A J Frost:—These are income tax appeals in respect of each of the appellants’ 1968 and 1969 taxation years. The appeals came on for hearing in Saskatoon, Saskatchewan on Monday, December 4, 1972 and it was agreed by the parties that they should be heard together on common evidence as the facts in each case are the same.
In 1958 the appellants purchased a 10-acre farm for their ageing parents outside the city limits of Saskatoon. The farm had a 7-room house on it and was serviced with power but no other facilities were available. The parents of the Dobroskay brothers had farmed from 1910 to 1947 when they decided to retire and live at Saskatoon where their three sons were engaged in the operation of an auto body shop. The parents and three sons were a closely knit family group and as time went on the sons became increasingly concerned for the wellbeing of their ageing parents especially as their mother seemed unhappy about city life. It was decided that the best solution to the problem would be to locate a small parcel of land not too far from the Dobroskays’ business where the parents could live out the balance of their lives in surroundings not too dissimilar from those they had become accustomed to during their 37 years of active farming. A suitable 10-acre plot was located and the Dobroskay brothers made an initial offer of $15,000 but reduced it later to $13,000. The second offer of $13,000 was accepted.
Shortly after the purchase, Mrs Helen Dobroskay, the mother of the three appellants, became ill and was admitted to the Saskatchewan Hospital, North Battleford on March 3, 1959 suffering from arteriosclerosis and general senility—frustrating the plans of her three sons to provide for the welfare of their parents by purchasing the small farm.
At the time of the purchase there was little or no speculation in the area although the City of Saskatoon had for many years adopted the policy of buying farms for subdivision purposes. The Board allowed several newspaper clippings to be introduced in evidence. An extract from one newspaper under date of March 26, 1958 (Exhibit R-4) reads as follows:
City approves Purchase of Half Section of Land for Future Residences
City Planner Bill Graham said the land is to be made into a residential subdivision eventually, but that it would not be subdivided and offered for Sale to home builders for at least 5 years.
Evidence as to secondary intention was adduced by both parties. The appellants endeavoured to show that it was their intention to use part of the 10-acre plot for their body shop business but that this intention was frustrated when the City of Saskatoon took in the area and the development plan adopted by the City did not permit the establishment of light industry or a body shop in the 10-acre replotting scheme.
The respondent on the other hand adduced evidence to indicate: (1) that the appellants bought the land with the intention of subdividing it right away, and (2) that the City of Saskatoon had for a long time, in fact as far back as the 1920’s, followed the practice of buying land outside the city and subdividing the land into individual lots and that the policies of the City of Saskatoon were of some importance and had a bearing on the instant case.
Most of the main facts of the case were well established indicating clearly that the appellants were not traders in real estate, had a primary motivation in buying the 10-acre plot outside the City of Saskatoon limits to provide a small farm for their ageing parents, and had no alternative but to sell the land on a lot-by-lot basis for residential building after the Citv of Saskatoon extended its boundaries. Another important fact came out in evidence, namely, that no lots were sold until 8 years after the date of purchase.
Exhibit R-1 (an application for an $18,000 loan signed by a Mr Cooper) contains the following words:
Market value of this security should increase in value in the near future due to the present residential development adjacent to the acreage involved. The security is located within the city limits and applicants intend subdividing acreage for sale as individual lots during 1959, with the proceeds to be applied to our mortgage at the company’s discretion.
The above hearsay evidence was admitted by the Board but under oath each witness expressly denied any personal knowledge of the statement and further denied the truth of the facts asserted.
The question in issue is therefore one of secondary intention. Were the appellants motivated to buy the property for speculative gain and what weight, if any, should be given to such motivation? Questions such as these are practical questions of fact and must be considered carefully in the light of all the circumstances, It may well be that the appellants had several reasons for acquiring the 10-acre plot and these may have included the use of part of the property for business pur- poses and the eventual resale of the land after their parents could no longer make use of it, but these reasons do not necessarily constitute secondary intention as an important motivating factor.
On the evidence, I find that the appellants did not engage in an adventure in the nature of trade in respect of their purchase of the said farm plot for their ageing parents, or that the secondary intention alleged by the respondent gives rise to the incidence of taxation. In my opinion, the doctrine of secondary intention which in this case would give rise to an adventure in the nature of trade can only be used as a basis for taxation when it is crystal-clear from the evidence that a taxpayer from the beginning had an alternative in mind to be effectively used if the primary objective were frustrated. To give a capital investment the additional character of a speculative venture, the possibility of a resale must unmistakably exist as an operating motivation. It does not suffice that a capital investment merely contained an element of speculation or that the possibility of resale had passed through the purchaser’s mind. Does not every prudent investor consider the possibility of resale? The dual character of the transaction must be obvious and immediate in order to play a role in the assessment procedure. A secondary intention should not be a long-range intention based on remote possibilities.
Every prudent investor has his price and tries to minimize losses. A sound investment must contain some element of speculation, otherwise it would not be considered sound. The prudent investor endeavours to preserve the purchasing power of his dollar through judicious management of his investment holdings. For example, when the holder of government bonds lengthens or shortens his. bond maturities by switching his holdings, he is obviously speculating as to the risk inherent in the interest-rate structure of the bond market but this activity does not make him a speculator. He is simply observing one of the basic tenets of the prudent investment management.
If in the instant appeal it were found that the primary motivation had been to buy and hold property for speculative gain, it would be taxable. However the avowed primary purpose herein, as testified by the Dobroskay brothers, was to buy property for their aged parents. Even if it could be inferred from the course of conduct of the appellants that they had in mind the possibility of eventually selling the 10- acre plot by subdividing it, such possibility would not, in my opinion, necessarily constitute a secondary intention that would justify taxation of a gain which inadvertently came their way.
The appellants did not have a background of real estate speculation, but did have a genuine interest in acquiring the subject property for their parents’ use. The real estate expansion which eventually engulfed the area is not something which would likely have been foreseen by the appellants as there was little, if any, speculation in land in the environs of Saskatoon in 1958 and, if there had been, the appellants were not consciously and purposely engaged in it.
In my opinion, the sale of lots which eventually followed the isolated purchase of the 10-acre plot was on capital account because the whole course of conduct of the appellants indicated that they were not land speculators or traders and no inference as to secondary intention, as understood for taxation purposes, can be drawn from anything the appellants said or did.
Appeal allowed.