Richard D. Mackinnon v. Minister of National Revenue, [1988] 2 CTC 2262

Tremblay, T.C.J.:—This appeal was heard on July 16, 1987 at the City of Charlottetown, Prince Edward Island.

1. The Point at Issue

Pursuant to the notice of appeal and the reply to the notice of appeal, the point at issue is whether the appellant is correct in the computation of his income for the 1980 and 1981 taxation years to consider as capital gain the profit made from the sale of four acres of land in 1980.

The respondent contends that the profit was a business income because, as of September 13, 1971, the subject land underwent a change in character from capital property to inventory of the appellant's business of trading in land for a profit. The respondent also contends that the fair market value of the land on the said date of September 13, 1971, was $13,400, i.e. $3,350 per acre. The appellant, contending that the profit was a capital gain, says that the fair market value on December 31, 1971, would have been somewhere between $7,044 and $25,000 per acre.

2. The Burden of Proof

2.01 The burden of proof is on the appellant to show that the respondent's reassessments are incorrect. This burden of proof results particularly from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v. M.N.R., [1948] S.C.R. 486; [1948] C.T.C. 195; 3 D.T.C. 1182.

2.02 In the same judgment, the Court decided that the assumed facts on which the respondent based his reassessments were also deemed to be correct. In the present case, the assumed facts are described in paragraphs 3(a) to (f) of the amended reply to notice of appeal as follows:

3. In so reassessing the Appellant's income tax liability for his 1980 taxation year, the Respondent relied, inter alia, upon the following assumptions of fact:

(a) In 1980 the Appellant sold four acres of land (the land) located near Charlottetown, Prince Edward Island for proceeds of disposition of $104,010.00 [admitted by the appellant].

(b) On September 13, 1971 the fair market value of the land was $13,400.00 [admitted by the appellant].

(c) The Appellant incurred certain outlays and expenses with respect to the

sale of the land in the amount of $3,016.00 [admitted by the appellant].

(d) At all material times the Appellant was familiar with the real estate business and was in the business of real estate sales and rentals [denied by the appellant]. lant}.

(e) As at September 13, 1971 the land underwent a change of character from capital property to inventory of the Appellant's business of trading in land for a profit [denied by the appellant].

(f) The Appellant realized a gain of $87,594.00 on income account upon the disposition of the land in 1980 [denied by the appellant].

3. At the beginning of the trial, counsel for the appellant informed the Court that his client had withdrawn his appeal concerning the 1981 taxation year.

4. The Facts

4.01 It is agreed by both parties that the fair market value of the subject property on September 13, 1971 and December 31, 1971, was $13,400.

Moreover, it is agreed that if the appellant realized a capital gain, the said capital gain was $87,594, calculated as follows:

4.02 It was adduced in evidence that the majority of the land was acquired through inheritance or under special purchase conditions from members of the appellant's family. The majority of the land had belonged to the same family for several decades.

4.03 It was admitted by the respondent that the land was capital until September 1971.

On September 13,1971, the appellant filed a proposed plan of subdivision of the land to the Planning Division of the Department of Community Services, P.E.I.

As a result of a study of the plan, it was suggested to the appellant, in a letter dated September 28, 1971 (Exhibit A-1) that, "in view of the extensive size of the development, it would be in your interest to employ a professional firm or individual to prepare a plan utilizing the site to its best advantage. However, as you are possibly aware, an overall development study of areas surrounding Charlottetown is presently underway; you may, therefore, wish to await the outcome to determine how your property fits in with any proposals which might then be made.”

4.04 On October 2, 1971, the appellant wrote a letter of reply (Exhibit R-2) to the above-quoted letter.

4.05 It is only in 1980 that the development of areas surrounding Charlottetown favoured the sale of the appellant's land. Then, indeed, the Northumberland Ferries decided to construct head office facilities. This then coincided with the appellant's plan to ultimately have all the property put to commercial and related uses. The final incentive to sell was the appellant's need for funds in order to construct a personal dwelling.

5. Law - Cases at Law - Analysis

5.01 Law

The main provisions of the Income Tax Act involved in the present appeal are sections 3, 4, 9, 38 and subsection 248(1) (definition of business). They shall be quoted in the analysis if it is required.

5.02 Cases at law

The following precedents were referred to the Court by the parties:

1. Edmund Peachey Ltd. v. The Queen, [1979] C.T.C. 51; 79 D.T.C. 5064 (F.C.A.);

2. Moluch v. M.N.R., [1966] C.T.C. 712; [1967] 2 Ex. C.R. 158; 66 D.T.C. 5463;

3. Dubbel Wear Holdings Ltd. v. M.N.R., [1981] C.T.C. 2348; 81 D.T.C. 351 (T.R.B.);

4. Carter v. M.N.R., [1980] C.T.C. 2623; 80 D.T.C. 1537 (T.R.B.);

5. Lovering v. M.N.R., [1982] C.T.C. 2736; 82 D.T.C. 1731 (T.R.B.);

6. Magilb Development Corp Ltd. v. The Queen, [1987] 1 C.T.C. 66; 87 D.T.C. 5012 (F.C.T.D.);

7. Joe's & Company Ltd. v. M.N.R., [1986] 1 C.T.C. 2123; 86 D.T.C. 1073 (T.C.C.).

5.03 Analysis

5.03.1 The problem is whether the land changed in nature from capital property to inventory property in September 1971 pursuant to paragraph 3(e) of the assumptions of facts (par. 2.02) when the appellant made a proposed plan of subdivision for the land (par. 4.03).

5.03.2 The main principle involved is outlined in the lengthy study undertaken in the Magilb Development Corp. Ltd. decision (par. 5.02(6)), rendered by McNair, J. of the Federal Court-Trial Division, in November 1986. The facts are summarized as follows at page 5012 D.T.C.:

The taxpayer corporation was owned by H and his family. H owned a majority of the shares but all shareholders participated equally whenever a vote was taken. Upon incorporation in 1964, H transferred the family farm to the taxpayer. In 1971, the taxpayer approached municipal authorities concerning the possible development of the property. H was advised that it would be many years before the property could be serviced by water and sewage facilities. In 1974, H transferred most of his shares to his children. In 1975, water and sewage services became available and the property was quickly subdivided. On the taxpayer's disposition of the property, the Minister assessed the taxpayer on the basis that the property was converted to inventory in 1971 when H made his tentative overtures to the municipal authorities concerning development and that the subsequent gains were therefore on account of income. The Tax Review Board (82 D.T.C. 1249) dismissed the taxpayer's appeal from that assessment and the taxpayer further appealed to the Federal Court-Trial Division.

Held: The taxpayer's appeal was allowed. The Court found that the property did not become inventory until January 1, 1976. The weight of evidence showed that the taxpayer did not carry on or intend to carry on the business of subdivision development in 1971.

The facts are in substance the same as those in the present appeal.

Most of the cases at law referred to in the present case were studied by McNair, J. Counsel for the respondent quoted, among others, Cattanach, J. in the Moluch case (par. 5.02(2)) at page 719 (D.T.C. 5467):

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

In the Magilb decision (par. 5.02(6)), the taxpayer was a company. Despite corporate objects of the appellant, it was held that the land had not been converted from capital to inventory in 1971 when the first overtures to the municipal authorities were made, but in 1976 when the final subdivision occurred.

5.03.3 In the present case, the appellant is an individual. It seems to me that the argument is stronger in his favour.

After the letter dated October 2, 1971 (Exhibit R-2) which the appellant sent to the Planning Division of the Department of Community Services, P.E.I., he continued "to sit with the land”, as he said in his testimony.

It is only in 1980, in fact, that the development of areas surrounding Charlottetown favoured the sale of the appellant's land (par. 4.05), as provided by the Planning Division letter (Exhibit A-1).

6. Conclusion

For these reasons, the appeal for the 1980 taxation year is allowed with costs and the matter is referred back to the respondent for reconsideration and reassessment. And whereas counsel for the Minister moved for dismissal of the appeal in respect of the 1981 taxation year, the appeal is dismissed.

Appeal allowed.