Monte Vista Acres Limited v. Minister of National Revenue, [1976] CTC 2299

Roland St-Onge (orally: July 7, 1976):—The appellant company appeals from the respondent’s reassessment in respect of the 1973 taxation year and the point at issue involves a real estate transaction.

The appellant company was incorporated on October 23, 1970 for the purpose of acquiring a property of 1,110 acres located at Grand Lake, Hants County, Nova Scotia. As a matter of fact, the appellant purchased the property on November 17, 1970 for the sum of $130,000 and sold it on October 30, 1972 at a profit that, for income tax purposes, both parties have agreed to fix at $13,270.

Mr Noel Feetham, the appellant company’s majority shareholder, alleges in the Notice of Appeal that this land, which was already operated as a camping site and recreation facility by the owners, Messrs Andrew and Robert Horne, was acquired by the company. to allow it to operate the site as a camping ground.

At the hearing he explained the following:

In 1968 he had been in the power line business for 18 years and he decided to buy a campany ground and operate it as a retirement investment. He approached the owners, Messrs Andrew and Robert Horne and offered them $100,000 but the transaction did not go through because they could not agree on the price.

Two years later, he learned that the camping ground was for sale and, with a lawyer who was well off, he decided to make an offer. Andrew Horne, who wanted his money back at that time, and Robert Horne who had only six months to live, both decided to sell the property for $130,000. Prior to the sale, the camping ground: was operated illegally because the Messrs Horne did not have a permit. Mr Feetham did not know that fact and, after the sale, he met with the officials of the municipality in order to improve the sanitary conditions. It was then that he learned that the Hornes had been operating illegally and that he had to comply with certain sanitary regulations before he could operate the site as a camping ground.

He explained that he was taken by surprise when he learned what it would cost to install a sewer and water system for the campers. His operating costs were already very substantial due to the fact that this camping ground had been purchased with borrowed money, and the fact that his partner had withdrawn from the company by transferring his 50 shares to Mr Feetham at cost, upset all his plans.

In order to pay the carrying charges, he sold three lots for $8,100, and cut timber which he sold for some $25,000.

He also swore that, when he bought the camping ground, his only intention was to operate it as such; that he has never purchased and sold any land or buildings except his residence and a tract of land that he had purchased in order to cut the timber thereon.

Upon cross-examination, he admitted that he did not examine the financial statement before buying the business; that he did not inquire about the permit, and that he spent two days with his partner appraising the value of the timber before buying. He also stated that the fact that there was $25,000 worth of timber made it easier for him to buy the property by reducing the purchase price to $100,000, the price that he had offered two years before and that the Hornes had rejected.

He also explained that this camping ground had many facilities such as boating, swimming, barbecues, playgrounds, ski slopes, horse rides and sleigh rides, and was known to be quite profitable for year- round camping. There was also a barn and a house thereon and, had it not been for the substantial cost of installing the sewer and water system and the obligation to pay such large amounts of interest on the money he had borrowed to make the purchase, he would have been able to operate it at profit.

Mr Barry W Doucette, who has been Mr Feetham’s accountant for 15 years, testified that his client had never been in partnership and that, if he had decided in 1970 to share the acquisition of the property with a lawyer, it was because he did not have enough money to finance this project alone; that after his partner left him, his client was very concerned about the substantial interest he had to pay and the fact that, as the place was 35 miles from a metropolitan area, it was too far away to be held as an investment.

Mr Feetham finally stated that he could have sold many lots to many friends but he was not interested in doing so because the whole project had to be sold in one block.

Counsel for the respondent argued that the only investigation Mr Feetham made before buying was to find out the value of the timberland, which represented only one quarter of the total price; that he did not inquire about the permit or the poor state of sanitation and did not even ask the Hornes to let him see their financial statement; that he did not discuss with his partner, who was a lawyer, their chances of operating this project at profit.

Counsel for the respondent concluded that Mr Feetham’s intention was not to operate the camping ground but to sell the timber for $25,000, three lots for $8,100 and keep 10 acres for himself.

The appellant argued that, because he had ceased to operate his power line business, his sole intention in buying the camping ground was to operate it at profit; that he cut and sold the timber for some $25,000 and built bridges and roads in order to maintain the property and earn a profit; and that because a water and sewer system had to be built at a substantial cost, it became impossible for him to hold that property. In addition to that frustration, his partner withdrew from the deal and he was left alone to make substantial interest payments.

The evidence has revealed that the appellant company’s majority shareholder, Mr Feetham, had no history in real estate transactions and that the possession of this camping ground in his retirement years was a Challenge to him and, because he had played there often in his youth, was a kind of satisfaction.

The Board believes that the usual badges of trade are not present in the case at bar. The camping ground was acquired as a going concern, with the intention of operating it at a profit, and because the type of work that had to be done to maintain the place, such as the building of bridges, the construction and repair of roads and the cutting and selling of logs, was within the sphere of his usual occupation as a contractor who had had to prepare the ground for the installation of power lines.

The Board believes Mr Feetham when he says that his sole intention when he purchased the camping ground was to operate it at profit and that he was frustrated when, in addition to being left alone to pay all the debts, he learned about the tremendous cost of installing a sewer and water system for the campers.

Furthermore, Mr Doucette has corroborated Mr Feetham’s testimony on all essential points and the respondent was unable to refute the evidence adduced by the appellant.

The Board judges that the appellant company, which had the onus of proving the main allegations set out in its Notice of Appeal, was able to do so and that the agreed profit of $13,270 should be considered to have been a capital gain.

For these reasons, the appeal is hereby allowed and the matter referred back to the respondent so that a capital gain of $13,270 may be reassessed in accordance with the terms of the new Income Tax Act, SC 1970-71-72, c 63, as amended.

Appeal allowed.