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Citation: 2003TCC575
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Date: 20030813
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Docket: 2002-1848(IT)I
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BETWEEN:
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CLARA JOAN WILLIS,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent,
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AND
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Docket: 2002-1847(IT)I
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BETWEEN :
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BARRIE A. WILLIS,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Bowman, A.C.J.
[1] These appeals were heard together
and are from assessments for the 1999 taxation year. The
appellants are husband and wife. In 1999 they sold a lot that
formed part of a parcel of land originally acquired by them in
1986. They treated the sale as being on capital account. The
Minister treated it as an adventure in the nature of trade and
therefore on income account.
[2] In 1986 the appellants jointly
purchased from the United Church a 3.63 acre parcel of
land (Parcel 7076) immediately behind their principal
residence on Greenhill Avenue in North Bay. Mrs. Willis had
some historical connection with the property as her grandfather
had given it to the United Church. The appellants heard that a
real estate development was going to be going in behind them and
this property was intended as a form of buffer zone to ensure
their privacy or, as Mr. Willis put it, as a
"greenbelt". I see no reason to question the veracity
of the appellants' stated purpose in acquiring the land. They
were both truthful witnesses. They bought the land in or about
June 1986 for $45,000. The Crown does not dispute that the land
was capital property in their hands when originally purchased.
Indeed, for many years after the transaction which I am about to
describe they used it for their own personal use and enjoyment
for skiing, hiking and tapping maple trees for making syrup.
[3] Within a few months after their
purchase of this property they were approached by the developer
who was putting in the subdivision in the area, Mayco Homes North
Bay Limited ("Mayco"). He was concerned that the
appellants' property cut off his access from Greenhill Avenue
by way of a road allowance that would be a continuation of
Bryan Road leading to Nottingham Drive in the proposed
subdivision. However, the developer could not simply purchase
enough land from the appellants to get the access it needed as
this would have required a severance, something that is difficult
if not impossible to get. Therefore the following plan was
devised.
[4] On September 2, 1986 the
appellants and Mayco entered into an agreement whereby the
appellants sold to Mayco the entire Parcel 7076 in
consideration of Mayco conveying to them Lots 34 to 40 in the
subdivision after completion of the registration of the plan or
subdivision on the entire property being developed (including
Parcel 7076) as well as the installation of all services
required under the subdivision agreement.
[5] The agreement also provided that
if the plan of subdivision was not registered within two years
from the obtaining of the draft plan approval on
December 21, 1988, whatever first occurred, Mayco was
obliged to reconvey the lands to the appellants. Presumably this
was to ensure that the appellants would get their land back in a
timely fashion.
[6] The appellants also agreed that
none of their lots would be sold before December 30, 1991.
We have no evidence from Mayco but one might surmise that it did
not want any competition in selling the lots until it had had an
opportunity of selling its own lots. As it happens the appellants
had no intention of selling their lots in any event.
[7] The sale of Parcel 7076 to
Mayco was completed on March 19, 1987. The reporting
letter from the appellants' solicitors to them describes the
transaction as follows:
The sale price was $45,002.00
with a deposit of $2.00 paid upon completion of the Agreement of
Purchase and Sale. The balance of the purchase price in the sum
of $45,000.00 was secured by a First Mortgage on the subject
lands given by the purchasers to you. This mortgage was to be
repaid by the conveyance to you of seven lots in the proposed
land of subdivision which incorporates the land in
Parcel 7076 Widdifield and Ferris.
[8] The seven lots were conveyed to
the appellants on May 27, 1987. The restriction on the sale
of lots by the appellants before December 30, 1991 was
incorporated into the registered transfer of the property to
them.
[9] Lot 38 on the plan of
subdivision was completely behind the appellants' principal
residence on Greenhill Avenue. Parts of Lots 37 and 39 touch
their residence. Lots 34, 35, 36 and 40 do not touch their
property at all. All of the lots that were conveyed to the
appellants are within the boundaries of the original
Parcel 7076 except for Lot 34.
[10] From 1987 to 1992 the appellants
continued to use the property as before for biking, cross-country
skiing and the production of maple syrup for their own use.
[11] In 1989 and 1990 a couple of events
occurred that caused the appellants to reconsider some of the
long-term objectives that they had planned. Their original
plan was to keep the land, both as initially acquired and in the
subdivided state in which they received the lots back from Mayco,
indefinitely as a form of "greenbelt". In 1986 and 1987
when they acquired it or reacquired it, they did not have a
primary or secondary intention of selling it.
[12] In 1989 Mrs. Willis developed cancer
and underwent a lengthy series of treatments, which I understand
to have been successful. In 1990 Mr. Willis was involved in
a serious accident and sustained multiple fractures. In 1991 they
closed two gift stores which they owned and operated.
Mr. Willis was in his late fifties and Mrs. Willis was
in her mid-fifties.
[13] The personal events involving their
health brought into sharper and more immediate focus their own
mortality. Nonetheless it did not impel them to make any efforts
to sell the lots. The lots were not listed and they told no one
they were for sale.
[14] However, in 1992
Mr. Leo Finnigan found out from his bank manager that
they owned some lots and approached them asking if they would
sell him one. They refused. However, he persevered and in 1993
they relented and sold a lot to him. They wanted him to take Lot
34 but he wanted Lot 40 and that is the lot that was sold to
him.
[15] In the late fall of 1994
Mr. Willis put up a sign on the property showing the lots
for sale except Lot 40 which had been sold to Mr. Finnigan
and Lots 38 and 39 which abutted the Willis' property.
[16] In April, 1995 they sold Lot 35 and in
September 1997 they sold Lot 34. Lot 36 was sold in 1999 and it
is this sale that is the subject of the appeals. In 2001, Lot 37
was sold.
[17] The appellants treated the gain on Lot
36 as being on capital account. The Crown's position is set
in paragraphs 9(h), (i), (j) and (k) as follows:
(h) on September 2, 1986 the intent of the original purchase
changed from capital in nature to that of an adventure in the
nature of trade for the purpose of making a profit;
(i) the seven serviced lots, referred to in subparagraph
9(f) herein, were received by the Appellant and the
'Spouse' as inventory for the purpose of gaining and
producing income from a business;
(j) on September 2, 1986 the adjusted cost base of
'Lot 36' was $6,663.42;
(k) on September 2, 1986 the fair market value of 'Lot
36' was $6,663.42;
[18] Counsel for the appellants has
retreated somewhat from the original position taken when the
returns were filed. He says that there was a change of intent on
January 1, 1992 and at that time, the lots were converted to
inventory and that there was a deemed disposition on that date at
the then fair market value. He asks that the appeals be allowed
and the assessments be referred back to the Minister for
reconsideration and reassessment on the basis of a deemed
disposition on January 1, 1992 and that the Minister determine
the fair market value at that time which would give rise to a
capital gain in 1992 (which cannot be taxed now because 1992 is
statute-barred) and which would also form the basis of the cost
of the land for the purpose of determining the taxable profit in
1999 when Lot 36 was sold.
[19] This is what was done in Roos et al.
v. The Queen, 94 DTC 1094 where a change of use at a date
subsequent to the date of acquisition was found to give rise to a
deemed disposition under paragraph 45(1)(a) of the
Income Tax Act. The Court stated:
No evidence of fair market value was adduced, and
quite properly so. It would have been premature to call evidence
of fair market value until it was determined whether the land was
originally capital in the appellants' hands and, if so,
whether a change of use took place, and when it did so. This is
in accordance with the decision of the Tax Review Board in
Dawd v. M.N.R. (supra).
[20] I shall deal first with the Crown's
position that there was a change of use on September 2, 1986
and a conversion to inventory on that date.
[21] Paragraph 45(1)(a) creates a
deemed disposition at fair market value where there is a change
of use followed by an immediate reacquisition at fair market
value.
[22] Here we have an actual disposition
which started with the agreement between the appellants on
September 2, 1986 which was completed on March 19,
1987, followed by an actual reacquisition on May 27, 1987.
[23] I do not think there was any change of
use when the agreement of September 2, 1986 was signed and
in my view the property remained capital from the date of its
original acquisition through to its sale to Mayco and it did not
lose that quality when the seven lots were conveyed to the
appellants on May 27, 1987.
[24] They were simply holding their property
in a different form but it remained capital property throughout.
Even in the 1990s they were selling a lot every two years. This
sedate and leisurely pace is hardly commensurate with the
commercial activities associated with a business or an adventure
in the nature of trade. They did not advertise (except for the
solitary sign that stayed on the property for years) and they
took no other steps to sell the property.
[25] After the agreement with Mayco in
September 1986 and the conveyance of the property to it they
did not participate in the subdivision or the installation of
services.
[26] Even if it had been their intention at
some point to sell the lots this would not in itself have turned
what was patently capital property into inventory.
[27] I need not refer at length to the
myriad of cases in this area of the law. Counsel referred to the
two classic statements of the law in Happy Valley Farms Ltd.
v. The Queen, 86 DTC 6421 in which Rouleau J. summarized the
usual tests and Racine, Demers and Nolin v. M.N.R., 65 DTC
5098 in which the doctrine of secondary intent was expounded.
Rouleau J. in Happy Valley Farms referred to
M.N.R. v. Taylor, [1956] CTC 189 in which Thorson P. of
the Exchequer Court discussed authoritatively the concept of an
adventure in the nature of trade. His analysis was approved by
the Supreme Court of Canada in Irrigation Industries Ltd. v.
M.N.R., 62 DTC 1131.
[28] The tests of an adventure in the nature
of trade need not be repeated. They are well known and they have
certainly not been met. The appellants acquired 3.6 acres
adjacent to their principal residence as a protective greenbelt.
They were approached by a builder who offered to acquire the land
in return for his reconveying a good portion back to them as lots
in a subdivision. The appellants were entirely passive. Seven
lots came back to them in 1987 and, on an unsolicited offer, they
sold one in 1993 after experiencing traumatic health problems.
Some time after 1991 but more likely in 1993 or 1994 they
concluded that life is altogether too vicissitudinous to warrant
sitting forever on a valuable capital asset and decided that they
should realize it and enjoy their remaining years. They kept two
lots and sold five, one every two years.
[29] If this is an adventure in the nature
of trade it is unlike any that I have seen in 40 years.
[30] Had counsel argued that the property
never lost its quality of capital I would have been hard put to
it to refuse to give effect to the argument. However, I do not
think that it is appropriate for me to reject the admission made
by counsel for the appellants that there was a change of use on
January 1, 1992 giving rise to a deemed disposition at fair
market value. The Court is of course not bound by admission of
law (L.I.U.N.A. Local 527 Members' Training Trust Fund v.
The Queen, 92 DTC 2365) but this is a pure admission of fact.
Since however the Crown's assumption of a change of use in
1986 has been thoroughly demolished, and the alternative that the
property remained capital throughout has not been advanced by
either party I must accept the admission that a change of use
took place on January 1, 1992. I am aware that this may be
more advantageous to the appellants than a capital gain on the
sale of Lot 36.
[31] The appeals are allowed with costs and
the assessments are referred back to the Minister of National
Revenue for reconsideration and reassessment on the basis that
Lot 36 on Plan 36M-561 was capital property in the hands of the
appellants until January 1, 1992 and was deemed by paragraph
45(1)(a) of the Income Tax Act to have been
disposed of for proceeds equal to its fair market value at that
time and immediately thereafter reacquired at a cost equal to
that fair market value.
[32] There should be only one counsel fee
for both parties.
Signed at Victoria, British Columbia, this 13th day of August
2003.
A.C.J.
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