Henri Cayer v. Minister of National Revenue, [1979] CTC 2701, 79 DTC 463

Guy Tremblay [TRANSLATION]:—The case at bar was heard at Quebec City, Quebec on March 22, 1978.

1. Point at Issue

The issue is whether the profit resulting from the expropriation on November 29, 1969 of a piece of land purchased by the appellant in April 1969 for use as a sand pit, and also as pasturage for animals during the summer, is a capital gain or income. The appellant operates a livestock farm with 200 head of dairy cattle and is the principal shareholder in a company having as its primary purpose the asphalt and road construction business. The judgment of the Superior Court homologating the order of the expropriation tribunal was delivered on May 31, 1972. The profit was included in the appellant’s income in respect of this year.

2. Burden of Proof

The burden is on the appellant to show that the respondent’s assessment is incorrect. This burden of proof results not from any particular provision of the Income Tax Act, but from several court decisions, including the judgment of the Supreme Court of Canada in ft W S Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

3. Facts

3.1 During the years in which the transaction involved in the case at bar took place and legally took effect, namely from 1969 to 1972, the appellant was a farmer and industrialist.

The Apppellant as Farmer

3.1 The appellant owned a livestock farm at St-Raymond de Portneuf, with about 200 herd of Holstein dairy cattle in 1969 (at the time of the hearing in 1978, the size of the herd was approaching 250 head).

3.3 After acquiring this farm from his father in 1944, he decided to raise purebred dairy cattle on it. This farm is considered one of the major ones in the province. Gross milk sales in 1969 amounted to $90,500. Various articles were written in farmers’ reviews in 1969,1975 and 1976 indicating that his livestock was highly rated. Several of his cows were awarded prizes at provincial exhibitions (Quebec City, Toronto). In 1969, one of his cows was sold for $7,600, and in 1967 another was sold for $11,000. These cows produced 28,000 to 30,000 pounds of milk annually. In 1974, the appellant was named a Canadian Master Breeder.

3.4 In 1969, the appellant owned about 125 milk-producing animals and 75 young animals. He kept the producing cows on his farm at St-Raymond. Since he could not keep the others on his farm because of the lack of space, he transported them to fields that he rented as pasturage in different places: the St-Raymond greater range, the St-Bernard lesser range, St- Léonard, Neuville (24 miles from his farm) and St-Augustin (27 miles from his farm). A series of leasing agreements for these pieces of land was filed jointly (Exhibit A-7). He transported his animals in trucks, the same trucks used for transportation to Quebec City and Toronto (600 miles from the farm) for the provincial exhibitions.

3.5 The appellant’s fiscal year was from August 1 to July 31.

The Appellant as an Industrialist

3.6 In 1969, the appellant was a shareholder (20% of the ordinary shares) and president of Pax Construction & Regional Asphalt, a company having as its primary purpose the asphalt and road construction business. The head office of the company is at St-Raymond de Portneuf.

3.7 According to the testimony of the appellant and Mr Lionel Larouche, superintendent of the company, the company required gravel and sand within a 15 to 20 mile radius of Ste-Foy. The company’s plan was in fact to set up an asphalt plant at Champigny. The plan of the future plant was filed as Exhibit A-2. The company purchased a stone quarry at Neuville (Exhibit A-3), which is located 7 miles from Champigny. The company already owned an asphalt plant at St-Marc des Carrières, but to meet the demand it was necessary to build another one not far from Ste-Foy.

3.8 A sand pit had been sought since 1967, when in the spring of 1969 Mr Larouche discovered a suitable piece of land three miles from Ville Belair very near Champigny. This land belonged to Mr Jean-Baptiste Vallieres. Neither Mr Larouche nor the appellant then knew Mr Vallieres or the piece of land in question.

3.9 Mr Larouche informed the appellant of the discovery of the sand pit. The appellant made some borings and estimated that there were about 200,000 tons of material, which met the need. The appellant was interested in buying by the ton. However, Mr Vallières refused to sell by the ton: he wanted to sell everything. The company was not interested in buying all this land, which had surface area of 120 arpents (4 x 30). In fact it only needed the sand and gravel for the purposes of the company.

3.10 The appellant, thinking of the use he might make of the rest of the land and the pasturage he needed for the young animals on his farm, decided to buy everything personally. A simple contract (Exhibit A-4) was concluded on April 24, 1969. The notarized contract (Exhibit A-1) was concluded on July 7 following. The price of the land was $8,000.

3.11 Mr Vallieres still had some animals. These animals were to remain on the sold farm for part of the summer of 1969. The appellant did not transport his young livestock there in the summer of 1969, nor did he use the sand pit that year for the purposes of the company or for sale. There was no sign advertising “sand for sale”.

3.12 On November 25,1969, the Roads Department of Quebec expropriated (notice of expropriation—Exhibit A-3) part of the 116 arpents of land purchased from Mr Vallieres with a view to using the sand for the roads; this is usually called a borrow pit.

The appellant learned this news on December 17 following, on his return from Europe.

3.13 The Department offered $4,900 (approximately $3,000 per arpent) for the part purchased, and the appellant took the appropriate steps before the expropriation tribunal, which established the value at $38,400 by a decision on May 10, 1972 (Exhibit A-11), homologated by the Superior Court on May 31, 1972. Interest of $6,115 was added to this amount.

3.14 Compensation was computed on the basis of the overall quantity of material (sand and gravel) of 256,000 tons at 15¢ net profit per ton. The surface area of the expropriated land was 601,290 square feet, or 16.339 arpents. Below the mass of material, there was a layer of water.

3.15 After the expropriation, the appellant went to meet the local representative of the Roads Department, Mr Louis Gascon, to make an agreement for the purchased land to be fenced so that he might put his herd of young animals to graze there. The answer was that the Department did not take care of that. The appellant did not contact other personnel in the Department.

3.16 According to the evidence, the part of the land where the animals would have been put to pasture was on the sand pit, but since the company would have needed about 4,000 to 5,000 tons of material a year, the sand pit would have lasted nearly 50 years and the animals would certainly have been able to graze for at least 20 years.

3.17 The rest of the land (about 100 arpents) was marshy land unsuitable for pasturage and cultivation, according to the appellant. He disposed of it in the spring of 1977 for $3,800 to Laval university.

3.18 It was proved that the appellant, as a businessman, had only once bought a property and that he had resold five years later. This property contained a brewery business.

3.19 When filing his income tax return for 1972 on April 2, 1973, the appellant did not declare the profit from the sale of the land, which he considered a capital gain. On June 25, 1973, he was assessed accordingly.

3.20 On February 23, 1976, by a notice of reassessment, the respondent included the amount of $29,400, among others, as profit from the sale of the land which the respondent considered taxable in computing the appellant’s income.

3.21 On April 26, 1976, an objection was filed to the notice of assessment. On April 25,1977, a notice from the Minister confirmed the notice of assessment as to the nature of the profit made on the land in question.

3.22 On June 10, 1977, an appeal was lodged with the Tax Review Board.

4. Act, Case Law and Comments

4.1 Sections 3, 9, paragraph 12(1 )(g) and subsection 248(1) were relied on by the parties and will be cited at the proper time and place, if necessary.

4.2 Among the factors to be considered to decide whether the profit arising from the sale of land is income or a capital gain, the purpose of the purchase is one of the most important.

It appears from the proven facts that the purchase of the land concerned in the case at bar was for a dual purpose, namely the use of the sand pit and pasturage for young livestock (paragraphs 3.9 and 3.10 of the facts). It is also evident that if the vendor, Mr Vallières, had not required that his land be sold in its entirety (120 arpents, less the buildings) the Pax Construction & Regional Asphalt company would have purchased the sand pit (16 arpents) since it had bought the stone quarry at Neuville. As a result of Mr Vallières’s requirement, however, and the company’s refusal to purchase, the appellant would not have purchased if he himself had not been a farmer with a need for pasturage.

Furthermore, even if the appellant was a farmer with a need for pasturage, what interest would he have had in acquiring 120 arpents of land if he had not also had an interest in the sand pit? Only some twenty arpents were in fact usable for the farm since the rest consisted of marsh.

Another fact which it is perhaps important to consider is that the pasturage was located on the sand pit. Moreover, it could have been used as pasturage for at least 20 to 25 years (paragraph 3.16 of the facts).

Finally, to reach a conclusion in this case, must the Board consider:

(a) the fact that the land was expropriated?

(b) the fact that the Roads Department expropriated the land because of the sand pit?

(c) the fact that the expropriation tribunal took the quantity of material in the pit into consideration to reach a valuation of $38,400?

(d) the fact that the appellant, at the time of the expropriation, had not yet begun to operate the pit, or indeed use the land as pasturage?

(e) paragraph 12(1 )(g) of the new Act paragraph (6(1)(j) of the former Act)? This section reads as follows:

12.(1)(g) Payments based on production or use.

Any amount received by the taxpayer in the year that was dependent upon the use of or production from property whether or not that amount was an instalment of the sale price of the property (except that an instalment of the sale price of agricultural land is not included by virtue of this paragraph).

To shed light on these points in particular and aid generally in reaching an appropriate conclusion, the precedents established in cases of the same type must be explained.

4.3 The cases cited by the parties are the following:

By the appellant

1. MNR v Duncan Morrison, [1966] CTC 558; 66 DTC 5368;

2. C W Logging Company Limited v MNR, [1956] CTC 15; 56 DTC 1007;

3. MNRv Southern Canada Power Company Limited, [1953] CTC 75; 53 DTC 1055;

4. Harold Duncan v MNR, [1977] CTC 2004; 77 DTC 6.

By the respondent

5. Aimé Roy v MNR, 14 Tax ABC 348; 56 DTC 106;

6. J Wm Fryer v MNR, 25 Tax ABC 356; 60 DTC 656;

7. Mary Orlando v MNR, [1962] CTC 108; 62 DTC 1064;

8. Vaughan Construction Company Limited v MNR, [1970] CTC 350; 70 DTC 6268;

9. May McDougall Ross v MNR, [1950] CTC 169; 50 DTC 775;

10. MNR v Gerthel L Lamon, [1963] CTC 68; 63 DTC 1039;

11. James Oliver Pallett v MNR, 22 Tax ABC 40; 59 DTC 230;

12. Herbert J Irwin v MNR, 31 Tax ABC 261; 63 DTC 251;

13. Frank Edwin Flewelling v MNR, 32 Tax ABC 191; 63 DTC 489;

14. Thomas William Mouat v MNR, 32 Tax ABC 269; 63 DTC 548.

4.4 Having examined all the above mentioned cases (most of which concern use or production (paragraph 3(1 )(f) of the Income War Tax Act, 6(1 )(j) of the former Act and 12(1)(g) of the new Act) (and also other cases (concerning, inter alia, capital gains), the Board is of the opinion that the following facts must be taken into consideration.

(a) The land was purchased partly for the sand pit and mainly for the sand pit. If the appellant had only been a farmer, he would not have purchased all this land, four-fifths of which was only marshland. The primary purpose of his purchase was to resell the sand and gravel to the Pax Construction & Regional Asphalt company (in which he owned 20% of the shares). The land was to be devoted to the subsidiary purpose of pasturage while waiting for the pit to be used. The pasturage was located on the pit.

(b) The Government of Quebec paid the appellant according to the value as a pit when it expropriated the latter. Even if the expropriator had not intended to use the sand and gravel but had purchased with a view to constructing a building, it would nevertheless have paid for the land according to the number of tons of material to be found. In a case of expropriation it is the use the expropriated person makes of the property, not the use the expropriator wishes to make of it, that must be considered to establish the price. The Board regards as immaterial the fact that the appellant had not yet begun to operate the pit. Such operation was also to begin after the asphalt plant was set up at Champaigny by Pax Construction & Regional Asphalt. The facts would be different if, after having retained the land for a relatively long time, the appellant had not yet begun to operate it and no longer intended to operate it. Moreover, the expropriator would then not have paid for the land according to the tonnage of material contained in the pit.

(c) Since facts (a) and (b) above must be taken into consideration, the Board has no alternative but to conclude that at the very least this was an adventure in nature of the trade. In fact, the appellant received from the expropriation in a lump sum the total price of the material which he hoped to sell over a period of years, since the sale of the material was the main purpose for purchasing the land.

4.5 The Board does not have to decide whether paragraph 12(1 )(g) applies.

5. Conclusion

The appeal is dismissed in accordance with the reasons stated above.

Appeal dismissed.