Jarvie Holdings LTD v. Minister of National Revenue, [1979] CTC 2520, 79 DTC 521

Guy Tremblay:—This case was heard in Saskatoon, Saskatchewan, on October 12, 1978.

1. Point at Issue

The point is whether the profit of $99,000 was made in June 1974 on the sale of 13.7 acres, part of 18.7 acres of undeveloped land located in the City of Saskatoon and bought one month before, is a capital gain or an income.

2. Burden of Proof

The burden is on the appellant to show that the respondent’s assessment is incorrect. This burden of proof results especially from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in R IV S Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

3. The Facts

3.01 The appellant was incorporated under the laws of the Province of Saskatchewan on March 1, 1971, as Jarvie Farm Equipment Ltd. The name of the appellant was changed pursuant to the laws of Saskatchewan on April 6, 1976, to Jarvie Holdings Ltd. The business of the appellant includes the distribution of industrial automotive farm machinery and equipment, tools, implements, parts and supplies.

3.01 Since its incorporation, the appellant company has been a dealership for the White Farm Equipment Division subsidiary of White Motor Corporation of Canada. In 1978, it was the largest dealership in Canada.

3.03 In the first 12 months that the appellant was in business, it generated $600,000 in sales. By the year 1975, it had generated 2.4 million dollars.

3.04 In the same interval, the inventory of the company has grown up to $300,000 and the book value of the assets was in excess of $700,000.

3.05 Since 1971 the appellant had to acquire or to lease five different premises to enlarge the original site and so fulfil the commercial need of the company.

3.06 In fact, in 1973 the appellant required additional facilities for storage sales and services and also desired to locate all of its operations in one centralized location.

3.07 In the fall of 1973, Mr Jarvie asked Mr G N Clackson, realtor, to find land for the company. Mr Clackson proposed a land situated on F North Avenue in the City of Saskatoon. It was an undeveloped land of 18.7 acres without municipal services. The appellant company offered to purchase 5 to 8 acres, the area it required for its needs (pages 91 and 92 of the transcript).

The owner of the land, Wellsask Construction Ltd, refused the offer because it objected to dividing the land and intended to sell it as a whole.

3.08 Mr Clackson explained in his testimony that he had the mandate to sell that land since 1968. Many clients made offers to purchase (St Lawrence Properties Ltd, R C. Baxter Limited, MEPC Canadian Properties Limited, Tigert Lumber, etc). Nobody had met the condition of the owner to sell it as a whole and to pay cash.

3.09 Consequently, to the refusal of the owner, the appellant made an offer on December 5, 1973 to purchase the whole land for $225,000 (Exhibit A-3) with a deposit of $5,000 and a clause stipulating that the purchaser would not pay the balance and not take possession until April 1, 1974. The offer was accepted a few days later.

3.10 The substantial delay of nearly four months was required by the appellant to find the necessary financing. In the event that the appellant was unsuccessful in raising its finances, it would forfeit its deposit.

3.11 In his testimony, Mr Jarvie explained that the company borrowed $175,000 from RoyNat, the difference of $50,000 coming from the operating capital. In fact, the company sold a property at 45A Street and used the proceeds as down payment on the land purchased from Wellsask Construction Ltd.

3.12 In making the arrangements with RoyNat, one of the clauses was that in the event the appellant were able to dispose of any part of the surplus of the properties, it would have the right to withdraw a part of the debt without penalty (Clause 15A, Exhibit R-1). This clause reads as follows:

Notwithstanding the provisions of paragraph 4 of this debenture, the company, when not in default hereunder, shall have the right at its option to redeem a portion of this debenture to the extent of fifty thousand dollars within six months from the date of disbursement of the funds secure by the debenture provided that the proceeds for such redemption are derived from the sale of a portion of the land secured hereunder, which sale may be made only with the approval of RoyNat Limited, which approval will not unreasonably be withheld.

However, according to Mr Jarvie, at the time of the purchase, he did not know any person, firm or corporation that had any interest in the property.

In re-direct examination, Mr Jarvie answered to the suggestive question of the appellant’s counsel concerning the clause (page 112 of the transcript):

Q. So if you will, you request to RoyNat to have the opportunity to prepay fifty thousand dollars without penalties, which is really what we are talking about—

A. Yes.

Q. —was simply prudence on your part?

A. I like to think so, yes.

3.13 The evidence concerning the date of the final contract with Wellsask Construction Ltd is not clear. The contract was not introduced as evidence. In its appeal, the appellant says it was passed on May 29, 1974. In its reply to notice of appeal, the respondent says it was passed on March 29, 1974. No witness specifically testified about the date. However, the Board finds on the Saskatchewan certificate of title (Exhibit A-7) that the date of registration was April 2, 1974. As the registration is not done before the final agreement but only after, the only possible date between May 29,1974 and March 29, 1974 for the final agreement is March 29, 1974.

3.14 Nor Mr Jarvie nor the company, nor a person on behalf of one or the other gave authority to any person to sell the surplus or any part of it. Moreover, the property was never advertised in papers and no sign was placed on the premises for sale. Nobody was approached to the same effect.

No service was required to divide it in marketable parcels.

3.15 During May 1974, Saskatoon Co-Op approached Mr Clackson to know whether the F North Avenue land was still available. The general manager of the Co-Op answered that it was sold. Mr Clackson said (page 35 of the transcript):

He asked if he could negotiate on it and we said well as far as we knew it wasn’t for sale.

Nevertheless, he gave instruction to Mr Clackson to meet the new owner and see if he would sell the whole land: 18.7 acres. Receiving this information, Mr Jarvie answered that the appellant needed 5 acres and that it was not possible to sell the whole land. Later, on June 11, 1974, Saskatoon Co- Op made an offer for the balance of the land: 13.7 acres for the price of $325,000 with $15,000 deposit. The offer was accepted by the appellant on June 14, 1974. The final agreement was signed July 12, 1974.

3.16 Mr Clackson received from the appellant a commission of 5% for the sale of the 13.7 acres (page 49 of the transcript).

3.17 In 1975, the appellant company, again by the intermediary of Mr Clackson, bought from Fashion Furs, a 32-acre piece of land. It was sold after to a third party, always by the intermediary of Mr Clackson (page 50 of the transcript).

3.18 In cross-examination, Mr Jarvie admitted he had prepared a handwritten document completed by a sketch dividing F Avenue property in 5 acres. It was filed as Exhibit R-2 and it reads as follows:

The above costs include the requirement that an additional $50,000 be paid to RoyNat within six months.

Conclusion. Plan to sell parcels as soon as possible to accumulate five acre building site for own at no cost. Such a plan would therefore not involve development of services prior to sale (unless cost of same expressly added to the sale price of parcel being purchased). Any sale of easement re the 41st Street with any parcel will require approval from the City to extend and have access to Circle Drive from Avenue F.

In the 5 areas sketch of F North Avenue appear the following figures on 4 parcels: (1) 3 acres: $70,000; (2) 3 acres: $115,000; (3) 3 acres: $45,000; (4) 4.7 acres: $35,000. In the right corner, the addition of the amounts of money is made totalizing $265,000.

3.19 The document R-2 is undated. Mr Jarvie testified that this document was prepared after the interest was generated by the Saskatoon Co-Op. The price had not yet been established and the amounts appearing on the sketch were potential prices.

Mr Ruskin, counsel for the respondent, asked Mr Jarvie (pages 105 and 106 of the transcript):

Q. And why did you split this into five parcels instead of two?

A. I didn’t know the price they were going to pay at the time, so I had to make a decision. Someone wants to buy let’s say 13.7 acres. At that point, I have to decide what my options are. Should I sell to one buyer, should I develop it myself and sell it for twice as much as what they are then going to give me. So at that time, I have to draw my conclusions as to what my course of action is. I did this plan, I said if I were to divide it, keep my five acres, if I were to divide into five remaining parcels such as could be salable in my mind, what could be obtained price-wise? Those are the figures on there that I came up with and I believe it totals two hundred and sixty-five thousand dollars.

Shortly thereafter, Mr Clackson presented an offer to me for three hundred and twenty-five thousand dollars and that is the offer that I accepted.

4. Law—Jurisprudence—Comments

4.1 Law

The main sections of the new Income Tax Act involved in the present case are section 3, subsection 9(1) and section 248 (definition of business) and which read as follows:

3. Income for taxation year.

The income of a taxpayer for a taxation year for the purposes of this Part is his income for the year determined by the following rules:

(a) determine the aggregate of amounts each of which is the taxpayer’s income for the year (other than a taxable capital gain from the disposition of a property) from a source inside or outside Canada, including, without restricting the generality of the foregoing, his income for the year from each office, employment, business and property;

(b) determine the amount, if any, by which

(i) the aggregate of his taxable capital gains for the year from dispositions of property other than listed personal property, and this taxable net gain for the year from dispositions of listed personal property,

exceed

(ii) his allowable capital losses for the year from dispositions of property other than listed personal property;

(c) determine the amount, if any, by which the aggregate determined under paragraph (a) plus the amount determined under paragraph (b) exceeds the aggregate of the deductions permitted by subdivision e in computing the taxpayer’s income for the year (except such of or such part of those deductions, if any, as have been taken into account in determining the aggregate referred to in paragraph (a));

(d) determine the amount, if any, by which the remainder determined under paragraph (c) exceeds the aggregate of amounts each of which is his loss for the year from an office, employment, business or property; and

(e) determine the amount, if any, by which the remainder determined under paragraph (d) exceeds the lesser of

(i) the amount, if any, by which the amount determined under subparagraph (b)(ii) exceeds the aggregate determined under subparagraph (b)(i), and

(ii) $1,000, or if the taxpapyer is a corporation nil;

and the remainder, if any, obtained under paragraph (e) is the taxpayer’s income for the year for the purposes of this Part.

9. Income from business or property.

(1) Subject to this Part, a taxpayer’s income for a taxation year from a business or property is his profit therefrom for the year.

248. Definitions.

“business” includes a profession, calling, trade, manufacture or undertaking of any kind whatever and includes an adventure or concern in the nature of trade but does not include an office or employment.

4.2 Jurisprudence

The jurisprudence cited by the parties is as follows:

1. fl P Cohen v MNR, [1970] CTC 386; 70 DTC 6244;

2. A S McKinney v MNR, [1970] Tax ABC 866; 70 DTC 1551;

3. W C Johnson v MNR, [1978] CTC 2006; 78 DTC 1001.

4.3 Comments

4.3.1 The major factors established by jurisprudence to determine a business income and a capital receipt are the following:

1. Intention;

2. The relation of the transaction to the taxpayer’s regular business;

3. The nature of the transaction and the type of asset being disposed of;

4. The number and frequency of the transactions;

5. The declared objects of the corporation.

Evidently, it is not necessary that all the factors be met to have a business income or a capital gain.

4.3.2 In the present case, the sold asset is a land, a real estate. It is at first view an object of investment. A sale of such object does not result necessarily in an income receipt. On the contrary, there is juris tantum a presumption to result in a capital gain, unless another factor reverses that presumption.

4.3.3 The relation of the transaction to the taxpayer’s regular business also plays in favour of the appellant. In fact, the sole business of the appellant company is the distribution of industrial automotive farm machinery.

4.3.4 Concerning the number and frequency of the transactions, The Board cannot ignore that in 1975 the company bought a 32-acre piece of land and resold it after. The evidence did not show it was for the need of the company (paragraph 3.17 of the Facts). The evidence showed that the lands and buildings purchased by the appellant before 1974 were to fulfil its commercial need (paragraph 3.05 of the Facts).

In fact, the F North Avenue land was also purchased to fulfil the commercial need of the company. The problem is that it bought 17.8 acres when it needed only 5 acres. However, at first view, it had no choice because the vendor refused to divide the piece of land and intended to sell it as a whole (paragraph 3.07 of the Facts).

4.3.5 However, can it be said that the intention of the company was to invest in the surplus or on the contrary was to resell that surplus in a relatively short time?

What did the evidence show about this?

The evidence shows that at least it was not a declared intention to resell that surplus as it appears from paragraph 3.14 of the Facts (no publicity, non-division in marketable parcels, etc). It even seems that the arrangement with RoyNat (to withdraw a part of the debt without penalty within 6 months in the event that the appellant were able to dispose of any part of the surplus) was simply prudence on the part of the company, “I like to think so”, said Mr Jarvie (paragraph 3.12 of the Facts).

4.3.6 However, other facts must be pointed out. Mr Jarvie could not ignore that for many years many clients tried to purchase the F North Avenue land and nobody had met the conditions of the owner to sell it as a whole and to pay cash (paragraph 3.08 of the Facts). Intelligent businessman as he is, it was easy to deduct that, after keeping the 5 acres the company needed, it would not be so difficult to find a purchaser, or even to let the purchasers come to it, or to let Mr Clackson, a realtor and a good friend whose business is to gain commissions, do this job.

Moreover, the evidence also shows that the appellant needed money. It took 4 months to find a lender to borrow $175,000.

4.3.9 Also, after the interest was generated by Saskatoon Co-Op in the land (a few weeks after the purchase by the appellant), Mr Jarvie not only made plans to succeed in selling it at the best price to Saskatoon Co-Op but also to develop it by himself. “At that point, I have to decide what my options are should I develop it myself and sell it for twice as much as what they are then going to give me. So at that time, I have to draw my conclusions as to what my course of action is’’ (paragraph 3.18 of the Facts).

4.3.10 Considering the intelligence and the experience of Mr Jarvie;

Considering the financial need of the company;

Considering the transaction made in 1975;

Considering the definition of the word “business’’ as quoted above;

The Board concludes that the said transaction was at least “an adventure in the nature of trade’’. The profit resulting from the transaction is an income receipt.

5. Conclusion

The appeal is dismissed in accordance with the above Reasons for Judgment.

Appeal dismissed.