Harold Dyck v. Minister of National Revenue, [1981] CTC 2056, 81 DTC 54

John B Goetz:—This is an appeal by the appellant with respect to his 1976 taxation year wherein he sold certain farm land acquired by him in the year 1972, the profit from which sale he declared as a capital gain as opposed to income.

In assessing the appellant, the respondent relied, inter alia, upon sections 2, 3,9 and 248 of the Income Tax Act, SC 1970-71-72, c 63, as amended, on the basis that the appellant was in the business of selling real estate; that his main source of income was from the sale of land; that he had little or no knowledge of farming and experience in raising animals other than the raising of some race horses; and that he, at least, had a secondary intention of purchasing the property in question on a speculative basis for the purpose of turning same to account at a profit.

Issue

Was the profit from the sale of land a capital gain or income?

Facts

I must first commend the appellant on the thorough and complete presentation of his evidence in support of his appeal and, in particular, I refer to the three exhibits filed by him, being A-1, A-2, and A-3. Exhibit A-1 is a book of photographs showing pictures of the property in question in a thoroughly dilapidated state, which pictures included his children assisting him in the erection of fences and destruction and burning of totally obsolete farm buildings. The appellant purchased the land in Carberry Hills in 1972, which purchase was composed of 1,700 acres of bush and pasture land with a minimal amount of arable area. Exhibit A-3 shows this portion of land purchased by him at that time (outlined in read pencil) which land is composed, in the main, of 50% bush and a mixture of bush and pasture. Very little of the land was arable. Exhibit A-2 shows a statutory declaration dated June 30, 1972, wherein the appellant leased from the Crown certain Crown bush and pasture area and within the declaration are the following words:

I would start with approx 30 head in the spring of 1973, and expand to a larger herd of up to 200 head over a period of four to five years to an economic viable operation.

In fairness to the appellant, he also indicated that part of his intention of leasing the Crown property was to study the ecology of the area and develop an agrarian style of life for his family. He was married and had three boys of the ages of 21,18 and 14 years respectively. The photographs were taken between the years 1972 to 1976, and I must say that they showed a graphic improvement in the appearance of the property as purchased in 1972.

Up to this point in time the appellant had lived 30 years in North Dakota where he worked in Dycks Containers & Forest Products and he was with that business for 20 years. He ended up as a manager of the business and sold out his interest therein in 1970 for $70,000. Considering the comparative worth of the dollar in 1970 to that of 1980, $70,000 was a fair amount of working capital. Quite obviously the appellant must have acquired and saved a certain amount of money in that he owned a home, which he ultimately sold for $100,000 in the late 1970’s.

With respect to the farm purchase, he totally disavowed any speculative intention as indicated by his statutory declaration and indicated that he was only interested in establishing a viable farming operation. To this end, during the period of 1972 to 1976, he constructed ten miles of wire fence at the cost of $6,000; built a feed lot at a cost of $1,500; improved the dam on the creek at a cost of $500; repaired and rewired a barn. The Crown lease involved two 3/4 sections which the appellant held from 1972 to 1977. In 1976 he sold 80 acres of land to a Mr Buller and in the same year he sold 160 acres of his land to a Mr Gumpf. In 1977 80 acres of land were sold to a Mr Bock. The land sold was 50% wooded and open sandy area, only usable for the raising of cattle but certainly not for growing crops. He sold the northwest quarter of his land to J Pool in 1977. He admits that there were fences in the area but he had to do a certain amount of repairing. The whole of the land in question, namely the Carberry farm, cost him $33,000.

Prior to the sales in question in 1976, the appellant admitted under cross- examination that in his 1972 tax return he had stated that his occupation was “real estate’’ and he suggested that this was a gross error. Nevertheless, in his 1973 tax return, he states his occupation as “farming and real estate’’. During this period he had purchased one parcel of land composed of 40 acres of $12,000, cleaned it up and sold it in two 20-acre parts for $30,000. These were cash sales which he declared in income. At this point in time, although he had no actual farming experience whatsoever, he showed that he had developed an expertise in the upgrading of what would appear to be originally dilapidated and non-productive farm property to a point where he could sell it at a substantial profit. He admits that he would clean up such areas, removes refuse, till the soil, make driveways and do all necessary improvements to make the property attractive. Again in his 1974 and 1975 tax returns, he states that his occupation was that of “farming and real estate”. It was not until 1976 that he shows his occupation as being merely “farming”.

Findings

Although the appellant strongly expressed a sole intention of using the land in question for the purpose of establishing a large herd of cattle, when he made his statutory declaration to that effect, he had not purchased one head of cattle, but spent money on equipment and exercised all his efforts solely in the direction of upgrading the land in appearance. The onus is on the appellant to discharge that which is established in the Reply to Notice of Appeal that he was not motivated in making the purchase by an intention to use the property in an adventure or operation in the nature of trade. This onus is established by MNR v Pillsbury Holdings Limited, [1965] Ex CR 676; [1964] CTC 294; 64 DTC 5184. See also Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

In short, it is incumbent upon the appellant to satisfy this Board that his Original and only intention, from the outset of the purchase of the property in 1972 and the acquisition of the Crown lease in June 1972, was for the purpose of establishing a viable farming operation for the purpose of raising cattle. From 1972 to 1976, he owned no cattle and his neighbour used his land. He admits that he made no profit from his “farming” operation on the Carberry farm and he states that his income since 1972 arose from the sale of fence posts and the sale of land.

The appellant admits that he actually did no farming whatsoever but merely was involved in the work related to the improvement of his land by upgrading the fencing, etc. He worked on a crop-sharing basis with J Pool and sometimes ‘‘allowed free grazing”. He states that when Mr Buller who was a friend of his saw the land, he wanted it and consequently he sold to Buller.

In 1976 the appellant published two advertisements for sale of the land in the Brandon Sun, offering same for “Horseback riding, cross-country skiing, hiking and a place to breathe”, at the rate of $150 per acre in one advertisement, and in the other advertisement describing the land as “Picturesque rolling parkland country. Excellent horseback riding—Hiking—Camping Carberry Hills area 80—160 acre parcels available”.

The appellant says he did this because of the pressure of finances and the cattle market had dropped in activity.

In fairness to the appellant I must acknowledge that he admits that he lived on a family farm in North Dakota, where they were involved with mixed farming, but he only lived there until he was 14 years of age and for the next 20 years he worked in family businesses in the manufacturing of wood products, boxes, cartons, etc. The appellant never, at any time, did any actual farming and his tractor was used solely for the purpose of repairing and improving the fencing, while a neighbour did the farming on a crop-sharing basis. He admits that after improving the farm, he abandoned it for a period of four years, although his intention was to raise grass-fed cattle from forage crop and that he is now actively searching for farm property and cannot consider farming land near his residence as it is too expensive.

His stated intention of now acquiring 200 cows which would produce 150 calves seems rather empty in the face of the fact that he never purchased one head of cattle during the whole period from 1972 to 1976, when he sold the first parcel of land. All of the equipment that he used seem to relate solely to the upgrading of the land. The following was the equipment used for what he calls “putting the farm in shape”: a Massey-Ferguson tractor, a fence post auger, a rotary brush cutter, a low-bed 20-foot trailer and a Ford truck. He sold his home for $100,000 in June 1980.

In reaching my conclusion as to whether the appeal should be successful or otherwise, I must not only consider what the appellant stated in his correspondence with the taxation department but also his conduct throughout. It was in 1973 that he put his home near Oakbank up for sale but the sale was not effected until 1980. He says that he brought new materials on to the land for a proposed new home, which materials he ultimately removed. He states that a serious financial situation developed in 1975 and the 80-acre parcel sold to his friend Herb Buller netted him $12,000, with a subsequent sale of another 160 acres of Mr Carl Gumpf for $24,000. He says in his letter to the Department of National Revenue:

With the sale of these two parcels of non-agricultural land, I realized the potential in recreational value of the farm in spite of the fact that Winnipeg was 120 miles away. (Italic mine).

His assertion of the value of recreation land lends very little weight to his argument, having consideration to the proximity of the Lake of the Woods area not much further than 120 miles from Winnipeg.

Considering the facts that: (1) the appellant did not purchase one head of cattle, and (2) his sole efforts were related to the upgrading in the appearance and saleability of the land, I therefore must take cognizance of these facts in face of what he states as attempting to establish a viable farming operation. His actions speak far louder than his words under oath and I deduce that his true intention from the outset, considering all of the circumstances of the case, was to turn the property over to account for profit.

I could give him the benefit of the doubt that he may have had a secondary intention to sell the land if it did not prove a viable operation as a farm, but no attempt was ever made by him to acquire farm income from the land purchased and leased by him.

It would appear that two of the sales about as a result of his advertisements in the Brandon Sun. I am fully aware of the findings in Hiwako Investments Limited v Her Majesty The Queen, [1978] CTC 378; 78 DTC 6281, wherein it was stated as follows:

Held

... An intention at the time of acquisition of an investment to sell it in the event that it does not prove profitable does not make the subsequent sale the completion of an adventure in the nature of trade, (per Jackett, CJ and Pratte, J).

Quite obviously, from the facts of this case, the decision in Hiwako (supra) does not apply. Rather, I think the decision in Gairdner Securities Limited v MNR, [1954] CTC 24; 54 DTC 1015, is more relevant in that this case con- siders the whole course of conduct of the appellant, which in the present appeal indicates to me quite firmly that the appellant made no attempt to farm the land and that his intention in the acquisition of the land and the Sale as it relates to the 1976 assessment was totally speculative. To say the least, he had a secondary intention that if the land did not prove suitable for farming and the grazing of cattle, he would sell it at a profit.

I have considered the following cases in particular, as well as others in this appeal:

Michael Starko v MNR, [1965] CTC 246; 65 DTC 5151;

Regal Heights Limited v MNR, [1960] CTC 384; 60 DTC 1270;

Robert D Tate and John Retzlaff v Her Majesty The Queen, [1974] CTC 731; 74 DTC 6559;

Demeter Equity Limited v Her Majesty The Queen, [1979] CTC 311; 79 DTC 5230;

Raymond Schumph v MNR, [1979] CTC 2850; 79 DTC 723.

For the above reasons, the appeal is dismissed.

Appeal dismissed.