Her Majesty the Queen v. Douglas Lloyd Anderson and Jean Emily Beckingham, [1973] CTC 606, 73 DTC 5444

Cattanach, J:—By order of Mr Justice Sheppard dated April 18, 1973, the four actions mentioned in the styles of cause above were placed on the trial list together to be heard at the same time on common evidence.

The four separate actions arose from the purchase, in 1964, of 160 acres of farm land adjacent to the south-east boundary of the City of Edmonton, Alberta at a price of $80,000 in which purchase the four taxpayers who are parties in these actions participated as tenants in common together with another individual and a joint stock company, making six persons in all, followed by the sale, in 1969, of the property so purchased for a sale price of $664,000 to the Alberta Housing and Urban Renewal Corporation, resulting in an overall gain of $584,000 which was shared by the six tenants in common in the proportion of their respective contributions to the purchase price and corresponding interest in the property.

There is no dispute between the respective parties as to the amounts of the respective assessments in the taxpayers’ 1969 taxation year nor is there any dispute as to the basic facts. The dispute which arises is as to the proper inferences to be drawn from the undisputed concrete facts.

If, as was contended on behalf of Her Majesty to have been the circumstance, the respective profits realized by the taxpayers were income from a business or a venture in the nature of trade pursuant to the provisions of sections 3 and 4 and paragraph 139(1)(e) of the Income Tax Act, then the profits so realized would be properly included in the respective taxpayers’ taxable income for their 1969 taxation years.

The rival contention on behalf of the taxpayers was that in purchasing a share in the property there was no intention on their part of trading in, dealing in, or otherwise turning the property to account but rather that their sole purpose was to invest in the property and, accordingly, the gain realized was a mere enhancement in the value of a capital asset and therefore not subject to tax under the Income Tax Act.

The taxpayers Joyce E McDonald and David C McDonald appeal directly to this Court from assessments to income tax levied by the Minister of National Revenue for their 1969 taxation years by which their proportionate shares of the gain realized upon the sale of the property were included by the Minister as income subject to tax.

The taxpayers Douglas Lloyd Anderson and Jean Emily Beckingham appealed their assessments to the Tax Review Board in the firs! instance. The member of the Board who heard the matters allowed the appeals without giving reasons therefor as far as is disclosed in the material forwarded to the Registrar of the Court by the Registrar of the Tax Review Board as required by subsection 100(1) of the Income Tax Act.

Her Majesty the Queen appeals from the judgments of the Tax Review Board allowing the appeals of the taxpayers Douglas Lloyd Anderson and Jean Emily Beckingham against their assessments for their 1969 taxation years.

Because the taxpayers Joyce E McDonald and David C McDonald are the plaintiffs and Her Majesty the Queen is the defendant in two of these actions and the taxpayers Douglas Lloyd Anderson and Jean Emily Beckingham are the defendants and Her Majesty the Queen is the plaintiff in the other two actions, I have abandoned the use of the designations “plaintiff” and “defendant” and have referred to and shall continue to refer to the taxpayers only as the “taxpayers”.

The starting point to the issues in the present four appeals is that Dr Louis A Miller, a retired medical practitioner, who devoted his ability and energy to the business of buying and selling real estate in the City of Edmonton and its environs extensively, with great financial success, was asked in March 1964 by the owner of a quarter section of vacant farm land, about two miles south-east of the city limits of Edmonton, if he would be interested in purchasing that land at $500 an acre, a total price of $80,000. The owner had been a well-known photographer in Edmonton, who had moved to the Pacific coast and therefore was anxious to dispose of the land. Dr Miller’s activities in buying and selling land were well known to the owner which is the obvious reason for the approach being made to him.

Dr Miller, because of his knowledge of and experience in dealing in real estate, was interested in buying the property but not the whole thereof.

Dr Miller had caused to be incorporated a company under the name of Homestead Holdings Ltd as the vehicle for the conduct of his real estate transactions. He was the principal shareholder of that company.

The taxpayer Mrs Joyce McDonald is the daughter of Dr Miller. Prior to her marriage Mrs McDonald purchased interests in two parcels of real estate with her own funds on the recommendation and advice of her father in conjunction with him and other family members. Dr Miller transferred his interest in these properties to Homestead Holdings Ltd. Neither property has been sold.

The taxpayer David C McDonald is the husband of Joyce McDonald from which it follows that he is the son-in-law of Dr Miller. Mr McDonald is a barrister and solicitor, living in the City of Edmonton and carrying on a general practice of law in that city. Mr McDonald has purchased an interest in six parcels of real estate.

In 1965 he bought a one-quarter interest in 100 acres, two miles northeast of the property offered to Dr Miller. Mrs Miller, the wife of Dr Miller, also purchased a one-quarter interest. The remaining interest in the property was bought by another individual and three joint stock companies in equal shares. Mr McDonald’s share of the purchase price was $18,375 of which $8,875 came from his accumulated personal savings and the balance of $9,500 from a bank loan.

Also, in 1965, he purchased a one-third interest, along with two other persons, in 102 acres in the same area as the 100 acres above mentioned and the land offered to Dr Miller. His share of the purchase price was $14,000 which he financed by a $13,000 bank loan and the balance of $1,000 from his personal savings.

Mr McDonald also owns a one-quarter interest in 153 acres. He bought a one-sixth interest in 1967 for $11,700 and in 1968 he bought a one-twelfth interest from another owner for $6,550. The remaining interest in this parcel of land was held by four other persons. To finance this purchase, Mr McDonald borrowed $10,000 from his bank, put up $1,700 from his personal savings and the balance of $6,550 resulted from the sale of shares inherited from his mother.

In 1970 Mr McDonald purchased a one-quarter interest in 160 acres for $33,460. This money became available to him from the sale of the property which gives rise to the present actions. This purchase was made jointly with Homestead Holdings Ltd, of which company his father- in-law, Dr Miller, is the chief shareholder, his mother-in-law, Mrs Ray Miller, his wife Joyce McDonald, his brother-in-law and his wife and Dr Miller’s accountant.

Also in 1970 Mr McDonald bought a one-quarter interest in 160 acres for $28,000. The source of his share of the purchase price was his accumulated savings. The other owners were Homestead Holdings Ltd, Dr Miller’s company, his brother-in-law, Dr Jo Miller, his wife Joyce McDonald, and another person and his wife.

In 1972 Mr McDonald bought a one-sixth interest in 137 acres for $14,200, the funds coming from his personal savings. The other owners were Homestead Holdings Ltd, his wife Joyce McDonald, his brother- in-law and his wife and the National Trust Company.

Mr McDonald’s interests in all six parcels were purchased after the purchase of his interest in the 160 acres in 1964 and three of the six were purchased after the sale of that property in 1969.

None of these six parcels of land has been sold as yet.

Mrs McDonald, in addition to the interest in two parcels of real estate purchased prior to her marriage, participated with her husband in the purchase of three further parcels of land. Mrs McDonald’s three purchases in conjunction with her husband and her father occurred after 1969.

Mr McDonald obtained three bank loans to finance his purchases of land.

One such loan was for $9,500 and another was for $13,000, a total of $22,500 which was borrowed in May 1965 and was repaid by June 1967 out of Mr McDonald’s earnings from the practice of his profession. A further loan of $10,000 was obtained July 21, 1967 and was repaid by April 1968 out of Mr McDonald’s earnings at the rate of $400 a month and a lump sum repayment of $6,000, the proceeds of a sale of shares.

Mr McDonald inherited “gilt-edged” securities from his mother to the approximate value of $50,000. He did not sell any of.these shares except in two isolated instances due to special circumstances. The proceeds of $6,550 from one such sale were used to partially finance the purchase of a one-quarter interest in 153 acres of land in 1967 and 1968 and, as indicated before, $6,000 of the proceeds from the second sale of securities was used to discharge a bank loan in 1968. Mr McDonald used the shares inherited by him as security for the bank loans he obtained. Obviously he was reluctant to exchange such liquid securities for land which did not have that characteristic.

As I have intimated above, the starting point of the transactions giving rise to the present actions was when Dr Miller was approached to purchase 160 acres of land for $500 an acre, a total purchase price of $80,000.

Dr Miller was anxious to purchase the land so offered to him but did not wish to purchase the entire interest himself.

Accordingly Dr Miller approached his son-in-law with the suggestion that he and his wife might participate in the purchase to the extent that they might determine. Dr Miller intimated to him that he would participate through Homestead Holdings Ltd, his wife, Ray Miller, would participate and it was suggested that his wife Joyce McDonald should participate and the opportunity to participate would also be offered to his brother-in-law, Dr Jo Miller.

After reviewing their resources, Mr and Mrs McDonald decided to participate to the extent of $10,000 each. The funds for Mrs McDonald’s participation came from her savings earned prior to her marriage and those of Mr McDonald were $5,000 from his personal savings and a $5,000 bank loan borrowed by him on March 23, 1964 and repaid on December 28, 1964. This bank loan and repayment antecedes the other three bank loans I have mentioned above.

Apparently, Dr Miller did not lay down specific proportions for participation other than that he did not wish to purchase the whole interest in the land himself but would be willing to take up the uncommitted proportion. It appears that Dr Jo Miller did not accept his father’s invitation to participate.

Accordingly Mr McDonald spoke to his law pariner, John Becking- harm. Mr Beckingham concluded that he was not in a position to participate personally but he was the executor of the estate of his mother-in- law. There were three children of Mr Beckingham’s mother-in-law, who were beneficiaries, Mr Beckingham’s wife, Jean Emily Beckingham, his brother-in-law, Dr Douglas Lloyd Anderson and a third child. The estate was in liquid assets and an imminent distribution was expected in the amount of approximately $10,000 to each beneficiary.

Mr Beckingham informed his wife and brother-in-law that this land was available for purchase and advised them to put a portion of the inheritance they were about to receive into it.

Relying on Mr Beckingham’s advice, Mrs Beckingham and her brother, Dr Anderson, each put up $5,000 towards the purchase.

This completed the participants which resulted in the purchase of the property, consisting of 160 acres in the early spring of 1964 for a total price of $80,000 by the following persons in the proportions expressed in the following tabular form:

Percentage

		of equity	Purchase
Purchaser	Fraction	hehd held	price paid
Jean Emily Beckingham
(wife of David McDonald’s law
partner)	1/16	6.25%	$ 5,000
Douglas Lloyd Anderson
(brother of Jean Beckingham)	1/16	6.25%	$ 5,000
David C McDonald
(son-in-law of Dr Miller)	2/16	12.5%	$10,000
Joyce McDonald
(daughter of Dr. Miller, wife of
David McDonald)	2/16	12.5%	$10,000
Mrs Ray Miller
(wife of Dr Miller)	2/16	12.5%	$10,000
Homestead Holdings Ltd
(Dr Miller principal shareholder)	8/16	50%	$40,000

He did this in three certificates of title, (1) to Homestead Holdings Ltd as owner in fee simple of an undivided eight-sixteenths (8/16) interest in the property, (2) to Ray Miller as owner of an undivided two- sixteenths (2/16) interest, and (3) to Joyce McDonald as owner of an undivided two-sixteenths (2/16) interest, David Cargill McDonald as owner of an undivided two-sixteenths (2/16) interest, Jean E Becking- ham as owner of an undivided one-sixteenth (1/16) interest and Douglas L Anderson as owner of an undivided one-sixteenth (1/16) interest.

Mr Beckingham took out the certificates of title in divided form as tenants in common to facilitate the sale of the respective interests because any tenant in common is free to dispose of his or her interest in the property. However, if one tenant wished to dedicate the property to a particular use that would necessitate the consent of all other tenants or a partition of the property.

The property was operated by a tenant as a farm. Dr Miller made all leasing arrangements, collected the rental payments, paid the municipal taxes and distributed the resultant income among the other owners. The income so received by the group was negligible. That income was as follows:

By way of illustration, in the 1964 year the taxpayer David McDonald would have received as his one-eighth share approximately $35, his wife and mother-in-law the same amounts, Homestead Holdings Ltd approximately $145 and the taxpayers Jean Beckingham and Dr Anderson about $17.50 each.

Mr McDonald frankly admitted that the income received was considerably less than the interest on the bank loan he obtained to finance his share of the purchase.

There is no question that the land was not bought for the income it might produce. The advantage was that this income covered the cash outlays consequent upon the holding of the land.

Mr McDonald testified that his purpose in purchasing a share in the property was to realize an accretion to the purchase price by sale at a time when the increase in price obtainable made it expedient to sell. He anticipated that time to be within ten to twenty years. It was agreed between the parties that the intention of Mrs McDonald, who did not give evidence, would coincide with that of her husband.

Mr Beckingham advised his wife and brother-in-law to purchase a share in the property for the same purpose as that expressed by Mr McDonald. I am prepared to accept as a fact that Mrs Beckingham acted on the advice of her husband.

A transcript of Dr Anderson’s testimony before the Tax Review Board was read into the record of the hearing before me by consent of the parties.

Dr Anderson testified that he too acted on the advice of Mr Becking- ham and purchased a share in the land in the expectation that he would realize a substantial gain within a minimum of ten years but no longer than fifteen or twenty years.

On cross-examination, Dr Anderson conceded that he was aware of the other participants in the purchase and that at the time he put up his money he was aware of those persons’ experience and capabilities, particularly that Dr Miller was an experienced and sagacious trader in real estate but reiterated that his decision to participate was based solely on the advice of Mr Beckingham and that he made no personal investigation whatsoever.

Neither Mr McDonald nor Mr Beckingham made a personal investigation of the land. Mr McDonald expressed the opinion that the price of $500 an acre for the land was a reasonable price therefor considering its location in close juxtaposition to the then boundaries of the rapidly growing and developing City of Edmonton. That was the basis for his conclusion that the price was reasonable. It was not an economically feasible price to pay for land to be operated as a farm.

The letter from the original owner to Dr Miller offering the land for sale was unsolicited and unexpected. Dr Miller wished to buy a portion of the land but not the whole. It was most likely predetermined that his wife would participate in the purchase and he afforded his daughter and son-in-law an opportunity to participate. The opportunity to purchase was shared by Mr McDonald with his partner Mr Beckingham with the concurrence of Dr Miller. Mr Beckingham was unable to participate himself but, in turn, passed that opportunity on to his wife and brother- in-law, also with the concurrence of Dr Miller.

I have no hesitation in finding as a fact that Dr Miller considered the land to be a “good buy” and acquired a portion thereof for that reason. Neither do 1 hesitate in finding that Dr Miller communicated his view to Mr McDonald and that Mr McDonald shared that view as did the other participants. The potential value of the land was obvious even though the main thrust of the city’s development appeared to be to the southwest rather than to the south-east where the land is situated.

The legislature of the Province of Alberta enacted a statute establishing the Alberta Housing and Urban Renewal Corporation which, in accordance with a modern trend, is referred to by its acronym. The corporation is so described on its letterhead as AHURC.

The purpose of AHURC is to acquire land banks for residential housing and is vested with authority to do so by purchase, expropriation or otherwise, and it may do so before the land is actually needed for and in anticipation of any project authorized by the Act.

AHURC decided, in 1969, to acquire the land owned by the taxpayers herein and the two other co-owners for early development of the area. It offered $4,000 an acre payable over a period of not more than four years and, failing the acceptance of that offer, the corporation was prepared to initiate expropriation proceedings forthwith.

Faced with this ultimatum, the co-owners accepted the offer on December 29, 1964, which resulted in the following gains:

Homestead Holdings Ltd and Mrs Ray Miller included the gains realized by them in their taxable income.

Mr McDonald testified that he was not a willing seller, that he sold because he was forced to do so but that his preference would have been to have held the land until it would have commanded an even greater price and this despite the fact that the price received in 1969 was eight times the price paid in 1964.

I might mention at this point that Mr McDonald did not permit the proceeds of the sale received by him in 1969 to lie fallow but in 1970 bought a quarter section of land with $28,000 of the proceeds in conjunction with Homestead Holdings Ltd, his mother-in-law, Mrs Ray Miller, his wife and his brother-in-law and his wife.

Mr Beckingham testified that he advised his wife and brother-in-law to sell because there was no alternative but that his opinion coincided with that of Mr McDonald which was that if the land were held for a longer period a still greater sale price might have been received.

It is my recollection of the evidence that Mr McDonald was prepared to rely on the advice of Dr Miller as to when to sell but that in 1964 he did not anticipate that he would be forced to sell in 1969. It is also my recollection of Mr McDonald’s evidence that Dr Miller felt that $4,000 an acre was a reasonable price in 1969. Mr McDonald and Mr Beckingham must have thought so also because they accepted that price rather than attempting to establish a higher market value in expropriation proceedings making due allowance for the inconvenience and costs incurred in such an action.

As I have stated above, the issue is the familiar one expressed in the oft-quoted and classical case of Californian Copper Syndicate v Harris (1904), 5 TC 159—is the sum of the gain that has been made 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 to include an adventure or concern in the nature of trade.

The onus of establishing the former to have been the case falls on the taxpayers.

On behalf of the taxpayers it was contended that vacant land is a fit subject of investment. There is no doubt whatsoever that in certain circumstances land may be the subject of investment, but in other circumstances it is equally susceptible of being inventory in a business. Into which of those categories vacant or raw land may fall depends upon the circumstances applicable.

In the case of Commissioners of inland Revenue v Fraser (1940-42), 24 TC 498, the Lord President (Normand) indicated that two factors were important indicia in determining whether a single transaction amounts to a transaction in the nature of trade. These factors were (1) the person concerned, was the transaction in the line of that person’s ordinary trade in which case it is generally more easy to find the transaction to be a trading one, rather than when the transaction is outside that person’s line of trade, and (2) the subject matter of the transaction.

With respect to land as the subject matter of a transaction, the Lord President said at page 502:

. .. A man may purchase land with a view to realizing 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.

In the present actions, the taxpayers intended from the first to sell the land at a profit. That fact itself does not determine the question whether a particular transaction is an adventure in the nature of trade rather than an investment. At the most it is an item of evidence which might tend to show whether a person is carrying on a trade or an adventure in the nature of trade with respect to his investment but that fact alone is not conclusive. It is characteristic of a “good” investment that the subject matter will be sold at an enhanced value.

The Lord President pointed to one factor with respect to an investment as being the production of income while held. In so stating he no doubt had in mind such property as is normally used to produce an annual return.

In the present actions, the annual income produced from the land was so negligible as to be immaterial. None of the taxpayers entered into the transaction for the recurring income which might be produced by the land.

Neither did any of the taxpayers exhibit nor did they have any “pride of possession” of the land.

Accordingly, the taxpayers herein do not satisfy either of the conditions of land as an investment mentioned by the Lord President.

The fact that they do not do so does not determine the matter. From the outset the taxpayers’ avowed intention was to hold the land until it had increased in price and then dispose of it at a gain. This does not detract from the possibility of the gain being the realization of an “investment” because land is susceptible of “capital growth” in the same manner as equity shares in a joint stock company.

Counsel for the taxpayers produced and read into evidence the examination for discovery of an officer of the Crown. Counsel for the taxpayers elicited from this officer an admission that one of the principal reasons that the taxpayers were assessed as they were was. that Dr Miller was a trader in real estate and that Homestead Holdings Ltd, incorporated by him to conduct his real estate transactions, was also a trader and that the association of the taxpayers in this particular transaction wih Dr Miller and his company was the basis of asserting liability against them.

The point taken by counsel for the taxpayers was that taxation by association does not follow. I would rephrase that proposition to say that taxation by association does not necessarily follow. It is well established that the gain made by one taxpayer in a group in the sale of property may not be taxable while the profits of the other members of the group may be subject to tax as an adventure in the nature of trade.

The different results follow from the different intentions of the different taxpayers at the time of the acquisition of the property.

That intention is a question of fact to be determined after considering all the evidence.

It was stated by three of the taxpayers herein and on behalf of the other one that it was their intention to acquire the land and hold it until such time as it had appreciated substantially in price. This they characterized as a long-term investment.

Declarations of intention by persons assessed to income tax will not secure immunity therefrom. A professed intention cannot be considered as determining what it is the concrete facts amount to. It is only part of the evidence and must be considered along with the objective facts.

The unchallenged starting point is that Dr Miller (and his company) is an acknowledged trader in real estate. The opportunity was presented to him to purchase the property here involved. The prospect of gain was obvious to him but he did not wish to buy the whole interest in the property himself. Therefore, he was willing to share the prospect of gain that he foresaw with the taxpayers, his daughter and son-in-law, and the two other taxpayers to whom the invitation to share was extended by Mr McDonald.

None of the taxpayers made a personal inspection of the property prior to its purchase. No doubt they knew the nature of the land. They knew its location adjacent to the south-eastern boundaries of the City of Edmonton. The only logical inference is that this information was given to them by Dr Miller. He advised them that the asking price was reasonable. It is an equally logical inference that Dr Miller recommended the purchase to his daughter and son-in-law as a “good” buy.

Mr McDonald and Mr Beckingham knew that the asking price of $500 an acre was not an economic price for farm land as such but that this particular farm land commanded that price because of its location. It must be assumed that Mr Beckingham communicated that information to his wife and brother-in-law.

There is no doubt but that Mr McDonald and Mr Beckingham exercised a measure of independent judgment but there is no question that the dominant factor which influenced the decision of the taxpayers to participate in the purchase of this land was the knowledge that Dr Miller was also a participant and the knowledge that Dr Miller was an experienced and successful trader in real estate. Without Dr Miller the opportunity to purchase was not available to the other taxpayers.

Mr McDonald and Dr Anderson were frank to admit that they had purchased a share in the land with the purpose of selling it sooner or later.

The paramount consideration was not the time within which the land would be sold, which was anticipated to have been between a minimum of ten years and a maximum of twenty years, but rather the amount for which it could be sold. When the land was sold under the threat of expropriation in 1969, five years after its purchase, the taxpayers were not willing vendors at that time. Mr McDonald was not a willing vendor because, while the selling price of the land was eight times the purchase price, he felt that the price would be considerably greater in the immediate future.

I have observed that in some instances in the pleadings, particularly in the statement of defence to the appeal of Joyce E McDonald from her assessment to income tax, the allegation that the taxpayers entered into this transaction “in partnership” with each other and with Mrs Ray Miller and Homestead Holdings Ltd all of whom are referred to as “partners”.

Bearing in mind that the words “partnership” and “partners” have a distinct legal meaning and distinct legal consequences flow from that relationship, the choice of such words may have been an unhappy one because that relationship was not established in evidence nor was it possible to establish.

The taxpayers together with Mrs Miller and Homestead Holdings Ltd were owners in common. Dr Miller conducted all negotiations for the purchase of the property on behalf of the co-owners. He managed the property on behalf of the co-owners during the period of ownership.

While the co-owners were not partners in the strict legal sense nevertheless they were acting in concert. Dr Miller was the innovator of the purchase and it was he who decided who the other participants should be in the sense that the opportunity was given to those participants with the choice of accepting or declining and if accepted the extent of their participation.

His invitation to participate was accepted by the taxpayers and on their behalf he completed the purchase.

The blunt fact is that the taxpayers joined Dr Miller in the purchase of the land.

1 do not think that, in these circumstances, the taxpayers can be heard to say that they supplied the funds to purchase an interest in the property but that their purpose differed from that of the initiator of the purchase with whom they had joined.

After having given careful attention to all the evidence, the preponderance of that evidence points to the conclusion that the taxpayers were joint adventurers with Dr Miller in a venture in the nature of trade and, accordingly, I am not satisfied that it can be said that the assump tions of the Minister, in assessing the taxpayers as he did, were not warranted.

Therefore the appeals of the taxpayers Joyce E McDonald and David C McDonald from their respective assessments to income tax for their 1969 taxation years are dismissed with costs.

The appeals by Her Majesty the Queen from the decisions of the Tax Review Board with respect to the assessments of the taxpayers Douglas Lloyd Anderson and Jean Emily Beckingham for their 1969 taxation year are allowed with costs and the assessments by the Minister are restored.