 to 11 of the memorandum of agreed facts. Her statement of claim, paragraph 9, states that she received offers to purchase the lots in 1964 for $19,880 and in 1965 for $42,350, and she accepted the offers.

Two real estate salesmen testified that they were familiar with the land, that Mr Darius told them in 1960 that he wanted to get rid of as quickly as possible, and he asked them to seek offers to purchase it and to bring any offers to him for his wife’s acceptance; the land was unserviced and there was no interest by builders in it at that time, but offers commenced to come in 1964, upon its subdivision into lots, and each was accepted without question.

By consent, evidence given before the Tax Appeal Board by the person who was solicitor for Mr Darius and the company in the relevant years was introduced at the trial, the person being then Mr M B O’Byrne, now Mr Justice O’Byrne. He testified that he drew up the documents in respect of the transfer of the land to Mrs Darius, the documents (Exhibit 6) being an agreement between the company and Mrs Darius, dated June 27, 1960, minutes of a meeting of directors of the company held on that date, and a declaration of trust dated January 10, 1963. In answer to a question as to what part Mrs Darius played in the operation and business of the company, he replied:

To my knowledge she played no part. My recollection of how the affairs of the company and Mr Darius were handled was that he would make the decisions, sometimes in consultation with his advisers, sometimes without, and it was simply a matter of the documents being prepared, the necessary documents. Mrs Darius would come in sometimes with her husband, sometimes by herself, and it was a mere formality on her part to sign wherever required for the corporate documents or the conveyances, as the case may be.

As to the reason for the transfer of the land, he said that to the best of his recollection the building of houses, which was the company’s principal business, was not going well, and Mrs Darius was a creditor of the company for about $30,000, and the land was transferred to her in partial satisfaction of the debt, and so far as he was aware that was the purpose of the assigning of the land to her.

In her statement of claim on appeal to this Court the plaintiff states, inter alia, that she did not acquire the land for the purpose, either in the primary or secondary sense, of selling it for a profit; and that the gain from its sale was not derived from carrying on an activity in the nature of trade but resulted solely from her attempt to realize on a Capital asset.

The statement of defence says that in making the assessments the Minister of National Revenue assumed, inter alia, that the undivided one-half interest in the 42 acres and the land traded for it was inventory of a business carried on by the plaintiff; that she realized the following profits on the sale of the lands:

1962— $19,992.16

1963— 31,459.37

1964— 19,863.37

1965— 32,228.24

that the land sold by the plaintiff was a trading asset and was acquired and sold by her in the course of carrying on a business, being a trade or an adventure in the nature of a trade, the property being acquired, dealt with and disposed of in the course of a business of the plaintiff or as part of a speculative venture entered into by her for profit; and that the profit realized was income from a business within the meaning of sections 3 and 4 and paragraph 139(1)(e) of the Income Tax Act.

Counsel for Mrs Darius submitted that her intention in accepting a transfer of the company’s undivided one-half interest in the 42 acres of land was to better her position in respect of her loan to the company, and that the evidence is consistent only with that intention: a consideration in that acceptance was that in 1960 the company’s prospects were not good and if title to the land remained in the company and it were unable to meet its commitments to pay the remainder of the purchase price of the land it might lose the land, and Mrs Darius would be left with only a promissory note of the company which it might not be able to pay; it was she who, having accepted the transfer of the land, made the decision to sell it and to seek offers of purchase, in order to recoup what was owing on her loan and to pay what remained owing on the land; the situation in 1960 was that no one was interested in buying the block of land, there was the possibility that it could only be sold at a loss, and profit was not the motivation for selling it; in later years each offer of purchase was accepted without effort to obtain a higher price; nothing was done on the land to improve it; the exchange for other lots came about by reason of the City’s plotting, which was beyond the plaintiff’s control; as to her interest in the company, she was a shareholder with her husband only because the law required two shareholders, and she gave the loan to assist him financially in the business of building houses for resale, but she took little part in it and knew little about the company’s dealings in selling houses and land; at no time was she personally in the business of trading in land, and any profits realized by her in respect of this land were not income from a business, but were capital gains.

For the Crown, it was submitted that Mrs Darius was appreciably active in the operation of the company and knowledgeable as to its affairs, and in 1959 she was paid $15,000 for her work; she had made the $29,000 loan to the company in 1955 and she was not, prior to the transfer of the land to her in 1960, showing concern over non-payment of interest on the loan or repayment of the principal; there was no urgency in 1960 either to repay the loan or to use the land for that purpose; 1959 had been a good year, the best, for the company, and in 1960 its assets were well in excess of its liabilities; it is reasonable to infer that it was also known in that year that the land was inventory of the company and that any profit realized by the company on its sale would be taxable; the history of the company and of Mrs Darius indicated a business of trading in land, and in accepting the transfer of the land at his suggestion and in her subsequent dealings with it, Mrs Darius looked to him to deal with it in a businesslike way, and their actions are indicative of her intentions, which included a transfer of the land to her for trading purposes with a profit motive; the land was a trading asset and was acquired, dealt with and disposed of in the course of a business of Mrs Darius or as part of a speculative venture by her for profit, and the profit realized by her was income from a business and taxable as such.

It is a well established principle that the question whether profits realized are (a) enhancements of the value of investments, or (b) gains made in the operation of a business in a scheme of profit making, is a question of fact, and that its determination must depend on the facts and circumstances of each case and the true nature of the transactions from which the profits were realized; also, that the question in each case is what is the proper deduction to be drawn from the taxpayer’s whole course of conduct viewed in the light of all the circumstances. In John Cragg v MNR, [1951] CTC 322; 52 DTC 1004,* [2] Thorson, P said at page 327 [1007]:

There is, I think, no doubt that each of the profits made by the appellant could, by itself, have been properly considered a capital gain and the Court must be careful before it decides that a series of profits, each one of which would by itself have been a capital gain, has become profit or gain from a business. Such a decision cannot depend solely on the number of transactions in the series, or the period of time in which they occurred, or the amount of profit made, or the kind of property involved. Nor can it rest on statements of intention on the part of the taxpayer. The question in each case is what is the proper deduction to be drawn from the taxpayer’s whole course of conduct viewed in the light of all the circumstances. The conclusion in each case must be one of fact.

In cases of this kind the intention of the taxpayer in engaging in the transaction leading to the profit is an important factor; but declarations of intentions by persons assessed for income tax, especially when made subsequently to the transaction, should be carefully scrutinized, for they are not conclusive or determinative of the true nature of the transaction, they are only part of the evidence, and they must be considered objectively along with all other facts.* [3]

Mrs Darius was a housewife and had five children to look after, but she was also a director of the company and played some part in its bookkeeping and operations, although the dominant directing person was her husband. In their testimony she and her husband minimized the importance and extent of her activity in that respect, but apparently they considered it to be of sufficient importance to warrant a substantial bonus payment to her in 1959, even taking into account the non-payment of interest on her loan. It is reasonable, I think, to infer that she was appreciably active in the operation of the company and had general knowledge of what it was doing.

Their evidence is that it was her husband who made the offer to transfer the land to her in partial repayment of her loan. That he did so and that she accepted the offer is not surprising, for her relations with him were excellent and he was the person with the greater experience in dealings with land and the potentiality of the 42 acres in question. However, it would be surprising, at least to me, if the matter was not talked over between them somewhat more than they indicated in their testimony.

The Chief Justice of this Court expressed opinions in B A Shuckett v MNR, [1965] 2 Ex CR 514 at 518-19; [1965] CTC 196 at 199; 65 DTC 5122 at 5124-5, in respect of situations where a person accepts from a borrower some asset in settlement of the obligation to repay the loan, and what he said, as follows, is pertinent in the situation in the present case:

There is, in my mind, no doubt that, if a person who has loaned money to a borrower who is unable to raise the money to repay it, accepts from the borrower some asset that cannot readily be turned into money at the moment in settlement of the obligation to repay the loan, the acquisition of such asset does not in itself constitute the launching of a venture in the nature of trade. Normally, in any such case, at the time of the settlement transaction, the lender does not know whether he will ultimately be able to obtain, upon disposition of the asset accepted in lieu of cash, an amount equal to the amount of the loan, an amount less than the amount of the loan or an amount greater than the amount of the loan. Nevertheless, if the sole motivating reason for the transaction as far as the lender is concerned is the lender’s desire to obtain repayment of the loan, the acquisition of the asset is, as far as the lender is concerned, merely receipt in kind of repayment of the loan.

On the other hand, the fact that the property acquired was paid for by discharge of a debt owing to the vendor by the purchaser is not incompatible with the acquisition being the inception of a venture in the nature of trade. Neither is the fact that the vendor of the property is unable to pay money owed by him to the purchaser of the property incompatible with acquisition being the inception of a venture in the nature of trade.

If, here, one of the motivating reasons for the acquisition by the appellant of the lots in question in 1951 wah his expectation and hope that he would be able to resell them at a profit, even if there was another motivating reason consisting of the appellant’s desire to collect loans from borrowers who were in financial trouble, the acquisition was the inception of a venture in the nature of trade.

As indicated earlier the onus in this case was on the appellant to show that he did not acquire the lots in question with a view to profit by turning them to account or trading in them. I have come to the conclusion that the appellant has failed to discharge that burden. There is no evidence to show that the expectation or hope that he could sell them at a profit was not one of the motivating reasons for the appellant’s acquisition of the lots.

The explanation given by Mrs Darius and Mr Darius as to the reason why the land was transferred to her and as to her intention in accepting it in 1960 and in disposing of it in parcels in subsequent years, is not implausible; but I am of opinion that one of the motivating reasons for the transfer was the hope and expectation of both of them that the land could be resold at a profit that would not be taxable. He was an experienced builder of houses and trader in land and in the last previous year, 1959, the company had its best year, with sales of over half a million dollars, and profits of about $63,616; by 1960 the City of Edmonton had expanded close to the land; at that time there was no apparent urgency to repay the loan; Mr and Mrs Darius were the only shareholders of the company and in complete control of it and able to watch its affairs month by month; the company’s interest in the land was not transferred to Mrs Darius by means of a mortgage or pledge to secure repayment of her loan while reserving to the company any excess over and above the amount due on the loan that might result from subsequent disposal of the land or portions of it, but on the contrary there was a transfer absolutely to her of the company’s interest; and in the end result her interest in the land, without any expenditure to improve it, was sold by her in part in 1962 for $30,000, in part in 1963 for $42,000 and, following the exchange for city lots, the lots that she retained were sold in 1964 and 1965 for further substantial amounts, the entire disposition resulting in profits in 1962, 1963, 1964 and 1965 referred to in the statement of defence and hereinbefore.

On the whole, I am not convinced, any more than the Tax Appeal Board was, that the transfer of the land was solely for the purpose of securing repayment of the loan and that such was the true nature of the transaction, and, in any event, the evidence does not persuade me that Mrs Darius has discharged the onus of showing that she did not acquire the land in 1960 with a view to profit by turning it to account or trading in it.

The appeal will be dismissed with costs.