Income Tax, Income or Capital Gain #31

By Gerry Neely
B.A. LL.B.

The intention of the taxpayer as the determinative factor in whether one hundred per cent of the profit realized on the sale of property is taxed as income, or only fifty per cent as capital gain, is described in the following two cases. In the first one, the taxpayer stated that over the years he had purchased numerous parcels of land (some improved) to hold as investments. It was his hope that an investment in land would appreciate in value at a rate greater than any investment in the stock market, and that it would be sold when the appreciation in value achieved the taxpayer's investment objective. The Tax Review Board stated that this was the "purest definition of trading that anyone can want. You buy and you sell and you make money." The period of time over which the land was held, and the fact that some of the land had improvements upon it, did not establish the purchases as investments. "The intrinsic characteristics of income or capital does not depend solely on the nature of the asset involved for income tax purposes; the purpose of acquisition, the use during ownership and the reasons for disposition are equally, if not more relevant to any such determination."

The profit on the sale by the taxpayer was held to be fully taxable as income.¹

In the second case, the profit realized by a taxpayer who had entered into an agreement to sell land five days after he had obtained a binding contract of purchase on the land, at twice the price he had agreed to pay, was held to be a capital gain. The intention of the taxpayer when he agreed to purchase the land was to build a warehouse-workshop for his own use, to replace similar space in a building owned by the taxpayer. The taxpayer was vacating this space in order to lease it to the tenant who occupied the remaining space in the taxpayer's building.

On the day the taxpayer's offer to purchase was accepted, he approached a member of council to start the process of changing the zoning, a process which he expected to achieve successfully within his time limitations. He then became aware for the first time that a group of businessmen had been assembling land in the area for a shopping centre, a fact known only to the businessmen and the land owners in the area, one of whom was the member of council approached by the taxpayer.

The Tax Review Board's decision that his profit of $74,000.00 was taxable as a capital gain, was based on its acceptance of the taxpayer's evidence that his only intention when he purchased the land was to build his warehouse. In rejecting the argument of the Minister of National Revenue, that evidence of his intention to sell was apparent from the quick turnover of the property, the Board accepted the uncontradicted evidence of the taxpayer, the councilmen and the businessmen purchaser, as well as the course of conduct of the taxpayer both before and after the sale was made. In addition, the chairman stated that he was at a loss to understand how and why the taxpayer could logically have refused such an offer.²

	1.	Lovering v. MNR, 82 D.T.C. 1731.
	2.	Toutouse v. MNR, 82 D.T.C. 1710.

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