Burgess v. MNR, 73 DTC 5040, [1973] CTC 58 (FCTD)

Heald, J:—These actions are appeals from income tax assessments for the taxation year 1969.

At the commencement of the trial, counsel for the parties applied to have both cases tried on common evidence and this application was granted.

The appellant Burgess has been in the house building and land developing business in the Halifax Area since 1949, first doing business as a sole proprietorship and since 1958, as a Nova Scotia corporation (Rex. Burgess Construction and Supplies Ltd) which corporation is owned beneficially entirely by Burgess and his wife.

From 1949 until 1953 Burgess was engaged in building a few houses each year for other persons.

In 1953, in equal partnership with one Jack Wallace, Burgess acquired a parcel of land referred to as the Fleming Glen subdivision located in the suburbs of the City of Halifax, about 4 /2 miles from the centre of downtown Halifax. There were about 100 building lots in this subdivision of which about 30 had been sold by the previous owner. Burgess says that he developed the remaining 70 lots by constructing roads therein, thereafter selling the lots to prospective homeowners. After selling the lots, his pattern was to endeavour to persuade the new owner to give him the contract for building his home. He says that he did in fact construct about one-third of the homes in this subdivision. He said that he never required that the lot purchaser engage him as a builder but the fact that he was the vendor of the lot and was available for house building gave him what could be described as a built-in advantage over other house builders. In any. event, the fact is that he did construct many of the houses in this subdivision.

Burgess and his wife purchased Wallace’s interest in this subdivision in 1958. At about this time Burgess became interested in certain land on the shores of Williams Lake, also in the suburbs of Halifax, about /2 mile distant from the Fleming Glen subdivision, hereinafter described as the Boulderwood subdivision.

His friend, the appellant Forward, expressed an interest in the development of this land on a joint venture basis. Burgess and Forward had grown up together in Halifax. Forward had been in the plumbing contracting business since about 1954 and Burgess had engaged him on some of his house jobs as the plumbing and heating subcontractor. Burgess had built Forward’s own home for him.

They had a fairly close personal and business association established over many years. Finally, in about 1963, Burgess and Forward were able to acquire this property which was transferred to a Nova Scotia corporation known as Boulderwood Properties Ltd which company was beneficially owned by Burgess and Forward in equal shares.

The two partners proceeded immediately to build a road into this property, they made subdivision plans, received tentative approval thereof from the authorities, they installed sewer and water and then commenced to advertise and sell the lots. There were 21 building lots in the Boulderwood subdivision, all of which were sold during the years 1966 to 1972 inclusive. Using the same pattern as in Fleming Glen, Burgess built four of the houses in this subdivision for the new owners and Forward also did some of the plumbing and heating work.

Boulderwood was a reasonably profitable enterprise from the point of view of its owners, Messrs Burgess and Forward.

In the income tax returns of Boulderwood Properties Ltd, the lot sales were reported as income and tax was paid on this income after deduction of properly chargeable expenses.

In. 1961 Burgess and Forward became interested in a large tract of raw land adjacent to the Boulderwood property on the shore of Williams Lake which was being advertised for sale for arrears of taxes. About 16 acres of this tract was situated on the north shore of the Lake and was accessible through the Boulderwood property. The other portion was on the south side of the Lake and was inaccessible for the time being. Investigation revealed about 100 different and separate titles and interests in this property. The appellants set about acquiring these various interests and by 1967, had acquired all of the necessary quit claim deeds from previous owners excepting two which had been acquired by one Velcoff, a Halifax lawyer. After protracted negotiations and discussions, Velcoff agreed to contribute his interest in this property to a new corporation to be formed in return for a one-third interest in said corporation. Finally clear title to this land tract was obtained in 1967 and ownership thereof was vested in said corporation known as Birkwood Properties Limited. Said corporation was beneficially owned by the appellants Burgess and Forward and Velcoff, one-third each.

Thus, the position of these two appellants in 1967 was that Boulderwood was developing and they were selling the lots therein. They were also working towards the opening up and the development of the Birkwood Properties. Beginning in 1965, in the process of developing Boulderwood, and, in anticipation of the eventual acquisition of Birkwood, a road was built, a 10-inch sewer line and 8-inch water main were installed with the purpose in mind of servicing not only Boulderwood but Birkwood as well. Plans were made to install a pumping station at a causeway which would connect the two pieces of land, thus enabling the sewer and water mains to run across the causeway to the Birkwood land. This causeway was constructed making the 16 acres of Birkwood land accessible for the first time. Most of the work of land clearing, road building and causeway construction was done personally by these two appellants between 1964 and 1968. They constructed a road across the causeway into the Birkwood property. By 1967 Birkwood began looking for prospective lot buyers and many persons indicated an interest in buying a lot as soon as Birkwood had clear title and the subdivision had been finally approved. In 1968 Birkwood continued with its plans to subdivide the land and tentative banking arrangements were made to finance the road building and for the extension of the water and sewer lines to the individual lots. The lots were advertised. The evidence establishes that the appellants intended to subdivide and build houses in Birkwood following the same pattern established in Boulderwood and Fleming Glen.

Meanwhile, the relationship between Burgess and Velcoff was deteriorating. Burgess did not know Velcoff before he became a partner in Birkwood. He says that he expected Velcoff would be able to con- tribute to the venture in terms of knowledge of legal matters such as subdivisions, title work, etc.

The evidence of both Burgess and Forward was that Velcoff contributed nothing financially or physically to Birkwood excepting, of course, his original interest in this land. Their opinion was that “he was along for the ride”. Forward said that he contributed “nothing but harassment”.

Their evidence was that he was consulted at all times on important decisions but was, at times, very difficult to the point of being impossible; that they themselves improved this property on weekends, before and after their normal working hours in an effort to save money and that Velcoff did not help them in any way except io come along in the evenings and, in the words of Burgess, “lord it over us”.

This alleged course of conduct on the part of Velcoff did not bother Forward much. He appeared to be of a different temperament than Burgess and more inclined to overlook erratic behaviour on the part of someone else. However, Velcoff’s actions bothered Burgess a great deal. He testified that Velcoff would telephone him at his home at midnight or later and berate him in rather vigorous and colourful language. This was very upsetting to him to the point where he began to wonder whether he could put up with this sort of harassment during the length of time which was necessary to complete the subdividing, the servicing of the lots, the advertising and the sale of them. The evidence is that, by the end of 1968, the relationship between Burgess and Velcoff was going from bad to worse.

In December of 1968 Burgess was approached by Jack Wallace, his former partner in the Fleming Glen subdivision, who, by this time, was in the real estate business in Toronto. Wallace had a client wishing to acquire building subdivisions and lots in the suburbs of Halifax. Wallace suggested that Burgess sell either Boulderwood or Birkwood. Burgess testified that he advised Wallace that he was most reluctant to part with either, that his business profits consisted largely of the profits from the lot sales and partly of the profits from his construction company and that he needed both to live decently. He says that Wallace persisted whereupon he told him he would have to check with his auditors. He said that, apart from his interests in Boulderwood and Birkwood, he owned himself substantial undeveloped land in Spryfield, another Halifax suburb, about 2 /2 miles further out from the centre of Halifax; that he knew, in December of 1968, that the Spryfield land, along with the Birkwood land, was going to be annexed by the City of Halifax on January 1, 1969 and he thought that if he was to get out of Birkwood, he would be able to concentrate on the development of Spryfield. The other factor which he says influenced him in favour of selling, was the unpleasant relationship which had developed with Velcoff. For those reasons in the main, Burgess reached a decision to sell. He then persuaded his partners Velcoff and Forward to also sell their interests in Birkwood. Forward testified that he was particularly reluctant to sell and did so only as a last resort. He testified that once Burgess became determined to sell, he was left with little choice. He said that they could not continue to operate Birkwood without Burgess, and the prospect of continuing in a minority position with new and strange partners was most unattractive to him. The result was that on December 9, 1968 all three partners gave an option to one T H Jackson of Toronto, in Trust, to purchase all the issued shares of Birkwood Properties Limited for a total price of $126,000 which option was subsequently accepted and the transaction was completed.

The respondent treated the gain made by both appellants on the sale of their shares in Birkwood Properties Limited as being from an adventure or concern in the nature of trade. Both appellants objected and it is the nature of this gain that is the subject matter of both actions.

The corporate objects of Birkwood as well as Boulderwood empowered these companies io, inter alia, carry on the business of a land company and to buy and sell “lands and real estate of all and every kind and description whether vacant, improved or otherwise”.

The appellant Burgess has a very active and extensive background in real estate development in the Halifax area over the past twenty years. He has been the substantial owner and motivating force behind at least three housing subdivisions in the suburbs of Halifax. He is presently engaged in a fourth (Spryfield).

The appellant Forward was a partner with Burgess in two of these projects. His knowledge of real estate is not nearly as extensive as is that of Burgess but I am satisfied that he had some knowledge because of his plumbing contracting business. He was a house building subcontractor and, as such, he certainly would have had some exposure to land and subdivision development. He said that he relied on the expertise and experience of Burgess to a very great degree. He had great confidence in Burgess and he felt that Burgess’ knowledge of real estate was. sufficient for both of them. He made the observation in evidence that his confidence in Burgess had been vindicated by the success of both ventures.

Both Burgess and Forward testified that their intentions in acquiring the Birkwood were twofold: first, they expected to sell the lots at a profit and, second, they expected these housing subdivisions. to generate house-building business for Burgess and plumbing and heating business for Forward.

I consider the decision of the Supreme Court of Canada in the case of Ronald K Fraser v MNR, [19654] SCR 657; [1964] CTC 372; 64 DTC 5224, to be relevant to the situation here. In that case, the appellant and an associate, both experienced real estate operators, jointly acquired four contiguous parcels of land, intending to build a shopping centre and apartment houses for investment purposes. The two associates then formed two corporations, selling the shopping centre land to one and the apartment house land to the other. The associates received all the issued shares of both corporations in equal proportions. Construction of a store was commenced on the shopping centre site, but before it was finished, the associates sold all their shares in the corporation holding that land and shortly afterwards all their shares in the other corporation. Mr Justice Judson, delivering the judgment of the Court, held that the associates were carrying on a business; they intended to make a profit and if they could not make it one way, then they made it another way.. The fact that they incorporated companies to hold the real estate made no difference. The sale of shares, rather than the sale of land was merely an alternative they chose to adopt in putting through their real estate transactions. The Court accordingly held the profit on the shares to be taxable as income.

In my view, the facts in this case are even stronger in favour of a taxable transaction than in the Fraser case. In the Fraser case, the main original intention was to construct fixed assets and to hold them as investments from which income would be derived. In the case at bar, there was never any intention to hold this land for revenue. The intention was clearly to acquire the raw land, improve it by clearing, installing roads, subdividing, servicing with sewer and water and then reselling at a profit. Also, in this case, such intention to buy and sell at a profit was a continuation of a pattern, earlier established in another similar venture (Boulderwood) a venture in which the profit on resale was declared in the income tax returns of the corporation as being taxable income.

Learned counsel for the appellants submitted that the pattern established by his clients was not one of selling raw land, but rather the sale of serviced lots, that, in the instant case of the Birkwood properties, this pattern was broken for the reasons given by Burgess in evidence, the main one being the unpleasant nature of the relationship with Velcoff. With deference, on the facts of this case, I do not consider that the reasons for selling make any difference to a final determination of the issues herein, The Birkwood lots were acquired for resale, they were the inventory of a trading business; by virtue of certain work (clearing, roadwork, subdivision, servicing, etc) they were made more valuable and were then resold at a profit. These lots, it seems to me, were trading inventory just as much as the raw material used by a manufacturer in the fabrication of a finished product which is then sold in the ordinary course of his business. Appellants’ counsel argued that this transaction was, in reality, a sale of the right to future profits, a discounting of future income, a discounting of a capital asset. I do not agree with this submission. I think the Birkwood lots were trading assets. The evidence was clear that the intention was to buy them, improve them and then resell them in much the same manner as any trader deals with his trading inventory.

Then, appellants’ counsel argued that this sale was not just the sale of an inventory of land, that the sale price of $126,000 could not be justified by the value of the land itself. His argument was that two things were sold: first, the ability to make development profits and, second, the opportunity of Messrs Burgess and Forward to make a profit in their contracting and plumbing business respectively and that what they were selling was a going concern which should be classed as a capital transaction. With every deference, I cannot interpret the evidence in this fashion. In my view, the evidence established clearly that Birkwood had only one asset, the land; this was their stock-in-trade and really the only thing they had to sell. The company had no goodwill in anything other than the land. The company had no separate office staff; it was operated by Burgess and his wife from their home. Burgess had established a reputation as a builder and developer and there was certainly goodwill attaching to Burgess but he retained this when Birkwood was sold and he still carried on with his construction business.

I believe that the evidence establishes that the purchaser from Birkwood purchased only and received only its stock-in-trade which was the land and the land alone.

The evidence was conflicting as to the value of the land, the appellants submitting that tne land value alone was considerably less than the purchase price, the respondent submitting that the sale price of the shares ($126,000) was clearly justified by the market value of the land at that time.

Based on the evidence of the sale of the Boulderwood lots and taking the evidence as to value as a whole, I am satisfied that the purchaser paid $126,000 for the land alone and that he was not paying for or receiving anything else and that such a price was probably not an unrealistic amount to pay for the land.

Appellants’ counsel also submitted that since neither Burgess or Forward had a history of buying and selling shares, that an isolated share transaction such as this should not be considered as a trading transaction. This point was considered by Mr Justice Pigeon in the Supreme Court case of MNA v Freud, [1969] SCR 75 at 81; [1968] CTC 438 at 442; 68 DTC 5279 at 5282; where he said:

. . . Due to the definition of business as including an adventure in the nature of trade, it is unnecessary for an acquisition of shares to be a trading operation rather than an investment that there should be a pattern of regular trading operations. In the Fraser case, the basic operation was the acquisition of land with a view to profit upon resale so that it became a trading asset. The conclusion reached implies that the acquisition of shares in companies incorporated for the purpose of holding such land was of the same nature seeing that upon selling the shares instead of the land itself, the profit was a trading profit, not a capital profit on the realization of an investment. . . .

In the Freud case, the taxpayer, a lawyer and his associate, conceived the idea of designing and developing a prototype of a sports car with the intention of selling their concept, embodied in the prototype, to a manufacturer of cars who could be interested in putting it into production. A corporation was formed to carry out the project and shares were issued to the two associates and others who put money in the undertaking. In 1960 the taxpayer advanced to the corporation a sum of money in a final attempt to sell the idea to a manufacturer. Part of this money was paid to the corporation and part consisted of direct payments for labour, materials and expenses.

At page 81 [442, 5282] of the judgment, Mr Justice Pigeon goes on to say:

If the respondent and his friends had been successful in selling the prototype sports car, they might well have done it by selling their shares in the company instead of having the company sell the prototype, and there can be no doubt that if they had thus made a profit it would have been taxable.

and at page 83 [444, 5283] :

In the present case as we have seen, the basic venture was not the development of a sports car with a view to the making of a profit by going into the business of selling cars but with a: view to a profit on selling the prototype. Therefore, the venture, from its inception, was not for the purpose of deriving income from an investment but for the purpose of making a profit on the resale which is characteristic of a venture in the nature of trade.

Likewise, in the cases at bar, the Birkwood venture from its inception was not for the purpose of deriving income from the lots but for the purpose of making a profit on the resale of the lots and thus, here, as in the Freud case, the sale has the characteristics of a venture in the nature of trade.

I have therefore concluded that the Minister was correct in assessing the profit on the sale of the shares in question as income. Both appeals are accordingly dismissed with costs.