A J Frost:
1 I shall now give my decision in this income tax appeal in respect of the appellant's 1969, 1970 and 1971 taxation years.
2 The question at issue herein is whether or not the gain of $79,881.06 realized on the sale of a trailer park owned by the appellant company is income within the meaning of sections 3 and 4 and paragraph 139(1)(e) of the former Income Tax Act.
3 In 1963, the appellant purchased 16.67 acres of land within the city limits of Calgary for $35,007 and subsequently developed a mobile home park known as Blackfoot Trailer Park with $125,000 of demand money guaranteed by the appellant's principal shareholders K S Dixon and N S Trouth. The land purchased was suitable for highway development of a commercial nature but unsuitable for a housing project. At the time of acquisition there was little trailer space available in Calgary for tourists and travellers. The developers envisaged a viable economic development in the nature of a trailer park subdivision to be held and operated as one of the principal investments of the appellant company. For the year ended December 31, 1968, the appellant showed property rental income as follows:
Land Trailer Shopping
lease park centre Total
Gross rentals $2,284 57,790 19,852 79,926
Expenses 10 50,417 10,081 60,508
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Income for the year $2,274 7,373 9,771 19,418
4 The expenses of operating the trailer park were relatively high, including $11,886 for interest and $10,930 for taxes and licences. However, the net income of the trailer park for the year 1968, which was the last full year of operation prior to sale, was in excess of 20% of the cost of the land. A 20% return on the equity investment in land, when only half of the land had been developed, leaves no question in my mind that the appellant company had in fact accomplished what Messrs Dixon and Trouth said they originally intended to do. At the time of sale, the park contained 80 spaces well landscaped and fully serviced with sewers, water and gas. The only limiting factor was the inability of the appellant to obtain long-term financing. The original loan of $125,000 from the Toronto-Dominion Bank had not been repaid as late as 1969, and some pressure was being applied by the bank to reduce this indebtedness. Under pressure, the appellant sold to Gary Parking Company Limited, one of the bank's customers that the bank manager had introduced to the appellant. The evidence indicated that the appellant wanted to keep the trailer park but, as I have said, under pressure from the bank, it was persuaded to sell.
5 Counsel for the respondent, in his argument, submitted that there was a speculative flavour to the purchase of the land, as the problems of (1) the acquisition of clear title to the land, (2) the development of services, and (3) the ultimate design of the Blackfoot Trail Highway, had not been resolved at the time of purchase. These factors, counsel contended, could be interpreted as necessary for the development of a trading asset. The Board rejects this contention, and finds on the evidence that the developers, Dixon and Trouth, clearly envisaged the final resolution of these problems, and the development of a long-term viable business enterprise on land on which the market had not placed too high a value.
6 It may well be that there was a speculative flavour associated with the original acquisition of the land, but it must be remembered that a worthwhile investment in land or equities ought, as a general proposition, to contain some speculative flavour, otherwise it is rather unlikely that a prudent investor would consider his investment sound.
7 The function of capital is to produce more capital as well as income. Speculative flavour, an element of risk, and the probability of capital gains go together. In the financial world, that is just plain, common, investment sense.
8 There is a big difference, however, between a speculative flavour and outright speculation. In the case at bar, speculation is outweighed by the fact of development. The efforts of the developers went far enough to establish the land as a capital asset, and there is no question in my mind but that the gain realized from the sale of that capital asset was a capital gain.
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