Robert John Cunningham v. Minister of National Revenue, [1972] CTC 2502, 72 DTC 1418

The Chairman (orally):—This is an appeal by Robert John Cunningham from an assessment by the Minister of National Revenue adding back a profit on the sale of real estate to the taxpayer’s income for the taxation year 1968. The facts are rather complicated but both counsel for the Minister and the appellant have been most helpful in presenting the oral and documentary evidence in a most orderly form. The appellant has submitted a book of exhibits, as has the respondent. I am referring to appellant’s Exihibit A, which is numbered 1 to 28. There was also a summary of disposition of funds which was filed as No 28 to appellant’s Exhibit A.

The facts briefly are that the appellant and his son are farmers, the appellant having farmed for about 33 years and is still farming land in the Georgetown area. The appellant called as a witness Mr Frederick Arthur Helson, a barrister and solicitor, who has lived in the Georgetown area since 1950 and who practises law in the community. The appellant, Robert John Cunningham, also gave evidence.

Four parcels of land were discussed during the course of this appeal and these are shown on page 1 of the appellant’s Exhibit A, being coloured yellow and marked A, B, C and D. Farms A and B were sold and were treated as capital assets and do not form part of this appeal save and except as to their relevance with respect to the remainder of the evidence. Farm D is now owned and farmed jointly by the appellant and his son.

Mr Helson said that the Georgetown area had suffered a severe blow when the Government of Canada ceased the production of the Arrow aircraft in or about 1958. As he put it, everything ceased in the area. He said that by 1965 a few houses were being built but there were really no real estate transactions of any major proportions being carried on in the area. Farms A and B were owned by the appellant and his son.

Mr Helson said that he has a very large real estate practice, if not the largest, in Georgetown, which I gather is about 30 miles from the City of Hamilton. He said that the first indication he had of any current assembly taking place was when Mr Cunningham came to him with two options to purchase Farms A and B respectively. Mr Helson said that he knew that a great many options and many offers to purchase had been signed over the years but many of these fell through. He said that he or his firm had been engaged in foreclosure actions where people were unable to complete the normal terms of their contracts.

Farm C, which is the farm in question, was purchased by the appellant, the original purchase price being $61,000, but this was subsequently increased to $85,000. It was resold almost immediately for $225,000. This is the farm which gives rise to the appeal before me today.

Mr Helson was well aware of Farm C, as he lived in the township. He knew the Ruddell Farm had been for sale and he said that many times he had noticed the “For Sale” sign on the property but after passing it regularly he no longer took particular notice but at least he knew the farm had been for sale for a number of years.

He said that the appellant consulted him before buying Farm C and that, although it was not his normal practice to comment on what a client wished to pay for property, he felt that he had represented this client long enough and knew him well enough to say that he felt that the price of $61,000 odd was far in excess of the value of Farm C. He said he himself had been interested in a farm in the area and presumably had made some inquiries and knew what the approximate values of farms in this area would be. He said that in June 1968 the appellant called him late at night to say that he had received an offer of $225,000 for Farm C but was not inclined at that time to sell it. As Mr Helson said, he sat on the offer, as the saying goes, until later in June, approximately two weeks before he accepted it.

The situation as indicated by the evidence is complicated and in these reasons I include the documents contained in appellant’s Exhibit A, pages 1 to 28, and make reference to them only in a cursory manner in delivering this judgment.

Farms A and B were optioned on October 12, 1967, Farm A for some $170,000 and Farm B for $175,000. These were the usual type of option with a payment on the signing of the option, a payment on the exercise of the option, with payments being credited to the purchase price.

If one looks at page 1 of appellant’s Exhibit A it will be seen that Farm B is surrounded on 3 /2 sides by the boundary line of the Municipality of Georgetown. Farm C is almost adjacent. If one assumes that this map runs north and south—there are no compass directions on it—the northwest corner of Farm B meets the southeast corner of Farm C except that it appears to be separated by a concession road. Also the northeast corner of Farm A, again assuming that the map runs north and south, meets the southwest corner of Farm B, subject again to what appears to be a concession road. Farms A, B and C are all close together, Farm A being the farthest farm from Georgetown.

Mr Cunningham stated that he felt there was a greater likelihood that the option on Farm B would be carried out as it might eventually be absorbed into Georgetown, but he was concerned about Farm A. He felt that Farm A by itself would not be a viable and profitable operation for himself and his son to operate. I should say here that they are in the dairy farm business. Apparently there was a barn on Farm A that they are using, but there was none on Farm D.

A rather strange thing occurred on December 6, 1968. The appellant signed an offer to purchase Farm C from Mr Ruddell for $61,750. The offer contained two conditions. First, the offer was contingent upon the sale of Farm B and, second, the vendor was given the right, should he receive a bona fide offer to purchase his farm at a higher price, to present the offer to Mr Cunningham who would then have the opportunity of waiving these conditions and proceeding with the purchase. As it turned out, on May 21, 1968 a third party offered $85,000 for Farm C. Some discussion took place with Mr Helson, who acted for both Ruddell and Cunningham. Helson advised Mr Ruddell that his only right against the appellant in this case was to present the offer to him and give him the opportunity to call off or waive the conditions. Ruddell felt that his right was stronger and he was advised to seek independent legal advice. However, he returned to Mr Helson and an agreement was drawn up on June 28 between Ruddell and Cunningham whereby the condition concerning Farm B was abandoned and an additional $23,000, or whatever the sum was, was agreed to be paid by Mr Cunningham to Ruddell provided the appellant in this case could complete the sale of Farm C, and also that the payment of the additional sum would be made to Ruddell as Cunningham received payments on the ’’mortgage back” in the transaction covering Farm C.

The appellant’s evidence is that he was afraid he might be left with Farm A, which was the farthest from the Municipality of Georgetown. Although he had had opportunities in the past he had not been interested in Farm C but now he felt that in order to have, as I say, a viable and profitable operation for both himself and his son, he needed additional land. He says that Farm C was a far less attractive farm than Farm A, and he gave various reasons for so saying. The question was put to him whether he thought the offer of $175,000, or whatever the amount was, was not a rather attractive offer, and he answered by saying in effect that if Farm C was worth $61,000 then his land was worth what had been offered to him.

In any event all three transactions were completed. Farms A and B were sold to an agent or agents, as it was later discovered, of a man by the name of Krehn, and Farm C was transferred, presumably to the appellant, for the $85,000 figure and sold immediately, or within a very short period of time, for $225,000 to the agent or developer. Within a very short period of time, between December 1967 and November 1968, the appellant sold Farms A, B and C for $170,000, $175,000 and $225,000 respectively, although large mortgages were involved in each case. As he says, there is still some doubt as to whether he will ever receive the full payment for the sales.

At the same time that this was taking place he and his son were looking at and eventually purchased in December 1967 Farm D. Farm D is some distance away. I am not able to ascertain the distance by concessions or mileage from the map, but it would appear that Farm D was more remote from the Municipality of Georgetown than the other three farms which are adjacent or almost adjacent to it.

The question of course is what was the intention of the appellant at the material time. He has said that he intended to farm on Farm C. As a result of a subsequent agreement entered into between the purchaser and the appellant, the appellant still farms Farms A, B, C and D, since apparently no development has taken place on the lands that were sold. Nevertheless I must determine whether the sale of Farm C was an adventure in the nature of trade, and to do that I am satisfied that I must find that the appellant had a secondary intention to turn the property to account at the first opportunity. I accept his evidence that his prime intention was to farm, which he had done all his life and is still doing.

I think I can decide this case on the very narrow point of time and Opportunity. As I have said, the whole transaction took place between the options in October 1967, the offer to purchase Farm C in December 1967, the appellant agreeing on June 28 to pay an additional $23,000, the agreement to buy Farm D on December 20, 1967 completed on June 20, 1968, and the knowledge that must be imputed to the appellant at the material time.

It is his evidence that he was concerned about Farm A, but had no concern, or perhaps it is not fair to say he had no concern, but he expected that Farm B, because of its location, would be more likely to be brought into the Municipality of Georgetown. I can see no difference between that and the position of Farm C. Nothwithstanding his primary intention to farm Farm C, I cannot help but draw the conclusion and the inference from his evidence that there must have been a secondary intention in his mind that if he was able to sell Farms A and B for the considerable sums that he did, the position of Farm C would also lend itself to a similar speculation.

I am supported in that belief by the fact that he and his son had an anchor to windward in the purchase of Farm D in December, later completed about the same time as these other transactions. It is true the completion of the other sales was in November 1968 and the appellant’s purchase from Ruddell was completed in June 1968, but the whole series of transactions happened in such a manner and for such prices as could only leave, in my view, in the mind of an intelligent man with knowledge such as the taxpayer had, a secondary intention that the property might be turned to account at a profit at an early opportunity as a result of what had happened with regard to Farms A and B.

For these reasons, and on the basis of the contents of the various exhibits and the viva voce evidence, the appeal will be dismissed and the assessment of the Minister reaffirmed.

Appeal dismissed.