Rip,
T.CJ.:—The
appellant,
Donald
R.
Bailey
(“Bailey”),
filed
his
income
tax
return
for
1983
reporting
a
loss
from
a
business.
The
business
was
said
to
comprise
two
real
estate
properties,
a
rental
property
and
vacant
land.
The
properties
were
described
in
the
inventory
of
the
alleged
business
and
were
valued
in
a
schedule
attached
to
the
return
of
income
at
their
fair
market
value
at
the
end
of
1983,
amounts
which
were
less
than
their
costs.
The
Minister
of
National
Revenue,
the
respondent,
reassessed
tax
for
1983
on
the
basis
that
the
properties
were
capital
properties.
The
respondent
also
took
the
position
in
his
pleadings
that
the
provisions
of
subsection
10(1)
of
the
Income
Tax
Act
("Act")
do
not
permit
the
appellant
to
"write
down"
the
value
of
the
properties.
The
appellant
appeals
from
the
reassessment,
as
well
as
reassessments
for
1982
and
1985
which
disallowed
him
from
carrying
back
to
1982
and
forward
to
1985
portions
of
the
non-capital
loss
he
reported
in
1983.
Bailey
has
practised
law
in
Edmonton
since
1969.
In
1977
he
met
his
present
wife,
a
real
estate
agent,
land
developer
and
an
approved
builder
with
Canada
Mortgage
and
Housing
Corporation
("CMHC").
At
the
time
of
the
marriage
Mrs.
Bailey
had
an
interest
in
two
multiple
unit
residential
buildings
("murbs")
which
qualified
as
Class
32
properties
and
which
she
acquired
as
investments.
Prior
to
meeting
Mrs.
Bailey
the
appellant
owned
no
real
estate.
Upon
meeting
his
future
spouse,
Bailey
discussed
with
her
investing
in
real
estate.
He
described
his
wife
as
conservative
in
her
economic
views.
As
a
result
of
these
discussions
Bailey
made
a
decision
to
purchase
income
producing
real
estate
which
over
a
ten
to
twenty
year
period
would
assist
in
making
him
financially
independent.
The
acquisition
of
murbs
would
allow
him
to
defer
tax
and
the
deferred
taxes
could
be
used
as
a
source
of
funds
for
investment.
Since
he
had
no
money
at
the
time
he
realized
his
investments
would
have
to
be
100
per
cent
financed.
He
purchased
a
14-unit
apartment
block
in
Salmon
Arm,
British
Columbia
in
December,
1977
and
in
December,
1979
acquired
with
Mrs.
Bailey
a
24-unit
building
in
Enderby,
British
Columbia.
This
latter
building
was
destroyed
by
fire
in
1988
but
the
land
is
still
owned
by
the
Baileys.
By
1980
Bailey
was
encouraged
with
the
results
of
his
real
estate
investments
and
with
Mrs.
Bailey,
purchased
a
12-unit
apartment
building
in
Edmonton.
This
building
was
the
fifth
revenue
property
owned
by
them
separately
or
together.
In
the
fall
of
1981
Mr.
and
Mrs.
Bailey
evaluated
their
investment
plans.
They
considered
their
investment
equity
reasonably
managed
and
safe.
They
decided
in
late
December,
1981
to
acquire
a
multiple
unit
residential
building
to
defer
tax
and
to
fit
their
goal
for
long
term
investment.
Mr.
and
Mrs.
Bailey
became
aware
of
an
apartment
building
in
Edmonton
known
as
Gardenwood
Apartments
("Gardenwood"),
a
62-unit
building
which
qualified
as
a
Class
32
asset
for
capital
cost
allowance
purposes.
Because
the
Baileys
wished
to
utilize
the
tax
advantage
of
the
property
for
1981,
it
was
necessary
to
purchase
the
building
before
the
end
of
the
year.
Unfortunately
Mrs.
Bailey
was
confined
in
bed
with
pneumonia
during
the
last
two
weeks
of
1981
and
only
Mr.
Bailey
inspected
the
property
prior
to
executing
the
purchase
agreement.
In
addition
to
the
inspection,
Bailey
and
his
wife
relied
upon
the
vendor's
warranties
in
the
offer
to
purchase,
Bailey's
discussions
with
the
first
mortgagee
which
indicated
it
had
not
experienced
problems
with
the
property,
and
their
knowledge
the
building
was
a
CMHC
project.
The
offer
to
purchase
was
executed
on
December
31,
1981.
As
with
the
12-unit
apartment,
the
Baileys’
participation
in
Gardenwood
was
100
per
cent
financed.
The
purchase
price
was
$2,600,000.
Mrs.
Bailey's
health
improved
and
in
mid-January,
1982,
she
inspected
Gardenwood.
She
was
shocked
and
disappointed.
The
property
was
not
what
she
had
expected.
Mrs.
Bailey
did
not
like
either
the
visual
appearance
of
the
building
or
its
location.
In
her
opinion,
it
had
no
redeeming
features
nor
could
she
conceive
how
she
could
make
it
look
better
with
only
reasonable
changes
to
its
appearance.
She
testified
the
workmanship
was
shoddy.
Construction
defects
had
been
hidden
from
Mr.
Bailey
during
his
inspection.
The
builder's
history
in
constructing
"murb"
units
in
Toronto,
she
said,
was
"disastrous"
and
the
builder
had
been
placed
in
receivership
and
its
principals
convicted
of
fraud.
The
building's
design
was
poor,
she
said.
She
did
not
like
the
unit
mix
of
one,
two
and
three
bedrooms
nor
the
layouts
of
the
units.
She
was
convinced
the
building
would
be
difficult
and
expensive
to
maintain.
Structural
problems
by
mid-January,
1982
included
problems
with
the
roof,
foundation,
sewers,
heat,
insulation
and
paving.
She
also
anticipated
problems
renting
the
units.
In
short
Mrs.
Bailey
did
not
want
this
building
as
part
of
their
investment
portfolio
and
Mr.
Bailey
concurred.
Legal
action
against
the
vendor
was
contemplated
but
because
of
costs
none
was
commenced.
The
Baileys
were
concerned
that
they
had
an
unsound
project
which
was
100
per
cent
financed
and
represented
approximately
one-half
of
their
entire
holdings.
Because
of
favourable
market
conditions
in
Edmonton
in
early
1982
they
felt
the
building
could
be
easily
sold
and
so
it
was
put
up
for
sale.
In
the
meantime,
in
order
to
reduce
their
overall
financial
exposure
by
taking
out
their
equity,
they
decided
to
sell
the
12-unit
apartment
building.
The
12-unit
apartment
building
was
selected
for
sale,
Bailey
said,
because
it
was
not
a
murb
and
its
sale
would
generate
very
little
recapture.
The
Baileys
accepted
an
offer
to
purchase
of
April
3,
1982
for
cash
plus
a
mortgage
back
to
the
vendors
on
a
three
year
term.
Gardenwood
was
not
yet
sold.
After
the
Baileys
were
committed
to
sell
the
12-unit
apartment
building,
they
received
an
offer
on
behalf
of
a
Mr.
and
Mrs.
Booth
to
purchase
Gardenwood
for
$2,860,000.
In
order
to
finance
the
acquisition
of
the
building,
the
purchasers
had
to
sell
a
quarter-section
of
farmland
for
$450,000
to
one
Clare.
At
the
same
time
the
Baileys
agreed
to
purchase
from
Clare
another
quartersection
of
farm
land
for
$330,000.
The
evidence
of
Bailey
was
that
the
farmland
they
acquired
was
located
near
Marionville,
at
the
time
a
"bedroom
community"
of
Edmonton
with
land
subdivision
taking
place
around
the
property.
Mr.
and
Mrs.
Bailey
assumed
the
farmland
could
be
resold
to
a
developer
within
the
year
at
a
profit
because
of
the
activity
in
the
area.
They
thus
acquired
the
farmland
from
the
Booths
for
$450,000
and
sold
it
to
Clare
for
the
same
price,
taking
his
farm
property,
valued
at
$330,000.
At
the
end
of
the
day
the
Baileys
together
owned
a
farm
property
worth
$330,000
plus
$120,000.
The
Gardenwood
property
was
sold
by
the
Baileys
to
the
Booths
by
agreement
for
sale
dated
May
1,
1982.
Gardenwood
and
the
12-unit
apartment
building
were
the
only
apartment
buildings
sold
by
either
Mr.
or
Mrs.
Bailey.
The
sales
were
reported
on
capital
account.
In
his
affidavit
Bailey
set
out
the
reason
for
reporting
the
gains
on
account
of
capital:
The
decision
to
sell
these
2
apartment
projects
occurred
very
shortly
before
their
actual
sale.
Therefore
we
assume
that
the
value
of
the
properties
had
not
increased
following
our
change
of
intention
towards
the
sale
of
the
properties.
With
hindsight
it
is
possible
the
price
may
have
even
decreased
as
the
Alberta
economy
had
begun
to
decline.
This
was
all
discussed
with
our
tax
accountant
Dan
Block
and
based
upon
his
being
advised
of
the
facts
as
set
out
above,
his
tax
advice
to
us
was
to
report
the
sales
as
capital
dispositions
and
he
prepared
the
tax
returns
accordingly.
Mrs.
Bailey
was
of
the
view
that
since
no
real
estate
commission
was
paid
on
the
purchase
of
Gardenwood
in
1981
and
the
seller
was
in
need
of
money,
the
purchase
price
was
a
"good
deal"
and
any
gain
on
the
sale
in
1982
“was
in
the
original
deal";
therefore
she
and
Bailey
concluded
any
gain
took
place
while
the
property
was
capital.
In
1982
the
Baileys
acquired
two
additional
apartment
buildings
for
investment
purposes
in
Edmonton,
one
containing
125
units
and
another
47
units.
Subsequently
three
other
properties
were
acquired.
All
these
properties,
said
Bailey,
had
the
qualities
he
and
Mrs.
Bailey
desired
to
have
in
their
investment
portfolio.
Shortly
after
the
two
apartment
buildings
in
Edmonton
were
acquired
payments
pursuant
to
the
agreement
for
sale
of
Gardenwood
stopped.
The
Baileys
commenced
foreclosure
proceedings
on
February
18,
1983
and
on
March
25,
1983,
the
Court
appointed
Bailey
as
receiver
of
rents
and
profits
from
Gardenwood.
The
Baileys
did
not
receive
any
rent
for
February
and
March.
On
August
12,
1983
the
interests
of
the
Booths
under
the
agreement
for
sale
was
determined
by
court
order
and
the
Baileys
once
again
became
legal
and
beneficial
owners
of
Gardenwood,
each
as
to
an
undivided
one-half
interest.
Bailey
testified
his
and
Mrs.
Bailey’s
intention
in
foreclosing
Gardenwood
was
to
clean
up
the
title
by
foreclosing
the
Booth
interest,
to
put
the
property
back
in
good
order
and
to
sell
it
again
at
a
profit.
There
was,
he
insisted,
no
intention
to
retain
it
as
an
investment.
In
the
meantime,
the
state
of
the
economy
of
Edmonton
became
further
depressed.
Bailey
said
that
when
he
and
Mrs.
Bailey
purchased
Gardenwood
the
Edmonton
economy
was
buoyant;
however,
the
economy
soon
started
into
a
decline.
When
he
sold
the
property
in
the
spring
of
1982
he
thought
the
decline
was
temporary.
The
purchaser
of
the
12-unit
apartment
building
had
also
defaulted
in
payments
under
the
agreement
for
sale
and
its
interest
was
also
foreclosed
by
the
Baileys.
However,
Bailey
affirmed,
the
12-unit
property
“still
met
all
of
our
requirements
as
a
long
term
income
producing
investment"
and
was
held
as
a
capital
asset
when
taken
back.
The
appellant
stated
that
he
and
his
wife
decided
to
take
back
Gardenwood
because
if
they
"didn't
take
the
property
back,
the
other
mortgagees
would
take
over.
We
thought
there
was
a
value
between
the
amounts
owing
on
the
property
and
its
market
value”.
This
difference,
he
said,
represented
the
profit
he
hoped
to
make
on
a
sale.
When
the
Baileys
purchased
Gardenwood
in
1981
they
assumed
an
existing
mortgage.
In
answer
to
a
question
whether
he
and
Mrs.
Bailey
were
liable
personally
on
their
covenants
on
their
mortgage,
Bailey
replied
"at
the
end
of
the
day,
no,
but
that
was
not
necessarily
our
knowledge
at
the
time”.
Later
on
in
cross-examination
he
said
an
alternative
to
foreclosing
would
have
been
to
"walk
away
and
hope
the
mortgage
company
didn't
know
we
existed".
He
explained
that
it
was
the
practice
of
mortgage
companies
not
to
pursue
personal
covenants
in
Alberta.
The
mortgage
company
would
have
gone
against
the
Booths,
as
owners.
This,
he
recalled,
was
the
practice
and
procedure
of
CMHC,
although
six
months
later
CMHC
changed
its
policy
and
started
pursuing
individuals
on
their
covenants.
He
said
he
was
of
the
view
that
to
walk
away
from
the
property
would
be
to
walk
away
from
a
potential
profit.
The
Baileys
were
not
in
a
position
to
sell
Gardenwood
until
they
received
title
and
after
the
appeal
period
had
expired.
However,
Bailey
explained,
when
they
were
awarded
legal
and
beneficial
title,
the
value
of
the
property
"dropped
so
much
we
could
not
sell”.
In
Bailey’s
view
the
value
of
the
property
in
August
1983
was
less
than
the
amounts
owing
on
it.
Bailey
claimed
capital
cost
allowance
on
Gardenwood
for
1981;
he
did
not
claim
any
capital
cost
allowance
for
1983,
when
the
property
was
taken
over,
and
subsequent
taxation
years.
The
Baileys
were
unable
to
dispose
of
the
farmland
they
acquired
from
Clare
on
the
purchase
of
Gardenwood.
Development
in
the
area
of
the
property
dried
up
by
the
end
of
1982
because
of
economic
conditions.
The
land
was
rented
for
farming
and
over
the
years
has
garnered
an
average
of
$2,000
annual
rent
plus
nominal
charges
for
access
for
drilling
for
gas.
When
discussing
their
income
tax
returns
for
1982
with
their
tax
advisors
in
April
of
1983,
the
Baileys
and
their
tax
advisors
considered
a
change
of
use
of
Gardenwood
to
have
taken
place
in
mid-January,
1982,
when
Mr.
and
Mrs.
Bailey
decided
to
sell
the
property;
it
was
the
view
of
all
concerned
that
from
that
time
on
the
property
was
inventory
since
it
was
held
for
sale.
A
conclusion
was
also
reached
that
the
farmland
was
also
inventory
because
it
was
acquired
for
resale.
Bailey
recalled
that
in
April
of
1984,
real
estate
values
in
the
Edmonton
area
were
severely
depressed
and
that
he
and
his
wife
realized
this
was
not
a
temporary
thing.
As
a
result
of
the
conclusion
that
the
properties
were
inventory,
one
of
the
tax
advisors,
Mr.
Daniel
John,
C.A.,
a
partner
with
Coopers
&
Lybrand,
Chartered
Accountants,
in
Edmonton,
specializing
in
taxation,
ad-
vised
Mr.
and
Mrs.
Bailey
that
the
value
of
the
properties
should
be
written
down
to
the
lesser
of
cost
or
fair
market
value,
in
accordance
with
subsection
10(1)
of
the
Act.
The
properties
were
valued
at
the
values
the
appellant
believed
the
market
value
of
the
two
properties
to
be
at
the
end
of
1983,
namely
$100,000
for
the
farm
property
and
$1,334,000
for
Gardenwood.
Bailey
attached
the
following
schedule
to
his
1983
income
tax
return:
BUSINESS
INCOME
Property
Received
on
Foreclosure
Held
for
Resale
Principle
[sic]
Outstanding
at
Foreclosure
Date
$2,500,000
Less:
Section
40(1)
reserve
of
previous
year
(71,200
X
2)
(142,400)
Add:
Reacquisition
costs
1,015
$2,358,615
Business
Income
NI.W.
24,
55,
25
Gardenwood
Total
Rentals
Received
2,800
154,903
157,703
Carrying
Costs
Property
Taxes
|
618
|
39,351
|
39,969
|
Interest
|
|
214,711
|
214,711
|
152
days
xX
$546.67
|
|
83,055
|
83,055
|
|
$
2,182
|
$
(182,214)
$
(180,032)
|
Inventory
Write
Down
|
|
Lesser
of:
Cost
|
$330,000
|
$2,358,615
|
$2,688,615
|
Fair
Market
Value
|
100,000
|
1,334,000
|
1,434,000
|
|
$(230,000)
|
$(1,024,615)
|
$1,254,615)
|
|
$227,818
|
$1,206,829
|
$1,434,647
|
Allocate:
Elizabeth
Bailey
|
|
$
717,323
|
Donald
Bailey
|
|
$
717,323
|
|
$1,434,647
|
With
the
consent
of
the
respondent,
the
appellant
produced
the
affidavits
of
two
chartered
accountants,
Daniel
Block
and
Dale
Frederick
Robarts,
both
partners
of
Coopers
&
Lybrand
in
Edmonton.
Counsel
for
the
respondent
agreed
each
of
Mr.
Block
and
Mr.
Robarts
qualified
as
an
expert
witness,
the
former
in
taxation
and
the
latter
in
audit,
accounting
and
taxation
matters.
In
his
affidavit
Mr.
Robarts
reviewed
discussions
he
had
with
Mr.
and
Mrs.
Bailey.
He
corroborated
the
testimony
of
the
Baileys
with
respect
to
their
tax
returns
for
1983
which
were
prepared
by
Coopers
&
Lybrand.
In
Mr.
Block’s
view
the
schedule
entitled
“Business
Income”
attached
to
Bailey’s
1983
tax
return
was
not
only
in
accordance
with
generally
accepted
accounting
principles
but
also
with
the
provisions
of
the
Act
and
Regulations
to
the
Act
and
accordingly,
in
his
opinion,
"no
adjustments
were
necessary
to
the
returns"
of
Mr.
and
Mrs.
Bailey
when
he
reviewed
them.
As
a
result
of
the
discussion
he
had
with
his
clients,
Mr.
Robarts
concluded
the
two
properties
were
inventory
and
their
returns
were
prepared
on
that
basis.
In
his
opinion,
"the
1983
income
tax
return
of
Bailey
as
originally
filed
and
as
originally
assessed
by
the
Minister
of
National
Revenue
is
correct".
Both
Mr.
Block
and
Mr.
Robarts
expressed
the
opinion
that
it
is
the
owner's
intention
which
determines
whether
a
property
is
being
held
for
sale.
However,
Mr.
Robarts
did
refer
to
the
definition
of
inventory
on
page
83
of
the
manual
Terminology
for
Accountants,
3rd
edition,
prepared
by
the
Canadian
Institute
of
Chartered
Accountants
("CICA").
The
manual
defines
"inventory"
as
follows:
1.
Items
of
tangible
property
which
are
held
for
sale
in
the
ordinary
course
of
business,
or
are
in
the
process
of
production
for
such
sale,
or
are
to
be
currently
consumed
in
the
production
of
goods
or
services
to
be
available
for
sale.
2.
An
itemized
list
of
goods,
the
annual
or
other
periodic
account
of
stock
taken
in
a
business;
the
articles
that
are
inventoried.
Closing
Inventory
Inventory
on
hand
at
the
end
of
an
accounting
period.
Opening
Inventory
Inventory
on
hand
at
the
beginning
of
an
accounting
period.
Mr.
Robarts
also
referred
to
page
204-1
of
the
publication
Canadian
Institute
of
Public
Real
Estate
Companies
Recommended
Accounting
Practices
for
Real
Estate
Companies
(November
1985)
which
states
that
land
currently
held
for
sale
and
land
held
for
future
development
and
sale
is
inventory
and
generally
accepted
accounting
principles
require
that
it
be
stated
at
the
lower
of
cost
and
net
realizable
value.
Mr.
Robarts
agreed
with
Mr.
Block
that
the
schedule
of
business
income
attached
to
Bailey's
1983
income
tax
return,
which
"wrote
down"
the
cost
of
the
properties
to
their
current
market
value,
was
in
accordance
with
generally
accepted
accounting
principles.
As
I
understand
it,
the
affidavits
of
Messrs.
Block
and
Robarts
were
filed
to
corroborate
various
discussions
between
the
appellant
and
his
accounting
advisors
in
preparation
of
the
relevant
tax
returns
and,
as
well,
to
give
their
opinion,
as
experts
in
tax
accounting,
whether
the
values
of
either
of
the
properties
may
be
written
down.
Such
affidavits,
however,
ought
only
to
render
opinion
on
accounting
principles
and
practice
and
ought
not
make
any
conclusion
in
law.
Whether
an
income
tax
return
is
correct
as
originally
filed,
for
example,
is
a
decision
for
the
Court.
The
opinion
of
experts
is
not
admissible
on
matters
of
domestic
law.
Counsel
for
the
respondent
inexplicably
failed
to
cross-examine
Messrs.
Robarts
and
Block
on
their
affidavits
even
though
they
were
present
in
Court.
No
evidence
was
led
by
the
respondent's
counsel
to
refute
the
expert
evidence
of
Messrs.
Robarts
and
Block.
I
therefore
accept
their
evidence
in
so
far
as
it
is
admissible
and
only
to
the
extent
it
is
consistent
with
other
evidence.
Mrs.
Bailey
as
well
was
not
cross-examined
and
I
therefore
accept
her
evidence
to
the
extent
it
is
not
inconsistent
with
other
evidence.
Gardenwood
was
inventory
in
the
appellant's
view
because
sometime
after
its
acquisition
in
1981,
the
appellant
and
his
wife
decided
to
sell
the
property.
He
acknowledges
that
he
and
his
wife
originally
purchased
the
property
for
purposes
of
investment
only.
Bailey
also
argues
that
when
he
and
his
wife
reacquired
Gardenwood
in
1983,
they
did
so
with
the
intention
of
selling
it
at
a
profit.
The
farm
property,
on
the
other
hand,
was
from
the
outset
acquired
for
the
purpose
of
selling
at
a
profit.
The
appellant
argued
that
in
1983
he
was
carrying
on
a
business,
or
alternatively,
he
was
engaged
in
an
adventure
in
the
nature
of
trade
which
in
itself
constituted
a
business,
as
defined
in
subsection
248(1)
of
the
Act.
That
subsection
defines
“business”
to
include:
.
.
.
a
profession,
calling,
trade,
manufacture
or
undertaking
of
any
kind
whatsoever
and,
except
for
the
purposes
of
paragraph
189(2)(c),
an
adventure
or
concern
in
the
nature
of
trade
.
.
.
With
respect
to
Gardenwood
I
cannot
agree
with
the
appellant.
Bailey
stated
that
the
reason
for
acquiring
Gardenwood
was
two-fold,
for
capital
cost
allowance
purposes
and
as
a
long
term
investment.
The
property
was
held
by
the
Baileys
as
a
capital
property
in
the
year
of
acquisition.
On
its
disposition
in
the
next
taxation
year,
the
profit
on
its
disposition
was
reported
as
a
capital
gain.
The
property
consisted
of
land
and
a
building
containing
rental
units.
This
property
was
no
different
from
any
other
of
the
properties
held
by
Mr.
and
Mrs.
Bailey
for
investment
purposes.
There
is
no
doubt
in
my
mind
Gardenwood
was
acquired
for
the
same
purpose
as
the
other
properties,
that
is,
to
obtain
capital
cost
allowance
to
reduce
taxable
income
and
for
investment.
A
Capital
asset
is
not
converted
to
inventory
by
virtue
only
of
the
discovery
after
acquisition
of
defects
which,
if
known
to
the
purchaser,
would
have
dissuaded
him
from
making
the
purchase.
Equally,
property
is
not
converted
to
inventory
by
making
a
decision
to
sell.
The
alternative
submission
of
the
appellant
is
that
he
and
Mrs.
Bailey
acquired
Gardenwood
on
foreclosure
with
the
intent
only
to
sell.
Bailey's
evidence
was
that
in
August,
1983,
when
the
Court
granted
him
the
ownership
of
Gardenwood,
there
was
an
expectation
that
real
estate
values
would
soon
start
to
increase;
I
have
no
reason
to
question
Bailey's
evidence
with
respect
to
real
estate
values
in
1983.
However,
I
am
not
convinced
the
property
was
reaquired
with
resale
as
the
operating
motivation
of
the
Baileys.
The
property
was
heavily
mortgaged
and
the
Baileys
were
personally
liable
on
their
original
mortgage.
The
amount
of
the
mortgage
is
not
in
evidence.
There
was
also
evidence
the
written-down
value
of
Gardenwood
was
more
or
less
than
the
aggregate
amount
of
the
mortgages.
Bailey
also
testified
that
he
spent
substantial
amounts
putting
Gardenwood
into
shape
so
that
it
would
be
easier
to
sell.
The
amounts
so
expended
are
not
in
evidence.
There
is
also
no
evidence
as
to
what
price
the
Baileys
may
reasonably
have
expected
to
fetch
for
Gardenwood
in
August,
1983,
or
at
any
period
thereafter,
when
they
claim
they
expected
to
sell
the
property.
Mrs.
Bailey
testified
the
property
was
not
a
good
investment
property.
However,
there
is
no
evidence
which
even
suggests
the
improvements
to
the
property
made
by
the
Baileys
would
cause
a
prudent
purchaser
to
overlook
defects
which
caused
the
Baileys
to
sell.
Consequently
1
cannot
conclude
that
if
Gardenwood
had
been
sold
in
August,
1983,
or
within
a
reasonable
time
thereafter,
it
would
have
been
sold
at
a
profit.
And
even
if
the
property
was
acquired
to
be
sold
at
a
profit,
it
does
not
necessarily
assist
Bailey.
In
M.N.R.
v.
James
Taylor,
[1956-60]
Ex.C.R.
3;
[1956]
C.T.C.
189;
56
D.T.C.
1125,
President
Thorson
wrote
at
pages
211-12
(D.T.C.
1137)
that:
The
intention
to
sell
the
purchased
property
at
a
profit
is
not
of
itself
a
test
of
whether
the
profit
is
subject
to
tax
for
the
criterion
to
make
a
profit
may
be
just
as
much
the
purpose
of
an
investment
transaction
as
of
a
trading
one.
In
my
view
the
Baileys
foreclosed
on
Gardenwood
to
protect
their
economic
interests
in
the
property.
A
sale
may
have
been
intended
on
reaquisition
of
Gardenwood
and
may
have
been
necessary
in
the
circumstances.
The
property,
however,
was
not
acquired
for
resale
in
a
trade
or
an
adventure
or
concern
in
the
nature
of
trade.
Gardenwood
was
held
by
Bailey
as
a
capital
asset.
The
farmland
property
acquired
in
1982
was
not
purchased
for
the
purpose
of
investment
although
the
Baileys
received
a
nominal
rent
from
the
property.
That
property
was
different
from
any
of
the
other
properties
owned
by
the
Baileys
for
investment:
it
was
raw
land.
The
land
was
situated
in
an
area
that
was
rampant
with
land
speculation,
according
to
Mrs.
Bailey,
and
was
surrounded
by
land
then
being
subdivided.
Mrs.
Bailey,
a
real
estate
agent
and
developer,
affirmed
she
appreciated
the
farm
property's
profit
potential
on
acquisition.
I
cannot
find
however
that
the
farmland
property
was
used
in
a
trade.
As
the
Lord
President
(Clyde)
put
it
in
The
Commissioners
of
Inland
Revenue
v.
Livingston
et
al.
(1926),
11
T.C.
538
at
page
542:
.
.
a
single
transaction
falls
as
far
short
of
constituting
a
dealer’s
trade,
as
the
appearance
of
a
single
swallow
does
of
making
a
summer.
The
trade
of
a
dealer
necessarily
consists
of
a
course
of
dealing,
actually
engaged
in
or
at
any
rate
contemplated
and
intended
to
continue.
The
acquisition
of
raw
land
by
the
Baileys
was
an
isolated
transaction.
As
Lawrence,
L.J.
stated
in
Leeming
v.
Jones,[1930]
1
K.B.
279;
[1930]
A.C.
415;
15
T.C.
333,
at
page
354:
It
seems
to
me
that
in
the
case
of
an
isolated
transaction
of
purchase
and
resale
of
property
there
is
really
no
middle
course
open.
It
is
either
an
adventure
in
the
nature
of
trade
or
else
it
is
simply
a
case
of
sale
and
resale
of
property.
The
phrase
"adventure
or
concern
in
the
nature
of
trade"
was
considered
by
the
Exchequer
Court
of
Canada
in
M.N.R.
v.
James
A.
Taylor,
supra.
The
President
of
the
Court
stated
at
page
199
(D.T.C.
1131)
that:
It
is,
I
think,
plain
from
the
wording
of
the
Canadian
Act,
quite
apart
from
any
judicial
decisions,
that
the
terms
'trade'
and
‘adventure
or
concern
in
the
nature
of
trade’,
are
not
synonymous
expressions
and
it
follows
that
the
profit
from
a
transaction
may
be
income
from
a
business
within
the
meaning
of
section
3
of
the
Act,
by
reason
of
the
definition
of
business
in
section
127(1)(c)
(now
subsection
248(1)),
even
although
the
transaction
did
not
constitute
a
trade,
provided
that
it
was
an
adventure
or
concern
in
the
nature
of
trade.
On
pages
210-11
(D.T.C.
1137)
Thorson,
P.
considered
the
circumstances
in
which
a
transaction
may
be
"an
adventure
or
concern
in
the
nature
of
trade”:
But
"trade"
is
not
the
same
thing
as
“an
adventure
in
the
nature
of
trade"
and
a
transaction
might
well
be
the
latter
without
being
the
former
or
constituting
its
maker
a
"trader"
.
.
.
The
very
word
“adventure”
implies
a
single
or
isolated
transaction
and
it
is
erroneous
to
set
up
its
singleness
or
isolation
as
an
indication
that
it
was
not
an
adventure
in
the
nature
of
trade.
Jackett,
P.,
as
he
then
was,
discussed
the
distinction
between
an
adventure
and
carrying
on
of
a
business
in
Tara
Exploration
and
Development
Company
Limited
v.
M.N.R.,
[1970]
C.T.C.
557;
70
D.T.C.
6370
at
pages
565
to
567
(D.T.C.
6374
to
6376).
There
is
no
evidence
whether
the
Baileys
intended
to
subdivide
the
farmland
and
then
engage
in
marketing
the
lots
and
continue
in
the
trade
or
whether
they
would
sell
the
property
once
it
reached
a
certain
value.
They
did
not
intend
to
hold
the
farmland
as
a
capital
asset.
They
testified
they
acquired
the
property
on
speculation
for
resale
at
a
profit
and
concluded
they
carried
on
a
business
with
respect
to
the
property.
The
acquisition
of
the
farmland
was,
in
my
view,
the
first
step
by
the
Baileys
in
an
adventure
or
concern
in
the
nature
of
trade.
The
final
step,
that
of
its
disposition,
has
yet
to
take
place.
The
appellant,
as
stated,
considered
the
farmland
property
(as
well
as
the
Gardenwood
property)
to
be
inventory
and
pursuant
to
subsection
10(1)
and
section
1801
of
the
Regulations
to
the
Act,
valued
the
properties
at
their
market
value
at
the
end
of
1983.
Subsection
10(1)
provides
that:
For
the
purpose
of
computing
income
from
a
business,
the
property
described
in
an
inventory
shall
be
valued
at
its
cost
to
the
taxpayer
or
its
fair
market
value,
whichever
is
lower,
or
in
such
other
manner
as
may
be
permitted
by
regulation.
Subsection
248(1)
states
that:
"Inventory"
means
a
description
of
property
the
cost
or
value
of
which
is
relevant
in
computing
a
taxpayer's
income
from
a
business
for
a
taxation
year.
The
question
before
me,
then,
is
whether
property
that
is
the
subject
of
an
adventure
or
concern
in
the
nature
of
trade
may
be
inventory.
Counsel
for
the
respondent
submitted
that
in
interpreting
subsection
10(1)
the
expression
“carrying
on"
should
be
read
to
appear
between
the
words
"from"
and
"a"
so
that
the
provision
would
read
“for
the
purpose
of
computing
income
from
carrying
on
a
business,
the
.
.
.”.
Parliament,
he
argued,
could
only
have
intended
inventory
to
describe
property
held
for
sale
in
the
course
of
carrying
on
a
business,
that
is,
where
there
is
a
continuity
of
operations
and
not
where
there
is
an
isolated
transaction.
Counsel
for
the
respondent
relied
on
the
reasons
of
in
Jellaczyc
v.
M.N.R.,
[1985]
1
C.T.C.
2158;
85
D.T.C.
184
and
Gilmour
v.
M.N.R.,
[1989]
2
C.T.C.
2454;
89
D.T.C.658.
In
Jellaczyc
the
taxpayer
failed
to
present
any
evidence
whatsoever
to
support
his
position
that
the
Act
permitted
him
to
“write
down"
property
to
fair
market
value.
In
the
Gilmour
case,
Taylor,
T.C.J.
found
vacant
land
was
held
by
the
taxpayer
as
a
capital
asset
and
therefore
was
not
eligible
for
valuation
in
accordance
with
subsection
10(1).
The
definition
of
"business"
in
subsection
248(1)
includes
“an
adventure
or
concern
in
the
nature
of
trade".
It
is
the
word
"business"
so
defined
that
is
used
in
subsection
10(1).
When
Parliament
does
not
intend
an
adventure
or
concern
in
the
nature
of
trade
to
be
included
in
the
word
“business”
it
provides
for
the
exception
in
the
substantive
definition
of
business;
for
example,
the
word
"business"
used
in
paragraph
18(2)(c)
does
not
include
an
adventure
or
concern
in
the
nature
of
trade:
subsection
248(1).
The
definition
of
inventory
in
subsection
248(1)
does
not
assist
in
determining
whether
a
particular
property,
the
farmland,
that
is
the
subject
of
an
adventure
in
the
nature
of
trade
may
be
described
in
inventory.
Evidence
of
accounting
procedures
and
principles
is
relevant
to
the
computation
of
income
for
purposes
of
section
9
of
the
Act.
Jackett,
P.
(as
he
then
was)
explained
in
Associated
Investors
of
Canada
Limited
v.
M.N.R.,
[1967]
2
Ex.C.R.
96;
[1967]
C.T.C.
138;
67
D.T.C.
5096,
at
page
143
(D.T.C.
5098
and
5099),
that:
Under
the
Income
Tax
Act,
in
determining
the
income
tax
payable
by
the
appellant
for
a
year,
the
first
step
is
to
determine
the
“income”
from
the
appellant's
business
for
the
year
(Section
3).
Subject
to
any
special
provision
that
may
be
applicable,
the
“income”
from
a
“business”
for
a
year
is
the
"profit"
therefrom
for
the
year
(Section
4).
Profit
from
a
business,
subject
to
any
special
directions
in
the
statute,
must
be
determined
in
accordance
with
ordinary
commercial
principles.
(Canadian
General
Electric
Co.
Ltd.
v.
M.N.R.,
[1962]
S.C.R.
3,
per
Martland,
J.
at
page
12;
[1961]
C.T.C.
512
at
520.)
The
question
is
ultimately
"one
of
law
for
the
court”.
It
must
be
answered
having
regard
to
the
facts
of
the
particular
case
and
the
weight
which
must
be
given
to
a
particular
circumstance
must
depend
upon
practical
considerations.
As
it
is
a
question
of
law,
the
evidence
of
experts
is
not
conclusive.
(See
Oxford
Motors
Ltd.
v.
M.N.R.,
[1959]
S.C.R.
548,
per
Abbott,
J.
at
page
553;
[1959]
C.T.C.
195
at
202,
and
Strick
v.
Regent
Oil
Co.
Ltd.,
[1965]
3
W.L.R.
636
per
Reid,
J.,
at
pages
645-6.
See
also
M.N.R.
v.
Anaconda
American
Brass
Ltd.,
[1956]
A.C.
85
at
page
102;
[1955]
C.T.C.
311
at
319.)
My
first
task
is
therefore
to
determine
the
proper
treatment
of
the
amounts
in
question
in
accordance
with
ordinary
commercial
principles.
Having
ascertained
that,
I
must
consider
whether
any
different
treatment
is
dictated
by
any
special
provision
of
the
statute.
Terminology
for
Accountants,
supra,
defines
inventory
as
“items
of
property
which
are
held
for
sale
in
the
ordinary
course
of
business".
[I
do
not
believe
there
is
any
significance
to
the
fact
the
word
"items"
is
plural.]
In
the
case
at
bar
the
farmland
in
issue
was
an
item
of
property
held
for
sale
in
a
business,
as
"business"
is
defined
in
the
Act.
I
must
consider
whether
it
is
held
for
sale
“in
the
ordinary
course
of
business”.
In
Blok-Andersen
v.
M.N.R.,
[1972]
C.T.C.
338;
72
D.T.C.
6309,
Mr.
Justice
Cattanach
held,
at
page
353
(D.T.C.
6321),
the
subsection
248(1)
definition
of
“business”,
previously
paragraph
139(1)(e),
permitted
the
substitution
of
the
words
"adventure
or
concern
in
the
nature
of
trade”
for
the
word
“business”
in
paragraph
12(1)(b),
previously
paragraph
85B(1)(b),
so
that
the
section
would
read
“in
the
course
of
an
adventure
or
concern
in
the
nature
of
trade".
The
substitution,
said
Cattanach,
J.,
is
logical
and
does
no
violence
to
the
section
so
as
to
render
it
repugnant
to
the
general
scheme
of
the
Act
or
leading
to
an
absurdity.
Cattanach,
J.
added
at
page
354
(D.T.C.
6321):
The
phrase
“in
the
course
of"
contemplates
a
succession
of
events
in
a
regular
order.
It
also
contemplates
a
result
which
follows
from
an
event
being
set
in
motion.
Such
a
result
will
arise
in
the
case
of
an
isolated
sale
as
well
as
in
a
continuous
number
of
sales.
The
definition
of
inventory
in
Terminology
for
Accountants
modifies
the
expression
"course
of
business”
with
the
word
“ordinary”.
Amongst
the
definitions
of
"ordinary"
in
The
Oxford
English
Dictionary,
Second
Edition,
are:
Something
ordinary,
regular,
or
usual;
An
ordinary
thing
or
person;
something
of
usual
or
commonplace
character;
Phrases
..
.
of,
for,
in
ordinary
.
.
.
in
the
ordinary
course,
as
a
regular
custom
or
practice,
ordinarily.
In
the
expression
“in
the
ordinary
course
of
business”
the
word
"ordinary"
restricts
the
rest
of
the
phrase,
"course
of
business”,
to
what
is
normal
and
usual
for
the
business.
A
sale
of
tangible
property
held
for
sale
outside
the
ordinary
course
of
business,
for
example,
for
a
special
or
exceptional
transaction,
is
not
to
be
described
in
inventory,
according
to
the
CICA
publication.
Thus
in
Re
Bradford
Roofing
Industries
Pty.
Ltd.,
[1966]
1
N.S.W.R.
674,
cited
in
Words
and
Phrases
Legally
Defined,
vol.
4,
Butterworth's,
London,
1969,
the
Court
was
asked
to
consider
the
provisions
of
the
New
South
Wales
Companies
Act,
1961,
which
prohibited
an
official
manager
from
disposing
of
the
company's
assets
save
in
the
“ordinary
course
of
the
company's
business”.
In
Sheet,
J.'s
view:
"The
transaction
must
be
one
of
the
ordinary
day-to-day
business
activities,
having
no
unusual
or
special
features."
To
determine
what
is
"ordinary"
in
an
isolated
transaction
the
event
being
set
in
motion
must
be
one
that
is
considered
ordinary
in
trade.
If
the
isolated
transaction
is
in
the
nature
or
concern
of
a
particular
trade,
the
transaction
ought
to
be
a
transaction
considered
ordinary
in
that
trade.
Mr.
and
Mrs.
Bailey
testified
that
once
they
acquired
the
land
they
did
nothing
to
it,
waiting
for
an
opportune
time
to
sell
which
they
believed
would
be
sometime
in
the
future.
There
was
no
suggestion
the
land
was
held
for
sale
in
any
manner
different
from
a
trader
of
similar
land.
Both
a
trade
and
an
adventure
in
the
nature
of
trade
are
activities
included
in
the
statutory
definition
of
“business”.
The
tangible
property
in
both
cases
is
held
for
sale
“in
the
ordinary
course
of
business".
In
both
a
venture
in
the
nature
of
trade
and
a
trade
the
farmland
and
tangible
property
which
is
similar
to
the
farmland,
may
be
described
in
inventory
for
accounting
purposes
when
that
property
is
held
for
sale
in
the
ordinary
course
of
business;
this
is
quite
clear
from
the
evidence
of
Mr.
Robarts.
There
is
no
reason
why
the
farmland
cannot
be
described
in
inventory
for
purposes
of
subsection
10(1)
of
the
Act
as
well.
Subsection
10(1)
directs
a
property
to
be
valued
“for
the
purpose
of
computing
income
from
a
business”.
The
phrase
does
not
contemplate
computing
income
only
from
carrying
on
a
business,
as
suggested
by
counsel
for
the
respondent.
The
phrases
"carrying
on
a
business”
and
"carried
on
a
business"
are
found
in
several
provisions
of
the
Act:
see,
for
example,
paragraph
2(3)(b),
and
subsections
115(1)
and
219(1).
"To
carry
on
something,"
stated
Jackett,
P.
in
Tara
Exploration,
supra,
page
567
(D.T.C.
6376),
"involves
continuity
of
time
or
operations
such
as
is
involved
in
the
ordinary
sense
of
a
'business'".
When
this
expression
"carry
on”
is
used
in
the
Act,
Parliament
describes
a
continuity
of
time
or
operations
with
respect
to
the
factual
situation
contemplated
by
the
particular
provision.
Such
continuity
is
not
required
in
subsection
10(1)
and
its
addition
to
that
provision
would
add
nothing
to
that
provision’s
ordinance.
A
continuity
is
not
necessary
to
compute
income
from
a
business.
The
wording
used
in
subsection
10(1)
is
natural
and
has
the
meaning
contemplated
by
Parliament
without
the
addition
of
any
other
words.
Mr.
and
Mrs.
Bailey
were
engaged
in
an
adventure
in
the
nature
of
trade:
he
was
in
a
business.
As
such
he
was
required
by
the
Act
to
compute
income
from
the
business
and
was
required,
as
any
other
person
who
computes
income
from
a
business,
to
value
property
described
in
inventory
at
its
cost
to
him
or
its
fair
market
value,
whichever
is
lower,
or
in
such
manner
as
may
be
permitted
by
regulation.
The
appeal
for
1983
is
therefore
allowed
to
permit
Mr.
Bailey
to
“write
down"
the
value
of
the
farmland
only;
the
appeals
for
1982
and
1985
will
also
be
allowed
to
permit
him
to
carry
back
to
1982
and
forward
to
1985
any
non-capital
loss
incurred
in
1983.
Since
his
success
in
the
appeal
was
not
substantial,
bearing
in
mind
the
total
amount
of
tax
in
issue,
he
is
not
entitled
to
costs.
Appeal
allowed
in
part.