Paul Hayes and Dorothy Hayes v. Minister of National Revenue, [1989] 2 CTC 2008, 89 DTC 334

Bonner, T.C.J.:—Mr. and Mrs. Hayes each appeal from assessments of income tax for the 1981, 1982 and 1983 taxation years. Mr. Hayes also appeals from an assessment for his 1980 taxation year.

On assessment the respondent included gains realized from the sale of lots at Candle Lake, Saskatchewan. The sole issue in each case was whether the gains are income or whether they were on capital account. The appeals were heard together on common evidence. Initially, in the pleadings, it was the position of the respondent that in acquiring the land, one of the major motivating factors was the possibility of turning it to account for profit. This was, according to the respondent, either the primary or if not, the secondary motive for acquisition.

The respondent, adopting a scattergun approach, took the further position, not expressed to be in the alternative, that Parcel B, which I will describe later, was converted to inventory not later than December 31,1971, and that the per-lot value of lands within Parcel B on that day was not more than $460.

According to Mr. Hayes, whose evidence was corroborated by that of his wife, he moved to Candle Lake in 1942. Initially he leased and lived in a house on the northwest quarter of section 17. Subsequently he leased part of the quarter and built a house on it for use by him as a dwelling.

In 1950, the owner of the quarter section decided to sell it and move away. Mr. Hayes and his brother then bought the entire property. The owner was not interested in selling it in pieces. The Hayes continued thereafter to live on the property. At that time, Mr. Hayes earned his living by trapping in the area north of Candle Lake. His brother built a dwelling on the quarter section for his own use. Subsequently, Mr. Hayes developed a business in response to a demand for a tenting and trailer park facility. He also built a total of eight rental cabins. He rented boats to the campers and ran a gas bar. Mr. Hayes' brother operated a café and store.

During this period Mr. Hayes was also involved in trapping, in a shortlived farming venture, and in driving a bulldozer.

In 1962, a part of the quarter section was subdivided into two blocks, each containing 18 individual lots. The northerly block, number one on Exhibit A-2, was transferred to Mr. Hayes' brother and the southerly block to Mr. Hayes. Mr. Hayes, however, did not sell off any part of the Block 2 lots until 1968, when he sold one lot. The remainder of the block 2 lots were sold later; the last sale taking place in 1980.

Mr. and Mrs. Hayes sold lots only in response to inquiries made of them. They did not advertise or promote sale in any way. Mr Hayes' evidence as to the manner in which he arrived at a price was imprecise, but he does not appear to have done so in any sort of businesslike way.

In 1970, Mr Hayes and his brother divided the remainder of the quarter section between them, in accordance with a plan which divided the remainder of the quarter section into six blocks. This was done (and I am still recounting Mr. Hayes' testimony, which I accept,) because of a dispute between him and his brother. The brother wanted to subdivide and Mr. Hayes was not ready to do so. Mr. Hayes received the blocks designated as B and E on Exhibit A-3.

I may note at this point that the respondent's counsel conceded, and quite properly I might add, that there was no conversion of the land into inventory prior to December 3I, 1971. There was, of course, absolutely no evidence on which it could be found that the interest of the appellants in the quarter section was acquired with the intention of turning it to account for profit by resale. That assumption in the Reply borders on the irresponsible, in the circumstances.

In 1974, Mr. Hayes told the engineer to make a sketch of part of Block B satisfactory to local government. In consequence, the 25-lot subdivision outlined in yellow on Exhibit A-3, was prepared and registered in 1977. The appellant did nothing to improve the property for purposes of resale, save to gravel the roads and place culverts at the edge of the road opposite the entrance to each lot. He indicated, that he did this in response to the demands of the local municipality. Again, there was no sign advertising the property for sale, no advertising of any sort and there was no effort to promote sale of the lots. Despite the absence of any attempt to promote the sale of the lands, the demand was there. Mr. Hayes stated that he sold quite a few of the lots from that plan in a very short time. The appellants made application in 1979 for a further subdivision. This further subdivision comprised the lands outlined in black on Exhibit A-3. Here again there was no advertising or promotion of sale.

Overall, the activities of the appellants, as revealed by the evidence, amount to little more than the registration of plans of subdivision of lands which were held by them as capital assets. The improvements effected by the gravelling of roads and supplying of culverts were rudimentary at best. I can find no business organization, business plan, or scheme for profit making. On the evidence I would characterize the appellants' activities as amounting to nothing more than taking the bare minimum steps necessary for optimal realization of the capital assets which they already possessed. Those efforts did not yield to the appellants a saleable product that was in any significant way different from what they had at the outset.

It may be helpful to refer to some of the case law. First there is the decision of the Exchequer Court on an appeal from the Board in McGuire v. M.N.R., [1956] C.T.C. 98; 56 D.T.C. 1042 and I will just refer to the passage at page 101 (D.T.C. 1044), where Mr. Justice Hyndman said:

Surely the fact that a man wants to sell his own property does not constitute a business. I can't see that. If he went around the country trying to find customers and made a regular business of it that in the ordinary sense of the word there might be a question then, or if he was selling other people's property as well as his own that might have a bearing on the case but as far as the evidence is concerned he was selling his own property and nothing more, which I think he had a perfect right to do.

I hesitate to differ with Mr. Fisher, who is an authority on these matters but in this case I cannot agree with him. In the end if there is any appeal, it may be evident he was right and I was wrong, but as I see it now I am of the opinion that this is a pure case of a man selling his own property which he had acquired in a way which was not speculative and there can be no objection in law to selling it, and I do not think it makes any difference whether he sold the property as a whole or as half or in 50 pieces.

Next, I will refer to a quotation from Mr. Justice Cattanach in Moluch v. M.N.R., [1967] 2 Ex. C.R. 158; [1966] C.T.C. 712; 66 D.T.C. 5463 which is quoted at page 2265 (D.T.C. 1653) of the decision of this Court in Mackinnon v. M.N.R., [1988] 2 C.T.C. 2262; 88 D.T.C. 1651:

. . . the filing of a plan of subdivision and selling lots thereunder does not of itself constitute a business in the absence of other circumstances.

Next, and finally, I will refer to Elwood Holmes v. M.N.R., [1981] C.T.C. 3062; 82 D.T.C. 1010 a decision of my brother Judge Goetz at page 3066 (D.T.C. 1013), where he said:

During the period under appeal the appellant continued to act as a full-time farmer, and I do not accept the allegations of the Minister that the property had been changed from raw farmland to serviced residential lots. They were raw unimproved building lots with no services whatsoever.

[That pretty accurately describes what we have here, I may interject.]

The appellant was a farmer and had no experience or expertise in the real estate field.

[This again is on all fours with this case.]

It was only his condition of health and age that prompted him to dispose of the lots contained in his two subdivisions . . . and the availability of the lots for purchase became a generally known fact in the area and as far away as Toronto.

The mere filing of the subdivision plans and the selling of lots thereunder do not in themselves affect the status of the gain, notwithstanding that such subdivision may have enhanced the value of the land. If the appellant had gone beyond the minimal service he performed, namely access roads, I believe that he would have been in a different position.

Well, in this case of course, the appellant did not go beyond that bare minimum. I think it would be idle to refer to any more cases; the law is pretty plain. In the present circumstances, applying the principles to which I have just referred, I cannot find that any of the land covered by the first three subdivision plans was converted into inventory in the hands of the appellants.

The appeals will therefore be allowed and the assessments in issue will be referred back to the respondent for reconsideration and reassessment on the basis that the appellants' revenues from the sale of lots are on capital account.

Now, the question of costs.

Mr. Krishan, you referred to costs on a solicitor/client basis, I believe. I commented earlier during the hearing on my views as to the importance of the filing by the Minister of pleadings which accurately set out the basis of the assessment. I regard such pleadings as essential to the fair operation of the appeal process in income tax matters and here, the pleadings (which I will note for the record were not prepared by Mr. Chalmers, the counsel appearing here today) fall far below the standard that is desirable. I think they occasioned a great deal of unnecessary work, despite the fact, incidentally, that the Minister took two stabs at filing pleadings. He filed a reply and an amended reply. Even then he was far wide of the mark. In the circumstances I feel inclined, of course, to allow costs, and I believe that the matter in all justice ought to be brought to an end as swiftly as possible. I am going to bring it to an end today by dispensing with the necessity of the taxation of costs. I am going to fix costs in a lump sum.

Perhaps I will leave it to you, Mr. Krishan, to suggest a figure, and then I will hear what Mr. Chalmers has to say. Some account has to be taken of the fact that the proceeding may not have been necessary at all had the Minister applied his mind to what basis there might be for justifying the assessments.

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The formal judgment will read that the appeals are allowed with costs which are hereby fixed in the amount of $2,000.

Appeals allowed.