Oakland Homes LTD v. Minister of National Revenue, [1980] CTC 2494, 80 DTC 1432

D E Taylor:—This is an appeal heard on March 18,1980, at the City of Edmonton, Alberta, against an income tax assessment for the year 1974 in which the Minister of National Revenue assessed on income rather than on capital account the gain from the sale of certain real property. In assessing, the respondent relied, inter alia, upon section 3, subsections 4(1), 9(1) and 248(1) of the Income Tax Act, SC 1970-71-72, c 63, as amended.

History

Oakland Homes Ltd (“Oakland”, the “Company”, or the “appellant”) was duly incorporated under the laws of the Province of Alberta in 1963 and carried on business in the City of Edmonton, Alberta. The major shareholder was Mr Erich Albrecht (Albrecht), who owned 98 of the 100 issued shares. On or about December 11, 1969, the appellant purchased a parcel of land of approximately 9.03 acres, described as lots “A”, One (1) and Two (2), Subdivision Plan 984 AY (South Park—SE 9-52-24-W4) in the City of Edmonton, for the total price of $41,000. On or about October 12, 1973, the said 9.03 acre parcel of vacant land was sold by the appallant to Altaland Industries Ltd (Altaland) for $145,000.

In filing its 1974 corporate income tax return, the appellant reported a capital gain of $51,482 and a taxable gain of $25,741. The respondent, on June 1, 1977, reassessed so as to treat the sale of the property as being of an income nature, and made the following adjustment to the 1974 return of the appellant:

Contentions

For the appellant:

—The Company purchased the land for use in its business and not for resale. The land was zoned agricultural at the time of purchase with safe possibility of being rezoned industrial. The land was acquired as the first step to setting up a prefabricating plant. The appellant saw potential in the prefabricating business and the site seemed ideal as it would be close to the nearby residential subdivision development of “Mill Woods”. The taxpayer had drawn up rough sketches as to the full use of the land and these included office building, warehouses and lumber yard to go with the prefabricating plant. The taxpayer realized the potential in having a prefabricating plant for walls, stairs, trusses, garages, basements, joists, etc. The availability of low cost residential lots in Mill Woods would make this a viable project. The rezoning would come and the years in between would provide him with the financial base. The taxpayer was not in a position in 1970 to commence operations on the prefabricating plant, but wanted the location as a starting point.

— Albrecht was the driving force in the company and he suffered a very serious car accident in July 1973. This accident precipitated the sale of the land to pay off the bank. As well, the company was forced to drop the purchase of various building lots it had arranged to purchase and it was also forced to sell some of its shares in Carma Developers Ltd (Carma). The shares in Carma were required to participate in building lot purchases, the number of lots depended on shareholdings. The appellant had purchased more shares in Carma only a few months before the accident. The company was on its way to becoming a major builder when Albrecht had his car accident.

—Since the company’s incorporation it has only purchased serviced residential land on which to build houses with two exceptions. An apartment block was built in 1969-70 and is still on hand today and the land in question was purchased in 1969 and sold in 1973. Any surplus serviced residential land sold separately has always been reported as income and the only capital gains the taxpayer has realized have been the above sale of the industrial site and the sale of Carma shares.

—The land was not offered for sale at any time prior to the time of the actual sale.

For the respondent:

—The memorandum of association of the appellant states that one of its objects is to “purchase, lease, take in exchange or otherwise acquire lands or interests therein”, and to “sell, lease, exchange, mortgage or otherwise dispose of the whole or any portions of the lands, and all or any of the buildings or structures that are now or may be hereafter erected hereon ..

—Albrecht was a builder familiar with land costs and by virtue of his occupation, was fully knowledgeable in land dealings in that particular area;

— In acquiring the land, the appellant did so with the intention of turning the property to account by means of resale as part of an adventure in the nature of trade or profit-making concern or undertaking and, alternatively, if not acquired and sold with the primary intention to sell for a profit at the appropriate time, then at least with the dual or alternative intention, ab initio, to do so.

Evidence

Mr Albrecht, on behalf of the appellant, described the history and development of the company leading up to the purchase of the subject land, the events between 1969 and 1973 which impinged on his plans for its use, and the circumstances surrounding its ultimate sale. In general, his practice had been to acquire serviced residential lots wherever and whenever he could, and build “individual” “custom-made” homes thereon. During the years from 1963 to the early 1970’s, he had built up not only the reputation of the company, but its capacity and volume from about 15 units per year to about 50 units per year. It was his estimate that at a volume of 75 to 100 units per year, he could support a prefabrication plant on the subject property, and he asserted that at the time of purchase such a goal was realistic for the company within the foreseeable future. Without his accident in July 1973, the volume would have been about 60 units, completed or at least started, financial difficulties which became acute about the same time caused him to sell the Carma shares in July 1973 and then the subject property in October 1973. He had started few if any new homes since then, and gradually wound up the construction business of the appellant company. Carma was a form of co-operative land holding and development company organized for the use of several of the construction firms in the area, of which the appellant was one. During the relevant years it gradually became his major, virtually his only source of residential lots, and in order to participate more (on a porportionate basis) he had even acquired additional shares in Carma earlier in 1973. He had never considered the use of the land for residential purposes—he was quite certain no such rezoning would have been permitted, although at acquisition he had anticipated industrial or commercial rezoning could be obtained. A draftsman friend had drawn up basic buidling plans for the use of the site for the construction of a prefabrication plan.

In 1973, acceding to pressure from his bank, he first sold his most- recently acquired Carma shares, and then the subject property. The Carma shares had been held by his bank for security against a loan used in their purchase, and his bank was also the bank for Carma. He had no gain on the sale of the Carma shares, but did use the gain on the sale of the subject land to alleviate his financial position. While the respondent alleged that he had listed the property for sale, Mr Albrecht stated this had not been done—any documents indicating so had originated at some real estate dealer’s office, over which he had no control, and which he had not encouraged in any way. The company business since 1973 reduced gradually until now it is not in the construction business at all, retaining only certain rental property.

Under cross-examination, Albrecht agreed with counsel for the respondent that the subject land really was divided into “3 pieces”, thereby at least lending itself to partial disposal; that a prefabricating plant could only have used a relatively small portion of the property; that he had not specifically instructed the real estate dealers not to show the land to possible or prospective customers (according to his statement, he assumed they did this without his permission anyway, and sent him regular letters to establish or preserve some rights in any possible sale); and he had participated in a general effort of owners in the area to have the land rezoned to industrial earlier than 1973.

It was also brought out that the cost of the land in 1969 ($41,000) had been carried in the company assets as part of “Building Lots“—shown at a total of $182,342 on the July 31,1973 balance sheet, and at $304,650 at July 31, 1974 (the year end statements were filed with the Board). According to the appellant, identifying the subject property as part of “building lots” had always been in error. The financial statements of the company for these two years ended July 31, can be summarized as:

The activity in ‘‘building lots” during the fiscal year ended July 31, 1974 may be reconstructed from the available financial statements to show in summary:

Argument

Counsel for the appellant proposed that the rationale for both the purchase and the sale of the land complied precisely with situations in which the gains were held to be on capital account for income tax purposes. The fact that the appellant was in a business requiring the acquisition and use of land should not be a factor against allowing the appeal.

Counsel for the respondent, while agreeing that under certain circumstances the regular construction business of a taxpayer need not be a negative factor when the gain on buying and selling land is claimed to be on capital account, stated that the circumstances of this appeal did not lend themselves to that interpretation. The appellant simply had not shown that his proposal for the use of the property could have been serious at the outset, was pursued in any reasonable way, or was frustrated by events leading to the sale.

Findings

The general format within which this matter should be reviewed was put forward in Elmer D Bassani v MNR, [1977] CTC 2311; 77 DTC 208, at 2321 and 215 respectively:

In my opinion, to determine a question of the kind posed at this hearing, particularly dealing with the purchase and sale of land and considered against the background just described, requires the following:

(a) An examination of the appellants’ personal and business circumstances at the time of acquisition, as such circumstances conflicted with, or complemented the probable fulfilment of their stated intention.

(b) A review of the efforts made and the progress demonstrated toward such stated intention as an objective.

(c) A critical consideration of the reasons advanced for the eventual abandonment or the frustration of the stated intention.

With regard to “(c)” above—frustration—as I understand it, the appellant is asserting that the sale of the property and the sale of the Carma shares were occasioned by the physical difficulty Albrecht himself encountered in operating the business after his accident in July 1973, and by the financial difficulty of the company, commencing about the same date, which required liquidation of certain assets to pay the bank. The sale of the Carma shares, in my view, does not accord with this rationale—the ownership of these shares, according to the evidence of the appellant, was essential to the continuation of the business. The sale, accordingly, should have virtually ended the activity of the appellant in the residential construction field. In fact, however, the appellant company had its most active and profitable year (including the expenditure of a very substantial amount of funds for new building lots) following the sale of the Carma shares and following the accident to Albrecht. In addition, the sale of the shares produced no material financial benefit or relief to the appellant. The evidence to support the appellant’s claim regarding the role played by the Carma shares and the relationship of that role to the gain at question in this appeal is simply not available to the Board.

Viewed in the same light, the rationale provided for the sale of the subject property also leaves a great deal to be desired. It is difficult to accept that the accident to Albrecht in July 1973 seriously impaired the appellant’s business—as noted above, the company had a very successful year from July 1973 to July 1974 in every way. If the business was affected, it must have been of a fairly short duration. The financial statements at July 31, 1973 do show some indication of asset liquidity problems, but there is no evidence therein of any general financial over-extension of the appellant company. Any problem, therefore, in my view must have been manageable within the regular credit structure, or the impact on the fiscal year 1973-1974 would have been noticably the opposite to the results obtained. While I understand that the funds from the sale of the subject property would have provided welcome relief from some temporary financial difficulties, the evidence does not support a conclusion that the circumstances related to the appellant’s operation in 1973 were such as to warrant the abandonment of any strongly held intention to build a prefabrication plant on the subject property, as a major part of the company’s long-range objectives. Such evidence, as I see it, points clearly the other way—volume of business, profitability, assured access to building lots (allegedly from Carma), years of continued and responsible growth and reputation in the area, etc.

With regard to “(b)”—progress—in Bassani (supra) the only supportive evidence adduced by the appellant was that some preliminary draft building plans which cost about $100 were prepared sometime after purchase of the property. The conflicting evidence is that considerable effort continued through local real estate dealers to rezone and/or resell the property during the same period. Even taking into account Mr Albrecht’s testimony that such efforts did not originate with him, it cannot be seriously asserted that efforts worthy of the initial investment, the stated intention and the alleged business prospects proceeded during tenure.

Turning ultimately to “(a)”—acquisition—again in Bassani (supra), since the evidence in support of the appellant’s assertions regarding “(b)” and “(c)” above is unconvincing, the evidence with respect to the acquisition itself must be convincing indeed to serve the appellant’s cause. However, there is in fact little or no evidence, other than the testimony of Mr Albrecht, to indicate any purpose whatsoever for the acquisition. The contrary evidence, as I see it, is that the property was zoned agricultural in 1969 and remained that way until 1973; that the type and volume of the business done by the appellant in 1969 was not such as to envisage a requirement for a prefabrication shop for many many years ahead, and then only after dramatic changes in the methods of construction (from individual or custom work to mass production work); that the land was much too large for any possible “pre-fab” requirement; that adjacent residential subdivision land (eg Mill Woods) would be completely filled before the appellant could conceivably require such a plant; and that the land was carried on the books and the financial statements of the company as “building lots” for the entire period of time it was held.

Summary

In my view, the appellant at some time gave passing thought to the possibility of constructing a building on the property which could serve some useful purpose but the prospect of using the property as the site for a residential construction prefabrication plant did not exist as a primary reason for acquiring the property or holding it during tenure. It did not enter into the decision to sell the property in any way. The Minister is entitled to conclude that, at a minimun, the prospect of resale of the land for profit occupied a position in the appellant’s program, at least comparable to any prospect of using it as asserted by the appellant.

Decision

The appeal is dismissed.

Appeal dismissed.