Gordon Papley, Kenneth Papley v. Minister of National Revenue, [1984] CTC 2676, 84 DTC 1562

Brulé, TCJ:—These are appeals heard on common evidence in Edmonton, Alberta, on April 10, 1984, against income tax assessments for Gordon Papley with respect to the 1976 taxation year and for Kenneth Papley with respect to the 1976, 1977 and 1978 taxation years.

Issue

The appeals involve the issue of whether each appellant’s respective share of profit realized on the 1976 resale of certain parcels of land purchased in the same year is to be considered as a capital gain or as income in the hands of the respective appellants, and further if the 1977 and 1978 resale of certain parcels of land is to be considered as a capital gain or as income in the hands of Kenneth Papley.

Facts

The appellants were part of a farming family who owned seven-quarter sections of land near Leduc, Alberta. These were acquired over the years, the last purchase being made in 1975, and latterly were used for grain farming. The properties were not all contiguous.

In 1975 Kenneth Papley who gave evidence on behalf of his brother Gordon, since deceased, and himself learned that K R Ranches (1970) Ltd who held 13/2- quarter sections in the area was prepared to sell its properties. At the time Papley stated he was not really interested as he had just completed another purchase. Early in 1976 he met A E Eyben who was a real estate salesman for Weber Bros Realty Ltd. Eyben suggested that Papley buy some of the K R Ranches property as his company was the agent. Eyben knew the property as he had previously worked for K R Ranches. Papley submitted an offer for a part of the property but this was rejected as the vendor wished to sell all its property and for cash.

Obviously interest in the K R Ranches property continued because Papley asked his brother and another farmer in the area, a Maurice Goudreau, if they might wish to join him in a joint venture. They agreed. On March 17, 1976 a meeting was held with Papley representing the prospective purchasers, representatives of the vendor corporation, its solicitor and an agent from Weber Bros Realty Ltd.

Before the day was over Papley had signed a lengthy and detailed offer to purchase and interim agreement which in total set out the purchase price for the properties as being $1,200,000, with a deposit of $15,000, a closing balance to be paid on April 15th of $385,000 and four mortgages with a total value of $80,000, each mortgage covering a specific group of properties.

On the same day Papley signed nine listing agreements with Weber Bros Realty Ltd through their agent, Mr Eyben, covering the majority of the properties and offering such for sale at prices higher than they agreed to pay for such properties on the same day. There was excluded one property for each of the three joint venturers, one which eventually went to Mr Eyben, the real estate agent, at cost, and two others not specifically mentioned in evidence. Offers were received and accepted as early as the following day and within a relatively short time most of the excess properties had been secured by way of agreements to sell.

Subsequent to this activity a joint venture agreement was signed on April 1, 1976 by Kenneth B Papley, Gordon Papley and Maurice Goudreau stating among other things that Kenneth Papley was to represent all three, each was to receive one parcel of land at the stated price, they retain Weber Bros Realty Ltd to dispose as expeditiously as possible of the surplus lands not taken by each party.

In the agreement there was shown the values agreed upon by the parties as the purchase price for each property as follows:

Subsequently the same properties were sold for the following prices indicated:

The total sale proceeds of $1,253,500 together with the purchase value of each of the properties retained by the joint-venturers totalled $1,481,500, thus sharing an overall gross profit of some $281,500.

As a result of this profit on the lands sold there was a reassessment to include such in the income of the appellants for the years stated above.

Taxpayer's Submissions

The appellants argued that they did not embark on an adventure in the nature of trade. They wished to acquire more farm land and had no intention of engaging in the business of buying and selling properties. In order to obtain the lands they desired it was necessary to buy a great deal more and fortuitously they sold the excess land at a profit, and in their opinion this profit should be treated as capital gain.

Counsel contended that except for the three properties retained by the jointventurers the rest was surplus and was therefore put to sale immediately. This was necessary to produce funds to pay for the complete purchase. The three individuals involved were not in the business of buying and selling property. This purchase was an isolated transaction wherein the purchasers did nothing to develop the property, promote it and were not speculators as they did not retain the lands. The fact that when the listing agreements were signed the asking prices were more than the purchase prices was explained as being quite normal. There were certain expenses and according to the appellants there had to be “room for negotiation”.

Certain authorities were cited in support of these appeals and parts of other judgments were referred to as being supportive. These cases were:

Rudolph P Cohen v MNR, [1970] CTC 386; 70 DTC 6244 (Exchequer Court of Canada);

The Queen v Metropolitan Properties Ltd, [1974] CTC 527; 74 DTC 6434 (Federal Court);

Jarvie Holdings Ltdv The Queen, [ 1980] CTC 525; 80 DTC 6395 (Federal Court);

F W Woolworth Co Limited v MNR, [1983] CTC 2075; 83 DTC 85 (Tax Review Board);

Lily Harriet Ram Iswera v Commissioner of Inland Revenue, [1965] 1 WLR 663 (Privy Council).

Minister’s Submissions

The respondent set out that the facts in this case clearly indicate that the appellants while buying and retaining some lands for themselves embarked on a program to sell the remaining lands with a profit motive in mind, and this in fact occurred. It was pointed out that both appellants had previous experience in buying properties, other than farm lands, and could be reasonably certain that the excess lands might readily be sold. Kenneth Papley knew Eyben, the real estate agent, for some time and indeed Eyben had worked for the vendor company and knew the properties. Some planning must have taken place because while the vendor sold all the property for $1,200,000 without a breakdown, all properties to be sold by the joint-venturers were listed the same day with individual prices, and some purchasers signed offers the next day. This would indicate that the appellants knew the situation quite well and that there had been interest in the properties as other persons had attempted to buy portions of the K R Ranches properties.

Counsel for the Minister argued distinctions in the authorities cited by the appellants from this case and offered further in support of his position the following:

Andrew S McKinney v MNR, [1970] Tax ABC 866; 70 DTC 1551 (Tax Appeal Board);

Malte Von Anrep v The Queen, [1983] CTC 84; 83 DTC 5100 (Federal Court of Appeal).

Analysis

A trading case is essentially one determined on its facts and is not a question of law. Addy, J, set forth the test to be applied in determining when the term “adventure in the nature of trade” applied in Glacier Realties Limited v The Queen, [1980] CTC 308; 80 DTC 6243, as follows at 311 [6246]:

All purchases of land bought in the hope of making a profit are not necessarily adventures in the nature of trade (see Minister of National Revenue v Muzly Lawee and Naima E Lawee, 72 DTC 6342). It is seldom indeed that an asset is not purchased with the hope of ultimately making a profit should the time come to dispose of it. But what is important is whether selling at a profit was the main or one of the main purposes of acquiring the asset in the first place.

Since the Plaintiff could not be characterized as a trader, it is of course very important to determine whether or not it could be considered as having been engaged in an adventure or concern in the nature of trade . . . In such cases the actual intention at the time of acquisition is of paramount importance. Evidence of what was actually done following the purchase is really useful in such cases only to determine what the original intention was except possibly where subsequent actions might tend to indicate a substantial change of intention or orientation.

The onus in such cases rests upon the taxpayer to prove that at the time of purchase the lands were not acquired as revenue assets, that is, as inventory or as an adventure in the nature of trade. Lord Reid in Lily Harriet Ram Iswera v Commissioner of Inland Revenue, (supra), stated:

If in order to get what he wants the taxpayer has to embark on an adventure which has all the characteristics of trading, his purpose or object alone cannot prevail over what he in fact does.

Counsel for the appellants argued that they had to sell the surplus land in order to acquire what they wanted. No evidence was offered that at the time of purchase they knew which parcels of land they wanted. It was stated that Kenneth Papley wished to acquire more land, not a specific property. No mention was made of what the other two wished. No evidence was introduced showing that the acquisition of additional properties was essential to their farming operations. This fact alone distinguishes this case from several of those relied upon by the appellants and cited above which showed that the purchase of land was a necessity to carry on business.

Counsel for the Minister properly distinguished the cases referred to by the appellants’ counsel from the facts in the present case. Here there was no intention that the surplus lands be used as a source of income. They were marketed immediately and not as a result of any unsolicited offers.

From the evidence here it was obvious that the appellants’ motives had both investment and trading purposes in mind when they purchased the properties. What was not to be retained was to be sold and from the knowledge of the properties, together with the fact that others had wanted to buy portions of the K R Ranches lands and the help of Mr Eyben who had a close identity with the various parcels, it was likely that the appellants felt certain that they could dispose of the lands for at least as much as the cost price. The possibility of profit was probably in their minds. This was manifest in that the so-called “room for negotiation” was large in terms of dollar amounts. It was not suggested that the joint-venturers were traders or speculators. Evidence was addressed that at least Kenneth Papley who was the spokesman for the three knew the area, and his experience and this knowledge was sufficient in my opinion to show the intentions of the group at the time of purchase.

The case of Normae Investments Limited v MNR, [1969] CTC 468; 69 DTC 5326, subsequently confirmed by the Supreme Court of Canada [1970] CTC 325; 70 DTC 6234, advanced the proposition that where at the time of acquisition a resale is envisaged the profits are taxable as income.

Considering the situation objectively it appears that the three joint-venturers while acquiring some property for themselves and selling the remainder almost immediately did so with the expectation of some profit and certainly no loss. This has been evidenced by the quick sales at a profit without any changes to the properties. I believe their motive was for some gain with the excess parcels of land and therefore the undertaking can be classified as an adventure in the nature of trade.

In the result these appeals are hereby dismissed.

Appeals dismissed