Mary Wladyka, William Wladyka v. Minister of National Revenue, [1980] CTC 2408, 80 DTC 1374

D E Taylor:—These appeals were heard on common evidence at the City of Ottawa on February 28 and 29,1980 and are against assessments for the year 1974 in which the Minister of National Revenue taxed on income rather than on capital account the gain on the sale of certain real property. In so assessing, the respondent relied, inter alia, upon sections 2, 3, subsection 9(1), paragraph 20(1)(n), sections 38, 39, 40, and subsection 248(1) of the Income Tax Act, RSC 1952, c 148 as amended by section 1 of c 63, SC 1970-71-72, as amended thereafter for the 1974 taxation year.

Background

Mary Wladyka is the wife of William Wladyka. In 1969, William was 55 years of age, his wife 46 years of age.

— By an agreement dated July 4, 1969, the taxpayers as equal partners purchased Part of Lot 3, 4, and 5, Concession 2, in the Township of Hope, know as the Belmont Farm, comprising 215.244 acres more or less for the amount of $100,000 (the property).

—On June 13, 1973, they accepted an offer for this property in the amount of $640,000 with the provision that a residence and approximately 4 acres be severed therefrom.

—The profit on the sail of the subject property was approximately $506,850, shared equally between the appellants.

—The appellants did not engage in actively farming the subject property.

— In computing their income for tax for the 1974 taxation year, the appellants sought to include in their income a capital gain on the sale of land calculated as follows:

—The respondent added to each appellant’s income the amount of $44,013 calculated as follows:

At the commencement of the hearing, counsel agreed that whatever the decision on the merits of the appeals, the V-Day value of the property would be accepted at $1,500 per acre, necessitating at least an adjustment in the assessments at issue to that extent.

Contentions

For the appellants:

—The property was acquired as an investment for development as a combined trailer camp (summer) and snowmobile camp (winter), purely for recreational purposes.

—The property is situated immediately adjacent to the Ganaraska Conservation Area and has a perfect view of the Ganaraska River.

— Immediately after acquisition of the property, development began for a campsite/playground by repairing rail beds and culverts to provide a snowmobile trail for the first winter. The cost of this preparation initially was in excess of $900.

— Immediately after acquisition, the taxpayers began advertising the property as Belmont Park, a showmobile area.

—The taxpayers, immediately after acquisition, began to apply to re-zone the property from its then agricultural zoning to a qualifying commercial category which would permit camping and snowmobiling. Following on a letter to the Planning Committee, the taxpayers made representations to such Committee with respect to the re-zoning, but the re-zoning application was rejected. The rejection resulted in the cessation of development for either a mobile home campsite or for snowmobiling and left the taxpayers with the problem of property unsuitable for the intention originally desired.

—While proceeding with the re-zoning, the taxpayers commenced renovation of the 22-room building on the property known as the “Choate Residence” (the building) by constructing washrooms, a club room, and installing the necessary electrical work. They arranged for managers for the property and began negotiating for the leasing of adjoining property to provide even greater facilities for snowmobile trails.

—After rejection of the re-zoning application, the building had been converted to apartment use to provide 3 apartments in the building, one of which was to become the principal residence of the taxpayers, since it was no longer practical for them to maintain their existing residence in Port Hope, as well as the now farm residence.

—On February 9,1972, the building was totally demolished in a fire, with the loss of the entire investment therein.

— Following on from the fire, and a loss of the proposed principal residence of the taxpayers, it became essential to reconstruct or construct a residence. The taxpayers, therefore, planned and built a new house for their personal use, the location being dictated by the Ontario Department of Highways because of the proximity of the property to Highway 401, the proximity of the property to the service roads and interchanges, etc. This building was completed in mid-1973.

—The property had continuously been farmed during this period through a lease, share-crop, arrangement with a local farmer.

For the respondent:

—The appellants were aware before purchasing the subject property that the property had been designated by the Town of Port Hope as part of a “growth area’’ and as such was designated for future residential and/or commercial zoning;

—The motivating reason for the purchase of the subject property was the prospect of resale at a profit;

—The subject property was a trading asset and not a capital asset and the purchase and sale were done in the course of carrying on a business, being an adventure in the nature of trade, the property being acquired, dealt with and disposed of as part of a speculative adventure entered into by the appellants for profit.

Evidence

Mr William Wladyka, one of the appellants, Mr John Bannister, the real estate agent who sold the property to the appellants, and Mr Michael Wladyka, brother of William, presently employed as manager of the Port Hope Canadian Legion, all gave evidence in support of the appellant’s assertions. William and Michael Wladyka had been owners/partners in a hotel in Port Hope for many years prior to the period relevant to these appeals. During much of this time (including some of the relevant period) Michael had been the Mayor of the Town of Port Hope and as such was actively engaged in the planning, zoning and development of the town, including the annexation of substantial areas of land adjacent to it. Highway 401 (a portion of the Trans-Canada Highway), the main east-west route in Ontario, was constructed shortly before the period relevant to these appeals, and it virtually formed the northern boundary of Port Hope and the southern boundary of the Township of Hope. The property in question in these appeals was contiguous to the 401 Highway in the Township of Hope. William Wladyka had wished to leave the hotel business, had purchased other land prior to 1970 (also adjacent to Highway 401) and attempted to construct thereon a motel, but was prevented from doing so due to land and access requirements which resulted from the concurrent construction of a local hospital. Snowmobiling was just becoming a popular winter sport, and there was only one small summer camping area near Port Hope, which was completely filled up each week.

Mr Bannister testified that William had informed him of the desire to acquire some land for a recreation area, and the purchase in 1970 had resulted. Mr Michael Wladyka confirmed the testimony of William that he had provided no “inside” information to his brother, and indeed in his official capacity had enacted certain measures which went quite against the plans which his brother was making. These plans (including the acquisition of the property) were not known to Michael for a long period of time after the purchase of the land. Further, there were no plans by Port Hope to extend its municipal boundaries beyond the 401 Highway. This information, provided by Michael Wladyka, was later confirmed in the evidence of a Mr Stapleton, called by the respondent as a witness. Mr Stapleton pointed out that during the relevant period he had been the secretary to the Township of Port Hope Planning Committee and the Township would have strongly resisted any such effort by the Town of Port Hope. It was the desire of the Township officials that the Township remain agricultural and rural, which for the most part—including the subject property—/! remains to this day. Information and documentation, including the purchase and sale agreements, official municipal plans, subdivision plans, newspaper advertisements, etc. were submitted in support of the assertions made.

Argument

The main features of the summations of counsel for the appellants were (the singular has sometimes been used rather than the plural):

The Government’s case is that he is solely a speculator, that when he purchased the land it was because he was aware, as the Reply states . . . he was aware that the subject property had been designated by the Town of Port Hope as part of a growth area and as such was designated for future residential and/or commercial zoning. This, . . . is the key, a key element in the Government’s case, but there is no evidence of this fact. All the evidence, particularly Mr Michael Wladyka the Mayor, Mr Weston Bannister and the Government’s own witness, George Stapleton, testified that the site is not designated for future residential and/or commercial zoning. It was agricultural recreational. Hope Township wants no urban growth there. The Town of Port Hope is opposed to it. This key assumption in the Government’s case is shattered by the evidence.

. .. the property that Mr Wladyka had is zoned special uses or became special uses in the official plan ... (and) land so designated is intended primarily for agricultural preservation, conservation or recreation. .. . Was Mr Wladyka so far off in ’69 when he felt that this would be perfect for his site? I suggest that he wasn’t. He sold the property in ’73. His original plans were frustrated.

What is the true course of conduct of this man? The true course of conduct is his intention to get into a better life style for his family. That has been his intention in the fifties. His brother said he wanted to get out of the hotel business and if there is one driving intention, it is to look after his family and that is the true course of conduct.

Counsel made major reference to Ross Brown and Audrey Brown v MNR, [1979] CTC 2248; 79 DTC 227, a similar matter decided in favour of the appellants.

Counsel for the respondent made the following points:

. . . My submissions are first, that Mr Wladyka’s submission that he purchased the Subject property with an investment intention, that is to establish a summer campground and winter snowmobile park, is not credible and is not supported by the fact.

Secondly, Mr Wladyka’s entire course of conduct demonstrates a trading intention with the result that the entire profit on the sale is income from a business and third, alternatively even if his primary intention is investment, his secondary intention was the re-sale of the land at a profit and the profit is income.

In a case such as this, the Board attempts to determine the objective intention of Mr Wladyka at the time he purchased the land, but the taxpayer’s testimony as to his intention is not reliable and that is generally the case. I am not making a specific comment about Mr Wladyka. I am saying that this is generally the case and the Court must look to the entire course of conduct of the taxpayer.

Mr Wladyka’s version of his own intention is unclear. His pleadings say only that he intended to establish a trailer camp and snowmobile park.

In his testimony, he added that he wanted all along to move into the property as well and when I asked him,—“when did you decide to open a snowmobile club”?, at one point he said “after I bought the farm”.

Mr Wladyka also contradicted himself on the assurances from the vendor about re-zoning.

I would submit that if he were serious about a campground and snowmobile park, he would have made financial plans. He would have had profit projections. He would have attempted to assure himself that his profits would have covered his mortgage costs. He would have obtained, I submit, written assurances from the vendor as to obtaining re-zoning or made those a condition of purchase or indeed purchased an option on the property, subject to obtaining a re-zoning. He would have gone ahead and attempted to get re-zoning for the campground and snowmobile park or at least get permission for the campground, which he never did. If he saw he was not going to get re-zoning from the planning board, he should have in my submission (sic) gone to council or gone to the planning board and then council and then appeal to the Ontario Municipal Board if he was unsuccessful.

The inference must be that he had reason to believe that he could get subdivision approval. In summarizing all the indicia of a venture in the nature of trade, a trade being land speculation, the series of transactions in land before and since and at least two efforts at subdividing in land for resale, that is the subject property and the farm next door. The subject matter is raw farm land. Subdivisions and houses springing up nearby, I must reiterate, the houses on the north side of the 401 Highway. Mr Wladyka’s business activity and his activity in the business community, the purchase of $100,00 (sic) in mid 1969 and resale for $640,000 in 1973 and the relatively short period of time and the rise in the market value.

If the monies were invested in the snowmobile park and campsite as he said they were, then he surely would have been spured on by his cash requirements to bring this plan into action, but he did not. My submission is that he did not because his ideas about the campground and snowmobile park were merely secondary. His main intention, on the basis of his entire course of conduct, is to engage in the business of land speculation. The campground and snowmobile park might provide some cash flow to help cover the interest costs on the mortgage while he waited for an opportunity to re-sell the land later either as subdivided lots or as a whole unit.

. .. I move now to my second line of argument, if you should find that Mr Wladyka’s primary intention in purchasing the land was to invest in campground and snowmobile park, as he has submitted in his Notice of Appeal, which I submit is entirely inconsistent with the facts and with his course of conduct, then he at all times had in mind a secondary intention or motivation to sell the land at a profit if his plans did not work out.

So, to summarize, we have the purchase of a farm on the edge of town, no intention to farm it himself, certainly no effort to farm it himself, a rise in market in land, new subdivisions and services on the other side of the highway, a shaky investment. Mr Wladyka could not show that the campground and snowmobile park would cover the costs of the mortgage. No assurance that the zoning would be changed to accommodate the investment intention; no application to change the zoning and no appeal. The taxpayer is a businessman who had previous business dealings in land and (had) a surveyor plan a subdivision thirteen (13) months after closing, and an application for zoning change in 1973 and sale for half a million dollars profit three years after closing. In the face of this, I submit it is inconceivable that the prospect of re-sale at a profit is not operating on the minds of Mr and Mrs Wladyka at the time they bought the land in 1969 as an operating provision.

To find otherwise would (be) to find that the only motivating objection of the appellants at the time they made their purchase on the subject land was to operate it aS a campground and snowmobile camp and on the face of the entire course of conduct of the Wladykas, I would submit that was not their only objective.

Findings

The Board has available to it two perspectives, and one of them must stand on its own as the primary objective. One, that these appellants, after many years in the hotel business, wished to leave it for what they hoped would be a less strenuous life, and decided on the development of some nearby property which, in their view, could be adapted to recreational uses for both winter and summer, and in addition was adjacent to both the recently opened 401 Highway and a major conservation area. Or two, that they had no such intention but purchased the property with the anticipation of sale at a profit. There can be no secondary intention worth considering in these particular appeals—the determined development and operation of recreational property (if accepted as the primary intention) would require such a long-term commitment of time and resources to make it viable and such a unique utilization of the property, that the possibility of resale of the property itself could hardly be regarded as realistic.

It is my assessment of the facts that at the time of acquisition the appellants did not even entertain the thought of resale. I am convinced that not only did they have the idea of developing the property recreationally, but in addition it was a good and viable idea. They had certain business experience of a generally similar nature, had the financial resources to do so, and had a good motive to leave the hotel business (including certain family illnesses appropriately not stressed by counsel for the appellants). There is no evidence that major zoning restrictions would be encountred, and indeed it is possible (as suggested by counsel for the respondent) that had they persisted, they might have obtained all the necessary approvals. The fact that they did not so persist however, while not in their favour, does their cause little damage when the emerging and changing circumstances which impinged on their plans are looked at in total. There is no evidence that pressure for additional residential subdivision land would rapidly engulf the Subject property, and there is certainly no substantial evidence that the appellants themselves wished to engage in the business of subdivision and/or residential construction. A major part of the evidence in favour of the appellants is the earlier effort to construct a motel—incidentally on a site not too far removed from the subject property. The motel was obviously intended to capture some part of the passing tourist and recreational traffic, a purpose not totally dissimilar from that alleged for the subject property.

The appellants were familiar with property values in the area, and had made some profit on the sale of the land originally intended for the te of the motel. Certainly it is to be expected that they tried to acquire, and obviously did acquire, a property that had some potential for retaining or perhaps increasing its value. But they did so within the total framework of a program to make use of the property in a business enterprise, not to use the property itself as inventory for sale in a trading venture. There were several circumstances which impeded and interfered with the bringing to fruition of that recreational intention, and it could well be argued that the original intention rapidly lost its attractiveness, and that the property did become available for sale in the minds of the appellants at some date subsequent to its acquisition. I do not propose that the appellants were unaware of the fact that during the years 1970-1973 the value of the subject property had gone up, and it might well have been contended by the Minister that at some date during that period, the character of the property as an investment had been subordinated and in fact lost, and it had re-emerged as inventory for sale. The Minister, however, did not so argue, and the Board therefore need make no comment on the taxing results which might have flowed from that perspective.

Summary

In general, I would agree with counsel for the appellants that, allowing for the differences in facts and circumstances, this matter rests virtually on the same footing as the case of Brown et al v MNR, (supra). I would paraphrase Brown (supra) from pp 2253 and 231 respectively as follows:

In my opinion, this appellant has adequately and appropriately discharged the onus upon him to show to the Board that indeed his stated intention of using the property (in the business of recreation*) was not only practical but also possible and reasonable. In addition, there is no evidence upon which to conclude that he could have had a secondary concurrent intention. His conduct, both during and after the purchase of the property, leads to only one conclusion—that he was fortunate enough to make a (business*) acquisition which resulted in substantial, unexpected and unintended profit.

Decision

The appeals are allowed with respect to the main point at issue, with only the proviso that in the recalculation of the gain involved the V-Day value of the property is to be $1,500 per acre. The entire matter is referred back to the respondent for reconsideration and reassessment accordingly.

Appeals allowed.