Andrew Hawrish v. Minister of National Revenue, [1984] CTC 2868, 84 DTC 1752

Taylor, TCJ:—This is an appeal heard in Saskatoon, Saskatchewan on August 2, 1984 against income tax assessments for the years 1972, 1973, 1974 and 1975 in which the Minister of National Revenue had assessed on income account rather than capital account the gains realized on the sales of certain parcels of real property. At the start of the hearing the parties agreed that there was no appeal with regard to the taxation year 1974, and that purported appeal will be quashed. As detailed in the reply to notice of appeal, the situation was:

— In November, 1968 and January 1969, the Appellant and a company known as A & E Land Industries Ltd, of which the Appellant and his wife are equal shareholders, acquired 42 quarter sections of land, most of which was under bush, bush grazing, pasture, slough or waste land, requiring substantial development and improvement before the land could be cultivated.

— In January 1969, an agreement was entered into between A & E Land Industries Ltd and Spense Constructions Ltd for the brushing, piling and plowing of about 7,000 acres of land.

— In 1972, the Appellant sold a quarter section of the land, realizing a profit of $594.04.

— In 1973, the Appellant disposed of a further one half section of land, realizing a profit of $4,775.96.

— In 1975, the Appellant sold ten quarter sections of land, realizing a profit of $168,840.54.

— The Appellant reported the disposition of the afore-mentioned lands in his tax returns by treating the profit as a taxable capital gain.

— Upon reassessment, the Respondent included the gains realized by the Appellant on the disposition of the lands in 1972, 1973 and 1975 in the Appellant’s income and for his 1975 taxation year, also applied the reserve provisions of the Income Tax Act.

— For each of the taxation years, the Appellant reported losses from a farming operation which, upon reassessment, were restricted according to section 31 of the Income Tax Act.

— In so assessing the Appellant for each of the years under appeal, the Minister of National Revenue, assumed, inter alia, that:

— With respect to the profits realized on the dispositions of land in 1972, 1973 and 1975;

(i) the land, at the time of acquisition, was not suitable for grain growing;

(ii) subsequent to clearing and breaking of the land, the Appellant then disposed of it;

(iii) the Appellant’s only interest in acquiring the land was for resale at a gain;

(iv) the property was acquired with that knowledge and expectation, and that expectation was realized;

(v) minimal income was earned by the Appellant while he owned the land;

(vi) at the time of purchase of the land, the Appellant had no farm equipment, buildings or machinery to carry out a farming operation;

— With respect to the farm losses claimed by the Appellant:

(i) from the period 1969 to 1971, the Appellant while reporting minimal gross income, claimed farming losses totalling $34,112.47, which was accepted by the Minister;

(ii) during the years under appeal, capital investment in the form of depreciable assets by the Appellant was inadequate to farm the Appellant’s widespread land holdings;

(iii) farm work that was done, was on a “customM [sic] basis;

(iv) during the relevant period, the Appellant carried on the practice of law in the City of Saskatoon;

(v) the Appellant’s chief source of income for the years under appeal was neither farming nor a combination of farming and some other source of income;

A discussion was held among the Court and the parties regarding the Minister’s concession, (supra), that the appellant was entitled to the “restricted farming loss”, but that the Minister was contesting any claim to the “full farming loss” deduction. The Court noted that given the circumstances of the appeal, and the general information related in the reply to the notice of appeal, (supra), that would appear to translate into agreement by the Minister that the property in question had been used for the “business of farming”. That position by the Court is not necessarily a reflection of the view the Court might take on the basic question of the “reasonable expectation of profit” to be found in the operation. Indeed the evidence and testimony would indicate little or no support for a proposition that there could be an expectation of profit. Nevertheless, since the Minister was unable to make a viable and credible distinction, which would serve to identify the property sold as inventory for sale (at the time of sale) — rather than business farm land, its continued use as a capital asset would appear relatively indisputable. There was no evidence or testimony that the appellant had changed the purpose or use of the land or even changed his intention for its use from acquisition to disposition, including the period he held it. The appellant’s claim and the Minister’s admission are consistent — it was purchased and held for the business of farming and sold as such.

In reviewing the assessments at issue, and considering the proceedings I am aware that there may be other points which arise out of the reassessments which must flow from this judgment. However I am content to leave those possibilities or prospects up to the parties, and if need be the Court will hear such issues later. The Court’s decision in this matter is simple and direct — the gains realized on the sale of the properties involved are all on capital not income account.

The appeal is quashed with regard to the 1974 taxation year. The appeal with regard to the 1972, 1973 and 1975 taxation years is allowed and the matter referred back to the respondent for reconsideration and reassessment.

Appeals allowed in part.