Brian McKinney, Stanley G Watson v. Minister of National Revenue, [1978] CTC 2675, [1978] DTC 1490

The Chairman:—The appeals of Brian McKinney and Stanley G Watson from income tax assessments in respect of the 1974 taxation year were, by consent, heard simultaneously and on common evidence.

The issue in these appeals is whether the gain realized by each appellant as their respective shares of the sale price of a certain parcel of land is a capital gain or income.

Brian McKinney successfully commenced a machine shop business in 1954 which expanded over the years. Mr McKinney is a very prudent man who never acquired anything whether it was land, building, or equipment for the machine shop if he did not have the cash to pay first. From his testimony this method of doing business was a deep rooted and unvarying principle for this appellant. The evidence adduced confirms that Mr McKinney had no history as a trader in land. The only property he had, other than his machine shop, was his residence which he subsequently sold to purchase a 78-acre farm at Ellerslie, Alberta.

Mr Stanley Gordon Watson, the second appellant, was a farmer on his own farm for some 41 years and had no other occupation.

In June of 1965, Mr Harry Hayter, a real estate agent from whom Mr McKinney had the previous year purchased land on which he subsequently built his residence, approached Mr McKinney to ask him if he would be interested in joining a syndicate known as “The Alberta Park Syndicate’’ which had purchased 170-acres of raw land for a price of $487,200. Mr McKinney was interested and purchased, with surplus funds that he had, a 10% interest in the syndicate which was made up of 16 members (Exhibit A-1). Mr McKinney’s interest was admitted to have been held by his wife Marie, but the money was, in fact, Mr McKinney’s. Mr Watson, the second appellant, in June of 1965, also acquired a 10% interest in “The Alberta Park Syndicate” also with funds which he had, (Ex A-1).

In March of 1973, some 9 years after the purchase, the property was sold for $1,850,000. Mr McKinney and Mr Watson each realized a profit of $136,799 from the proceeds of the sale.

Since counsel for the appellants, during the course of the hearing, amended Mr Watson’s notice of appeal by stricking out the words, “and for the purpose of farming” from paragraph 3 of the statement of facts, both appellants allege that they acquired the interest in the subject land as a long-term capital investment and that the gain realized from that investment is a capital gain.

The respondent, on the other hand, contends that the land was acquired by the syndicate with the primary or at least the alternative intent at the time of purchase of reselling the land at a profit and he concludes that the gain thus realized is income from a business or from an adventure in the nature of trade.

Counsel for the appellants claimed that since neither of the appellants were traders in land, since the purchase and sale of the subject property was an isolated transaction for each appellant, and that neither Mr McKinney nor Mr Watson acted as would traders, one must accept the appellants’ declared intention of making a long-term investment by becoming members of the Alberta Park Syndicate. Counsel also suggests that the long holding period of the land by the syndicate gives the transaction a capital quality.

The question which to me appears fundamental in these appeals is whether a speculative purchase of vacant land from which only a nominal income is derived and where the most profitable selling price is awaited for whatever period of time, can be for tax purposes, considered as a long-term capital investment?

Although some vague evidence was adduced to the effect that some thought had subsequently been given by the management committee of the Syndicate to the construction of a golf course and alternatively a trailer park and that the municipality would not service the land and that the cost to the syndicate of servicing the land would have been prohibitive, there is no valid evidence that at the time of purchase that any plans were seriously considered for the development of the said land and what, in fact, was purchased was vacant raw land which was zoned industrial and situated in an area of the City of Edmonton which was being developed. The appellants did not establish to the satisfaction of the Board that the land was purchased by the Syndicate with a view of earning income therefrom or of developing it in any way and there is no evidence that subsequently any serious effort was made to develop it or even to subdivide it.

Counsel for the appellant cited the decision of the Federal Court in Roy M Power v The Queen, [1975] CTC 580 at 583; 75 DTC 5388 at 5391, in which the Honourable Mr Justice Addy allowed the appeal on the grounds that:

There can be no doubt that, at the time he commenced assembling lands and for several years previously that is from 1960, the taxpayer’s main goal and intention were to guarantee a permanent source of income for himself after retirement and, at the same time, provide a permanent home for himself, his mother and his family in an area near the Gardens in. Halifax where he had resided for so long.

In the instant appeals, although the land did produce a rental income of $2,000 a year and income of $2,990.13 from the sale of top soil in two of the pertinent years the amounts received are, in my view, insignificant compared to the purchase price of the land and indeed that fact is not mentioned in either of the appellants’ notices of appeal as a motivating factor in the purchase of the land by the syndicate. In my opinion the facts of the instant appeal can therefore be distinguished from those of the Roy M Powers case (supra).

Counsel for the respondent, in holding that the taxpayers’ intention is “a key” in deciding whether a transaction is an adventure in the nature of trade or capital in nature also added that an avowed intention must be consistent with the objective facts. In support of that principle he cited the case of The Queen v Douglas Lloyd Anderson and Jean Emily Bechingham, and, Joyce E McDonald and David C McDonald v Her Majesty the Queen, [1973] CTC 606 at 615; 73 DTC 5444 at 5451, in which the Honourable Justice Cattanach states:

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 appellants, in stating that their intention in acquiring interest in the syndicate was to make a long-term capital investment, is Unsupported and their intention cannot, in my view, be any different from the intention of the Syndicate as a whole, because in signing the syndicate agreement the appellants turned over to a management committee of the syndicate the entire control of the affairs of the syndicate, (Exhibit A-1 (Par 6)).

There is no evidence whatever that the syndicate’s motive in acquiring the land was to earn income from it, or was to develop it in any way so as to earn income from it. The circumstances and the facts surrounding the purchase and sale of the land by the syndicate, as the evidence shows, leads one to conclude that the land was acquired speculatively for resale at the best opportune moment and thus constitutes an adventure in the nature of trade. Although, as pointed out by the learned Judge in the Anderson, McDonald case (Supra):

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 appellants in the instant appeal, by turning over the entire control of the affairs of the syndicate to a committee they became associated with the syndicate which, in my opinion, speculated in vacant land.

The answer to the question as to whether land purchased with the intention of reselling it at a profit even though it produces some income and is held for a long period of time awaiting an accretion of its selling price can be considered as a long-term capital investment is Clearly given in the Federal Court of Appeal decision in the case of David C McDonald v The Queen, [1974] CTC 836 at 837; 74 DTC 6644 at 6645, where it is stated:

A review of the transcript of evidence reveals that there was ample evidence upon which the trial judge could have based his following two findings. of fact. Firstly, that the appellant’s sole purpose in purchasing a share of the property, the profits from the sale of which have been assessed for tax by the respondent, 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. ,

secondly, that the annual income produced from the lands was so negligible as to be immaterial so that it was clear that the property was not purchased as an investment to produce income. These findings of fact, in our opinion, ought not to be disturbed by this court.

Having so found, the contention of the appellant that his interest in the vacant land purchased was an investment and being an isolated transaction outside the ordinary scope of his profession, the profit earned on its resale was not taxable, is in our view, untenable. Even if the fact is accepted that the sale was made due to a threat of expropriation, it was nonetheless a premature occurrence of the appellant’s ultimate intention, namely to sell his interest in the land at a profit. Although he was not dealing in what is normally considered to be a subject of commerce such as commodities, the transaction from its very inception was purely speculative in character and was, in our opinion, as a matter of law, a venture in the nature of trade.

Moreover, we are of the further opinion that the character of the transaction and the taxability of the profit arising therefrom is in no way changed simply because the appellant’s intention was to retain his interest in the land for a substantially longer period of time than, in fact, he did. Since his intention from the beginning was to sell at a profit from then on its characterization as a venture remained and thus the validity of the taxation of his gain on the sale also remained.

On the basis of the decision of the Federal Court of Appeal and on the facts of these appeals, I hold that both the appellants were associated with the syndicate in which they were members and that the primary purpose of the syndicate in acquiring vacant land was not to earn income from it or to develop it but to speculate and hold it until the greatest profit could be realized from its resale. In acquiring interest in the syndicate the appellants did not make a long-term capital investment, they participated in an adventure in the nature of trade and the whole amount of profits realized as their respective shares of profit in the disposition of the land are taxable in their hands.

The appeal is therefore dismissed.

Appeal dismissed.