Carribean Properties Limited,* Plaintiff,, [1974] CTC 858, 74 DTC 6660

Kerr, J:—This is an appeal in respect of reassessments for the plaintiff's taxation years 1969 and 1970 that were made by the Minister of National Revenue on the basis that a gain realized by the plaintiff on the sale of certain land was income from a business or adventure in the nature of trade, within the meaning of sections 3 and 4 and paragraph 139(1)(e) of the Income Tax Act (as it was prior to the amendments effected by section 1 of SC 1970-71-72, c 63). The plaintiff says that the gain was a capital gain, not income.

At the time of its purchase by the plaintiff the land, about 70 acres in size, was farm land situate in the Village of Markham, Ontario. It was purchased by the plaintiff early in 1962, pursuant to an agreement dated April 27, 1961, for $58,000, and was sold by the plaintiff in August 1969, and the plaintiff realized a gain of $344,985 on the transaction. The amount of the gain is not disputed.

Two witnesses, John M Baird and Carl E Sellers, gave evidence on behalf of the plaintiff, and a number of documents were admitted in evidence by agreement of the parties, Exhibits A, B, C and D.

John M Baird, who was vice-president and a director and shareholder of the plaintiff company at all relevant times, testified respecting the land, its acquisition and sale, and the intention of the shareholders in regard to it. His personal business was that of real estate broker in Markham. He said that in February or March 1961 the availability of the land came to his attention. It was then being farmed by a tenant farmer. He thought it would be suitable for conversion into a par 3 golf course. It was one of the better farms in the area, having sandy soil, no bush or swamp, it had a stream flowing through it, and he thought that all of it could be used for a golf course. There was no other golf course within 7 miles of Markham, which had a population of about 2,500 people. Mr Baird said that what he had in mind was a “pay as you play” course, without membership or a club house at the start and those things would come later after the course was in operation for a while. So he endeavoured to get a small group together, about five persons, for the purpose, and he was able to get three others besides himself. They were his own brother William S Baird, who was a chiropractor in Markham, and William J Britton and Donald K Van Luven,* [1] who were business men and friends of his. On his advice this group incorporated the plaintiff company and at all times they were the shareholders and had the following number of shares:

A main reason for the incorporation was that the members of the group were concerned about having a personal liability in connection with the proposed undertaking. John M Baird was the principal driving force in the project and the others accepted his advice.

An agreement for purchase and sale of the land, dated April 17, 1961, was entered into by the owner with William Britton as purchaser and trustee on behalf of a company (the plaintiff company) to be incorporated. The price was $58,000, with a down payment of $20,000 and a mortgage back to the vendor for $38,000. The transaction was closed in 1962, a deed of the land was given to the plaintiff, and the plaintiff gave a 10-year mortgage to the vendor. The mortgage contained a provision giving the plaintiff a privilege of obtaining a partial discharge of the land from the mortgage upon payment of $850 for each acre so discharged, provided that the provisions of section 26 of the Planning Act are complied with. The money for the down payment was provided by the group pro rata according to their shareholdings in the company. Baird acted as a real estate agent for the group of purchasers and for the vendor, and he disclosed his interest to them. He borrowed from a bank his $2,000 share of the down payment, and paid it back out of a $2,900 commission that he received on the $58,000 purchase price. On the subsequent sale of the land by the plaintiff some years later he received a commission of $10,407.90 from the company.

Mr Baird said that in the spring and summer of 1961 he had only a “ball park” idea of what it would cost to convert the land into a golf course. He was thinking in terms of up to $60,000, not including a club house that would come later and add maybe another $30,000 to the cost. He knew that it would be necessary to borrow for the project, but felt there would be no difficulty getting the money from a bank. He said also that his intention was that the shareholders would be involved in managing the golf course business, although none of them had any experience in that kind of operation. The land was zoned M-1, light industry, and a change in zoning would be needed for its conversion into a golf course, but he had spoken to the Markham solicitor and the reeve and deputy reeve, and he understood that there should be no difficulty in getting the necessary zoning change. He also made discreet inquiries of golfers in the area prior to the decision to purchase the land, but he had no discussions with managers or financial officers of golf clubs at any time as to the revenues, expenses or operation of a golf club; and he did not make or obtain any analysis of maintenance costs or as to prospective membership, income flow or salaries or expenses, he thought the principal operating expense would be the cost of keeping the greens in good shape, that interest charges on the mortgage and a bank loan would be about $6,000 per year, and that an annual income of about $10,000 to $12,000 would be needed to break even.

Mr Baird had played golf at the Tam O’Shanter golf course, and the greenskeeper there, Carl Sellers, was a friend of his, and in the summer of 1962 he asked Sellers to look over the farm and tell him what he thought of it for a golf course; he and Sellers then walked over the farm and examined it together, and Sellers said it would be suitable but he did not give any written opinion at that time; come late 1964 Baird wanted an opinion in writing to take to a bank in seeking a loan for the project, and he wrote to Sellers on October 26, 1964, referring to the land and saying that “we were contemplating establishing an 18 hole par 3 golf course on same”, and requesting Sellers to advise whether it would lend itself to that, and if possible to give an estimate of what would have to be spent on such a proposition. He and Sellers then went over the land again, following which Sellers wrote on November 2, 1964, to the effect that an 18 hole par 3 golf course would be feasible, that a liquor licence should be available, that the land had an adequate supply of water, and that the approximate cost would be about $4,000 per hole, $72,000 for 18 holes, and about $40,000 extra for a club house, and he enclosed a sketch lay-out. Baird said he discussed the sketch subsequently with Sellers by telephone. No other sketch or plan was prepared and no other estimates of cost were obtained from Sellers or anyone else. The sketch is shown at page 9 of the plaintiff’s Book of Documents (Exhibit C).

Baird said that after receiving the letter from Sellers he and Van Luven went to the Bank of Commerce in Toronto in December, 1964 and talked there to a Mr Wightman, whom Van Luven knew as a friend, about their plans for a golf course on the land and their need to borrow at least $50,000 for the purpose. The bank advised several days later that any loan would be conditional on the shareholders giving a joint and several guarantee for repayment. The shareholders were reluctant to give such a guarantee, and they decided to wait, thinking that alternative financing would become available and that they personally could afford to wait for it. A letter from Mr Wightman, dated June 22, 1971 to Mr Van Luven stated that he recalled having verbal discussions with an officer of the company several years previously relative to long term financing for a proposed golf course.

No application or request, other than the discussion with Wightman, was made to any bank or lending institution for a loan or financing.

Mr Baird also testified that construction of a new par 3 golf course, Crestview, was commenced in 1964 and completed in 1966, which would be competitive with the golf course the plaintiff had in mind. So the plaintiff’s group awaited events, meanwhile keeping the land leased to the tenant farmer, who continued to farm the land and pay rent until it was sold by the plaintiff in 1969. The lease had a provision that in the event of the company selling the land it could terminate the lease. Nothing was done to develop the land while the plaintiff owned it, and the only income from it was the rent paid by the tenant, which the plaintiff increased to $175 per month in 1964.

Mr Baird said that he received a verbal offer to purchase the land in 1966 for $175,000, but he thought the land had its original potential for a golf course, and he hoped that the group would be able to go ahead with the project later. Then, early in 1969 he received a phone call from another realtor asking if the land was for sale and he told him to submit an offer, and the result was a sale of the property for $416,316. The down payment was $100,000, and a 10-year mortgage was given to the plaintiff for the balance. Baird shared the commission on the sale with the other realtor.

Carl E Sellers testified that the land was well suited for a golf course. The Crestview land was very similar, but did not have as good a water supply. He and Baird examined the subject land once in 1962 and once again in 1964. His cost estimate of $72,000 for construction of the course and $40,000 for a club house did not include the cost of making an access road or paving a parking lot. He did not discuss any operating costs or finances or any costs other than the cost of converting the land and building a club house. His sketch showed a roadway from Highway 48 to the site of the club house, but in a letter dated October 4, 1972, a copy of which is in the plaintiff’s Book of Documents (Exhibit C), Mr Baird provided another sketch of the land and, referring to it and the adjoining railway line, said:

2. You will note that all the frontage this property had in concession 7 was 88 feet which was ample to bring a road into the property until we discovered that no road could enter onto a main artery at less than 1000 feet from the railway. This had the effect of making it impossible to bring a road into the property. You can see from the sketch the only access the property had from the east was a 12 foot right of way out to Station Street and Highway 48.

Sellers’ experience was more in the maintenance of golf courses than in their designing or construction, but I think that he had sufficient knowledge and experience to be able to give an opinion as to the suitability of the land for a golf course and to give the rough approximate estimate of cost that he gave.

Mr Baird also testified to the effect that when the land was purchased the only intention he had for it was to develop it as a golf course, it never entered his mind that the project might not go ahead or that the land would have to be used in some other way, and there never was any discussion as to what to do with the land other than to use it for a golf course, nor was there an intention that if it was not so used it could be used otherwise or sold at a profit. It was a case of putting all eggs in one basket, i.e., a golf course only. In cross-examination Mr Baird held firmly to his testimony to that effect.

The plaintiff has had no other dealings in land and never solicited offers for purchase of it.

The company’s income tax returns show the following shareholdings of common stock:

Wm G Britton, 4 shares, value $4

Wm S Baird, 3 shares, value $3

Donald K Van Luven, 2 shares, value $2

John M Baird, 1 share, value $1

The shareholdings and the total paid up capital stock were constant throughout the years concerned.

The shareholders also advanced pro rata the down payment of $20,000 for the purchase of the land and the amounts needed from time to time to meet the payments due on the mortgage.

The company’s balance sheet for 1961 shows, under current liabilities, “advances from shareholders” $20,000. The balance sheet as at December 31, 1968 shows advances totalling $44,210. The balance sheet for 1971 does not show any amount of advances from shareholders as liabilities, but shows advances to them in the amount of $35,790. Those two amounts of advances from and to the shareholders ($44,210 and $35,790) total $80,000, which Mr Baird said came from the proceeds of the sale of the land in 1969. No interest was charged the company on the advance made by the shareholders.

In the company’s balance sheet as at December 31, 1961 the land is shown as a current asset, and it continued to be so shown until 1967 when it became shown as an investment. The company’s income tax returns in its early years described its business as ‘‘Real Estate” but in 1967 this was changed to “Investments”.

Mr Goodman, for the plaintiff, argued that the evidence establishes that the land was acquired in good faith with an intention to develop it into a golf course and that there was no secondary or other intention to deal with it otherwise; the land was suitable for that purpose; the whole course of conduct of the shareholders shows that their intention initially and always was to develop a golf course as an investment; Baird made discreet personal inquiries of golf professionals, and inquired also of appropriate persons in respect of zoning, and he was Satisfied that the project was feasible; he had in mind a modest par 3 golf course and felt that the necessary money for it could be borrowed from a bank without difficulty; he assembled the group of shareholders and they advanced the $20,000 down payment; the capital structure of the company was not unusual, i.e., nominal shareholdings supported by advances to the company by the shareholders; in due course Baird obtained a written opinion from Sellers to support an application for a bank loan and then he and Van Luven approached the bank for financing, their approach being in accordance with common practice to first explore with a bank officer the possibility of obtaining a loan and the conditions for same before filing a formal application; the shareholders did not want to become severally liable to the bank and, without changing their intention to develop the golf course, they decided to wait for more acceptable financing, and they were in a financial position personally to do so; meanwhile the land was being farmed and rent was being paid by the tenant; the land was never offered or advertised for sale and it was kept available for conversion into a golf course until the unsolicited offer for its purchase was received in 1969 and the price was such that it could not sensibly be refused; the Crestview course had come into existence, the cost of converting the plaintiff’s land had escalated, and in view of the price offered it would have been absurd to still go ahead with the plan for a golf course; Baird was a real estate broker but that fact should not have important significance in deciding the question whether the transaction was a venture in the nature of trade; the land was held for about 8 years without any move to dispose of it or to turn it to any other use other than for the intended golf course; this was the only land transaction of the company; the evidence as a whole does not show a scheme of profit making or conduct or badges of trade sufficient to stamp the transaction as a trading venture rather than an investment; and even if Baird, who master-minded the acquisition and retention of the land, had a speculative intention that it could be sold at a profit if the golf project was not proceeded with, that is not sufficient to stamp the transaction as trading or a venture in the nature of trade.

Mr Power, for the Crown, argued that notwithstanding the testimony of Baird as to the intention of himself and the group (testimony to which he adhered in cross examination), the evidence as a whole and the course of conduct of Baird and the shareholders support the assessment made by the Minister on the basis that the land was acquired with a view to dealing or trading in it or otherwise turning it to account at a profit and that the profit gained was income from a business or adventure in the nature of trade. Mr Power submitted, as being significant, that Baird was a realtor and his associates in the transaction were business men who, in considering whether to buy the land, would have had in mind the possibility that its conversion to a golf course might not come about and that some other disposition or use of the land would in that event be resorted to, and they would not “have put all their eggs in the one basket” of a golf course; none of them had any experience in the construction or operation of a golf course, yet no inquiries were made of knowledgeable persons in that respect, or as to the cost of making the course or the revenues, expenses, salaries and factors of that kind; Sellers was not consulted until 1962, and at that time only informally, and it was not until nearly the end of 1964 that he was asked by Baird to have another look at the land and put something in writing as to its feasibility for a golf course and the cost that would be involved, and he made only a rough lay-out sketch, and no other sketches or plans were ever prepared, nor was anyone else consulted; the need for borrowing was known from the start, but the only move to obtain a loan was the one visit to the Bank of Commerce in December, 1964, when the members of the group were not willing to give personal guarantees to the bank, although they must have been aware that the capital structure of the company and its. assets were such that it was most unlikely that it could obtain a large loan without such guarantees; there was a provision in the mortgage, when the land was acquired, for partial discharge of the land from the mortgage acre by acre; the land was unproductive of revenue, apart from the rental revenue, which fell short of meeting current expenses, and there would have been an intention when it was being acquired to turn it to account in some more profitable way, including sale at a profit, and not solely an intention to convert it into a golf course.

The case was strongly argued by counsel on each side, and numerous decisions were cited by them. It is a case that can lend itself to differing inferences and conclusions.

The Court must endeavour to determine on the evidence the true nature of the transaction, a transaction that had its origin in the purchase of land some 12 years ago and its culmination in a sale that took place. about five years ago. The problem raised is one in respect of which the applicable principles were stated by Noël, J (as he then was) in Racine, Demers and Nolin v MNR, [1965] CTC 150; 65 DTC 5098 at 5103, approved by the Federal Court of Appeal in Morev Investments Limited et al v MNR, [1973] CTC 429 at 430-31: 73 DTC 5353 ‘at 5354, as follows:

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.

Only one member of the group that formed the plaintiff company gave evidence. He was the vice-president of the company, John M Baird, and he insistently held throughout his testimony that the land was bought solely as an investment with a single intention to convert or develop it into a golf course. However, his testimony that when the land was being purchased the thought never entered his mind that the golf project might not be proceeded with, and that there never was discussion as to what to do with the land. otherwise, appears to me to be improbable and to me it is less than convincing, despite his sworn insistence that such was the case. I am aware that a court should not arbitrarily reject sworn testimony, but the intention with which the land was purchased is in this case an objective fact, not necessarily established by Baird’s own testimony as to what the intention was, and inferences as to the intention may be drawn from the conduct of the parties involved and from other relevant facts. Neither Baird nor any of the other three associates in the venture had any experience in the construction, operation or management of a golf course, and they had little knowledge when the land was purchased of the cost that might be involved in such a venture, except the “ball park” idea of Baird. He was a real estate broker in the area, with knowledge of real estate opportunities there, his brother was a chiropractor, the other two were businessmen. Presumably they were sufficiently knowledgeable in business to have questions in their minds respecting matters pertaining to the cost and financing of a golf course, such as how much over and above the purchase price of $58,000 it would cost to develop the farm as a golf course and whether it could be financed and by what means; how much would it cost to operate and maintain it and what would its revenues be; but no real inquiry into such matters, other than Baird’s limited and discreet inquiries of golfers in the area, was made to determine initially whether it would be good business to acquire the land for a golf course, and very little was done in that respect after the land was purchased. The agreement for purchase was executed in April 1961, but not until the summer of 1962 did Baird ask his friend Sellers for his opinion whether the farm. was suitable for a golf course, and it was not until almost the end of 1964 that he asked Sellers for something in writing and in reply received a brief letter and sketch. No effort to obtain financing was made until December 1964, and when the bank indicated that a loan would have to be backed by personal guarantees, which the group might reasonably have anticipated would ‘be the case, they declined to accept financing on that basis. Lack of financial means to accomplish an object can sometimes support an inference that one had an alternative intention to sell if financing cannot. be obtained, and in the present case there was no assurance at any time that necessary financing could be obtained on terms acceptable to the group. The group did nothing further, except wait, to advance a golf project. No sketch or plan except the rough sketch by Sellers was made. No other effort to obtain financing, before or after the land was acquired, was made. No other expert advice was sought. The land was left rented and earning rental revenue, and although leaving it thus is consistent with holding it for conversion to a golf course it is also consistent with keeping it in a state in which it could be utilized in any feasible way and, if an opportunity for a profitable sale came, to dispose of it in whole or in parcels, which was permissible under the mortgage. In my opinion there was from first to last a very meagre effort to plan or pursue a plan for development of the land as a golf course, so meagre that it raises a reasonable doubt that the land was purchased with only that intention and for only that purpose and not with an intention to turn it to account for profit in any way which might present itself as the most convenient, including the sale of the land in whole or in part.

I think that it is extremely improbable that the group, led by a real estate broker, would not when deciding to acquire the land have contemplated its sale in the event that for any reason it would not be developed as.a golf course. It is improbable that they would ‘put all their eggs into one basket”.

In reaching my conclusions I have not been influenced by the fact that no application was made foi* a change in zoning or for a liquor licence, for those things could well be deferred. I am also satisfied that it would not be unreasonable to defer, plans for construction of a club house.

I also do not regard as important the fact that the shareholdings in the plaintiff company were nominal, or the fact that Baird’ s letter to sellers used the word “contemplating” rather than. a word more apt to indicate an actual intention to develop the land as a golf course.

The fact that for a period of 7 to 8 years no effort was made to sell the land or to devote to it any purpose that would prevent its development as a golf course is a factor favouring acceptance of the professed intention to use it for a golf course. I also accept that the offer received in 1969 to. purchase the land was unsolicited and so good that it would have been unreasonable at that time to refuse it.

The fact that this was the only real estate transaction of the company is indecisive on the question whether the gain was income from an adventure in the nature of trade, or whether it was a capital gain. Nothing turns upons the fact that the objects of the company stated in its letters patent include the’ power to purchase and sell land and deal in real estate.

On. the whole, despite such evidence as there is of an intention to develop the land as a golf course, I am far from satisfied that there is a balance of probability that the land was acquired for the purpose of developing it as a golf course to the exclusion of any purpose to dispose of it at a profit as an alternative to such development, and I do not think that the existence of facts or law showing error in relation to the reassessments has been established.

The appeal is therefore dismissed, with costs.