Her Majesty the Queen v. Erwin Schmigelski, [1976] CTC 397, 76 DTC 6226

Cattanach, J:—This is an appeal from a decision of the Tax Review Board dated October 31, 1974, whereby an appeal by the defendant herein from an assessment to income tax for the defendant’s 1967, 1968, 1969 and 1970 taxation years by the Minister of National Revenue was allowed.

The Minister in assessing the defendant as he did for the years in question included in the defendant’s income the gain realized upon the sale of a parcel of land consisting of 39.89 acres immediately north of the City of Edmonton, Alberta.

The issue raised in this appeal is whether the gain so realized is a capital gain or an income gain. If the former is the case, as contended by the defendant, it does not attract tax. If the latter is the case, as contended by the plaintiff, it does. The onus of establishing the former to be the case falls on the defendant.

The defendant, who is carpenter by trade, so qualifying after a rigorous apprenticeship in West Germany, came to Canada in 1948 and settled in Alberta. He first worked as a labourer and then at his trade as a carpenter in a small town some distance from Edmonton. While so engaged he bought a quarter-section farm. He did not farm it because he was making 90¢ per hour at his trade. The land was leased to a tenant on a share crop basis from which the defendant netted about $300 per year. At about this time the defendant married and considered his prospects at his trade were better in Edmonton to which city he moved with his wife. He sold the farm which he had purchased and held for three years and realized a gain on the sale of about $250.

On moving to Edmonton in 1950 the defendant pursued his trade as a Carpenter. He worked hard and saved the money he earned. In 1953 he decided that he should venture forth on his own account in the building business. He bought service lots on which he built houses and sold the house and lot. He financed the operation by way of mortgages from mortgage companies, Central Mortgage and Housing, and by advances from his bank.

The cost of the lots he recouped from the purchaser with a margin of profit thereon. The mortgage on the property was assigned to and assumed by the purchaser. At that time Edmonton was in a building boom and from 1953 until 1959 the defendant’s business prospered. In 1953 the defendant built and sold ten houses.

In 1959, on the advice of his solicitor, the defendant incorporated a joint stock company to carry on the house building business. Business remained good in that year. However in 1960 and 1961 the defendant’s business was not as successful as in previous years. He encountered difficulty in selling the houses he had built and from 1961 forward he had difficulty in obtaining mortgage financing. Business deteriorated to such an extent that in 1964 the company ceased its operations. At that time the company was indebted to its bank to the extent of an overdraft for $10,000 but the company continued in existence for the purpose of collecting outstanding accounts and paying off its in- debtedness. I have no doubt that the corporate indebtedness was personally guaranteed by the defendant.

In the course of his business the defendant was obliged to purchase serviced lots to carry on that business as he did. He witnessed the rise in the cost of serviced lots from about $900 to between $2,000 and $3,000 and the decrease in the availability of such serviced lots. He would buy two or three lots at one time. In 1960 he obtained an option on 12 lots. The defendant could not obtain the necessary funds to build on these lots so did not exercise his option but rather assigned his option to his brother-in-law at a modest profit.

In 1964, on the cessation of his house building business, the defendant took a course of instruction from a real estate board and wrote qualifying examinations as prescribed by that board. His venture as a real estate salesman was disastrous. He is a carpenter not a salesman and he was not successful in selling one piece of property. He then obtained employment as a superintendent of construction for a well established and reputable company engaged in commercial construction for which occupation his talents were much more suitable. In 1960 the defendant built a house for the occupation of himself and his wife. He traded that house for a smaller house on which transaction I assume he realized a gain although there was no evidence to that effect. He occupied that smaller house for 10 years when he bought another house, which would be in 1970, from his father-in-law, if my recollection of the evidence is correct, but he retained ownership of his former home from which he derives rental income of $200 per month.

At this point I should mention that the defendant has bought a parcel of land in 1969 some 18 miles distant from the City of Edmonton for the avowed purpose of building a home on it for himself and his wife. Presumably the defendant purchased the land without first consulting with his wife because when his wife was told or saw the land she was very unhappy as she had no desire to live so far from the city. The defendant thereupon sold the land which he had bought for $2,700 for $3,000 thereby realizing a gain of $300.

Adverting to the particular transaction which gave rise to the assessments herein the defendant in 1959 after some six years of moderately successful pursuit of his house building business had accumulated a modest amount of money. In that year he was approached by a neighbour, who was a real estate salesman, to buy a parcel of land comprising 39.89 acres abutting 137th Avenue North which was the northerly boundary of the City of Edmonton, which the salesman had listed with him for sale at $52,000. The defendant looked at the land. He liked it because it was flat and free of brush. The land had been farmed at one time. Ten acres had been cultivated and the remaining 30 acres may not have been broken but produced hay.

The defendant consulted his bank manager in whose advice he had faith. The bank manager advised the defendant not to place all his surplus funds in the land, apparently the total purchase price of $52,000 would have exhausted his savings, but to retain an amount sufficient to serve as working capital for his house building business. The defendant also viewed the land in company with his wife. He testified that he did so because of his prior experience when he had purchased a parcel of land 18 miles from Edmonton which did not meet with his wife’s approval on the site of a future home. I have difficulty in appreciating how this experience could have been prior and a factor influencing his purchase of the land because I made a particular note that the parcel 18 miles from Edmonton had been purchased in 1969 which is subsequent. However, there is no doubt that the wife approved the eventual purchase but I am in doubt as to the exact purpose of that approval. The implication I thought the defendant sought to convey was that his wife approved the land as a potential site of their future home. I am not satisfied that this circumstance so establishes bearing in mind that the defendant built a home for their occupancy in 1960 which was within one year of the purchase of the land here in question, even though he could sell that home and very shortly after its construction did so.

The defendant accepted his bank manager’s advice and sought a fellow participant in the purchase. To that end the defendant asked Victor Belland, whom he had come to know as a salesman with a building supplier and with whom he had dealt, to ascertain if Mr Belland knew any person who would take a share of the land. After consideration and borrowing funds from his father, Mr Belland decided to take a one-third interest himself. Accordingly the deal was consummated and the land was purchased in February 1959 at the asking price of $52,000. An amount of $34,000 was paid in cash and the balance of $18,000 was payable at the rate of $150 per month inclusive of interest at 5% per annum until the outstanding balance was fully paid.

The defendant and Belland held the land as tenants in common in the proportions of an undivided two-third interest to the defendant and an undivided one-third interest to Belland. Any income from the land and all costs with respect thereto were to be shared or borne in those same proportions.

The defendant and Belland entered into an agreement to this effect on February 16, 1959, which an agreement was entitled “Joint Venture Agreement”. The use of the word “venture” was an unhappy selection bearing in mind the tax implication of that word. In all likelihood the agreement was not drafted with tax implications in mind but rather to record the agreement between the parties. It included a provision that if either party wished to sell his interest the other party would have the first opportunity to buy that interest. As previously intimated in 1960 the defendant’s construction business began to falter until its demise in 1964. The defendant’s misfortune with the decline of his business was accentuated by the fact that his wife who was working and contributed her salary to the family coffer was expecting her first born child and stopped working. That source of revenue was no longer available.

Mr Belland’s share of the monthly payments of the unpaid purchase was $50 which he regularly paid to the defendant. The defendant’s share was $100. The defendant could not and did not meet his share. In 1967 there were 37 monthly payments in arrears much to the dismay of the vendor and Mr Belland who had paid his share to the defendant in a total amount of $1,850, which had not been transmitted to the vendor by the defendant. The defendant was in default to the extent of $3,700. No doubt interest should be added to each of these amounts.

The land was immediately adjacent to the north boundary of the City of Edmonton. That boundary existed in 1913 and has not been changed as of this date. The city has experienced a tremendous growth and its boundaries have been extended to the south, east and west but the boundary upon which this land abuts has not been changed.

The land is situate in another municipality which is a regional one and the area in which the iand is located is zoned agrculiurai by which is meant that the land can be used for agricultural purposes and for institutional or recreational purposes. The land immediately to the north is used for a “go-cart” operation which is recreational. About a mile and three-quarters east of the land there is a substantial housing development. Adjacent to the land on the west is a parcel of the same size on which has been established a furniture warehouse. This appears to me to be a light industrial use. Immediately south the city has encroached to the boundary of 137th Avenue. There is dense housing along that boundary and extending to the east but not to the west.

The defendant enquired at City Hall and was informed that the land was just beyond the city limit and so far as the informer knew there was no immediate prospect of the area being incorporated into the city. The adjoining iand on the west had been subdivided. Mr Belland enquired and found that subdivision into 10 acre lots was permissible. This the defendant also knew. Accordingly, at the time of purchase by the defendant and Belland this land was susceptible of being subdivided into four 10 acre lots but steps were not taken to do this. In 1959 the taxes on the land were $100 but by 1967 the taxes had doubled to $200.

The defendant drilled a well on the property and brought power to the property in 1963. In 1962 the defendant allowed the foreman of his construction business to begin the construction of a house on skids (so as to be removable) on the property which was completed and occupied by the foreman in 1963. This was done with a permit from the municipality. This no doubt explains why a well was drilled on and power brought to the property in 1963 by the defendant.

The defendant was notified by the municipality to control the noxious weeds on the property. This he did by arranging with a neighbouring farmer to mow the land, the only consideration being that the farmer was permitted to retain the hay for fodder.

The defendant testified that in 1964 an offer of $70,000 was received for the land. Mr Belland also so testified but he placed the year that offer was received as earlier as after they had owned the land for two or three years, which would be in 1961 or 1962.

The real estate agency would not disclose particulars of the offer, other than the offered price, unless the defendant and Belland listed the land for sale with that agency. For this reason that was done. The offeror was a religious order called the Sisters of Charity which contemplated the building of an institution on the land. The offer was subject to approval by the Order’s architect.

The defendant and his co-owner accepted that offer with alacrity. They did not strive for a higher price but accepted the amount offered. The architect’s approval was not forthcoming so the sale came to naught. The listing with the real estate agency accordingly lapsed.

In the spring of 1967 while the defendant was working at Jasper Place Mr Belland received an offer for the purchase of the land from Metropolitan Theatres Calgary Limited which he considered to be a serious and responsible purchaser. He asked $100,000 for the land. He forthwith telephoned the defendant who returned to Edmonton to consider the offer. Mr Belland wanted to get out from under and to return the money he had borrowed from his father to enable him to engage in the original purchase. The defendant needed money to pay the debts with which he was burdened. The sale was completed forthwith by an agreement for sale dated June 7, 1967 at a total purchase price of $95,000 of which $20,000 was paid on the execution of the agreement and the balance of $75,000 payable in 5 annual instalments of $11,000 beginning on September 1, 1967, and two instalments of $10,000 each on September 1, 1972, and 1973 with interest at 7% per annum on the unpaid balance.

As a consequence of this sale the defendant realized a gain of $19,690.27 on his two-third interest in the property and Mr Belland realized a gain of $9,945.13 upon his proportionate share and both would receive substantial interest income on the unpaid balance.

The instalment payments of the purchase price explains the assessments over the defendant’s 1967, 1968, 1969 and 1970 taxation years now under review and the applicability of section 85B of the income Tax Act.

During the time that the defendant owned the land, that is from February 1959 to June 7, 1967 it produced no revenue whatsoever. The defendant testified that he bought the land as “security” by which I assume he meant as a hedge against inflation or a long term investment it being a notorious fact that the value of land in Edmonton and close proximity thereto was constantly rising over the years and this fact was well known to the defendant from his experience in purchasing building lots in the course of his construction business.

He also testified that he thought of moving on to the land, which he never did, and that he thought of farming the land but that he was not ready at the time to do this and he never did. It is unrealistic that such a small acreage bought at a price of $52,000 could be economically devoted to a farming operation. I am convinced that the defendant had no serious thoughts of putting the land to either such uses. These were merely possibilities which occurred to the defendant but without any real likelihood of implementation.

It is equally susceptible that he may have thought that if his construction business continued to prosper, if the zoning were changed, or if the city incorporated the area in its boundaries, he would then be possessed of valuable building lots as inventory in his building business, or for sale as a whole as a building development, at a phenomenal profit if these events had occurred, which they did not during the defendant’s ownership.

Mr Belland had ideas as to how the land might be turned to account. He thought of the sale of top soil or the growing of sod. Neither of these ideas came to fruition and I doubt if he even discussed those possibilities with the defendant who made no mention of either such possible use during his testimony.

The land was not dedicated to any of these possible uses.

I am convinced that from the outset the defendant’s intention was to hold the land until it had increased in price and then dispose of it at a gain. I think that Mr Belland’s intention was the same and that it would be unlikely for one to so dispose of the land unless in concert with the other, but that possibility was envisioned in the “joint venture agreement” by providing the land was held as tenants in common which. permits one such tenant to sell his undivided interest without the concurrence of the other subject always subject to the provision in the agreement that the party wishing to sell must first offer his interest for sale to the other party and that the land could not be sold at a lesser price than that. requested of the other party.

Thus the issue to be determined against this background is whether the sum of the gain that has been realized by the defendant is a mere enhancement of value by realizing an investment or is it a gain made in the operation of a business within the extended meaning of that word as used in the Income Tax Act by virtue of paragraph 139(1)(e) thereof to include an adventure or concern in the nature of trade or as put more succinctly at the outset is it a captial gain or an income gain.

On the basis of the facts outlined the defendant’s sole purpose in purchasing an undivided two-third interest in the property, for security as he described it, must have been to realize an accretion to the purchase price by sale at a time he deemed it expedient to sell. Because the defendant described the purchase of the land as a security and his knowledge of the rise in the price of land in the area from his experience in the building trade he must have considered the land as a liquid asset, readily disposable at a gain whenever his need arose.

In certain circumstances vacant land may be a fit subject of investment but in other circumstances it is equally susceptible of being the subject of a venture in the nature of trade. Into which of these categories vacant land may fall depends upon the circumstances applicable.

However the fact that a purchaser buys land with the purpose of selling it at a profit standing alone does not render an eventual sale at a profit a venture in the nature of trade rather than an investment. It is the characteristic of an investment that the subject matter will be sold at an enhanced value.

in view of my conclusions that the defendant bought his interest in this land with the express purpose of selling it at a profit at some future time the doctrine which has been characterized as that of “secondary intention” has no application to the present appeal.

This particular appeal, in my opinion, falls to be determined upon a consideration of the subject matter of the transaction. Was the land bought speculatively in order to make a gain on its sale ot was it truly an investment. To determine on which side of the borderline this transaction falls regard must be had to all the surrounding circumstances.

The defendant, in the course of his house building business, bought land, constructed houses thereon and sold both the land as a complete parcel. Incidentally thereto he bought and sold land, although it cannot be said that he was a dealer in vacant land. While dealing in land may not have been the defendant’s ordinary business, despite the purchase and sale of land apart from his construction business which has been mentioned, nevertheless it is closely akin thereto and in the course of his business he acquired a great deal of experience in the acquisition of vacant land and its disposal in an improved state.

From the defendant’s experience so acquired he was well aware of the scarcity of land in the limits of the City of Edmonton and its immediate environs and he was also aware that, because of the rapid expansion of the city, the consequent and continued demand for vacant land resulted in a spiralling rise in the cost of land.

While it is true that the defendant’s building enterprise came to an end in 1964, it was prospering in 1959 when the land in question was purchased and while the land so purchased adjoined the boundary of the city limits was zoned agricultural and was not susceptible of subdivision into lots of less than 10 acres in area in view of the expansion of the city, there was the distinct possibility of these conditions being changed. These factors account for the high cost at which the land was purchased by the defendant in 1959 when those conditions prevailed (and still prevail) and that cost is not compatible with the use of the land for agricultural purposes. Therefore there were speculative elements present in this parcel of land over and beyond the normal expectation of an increase in value over the years.

Within two to three years, so relatively short a time as to be inconsistent with a long term investment, an offer at approximately 40% higher price was received and accepted without hesitation. The fact that the transaction fell through does not detract from the alacrity with which the offer was accepted.

In Commissioner of Inland Revenue v Fraser (1940-42), 24 TC 498, Lord President (Norman) said at page 502:

The individual who enters into a purchase of an article or commodity may have in view the resale of it at a profit, and yet it may be that inat is not the only purpose for which he purchased the article or the commodity, nor the only purpose to which he might turn it if favourable opportunity of Sale does not occur. In some of the cases the purchase of a picture has been given as an illustration. An amateur may purchase a picture with a view to its resale at a profit, and yet he may recognise at the time or afterwards that the possession of the picture will give him aesthetic enjoyment if he is unable ultimately, or at his chosen time, to realise it at a profit. A man may purchase stocks and shares with a view to selling them at an early date at a profit, but, if he does so, he is purchasing something which is itself an investment, a potential source of revenue to him while ne holds it. A man may purchase land with a view to realising it at a profit, but it also may yield him an income while he continues to hold it. If he continues to hold it, there may be also a certain pride of possession.

From the foregoing extract it is evident that two elements of an investment in land are that the property is a source of income while held and that while held confers a pride of possession in the like manner that a picture purchased for ultimate resale gives the purchaser aesthetic enjoyment during the interval.

In the present instance the land produced no revenue and, in my view, the defendant did not exhibit any pride of possession nor did he experience any aesthetic enjoyment from its possession as would have been the case of a parcel of land which is a promontory into a lake to which resort could be had for picnics, swimming and like recreation. Here the land was flat, is adjacent to the city and possessed of none of those attributes and was not used by the defendant for any such purpose.

The cumulative effect of these circumstances leads me to the conclusion that the land was the subject matter of an adventure or concern in the nature of trade and accordingly it cannot be said that the Minister was not warranted in assessing the defendant as he did. nor that the defendant has discharged the onus cast upon him t establish otherwise.

The appeal is therefore allowed with costs and the assessments are restored.