Margaret Stroh, Lincoln H Stroh v. Minister of National Revenue, [1980] CTC 2508, 80 DTC 1457

D E Taylor:—These are appeals heard on common evidence at the City of Edmonton, Alberta, on March 19, 1980, against income tax assessments for the years 1972, 1973, 1974 and 1975 in the case of Lincoln H Stroh, and for the years 1972, 1973 and 1974 in the case of Margaret Stroh. In assessing, the Minister of National Revenue taxed on income rather than on capital account, the gain realized on the sale of a parcel of land near Edmonton. Certain other issues arising out of the assessments were noted both by the appellants and the respondent in the documentation prepared for the hearing, but it was agreed at the commencement of the proceedings that the only issue still unresolved, and therefore to be brought before the Board, was that related to the capital or income question on the subject parcel of land. Therefore, the degree to which the outcome of the appeals has relevance (in the sense of reserves, etc, if applicable) to any of the particular taxation years under appeal was left to be determined by the Minister after this decision.

It was also noted that agreement had been reached between the parties that in the event it became material to the determination of the assessment of tax in this matter, an amount of $5,000 per acre was to be attributed as the V-Day value of the subject property.

In assessing, the respondent relied, inter alia, upon sections 3, 4, subsection 9(1), paragraphs 12(1)(a), 18(1 )(a) and (h), and subsection 248(1) of the Income Tax Act, SC 1970-71-72, c 63, as amended.

Background

Margaret Stroh was born in 1907 and is the wife of Lincoln H Stroh who was born in 1890. In 1966, the appellants purchased the subject property—a 40-acre parcel of vacant land, and they disposed of the property in two separate transactions, realizing profits of $55,000 and $95,000 in the years 1972 and 1974 respectively according to the assessments in question. They were taxed equally by the Minister, that is $27,500 to each appellant in 1972, and $47,500 to each one in 1974.

Contentions

For the appellants:

—The taxpayers were not in the business of the buying and selling of property, but rather, considered the opportunity of the purchase of the property as an unusual investment opportunity.

—When the facts are fully assessed concerning these properties, the following emerges:

—The primary intent was to use the property for the building of a residence.

—The secondary intent was to allow the increment of the capital invested by the foregoing of an immediate return on the investment in the form of income.

For the respondent:

—The appellants’ intention was not that of receiving investment income as a result of the ownership of the said parcel but was to resell the same at a profit.

Evidence

Evidence regarding the general location of the property, its history, zoning and use, was provided by Mr Alfred Hawkins, now retired but formerly the Administrator of the County of Strathcona, in which the land was situated. Mr Hawkins’ evidence in summary was that in 1966 it was Strictly agricultural land (the “Hunger” farm), as it had always been, and no serious nearby residential or commercial subdivision projects, or land speculation related to such property started until about 1969.

Margaret Stroh testified that she had married Lincoln Stroh late in life, but did not wish to move to Kitchener to live, as she preferred Edmonton where she had lived for many years in the McDonald Hotel prior to her marriage. She was independent financially, as was her husband. Although they did live in Kitchener during some periods of each year, they also travelled in the winter and resided both in California or Florida on occasions. At one time (also during the years relevant to these appeals) they had actually purchased property and built a home in California but had sold it since they did not like to live there for lengthy periods of time. No matter where they were, they had always come back to Edmonton for about six weeks each year in the summer. It was during such a visit in 1966 that her friend (a later witness) Mrs Alice Hunger asked if she would like to purchase part of the Hunger property which she (Mrs Hunger) wished to sell. Margaret Stroh discussed it with her husband and noted for the Board that the idea of owning a parcel of land near Edmonton appealed to her. She planned to build a retirement home thereon, since she was familiar with the property, having visited it when she was a girl growing up in that area. She did not enquire about the value but agreed to pay Mrs Hunger the amount requested $500 an acre. It was 40 acres, and for herself and Lincoln Stroh the payment of $20,000 under the circumstances was not particularly difficult.

Mrs Alice Hunger confirmed the testimony of Mrs Stroh, adding that the farm had originally been 160 acres, that her father had died in 1964, leaving her mother to administer the estate, the main asset of which was the farm. Later her own husband died and she needed funds to support her mother, so she sold a part of the farm at the price of $350 per acre, and had not only asked for but was quite satisfied with the amount of $500 per acre she received in 1966 from the appellants. There was nothing to indicate to her at that time that the land was worth more, or nothing to indicate that it soon might be worth more. However, in 1969 after the death of her mother, she had sold the balance of the land for what she later learned was part of a large Alberta Housing Corporation land assembly, at a price of $1,775 per acre. About the same year she had also told her friend Margaret Stroh that vandalism had commenced in the area, and that she would advise against building there and living alone on the property, since it was still quite some distance from the City.

Mr Lincoln Stroh agreed that he was knowledgeable about the land and construction industry (particularly in the Kitchener area), although he had been retired from it for some years before 1966. He still retained some rental property he had built or acquired in Kitchener during his working years. His wife (Margaret) had never relinquished her interest and roots in the Edmonton area, and always wanted to buy some land near there on which they would eventually retire. While he had not been quite so fascinated with the Edmonton area, he had no reason to interfere with those desires or interests of his wife, and certainly agreed willingly to the acquisition. He accepted his wife’s assessment (originally from Mrs Hunger) that the land was good land in any event, and worth the asking price. He was unaware in 1966 of any possible serious development interest in the area.

Argument

Counsel for the appellants simply pointed out that there was nothing in the conduct of the appellants to indicate that when they had purchased the property they had any intention of reselling it at a profit. They certainly understood that land was a good stable investment, but they did have a reasonable purpose for its acquisition at the time.

Counsel for the respondent’s view was that the land had been purchased for its potential to increase in value, that there was no evidence the appellants seriously considered building on it, and that it was sold when the price reached an amount they would accept.

Findings

I am conscious of the related business background of Lincoln Stroh which could lend support to the argument of the Minister that the land was purchased for resale at a profit. In addition, it is clear that the stated intention of building a home on the property did not come to fruition, nor even show signs of progress. However, I am of the view that Lincoln Stroh was not the motivating influence behind the purchase, and the fact that he was satisfied in any event it would be a safe investment was merely a reflection of his sound business background. Margaret Stroh wished to have the property—not only for possible residential building purposes—but also for sentimental, family and historical reasons. I can conceive of the fact that she had persisted in her efforts to persuade Lincoln Stroh to live in Edmonton rather than in Kitchener, and that the acquisition of the land would be part of that intention. Even if she never built on it, its ownership undoubtedly gave her considerable satisfaction and a sense of security. I do not find it unreasonable that in 1966, when she was only 59 years of age, she would entertain thoughts of building a permanent retirement home in this attractive, productive and familiar setting. It is a somewhat wishful but pleasant thought that may have crossed other minds on occasions. Without difficulty, I can conceive of Margaret Stroh remaining content to retain and survey her 40 acres of farm property for the rest of her natural life, even if she never built on it. I doubt seriously that Lincoln Stroh would have made any effort at all to interfere with anything she wanted to do with it. The thought of building was more likely, under the circumstances of this case, than any idea of holding the land or subdividing it for resale.

Before leaving the matter, however, I should like to comment on certain remarks made in the respective notices of appeal, apparently prepared by a Mr R F Bott, CA, of Kitchener. The particular quotation is taken from the appeal of Margaret Stroh, but is identical in all material aspects to a similar statement in the appeal of Lincoln Stroh:

There is no scarcity of judicial decisions that have indicated that the “profit motive” cannot be used to negate the “Capital Gain” nature of a transaction. In fact, it would be a very indiscreet, if not foolish, investor who would invest any funds without some degree of the “profit motive”. No one, no matter how generous his nature, invests funds without some anticipation of a return on that investment, albeit some with an insatiable avarice for the accumulation of affluence, will charge an exorbitant rate of interest while others are satisfied with a more conservative return on the investment, nevertheless, each is desirous of a “profit” no matter how much or how vehemently he disavows the “profit motive”. Therefore, in the determination of whether a particular transaction gives rise to in- come or Capital Gain, of necessity there must be some primary element other than the “profit motive” which consummated the transaction and which can be classified as “income” in nature and by definition.

“Income” has been defined as “the gain which proceeds from labor, business, property or capital; annual receipts of a person or corporation”. This definition of income indicates that in order for the return on an investment to be considered as income, there must of necessity be a continuous flow of that return although it may be paid on a periodic basis.

The taxpayer denies that the primary intent was to sell the property at a profit. The primary intent was to use the property for the building of a residence for her and her spouse. The secondary intent was to allow the increment of the capital invested by the foregoing of an immediate return on the investment in the form of income. As previously outlined, the “profit motive” may not be construed to be the deciding principle in the analysis of a transaction. Usually the word “profit” is symptomatic of business activity. The appellant was not in business nor an associate of anyone in business. If, in her astuteness, she preferred an investment with the potential of a Capital Gain rather than investment income, that is her prerogative. The appellant concurs with the observation made by a British justice who, during a judicial decision, stated: “Every man should pay all the taxes imposed by his government but this does not prevent a man from so ordering his affairs so as to attract the least tax.” We submit that the appellant had so ordered her affairs so as to attract the least tax and the so-called profit should be taxed under the provisions of the Income Tax Acts or Acts dealing with Capital Gains. (Italics mine)

Suffice it to say that the evidence to support the alleged “primary intention to use the property for the building of a residence” is slim indeed, and the Board has only accepted it on the basis that such an intention rated at least as high as any other alleged intention to resell at a profit. In stating “The secondary intention was to allow the increment of the capital invested by the foregoing of an immediate return on the investment in the form of income.” I can only presume Mr Bott’s desire was to establish that a gain realized from such an intention at acqusition—to buy and hold land for resale with the acknowledged purpose of realizing a profit from increased value—would be taxable on capital rather than on income account. However, if the Board took his statement literally, or if the evidence at the hearing lent any substantial support to such a contention, the result would be precisely the opposite—it would be taxable on income rather than on capital account—to the detriment of his clients’ interest. It is not difficult to understand that the Minister would assess as he has done, with this statement by Mr Bott as base information. The Board would make reference to the decision of Sam Grossman v MNR, [1979] CTC 2132; 79 DTC 141, for a review of this point.

Summary

The testimony and the evidence provided support the Minister’s contention that the appellants did not have the intention of earning investment income from the property, but it does not lead to the conclusion that the appellants’ purpose at acqusition was to turn the property to account for profit. The appellants have proposed a viable objective of personal use and satisfaction, as the reason for the acquisition of the property, and this is considered acceptable under the circumstances of these appeals.

Decision

The appeals are allowed to the degree that the gain on the sale of the Subject property should be assessed on capital rather than on income account, and that the V-Day value of the property was $5,000 per acre. The Board has no comment to make on the assertion of the appellants that a capital loss rather than a capital gain occurred in 1972, or on the taxing results which would flow therefrom. That matter is to be determined by the Minister and, together with any remaining questions in these appeals, is referred back to the Minister for reconsideration and reassessment.

Appeal allowed.