Robert D Tate and John Retzlaff v. Her Majesty the Queen, [1974] CTC 731, 74 DTC 6559

Cattanach, J:—These are appeals by the two plaintiffs named in the above style of cause from a decision of the Tax. Review Board dated April 2, 1973 wherey the appeals by the plaintiffs from their respective assessments to income tax by the Minister of National Revenue for the plaintiffs’ respective taxation year 1970 were dismissed.

The question for determination is the familiar one as to whether the profit realized upon the expropriation of a parcel of land purchased by the plaintiffs, in conjunction with another party, in the southeast area of the city of Edmonton, Alberta is income for the purposes of the Income Tax Act. There is no other dispute between the parties.

If it was the exclusive purpose of the plaintiffs at the time of the acquisition of the land to use it as the site for the anticipated and contemplated expansion of the business of a joint stock company in which they were each the holders of one-third of the issued and outstanding shares and of which company they were officers and directors, as both plaintiffs testified was their avowed purpose or for the exclusive purpose of deriving revenue therefrom, the profit from the expropriation of the land would not be profit from a business or an adventure in the nature of trade.

if this was not the plaintiffs’ exclusive purpose at the time of acquisition there can, in the circumstances, be no doubt that the acquisition of this land had for its purpose, or one of its possible purposes, subsequent disposition at a profit then the resulting profit is taxable.

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

The question of fact as to what was the plaintiffs’ purpose in acquiring the land in question is one that must be decided after considering all of the evidence.

The plaintiffs, together with one, Martin Borza, were the shareholders and officers in Coronet Machine and Supply Limited incorporated pursuant to the laws of the Province of Alberta on November 12, 1964. The principal business of the company was the repair of oil drilling rigs and latterly the supply of self-contained electricity generating plants for use in locations where electricity was not otherwise available. One oil drilling rig comprises about 14 truck loads of equipment. Accordingly extensive space would be needed to accommodate one complete rig but it was explained that a complete oil rig was never on the company’s premises at any one time but only the component parts thereof. I assume that component parts of other rigs might also be present at the same time.

Accordingly Mr Tate, on behalf of the other shareholders and himself, sought more spacious premises for the company’s operations in the southeast area of the city of Edmonton. Both Mr Tate and Mr Retzlaff made frequent visits to the area in search of a suitable site. Both the plaintiffs knew that there was a demand for property in that area and that the price of property in that immediate area was rising rapidly. Mr Tate specifically mentioned approaching one farmer in the area who was antagonistic because of the many prospective purchasers who importuned him to sell his land to them.

A real estate salesman was engaged to find an available site in the desired area. This salesman found a parcel of land consisting of approximately 35 acres which was for sale at a total cost of $64,000. This land was held by Consolidated Land & Investments Limited, which company, as is implicit in its corporate name, is a development company and was so described in evidence, under an agreement for sale from the farmer who owned the land and who continued to farm it.

Mr Tate had explained to the real estate agent that the purpose of the purchase of land was as a prospective site for an expanded repair business at a location in proximity to their existing site to consist of an area of 5 to 10 acres. The agent found the land which was eventually bought but it consisted of 35 acres which was in excess of the plaintiffs’ need for the company’s operation. However it was the only parcel available in the area. The agent ascertained that the land was zoned for agricultural purposes but advised the plaintiffs that he foresaw no difficulty in having the zoning. changed to use for industrial purposes. Apparently there was a scattering of light industry in the immediate area and no extensive residential development. The asking price per acre was substantially less than that received on sites of other land in the area.

The plaintiffs were prepared to purchase the land but Mr Borza, the third equal shareholder in the company, was opposed. It was his view that the limited working capital of the company should not be depleted by the purchase. Further it was explained that Mr Borza was about to disassociate himself from the company and retire to a warmer climate which he eventually did.

Accordingly the purchase was made by the plaintiffs and not by the company.

The purchase was effected by means of a transfer of an agreement for sale between the owner and Consolidated Land and Investments Limited to the plaintiffs and Hett & Sibbald Limited each to own an undivided one-third interest.

The plaintiffs invited Hett & Sibbald Limited to join in the purchase because their own available funds were limited and the land was in excess of their company’s needs. Hett & Sibbald Limited was engaged in the lumber business, principally in Calgary, Alberta, and an officer of that company viewed the property and concluded that it would be suitable for a sawmill and planing plant to invade the Edmonton market. Accordingly Hett & Sibbald Limited joined in the purchase.

The purchase price was $64,000 of which $14,000 was paid down and the balance of $50,000 payable under the agreement of sale was assumed by the purchasers payable in 97 monthly instalments of $650 inclusive of principal and interest at the rate of 8% per annum. The Original owner had the right of free occupancy of the land until the price under the agreement of sale was paid in full. He continued to operate the land as a farm. However there was an acceleration clause giving the purchasers the right to pay the outstanding balance to the Original vendor at any time without notice or bonus. In short the purchasers would not be entitled to title or occupancy of the land until the total purchase price was paid, which, if the regular monthly payments were made and there was no recourse to the acceleration clause, would be approximately eight years.

The plaintiffs found their respective shares of the down payment by way of personal bank loans. They financed their interest in the deal by borrowing and without recourse to funds of the company.

The company had a lease on the premises it occupied which would not expire for five years. Accordingly there was an overlap of five of the eight years within which eight years the purchase price of the land would be paid and the plaintiffs would be entitled to occupancy assuming that the acceleration clause was not invoked by them.

Shortly after the purchase of the land, the plaintiffs (and I assume Hett & Sibbald Limited) entered into negotiations with Mr Cuthill of Guthrie MacLaren Drilling Ltd, a customer of the plaintiffs’ company. This company had many transient workers who lived in trailer accommodation. Mr Cuthill deemed it advantageous to acquire a trailer park for his company’s employees in Edmonton and was prepared to expend in the neighbourhood of $140,000 to construct a trailer site. From Mr Cuthill’s point of view the land purchased by the plaintiffs was ideal for this purpose. The basic arrangement between the plaintiffs and Heit & Sibbald Limited, on the one hand, and Guthrie Maclaren Drilling Ltd, on the other was that Guthrie MacLaren would expend $140,000 to convert the entire parcel of land into a trailer park and the plaintiffs and their corporate associate would contribute the land. The expected profits from the operation of the trailer park would be shared equally between the parties. This arrangement in itself indicates that within the short space of about six months the value of the land had appreciated from $64,000 to $140,000, that is more than double.

It will be recalled that the plaintiff, Tate, was the prime negotiator of the purchase of the land while the plaintiff, Retzlaff, was more or less the concurring but silent partner therein and that the real estate agent advised the purchasers that the land was zoned as agricultural but that he foresaw no impediment to changing that zoning to industrial. The establishment of a trailer park necessitated a change in zoning.

Mr Cuthill, not Mr Tate, made application to the City of Edmonton for a zoning change. The City refused the application pointing out that the site was zoned agricultural and the prospect of it being changed to an industrial zone would not be considered by the City until subsequent to 1981 some fifteen years after the purchase of the land on January 4, 1967.

The idea of converting the land into a trailer park was therefore abandoned.

Approximately three years after the purchase of the land the plaintiffs were approached by a real estate agent with an offer to purchase the land for an undisclosed principal. The plaintiffs refused this offer.

However the undisclosed principal was Albert Housing and Urban Renewal Corporation, an entity created by the Government of Alberta for the purpose of acquiring a land bank for future residential development at stable prices which entity was vested with the power of expropriation. On refusal by the plaintiffs to accept the offer to purchase the corporation threatened to invoke its power of expropriation. Faced with that threat the plaintiffs, within three years of their purchase of the land, sold it for $4,100 an acre whereby each plaintiff realized a gain of approximately $23,615 in their 1970 taxation year which the Minister included as the income of each plaintiff and levied tax accordingly.

The contention of the plaintiffs is that the gain so realized was merely the enhancement in value of a capital asset whereas the rival contention of the defendant is that the gain was income from a ‘business” within the meaning of that word as extended by paragraph 139(1)(e) of the Income Tax Act to include an adventure or concern in the nature of trade.

As I stated at the outset the question of fact as to what the plaintiffs’ purpose was at the time they acquired is one of fact which is to be determined on all of the evidence.

The following salient facts emerge from the evidence.

The land was zoned agricultural. The plaintiffs apparently placed reliance on a real estate agent’s assurance that the zoning could be changed to industrial. Assuming that this assurance was given in good faith but bearing in mind that a real estate agent anxious to earn a commission is likely to be unduly optimistic the plaintiffs made no further investigation or enquiry whatsoever of the appropriate municipal authorities which common business sense would dictate. An inquiry by an associate of the plaintiffs made about a year subsequent to the purchase of the land disclosed that the land would not be rezoned until after 1981 some fifteen years after the purchase of the land. The assurance given to the plaintiffs by the real estate agent they engaged was obviously erroneous but the plaintiffs had made no independent check prior to their purchase of the land. ’•

The area of the land was in excess of the avowed purpose of the plaintiffs in purchasing the land for which reason the plaintiffs brought in a co-purchaser. While there was no direct evidence on the point I assume that a lesser portion of the 35 acres could not have been purchased. Each of the purchasers took an undivided one-third interest in the land. However geographic allocation of the land for a site for the plaintiffs’ business and that of the co-purchaser was not made in ‘advance apparently because of the amicable relationship between the parties. It is notorious that a relationship of this nature may deteriorate for which reason business acumen dictates provision against such eventuality.

The land was not purchased in the name of Coronet Machine and Supply Limited but rather personally by the plaintiffs and their copurchaser for the reasons they gave in evidence principally because the third shareholder wanted no part of the purchase on behalf of the company because of its lack of working capital. The down payment was made by the plaintiffs with borrowed money. There was no absolute dedication of the land to the company’s eventual ownership.

The company was committed to its present site for five years by a lease which had that time to run. No efforts were made by the plaintiffs to negotiate a termination or a sublet of that lease. Rather the business of the company was carried on at that site despite the limitation of space which was advanced as the reason for the relocation of the business. It is evident that the necessity for relocation of the business was not pressing.

At no time during which the land was held by the plaintiffs did it produce any revenue.

There is no question that the plaintiffs knew that land in the area in which they purchased this parcel was rapidly rising in value. Mr Tate knew this from frequent visits to the area by talking with possible vendors and from his knowledge of sales of land in the vicinity at a much higher price than that which was paid for this particular parcel. Obviously the plaintiffs exercised foresight in purchasing this particular parcel of land regardless of their ultimate purpose.

The purpose advanced by the plaintiffs for the purchase of the land was for a larger site for the operation of the company of which they were officers and shareholders. However that avowed purpose is negatived by the act that within a space of six months they began negotiations with Mr Cuthill of Guthrie MacLaren Drilling Limited to turn the site into a trailer park.

The cumulative effect of the evidence leads me to the conclusion that, while the land may have been purchased for the primary purpose as a site for the plaintiffs’ company, nevertheless the plaintiffs were prepared, as a secondary purpose, to turn it to account as a trailer park or some like enterprise as opportunity arose and I am not satisfied on a balance of probabilities that there was not present to their minds at the time of purchase the tertiary purpose of disposition by resale at a profit.

lt was agreed between the parties, and correctly so, that the fact the ultimate sale was consequent upon a threat of expropriation has no material bearing on the nature of the profit in the circumstances of these appeals.

lt follows, therefore, that the plaintiffs have failed to discharge the onus cast upon them to establish that the land was acquired by them for use as a site for the business of their company or otherwise as a capital asset to the exclusion of its disposition at a profit.

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

The appeals are therefore dismissed with costs.