Murchie v. R., [1997] 2 CTC 2595

Beaubier T .C J .:

This matter was heard pursuant to the General Procedure at Vancouver, British Columbia on January 30 and 31, 1997.

At the opening of the hearing counsel advised that the following matters had been concluded between them:

1. The Appellant withdrew her claims for rental losses in 1988 and 1989 on the Maui and Penticton properties as described in paragraph 20 of the Notice of Appeal.

2. The Appellant withdrew her claim for deductions in 1988 and

1989 described in paragraph 24 of the Notice of Appeal.

3. It was agreed by the parties that the capital gain of the Appellant described in paragraph 25 of the Notice of Appeal be fixed at the amount of $443,728.

Therefore, these matters were referred to the Minister of National Revenue for reconsideration and reassessment on the above basis.

The Appellant testified and called David Freeman, Q.C. as a witness. The Respondent called Kenneth Major and Derrick Doubleday, both retired officials of the Township of Langley, British Columbia; Lorna Duncan (nee Giles), formerly employed by the British Columbia Ministry of Recreation and Environment; and Gordon Cameron, a developer and previously a vice- president of Wolstencroft Agencies Ltd. (“Wolstencroft”), a division of Webb and Knapp.

The appeal was heard relating to the Langley Property (the “Property”), which consisted of 78 acres of rural land owned by the Appellant (Gwen) and her husband John Murchie (John) in equal shares at 8th Avenue and 232nd Street in Langley, British Columbia. The issues in dispute between the parties are:

1. Whether the date of conversion of the property from capital to inventory occurred on

(a) September 18, 1975,

(b) September 17, 1979, or,

(c) May 8, 1980; and

2. if it occurred at a date other than September 18, 1975 or May 8, 1980, the value of the property on that other date.

3. The proper treatment for tax purposes of seven lots disposed of by the Appellant from the Langley property in 1988. A method of calculating the sums attributable to each of the seven lots was agreed upon between the parties.

A joint book of documents (Exhibit AR-1), which is referred to by tab numbers, and the following Statement of Agreed Facts were filed by the parties:

The parties admit the following facts for the purposes of this action only. Either party may adduce such further and other evidence relevant to the appeal and not inconsistent with this Statement. Each party reserves the right to object to the relevance of any of these facts.

1. The Appellant is an individual who resides at 2273 Mathers Avenue, West Vancouver, British Columbia and appeals from reassessment number 810082, notice of which was dated September 10, 1992, in respect of her 1988 taxation year, and reassessment number 810083, notice of which was dated September 10, 1992, in respect of her 1989 taxation year.

2. In 1957 the Appellant and her former spouse, John Murchie, acquired a property situated at 8th Avenue and 232nd Street in Langley, British Columbia and legally described as the north half of the Northwest quarter of section 4, Township 10, except parcel “A” (reference Plan 3422), New Westminster District (the Langley Property”).

3. The Langley Property was acquired for personal recreational use. The Langley Property was later used to generate income from gravel extraction, commencing no sooner than 1966 and ending no later than 1974.

4. The Langley Property was part of an agricultural land reserve and could not be subdivided unless approval was obtained from the B.C. Agricultural Land Commission (the “ALC”) and the Township of Langley,

5. In 1979, the Appellant and John Murchie made applications for the approvals necessary to subdivide the Langley Property. Applications for subdivision approval were made to the ALC on June 12,1979 and to the Township of Langley on September 17,1979.

6. On September 5, 1979, the Appellant was advised by the ALC that the application to subdivide was allowed, subject to an adjacent property described as Lot “A” being consolidated with proposed Lot 13.

7. The Appellant and John Murchie entered into an agreement to sell the Langley Property to Wolstencroft Agencies Ltd. (“Wolstencroft”) on December 21, 1979. The agreement was subject to the Appellant and John Murchie acquiring an adjacent lot owned by the Township of Langley (“Lot A”) and consolidating it with the Langley Property, as well as being subject to the approval of the board of directors of Wolstencroft.

8. On February 11, 1980, the Township of Langley voted against the sale of lot A to the Murchies.

9. On April 24, 1980, the ALC rescinded the condition of Lot “A” being consolidated with Lot 13 in order to obtain subdivision approval.

10. Final subdivision approval was granted by the Township of Langley at a meeting held on Monday, October 20, 1980.

11. The Langley Property was subdivided into 13 lots, one of which was sold in 1980, three of which were sold in 1981 and seven of which were sold in 1988.

12. In 1988 the Appellant reported her income on the basis that there was a conversion in respect of the Langley Property from capital property to inventory on May 8, 1980. The Appellant reported a capital gain from the disposition of the seven lots to the extent that their value as capital property increased during the period of December 31, 1971 to May 8, 1980. Any gains accruing after May 8, 1980 were reported as business income.

13. In reassessing the Appellant’s 1988 taxation year, the Respondent agreed that the Langley Property was capital property, but took the position that there was a conversion from capital property to business inventory on September 18, 1975.

14. By notice of objection dated December 3, 1992, the Appellant objected to the reassessments issued in respect of the 1988 and 1989 taxation years.

15. By notification of confirmation dated October 4, 1994, the Respondent confirmed the reassessments of the 1988 and 1989 taxation years issued to the Appellant.

16. The parties have agreed for the purposes of this appeal that the value of the Langley Property on December 31, 1971 was $200,000.

17. The parties have agreed for the purposes of this appeal that the value of the Langley Property on September 18, 1975 was $401,000, and that this figure will be used to calculate the Appellant’s income should the Court determine that there was a conversion of the property from capital property to inventory on September 18, 1975.

18. The parties have agreed for the purposes of this appeal that the value of the Langley Property on May 8, 1980 was $1,000,000, and that this figure will be used to calculate the Appellant’s income should the Court determine that there was a conversion of the property from capital property to inventory on May 8, 1980.

On the dates put in issue by the parties, the following occurred in respect to the Property:

1. September 18, 1975 - On September 20, 1975 John attended before the Township of Langley Council to discuss the development of the Property and its sale to the Township of Langley. $10,500 per acre was a price discussed (Tab 2). Gwen testified that she did not know of this action by John.

2. September 17, 1979 - John and Gwen signed and submitted a subdivision

application to the Township of Langley (Tab 10).

3. May 8, 1980 - John received a letter from Wolstencroft agreeing to sell him their subdivision plans for the Property (Tab 16). These were used by the Murchies to subdivide and develop the Property. On the same date Gordon Knight, a contractor, wrote John and Gwen an estimate to clear six acres of roadway on the Property (Tab 17).

Gwen and John were married on October 18, 1957. They had four children.

In 1962 Gwen and John opened their first Murchie’s Tea and Coffee store in the Park Royal Shopping Centre in West Vancouver. In 1967 they bought out John’s uncle’s store on Robson Street in Vancouver. At that time they incorporated the business, which they owned equally until their divorce. In 1969 they set up a warehouse, packaging and mailing premises on Mainland Avenue. By that time they had three children, but Gwen and John were both working full time at the business. In 1971, after a lawsuit, Gwen and John purchased Murchie’s Tea and Coffee Store in Victoria from another of John’s uncles. In 1972 they expanded the Park Royal store, opened a store in the Richmond Centre and purchased a building at Cambie and Dunsmuir in Vancouver and opened a store there. In February, 1974 they adopted their youngest child and another child was diagnosed with hyperthyroidism. In 1979 they purchased a building on Beach Avenue and opened a store there. They opened another store in the Pacific Centre and in 1977 added a beverage bar. In September, 1977 Gwen suffered an aneurysm as a result of which she lost her speech, she was also diagnosed with a form of cancer, rediagnosed as not having cancer and was off work until February, 1978.

In 1979 John arranged a sale of their corporate operations, “Murchie’s Tea and Coffee”. When he revealed it to Gwen she refused to sign and stopped the sale.

Before this time the two had settled into a routine. Gwen was managing the day to day operation and the finances. Signing power of business cheques in the business was joint, although each had a personal bank account. John, who had started out as a machinist, was the idea man. He thought up advertising, registered copyrights or trademarks, and sought out locations. He designed a special filter. He also bought himself lapidary equipment. Mr. Freeman testified that as time went on, John’s ideas became fantastic and it became harder and harder to control or guide him. His testimony concerning this confirmed Gwen’s. However, as Gwen testified, ultimately she could refuse to sign. Since they both had to sign for everything to close a deal or pay a bill, this was her means of control.

In 1980 John had designed and built the “Murchmobile”, a small urban car. Gwen first learned of it when he presented it to Gwen and some assembled guests. That night they had a fight, John hit Gwen around and she threw him out of the house. In September of 1980 the couple separated. In 1980 John was diagnosed as a manic depressive, subject to violent mood Swings.

In 1981 they purchased a coffee roaster which was installed at the Beach Avenue location. In 1983 they were again living together when John revealed to Gwen that he had purchased a property in Victoria at Government and 4th, near their old location. She signed the purchase agreement and they developed “Oak Lane” and moved their Victoria store across the street into it and developed a restaurant there. In 1983 the Cambie premises were sold to the LRT and in 1984 they purchased a building at Homer and Davies to which they moved the Cambie store in 1985.

On April 29, 1987 John was signed into Vancouver General Hospital against his will. Gwen and their daughter, Bonnie, were appointed Committee of John’s estate and retained that power until May, 1989. Gwen testified that during that period a loan was called and that she had the conduct of the sale of seven lots on the Property in 1988. She also sold the Beach Avenue property in 1989. John and Gwen were divorced in 1989.

In 1990 Gwen became sole owner of the corporate operations of “Murchie’s Tea and Coffee”. John got the two lots left on the Property. He now lives on one of them.

As is described in the Statement of Agreed Facts, matters were proceeding respecting the Property throughout these years. Gwen testified that she never met any authorities at the Township of Langley until the Council meeting of February 11, 1980 (Tab 13); she stated that she did not attend a meeting on June 12, 1978, although she later learned that John had attended. She also testified that she did not attend a Council meeting of June 19, 1978; the minutes of the meeting do not refer to her (Tab 5), but a letter of Mr. Doubleday to Mr. and Mrs. John Murchie dated June 23, 1978 refers to her attendance. Mr. Doubleday could not swear that she had attended the meeting.

Both Mr. Major and Mrs. Duncan testified that they had met with Gwen concerning development of the Property and that Gwen had been very forceful at those meetings. Mr. Major could not recall the date of the meeting and Mrs. Duncan could not be sure when it had occurred over a two year span ending in 1981. Gwen swore that she had not met either of them. Neither of them was asked to identify Gwen in the court room. In the face of Gwen’s strong denial, their testimony is somewhat dubious. John was thrown out of the house in 1980. He was mentally unstable and there could have been another woman in attendance, or the dates could have been at times that are not pertinent to the Court.

In the Court’s view, the important dates are when Gwen is verified as having acted. Based on her testimony and history, particularly in respect to the proposed sale of Murchie’s Tea and Coffee in 1979 and the purchase of the Victoria property in 1983, when Gwen signed, the evidence is that she followed through.

Gwen’s testimony, verified by Mr. Freeman, is that the Property was one of John’s pet projects and Gwen allowed matters to go along, although she was unwilling to put more capital into it and at times wanted to sell it and inject the capital into Murchie’s Tea and Coffee. There were liability concerns resulting from trespassers using the Property. John wanted to live on the Property, and about the time the gravel work ended, he began to want to subdivide it. Gwen wanted to sell it as a block and be done with it. Mr. Freeman testified that there were law suits concerning the gravel operation.

Gwen appears to have failed to report her share of income from the gravel operation for income tax purposes in at least two years. She stated that she followed professional advice respecting this. However, Gwen was an experienced business woman by the time this happened. Therefore, this explanation is not accepted.

On June 12, 1979, Gwen and John signed an application under the Agricultural Land Commission Act to subdivide the land into five acre residential parcels (Tab 7). On September 5, 1979 this was allowed, subject to the acquisition from the Township of Langley of Parcel A (Tab 9). On September 17, 1979, John and Gwen signed a subdivision application form for the Township of Langley to subdivide the Property (Tab 10). This proposed that the Township of Langley sell Lot A to John and Gwen to consolidate with Lot 13.

Until these two signatures of Gwen, John and Gwen merely owned the Property together. There is no satisfactory evidence that Gwen partook in any act in respect to the possible subdivision or sale of the property before her signatures. She knew that, in fact and in law, John could do nothing without her signature and he did not have it. This was a course of action that she had adopted successfully in the past.

In Roos v. Canada, (1994), 94 D.T.C. 1094 (T.C.C.), at 109, Bowman J.T.C.C. stated:

During the course of argument I suggested to Mr. Menninga that possibly the operative date for the change of use was the registration of the subdivision agreement and of the plan of subdivision, on the basis that at that point the appellants had given binding commitments and had taken a final irrevocable step prior to actual development that entitled them to accept offers to purchase. On reflection I think that point in time is too late. The step, at least in this case, that conforms most closely to the “clear and unequivocal positive act” referred to by Mr. Justice Heald is the submission of the formal application to the Ministry of Municipal Affairs and Housing for a plan of subdivision. By this time they were fully committed to proceeding with the subdivision and had progressed far enough that their change of intention was evident from their affirmative acts.

Thus the change of use with respect to the 10 lots in Phase I took place on June 12, 1985 and, with respect to the 48 lots originally included in Phase II on October 14, 1986.

Gwen’s signatures on June 12 and September 17, 1979 are physical evidence that they had entered into a common venture to sell the Property at a profit. By her signatures, she did what she had done before. She authorized John to proceed with his plans to subdivide and sell the Property at a profit. Their joint signatures evidence their intention to market and sell the Property, either as a block or subdivided, at a profit. Before that, neither agreed with the other on the sale of the whole property or the sale of subdivided lots. Their signatures on June 12 and September 17, 1979 are evidence that they had reached a compromise. Even the Wolstencroft offer to purchase signed by them on December 21, 1979 (Tab 11) required them to acquire Lot A and consolidate it with Lot 13, for a total of 80 acres; both of these requirements are based upon the subdivision plan. Gwen’s signatures established that subdivision and sale had become Gwen’s primary or secondary intention. By her signatures she put matters in motion.

The application to the Agricultural Land Commission dated June 12, 1979 (Tab 7) was merely an application to be allowed to subdivide. The application to the Township of Langley on September 17, 1979 (Tab 10) was for subdivision approval; it was the formal application for a plan of subdivision. For this reason, the Court finds that on September 17, 1979 Gwen’s change of intention was evident from her signature. In the words of Heald, J., (Edmund Peachey Ltd. v. R., (1979), 79 D.T.C. 5064 (Fed. C.A.), at 506) it was a

clear and unequivocal positive act implementing a change of intention ... necessary to change the character of the land from a [capital] asset to a [trading] asset.

Therefore, the date of conversion of the Property from capital to inventory was September 17, 1979.

There is no evidence before the Court respecting the value of the Property on September 17, 1979, so the Court makes no finding as to its value.

With respect to the determination of the proper treatment for tax purposes of seven lots disposed of by the Appellants, the parties have agreed upon a method of calculation and so advised the Court before the commencement of the hearing.

The appeal is allowed and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with these reasons on the basis that the change of use of the Property took place on September 17, 1979.

In view of the fact that neither of the original dates chosen by the parties was accepted, and that the September 17, 1979 date was inserted in the pleadings by amendment to the Reply, there is no order as to costs.

Appeal allowed.