David Chin v. Minister of National Revenue, [1980] CTC 2296, 80 DTC 1246

D E Taylor:—The appeals of David Chin (79-473), Yin Chiu Chan (79-472), C C Woo Chin (79-474), Bill Chan (79-475), Ming Wah Gin (79-476) and Nelson Chan (79-477) were heard on common evidence in the City of Winnipeg, Manitoba, on February 11, 1980. The dispute is whether or not the gain realized on the sale of a parcel of vacant land should be taxed on capital or on income account. In assessing the appellants, the respondent relied, inter alia, upon sections 3, 4, 9, 18 and subsection 248(1) of the Income Tax Act, SC 1970-71-72, c 63, as amended. The Board will deal with the matter as if it related to David Chin only (as the “appellant”) for simplicity in writing, but the decision will apply to all parties, referred to as the “group” or the “partnership”.

Background

During the year 1973, the appellant as one of the “group”, acquired an interest in certain lands of approximately 125 acres more or less situate North of the City of Winnipeg (the property). During the year 1976, the appellant and his co-owners did dispose of a portion of the aforesaid lands at a gain of which the appellant’s share was $35,488.35.

Contentions

For the appellant:

— His object and that of his co-owners was as a depository of funds and as a Capital investment.

— His object and that of his co-owners did not include the intention to acquire the aforesaid lands solely for the purpose of immediate disposition or at the first opportunity for profit.

— He and his co-owners did not acquire the land referred to herein as an adventure or concern in the nature of trade, as assumed by the respondent, but solely as a long-term growth investment.

— He was not engaged in a “business” as assumed by the respondent.

For the respondent:

—The operating motivation for the acquisition of the property was the intention to resell it at a profit.

—The gain was from a venture in the nature of trade.

Evidence

Mr David Chin gave evidence that he and Mr Nelson Chan (his nephew) were the main forces behind the formation of the group and the purchase of the property. The other partners were either relatives or friends. He was concerned about the erosion of the Canadian dollar, considered land as safer, and acquired the property for long-term investment and capital gain. The cost was $160,000 and the partnership put up $50,000, taking out a mortgage for the balance. Only nominal income (a few hundred dollars per year) was received from the rental of the land and each partner contributed his proportionate share when payments on the mortgage were required. While it was true that the property had been advertised for sale, this had been only to determine the value, since there was a possibility that one of the partners wanted to sell his share to another partner (an internal transaction), and it was necessary to determine how much should be paid.

The eventual sale in 1976 resulted from the fact that he had received an unsolicited offer to sell one part of the property at a price which allowed the partnership to pay off the mortgage and hold the balance of the land indefinitely. That latter portion of the land (now worth several hundred thousands of dollars) is still held by the group, and there is no intention to sell it. Mr Chin agreed he would consider a very large offer to sell—similar in nature to the one he had accepted in 1976—but he had no desire to see such an eventuality.

Argument

Counsel for the appellant’s basic proposition was that vacant land in law could qualify as an investment, particularly if its purchase was part of a programme of retention over a long period of time. The “long haul’’ aspect of the acquisition was important to distinguish it as a capital investment from the “short term” venture for a quick profit. Counsel put forward three cases in support of this approach: Leslie Todd v MNR, 15 Tax ABC 42; 56 DTC 208; Royal Clarence Sim v MNR, 28 Tax ABC 189; 62 DTC 1; and Donald Quon and Lee K Yuen v MNR, [1962] CTC 343; 62 DTC 1204. He quoted with approval certain passages, including the following:

From Todd (supra) at pp 45 and 211 respectively:

I cannot agree that, merely because a property of any nature is purchased and is non-revenue-producing, therefore, ipso facto, it must be presumed when the property is sold that the purchaser had the ultimate intention of selling it at a profit by entering into an adventure in the nature of trade which would automatically result in any profit realized from such a sale being liable to income tax. In my opinion there must be other factors and circumstances proven before the profit realized can be considered to be a taxable profit.

From Sim (supra) at pp 192 and 2 respectively:

Lots bought for a mere song, so to speak, and then held for a decade or longer, can be an investment by the very fact of their cheapness originally. When one can buy one-acre lots at $75 each, it is hardly tying up capital that could be employed to better advantage. The return from $75, if invested in securities, would be too small to be noticeable. The entire outlay, including the wife’s, over a period of several years, for as much as 19 acres was only $1,950, payable on terms, which is far from being a large sum.

Counsel for the Minister pointed out that the only evidence adduced (that of Mr David Chin) and the exhibits filed supported the view of the matter taken by the Minister more than that of the appellant, and that the appellant had not established any basis upon which the Minister’s assessment should be disturbed. Reference was made to judicial case law in which the fact that there had been only one transaction involved did not benefit the taxpayer—the gain was judged to be on income account. Counsel also noted that the case of Quon (supra) did not have relevance here because originally there had been a business purpose for the acquisition in question.

Findings

In my view there is only one point at issue here—does the purchase of

property, with only the apparent purpose of holding it until it can be resold at a satisfactory profit, warrant such consideration that the gain therefrom should be on capital rather than on income account. Counsel for the appellant puts forward that indeed vacant land may so qualify if the intention is to hold it for a long time, and he has related certain aspects of the matter which he contends show such a “long haul” intention. While I am certainly prepared to accept that a “longer” view of the retention period, as opposed to a “shorter” one, might have merit in examining a situation where there are a number of factors involved for consideration, I do not regard it as determinative of the character of any gain realized. At best, it is an uncertain and unclear guide post, not an infallible beacon light.

One difficulty in this matter is the belief of the appellant that the accretion to cost of an asset, particularly one usually regarded as a capital asset, which can be realized merely by holding the property until by whatever cause it matures, automatically classifies the gain realized as on capital account. There may be situations in which the acquisition of vacant land with no other visible purpose in mind but holding and disposing of it at a profit may warrant the conclusion that the gain should be on capital account. In my opinion, however, the factual situation therein would be unusual indeed, virtually unique, in order to so characterize such a transaction. There may have been a time when the judicial perspective on such matters indicated that such accretion to the value of a capital asset purchased only for resale was on capital account, and indeed the cases of Todd (supra) and Sim (supra) would so imply. However, the judgments of the Courts in recent years do not lead me to believe that this Board should automatically so regard it. In this respect, I would make reference to some of the Board’s comments in Sam Grossman v MNR, [1979] CTC 2132; 79 DTC 141, in which the leading cases on this point are reviewed and summarized at pp 2145 and 152 respectively:

Therefore, at the risk of certain selective perception, one may elucidate as follows from the above summary of cases (particularly that of Hiwako (supra)):

(1) where there was “an expectation on the part of the purchaser, at the time of purchase, that . . . it could be sold at a profit and that such expectation . . . in

duced him to make the purchase . .	or
(2) “If property is acquired when there is no business . .		or

(3) “one possibility in the mind of the purchaser is to use the property as the capital asset of a proposed business”; or

(4) . . the purchaser has not considered how he will use it (the property)” (italics mine).

The Minister may then make the assumption that the gain is on income account, and assess accordingly. It then rests with the appellant, on appeal, to prove 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”. That this is a major task for an appellant is indicated in the same judgment (Hiwako (supra)) at pp 6285 and 384 respectively:

Where the subject of the purchase and re-sale is an active profit producing property, it may be more difficult to conceive of its having been acquired both as an investment in the sense of property to be held for the income arising therefrom and as a speculation in the sense of an undertaking or venture in the nature of trade. I am not aware of a clear cut decision with reference to a case of this kind but I do not regard it as theoretically impossible. (Italics mine).

The total basic thrust of the Minister’s assessment must be attacked by the appellant, and the onus on the appellant is not discharged merely by a diffusion of this basic thrust through grammatical or constructional analysis, or by a demonstration of certain comparative similarities or differences over a range of jurisprudence. To succeed, the appellant must dislodge the Minister, in fact and in law, from the validity of the assessment inherent in the assumptions of trading which have been made.

It would appear that this taxpayer assumed that since he had no intention of immediately disposing of the property, and wished to retain it as long as possible to benefit from the future increased value he anticipated, these factors either established vacant land as an investment (and therefore capital property), or preserved its original integrity as such. I am sure that there are other examples of property to which this appellant might attribute the same characteristics and arrive at the same conclusion under somewhat similar circumstances. In fact, his counsel discussed with him his views regarding gold, and art, as possible and equivalent investments.

However, I am not aware of any basis for the primary assumption of the appellant— that vacant land, in and of itself, when purchased and held with the sole purpose of sale at a profit, has the inherent characteristics of an investment rather than the characteristics of an inventory item.

The point may be raised that “this is the only time the taxpayer has bought and sold land, he has no history as a trader and did not conduct himself as would a trader”. In my view, that is of value as a possible defence only when the precise purpose of the transaction (to hold for sale) is not itself completely evident. To put forward such a proposition as a defence under any other circumstances rather tends to foster the perspective that each person should be allowed one such transaction as capital gain, and it should not be treated as a venture in the nature of trade, the definition to which, in my view, it is most aptly suited.

The situation demonstrated by the testimony of Mr Chin in this appeal shows that, as an experienced businessman with an eye toward maintaining and improving his financial position, he decided to change “cash on deposit earning interest’’but itself (the cash) steadily depreciating in purchasing power, for “vacant land capable of earning no income”, which he expected would retain or increase in purchasing power during tenure or at disposition. As he views the matter, he substituted the capital of one type of investment (the cash on deposit) for the capital of another type of investment (the vacant land), and willingly accepted the elimination of the interest income in the exchange. I would suggest, however, quite a different interpretation should be placed on the transaction. In my view, he did not simply substitute one type of investment for another type of investment while he remained throughout in the same kind of endeavour. In the first instance (with cash on deposit earning interest), he was earning income from a property, in the second situation he had effectively gone into business by engaging in a venture in the nature of trade—purchasing something for resale. Earning income from a business is quite different from earning in- come from a property, but both are taxable on income account. In each case he held a property—but in the first that property was an investment, essentially not for sale; in the second, it was inventory specifically for sale. The accretion to value of an inventory asset held for sale should not be confused with the interest, dividends or rental earned from an investment asset not held for sale.

Summary

The appellant’s own testimony supports the basis of the Minister’s assessment that the only motivation for the purchase was “sale for a profit at a later date”. The fact that the asset acquired was vacant land does not affect by itself the treatment to be accorded the gain realized on the transaction. That transaction was a venture in the nature of trade, and the profit realized is to be taxed as on income account.

Decision

The appeals of all parties heard on common evidence are dismissed.

Appeal dismissed.