Edward A. Schaffer v. Minister of National Revenue, [1971] CTC 577, 71 DTC 5306

Kerr, J.:—This is an appeal from an assessment of income tax on net profits realized by the appellant in his 1966 and 1967 taxation years on the sale of lands in the Bassano area of Alberta hereinafter referred to as the ‘‘ McKenzie land ’ ’ and the ‘‘ Tiffin land”.

The appellant purchased the McKenzie land, consisting of 25 quarter-sections of unbroken grassland, on September 20, 1965 for $110,000. He assigned his interest in 18 quarters of the land to Trapp Farms Limited on October 29 of the same year for $105,000, and sold the remaining 7 quarters to Paul Shemik on April 22, 1966 for $438,000. He bought the Tiffin land, 640 acres, on April 11, 1966 for $28,800 and sold it on June 28 of the same year to Norman Trapp for $35,500.

The appellant claims that the profits were capital gains from investments. The respondent says that they were income from a business within the meaning of Section 139(1) (e) of the Income Tax Act.

The appellant was born in Bassano in 1934. From 1947 to 1954 he lived on a farm in the Three Hills area and from 1954 to 1960 he was an automobile salesman in Bassano. In 1960 he became part owner of Bud’s Service (1960) Limited, a company with a General Motors dealership and an Esso service station in Bassano. He owned 51% of the issued shares of the company. His business associate, Lawrence E. Stewart, owned the remaining 49% until he disposed of them in 1970. The appel- lant’s brothers now own the 49%. At all relevant times the appellant was president and manager of the company. The service station premises were owned by Stewart Realty and leased to Bud’s Service.

The $110,000 purchase price of the McKenzie land was payable by the appellant $5,000 down and the remaining $105,000 on February 1, 1966. The appellant gave evidence that he was negotiating with McKenzie over a period of several months to obtain the land and that during that period he had a verbal promise from the manager of the Royal Bank in Bassano that the bank would lend him $95,000, repayable over a 10-year term, to purchase the land. He felt able to make the repayments in the 10 years, for he was drawing dividends of $10,000 a year from Bud’s Service, in addition to his wages, and he also expected to obtain revenue from the land. The bank advanced $5,000 for the down-payment and in turn took a promissory note from the appellant for that sum payable on demand. The bank’s district office approved the granting of the loan for $95,000, but reduced the repayment period to 5 years, subject to renegotiation at the end of that time because of possible changes in interest rates. However, the remainder of the loan was not actually taken from the bank, for in October 1965, before the due date of February 1, 1966, for payment of the balance of the purchase price to McKenzie, the appellant had assigned his interest in the 18 quarters to Trapp Farms for $105,000 and that company made an early payment in full by February 1966.

The appellant bought the Tiffin land from Tiffin Holdings Ltd. in April 1966 for $28,800, payable $10,000 down and $18,800 on July 1, 1966. He borrowed the money for the down payment from the bank and gave his promissory note to cover it, and borrowed $15,000 from the bank on July 8, 1966, to pay the remainder of the purchase price owed to the Tiffin company. He sold this property on June 28 of the same year to Norman Trapp for $35,500. He obtained a down payment of $2,000, and was paid the remaining $33,500 in 1967.

The appellant also bought two other farms in 1966. On March 1 of that year he bought a farm, in size 3 quarter-sections, together with a herd of cattle on the farm, 39 cows and calves and 1 bull, from Alfred W. Neufeld for $33,500, payable $1,000 down and the balance by May 16 of that year. On March 23, of that same year, jointly with his business associate, Lawrence Stewart, he purchased 1,058 acres, about 7 miles from Bassano, from R. W. Ferguson for $26,000. He paid $1,000 down and borrowed $24,000 from the bank for the purchase, giving his promissory note for the amount of the loan. Stewart had his hand in the acquisition of these properties and provided $25,000 for the purpose. Eventually, pursuant to mutual arrangement, the appellant took the Ferguson land and Stewart took the Neufeld property. The appellant took the cattle.

The appellant’s general explanation of those purchases is that he wanted to acquire farm and ranch land in the Bassano area with the object of building it into an economic operating unit for the future use of himself and his family, particularly for the years after 1970 as there was uncertainty as to renewal of the lease on the service station on its expiration in that year and as to his position as manager with Bud’s Service as from 1970, and it was his intention to get out of that business at that time.

The appellant said that while he was negotiating for the McKenzie land he reached a verbal agreement with Norman Trapp, acting for Trapp Farms Limited, that this company would take a 5-year lease of the best 18 quarters of the land and break and cultivate it, at the end of which time the appellant would take the land himself and operate it. Trapp Farms is a large family-owned company that had the necessary equipment to break the land, whereas the appellant had neither equipment nor men to do so. The agreement called for Trapp Farms to break and farm the 18 quarters on a rental basis of $1 per acre and /3 of crop. The remaining 7 quarters were unsuitable for cultivation and would remain with the appellant, who said that he intended to pasture cattle on them. However, the verbal agreement was never made effective, for after the appellant bought the land Trapp Farms pushed for a 10-year lease and also sought to purchase the 18 quarters. At that point the appellant put a price of $105,000 on the 18 quarters and the Trapp company bought them at that price in October 1965. In April 1966 the appellant sold the remaining 7 quarters to Shimek, as already indicated, on an unsolicited offer to purchase them.

As to the Neufeld land, the appellant said that he bought it in the hope that he could trade it to Tiffin Holdings Ltd., which had an adjoining property, in exchange for a section which that company owned nearer Bassano (hereinbefore referred to as the ‘‘ Tiffin land’’). The Tiffin company indicated that it was not interested in the trade or acquisition of the Neufeld property but was willing to sell the Tiffin land, which the appellant thereupon purchased. Subsequently he transferred the Neufeld land to Stewart, as previously stated.

The Ferguson land. The appellant said that he put cattle on this land and worked it in the spring of 1966. He purchased a tractor and cultivator at that time, had men running the machines there and took a crop off the farm in 1966. He also advertised the farm for sale in the Calgary Herald, with an asking price of $58,800 and $30,000 down payment. No sale resulted and he still owns and works the farm. He said he had been willing to sell it at a right price if the opportunity to do so came along. He has had sizable herds of cattle on the farm, starting with the herd he bought from Neufeld. At the time of the trial he had about 90 head. on it. This was the only one of the various parcels of land that he advertised for sale or sought to sell, the sales of the McKenzie land and the Tiffin land being the result of unsolicited offers to buy.

The manager of the Royal Bank with whom the appellant was dealing confirmed that he had agreed to lend the appellant $95,000 to enable him to purchase the McKenzie land, repayable over a 10-year period, and that later the details were agreed whereby the term was set at 5 years, at the request of the district office, subject to re-negotiation at the end of that period, having regard to fluctuations in interest rates. He knew of the appellant’s Bud’s Service business and that he had salary and dividends from it, and he regarded the appellant as a good credit risk for the loan. He said that the appellant had given as a reason for wanting the loan that he was seeking to acquire and operate an economic farm unit.

Norman Trapp confirmed the appellant’s testimony respecting the proposed leasing and breaking of the 18 quarters of the McKenzie land. He said that while the appellant was negotiating with McKenzie he had approached him, Trapp, to see if his company would break the land over a 5-year period, at the end of which the appellant would take over the operation of the land, and he then verbally agreed with the appellant that his company would break and cultivate the best 18 quarters, on a 5-year lease basis; but his father, who had the final say, wanted a 10-year lease and the negotiations for the lease continued after the appellant had bought the land. At this point he asked the appellant if he would sell the 18 quarters outright to Trapp Farms and the appellant put a price of $105,000 on that portion, and Trapp Farms accepted. Trapp also confirmed that the appellant had difficulties in getting farm labour for the Tiffin farm and in seeding it and that he asked the appellant to sell it to him personally, and the sale resulted.

The appellant’s explanation as to why he sold the McKenzie land was that Trapp Farms was insisting on a 10-year lease instead of the 5-year term he had been led to expect, and this left him with a choice of (a) holding on to the land without equipment to break it, (b) giving a 10-year lease which would run beyond 1970 when he wanted to be able to operate the land himself, or (ec) selling the 18 quarters to Trapp Farms at what he regarded as a good price. The bank had also put loan repayment on a 5-year term. So he elected to accept Trap-p Farms’ offer to buy the 18 quarters. He then still had the remaining 7 quarters but by the time Paul Shemik came to him in April 1966 seeking to buy the 7 quarters he had already bought the Ferguson farm. He did not need both, the 7 quarters of the McKenzie land was poor and not an economic unit for the appellant’s purposes, and Shemik’s offer was good, so he sold to Shemik.

His explanation for selling the Tiffin land was that he had experienced difficulty in the spring of 1966 in getting farm labour to work it and in getting it seeded, and there came an unsolicited offer from Norman Trapp to buy it, which was attractive to the appellant.

There was other evidence to the effect that the appellant knew the Bassano area and its people well; he had not bought farm land prior to the transactions in question; although he is working the Ferguson land he has not moved to live on it; at the date of the trial in June 1971 he was not working at the Bud’s Service business but. until about 2 months prior thereto was giving 3 days a week to that business and is still a shareholder.

What the court must seek to determine on the evidence and proper inferences is the true character of the transactions and of the appellant’s involvement in the purchase and sale of the McKenzie land and the Tiffin land. The lands themselves are by their nature capable of being acquired as investments, or acquired and sold in the course of a ‘‘business’’ or adventures in the nature of trade. The onus is on the appellant to show that the assessment made by the respondent was wrong.

Counsel for the appellant, in arguing that the profits were capital gains and not income from a business and that neither of the transactions in question was an adventure in the nature of trade, submitted that the appellant had been a farmer in his earlier years and subsequently was in the automobile business but never in the business of buying and selling land ; his intention was to build up an economic farm; the original verbal agreements for a 10-year bank loan and a 5-year lease of the McKenzie land to Trapp Farms were indicative of an intention to hold rather than to sell the land ; the 10-year lease that Trapp Farms asked for would be destructive of his plan to operate the McKenzie land in 1970; he sold the McKenzie land as a result of unsolicited offers to purchase; he bought cattle and some farm machinery and endeavoured to farm the Tiffin land, but experienced difficulties in doing so, and sold it on an unsolicited offer ; he still owns and is farming the Ferguson property ; he did not take options on any lands or have dealings with dealers in land or have any of the usual characteristics of a person engaged in the business of buying and selling land; farm land does not normally lend itself to quick turnover sale at a profit, unless there are prospects for other than farming, for example, subdivision, that attract purchasers ; and the appellant’s financing ot the purchase of the lands on borrowed money is not inconsistent with their purchase as investments for farming.

The respondent says that the appellant’s object in acquiring and in dealing with the lands was the earning of profit and in particular that he intended, either primarily or as an alternative means of accomplishing his purpose of earning profit, that the lands be sold or otherwise dealt with or traded in. Counsel for the respondent argued that the sales in question were the results of trading for profit or of adventures in the nature of trade for profit, and in support. thereof submitted that the lands were purchased by the appellant on borrowed money and were very quickly sold by him at a good profit; he did not have financial means of his own to buy the lands, or time, money, men or equipment to break the McKenzie land or farm the Tiffin land; he was a business man who knew the Bassano area well, he had a profitable automobile business and there was a definite element of speculation on his part in buying farm lands in 1965 and 1966 for operation in 1970 ; he has retained only the Ferguson farm, and that after unsuccessfully advertising it for sale; and his conduct in 1965 and 1966 indicated that he was at that time making a business of buying and selling land, farming was not his sole intention in purchasing the lands and he had a secondary intention to sell them for profit if opportunity to do so presented itself.

I am satisfied that in purchasing the McKenzie land the appellant intended to have it broken and cultivated, for he approached Trapp Farms to do so, and the bank manager and Norman Trapp confirmed that the appellant had expressed that intention when he was negotiating for the purchase. But, looking objectively at the circumstances. and the whole course of. his conduct and his transactions in buying and selling land in 1965 and 1966, I think that in those years he had only provisional and less than definite or firm plans to leave his automobile business or go into farming and that there was a substantial element of speculation on his part in his acquisition and plans for the use of the McKenzie and Tiffin lands, and that possibility of re-sale, if he should later choose not to farm them or if an opportunity came to sell them at a profit, was an operating motivation for their acquisition. In my opinion the balance of probability is to that effect and I think that the circumstances and evidence do not clearly stamp the acquisition of either property with the character of an investment or establish that the appellant bought either property with the intention of keeping it for farming purposes and without any secondary intention (as it is sometimes called) of selling it for a profit. In the whole, I do not think that he has sufficiently discharged the onus of showing that the Minister’s assessment was erroneous.

His automobile business, judging from the amount of yearly dividends he was drawing, was prosperous and the possibility that rent for the premises might be increased in 1970 was hardly, in 1965, much of a reason for him to think that he would be leaving it in 1970. The reduction of the bank loan repayment period to 5 years from 10 should not have been of great significance, for the reduction was on account of interest rates and was not a reflection on his credit standing, and there was no evidence of any likelihood or belief on his part that at the end of 5 years he would not get an extension of the loan.

The agreement by the appellant to lease the McKenzie land to Trapp Farms for 5 years is, in my opinion, the strongest factor in support of his position that resale was not in his mind in purchasing that land. But it is not conclusive, nor is it inconsistent with an objective to enhance the value of the land by breaking and cultivating it and thereby make it more saleable.

The appellant sold most of the McKenzie land in the next month after he bought it and sold the rest of it at the first opportunity about 6 months later. He sold the Tiffin land within 3 months after he bought it. In each instance he sold as soon as an opportunity for sale at a profit presented itself. He bought the Neufeld place with an intention to trade it to obtain the Tiffin land, a speculative venture, for he bought it without first ascertaining if Tiffin Holdings was interested in acquiring or trading for it. He passed the Neufeld farm to his business partner. He advertised the Ferguson place for sale at an asking price that would, if obtained, have yielded a good profit. Apart from his retention and operation of that farm, having failed in his effort to sell it, he has not gone into farming, and until shortly before the trial in June 1971 he was still actively engaged in his automobile business.

Therefore, the appeal will be dismissed with costs.