Rokosh Engineering & Construction Lid v. Her Majesty the Queen, [1974] CTC 536, 74 DTC 6375

Cattanach, J:—These are appeals by the plaintiff from its assessments to income tax by the Minister of National Revenue for its taxation years ending May 31, 1970, 1971 and 1972.

In completing its income tax return for the year ending May 31, 1970 the plaintiff reported a loss in the amount of $15,795.33.

The Minister in assessing the plaintiff as he did added to the plaintiff's income an amount of $18,687.50 as a gain realized upon the sale of real property with the result that the plaintiff had a taxable income in the amount of the difference between $15,795.33 and $18,687.50 which I compute by simple mathematical subtraction to be $2,892.17.

By a subsequent adjustment the Minister reduced the amount of $2,892.17 by deducting therefrom an amount of $100 as an “automotive capital cost allowance”.

In paragraph 8 of its statement of claim dated December 13, 1973 the plaintiff alleges that the Minister “reduced the Plaintiff’s capital cost allowance on the Plaintiff’s automotive equipment in the amount of $100”.

In the prayer for relief the plaintiff. states that “the Defendant erred in its assessments as aforesaid” and accordingly requested that the assessments be vacated.

The statement of claim dated December 13, 1973 is included in the certified copy of the record together with the Minister’s defence dated February 1, 1974 and filed on February 4,1974.

However the plaintiff through its solicitor filed an amended statement of claim dated January 25, 1974 in which paragraphs 1 to 7 remain the same as in the statement of claim, paragraphs numbered 8 to 9 were inserted, paragraph 8 of the original statement of claim became paragraph 10 of the amended statement of claim and the prayer for relief remained identical. This amended statement of claim was forwarded to the Deputy Attorney General of Canada by the Registry on February 4, 1974.

Obviously the Minister’s reply dated February 1, 1974 was to the statement of claim dated December 13, 1973 and no amended defence was filed nor does it appear necessary.

Accordingly I asked counsel for the plaintiff what assessments were under appeal. He replied that the plaintiff's 1970 taxation year was the only assessment under appeal but that the assessments for the years ending May 31, 1971 and 1972, wherein the Minister refused to carry forward the loss claimed by the plaintiff in its 1970 year, would also be affected.:!n this he is right in that decision with respect to the 1970 year will correspondingly be affected but in reality, under the amended statement of claim, the plaintiff’s assessment for its 1970, 1971 and 1972 taxation years are under appeal despite the fact that the amended statement of claim is not included in the certified record.

I also specifically asked counsel for the plaintiff if the question of the capital cost allowance on the plaintiff’s automotive equipment, as alleged in paragraph 8 of the original statement of claim and in paragraph 10 of the amended statement of claim was in dispute. This question was prompted by counsel’s statement in opening that the sole issue in the appeal (or appeals) was whether the gain realized by the plaintiff on the sale of a parcel of real property was properly included by the Minister as taxable income to the plaintiff. He replied that the question of capital cost allowance was not in dispute but had been merely inserted in the statement of claim for some reason which was not satisfactorily explained to me if in fact it was not the intention to dispute that matter as well. No evidence or argument was adduced or advanced on this matter and therefore paragraph 8 of the original statement of claim and paragraph 10 of the amended statement of claim are stricken out.

The question for determination is the familiar one, and commonly referred to as a “trading case”, as to whether profit realized upon the purchase and subsequent resale of real property is income for the purposes of the Income Tax Act.

The plaintiff sets out its case in paragraphs 1 to 5 of the statement of claim as follows:

1. The Plaintiff is a private company incorporated under the laws of the Province of Alberta carrying on business in the said Province.

2. By an agreement for sale made in writing dated November 23, 1968, the Plaintiff purchased Block 2, Plan Calgary 3452 HJ for a price of $30,475.00.

3. The property was purchased by the Plaintiff for permanent use in its business as a construction shop and storage yard.

4. After purchase the Plaintiff learned that the property could not be serviced for major utilities, namely, water and storm sewer as the City of Calgary refused to extend the services to the property.

5. Because the property would not be adequately serviced the Plaintiff decided not to use the property for the purposes originally intended and it was sold in November, 1969, for $51,750.00. nn?

The Minister’s reply so far as it is relevant reads as follows:

2. He admits as alleged in paragraph 2, the Plaintiff purchased Block 2, Plan Calgary 3452 HJ about November, 1968, for $30,475.00.

3. He does not admit the allegations contained in paragraphs 3 or 4 thereof.

4. He admits as alleged in paragraph 5 thereof, the Plaintiff sold the property referred to in paragraph 2 about November, 1969, for $51,750.00.

5. He admits the allegations contained in paragraphs 6 and 7, and says that in assessing the Plaintiff for 1970 on the 31st day of April, 1971, the Minister of National Revenue assumed the following facts:

(a) About November, 1968, the Plaintiff, through the services of Richfield Real Estate Ltd in the City of Calgary in Alberta, purchased from Shaw Construction Company Ltd some five and three-quarter acres of land In the vicinity of Calgary for $30,475.00.

(b) The land acquired from Shaw Construction Company Ltd was, at the time it was purchased in 1968, reasonably adjacent to industrial development in the vicinity of Calgary.

(c) Following its acquisition in 1968, and until it was sold in 1969, the land in question was left unused, unfenced, and undeveloped.

(d) Some time in 1969 the Plaintiff requested Richfield Real Estate Ltd to sell the land in question, and in November, 1969, the land was sold to Springfield Development Ltd for $51,750.00, the Plaintiff realizing a profit of $18,687.50.

(e) The Plaintiff acquired the land in question, known as Block 2, Plan Calaary 3452 HJ, with the expectation the land could be resold for a profit.

(f) The profit arising from the sale of the land in question is income from a business within the meaning of that word as it is used in the Income Tax Act.

The provisions in the Income Tax Act referred to in paragraph 5(f) are sections 3, 4, and paragraph 139(1)(e) which read:

3. The income of a taxpayer for a taxation year for the purposes of this Part is his income for the year from all sources inside or outside Canada and, without restricting the generality of the foregoing, includes income for the year from all

(a) businesses,

(b) property, and

(c) offices and employments.

4. Subject to the other provisions of this Part, income for a taxation year from a business or property is the profit therefrom for the year.

139. (1) In this Act,

(e) “business” includes a profession, calling, trade, manufacture or undertaking of any kind whatsoever and includes an adventure or concern in the nature of trade but does not include an office or employment;

The question in this case is whether. the purpose for which the plaintiff acquired the land on November 23, 1968 was to use it as a storage yard for its heavy earth moving equipment and the construction of a building thereon for its use as an office and repair shop.

If that was the plaintiff’s exclusive purpose at the time of acquisition, and that is the material time, then profit from the sale of the land would not be profit from a business or an adventure in the nature of trade. If that was not its exclusive purpose at that time there can be no doubt, in the circumstances, that the acquisition of the land had for its purpose, or one of its possible purposes, subsequent disposition at a profit and the resulting profit is therefore taxable.

The onus of disproving the Minister’s assumption, in assessing the plaintiff as he did, that the latter was the case, falls on the plaintiff.

Mr Rokosh, who together with his wife are the only shareholders in the plaintiff and are the president and secretary respectively, was the only witness to testify. His intentions are the intentions of the plaintiff. He was a refreshingly honest witness.

The plaintiff is engaged in the construction business particularly heavy construction such as roads, railroads, irrigation ditches, earthen dams and the like. It specialized in earth moving ventures and for its purposes it owned between 15 and 20 pieces of heavy equipment.

Much of this equipment would be stored on a job site during the winter months but the plaintiff had an office in the City of Calgary as well as a site consisting of approximately 1.5 acres upon which it stored equipment which could be conveniently brought to Calgary. On this site there was a portable too! shed on skids but no other building. In order to effect repairs to its machinery the plaintiff rented sheds in which its employees would do this work. Routine and minor repairs were done in the open in the storage yard or on the job site.

Mr Rokosh testified that this storage yard was inadequate by reason of lack of space, all equipment could have been stored on the site in tight positions but the necessity of all equipment being in Calgary at the same time was a rare occurrence no adequate protection for the equipment by fencing or otherwise with consequent pilfering and there was no security of tenure. The space was rented under a loose agreement. The landlord would not give a long-term lease, perhaps he foresaw other uses for the land, and no cash rent was paid. The plaintiff undertook, in exchange for the privilege of storing its equipment, to maintain the site. It did some levelling work and built some sidewalks.

Accordingly Mr Rokosh had in mind the acquisition of a suitable site on which to construct a building to house a repair shop and office and to serve as a storage yard for the plaintiff’s construction equipment.

With that objective in mind Mr Rokosh had looked at several properties over a space of time but never seriously considered purchasing any of those properties.

In discussions with a fellow engineer turned real estate salesman, Mr Rokosh had disclosed his hopes.

In June 1968 this real estate salesman advised Mr Rokosh that the firm for which he worked had listed with it a parcel of land consisting of 5.75 acres not far from the yard the plaintiff used for storing its equipment. This land was within the city limits and was zoned agricultural-manufacturing. This land was close to a railway spur. It was unserviced and access to it was by an unimproved road. Mr Rokosh was supplied with a descriptive brochure by the real estate agent. He made a casual inspection of the land but placed reliance on the information contained in the brochure.

On October 10, 1968 the plaintiff made an offer to purchase at a price of $30,475 payable $10,475 in cash and two subsequent annual instalments of $10,000 each. Mr Rokosh testified that the cash payment of $10,475 was made from the working capital of the plaintiff. The offer to purchase was subject to the condition that the City approve the construction of a shop and storage yard without rezoning by November 14, 1968.

That condition was fulfilled.

Mr Rokosh applied to the City planning department for approval of a plan to fence a portion of the 5.75 acres for storage of the plaintiff’s equipment identical in size to the storage yard in use. He had abandoned his plans for the construction of a repair shop and reserved that possibility for future consideration.

The City approved those plans and accordingly on November 23, 1968 the plaintiff bought the property.

Mr Rokosh then made a more thorough examination of the site and found that the description of the topography in the brochure supplied to him by the real estate agent was not completely accurate. The construction of a sewer line would have to be dug deeper due to the grade with a consequent increase in cost.

Mr Rokosh then became dissatisfied with the property for use as a storage yard and on February 1969 or thereabouts, some four months after the purchase of the property, he spoke to the real estate agent expressing his willingness to sell and received the assurance of the real estate agent that a buyer could be found.

On November 6, 1969 the plaintiff sold the property for a price of $51,750. The difference between the purchase price of $30,475 and the sale price gives rise to the assessments under appeal.

The question of fact as to what the plaintiff’s purpose was in acquiring this property is one that must be decided after considering all the evidence. The evidence of Mr Rokosh at the trial that his purpose, and that of the plaintiff, was to use this land to construct thereon a shop and storage yard is only part of the evidence. Such evidence may be given in all sincerity and still not reflect the true purpose at the time of acquisition. Statements now as to the intention at the time of acquisition must be considered along with the objective facts.

Those objective facts are that Mr Rokosh bought the land after the most casual investigation. Mr Rokosh is a professional engineer with experience in the construction of sewers. He made a visual inspection of the land but the difficulty with respect. to laying a sewer line was not readily discernible. He made no inquiry of the City planning department prior to the purchase of the land.

Even subsequent to the purchase of the land the inquiries made by Mr Rokosh were quite casual. He accepted the advice given over the telephone by an unknown employee of the city that construction of a sewer was in the distant future. He did not pursue those inquiries in a more formal manner to ascertain when the sewer might be laid. In fact the line was constructed within three or four years of the sale.

The condition precedent to the agreement for sale that the construction of a shop and fenced storage yard would be approved without rezoning was complied with but the plaintiff forthwith, after the purchase of the land, abandoned its expressed intention to erect thereon a repair shop and office, even before the lack of sewer facilities became evident. The plan for which approval was sought. and obtained was for the erection of a fence for a storage yard of the same dimensions as the yard in use by the plaintiff. The plaintiff did store some equipment on the site and did some levelling of the site but at the same time it continued to use its other yard for storage. A fence was never erected nor any start made to do so.

At the time he bought the land Mr Rokosh candidly admitted he felt it was a good buy at the price and that the prospect of incurring a loss was remote. This admission was predicated upon his knowledge, which was common to most people, that the price of land was rising consistently. He was unaware of one particular commercial development put to him in cross-examination but he was aware of both industrial and residential development in the immediate area.

The land was held for a very short period before the decision was made to sell it and it was, in fact, sold within one year. It was bought at approximately $5,300 an acre and sold at $9,000 an acre within a year which represents the rapid rise in the value of the land.

Further the plaintiff was operating on a limited budget and with modest success. The cash payment was taken from working capital. It seems somewhat incongruous that the plaintiff would exchange a practically rent-free site for another site of comparable storage area and with not much difference in other facilities and equal distance from the plaintiff’s rented office accommodation at a cost of $30,475.

Giving careful consideration to all the evidence I am not satisfied that there is a balance of probability that the plaintiff acquired the land for the purpose of using it as a storage yard to the exclusion of any purpose of disposition at a profit.

Accordingly it cannot be said that the assumptions of the Minister in assessing the plaintiff as he did were not warranted.

The appeals are, therefore, dismissed with costs.