Marilyn a Palmer v. Her Majesty the Queen, [1973] CTC 323, 73 DTC 5248

Cattanach, J:—This is an appeal from a decision of the Tax Review Board whereby the assessment of the plaintiff to income tax by the Minister of National Revenue was confirmed on the ground that a gain realized upon the sale of property was properly included in the plaintiff's taxable income for her 1969 taxation year as profit accruing to her from a scheme of profit-making or an adventure or concern in the nature of trade and as such constituted income from a business within the meaning of business in sections 3 and 4 of the Income Tax Act and as the meaning of business is expanded in paragraph 139(1)

(e) of the Act.

In contesting the assessment the plaintiff alleges that she purchased the property in question for the purpose of providing a private wilderness retreat for the enjoyment of herself and her family, but that because of unanticipated and unforeseen circumstances, which she described and which I shall subsequently relate, the property no longer held the prospect of enjoyment for which she had purchased it. When the creator of the circumstances which destroyed the plaintiff’s original purpose in acquiring the property made an unsolicited offer to purchase the property at a price tenfold greater than the cost to her she accepted that offer.

The plaintiff is the wife of John Earl Palmer, a barrister and solicitor, who was called to the bar in 1952. Prior to her marriage in 1954 the plaintiff had been employed in a secretarial capacity with a producer of travelogue films. Through their joint efforts the couple purchased a house in the suburbs of Toronto, Ontario.

In 1958 Mr Palmer purchased a legal practice in Minden, Ontario, a community with a population of approximately 900 people which is situated in the area of the Haliburton High Lands famous for its rugged wilderness beauty with 650 named lakes and many smaller unnamed ones. It was a condition of the purchase of the legal practice that the former practitioner’s house should be purchased. also. The plaintiff was disappointed in the house. It was built in a subdivision which was without trees and on standard lots without individual character, whereas the plaintiff had envisioned a home with trees, rocks and water. However the type of countryside of which the plaintiff had dreamed surrounded Minden.

Mr Palmer described his practice as a general one. He was the only solicitor in the area. As he described it, it consisted primarily of conveyancing and it was quite evident that his clients became his friends. When he first acquired the practice there was a backlog of unattended matters. The plaintiff helped her husband in the filing and such routine secretarial duties of which she was capable until March 1960 when they adopted their first baby boy. In the meantime Mr Palmer had engaged staff until an adequate complement of four was reached.

There is no question that Mr Palmer supplemented his income by trading in real estate and that he was a “trader”. He gravitated to that business because of the nature of his legal practice and because of the countryside which was a resort area, originally with camps and lodges widely dispersed but latterly with denser population on desirable lakefronts. He described several real estate transactions as adjuncts to his legal practice whereas others were outright speculative property and development transactions.

Mr Palmer and the plaintiff together with the local doctor and his wife became equal shareholders in a company incorporated on July 8, 1959 under the name of Leisure Land Limited for the purpose of trading in real estate. In February 1965 or thereabouts the doctor and his wife left the community and Mr Palmer and the plaintiff bought the shares held by them so that Mr and Mrs Palmer became the holders of all the outstanding shares. The plaintiff transferred one share to her husband to give him control and one share to her brother-in-law to permit him to qualify as a director, the beneficial ownership of which share was in her husband, so that Mr Palmer was registered owner of 2,001 shares, the plaintiff 1,998 shares and Mr Palmer’s brother 1 share.

Both the plaintiff and her husband testified that the plaintiff did not. have a detailed knowledge of Mr Palmer’s legal practice nor his real estate transactions and this despite the fact that the plaintiff was on at least three occasions named in the deed as joint owner of real estate.

Mr Palmer described those three transactions, which were purchases of lake-shore properties, as adjuncts to his legal practice.

One such purchase was from a client named Puffer. Mr Puffer requested that Mr Palmer arrange for a survey of his property in accordance with a rough sketch prepared by him. When the survey was completed Mr Puffer was dissatisfied with the boundaries of one lot. To preserve good feeling Mr Palmer bought the lot.

In another instance a client named Austin needed money immediately and Mr Palmer bought lake-shore property from him to facilitate the client’s needs.

In both these instances Mr Palmer included his wife as joint owner of which fact his wife was unaware. Mr Palmer testified he did this as a matter of course and as his customary practice on the traditional belief that the wife should be so included. However he was not consistent in that tradition because he sold both parcels respectively seven and three years after purchase, at modest profits which he reserved exclusively to himself. However I am certain that the plaintiff did participate in the benefits by other indirect means normal to a happy marriage.

In the third purchase, in which the plaintiff was included as joint owner by her husband without her knowledge, Mr Palmer bought a lake-front property from a client to overcome difficulties in an estate. This property has not been sold and the plaintiff and her family occasionally use it for swimming, picnics and like outings.

There was one further instance of a purchase and sale of land by the plaintiff. Mr Palmer conducted this transaction on behalf of a client whose name, for some reason, could not be used. As an accommodation to the client Mr Palmer conducted the transaction in his wife’s name as trustee for his client. In all other instances of many purchases of real estate title was taken only in Mr Palmer’s name.

It is a badge of trade that a person who habitually does acts capable of producing profits is engaged in a trade or business but it is a question of fact whether a series of acts amounts to carrying on a trade or business. Principal considerations in determining such an issue of fact are (1) the nature and the frequency of the acts and (2) the intention of the person concerned.

Both Mr Palmer and the plaintiff testified that Mrs Palmer had no detailed knowledge of her husband’s legal practice nor his real estate transactions. Having observed both witnesses I have no hesitation in accepting their testimony as truthful. Mrs Palmer, the plaintiff, had interests indigenous to herself as did her husband, but with areas of common interest which excluded the husband’s business activities.

It therefore follows that the plaintiff was not a participant in the trading by her husband in real estate.

This is equally true of the plaintiff’s connection with Leisure Land Limited which was incorporated for the purpose of trading in real estate. On the inception of the company the plaintiff held 25% of the shares and subsequently almost 50%. She was at all times described as the secretary of the company. It was her husband who purchased the additional shares for his wife from the wife of the doctor when this couple left the area. Mr Palmer put up the money, which he described as a loan, but in view of the explanations given to me I would categorize it as a gift if it was necessary to decide that matter. The plaintiff testified that she paid scant attention to the particulars of the transaction whereby she acquired her original shareholdings and the subsequent increase thereof. She said that she paid out no. money at the time, which is true, because her husband did. She does not recall paying the money back to her husband although he testified that she did but under circumstances that she would not recall. Those circumstances were not explained but I assume they were consequent upon some domestic arrangement.

Leisure Land Limited has shown modest profits. In 1967, 1968 and 1969 the profits were $5,420, $14,450 and $9,255 respectively, but no dividends were paid. Mr Palmer conducted the affairs of the company with a cavalier disregard of corporate management. He maintained only minimal records directed exclusively to those from which the business he conducted in the corporate name could be followed. No share certificates were ever issued, no organization meeting was held, no directors or shareholders meetings were ever held and it follows that there were no minutes of meetings. Mr Palmer said that like the shoemaker’s children whose shoes were never repaired he devoted his time to his clients’ affairs and deferred attention to his own until time was available which never came.

Again, while the plaintiff was nominally and actually a shareholder and officer of the company, she was completely oblivious of its affairs. She did not participate in them actively and her passive acquiesence therein, in my view, does not constitute her a participant.

By reason of the foregoing facts the plaintiff did not have a history of trading in real estate nor can she be assessed with the character of her husband as a trader. Accordingly whether the plaintiff is liable to tax as assessed by the Minister falls to be determined whether an isolated purchase and sale of property amounts to carrying on a business in the sense of “business” as including “an adventure or concern in the nature of trade” within the statutory definition of “business” in paragraph 139(1) (e) of the Income Tax Act.

In my view, this issue is to be determined upon the intention of the plaintiff at the time she purchased the particular parcel of property here in question.

IF it was the plaintiff’s exclusive intention at the time of its acquisition to use the property as a private retreat for her own aesthetic enjoyment and to inculcate in her four young children an appreciation of the beauty of nature and the advantages of living close to nature in accordance with a philosophy of contemplative living akin to Thoreau’s, then the profit from the sale of that property, when the plaintiff concluded that it would no longer serve that purpose, would not be profit from a business or an adventure or concern in the nature of trade. If that was not her exclusive purpose at that time then there can be no doubt, in the circumstances, that the acquisition of this property had for its purpose, or one of its possible purposes, subse- quent disposition at a profit and the resulting profit is, therefore, taxable.

With these considerations in mind I now turn to a review of the evidence pertaining to the plaintiff’s purchase of this property.

The plaintiff was not completely happy with her house in Minden because it was in a subdivision, bereft of trees and without individuality. However she was enchanted with the Haliburton area, particularly its rugged beauty and the character of its inhabitants. She and her husband made many sincere friendships among the local people. The plaintiff admired and fully approved of their attachment to their land. For her part the plaintiff preferred the landscapes she could see in the area to window-shopping in metropolitan areas.

The plaintiff and her husband formed a particular friendship with a Mr Boice and his wife. Mr Boice was born in the area and had spent his lifetime there engaged in logging. He knew the area well having tramped over most of it. He had built a rustic home on the northernmost shore of Redstone Lake and the plaintiff and her husband were their frequent guests. Redstone Lake is one of the larger lakes in the area about 40 miles in a northerly direction from Minden and is reached by a loose surfaced road. There is access by a secondary road to a spot called Barnes Landing on a cove with a small marina with boats for hire. The shores of the lake are reached by boat, being otherwise inaccessible due to the lack of roads, the very rocky terrain and dense bush covering. I would estimate the lake to be about 4 miles in length and about a mile wide. There are many inlets, coves, and promontories with the result that there is much shoreline.

While visiting the Boices a great deal of time was spent boating on the lake in the Boices’ large power cruiser. The plaintiff soon became enamoured of the shoreline and particularly one promontory, the shores of which rose precipitously from the lake surface to a height of about 200 feet. There were only two small coves where landing could be effected.

From her first experience on the surface of Redstone Lake the plaintiff formed the desire to own a part of the shoreline as her very own and with each succeeding visit her desire became more intensified

Two years after acquisition of the legal practice in Minden by Mr Palmer it prospered to the extent that he hired a staff of four and the plaintiff’s help in filing was not required.

The couple then first adopted their first baby boy and within a year their second.

At this time Mr Palmer was acting for an estate, the sole remaining asset of which was a one-half interest in a parcel of real estate in the shape of a promontory about 180 acres in area on the shore of Redstone Lake. The other half interest was owned by the school principal at Minden who had bought his interest for admittedly speculative purposes.

A sale was imminent to a resident of Cleveland, Ohio for a price of $4,500, so imminent that the executors and owner had asked Mr Palmer to prepare a deed of grant to the prospective owner which he did, the deed bearing date of December 2, 1963. Mr Palmer and the plaintiff then left on a holiday.

They returned on February 25, 1964 and that date is indelibly stamped on the plaintiff’s memory, as well as on that of her husband, because on that day they picked up the first baby girl whom they had adopted. This brought their family to three, two boys previously adopted and the baby girl to be followed the next year by another baby girl.

On his return to his office Mr Palmer was informed by the executors of the estate that the sale of the sole remaining asset, the property on Redstone Lake, had fallen through because of a death in the family of the proposed purchaser.

Because he knew of his wife’s overwhelming desire to own a piece of the shoreline of Redstone Lake he told her that this land was available.

Naturally the plaintiff was delighted. She was reasonably certain from the description of the land relayed to her by her husband from the real estate agent that this was the promontory that she had seen or very near thereto.

The price was $4,500 with a down payment of $500 and a mortgage for the balance of $4,000 payable in instalments of $60 per month. The plaintiff examined her resources and felt that she could finance the purchase which she promptly made. She had a small bank balance of her own, she had a half interest in monthly mortgage payments of $80 from the sale of the couple’s home in Toronto and her mother, who was well aware of the laintiff's consuming desire to own property of this kind, had assured her of financial assistance. It was her maternal instinct to satisfy her daughter’s fond wish. The plaintiff was certain that she could meet the monthly instalments of $60.

As it turned out the mortgage was fully paid with gifts from the plaintiff's mother. At one time it appeared that Mr Palmer had loaned his wife $2,500 to pay off the balance of the outstanding mortgage. Mr Palmer had so advised the revenue officials by letter. He was wrong in so stating. What he had in mind was the $2,500 he had paid for shares for his wife in Leisure Land Limited. I accept his explanation of the error. However even if the contrary had been the case I do not think it would be material in these circumstances because there is no impediment to a husband supplying funds to his wife and that fact need not be indicative that he was acting on her behalf or was her alter ego.

The plaintiff stated that her decision to purchase the property was made during the latter part of April 1964. This I accept unequivocally because it was after February 25, 1964, when the couple picked up their first baby girl on. their return from a holiday, that Mr Palmer learned the sale to the American resident would not be made and informed his wife that the land was available for purchase.

However, the deed of grant from the owners to her is dated December 2, 1963.

In Warnford Court (Canada) Limited v MNR, [1964] Ex CR 944; [1964] CTC 175; 64 DTC 5103, Jackett, P said that the time as of which the intention of a purchaser is significant is ordinarily the time when the purchase agreement becomes legally binding rather than the time when legal title is acquired. This I take to broadly mean the time when the purchaser is committed thereto.

Relying on that statement counsel for the Minister contended that the material time at which to consider the plaintiff’s intention was at December 2, 1963 because the purchase was effected as of that date. He then put the question to her as to whether her intention at that date was to acquire the property for the purpose of a retreat for herself and her family to which the plaintiff truthfully replied that it was not. Had the question been posed to her whether the possibility of sale at a profit was also present to her mind at that time her answer would also have been in the negative because it was not until April 1964 that she learned the property was available for purchase and it was not until that time that she decided to purchase the property. As at December 2, 1963 she had no intention of any kind respecting the purchase of the property for any purpose because she had no knowledge whatsoever of the matter at that date.

Mr Palmer gave the explanation as to how the deed bore the date of December 2, 1963. When the sale of the land to the American purchaser was a virtual certainty he drew up the deed of grant and had the executors of the estate and the other joint owner affix their signatures thereto. Later when his wife became the purchaser, in lieu of the American resident, Mr Palmer merely removed the front page from the instrument and had his stenographer replace that page with another in which the plaintiff’s name was inserted as the grantee. The date of the previous instrument was not changed. The grantors affirmed that their previous signatures were to be effective and constitute their signatures to the grant to the plaintiff. This is confirmed by an examination of the document. On the backing page it is readily discernible that the name of the original grantee was erased and that of the plaintiff substituted.

It was my opinion at the time that evidence was tendered that it was properly admissible in explanation of the circumstances surrounding the execution of the deed of grant to the plaintiff and did not offend against the rule of extrinsic evidence not being admissible to contradict, vary, add to or subtract from the terms of a written instrument. On reflection I adhere to that view since the evidence does not contradict the document in any way. What was sought to be established was the date upon which the plaintiff formed her intention as to her purpose in purchasing the property and that is established as being April 1964. The deed was registered on April 22, 1964.

Despite her professed intention of using the land as a private retreat for herself and family the plaintiff only set foot on the land five times during her period of ownership. This failure to immediately put the land to that use was explained by the plaintiff. The site was difficult of access, the only practicable means being by boat. The five times the plaintiff visited the site three were by use of the Boices’ boat when visiting them and two times she drove to Barnes Landing, rented a flat-bottomed row-boat and rowed to the site. There were only two small coves which permitted of landing, the shoreline elsewhere being extremely precipitous. Mr Boice, who knew the land very well having once owned it and logged it before he sold it, said that there were only two possible sites on the entire 180 acres on which a cottage could be built. To visit the property from Minden was a full day’s excursion. The plaintiff, at that time, had four infant children. It was impossible to camp with small children without adequate facilities for their care. Notwithstanding these difficulties the plaintiff did not abandon her hope for using the property for the purpose she envisioned in the future.

Even though she only set foot on her property five times she did pass by it many times when boating on the lake with her friends. She described the feeling of pride and satisfaction she experienced upon seeing the land and knowing that she was the owner of it.

It is untenable to contend that a purchase of virgin land with the eventual sale thereof must invariably constitute an adventure or concern in the nature of trade.

In CIR v Fraser (1940-42), 24 TC 498, commonly referred to as the “whiskey case’’, the Lord President (Normand) indicated that the subject matter of the transaction was an important factor in determining whether the transaction is an adventure or concern in the nature of trade. He said at page 502:

. . . The individual who enters into a purchase of an article or commodity may have in view the resale of it at a profit, and yet it may be that that is not the only purpose for which he purchased the article or the commodity, nor the only purpose to which he might turn it if favourable opportunity of sale does not occur. In some of the cases the purchase of a picture has been given as an illustration. An amateur may purchase a picture with a view to its resale at a profit, and yet he may recognise at the time or afterwards that the possession of the picture will give him aesthetic enjoyment if he is unable ultimately, or at his chosen time, to realise it at a profit. A man may purchase land with a view to realising it at a profit, but it also may yield him an income while he continues to hold it. If he continues to hold it, there may be also a certain pride of possession. But the purchaser of a large quantity of a commodity like whiskey, greatly in excess of what could be used by himself, his family and friends, a commodity which yields no pride of possession, which cannot be turned to account except by process of realisation, I can scarcely consider to be other than an adventure in a transaction in the nature of a trade; . . .

Counsel for the plaintiff very aptly compared the aesthetic enjoyment that the plaintiff experienced from viewing the land she possessed to that given by a painting. The area is the subject of work by many artists. I might also add, as the Lord President pointed out in the above quotation, that there is a certain pride of possession which the plaintiff exhibited in the present case.

The plaintiff took title to the property retroactively, because of the circumstances outlined, as at December 2, 1963.

In 1965, or thereabouts, an organization known as Brown Camps bought farm land in the general area of Minden to use as treatment centres for disturbed children of various ages. As indicated in the organization’s popular name the motivator was a gentleman named Brown, a controversial figure. To some persons he was a saint and to others a charlatan. His methods of treating emotionally disturbed children and the effectiveness of those methods excited equal controversy.

in 1966 this organization acquired the property adjacent to the plaintiff’s property on which there was a disused log building known as the Redstone Lodge. For the two years this lodge was used by the counsellors at Brown Camps. After that time it was used as another treatment centre for the disturbed children.

The plaintiff was aware of the controversy about Brown Camps. One of her intimate friends was a nurse trained in psychiatry who was approached for and refused employment in the Brown organization. She was one of those who disapproved of the Brown method of treatment. The plaintiff was influenced by her friend’s opinion.

Further, the plaintiff had met many of the “patients” at the Brown Camps on their excursions to Minden. She found them aggressive and ill-mannered with a complete disregard of other persons. She also felt that they were slovenly in their dress and appearance and she had doubts about their cleanliness.

She felt that they were undisciplined and undesirable neighbours. On one of her infrequent visits to her property she saw evidence of carelessly lit and extinguished camp fires. The plaintiff considered such unrestrained activities as a fire hazard. She also saw where bark had been slashed from birch trees. This to the plaintiff constituted desecration. She did not remonstrate with those in charge of the camp and she felt the erection of a barrier was impractical.

I have no hesitation in finding that the presence of these troublesome neighbours led the plaintiff to the inevitable conclusion that her property no longer had the potential of the quiet contemplative atmosphere she considered essential to her enjoyment of the property.

In June 1968 the plaintiff, with her husband, was at a fly-in. While there she was approached by Mr James Cooper, whom she knew as a preacher and a salesman of electrical appliances. He asked her if she would be interested in selling her property to which she immediately replied that she was not. It is not certain whether Mr Cooper, who was then acting as a real estate agent, told the plaintiff that his client was Brown Camps. If he did, as most likely he would, the information did not make a vivid impression on the plaintiff as the discussion was most casual and in surroundings not conducive to business negotiations. Mr Cooper also approached Mr Palmer at the fly-in to ask if the plaintiff would be interested in selling her property and he did tell Mr Palmer that the prospective purchaser was Brown Camps.

I would add that at the time the plaintiff had purchased her property she was not aware that Brown Camps had embarked upon a programme of acquiring lake-shore property. At the most she knew that this organization had purchased farm land in the Minden area far removed from Redstone Lake.

Later, in the first week of July 1968, Mr Cooper telephoned and spoke to Mr Palmer. He wished to call and discuss an offer for purchase of the plaintiff’s property. Mr Palmer obtained his wife’s concurrence to Mr Cooper calling to discuss the matter with her and so advised Mr Cooper.

Within twenty minutes Mr Cooper was there. He had a standard form of offer for purchase used by real estate agents. The purchaser was Brown Camps, or the corporate entity that acquired property on behalf of the organization. The price offered was $50,000. There was a Clause in the form that the vendor would pay the agent’s commission at the rate of 5%. At that time the plaintiff was aware that the adjoining property was occupied by the disturbed patients and as I have mentioned before she had become disenchanted with her property as a secluded retreat by reason of the presence of Brown Camps. She therefore accepted the offer and realized a profit of the difference between the original purchase price of $4,500 and the sale price of $50,000 less agent’s commission of 5% on $50,000.

That profit the Minister has included in the plaintiff's income and assessed her accordingly.

Giving careful attention to all the evidence I have concluded that at the time of the acquisition of the property the plaintiff had as her exclusive intention the use of that property as a retreat for the enjoyment by herself and her family and that she only sold that property when it became evident to her that the property would not serve that purpose because of the use to which adjoining property was being put latterly. I would add that in reaching this conclusion I was impressed by the plaintiff and her husband as being truthful and sincere witnesses. I recognize that there were minor inconsistencies in their testimony which are understandable due to the frailty of human memory but in my view these inconsistencies emphasize rather than detract from the purport of their testimony as a whole.

The appeal is, therefore, allowed with costs to the plaintiff.