Hegel v. R., [1997] 3 C.T.C. 2030

Beaubier T.C.J.:

1 This appeal pursuant to the General Procedure was heard at Prince George, British Columbia on April 30, 1997. The Appellant and his brother Rick testified.

2 The issue is whether the Appellant's purchase and sale of a 210 acre parcel of land, legal description DL 12499, in 1988 was on account of income or capital.

3 The Appellant was the sole owner, director and officer of Aggressive Logging Ltd. (“Aggressive”). Aggressive owned a skidder and the Appellant used it to conduct a small logging business on a virtually one-man basis in the district of Prince George. The Appellant had been given a home property by his brother and he had used the home property to secure a loan in order to buy the skidder. At the times in question this loan amounted to between $30,000 and $40,000. The Appellant also owed the Royal Bank of Canada about $50,000. In 1988 his reported income was $5,000, commission of $249.28 and a cash-in of an R.R.S.P. of $5,128.10, aside from the transaction in question.

4 On April 6, 1988 Aggressive paid $1,000 down on an accepted offer to purchase DL 12499 (Exhibit A-3). The price was $90,000. $20,000 was to be cash and the remaining $70,000 was a mortgage from the vendors for two years at 10% per annum. The mortgage was to be paid at $1,000 per month, plus 50% of the gross selling price of any marketable timber on the property. DL 12499 consisted of 210 acres with some timber on it. It was situated along a riverbank.

5 Possession was August 1, 1988. The remaining $19,000 cash was to be paid on July 1, 1988. Aggressive paid the $19,000 on July 1, 1988 (Exhibit A-6).

6 Upon payment of the $19,000, the appellant invited timber cruisers from a number of lumber companies onto the land to estimate the value of the timber and to make offers to buy it. One cruiser represented Dunkley Lumber Ltd. (“Dunkley”). The trees were too small. The Appellant received no offers for the timber.

7 While the cruisers were looking at the timber the Appellant, his brother and his nephew began to clean up the house and area of DL 12499 which was strewn with old cars and other junk. He and his brother testified that the Appellant, his girl friend, Rick and the nephew moved into the mobile home on the property on or just after July 1, 1988 from the home property which the appellant had mortgaged to buy the skidder. The Appellant listed the home property for sale on June 30, 1988 for a price of $55,000 (Exhibit A-5). That listing was to expire September 30, 1988.

8 The appellant took title to DL 12499 in his own name, not Aggressive's, on July 28, 1988 (Exhibit A-7). On July 28, 1988 he executed the mortgage back to the vendor for $70,000 pursuant to the terms of the offer to purchase (Exhibit A-4).

9 The Appellant testified that he, his brother, his nephew and a faller began to build a landing on the river and felling trees to pile them on the landing to try and sell the logs. He stated that they might look better to a potential buyer there than they had as standing timber. While they were doing this a helicopter circled the property and landed on the landing. The Appellant states that he had a conversation with the occupants. They were Mr. Maize, the timber cruiser for Dunkley, and Mr. Novak, whose family owned Dunkley. Mr. Novak asked the Appellant how much he wanted for the property. The Appellant said $180,000. Mr. Novak said he would pay it. The Appellant testified that he asked for a couple of days to think about it. Mr. Novak agreed but told him to stop doing any further work or logging on the land. The Appellant stopped everything. On August 9, 1988 he sold DL 12499 to Novak Bros. Contracting Ltd. for $180,000 (Exhibit A-8).

10 The Appellant and his entourage moved back to his home property where the Appellant lived for a number of years before selling it.

11 The assumptions of the Minister of National Revenue are that when the Appellant purchased the property he intended to sell it and that was his operating motivation; he was engaged in an adventure in the nature of trade.

12 The Appellant states that he bought the property to harvest the timber and so as to use the property in order to obtain a wood lot from the British Columbia government. It is agreed that the appellant made an inquiry and requested a tender package on a wood lot on March 25, 1988. After the events in question he submitted a tender. He was not successful.

13 When Aggressive made the offer for DL 12499 on April 6, 1988, it proposed taking on $70,000 in debt. The Appellant owed $30,000 or $40,000 on his home and another $50,000 to the Royal Bank of Canada. Aggressive was to pay $1,000 per month and 50% of the gross from timber on DL 12499 on the mortgage. There is no evidence about Aggressive's income. The Appellant's was minuscular. His liabilities were gigantic by comparison.

14 Between June 30 and July 28, 1988 the Appellant acquired the property. It is his intention which is at issue, not Aggressive's.

15 The Appellant is not a credible witness. His wood lot application contained two areas of exaggerations and falsehoods. His finances could not carry the mortgage on DL 12499 on a monthly basis, let alone for two years. The timber on DL 12499 was too small to sell; he had been in the business for two years and would have known that himself.

16 The unexplained change of title, the quick move onto DL 12499 and the quick sale to Novak all indicate that the Appellant received an offer or a strong indication of interest from Dunkley or Novak in the period from June 30, inclusive to July 28, 1988.

• 1. Nature of Property Sold: The property had no source of income sufficient to carry the mortgage. Nor did the Appellant.

• 2. The period of ownership was about 12 days.

• 3. The frequency of other transactions by the taxpayer. This was the first such transaction by the Appellant.

• 4. Work expended in connection with the property. Aside from the clean up, the evidence respecting the alleged construction of the landing and the logging is sketchy. They may not have logged for a full day.

• 5. Circumstances responsible for the sale of the property. The Appellant made the offer. However, financially, the record indicates that the property either had to be sold or foreclosed. The Appellant's and Aggressive's debts were too great for the Appellant to afford. The Appellant had guaranteed Aggressive's debts.

• 6. Motive. The Court has no doubt that the Appellant purchased the land in his own name with the intention to sell it at a profit. That intention was the operating motivation for him to purchase DL 12499 in his own name and not Aggressive's. He had two opportunities: the home exemption and the capital gain exemption. He intended to sell and to realize upon both.

18 The Court finds that the Appellant engaged in an adventure in the nature of trade in his purchase and sale of DL 12499.

19 The appeal is dismissed.

20 The Respondent is awarded its party and party costs.