Thomas J Collins v. Minister of National Revenue, [1980] CTC 2654, [1980] DTC 1546

John B Goetz:—This is an appeal heard at a sittings of this Board in Penticton, British Columbia, on June 3, 1980, in which the appellant appeals against reassessments for the 1973, 1974, 1975 and 1976 taxation years.

Appeals were also filed by K Mary C Collins, wife of Thomas J Collins, Charles G Holmes and Gloria Lim, all appealing their respective reassessments for the 1973, 1974, 1975 and 1976 taxation years.

It was agreed that these appeals would be heard on common evidence and that the results of the appeal of Thomas J Collins would apply to the other appellants, if necessary.

Facts

The facts are somewhat prolix in that Thomas J Collins seemed to be the moving force for all the activities relating to the appeals and he gave evidence for over half a day. I feel it necessary, therefore, to go through the facts fairly fully in that Mrs Collins gave no evidence whatsoever, but the appellants Holmes and Lim did.

The appellant was an accountant since 1950 and did books for a number of farmers in the Penticton area. He came to the Okanagan in 1951 and bought a small 18-acre farm. In 1958 he married Mrs Collins. When he sold his 18-acre farm, he put the money into the Lavington area of 123 acres, which property is now owned by his son, and his son is now operating it. This farm was called the “Top Farm”. Mrs Collins lived in the Okanagan all her life and on a farm with her grandfather and an uncle, and could do farm work as well as a man. In 1960 Collins purchased 25 acres of uphill property which he calls the “Burgie” property and subsequently in 1961, he purchased 125 acres of bottom land which was located one-half mile from his other property. This was called the “Weide” property. Bottom land is that close to the river and where the water table is very high and consequently more valuable.

In 1964 Mrs Collins became a partner with the appellant Thomas J Collins and they started farming, raising cows and calves. They found that this was not economic on the land that they owned but needing more land, Mrs Collins borrowed money from her family and put it into “Lavington Stock Farm” (hereinafter referred to as “Lavington”), which is the name under which they operated in their partnership. This money was used to acquire 1200 acres of range land in Creighton Valley, which was located 16 miles from the “Top Farm”. On this land they established a herd of Hereford cows and a bull, with the objective of selling calves. Profits on this operation were marginal so they moved in to purchasing beef calves to grow steers and fatten them for the market. He says that he struggled in this area of farming until 1966, at which time there was a forecast shortage of milk and Mr Collins decided to go into the dairy business. Any farmer going into the dairy business at that time, based on a two-year production volume of milk, would get a quota from the British Columbia Milk Board. The quota was vital and gave them the right to produce and ship a certain quantity of milk per day, which was shipped to dairies which had paid the quota price. This was much higher than the price allowed for “surplus milk” (although this was the same milk that was sold to the dairies under quota and which was called manufacturing milk and delivered to the dairies which paid a lower price therefor). Lavington Stock Farm seized on this opportunity and in 1968 borrowed $65,000 from the Industrial Development Bank. This money was spent for the purpose of building a house and acquiring 15 acres adjacent to the “Top Farm”, which brought that farm to a total of 135 acres, where they built their house. They also were able, with the loan, to acquire 26 acres of flat irrigated vegetable land which they called the “Shinduck Farm”. The balance of the loan was used to build and buy equipment, establish a milk parlor and buy a dairy stock of 25 to 30 cows. His dairy herd grew to 90 cows and in 1967-68, he produced a million pounds of fluid milk which was sold to the Co-Op and his was the first herd in the Okanagan Valley to reach this level of production. They acquired automated haying equipment and sold the “Burgie Hill” farm as it was too steep for their equipment. All funds went into Lavington Stock Farm. It would appear that Mrs Collins did as much or more work on the land as Mr Collins as she milked all the cows in the first two years of their dairy operation; she also worked in the field, operating sprinklers for irrigation and haymowing and hay baling equipment. Pictures of her doing this work were filed as exhibits.

After acquiring the 1200 acres of range land in Creighton Valley, the appellant sought to buy adjoining land but could not because the price was too high and says that the Lavington Stock Farm area was becoming suburbanized and as they were fully extended financially, he sought assistance from Dr Charles G Holmes, who is a cousin of Mrs Collins.

The appellant Thomas J Collins, as was stated, was an accountant and did the books for one Munro Davis, who was a friend of his and with whose land he was thoroughly familiar. The appellant was there many times and visited Mr Davis on many occasions socially with his accounting partner. In 1971, Munro Davis put up his farm for sale and in May 1971 the appellant became aware of this and because he did not have any finances of his own, he contacted Dr Holmes who lives in Kelowna, and Mrs Lim, who also lives in Kelowna. They were brought by the appellant to inspect the land. The Davis property consisted of 1975 acres in three separate parcels. First, the Davis home was located on a farm of 230 acres, of which 170 acres were cultivated and this land was located along the river. The range land which composed of 1400 acres was five miles away from the Davis home. The third parcel consisted of 230 acres of rocky block range land, two or three miles beyond the main range land. Holmes and Lim decided to invest in the acquisition of the Davis farm, provided that the farm was operated by the appellant. The appellant spoke of his “dream of a large farm’’ which was blocked in growth unless he could get more capital. This he did, in that he purchased the Davis farm for $105,000, with a down payment of $70,000 and assumption of a farm credit mortgage in the amount of $35,000. The balance was to be payable under an agreement for sale at the rate of $10,000 a year. The Davis land was to be operated as a separate partnership from the Lavington Stock Farm. Holmes and Lim each put in $17,000 for the purchase price and Lavington Stock Farm (the partnership of Mr and Mrs Collins) was transferred to a company which was incorporated at that time and known as Bob-O-Link Farms Ltd (hereinafter referred to as “Bob-O-Link”). The transfer consisted of 26 acres which was the Shinduck Farm, which they valued at that time at $41,000. The property and the other Lavington Stock Farm land were subject to farm credit and to the Industrial Development Bank mortgage. Lavington Stock Farm then became a partner with Holmes and Lim, operating under the name of “Bob-O-Link Farms Ltd’’ and Lavington was to provide equipment and do the work on the farm land. A further sum of $30,000 was borrowed to cover operating expenses and the four partners signed a note and guarantee. Thomas Collins considered the Davis farm good value for the purchase price in that it had a potential compared to Lavington which was suburbanized. I might point out that Thomas Collins is still living and farming on the Lavington property. He also felt that the Davis farm was a good farm and was viable. He stated that Bob-O-Link, through his work, would hope to establish a viable stock operation, with Lavington Stock Farm supplying the equipment. Immediately after the purchase, Lavington Stock Farm placed their stock on the Bob-O-Link farm and paid for the use thereof. Munro Davis, the former owner, was allowed to retain use of the range land for the balance of the year and to live in his home rent-free, keeping an eye on the farm. Davis had his own equipment which he intended to use for custom farming. Within two weeks of purchase of the Davis farm, Thomas Collins had one-third of the bottom land reseeded to hay. He purchased the seed and fertilizer, and charged this to Bob-O-Link. Within two weeks of purchase, he and his wife took out 75 head of Lavington stock to the bottom land and fenced away from the newly-seeded area. Later in the season when the hay was ready for cutting, Mrs Collins brought over a self-propelled hay swather from Lavington Stock Farm which is 16 miles away.

Thomas Collins kept the books for accounting record for Bob-O-Link Farms because, as he indicated, he had considerable accounting experience. The purpose of providing Bob-O-Link Farms with a statement of capital accounts, balance sheets and report as of May 31,1972, was for: (a) to inform the partners; (b) to inform the credit companies; (c) to prepare tax returns. I quote here certain statements made by Thomas J Collins for the year ending May 31, 1972, on the Bob-O-Link Farms report:

Following the purchase of the “Silver Hills Ranch’’ in June, 1971, from M & A Davis, careful consideration has been given to the various alternatives open to us that would insure a successful farm operation. . . .

The potential of the ranch as a beef operation is limited to around 200 head in a cow/calf operation and this is below the size necessary for a profitable operation with the hired labor that would be required.

A steer operation may be feasible in the near future but current high prices make the risk too high at this time. Usefulness of the Byers Range is limited by the high numbers of cattle rustled each year and this has now reached a stage where the Lumby Range association must arrange full time patrols of the area.

Some 80 acres of the Home Ranch have been now seeded to alfalfa and a haying operation on the 155 acre home ranch as well as the irrigated Lavington properties will be carried on for the next year or two pending a more favorable time for establishing a steer or other more lucrative operation.

In the meantime, the Byers Range land will be sold and the funds used to acquire more cultivated land and improve working capital.

The recent purchase of the Bunting property will bring the potential hay production to around 750 tons within the next couple of years when the current reseeding and improvements begin to show results.

(This land was within one-half mile from the Lavington Stock Farm operation).

The land held at December 31, 1971, has been revalued to reflect current market conditions. Most of the increased values are attributable to the Byers Range land which has increased in value from $15 per acre to $100 or more. Various offers have been received for parcels of this range land over the past year and all were at prices over the $100 per acre valuation. (Italics mine).

Thomas Collins stated that shortly after purchasing the Davis property, Bob-O-Link Farms bought a piece of land next to Shinduck which consisted of 31 acres owned by a Mr Bunting. This was purchased in May 1972, at a purchase price of $31,000. It consisted of 27 acres of flat irrigated vegetable land and 4 one-acre lots already subdivided for many years. He indicated that this was not usable as farm land and the four lots were sold in the following year when a real estate agent came to him in 1973.

The appellant was quite proud of the fact that through the years he had been able to evaluate land which stemmed from his experience as a farmer as well aS a real estate agent.

Hay grown on the Davis farm was cut and stored in the barn, and 75-80 head of the Lavington Stock Farm cattle were left all winter to feed on the bales of hay.

In the spring of 1972 Munro Davis’ house burned down and Mrs Collins loaned him a cottage with furniture in which he could live. In June 1972 Munro Davis suffered an unfortunate accident while refuelling his tractor and was killed.

At this point in the evidence, Thomas Collins indicated that around 1972 he was suffering from fatigue and shortness of breath and when he went to a doctor, he was advised that he had a fibrillation in his heart. It was then decided to turn over the dairy farm composed of 133 acres, to their son, with no down payment and an agreement for sale bearing interest at 6%. The hay equipment was retained by Lavington Stock Farm. Mr and Mrs Collins agreed to do custom work with the swather, the baler and the tractor for their son. The appellant and his wife went to Vancouver and decided to stay until March where he (the appellant) visited a cardiac specialist at St Paul’s Hospital. Meanwhile, it is interesting to note that Lavington Stock Farm continued to operate in the absence of Mr and Mrs Collins.

All the Bob-O-Link land (Davis and Bunting) was sold during 1973, 1974 and 1975. In the fall of 1971, the appellant was approached by a real estate agent by the name of Donaldson, who had young clients from California anxious to buy land. As a result, Bob-O-Link divided the rock pile portion of the Davis farm consisting of 250 acres, and which was separate from the 1400 of grazing acres. This part was divided into three parts and was sold because, according to the appellant, it was not good for cattle. In the fall of 1971 when he sold 80 acres to one Burnstein, he stated that this property “had no agricultural value whatsoever’’. It would appear that in the fall of 1971 the appellant Thomas J Collins, with respect to the Davis farm, admitted that his vision of range land had changed and he preferred to handle the bottom land for dairy farming. One Jos Werdle had a farm of about 1,000 acres, 400 acres of which were bottom land. He spoke to Werdle some time after the purchase of the Davis property and took Dr Holmes out to look at it.

In direct examination and in reply to what was alleged in paragraph 5(a) of the reply to notice of appeal, the appellant stated he had become president of the Dairymen Association and he could tell perspective purchasers how much land would produce, having written real estate exams and having worked in real estate. The Davis property apparently had 18 to 20 legal titles but this was common in the area.

The evidence takes on a somewhat different picture in cross- examination. Under cross-examination, the appellant admitted that he was a very experienced farmer and had been engaged in all aspects of farming since 1951 and was aware with the change in situations. The Creighton ranch he held for five years with a struggle, grazing 50-75 steers thereon which kept going over, as he says, “Campbell’s hump”. He entered the dairy business because there was much more money in it. At this point in his evidence, he stated that he had a low opinion of grazing land because of low production needed, and to utilize the grazing land one would need vast amount of acreage. He said he sold the Creighton property because it was too expensive to fence cattle would come down to town and go to the top of the hill when it snowed and that there was too much work with steers as opposed to intensive farming.

The respondent filed as Exhibit R-1 and R-2 two maps on which the appellant indicated the location of the various farms. Exhibit R-2 indicated the Creighton Valley as being area #1 (of which the appellant formed a low opinion). The balance of the land, namely the Weide farm, the Birdie farm, the Top farm, the Shinduck and Bunting farms, were all within one to one-half mile from each other. In other words, it would appear that this was a viable farming operation and all the land owned was at close proximity to each other. The Davis home farm, the Davis range land, and the rocky bluff land were 16 miles away from the Lavington Stock Farm operation. In other words, to effectively farm the Davis land, Mr and Mrs Collins would have to travel at least 35 miles, bringing equipment that distance. He admitted that all acreage under the Lavington Stock Farm was within a mile perimeter in that it was better to have parcels as close as possible to make it a viable farm operation.

The appellant Thomas J Collins says that at the time of the purchase of the Davis range land, he considered it good and gave as his reason for buying this land, so far away from his Lavington Stock Farm, that he wanted a large farm unit. His options were to grow livestock or hay for dairy operation. He says that livestock is an “up and down’’ business but that dairy farming was the best. He made no attempt to acquire land approximate to the Davis farm, made no formal offer to anyone in proximity to the Davis land. He admitted that the Davis bottom land was very good land but nevertheless it was sold. He admitted that for the first year, Munro Davis was important to the operation of the Davis farm although he was allowed to use the house rent-free and could have left it any time, which seems to be apparent from the fact that he intended to do custom work with the machinery that he retained.

Referring back to the annual report of the Bob-O-Link Farms for the year ending May 31, 1972, the appellant admitted that he would have known at the time of the purchase that the potential of the Davis ranch as a beef operation was limited to around 200 head “in a cow/calf operation and this is below the size necessary for a profitable operation’’.

On September 2, 1977, the appellant Thomas J Collins, on behalf of Bob- O-Link Farms, wrote the District Taxation Office in Penticton, BC, wherein he indicated that he had decided to sell his dairy farm, cows and equipment (which was earlier mentioned sold to his son) but retained all the haying and cultivating machinery to fill his obligations to Bob-O-Link and that he had moved to the small farm where he now lives. It should be noted that his wife did as much field work (haying, irrigation, etc) as did the appellant and at no time did the farming operation stop, even during their visit to Vancouver. In that letter he states: “It was and is, essential that land be adjoining or very close by if it is to be farmed successfully’’. This was with reference to the location of the Munro Davis farm. The appellant had taken no options or made any serious efforts to acquire land adjoining the Davis property. It is interesting to note that within four months of the purchase of the Davis farm at $15 an acre, the selling price even for the grazing land, which apparently the appellant ended up despising, was for a minimum of $100 an acre or more. He admitted that he had not tried, by way of option or otherwise, to purchase land adjoining the Davis farm. This runs counter to his so- called visions of a larger farm operation.

Findings

As regards the sale of excess acreage, Mr Justice Collier stated in Ivan W Thrasher v Her Majesty the Queen, [1975] CTC 66; 75 DTC 5029, at 67 and 5030 respectively:

As has been said many times, the question in actions of this kind is essentially one of fact, and each case depends primarily on its particular facts. I refer to Regal Heights Ltd v MNR, [1960] SCR 902, per Judson, J at 907.

The above case involved the acquisition of 27 acres of original acreage in four parcels whereas the taxpayer realized a substantial profit. At the time of buying the original 27 acres, he also had to purchase a 225-acre property, which property was to the rear of the 27 acres which fronted on a road but the proposed development fell through. The Court in that case found against the taxpayer.

In the instant case, the appellant Thomas J Collins was and is an accountant, a Knowledgeable real estate agent, and a farmer. Since 1964 he operated a farm known as Lavington Stock Farm in partnership with his wife K Mary C Collins. He had full knowledge of land values—farm and otherwise in the area in which he lived. He says that he acquired the Davis property in May 1971, which property consisted of:

(a) the Davis home farm of 230 acres adjacent to the river, 160 acres of which were under cultivation;

(b) range land of 1400 acres, 5 miles from the Davis home; and

(c) 200 acres of rocky bluff land located three miles beyond the range land.

This property was acquired with the financial assistance of Dr Charles G Holmes and Mrs Gloria Lim to fulfill a dream of the appellant of a large farming operation. So he contends that his sole purpose in acquiring the Davis property was for a long-term investment to carry on various farming activities in the name of the partnership Bob-O-Link Farms Ltd, which partnership was formed at the time of the purchase. The purchase price was $105,000, Dr Charles Holmes and Mrs Gloria Lim each contributing $17,500. Lavington Stock Farms, for its contribution toward the purchase price, transferred to Bob-O-Link Farms the “Shinduck farm’’ which comprised 26 acres value at $41,000 and subject to various mortgages which were registered on all Lavington Stock Farm property.

Creighton Valley, which is range land and located 16 miles from the main Lavington Stock Farm operation, was acquired by Lavington in 1964 and sold in 1969 because the appellant became disenchanted with “range land’’ as opposed to bottom land. Further, the appellant says Creighton was 16 or more miles away from Lavington Stock Farm.

At the time of the purchase of the Davis land, Thomas Collins knew he could not use the 1400 acres of range land (5 miles from the Davis home} and the 230 acres of bluff land located three miles beyond the Davis range land. Davis, on the sale of his farm, set as a condition that he could use his farm house rent-free and watch over the cattle on his property. It was his intention to confine himself to the use of his equipment for custom work which, of course, would take him away from his home.

Consequently, it is clear to me that from the outset when the appellant acquired this farm in May 1971, the range and bluff portions of the Davis land were not suited to the needs of Bob-O-Link because, in the appellant’s own words, it was low-production land and to properly use grazing land, one “needed a vast amount of acreage”. In his letter to Revenue Canada dated November 7, 1977, he stated “Lavington Stock Farm had always suffered from a shortage of capital in increasing the scope of its operations in what is the most capital intensive business to-day. Farming with a required minimum capital employed ratio of over $200,000 per employee." (Italics mine).

Indeed Collins was knowledgeable in farming operations and from the inception of Bob-O-Link Farms, there was therefore a shortage of capital as required to make the Davis land a viable farm operation.

The appellant uses his illness, the serious nature of which I am not satisfied with, as a reason for selling the Davis property. It should be noted that Lavington Stock Farm kept operating during his absence with his wife in Vancouver.

On August 1, 1971 the Davis rocky bluff land was subdivided into three parts and sold at $115 an acre. On July 1, 1972, he sold Mr Whittaker 220 acres for the sum of $27,500. On July 1, 1972, he sold a Mr Youngson 320 acres for $35,000. On November 1, 1972, he sold Fisher MacGregor 52 acres for $8,000, for a total of $84,750. This was all range land. The appellant was fully aware in May 1971 of the vagaries of range land use as, by his own admission, “it was and is essential that land be adjoining or very close by (Lavington Stock Farm) if it is to be farmed successfully”. As a knowledgeable real estate agent in farm land, he said he could tell prospective buyers what farms would produce. Obviously, he was fully aware of the non-viability of the Davis land as a farm without further capital and employment of an employee. At the time of the purchase of the Davis land, he was also fully aware of the rapidly increasing value of the land, and Bob-O-Link Farms sold same on his advice as it had been divided into 18 to 20 legal titles prior to purchase. Further, as he stated and as he referred to in the Facts, the Davis farm was over 16 miles distant from the Lavington Stock Farm, in the neighborhood of the Creighton land which he had sold in 1969.

On September 2,1977, the appellant wrote the District Taxation Office in Penticton and used the following words:

It was soon obvious that moving machinery and cattle the thirty five miles between the Lavington Land and Munro’s ranch was not only beyond us physically but would be unprofitable as well. Market conditions and the productive capacity of Munro’s ranch precluded a fulltime resident farm hand particularly as it would now involve a new house and barns, etc.

The only property on the land at the time of purchase was an old farm house which burned down, after which Munro Davis was allowed to live in a cottage owned by Mrs Collins.

Admittedly, some hay revenue was derived from the Davis bottom land subsequent to purchase but it was minimal and, in my view, was used for the time that it took to sell all of the Bob-O-Link property, balance of which property was sold in 1973,1974 and 1975. The Bunting property had 31 acres which was composed of 27 acres of irrigated vegetable land and the balance subdivided into four one-acre lots. This land was purchased in May 1972 and sold in 1973.

Mr Justice Urie in the case of David C McDonald v Her Majesty the Queen, [1974] CTC 836; 74 DTC 6644, stated at 837 and 6645 respectively:

Firstly, that the Appellant’s sole purpose in purchasing a share of the property, the profits from the sale of which have been assessed for tax by the Respondent, was to realize an accretion to the purchase price by sale at a time when the increase in price obtainable made it expedient to sell.

Secondly, that the annual income produced from the lands was so negligible as to be immaterial so that it was clear that the property was not purchased as an investment to produce income. These findings of fact, in our opinion, ought not to be disturbed by this Court.

Although he was not dealing in what is normally considered to be a subject of commerce such as commodities, the transactions from its very inception was purely speculative in character and was, in our opinion, as a matter of law, a venture in the nature of trade.

Moreover, we are of the further opinion that the character of the transaction and the taxability of the profit arising therefrom is in no way changed simply because the Appellant’s intention was to retain his interest in the land for a substantially longer period of time than, in fact, he did. Since his intention from the beginning was to sell at a profit from then on its characterization as a venture remained and thus the validity of the taxation of his gain on the sale also remained.

I therefore find, for the above reasons, that the profit arising out of the various sale transactions by Bob-O-Link Farms was taxable by virtue of sections 3, 9 and subsection 248(1) of the Income Tax Act, SC 1970-71-72, c 63, as amended. In so finding, the principles enunciated in the following authorities were considered:

McDonald (supra); Californian Copper Syndicate v Harris (1904), 5 TC 159;

CIR v Livingston et al (1926), 11 TC 538;

CIR v Fraser (1940-42), 24 TC 498;

Regal Heights Limited v MNR, [1960] SCR 902; [1960] CTC 384; 60 DTC 1270;

Denis Lacasse v MNR, [1979] CTC 2560; 79 DTC 434;

Jean-Pierre Laurin v MNR, [1979] CTC 2571; 79 DTC 439.

For the above reasons, the appeal is dismissed.

Appeal dismissed.