Roger Voyer v. Minister of National Revenue, [1979] CTC 2685, 79 DTC 502

Guy Tremblay [TRANSLATION]:—This case was heard at Quebec City, Quebec on December 8, 1977.

1. Point at Issue

It must be decided whether profits made on land sales in 1973 and 1974 are capital gains or business income. A piece of land of 467,120 square feet was purchased in 1972, and more than 80% was sold within a year and a half of purchase.

2. Burden of Proof

The appellant has the burden of showing that the respondent’s assessments are incorrect. This burden of proof derives not from one particular section of the Income Tax Act but from a number of judicial decisions, including the judgment delivered by the Supreme Court of Canada in R WS Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

3. Facts

3.1 The appellant, a manufacturer in the Town of Portneuf, owns 49% of the shares in Produits Labonte Inc, a company whose purpose is the production and sale of food products.

3.2 In 1971 the company encountered a problem of shortage of space: it needed to purchase a lot measuring 150 feet by 200 feet in order to relocate. Though it made inquiries, it could not find a suitable lot. According to the evidence given, four different lots were inspected. A new shareholder was brought into the company, with a view to solving the problem. The conclusion of fruitless inquiries and a review of the company’s finances was that it would be fortunate to find a suitable lot at 0.20¢ per squre foot.

3.3 The appellant had approached the realtor concerned with the sale of the lot which is the subject of the case at bar, but the lot was unsuitably large (more than 450,000 square feet) and too expensive ($30,000). The owner, a Toronto Company, wished to dispose of it as a unit only, not piecemeal. This company had acquired it in 1960, and it had been offered for sale in 1970, 1971 and 1972.

3.4 In the fall of 1971 the company’s finances, even after bringing a new shareholder, would not allow any greater expenditure than necessary for a lot. The appellant therefore tried to find partners for the purpose of purchasing the large lot in question and reselling part of it to the company; this would solve the main problem. He did not find any partners, but nevertheless on October 5, 1971 offered to purchase the entire lot for $14,000. This offer was rejected on October 20 (Exhibit A-2).

3.5 In the summer of 1972 Produits Labonté Inc still required a lot and the lot owned by the Toronto company was still up for sale. The appellant telephoned that company and offered to purchase half the lot for $12,500. He was refused because they wished to sell the entire lot. As he knew from another source that he was the only person interested in the lot, he decided to take a gamble and offered $12,500 cash for the entire lot, giving the company until 3 pm the same day to accept. Before that time the company had accepted, with the condition that the contract be signed before the following August 31. Everything was confirmed in writing: an offer (Exhibit A-2) dated August 4, 1972 and an acceptance (Exhibit A-3) dated August 8, 1972. 3.6 At the request of the vendor company the notarized contract was in fact signed on September 13, 1972 (Exhibit A-9), the appellant paying by means of a loan of $12,500 from the Bank Canadian National. Before the cheque for $12,500 was presented to the bank the appellant had already repaid $5,000 by means of a part payment received from Produits Labonté Inc, as explained at paragraph 3.13 of the Facts. The balance was covered by a demand note.

3.7 On September 8,1972, that is, before the signature of the notarized contract, the Mayor of Portneuf and two aldermen approached the appellant and told him unofficially that they were interested in purchasing the lot in the Town’s name. They explained that the neighbouring lot, which was owned by the fabrique, would be used by the Town, which wished to be in a position to decide on the use of the appellant’s lot.

3.8 They made him an unofficial offer of $18,000 for 376,600 square feet, which he refused.

3.9 Following a special meeting of the Town Council on September 11, 1972 (Exhibit A-5), the Town’s secretary-treasurer sent the appellant, in a letter dated September 12,1972 (Exhibit A-6), an official request for a purchase price for the lot in question (376,600 square feet).

3.10 The appellant in a letter of September 18,1972 (Exhibit A-7) offered the lot for $28,245, that is, 0.07 /2$ per square foot, and allowed 15 days for acceptance. He was informed on the fourteenth day that the offer was refused. This is confirmed by the record of a Town Council meeting (Exhibit A-8).

3.11 At the beginning of 1973 the Mayor of the Town told the appellant that the price of the lot was too high, and that the Town would later expropriate it or at least homologate it for five years. During the summer of 1973 the appellant had plans and surveys drawn up. He stated that this was for the purpose of finding out whether the Mayor meant what he had said. If the Town did not buy but homologated the lot for five years, he would be in the difficult position of being unable to do anything for that period. He was aware that the lot would be very suitable for industry in view of its ready access by road, rail and river. In September 1973 he submitted a pilot project to the Town showing how the land could be divided into thirty-eight lots of 8,000 square feet each, in addition to the streets planned. Municipal services would cost $40,000. The Town made an offer of $27,000, $4,000 in cash and the balance in four instalments. The appellant accepted this offer, and the notarized contract was signed on November 22, 1973.

3.12 In order to show that his financial situation at that time was difficult, the appellant stated that the surveyor’s account for $484.80, dated October 3, 1973 (Exhibit A-12), was only paid on February 19, 1974 (Exhibit A-13).

3.13 The appellant stated that on the day following the notarized purchase of the land, September 13, 1972, he promised to sell a lot of 28,200 square feet to Produits Labonté Inc for $5,640. The company made a partial payment of $5,000 to Produits Labonté Inc (Exhibit A-10). The sale was finalized on January 23, 1973 (Exhibit A-14).

Produits Labonté Inc wished to construct a building suited to its needs on the purchased lot. According to the original plans the anticipated cost was $80,000. New government requirements raised this to $150,000. In view of the difficulty of financing and its continuing need, the company sold its lot in 1974, bought a garage and relocated there.

3.14 Produits Labonté Inc sold half of its lot to a Mr Audet and the other half to a Mr Gilles Leclerc. The latter purchased the lot in order to move his family home onto it (the lot on which it was standing had been expropriated). As the new lot was not large enough, he acquired another forty feet of frontage land by purchase from the appellant.

3.15 Mr Ghislain Larochelle (a contractor for Gilles Leclerc) also purchased a lot with 80 feet of frontage from the appellant.

3.16 The appellant swore in his evidence that before August 4,1972 he was quite unaware of the Town’s wish to acquire the lot which is the subject of this case. He stated that he was aware only that the Town had been offered the lot by the realtor in 1971, but had refused to buy.

3.17 Moreover, the appellant had undertaken no work of improvement or Subdivision of the lot, nor had he built roads or a sewage system.

3.18 The appellant had not advertised the land. The sale of the Town, according to him, was unexpected. In fact the purchase from the Toronto company was the only such transaction he had ever made.

3.19 When he filed his 1973 and 1974 tax returns the appellant reported the profits from the sales as capital gains. The assessments of June 21, 1976 treated them as income.

3.20 The appellant filed a notice of objection on September 2, 1976.

3.21 After a notification by the Minister dated January 6, 1977, confirming the notices of assessment, an appeal was submitted to the Tax Review Board on April 5, 1977.

4. Act, Case Law and Comments

4.1 The sections relevant to this case, covering each party’s options, are 3, 9, paragraph 20(1)(n), sections 38, 39, 40 and subsection 248(1) of the new Act.

4.2 Arguments in support of the appellant’s position

The main arguments available in support of the appellant’s position, namely, that the profits arising from the transaction is a capital gain, are the following.

4.2.1 The appellant cannot be regarded as a realtor. This, in fact, was the first time he had purchased a lot.

4.2.2 The subject of the land transaction was one inherently appropriate to investment rather than commercial in nature, that is, something which can be used or consumed (drink, clothing and so on), or resold.

4.2.3 The appellant did not improve the lots with a view to selling them, nor did he advertise them.

4.2.4 The sale to the Town was fortuitous and unexpected.

4.3 Arguments in support of the respondent’s position that this was an adventure in the nature of trade.

4.3.1 The fact that this was a single transaction, that there was no improvement of the lot, that there was no advertising, that the subject of the transaction was by its nature something which is invested in, is undoubtedly evidence in support of the appellant’s position, but it is presumptive evidence that can be overturned.

4.3.2 The Board is struck by the fact that the appellant certainly had an intention to realize a profit when he purchased the lot personally for the purpose of reselling part of it to Produits Labonté Inc. By offering $12,500 as he did for half the lot, that is, 233,560 square feet, he would have purchased that part for about 0.05¢ per square foot. By reselling the lot for 0.20¢ per square foot he would have realized a proft of 0.15¢ per square foot. In fact, by purchasing the entire lot for the same price, he paid about 0.02 /2$ per square foot and realized a profit of 0.17 /2$.

It has been clearly established by the evidence that the lot was purchased mainly in order to resell about 30,000 square feet of it to Produits Labonte Inc. If Produits Labonté Inc could have bought only that area of 30,000 square feet direct from the Toronto company the appellant would not have purchased the entire lot, but having been forced to act as a middleman, he undoubtedly intended to compensate himself for his trouble by making a profit.

The bilateral promise of sale between the appellant and Produits Labonté Inc, with a deposit of $5,000 paid on September 13, the day after the appellant’s purchase of the entire lot, is relevant in that it is “an adventure or concern in the nature of trade” as indicated in the definition of the word “business” in subsection 248(1) of the new Act:

“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.

The respondent has cited, among others, the case of MNR v James A Taylor, [1956] CTC 188; 56 DTC 1125. Taylor was the general manager of company X, whose purpose was the manufacture of items made of lead and other metals. The company was unable for certain reasons to import a consignment of lead from Europe. Taylor personally assumed the risk of bringing over the cargo and resold it to company X at a profit which was regarded not as a capital gain but as income deriving from an adventure in the nature of trade.

It should be noted, however, that in that case the lead was by nature a commercial commodity, and that the amount purchased could not be used by the appellant alone; the purchase was thus made with a view to resale. This was also true in CIR v Fraser, 24 TC 498, in which the taxpayer had purchased an entire consignment of liquor, and in the case of Rutledge v CIR, 14 TC 490, in which another taxpayer had purchased an entire consignment of toilet paper. It is true that in the case at bar the purchase was not intrinsically commercial, but the appellant has stated positively that the purchase of the land was made with a view to reselling part of it to Produits Labonté Inc.

4.3.3 As regards the lot purchased by the Town of Portneuf, the Board accepts that when the agreement of August 4, 1972 was made the appellant was unaware of the Town’s interest in a substantial section of this lot (376,600) square feet).

By comparison with the piece to be sold to Produits Labonté Inc (and this resale was the primary purpose of the purchase of the land) this was a leftover piece (even though it was larger).

Under the verbal threat of expropriation or, even worse, homologation for five years, the appellant decided to have survey plans drawn up. (This was for the purpose of finding out whether the Mayor meant what he said—paragraph 3.12 of the Facts). According to his own evidence the appellant was afraid that the lot would be homologated for five years, and that he would be unable to do anything for that period. This lot would be a very Suitable location for new industry. He did not say that he himself wished to reinvest in order to get this industry started (how could he have done so, since he had no financial resources?—paragraph 3.12 of the Facts). The appellant also stated that he was unwilling to make improvements to the lot because of the high costs involved. The Board must therefore conclude from this that he wished to dispose of the lot within five years and that homologation by the Town would have altered his plans. It is obvious that he wished to dispose of it, and at a profit.

4.3.4 To sum up, according to the evidence the appellant purchased a lot with the aim of reselling the first piece of it to Produits Labonté Inc at a profit. It also emerges from the evidence that it was the appellant’s intention to resell the primary leftover piece (the piece sold to the Town) within a relatively short time, and naturally at a profit.

Last, no evidence has been given to show that any part of the lot was purchased in the first instance for investment purposes. The evidence is quite the contrary.

The sale of the other small lots afterwards came about in consequence of the main transactions.

The Board concludes from all this that this was ‘‘an adventure or concern in the nature of trade’’ within the meaning of the definition of the word “business’’ in subsection 248(1) of the new Act.

5. Conclusion

The appeal is dismissed in accordance with the above-mentioned reasons for judgment.

Appeal dismissed.