Samuel J. Miller v. Minister of National Revenue, [1964] CTC 144, 64 DTC 5084

THORSON, P.:—This is an appeal from the decision of the Tax Appeal Board (30 Tax A.B.C. 57), dated October 1, 1962, so far as it dismissed the appellant’s appeal against his income tax assessment for 1956. In his reply to the notice of appeal herein the Minister gave notice by way of cross-appeal from the decision of the Board so far as it allowed the appellant’s appeal.

The issue in the appeal and cross-appeal is a novel one. Its determination depends on the deduction to be drawn from the facts which are not in dispute.

The appellant is a farmer residing near what is now the Village of Taylor in British Columbia, which is on the Alaska Highway, a short distance north of the Peace River, about 37 miles north of Dawson Creek and 12 miles south of Fort St. John. He first went to the Taylor district in 1927. At that time the settlement at Taylor consisted of a store, a log school house and a small church and a total population of between seven and fifteen persons. He homesteaded in the area in 1929 on the North-east Quarter of Section 28, in Township 82 and Range 17 West of the 6th Meridian and stayed there, apart from a period of six years, until 1952 when he bought additional land nearby. In that year he also purchased the North-west Quarter of Section 36, in Township 82 and Range 18 West of the 6th Meridian. He bought this land so that his daughter could go to school in the Hamlet of Taylor. This quarter section is bisected by the Alaska Highway which runs from about the centre of its southern boundary diagonally to near its north-west corner. The appellant moved his home from the homestead and located his buildings just north of the south boundary of the quarter section and west of the highway. This land which he purchased from a man called Barker became the appellant’s home quarter section. It will be referred to as the Barker quarter. He still farmed his other land. On the Barker quarter he grew barley and raised hogs. His hog production was carried on only on the portion of the quarter that lies west of the highway.

On May 20, 1955, he entered into an agreement with John Taylor, hereinafter referred to as Taylor, whereby Taylor leased to him the South-west Quarter of Section 36, which is immediately south of his home quarter, for a period of five years from the date of the agreement. This quarter section will be referred to as the Taylor quarter. It was also bisected by the Alaska Highway from about the centre of its northern boundary diagonally to near its south-east corner. The appellant described in detail the circumstances under which he entered into the agreement. A fire had destroyed Taylor’s buildings and he was anxious to sell or lease the land. The appellant desired to increase his hog production and was willing to rent the land. When he and Taylor had agreed on the terms of the agreement they went to Dawson Creek to see Mr. M. A. Lundeen, a solicitor practising in Dawson Creek, who drew the agreement. A small portion of the land, consisting of two acres, was set aside for Taylor.

It was a term of the agreement that Taylor should give the appellant an option to purchase the leased land at any time during the currency of the agreement for the sum of $3,000, and that in the event that he should desire to sell the land at any time during such currency he should give the appellant a first right of refusal and state the amount for which he would sell it and the appellant should have a period of 30 days within which to notify him that he would purchase the land at the said price.

The Taylor quarter could be conveniently farmed with the Barker quarter and the appellant farmed both quarters. He ploughed about 60 acres of the Taylor quarter, repaired fences, summer fallowed some of the land and expanded his hog production. He bought two big tanks and a gas engine to pump water from the river for his hogs.

By a letter, dated November 14, 1955, Taylor by his solicitor notified the appellant that he had an offer for the purchase of the land for $7,500. The appellant was concerned with the possibility of losing the land and arranged with his father-in-law to lend him $3,000. With this money he exercised his option, specified in the agreement, to purchase the leased land and it was transferred to him about December 1, 1955. The appellant would not have purchased it at the time except for the fact of the offer made to Taylor and his concern that he would not be able to carry on his expanded hog production if he could not continue to use the Taylor quarter as he had been doing.

At the time of the appellant’s purchase of the Taylor quarter it had no value except for the farm purposes for which he used it, but its character changed suddenly in the spring of 1956. At the end of 1955 the population of Taylor, which was then a hamlet, did not exceed thirty persons, but early in 1956 the news broke that Pacific Petroleums Ltd. had chosen Taylor as the site for a gas absorption plant and a rapid increase in population and an explosive boom in real estate values immediately resulted.

The appellant first learned of the proposal to build the plant at Taylor when he read about it in the Alaska Highway News of Fort St. John in its issue of January 12, 1956. There had been rumours of such a plant being located somewhere in the north but the report in the Alaska Highway News was the appellant’s first source of information regarding its location in the Taylor area. It was intended that the work was to begin as soon as the frost was out of the ground and it was possible to get on the land.

Some time in February of 1956, Mr. Clem Brooks, a real estate agent in Fort St. John, phoned the appellant and enquired whether he wished to sell a portion of the Taylor quarter and came to his house to discuss the matter. The upshot of the discussion was that the appellant, on March 3, 1956, listed an area of 22 acres in the Taylor quarter lying to the north and east of the Alaska Highway with Mr. Brooks for $6,250. Three days afterwards, namely, on March 6, 1956, the appellant signed a transfer of the 22 acre portion of Pacific Petroleums Ltd. for $6,250. The appellant said that he did not know the name of the purchaser until he signed the transfer. Of the $6,250 Mr. Brooks received a commission of $500, leaving $5,750 as the appellant’s net receipt from the sale of the 22 acre portion. This portion was part of the 60 acres which he had ploughed.

It was also disclosed that after the news release of January 12, 1956, the appellant received requests for building sites. On January 29, 1956, when Mr. Duncan Cran, a surveyor was having dinner with the appellant at his home a stranger, later identified as Mr. Roberts, came to the door asking the appellant to sell him a piece of land for a store, saying that he had heard that a plant would be built in Taylor and that he and his wife wanted to start a store. The appellant told him to call back in a couple of weeks. After Mr. Roberts left the appellant and Mr. Cran talked the matter over and Mr. Cran said that he would draw up a small plan and have it submitted to the Department of Highways of British Columbia for approval. On February 8, 1956, he drew a plan of a proposed subdivision of part of the Taylor quarter showing 20 lots west of the highway, each having a frontage of sixty feet on it and a depth of 150 feet from it. This plan was submitted to the Department of Highways on February 9, 1956, and approved by it on March 7, 1956. When Mr. Roberts came back to see the appellant a couple of weeks after January 29, 1956, the appellant told him that he had prepared a small plan but would not go ahead with the subdivision until the frost was out of the ground. Mr. Roberts looked at the plan and said that he was working at Dawson Creek where there were 800 men working there and that some of them would be interested in buying property. Soon afterwards, as the appellant put it, word got around that he was going to sell a few lots. So many people came to his door to enquire about lots that he went to Mr. Lundeen at Dawson Creek for advice. This was about the end of February or early in March. Mr. Lundeen advised him that he could take deposits from intending purchasers of lots to be held until a plan of subdivision was registered. The result was that the plan of February 8, 1956, was not proceeded with and no lots were sold from it. A second plan was drawn by Mr. Cran on March 16, 1956, showing a subdivision on the west side of the highway consisting of seven blocks of lots. The appellant took deposits from intending purchasers of lots shown on this plan and these deposits were held pending the transfer of titles. Details of the transactions were set out in a ledger, filed as Exhibit 13, showing the name of the intending purchaser, the block and number of the lot or lots and the amounts paid. It appears from the ledger that the prices for the lots ranged from $250 per lot and $275 for a corner lot in March to $425 in May.

The plan of March 16, 1956, was not proceeded with. On June 9, 1956, Mr. Cran drew a third plan extending the subdivision from seven blocks of lots to ten blocks, showing a total of 192 lots in an area of approximately 60 acres. A survey according to this plan was made. It was approved sometime in August and subsequently registered in the Land Titles Office at Kamloops as Plan No. 7715. The appellant explained that the reason for extending the plan from seven blocks to ten was that people kept coming to his door and he was running out of lots. There is a note in the ledger showing the details of two lots in the extended area sold for $800 per lot. The appellant had addresses of persons wishing to buy lots from Los Angeles, Fairbanks, Dawson Creek, Winnipeg, Edmonton and Vancouver, fifty per cent of them being speculators and the others being workmen in the plant who built homes, including Mr. Roberts who built a store.

I have already referred to the fact that at the end of 1955 the population of the Hamlet of Taylor did not exceed thirty persons. In about May of 1956 there were a thousand men working at the plant and the population of Taylor had grown to about 650 or 700 or 750 persons. The appellant could not say off-hand what the population was. ‘‘Everything was in a turmoil, upset; it was all a boom.’’ The settlement of Taylor was incorporated as a village in the winter of 1958.

Sometime in May of 1956, the appellant consulted Mr. Lundeen who advised him that the course that he was following was risky and that he should stop receiving deposits on lots and should either find a purchaser for the whole block of land or incorporate a private company. The appellant then instructed Mr. Lundeen to incorporate such a company and this was done on June l, 1956, under the name Miller Holdings Limited. The appellant and his wife were the only shareholders in the company.

After the incorporation the appellant turned the block of 60 acres, covered by the plan of June 9, 1956, over to Miller Holdings Limited for the consideration of $40,000. He was not able to explain how that figure was arrived at, but Mr. Lundeen said that he and Mr. McPhail, a chartered accountant, tried to arrive at a realistic sale price and this was fixed at $666 per acre. They concluded that the land when subdivided would make four lots per acre and that a minimum sale price of $250 per lot could be obtained, which would mean approximately $1,000 per acre gross, less subdivision costs. They were trying to establish as nearly as they could a price that an outside purchaser would pay for the land and still have a margin of profit. Thus $1,000 per acre would represent the gross amount that might be realized after subdivision and $666 per acre the value before subdivision. At about the same time the appellant turned 142 acres out of the Barker quarter over to Miller Holdings Limited for the consideration of $142,000, or $1,000 per acre. A plan of subdivision of this block of 142 acres had been drawn on May 7, 1956. The reason for the higher price in the case of the Barker quarter land was that the lots in the Barker quarter subdivision were more desirable for residential purposes than those in the Taylor quarter subdivision because they were farther away from the disagreeable smell and noise of the plant.

The transactions relating to the 60 acre tract in the Taylor quarter and the 142 acre tract in the Barker quarter were dealt with in a very informal manner. At the time of the transaction relating to the 60 acre tract in the Taylor quarter no money was paid by Miller Holdings Limited to the appellant and the same was true in respect of the transaction relating to the 142 acres in the Barker quarter. There was no agreement for sale of the land or transfer of it with a mortgage back. All that happened was that the consideration was set up in the books of Miller Holdings Limited as an account receivable by the appellant from the company and paid off as moneys were available.

Prior to the incorporation the appellant kept the deposits and payments which he had received from intending purchasers of lots in a trust account, but after the incorporation he turned all these moneys over to Miller Holdings Limited and the expenses of the subdivision and survey were paid out of these moneys.

I have already referred to the plan of the 60 acre tract out of the Taylor quarter which was drawn by Mr. Cran on June 9, 1956. This was approved sometime in August of 1956, and finally registered sometime in September of 1956. The plan of subdivision of the 1942 acres out of the Barker quarter which had been drawn on May 7, 1956, was approved on July 11, 1956. The survey was completed on August 28, 1956, and the plan was registered in the Land Titles Office at Kamloops on September 10, 1956, as Plan No. 7944.

It is clear, of course, that the transfers of the 60 acre block in the Taylor quarter and the 142 acre block in the Barker quarter could not be registered until the plans of the subdivisions had been registered. But as soon as they had been registered the transfers of the land covered by them were registered, and Miller Holdings Limited became the registered owner of the lands sometime in September of 1956.

An examination of Exhibit 13 discloses that the appellant took a few deposits in respect of lots in the 142 acre block as well as in respect of lots in the 60 acre block, prior to the incorporation of the company on June 1, 1956. These were at prices ranging from approximately $300 per lot upward. The appellant never transferred any of the lots in respect of which he had taken deposits. All the transfers were made by Miller Holdings Limited after it had become the registered owner of the lands. It has sold all the lots in the Taylor subdivision except about ten.

The appellant stated that he had received payments on account of the sum of $40,000 as the lots were sold by Miller Holdings Limited but said that he had not yet received all the balance.

There were lands in the Taylor area owned by persons other than Miller Holdings Limited that were subdivided for building sites, the Moodie subdivision, north of the Barker quarter. Lots in this subdivision were sold from $400 to $600 per lot.

The appellant still owns about 50 to 60 acres in the Taylor quarter which he is still farming and he still resides in his home on the Barker quarter.

In assessing the appellant for 1956, the Minister, as appears from the Notice of Re-assessment, dated January 15, 1960, and the explanation, dated December 30, 1959, added $43,946 to the amount reported by the appellant on his income tax return as taxable profit realized by the appellant on the sale of the 22 acres to Pacific Petroleums Ltd. and the sale of subdivision No. 7715 to Miller Holdings Limited. The profits on the sale of the 22 acres was put at $5,266, being $6,250, less the cost of the 22 acres at $484 and the commission of $500. The profit on the sale of subdivision No. 7715 was put at $38,680, being $40,000, less the cost of 192 lots at $1,320.

I should point out that the appellant did not sell 192 lots to Miller Holdings Limited. He sold a block of land covered by Plan No. 7715.

The appellant objected to the assessment but the Minister confirmed it on the ground that the amount had been properly taken into account in computing the appellant’s income in accordance with the provisions of Sections 3 and 4 of the Income Tax Act, R.S.C. 1952, c. 148.

The appellant then appealed to the Tax Appeal Board which allowed his appeal from the assessment to the extent that it included the profit of $5,266 from the sale of the 22 acres, but dismissed it to the extent that it included the profit of $38,680 from the sale of the 60 acres. It is from this decision that the appeal and cross-appeal herein are brought.

The inclusion of the amounts of $5,266 and $38,680 in the appellant’s income tax assessment for 1956 was based on the Minister’s assumption that the appellant was in the business of selling land or engaged in an adventure or concern in the nature of trade in dealing in land and that the amounts realized by him were profits from such business or adventure or concern.

In making the assessment the Minister relied on Sections 3 and 4 of the Income Tax Act and the definition of business in Section 139(1) (e) of the Act. Sections 3 and 4 provide as follows:

“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 employment.

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.’’

and Section 139(1) (e) defines “business” as follows:

“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. ’ ’

In my opinion, the assumption on which the Minister based his inclusion of the amount of $5,266 in the assessment appealed against was not warranted. At the time of the sale of the 22 acres to Pacific Petroleums Ltd. the appellant was not in the business of selling land and had not engaged in any adventure or concern in the nature of trade in dealing with it, and the amount of $5,266 was not profit from any business or adventure.

The evidence relating to the circumstances surrounding the sale was given in detail by the appellant. I summarize it. Mr. Clem Brooks phoned the appellant sometime in February of 1956 wanting to know whether he would sell the specified portion of the Taylor quarter and he mentioned that he might give him three or four thousand for it. The appellant said that he was not interested in selling but that the phone was not place to do business. Mr. Brooks then drove down to see him. The appellant had not taken any steps to sell the land. When Mr. Brooks came down from Fort St. John the appellant asked him who was buying the property but he said that he was not free to divulge the purchaser’s name, saying that he was just a client who wanted the land. The appellant told Mr. Brooks, “I’m not going to list it.” Mr. Brooks then said that in order to get his commission he would have to take a listing which generally ran thirty days. The appellant said that he did not want a 30 day listing. In about a week or ten days the appellant and Mr. Brooks agreed on the price. Mr. Brooks then told the appellant that he would have to pay the commission, whereupon the appellant said that he wanted $6,000 for the land, but if Mr. Brooks could raise the price to $6,250 they could split the commission. Thereupon the appellant listed the land with Mr. Brooks for $6,250. This listing was dated March 3, 1956, and on March 6, 1956, the appellant signed the transfer to Pacific Petroleums Ltd. When he signed the listing he did not know who the prospective purchaser was and first learned that it was Pacific Petroleums Ltd. when he signed the transfer. The appellant did not consider that Mr. Brooks was acting for him. And he was certainly justified in so thinking, for it is clear that Mr. Brooks was acting in the best interests of Pacific Petroleums Ltd. The appellant’s evidence relating to the sale of the 22 acres was not contradicted and I believe his state- ments. Under the circumstances, it is quite unrealistic to say that when the appellant sold the 22 acre plot to Pacific Petroleums Ltd. he was in the business of selling land or engaged in an adventure or concern in the nature of trade relating to it. No portion of the sum of $5,750 which he received on the sale was taxable income and the Minister was wrong in including the amount of $5,266 in the appellant’s assessment.

The question whether the amount of $38,680, which the Minister computed as the appellant’s profit on the sale of 192 lots by him to Miller Holdings Limited, should have been included in the assessment a quo is not quite as simple of determination. I should repeat what I have already stated, namely, that the appellant did not sell any lots to Miller Holdings Limited. What he sold was a block of land of approximately 60 acres in an area covered by the plan of subdivision, subsequently registered as Plan No. 7715, which comprised 192 lots.

It may be assumed that when the appellant began to take deposits from intending purchasers of lots shown on the plan of subdivision which Mr. Cran drew on March 16, 1956, he embarked on an adventure or concern in the nature of trade in dealing in land, even although the intending purchasers kept coming to his door and he never advertised that he had lots for sale or solicited offers to purchase.

But it does not follow that the amount of $40,000 which was put to the appellant’s credit on the books of Miller Holdings Limited as an account receivable by him from it was profit from the adventure or concern in the nature of tr ade on I which he had embarked. In my opinion, it was not.

It is an established principle that the first approach to the question whether a particular sum received or receivable by a taxpayer in his taxation year is subject to income tax is to make an inquiry as to the source of the sum. Was it income from a business, property or office or employment within the meaning of Section 3 of the Act and, if it was income from a business or property, was it profit from such business or property within the meaning of Section 4? The answer to such an inquiry in the present case is in the negative. The sum of $40,000 was not a profit from any business of the appellant or from the adventure or concern in the nature of trade on which he had embarked. Whatever profit he received from the transfer of the 60 acre subdivision did not accrue to him from any business activity on his part or from the adventure or concern in the nature of trade on which he had embarked. It resulted solely and exclusively from the explosive boom in land values in the Taylor area that came in the wake of the sharp increase in population following the establishment of the gas absorption plant. In just a few months from the end of 1955 when the population of the Hamlet of Taylor did not exceed 30 persons it burst into a population of from 650 to 750 persons. The result was that the Taylor quarter which had been useful only for the purpose for which the appellant used it suddenly took on a different character. The land on the west side of the highway, being immediately opposite the site of the gas absorption plant, was well located for residential purposes for persons who would be working at the plant and its value shot up. This suddent increase in the value of the appellant’s land on the west side of the highway came upon him and all that he had to do was to receive its benefit. His activities had nothing to do with the increase that so suddenly happened.

It can fairly be deduced from the facts that even if the appellant had never done anything about having a plan of subdivision drawn of the 60 acre area lying to the west of the highway and had never taken any deposits from intending purchasers of lots he could have sold the 60 acre area for at least as much as $40,000. The land had already acquired such a value. That is clear from the fact that persons wishing to purchase sites for homes kept coming to the appellant’s door and were willing to pay $250 to $275 for a lot showing on a plan of subdivision that was not yet even surveyed.

Indeed, the amount of $40,000 was considerably less than the fair market value of the area at the time the appellant turned it over to Miller Holdings Limited shortly after its incorporation on June 1, 1956. This is shown by the fact that Miller Holdings Limited made a profit of 31 per cent on the $40,000 when it sold the lots in the subdivision. Miller Holdings Limited paid income tax on the profit made by it. Any purchaser of the 60 acre area for the sum of $40,000 could have made a similar profit. Moreover, Mr. Lundeen gave evidence that certain persons who had purchased lots from Miller Holdings Limited for $250, $275 or $300 per lot in 1956 sold them early in 1957 for anywhere from $600 to $800 per lot and more.

It is interesting to note in this connection that the profit which Miller Holdings Limited made on the sale of the lots in the subdivision of 142 acres in the Barker quarter was 26 per cent, which is a further indication of the fact that $40,000 was less than the fair market value of the 60 acre area at the time the appellant turned it over to Miller Holdings Limited. It is also of interest that the amount which the appellant received for the 142 acre area in the Barker quarter was not included in the appellant’s assessment.

In my opinion, the evidence is conclusive that the 60 acre area covered by the plan of subdivision registered as No. 7715 had reached a value of at least $40,000 even as early as in March of 1956 when the appellant began to take deposits from intending purchasers of lots and, certainly, before the appellant turned the area over to Miller Holdings Limited and that it was unrelated to any activity on the appellant’s part. The increase in the value of the area was the result of the sudden rush of persons into the district and the explosive boom that followed, and not otherwise.

I find, therefore, that the sum of $40,000 did not include any element of profit from any activity on the appellant’s part and was not taxable income within the meaning of Sections 3 and 4 of the Act and that the sum of $38,680 which the Minister included in the appellant’s assessment should not have been included in it.

It follows that the appeal herein from the decision of the Tax Appeal Board and the income tax assessment for 1956 must be allowed and the Minister’s cross-appeal dismissed and that the assessment appealed against be set aside. The appellant will also be entitled to his costs of the appeal and cross-appeal to be taxed in the usual way.

Judgment accordingly.