Houg Development Limited v. Minister of National Revenue, [1974] CTC 2084, 74 DTC 1062

The Assistant Chairman:—This is the appeal of Houg Development Limited from an income tax assessment in respect of the appellant’s 1968 taxation year.

Because of a housing shortage in the City of Edmonton, Alberta after the last war, Mr Houg, the beneficiary shareholder of the appellant company, moved from his farm in the country and in 1945 built a house for himself. At that time the City sold lots to builders allowing a maximum purchase of ten lots per builder. In 1947 and 1948 the appellant bought two lots from the City and commenced building houses for resale on a very small scale. The construction business was good and in 1951 Houg Construction Limited, in which Mr Houg was the beneficiary shareholder, was incorporated and eventually became a sizeable enterprise owning its own sawmill, its own foundation equipment and building houses with precut lumber in an assembly-line fashion. Consequently it became uneconomical for the appellant company to build less than 20 to 30 houses at one time. From 1951 to 1955 the appellant purchased land and built houses for resale. There arose a shortage of city-owned lots and the builders were encouraged by the City of Edmonton to buy and develop land outside the city limits.

In 1956 Mr Houg acquired 240 acres of land, known as the Pearson farm, for $202,000. This property had two distinct topographical features. The southern part of the property consisting of some 100 acres was on high ground and generally suitable for. building houses. The other portion of the property was made up of river flats which formed an arc running north to northeast of the appellant’s higher land. The river flats were not suitable property on which to build houses and were in fact considered unusable. However, the vendor insisted that the property he bought as a whole and Mr Houg, in order to acquire the high land, was forced to acquire the river flats as well. An important factor in this appeal is the proximity of the Imperial Oil Refineries and the Canadian Industries Limited plant to the immediate east of the Pearson farm.

About the time the Pearson farm was acquired by the appellant, the land was brought within the city limits and the necessary sewer lines and municipal services were assured. However, owing to delays by Central Mortgage and Housing Corporation in approving the construction plans of the development, the land was held for two or three years and it was only in 1959 that construction began. From 1959 to 1961 the appellant constructed approximately 150 houses on lots on the higher land of the property.

In 1960 Houg Development Limited was incorporated as a holding company for the lots remaining on the higher land as well as on the river flats. The appellant company sold isolated lots on which it would have been uneconomical to build houses owing to the production-line construction system employed by the Houg Construction Limited, and it traded lots so as to acquire a large surface in a given area enabling it to build the number of houses at one time for which the Houg Construction Limited was geared.

At one period the City of Edmonton approached Mr Houg to purchase lots on the river flats for sewage disposal units but the appellant company preferred to exchange the river lots for city-owned land situated in the vicinity of the Pearson farm and on which Houg Construction Limited built other houses.

Objection was raised to the building of houses by the appellant in the vicinity of the Imperial Oil Refineries and Canadian Industries Limited, and although some lots were sold for the construction of a curling arena, several lots at the time of the appeal were still vacant. The profit made on the sale of all individual lots on the upper land was included in the taxable income of Houg Development Limited.

In 1967 as a result of continuous and serious complaints on the part of the owners of houses built by Houg Construction Limited on the Pearson farm concerning industrial wastes of Canadian Industries Limited which were discharged from the plant onto the river flats or ravine, with their accompanying objectionable odours, a statement of complaint was filed by Mr Houg against Canadian Industries Limited and Building Products of Canada Limited which gave rise to lengthy legal correspondence. The solution for eliminating the problem was the construction of a sewer, the cost of which was estimated at $250,000. None of the companies involved, singly or collectively, was willing to assume the responsibility for the continuing pollution. The position of Canadian Industries Limited was that it was granted an easement by Mr and Mrs Pearson prior to the sale of the Pearson farm to Mr Houg which gave Canadian Industries Limited the right to dispose of its effluent as it had been doing. Mr Houg was faced with the possibility of having to pay for the cost of the sewer if the problem were to be solved. The City of Edmonton and the Provincial Department of Health were also involved in the controversy.

The ownership of the river flats became a nightmare for Mr Houg and he approached the City of Edmonton and offered to sell the river flats for $1,000 an acre. The City which was concerned with the complaints of its taxpayers, as well as the rights of the industries involved, made the appellant a counter offer of $700 an acre. In 1968 the river flats were eventually sold to the city for $900 an acre, and the profit realized by the appellant company on the sale of land was $127,300 which was considered by it as a non-taxable capital gain and transferred to capital surplus.

The resondent included the amount of $127,300 in the appellant company’s income for 1968, contending that it was income from a business within the meaning of sections 3, 4 and paragraph 137(1)(e) of the Income Tax Act and the assessment was appealed.

The issue in this appeal deals specifically with the profit realized from the sale of the river flats and the Board must determine whether the profit was a capital gain or income.

Counsel for the respondent holds that the sale of the river flats by Houg Development Limited is no different from the sale of lots on the upper land on which the appellant company paid taxes.

The facts of this appeal indicate to me that Mr Houg’s principal concern and intention was to buy land for development purposes. There is no doubt in my mind that Mr Houg was a bona fide builder, and that he was forced to accept the river flats in order to acquire the upper land on which to realize his construction project. There is no evidence that would indicate that Mr Houg’s intention was to sell the river flats. On the contrary, since no buildings could be built on the flats, Mr Houg seemed content to have it serve as a playground for children living in that part of the appellant’s housing development. Moreover, he exploited a gravel pit which was situated on the river flats and which produced a revenue of several thousand dollars over a period of four or five years. In my view, there is a very substantail difference between the sale by the appellant of lots on the upper ground and the sale of the river flats. The problem of the industrial waste being discharged on the flats and the possibility of being called upon to construct a sewer are, in my opinion, sufficient motivation for Mr Houg to try to get rid of the flats which might otherwise not have been necessary.

Counsel for the respondent also claims that Mr Houg had the intention of selling every portion of the Pearson farmland and that he had a secondary intention of selling the flats to the City of Edmonton—the only possible purchaser for that land. Evidence shows that the decision by the City to make a park out of the river flats was subsequent to Mr Houg’s purchase of the Pearson farm and there was no way Mr Houg could know, at the time of the purchase, what was to become of the river flats and he did not in fact think he could sell the land that was considered by everyone as useless. Mr Houg even made an unsuccessful attempt to build a golf course on the flats.

In my opinion, all the facts taken together indicate that Mr Houg did not have, at the time of purchase, the intention of selling the river flats but thought he was in fact stuck with them.

It appears from the evidence adduced that the City of Edmonton became interested in the land because of the sanitation problem caused by the discharge of industrial waste into the flats. In order to solve the problem, the City purchased the flats and made a park out of the area thereby contenting the taxpayers, on the one hand, and not causing an indisposition to the concerned industries on the other hand.

This decision by the City of Edmonton to purchase the flats was extrinsic to Mr Houg. However, he did benefit from the decision in that he realized a profit from the sale of the land which he would not otherwise have done and which, in my opinion, constitutes fortuitous circumstances.

It is true that the river flats were transferred to the appellant company which is a holding company created to hold and sell land which had been acquired by Mr Houg for housing developments, and on which houses could not be economically built.

However, it appears to me that the circumstances surrounding the acquisition of the land and the nature of the land in question do not vary because of the legal vehicle through which the land is held or sold. In other words, because the river flats were transferred to Houg Development Limited, it does not change the intention that Mr Houg had when he was forced to acquire that portion of the Pearson farm, nor does it make the river flats any more useable or saleable.

Mr Houg’s attempt to sell the land was amply motivated by the fear of having to build a $250,000 sewage system, but there is no evidence to indicate that Mr Houg had intended or planned at the time of their acquisition to sell the flats to the City.

In my view, notwithstanding the fact that the flats were sold through a holding company, the circumstances surrounding the sale of that portion of the Pearson farm was due to fortuitous circumstances over which the appellant company had no prior control.

I conclude, therefore, that the profit realized by the appellant company on the sale of the river flats to the City of Edmonton was a capital gain as a result of a fortuitous event, and that the amount of $127,300 should not have been included in computing the appellant’s income for 1968.

The appeal is allowed.

Appeal allowed.