T-1922-87
Jake Friesen (Plaintiff)
v.
Her Majesty the Queen (Defendant)
INDEXED AS: FRIESEN V. CANADA (TD.)
Trial Division, Rouleau J.—Vancouver, November
20, 1991; Ottawa, March 12, 1992.
Income tax — Income calculation — Deductions — Appeal
from reassessments of taxpayer's business income — Parcel of
raw land acquired for resale at profit — Whether property
"inventory in business" under Income Tax Act, ss. /0(1),
248(l) — Meaning of "business", "inventory" — "Trade" and
"adventure or concern in nature of trade" distinguished —
Case law reviewed — Raw land not "inventory" for purposes
of Act, s. 10(1) — Method of accounting must reflect taxpay
er's true income position — Inventory value relevant only if
valuation of inventory can affect business' gross profit, not by
itself deductible from income — Inventory "write-down" of
property not reflecting truest picture of taxpayer's income
position — Act, s. 10(1) inapplicable — Action dismissed.
STATUTES AND REGULATIONS JUDICIALLY
CONSIDERED
Income Tax Act, R.S.C. 1952, c. 148 (as am. by S.C.
1970-71-72, c. 63, s. 1), ss. 9(1), 10(1), 248(1) (as am.
by S.C. 1988, c. 55, s. 188).
CASES JUDICIALLY CONSIDERED
APPLIED:
Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R.
536; [1984] CTC 294; (1984), 84 DTC 6305; 53 N.R.
241; Maritime Telegraph and Telephone Co. Ltd. v. The
Queen (1990), 91 DTC 5038; 41 F.T.R. 301 (F.C.T.D.);
Minister of National Revenue v. Shofar Investment Corpo
ration, [1980] 1 S.C.R. 350; (1979), 105 D.L.R. (3d) 486;
[1979] CTC 433; 79 DTC 5347; 30 N.R. 60; Bailey (D.R.)
v. M.N.R., [1990] I C.T.C. 2450; (1990), 90 DTC 1321
(T.C.C.).
CONSIDERED:
Commissioners of Inland Revenue v. Livingston and
others (1926), 11 T.C. 538 (Scot. Ct. Sess.); Minister of
National Revenue v. Taylor, fames A., [1956-60] Ex.C.R.
3; [1956] C.T.C. 189; (1956), 56 DTC 1125; Gilmour (R.)
v. M.N.R., [1989] 2 C.T.C. 2454; (1989), 89 DTC 658
(T.C.C.); Van Dongen, Q.C. v. The Queen (1990), 90
DTC 6633; 38 F.T.R. 110 (F.C.T.D.); Weatherhead(J.E.)
v. M.N.R., [1990] 1 C.T.C. 2579; (1990), 90 DTC 1398
(T.C.C.).
APPEAL from the reassessments of plaintiff's bus
iness income by the Minister of National Revenue for
the 1983 and 1984 taxation years. Action dismissed.
COUNSEL:
Craig C. Sturrock and Nicholas P. Smith for
plaintiff.
Robert W. McMechan and Al Meghji for defen
dant.
SOLICITORS:
Thorsteinssons, Vancouver, for plaintiff.
Deputy Attorney General of Canada for defen
dant.
The following are the reasons for judgment ren
dered in English by
ROULEAU J.: Mr. Jake Friesen is appealing the reas
sessments of his business income by the Minister of
National Revenue for the 1983 and 1984 taxation
years.
The plaintiff, a businessman, resides in the munici
pality of Clearbrook, British Columbia. He is a
member of a group of people who, on January 29,
1982, acquired a parcel of raw land in the city of Cal-
gary known as the "Styles Property". This property
was registered in the name of Trinity Western Col
lege which was to hold the land as trustee for the
plaintiff and the other members of the group.
The property was acquired for the purpose of rc ;el-
ling it at a profit. Part of the anticipated profit was to
be paid to the College as a charitable donation as well
as to other such similar charitable organizations; the
balance was to be divided on a pro rata basis
amongst the members of the group, including the
plaintiff.
The plaintiff valued his interest in the property at
the lower of cost and fair market value in accordance
with subsection 10(1) of the Income Tax Act, R.S.0
1952, c. 148 (as am. by S.C. 1970-71-72, c. 63, s. 1)
(hereinafter referred to as the Act) thus entitling the
taxpayer to an inventory "write-down". He claimed
business losses in his 1983 and 1984 income tax
returns in the amounts of $252,954 and $25,800
respectively. The $252,954 that was originally
claimed by the taxpayer is now recognized to be a
mathematical error and it is agreed that the correct
sum is $197,690.
The Minister disallowed these business losses on
the basis that the property was not "inventory in a
business" of the plaintiff within the meaning of sub
sections 10(1) and 248(1) of the Income Tax Act. The
Minister also submitted that the plaintiff overstated
his share of the cost of the property and that he failed
to identify the fair market value of his interest in the
land at the end of the 1983 and 1984 taxation years in
claiming the "write-downs."
The issue is whether or not the raw land purchased
by the plaintiff, who is not engaged in an ordinary
trading business, is "inventory" in a business pursu
ant to subsection 10(1) of the Income Tax Act.
It is the plaintiff's position that the property is
inventory and that he is therefore entitled to write
down its value from cost to the fair market value pur
suant to subsection 10(1) of the Act which provides
as follows:
10. (1) For the purposes of computing income from a busi
ness, the property described in an inventory shall be valued at
its cost to the taxpayer or its fair market value, whichever is
lower, or in such other manner as may be permitted by regula
tion.
In order to interpret this provision of the Act and
apply it correctly, it is important to ascertain what is
contemplated by the words "business" and "inven-
tory".
The definition of "business" in subsection 248(1)
(as am. by S.C. 1988, c. 55, s. 188) "includes a pro
fession, calling, trade, manufacture or undertaking of
any kind whatever and, except for the purposes of
paragraph 18(2)(c), section 54.2 and paragraph
110.6(14)(f), an adventure or concern in the nature of
trade, but does not include an office or employment".
Over the years, the courts have defined many of these
terms. For example, the word "trade" was considered
in Commissioners of Inland Revenue v. Livingston
and others (1926), 11 T.C. 538 (Scot. Ct. Sess.), at
page 542:
... a single transaction falls as far short of constituting a deal
er's trade, as the appearance of a single swallow does of mak
ing a summer. The trade of a dealer necessarily consists of a
course of dealing, either actually engaged in or at any rate con
templated and intended to continue.
The phrase "adventure or concern in the nature of
trade" was considered by the Exchequer Court of
Canada in Minister of National Revenue v. Taylor,
James A., [1956-60] Ex.C.R. 3, at page 13:
It is, I think, plain from the wording of the Canadian Act,
quite apart from any judicial decisions, that the terms "trade"
and "adventure or concern in the nature of trade" are not
synonymous expressions ....
Considering the circumstances in which a transac
tion may be "an adventure or concern in the nature of
trade", Thorson P. wrote at page 25:
But "trade" is not the same thing as "an adventure in the
nature of trade" and a transaction might well be the latter with
out being the former.... The very word "adventure" implies a
single or isolated transaction and it is erroneous to set up its
singleness or isolation as an indication that it was not an
adventure in the nature of trade.
In a more recent decision, Bailey (D.R.) v. M.N.R.,
[1990] 1 C.T.C. 2450 (T.C.C.), Mr. Justice Rip con
cluded that, for the purpose of subsection 10(1),
"business" as defined in subsection 248(1) includes
"an adventure or concern in the nature of trade". He
added that continuity is not necessary to compute
income from a business. From this reasoning one can
conclude that an isolated transaction may fall within
the meaning of the word "business" in subsection
10(1).
On the basis of the foregoing, counsel for the
plaintiff relying on the definition of "business", sub
mits that even if the plaintiff was not in the "business
of trading properties" and that this was an isolated
transaction, it can be argued that the plaintiff was
engaged in an adventure in the nature of trade and
therefore in a "business" for the purposes of subsec
tions 248(1) and 10(1) of the Act.
The question of whether or not land purchased in
an adventure in the nature of trade constitutes inven
tory for the purposes of subsection 10(1) was also
canvassed in the Bailey decision, supra, where it was
determined that land acquired for resale in a trade or
an adventure or concern in the nature of trade could
be classified as inventory for the purposes of subsec
tion 10(1). However, if the intent of the taxpayer was
to hold the land as an investment such as "capital
property", it could not be classified as "inventory"
for the purposes of subsection 10(1). This was
reviewed in Gilmour (R.) v. M.N.R., [1989] 2 C.T.C.
2454 (T.C.C.), by Taylor T.C.J. at page 2455:
As t see it, the taxpayer had always treated the land as a
capital asset not a trading asset, by adding to its original cost
the carrying charges of interest and taxes, permitted under sec
tion 53 and 54 of the Income Tax Act.
In that case, it was held that the vacant land was held
by the taxpayer as a capital asset and therefore was
not eligible for valuation in accordance with subsec
tion 10(1).
In Van Dongen, Q.C. v. The Queen (1990), 90
DTC 6633 (F.C.T.D.), my colleague Cullen J. looked
to the Bailey decision, supra, as representative of the
state of the law on the issue. As mentioned earlier, in
Bailey, supra, it was established that land held as an
adventure in the nature of trade was eligible for
inventory "write-down"; that a parcel of raw farm
land purchased by the taxpayer for resale was "inven-
tory" pursuant to subsection 10(1) despite the fact
that the purchase of the land was not used in trade but
was an isolated transaction. This reasoning was also
applied in Weatherhead (J.E.) v. M.N.R., [1990]
1 C.T.C. 2579 (T.C.C.).
Both parties having conceded that the property in
issue was acquired for speculative reasons, the plain
tiff contends that based on the jurisprudence, the land
may be characterized as "inventory" for the purposes
of subsection 10(1) of the Act. Accordingly, the
plaintiff should he entitled to write down the property
in the 1983 and 1984 taxation years.
In my view, subsection 10(1) should not be inter
preted as suggested. It is a well established principle
that any provision in the Income Tax Act must be read
in light of the Act as a whole. A section of the Act
cannot be interpreted in isolation (Stubart Invest
ments Ltd. v. The Queen, [ 1984] 1 S.C.R. 536). For
the purposes of interpreting subsection 10(1), other
relevant sections of the Act must be considered
namely, subsections 248(1) and 9(1).
10. (1) For the purpose of computing income from a busi
ness, the property described in an inventory shall be valued at
its cost to the taxpayer or its fair market value, whichever is
lower, or in such other manner as may be permitted by regula
tion.
248. (1) In this Act, .. .
"inventory" means a description of property the cost or value
of which is relevant in computing a taxpayer's
income from a business for a taxation year.
"business" includes a profession, calling, trade, manufacture
or undertaking of any kind whatever and, except
for the purposes of paragraph I 8(2)(c), section
54.2 and paragraph 110.6(14)(O, an adventure or
concern in the nature of trade but does not include
an office or employment;
9. (1) Subject to this Part, a taxpayer's income for a taxation
year from a business or property is his profit therefrom for the
year. [My emphasis.]
In the computation of profit for the purposes of
subsection 9(1), a taxpayer's profit must be deter
mined in accordance with ordinary commercial and
accounting principles and practices. The applicable
method of accounting should he one which best
reflects the taxpayer's true income position. This
principle has been well settled in a number of deci-
sions including the recent decision of Madam Justice
Reed of the Federal Court, Trial Division, in Mari
time Telegraph and Telephone Co. Ltd. v. The Queen
(1990), 91 DTC 5038.
Ordinary commercial principles and practices dic
tate that in any business, the revenue should be
matched against the expenses before any loss or
profit is recognized. Generally, in the case of a trad
ing business, the following method is used since it
best reflects the business' true income position:
Profit (loss) = Proceeds of sales — cost
of sales*
* Cost of sales = (Value of inventory at the
beginning of the year +
cost of acquisitions) —
value of inventory at the
end of the year
Adopting this formula, a trading business can deter
mine its cost of sales by calculating the change in the
value of its inventory from the beginning to the end
of a given period. The valuation of inventory can
therefore affect the business' gross profit. It is only to
this extent that the inventory value becomes relevant.
It is not by itself deductible from the taxpayer's
income.
This approach is supported by the Supreme Court
of Canada decision in Minister of National Revenue
v. Shofar Investment Corporation, [ 1980] 1 S.C.R.
350. There, with respect to subsection 14(2) [now
subsection 10(1)] of the Act, the Court wrote at page
355:
The value of inventory, which is used in determining profit, is
determined on the basis of cost or fair market value, whichever
is lower, or in such other manner as may be permitted by regu
lation. By virtue of subs. 14(2), therefore, the cost of an inven
tory item is a factor which has relevance in determining inven
tory value. To that extent it can affect the ascertainment of the
gross profit of the business, but it is not, in itself, deductible
from the taxpayer's income.... [My emphasis.]
Items in inventory that are not yet sold are relevant
in calculating profit of a trading`business since they
are factored into the cost of sales formula as previ-
ously outlined. Profit or loss is always dependent on
the inventory valuation.
The computation of profit in the case of a business
with relatively few transactions is somewhat different
than that of the continuous trading business. The
"cost of sales" formula is not generally applied in
these circumstances since it does not reflect the true
picture of this business' income position.
For example, when there is but one item in inven
tory, profit or loss cannot be ascertained until the dis
position of that particular item since before disposi
tion, there would be no revenues upon which to set
off costs.
Subsection 10(1) clearly states that only property
described as "inventory" can be written down.
According to subsection 248(1), "inventory" includes
property whose cost or value is relevant in computing
a taxpayer's income. In a business of few transac
tions, the value of its inventory is not relevant in
computing income until disposition. As a result, in a
year when the property is not sold, it would not be
included in the computation of income for tax pur
poses and therefore, subsection 10(1) would not
apply.
Counsel for the plaintiff submits that the definition
of "business" in subsection 248(1) specifically
includes an adventure in the nature of trade except
for the purposes of paragraph 18(2)(c), section 54.2,
paragraph 110.6(14)(f). Subsection 10(1) is not
included in the exceptions, therefore, "business" used
in the subsection must include an adventure in the
nature of trade. I disagree.
It has been well established that what is not specif
ically excluded from a legislative provision may
remain excluded if it would otherwise create an
absurdity. In this case, applying subsection 10(1) to
an adventure in the nature. of trade would, in my
opinion, lead to such an absurdity since the Act does
not tax unrealized profits and it follows that it should
not recognize unrealized losses. If the property had
increased in value during the time it was held, there
would be no taxation of the increased value until its
disposition.
Consider the case of a judge who acquires a piece
of raw land in an adventure in the nature of trade.
Due to a downturn in the economy, this land loses
value. Should this judge be allowed to write down
this land pursuant to subsection 10(1) of the Act and
claim a business loss against his or her judge's
salary? From a practical standpoint, I think not.
Since subsection 10(1) of the Act deals with the
valuation of inventory property for the purpose of
determining incomé from a business, it cannot be
interpreted without having regard to subsection 9(1)
of the Act. When considering subsection 9(1), it
becomes apparent that an inventory "write-down" of
the "Styles Property" would not reflect the truest pic
ture of the plaintiff's income position. As a result,
subsection 10(1) does not apply to this plaintiff.
The plaintiff's action is therefore dismissed. Costs
to the defendant.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.