Minister of National Revenue v. Glen-Rouge Parks Limited, [1973] CTC 443, 73 DTC 5364

Cattanach, J:—This is an appeal from a decision of the Tax Review Board whereby it was held that a gain of $545,570 realized by the respondent on the sale of land was not a profit from an adventure or concern in the nature of trade within the meaning of sections 3 and 4 and paragraph 139(1)(e) of the Income Tax Act but rather that the land in question had been acquired by the respondent as a capital asset for the purpose of producing revenue therefrom and accordingly the subsequent sale was a mere enhancement in value rather than a gain made in carrying out a scheme of profit making.

The issue on the appeal by way of a hearing de novo is thus the familiar one which inevitably arises in what has come to be known as a “trading case”.

If the exclusive purpose of the respondent at the time it acquired the land was to construct and operate thereon park and recreational facilities to derive revenue therefrom, as was contended by the respondent, then the gain realized by it from the sale of the land would not be profit from a business or an adventure or concern in the nature of trade. If that was not the respondent’s exclusive purpose at that time, then there can be no doubt, in the circumstances, that the respondent had for its purpose, or one of its possible purposes, the disposition of the land at a profit, the resulting profit would be taxable, as is contended by the appellant.

The correct approach to the solution of a problem of this kind of case in any given set of circumstances is first to examine the taxpayer’s acts and operations objectively. If, after consideration of those facts, it should be concluded that the inference to be drawn is one of “trading”, then the matter must be considered to ascertain if there is some satisfactory explanation, consistent with the facts as found, which would negative that prima facie evidence. If from the facts that are proved it appears to the satisfaction of the Court that at the time of acquisition, the purpose was to provide the taxpayer with an asset to derive revenue from the operation of it and there was not in contemplation at that time the possibility of sale, then the inference of trading would be rebutted.

The onus of disproving the Minister’s assumption, in assessing the taxpayer as he did, falls on the taxpayer.

The salient facts in the present appeal may be summarized.

John A Bailey, now deceased, but who had a varied and remarkable career, was an acknowledged speculator in real estate. In 1960 he acquired 478 acres of land in the Rouge River valley. He held the land until 1962. In the interval he had in contemplation the sale of such land for a number of possible purposes but most particularly as a golf course. In 1962 Bailey, although not in desperate financial difficulties, was short of ready cash.

At this time a group of ten persons formed a company to sell citrus fruit mix to alcoholic beverage outlets. The company was very successful and those persons are referred to as the “citrus group”.

Bailey approached that group, the members of which were well known to him, and persuaded them to take an option on the property. This option was conditional upon the citrus group finding enough persons willing to purchase a sufficient number of units to meet the asking price of $665,000 which they were successful in doing.

Bailey sold the property to the citrus group at a profit and the citrus group in turn conveyed the property to the respondent herein, which was a company incorporated by them for this purpose, at a profit. Undoubtedly the profit so realized by Bailey and the individuals comprising the citrus group would be taxable but those persons are not the parties in this matter. The respondent is.

Bailey became the president of the respondent but prior thereto and in that capacity he was the author of many documents principal among which was a brochure serving as a prospectus to induce persons to purchase “units” (which were share capital in the respondent). A statement typical of several made by Bailey appeared in the prospectus:

. . . in short, we believe this is an excellent land speculation which affords varied alternative profitable uses.

There was evidence that this and similar statements made by Bailey were to assure prospective purchasers, and later those who were asked to advance further funds, that their money was secure because the land itself was valuable and would increase in value. There was evidence that Bailey’s share ownership was never more than 10% so that he could not control the respondent and that the other directors and shareholders did not share or endorse Bailey’s more flamboyant views but were convinced that the property was best suited to use as a recreational park from which use they fully expected, after the initial two or three years when losses were anticipated, to derive substantial profits.

The respondent, upon acquiring the property, immediately began to convert it to use as a recreational centre. The respondent applied to the township to re-zone the land to accommodate a recreational park.

An engineer, expert in the field (who was also a witness and a shareholder), was engaged to prepare an overall plan for the park, and an initial phase thereof, to get the park into immediate operation.

The respondent implemented this initial phase at a cost of $110,000 by the creation of two large swimming areas by dams on the Rouge River and the construction of changing houses, unusually wide and well drained roads, parking areas, refreshment stands, picnic facilities and areas, expensively constructed wells to ensure a constant supply of drinking water and other like amenities.

The respondent conducted an extensive advertising campaign, through a public relations officer, at a cost in excess of $15,000.

It hired a manager whose credentials and experience seemed unimpeachable.

The park opened for business on July 1, 1962 with great fanfare, in the presence of municipal dignitaries.

The operation in this first year resulted in a loss of $78,000 which was in excess of the loss anticipated by the officers of the respondent. This was attributable to (1) the late opening, (2) poor weather on weekends and (3) inefficiency and suspected dishonesty on the part of the manager.

In the fall of 1962 surveyors were observed upon the property. Upon enquiry it was ascertained that the survey was a prelude to expropriation by the Metropolitan Toronto and Region Conservation Authority a body to set up and control a repetition of the drastic results of a prior flooding.

The land owned by the respondent was included within the master plan of flood plain and conservation lands to be acquired by the Authority. It was established in evidence that use of such land for golf courses and like uses was approved by the Authority. The use of the land by the respondent as a recreation park was a similarly acceptable use.

The respondent was further advised by the Authority that it was not essential that the respondent’s land receive high priority for acquisition.

The respondent was further advised by employees of the Authority that acquisition of the land would not be considered at what they considered to be an “unrealistic” price of $1,900 an acre and stated that $1,000 per acre was a reasonable price.

The respondent purchased the land at $1,500 an acre, expended in excess of $110,000 on facilities and incurred a loss of $78,000 in the first six months of operation. The total of these amounts results in a cost to the respondent of $1,900 per acre.

What the respondent sought from the Authority was some assurance that it might be permitted to continue its use of the land for a period of fifteen years in order that it might recoup its expenditures.

Such an assurance was not forthcoming from the Authority. It did not even reply to that inquiry.

The officers and shareholders exploited every possible avenue available to them, political and otherwise, to force an answer, one way or the other, from the Authority. Those efforts were equally unsuccessful.

Accordingly the respondent concluded that expropriation was imminent, but the time thereof was most uncertain, and that because further improvements ‘and maintenance of those in existence and losses anticipated in the operation of the recreational facilities in the initial years could not be recovered on expropriation it was impractical to continue the operation in 1963 and subsequent years, and did not do SO.

In 1967 the respondent sold 10 acres of land on a plateau overlooking the valley for a cash price of $30,000 or $3,000 an acre. This was done to establish a fair market value in the event of expropriation.

In 1965 further shares were sold to the existing shareholders to meet the mortgage payments.

The respondent had a plan of subdivision prepared for the land. There was no possible hope that the plan would be approved but it was a desperate subterfuge by the respondent to move the Authority to some kind of action. In my view the device was futile and a waste of money and effort.

The land would not be available for residential development until after 1980 because of the official plan of Scarborough Township.

The witnesses were quite frank to admit that at some time in the future it would not be economical, because of the appreciation in land value, to continue the operation of a recreation park on the land and in that event the land would be sold.

In my view these honest and common sense admissions do not detract from the originally expressed intention to operate the land as a commercial recreational enterprise and does not establish the “alternative intention” to sell the land at a profit at the time of its acquisition. It is inherent in every investment that the subject matter will be sold eventually and it is characteristic of a “good” investment that it will be sold at an enhanced value. There are numerous instances where a taxpayer has been offered a price for an asset which was so attractive it could not be refused. In such circumstances the gain was held not to be taxable.

In view of the failure of the respondent to obtain the assurance from the Authority to permit of the operation of recreational park facilities on the land for a period of time, which the respondent considered essential, it is not surprising that the respondent became anxious to dispose of its land. The most logical purchaser would be the Authority itself which had expropriation powers or some person who might expect greater cooperation from the Authority.

In September 1967 or thereabout the respondent received an offer in trust of $1,600,000 for its land from a real estate agent, Mr Hans, employed by a real estate broker. The respondent did/not know for whom the land was being purchased nor did it care. It accepted that offer with alacrity. It did not even dispute an unearned commission of $80,000 it was required to pay to the real estate agent.

The officers of the respondent learned later that the Conservation Authority was the purchaser. The land is now used as a zoo by Metropolitan Toronto.

The respondent realized a gain from the sale in the amount of $545,570 the taxability of which is the issue in this appeal.

In my view the respondent has rebutted the inference, following from the sale of the land at a profit, that the transaction was a venture in the nature of trade by satisfactory explanations for that action.

I have not overlooked that this appeal is a hearing de novo but the identical witnesses who gave testimony before the Tax Review Board also gave evidence before me. Each witness was asked by counsel for the respondent and answered that the evidence given by him before the Board was identical in substance to that given before me.

The learned Chairman of the Tax Review Board gave oral reasons for judgment. Those oral reasons were not included in the material transmitted to the Registrar of this Court by the Registrar of the Tax Review Board although stated to have been included under cover of the transmitting letter. As an expedient and in order that I might be informed of those reasons counsel for the respondent tendered an official transcript of those reasons which was received as an exhibit.

It is apparent from those reasons that the same arguments as were advanced to the Tax Review Board were presented by counsel before me and that no further or different issue or question of law was raised before me.

It is also readily apparent from those reasons that the approach adopted by the Chairman to the solution of the problem before him, which is the same as the problem before me, was that which I have outlined above as being the correct approach.

After a closely reasoned and analytical review of the evidence before him the Chairman expressed his conclusion that it was the intention of the respondent, expressed through its officers, at the time of the acquisition of the property by it, to operate a recreational park on the land for profit, to the exclusion of selling the property at a profit and that the onus of explaining inferences to the contrary was discharged to his satisfaction.

Since my conclusion coincides with that of the Chairman of the Tax Review Board and since I am in agreement with the reasoning by which he reached that conclusion, the appeal is dismissed with costs.