Donald F Coons and James T Kemp v. Minister of National Revenue, [1978] CTC 2228, 78 DTC 1185

The Chairman:—The appeals of Donald F Coons and James T Kemp from income tax assessments in respect of the 1972 taxation year were, by consent, heard on common evidence.

The basic issue is whether the profits of $11,896.68 realized by each of the appellants from the disposition of certain parcels of land IS a Capital accretion or income in their hands.

Facts

To summarize the facts briefly, in 1954 Mr Kemp, a general contractor, purchased a summer cottage on Lake Ontario which he held and used consistently until 1971. Mr Kemp’s six children, having grown up, lost interest in the cottage and the maintenance of the property proved to be too much for Mr Kemp by himself and he sold it in 1971.

Immediately to the rear of Mr Kemp’s property was a parcel of land of some 10 acres which was used as a vineyard and on which there was an old house.

In 1964 the owner of the said parcel of land (hereinafter referred to as the vineyard) wished to sell the vineyard and offered it for sale. Mr Watson Wright, one of Mr Kemp’s neighbours who also owned a cottage on Lake Ontario, advised Mr Kemp of the possibility that the vineyard might be sold. Although the evidence may not be clear as to who suggested the transaction, the fact is that Mr Kemp and Mr Watson [Wright] decided to purchase the vineyard jointly, each having an undivided one half interest in the 10 acres of land. It seems clear from the evidence so far that the purpose for which the vineyard was purchased by Mr Kemp and Mr Wright was to head off any possible construction on the vineyard which would destroy the privacy, the enjoyment and indeed the value of their respective lake front properties. Exhibit A-1 is a survey plan indicating the location of the vineyard in relation to Mr Kemp’s and Mr Wright’s cottages.

The appellant’s undivided one half interest in the vineyard was acquired at a cost of $19,500 by deeds dated June 24, 1964 and July 1, 1964 (Exhibit A-2).

In order to finance the cost of his half interest the appellant borrowed $10,000 from the bank and allegedly borrowed $10,000 from Donald F Coons, the other appellant in this appeal. Subsequently, by deed dated August 26, 1964, registered on December 22, 1964, the appellant transferred half of his undivided one half interest in the vineyard to Mr Donald F Coons.

From 1964 the vineyard was leased for amounts of $300 and $400 a year which was stated to have been enough to cover taxes. Mr Kemp also had a small vegetable garden in one corner of the property.

In 1968 Mr Kemp, Mr Coons, Mr John Charles Stradwick and Mr John M Moro, who had been friends for many years, formed a partnership, Strad-Mor Associates, to which each would contribute moneys in equal amounts for purposes of investment (Exhibit A-7).

Mr Stradwick and Mr Moro were advised, that Mr Kemp and Mr Coons each owned one half of the undivided half interest in the vineyard (which half interest is hereinafter referred to as the real property) and suggested that Mr Stradwick and Mr Moro might consider the purchase of an interest in the land. It is alleged that the condition of such purchase would be that the land could not be sold for as long as Mr Kemp owned the lake front property. It was suggested that the value of property would likely increase over a period of years and that rental income was sufficient to pay the taxes. The suggestion was accepted and Messrs Stradwick and Moro purchased half of Mr Kemp’s and Mr Coons’ interest in the real property, with the result that each of the four partners had a /4 share in the real property (Exhibit A-8).

The selling price for the half interest in the real property was based on the purchase price plus 6%. As a result, Mr Kemp and Mr Coons each received approximately $6,000 for their respective A interest. It was stated by counsel for the appellant and not contradicted by counsel for the respondent that that transaction was treated as a Capital gain and was not taxed.

In 1971, in the circumstances above described, Mr Kemp sold his lake front cottage. Subsequent to the sale of the cottage Mr Wright advised that the separate school board had offered $15,000 an acre for the vineyard. Since Mr Kemp had sold the cottage and no longer had any interest in protecting it, he and the partners were willing to sell the real property to the separate school board. Mr Coons, for that purpose, met with Mr Wright who was unwilling to sell his half undivided interest in the vineyard because he still owned his cottage and still wanted his privacy. As a result of the meeting, Mr Wright decided to buy the real property himself for $15,000 an acre. The sale was effected (Exhibit A-9),

The profit realized by each of the appellants from the disposition of their share in the real property was $11,896.68 which was added to Mr Kemp’s and Mr Coons’ respective incomes for the taxation year 1972 from which assessment both taxpayers appealed.

Contentions

Counsel for the appellants contends that although four persons were involved in the sale of the real property they should not all be treated in the same way. The evidence is that Mr Stradwick and Mr Moro, who did not appeal from their assessments, acquired their interest in the real property in 1968 under circumstances quite different than when Mr Kemp and Mr Coons acquired the interest in the property in 1964. Counsel for the appellants contends that the appeals of Mr Kemp and Mr Coons must be decided on the basis of the intention that each had at the time the property was acquired and suggests that at the time of acquisition Mr Kemp’s purpose in purchasing the land was for the specific purpose of protecting the value and enjoyment of his lake front property and that he had no other intention at the time of purchase. Counsel for the appellants also contends that Mr Coons’ intention in 1964 in acquiring the land was not with a view to reselling the land at a profit. It first was to help his friend Mr Coons in meeting a financial problem and later when the interest in the land was transferred to his name he admitted that he felt he had nothing to lose and the land might increase in value over the years. Counsel for the appellants suggested that the evidence indicates that neither Mr Coons nor Mr Kemp or any of the companies in which the appellants may have had interest, had any experience in buying and selling real property; that neither had purchased the interest in the land with either a primary or secondary intention of selling the land for profit.

Counsel for the respondent, on the other hand, contends that through a series of transactions the appellants basically bought the property and sold it at a profit through a partnership which was dedicated to trading and to making profits. Counsel suggests that there could be no valid business reason for the partnership, Strad- Mor Associates, to acquire the land to preserve the privacy of the lake front property of one of the partners. Although counsel admits that there may have been an agreement among the partners not to sell the property for as long as Mr Kemp owned the cottage, the only purpose for which the interest in the property was acquired by the partnership was the possibility at some future time to sell it at a profit. Counsel stated that the Minister did not tax the entire profit made in the transaction but taxed only on the gain from the time the property was transferred to the partnership.

Counsel for the respondent also pointed out that a distinction must be made between the declared intention of the taxpayer and what, in fact, he actually did. In this respect counsel referred to Mr Kemp’s declared intention of never selling the property while he owned the cottage and yet very shortly after acquiring the undivided half interest in the vineyard he transferred half of his interest in the land to Mr Coons. Counsel. contends that there are discrepancies in the evidence given by Mr Coons and Mr Kemp and there are discrepancies in the documents which makes it unclear as to whether it is Mr Kemp or Mr Kemp and Mr Coons who first acquired the property and suggests that the credibility of both taxpayers be questioned.

Counsel also contended that Mr Kemp, whose declared intention it was not to sell the property, nevertheless realized a profit of $10,000 by transferring half of his interest to Mr Coons. He then made another profit of $6,000 in transferring 1/4 interest to the partnership and finally made another $12,000 profit on his share in the partnership sale of the property.

Counsel for the respondent contends that the circumstances surrounding the various related transactions point clearly to a trading intent.

Finding of Facts

I am satisfied on the basis of the evidence given by both Mr Kemp and Mr Coons, both of whom were credible witnesses, that the acquisition by Mr Kemp of his undivided half interest in the vineyard was motivated exclusively by his desire to protect the value and enjoyment of his lake front cottage and that at the time of purchase he did not have any intention of acquiring the land to turn it to account.

Mr Kemp admitted that he had borrowed the whole amount of his share of the purchase price, $10,000 of which was borrowed from Mr Coons, a long time friend with whom Mr Kemp had had many transactions and whom he met socially weekly.

The loan was made by Mr Coons without any promissory note or any written document but with the understanding that the loan would be reimbursed whenever Mr Coons asked for it.

Mr Kemp stated that shortly after borrowing the $10,000 he felt that some collateral should be given to Mr Coons and transferred half of his half undivided interest in the vineyard to him.

There is some confusion as to exactly when this transfer was made and the respondent seemed to suggest that Mr Coons acquired his interest in the vineyard at the same time as did Mr Kemp.

Mr Coons, who was not present during Mr Kemp’s testimony, confirmed that Mr Kemp had indeed offered to transfer the land as collateral, which he accepted, but stated that the oral agreement with Mr Kemp still stood and that he could get his loan back at any time, notwithstanding the transfer.

In a very thorough cross-examination of both Mr Kemp and Mr Coons, the respondent was unable to establish that either of the appellants or any of the companies with which they were associated, dealt in any way in real estate, nor could the respondent establish that the appellants knew of pending development in the immediate area of the vineyard at the time of purchase. The evidence is that no development has taken place within two miles of Mr Kemp’s cottage.

In my opinion, the preponderance of the. evidence supports the position that neither Mr Kemp nor Mr Coons acquired interest in the vineyard for the purposes of resale,* nor did they, at the time of purchase, entertain any idea of disposing of the land.

When each of the appellants sold half of their interest in the land to Strad-Mor Associates and retained a quarter interest in the partnership, it is immaterial in my view for purposes of this appeal whether, at that time, the appellants had the intention of selling the land at a profit. What appears to me to be decisive in this appeal is that the appellants did not have, at the time of acquisition, any primary or secondary intention of selling the land. What happened subsequent to the time of acquisition is immaterial and that is probably the reason why the profits realized by the appellants in selling part of their interest to Strad-Mor Associates were considered by the Minister as Capital gains.

The other two partners in Strad-Mor Associates who had acquired the interest in the land in 1968 with a view to ultimately reselling It did engage in an adventure in a nature of trade, notwithstanding that there is evidence that the land was used by Strad-Mor Associates as collateral for bank loans used for investment purposes, the profit from the sale of the property in 1971 was income in their hands. However, the appellants who had acquired the property in 1964 cannot be said to have engaged in an adventure in the nature of trade because there is no evidence that at the time of purchase there was any interest on their part of acquiring the land for resale or Speculation.

For these reasons I must conclude that the profits realized by the appellants from the sale of their respective interest in the subject property in 1971 are non-taxable capital gains.

The appeal is therefore allowed and the matter referred back to the Minister for reconsideration and reassessment in accordance with the reasons for judgment.

Appeals allowed.