Friesen v. Canada

Friesen v. Canada
Collection
Supreme Court Judgments
Date
1995-09-21
Report
[1995] 3 SCR 103
Case number
23922
Judges
L'Heureux-Dubé, Claire; Sopinka, John; Gonthier, Charles Doherty; Iacobucci, Frank; Major, John C.
On appeal from
Federal Court of Appeal
Subjects
Taxation
Notes
SCC Case Information: 23922
Decision Content
Friesen v. Canada, [1995] 3 S.C.R. 103
Jake Friesen Appellant
v.
Her Majesty The Queen Respondent
Indexed as: Friesen v. Canada
File No.: 23922.
1995: March 1; 1995: September 21.
Present: L'Heureux‑Dubé, Sopinka, Gonthier, Iacobucci and Major JJ.
on appeal from the federal court of appeal
Income tax ‑‑ Deductions ‑‑ Taxpayer purchasing parcel of raw land for resale at profit ‑‑ Taxpayer engaged in adventure in the nature of trade ‑‑ Land declining in value in subsequent years ‑‑ Taxpayer claiming decline in fair market value of land as business loss in taxation years prior to its sale ‑‑ Whether taxpayer entitled to make use of valuation scheme in s. 10(1) of Income Tax Act ‑‑ Meaning of "business" and "inventory" ‑‑ Income Tax Act, S.C. 1970‑71‑72, c. 63, ss. 9, 10(1), 248(1) "business", "inventory" ‑‑ Income Tax Regulations, C.R.C. 1978, c. 945, s. 1801.
In 1982, the appellant and several others bought a parcel of land for the purpose of reselling it at a profit. In the years immediately following its acquisition, the property substantially decreased in value and was eventually foreclosed in 1986. The appellant, relying on ss. 248(1) , 10(1), 9 and Regulation 1801 of the Income Tax Act, sought to deduct the decline in the fair market value of the land as a business loss in his 1983 and 1984 tax returns. The appellant argued that he was entitled to make such deductions because s. 10(1) permits the use of such a valuation scheme should the initiative to purchase the land be deemed a "business" and should the land be defined as "inventory". The Minister of National Revenue disallowed these business losses on the basis that the property was not "inventory in a business" within the meaning of ss. 10(1) and 248(1) . The taxpayer appealed and both the Federal Court, Trial Division and the Federal Court of Appeal upheld the Minister's disallowance of the losses.
Held (Gonthier and Iacobucci JJ. dissenting): The appeal should be allowed.
Per L'Heureux-Dubé, Sopinka and Major JJ.: In interpreting sections of the Income Tax Act, the correct approach is to apply the plain meaning rule. When a provision is couched in specific language that admits of no doubt or ambiguity in its application to the facts, it must be applied. Here, on a plain reading of the relevant sections of the Act, the appellant was entitled to make use of the inventory valuation method in s. 10(1) in order to recognize a business loss on the property in the 1983 and 1984 taxation years.
Section 10(1) requires a taxpayer who computes income from a "business" to value the "inventory" at the lower of cost or market value or as permitted by regulation. The definition of "business" in s. 248(1) of the Income Tax Act specifically includes an adventure in the nature of trade. The appellant's venture is thus a "business" pursuant to that definition since it meets the judicially established test for an adventure in the nature of trade ‑‑ namely, that the taxpayer has a trading or business intention with respect to the property. Indeed, the factual record reveals a legitimate "scheme for profit‑making" with respect to the property.
The property is also "inventory" pursuant to the definition in s. 248(1). Under that definition, an item of property is not required to contribute directly to income in each taxation year in order to qualify as inventory. Provided that the cost or value of an item of property is relevant in computing business income in a year, that property will qualify as inventory. As a general principle, items of property sold by a business venture will always be relevant to the computation of income in the year of sale. The property at issue is therefore correctly categorized as "inventory" for the purposes of the Income Tax Act, both in the taxation year of disposition and in preceding years, because its cost or value is relevant to the computation of business income in a taxation year. The plain meaning of the definition of "inventory" in s. 248(1) is consistent with the commonly understood definition of the term and also reflects the definition of inventory which is accepted according to ordinary principles of commercial accounting and of business. While the express wording of the Income Tax Act is capable of overruling these principles where it is sufficiently explicit, a court should be cautious to adopt an interpretation which is clearly inconsistent with the commonly accepted usage of a technical term particularly where an interpretation consistent with common usage is more natural on a plain reading of the definition.
Under s. 9 of the Income Tax Act, the determination of profit is a question of law to be determined according to the business test of well‑accepted principles of commercial or accounting practice, except where these are inconsistent with the specific provisions of the Act. Since these principles establish that the value of inventory is relevant to the calculation of business income because it contributes to the cost of sale, the appellant was entitled to use the valuation scheme set out in s. 10(1). This section recognizes the well‑accepted commercial and accounting principle of requiring a business to value its inventory at the lower of cost or market value. This specific legislated exception to the principle of realization is well accepted in the valuation of real estate inventory. Section 10(1) also represents an exception to the principles of matching and symmetry. The underlying rationale for the s. 10(1) exception to the general principles is usually explained as originating in the principle of conservatism. Moreover, s. 10(1) is not a mere codification of the common law as it existed in 1948 when the provision first appeared in the Income Tax Act. While the common law rule was restricted to stock‑in‑traders, s. 10(1) explicitly states that it applies to the inventory of a "business". Since the word "business" in the Act specifically includes adventures in the nature of trade, to confine the scope of s. 10(1) to stock‑in‑traders would place a judicial limit on the clear and unambiguous wording of the section. As well, if Parliament had intended to restrict the ambit of s. 10(1) to taxpayers which "carry on a business" it would have done so. Lastly, policy considerations cannot serve to override the explicit wording of s. 10(1). In sum, the plain reading of this section allows single items of inventory held as part of an adventure in the nature of trade to utilize the inventory valuation method contained therein. This conclusion is consistent with the basic dichotomy in the Act between income and capital and the different schemes for taxing each of these.
Per Gonthier and Iacobucci JJ. (dissenting): The appellant cannot benefit from the application of the valuation scheme established by s. 10(1) of the Income Tax Act to deduct as a business loss in 1983 and 1984 the decline in the fair market value of the property. While the appellant's real estate purchase was an adventure in the nature of trade and, consequently, a "business" under s. 248(1) of the Act, he is not the kind of businessperson intended to be covered by s. 10(1) and, furthermore, the property is not "inventory" under s. 248(1) for the taxation years in question.
Neither s. 10(1) nor Regulation 1801 provides a deduction from income, nor do they mandate that any person with inventory can deduct any loss on fair market value arising therefrom. They simply give some direction as to how the valuation procedure should take place once ordinary commercial principles establish whether a business loss should be claimed under s. 9 of the Income Tax Act. The key taxation principle relevant to this case is the realization principle, which provides that, in the computation of income from an adventure in the nature of trade, gains or losses must be realized in order for them to be included in the computation of income for tax purposes. This principle is subject to an exception in the case of stock‑in‑trade, an exception which is codified in s. 10(1). Such stock‑in‑trade can be valuated at the lower of cost and fair market value and, consequently, a dealer therein can recognize as a loss the decline in the market value of its inventory in the year in which this decline occurs. The commercial principles and jurisprudential authority underpinning the Income Tax Act, however, do not recognize that this exception should operate for unsold single pieces of land alleged to be inventory that are held by adventurers in trade. The situation of dealers in stock‑in‑trade is markedly different from that faced by a business adventurer such as the appellant. The former are engaged in the "carrying on of a business", regularly purchasing hundreds of goods which are quickly sold. Since it is not practicable for them to determine their profit by looking at each individual item sold, an averaging formula is used. By contrast, the appellant has launched a single adventure and the profit/loss from the property is readily ascertainable in the year of disposition. While s. 10(1) applies to a business which includes an adventure in the nature of trade, only persons who "carry on a business" ought to be entitled to benefit from that section. Adventurers do not "carry on" a business and there is no need to extend the reach of s. 10(1) to that group. An interpretation which would entitle the appellant to make use of the inventory valuation method would undermine the matching principle underpinning s. 9 and the broad principles of symmetry. Moreover, and most importantly in this case, the applicable method of accounting within the taxation context should be that which best reflects the taxpayer's true income position. In the case of an adventurer such as the appellant, who is not carrying on business, and who has made no disposition, it is not appropriate to determine profit using the inventory valuation method. His income position is best reflected by not declaring the decline in the fair market value of the property as a business loss in 1983 and 1984, but instead waiting until the year of disposition to enter any such losses, in this case 1986.
As well, the land is not inventory for the 1983 and 1984 taxation years under the Income Tax Act's definition in s. 248(1) . The key element of that definition is that the property, in order to be properly classified as "inventory", must have a cost or value which, in the particular taxation year in question, bears some relevance to the amount of the taxpayer's income (profit or loss) for that particular year. Here, since the land was not involved in any transaction in 1983 and 1984, it bears no relation whatsoever to the appellant's income in the taxation years in question. The appellant should be able to claim, under the ordinary tracing formula (proceeds less the purchase cost), the drop in the value of the land in the year in which the property is disposed of, but not in years where the property remains dormant.
Cases Cited
By Major J.
Followed: Bailey v. M.N.R., 90 D.T.C. 1321; Weatherhead v. M.N.R., [1990] 1 C.T.C. 2579; Van Dongen v. The Queen, 90 D.T.C. 6633; Skerrett v. M.N.R., 91 D.T.C. 1330; Cull v. The Queen, 87 D.T.C. 5322; not followed: Canada v. Dresden Farm Equipment Ltd., [1989] 1 C.T.C. 99; referred to: Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536; Canada v. Antosko, [1994] 2 S.C.R. 312; Californian Copper Syndicate v. Harris (1904), 5 T.C. 159; Minister of National Revenue v. Irwin, [1964] S.C.R. 662; Gresham Life Assurance Society v. Styles, [1892] A.C. 309; Neonex International Ltd. v. The Queen, 78 D.T.C. 6339; Symes v. Canada, [1993] 4 S.C.R. 695; Ostime v. Duple Motor Bodies, Ltd., [1961] 2 All E.R. 167; Minister of National Revenue v. Anaconda American Brass Ltd., [1956] A.C. 85; Whimster & Co. v. Inland Revenue Commissioners (1925), 12 T.C. 813; BSC Footwear Ltd. v. Ridgway, [1971] 2 All E.R. 534; Minister of National Revenue v. Consolidated Glass Ltd., [1957] S.C.R. 167.
By Iacobucci J. (dissenting)
Bailey v. M.N.R., 90 D.T.C. 1321; Van Dongen v. The Queen, 90 D.T.C. 6633; Weatherhead v. M.N.R., [1990] 1 C.T.C. 2579; Skerrett v. M.N.R., 91 D.T.C. 1330; Minister of National Revenue v. Shofar Investment Corp., [1980] 1 S.C.R. 350; Californian Copper Syndicate v. Harris (1904), 5 T.C. 159; Edwards v. Bairstow, [1956] A.C. 14; Irrigation Industries Ltd. v. Minister of National Revenue, [1962] S.C.R. 346; Regal Heights Ltd. v. Minister of National Revenue, [1960] S.C.R. 902; The Queen v. Cyprus Anvil Mining Corp., 90 D.T.C. 6063; Daley v. M.N.R., [1950] C.T.C. 254; Dominion Taxicab Association v. Minister of National Revenue, [1954] S.C.R. 82; Friedberg v. Canada, [1993] 4 S.C.R. 285: Minister of National Revenue v. Consolidated Glass Ltd., [1957] S.C.R. 167; Whimster & Co. v. Inland Revenue Commissioners (1925), 12 T.C. 813; BSC Footwear Ltd. v. Ridgway, [1971] 2 All E.R. 534; Minister of National Revenue v. Irwin, [1964] S.C.R. 662; Oryx Realty Corp. v. Minister of National Revenue, [1974] 2 F.C. 44; Tara Exploration and Development Co. v. M.N.R., 70 D.T.C. 6370, aff'd [1974] S.C.R. 1057; Neonex International Ltd. v. The Queen, 78 D.T.C. 6339; West Kootenay Power and Light Co. v. Canada, [1992] 1 F.C. 732; Tobias v. The Queen, 78 D.T.C. 6028; Symes v. Canada, [1993] 4 S.C.R. 695; Ken Steeves Sales Ltd. v. M.N.R., 55 D.T.C. 1044; M.N.R. v. Publishers Guild of Canada Ltd., 57 D.T.C. 1017; Associated Investors of Canada Ltd. v. M.N.R., 67 D.T.C. 5096; Maritime Telegraph and Telephone Co. v. The Queen, 91 D.T.C. 5038.
Statutes and Regulations Cited
Income Tax Act, S.C. 1970‑71‑72, c. 63, ss. 3 , 5 , 9 , 10 , 13(7) , 18(2) , 38 , 39 , 41 , 45(1) , 48 [rep. 1994, c. 21, s. 19], 54(b), 54.2, 63(3)(c), 70, 110.6(4)(f), 111, 127.2(6)(a), 127.3(2)(a), 248(1) "appropriate percentage", "balance‑due day", "business" [rep. & sub. 1979, c. 5, s. 66(3)], "gross revenue", "inventory", 253.
Income Tax Act, R.S.C., 1985, c. 1 (5th Supp .), s. 95(1) .
Income Tax Regulations, C.R.C. 1978, c. 945, s. 1801.
Income Tax Regulations, amendment, SOR/89‑419.
Authors Cited
Arnold, Brian J. Timing and Income Taxation: The Principles of Income Measurement for Tax Purposes. Toronto: Canadian Tax Foundation, 1983.
Arnold, Brian J., Tim Edgar and Jinyan Li, eds. Materials on Canadian Income Tax, 10th ed. Scarborough, Ont.: Carswell, 1993.
Canada. Department of National Revenue. Taxation. Interpretation Bulletin IT‑218, "Profit from the Sale of Real Estate", May 26, 1975.
Canada. Department of National Revenue. Taxation. Interpretation Bulletin IT‑218R, "Profit, Capital Gains and Losses from the Sale of Real Estate, Including Farmland and Inherited Land and Conversion of Real Estate from Capital Property to Inventory and Vice Versa", September 16, 1986.
Canada. Department of National Revenue. Taxation. Interpretation Bulletin IT‑459, "Adventure or Concern in the Nature of Trade", September 8, 1980.
Canada. Department of National Revenue. Taxation. Interpretation Bulletin IT‑473, "Inventory Valuation", March 17, 1981 (revised December 5, 1986).
Canada. Royal Commission on Taxation. Report of the Royal Commission on Taxation, vol. 3. Ottawa: Queen's Printer, 1966.
Canadian Institute of Chartered Accountants. Terminology for Accountants, 3rd ed. Toronto: Canadian Institute of Chartered Accountants, 1983.
Canadian Institute of Public Real Estate Companies. Canadian Institute of Public Real Estate Companies Recommended Accounting Practices for Real Estate Companies, November 1985.
Canadian Institute of Public Real Estate Companies. CIPREC Handbook, September 1990.
Harris, Edwin C. Canadian Income Taxation. Toronto: Butterworths, 1979.
Hogg, Peter W., and Joanne E. Magee. Principles of Canadian Income Tax Law. Scarborough, Ont.: Carswell, 1995.
Huot, René. Understanding Income Tax for Practitioners (1994‑95 edition). Scarborough, Ont.: Carswell, 1994.
Kieso, Donald E., and Jerry J. Weygandt. Intermediate Accounting, 2nd Canadian ed. Prepared by V. Bruce Irvine and W. Harold Silvester. Toronto: John Wiley & Sons Canada Ltd., 1986.
Krishna, Vern. The Fundamentals of Canadian Income Tax, 4th ed. Scarborough, Ont.: Carswell, 1993.
APPEAL from a judgment of the Federal Court of Appeal, [1993] 3 F.C. 607, 93 D.T.C. 5313, [1993] 2 C.T.C. 113, 156 N.R. 199, affirming a judgment of the Trial Division, [1992] 2 F.C. 552, 92 D.T.C. 6248, [1992] 1 C.T.C. 296, 53 F.T.R. 49, upholding the Minister of National Revenue's decision to disallow the appellant's claim. Appeal allowed, Gonthier and Iacobucci JJ. dissenting.
Craig C. Sturrock, for the appellant.
Roger E. Taylor and Al Meghji, for the respondent.
The judgment of L'Heureux-Dubé, Sopinka and Major JJ. was delivered by
Major J. --
I. Background
1 As set out in greater detail in the reasons of my colleague Iacobucci J., the appellant was a participant in an adventure in the nature of trade involving a piece of Calgary real estate known as the "Styles Property". The Styles Property was acquired for the sole purpose of reselling it at a profit. The anticipated profit was to be split between a charitable donation to Trinity Western College and other organizations and the investors in their personal capacity. Contrary to the expectations of the investors, real estate prices fell instead of rising.
2 The appellant claimed business losses on his 1983 and 1984 tax returns relying on s. 10(1) of the Income Tax Act , S.C. 1970-71-72, c. 63, which permits inventory to be valued at the lower of cost or market value. The Minister of National Revenue disallowed this claim.
II. Analysis
A. Introduction
3 The narrow issue in this appeal is whether land held for resale as an adventure in the nature of trade may be valued as inventory under s. 10(1) of the Income Tax Act . I have read the reasons of my colleague Iacobucci J., and, with respect, I disagree with his conclusion. In my opinion the provisions of the Income Tax Act allow land held as an adventure in the nature of trade to be valued as inventory under s. 10(1) and therefore I would allow this appeal.
B. The Scheme of the Income Tax Act
4 It is necessary to make some comments on the basic scheme of the Income Tax Act given my analysis of the issue raised in this appeal.
5 Section 3 of the Income Tax Act sets out the ground rules for the computation of a taxpayer's income for a taxation year. Section 3 recognizes two basic categories of income: "ordinary income" from office, employment, business and property, all of which are included in s. 3 (a), and income from a capital source, or capital gains which are covered by s. 3 (b). The whole structure of the Income Tax Act reflects the basic distinction recognized in the Canadian tax system between income and capital gain.
6 Subdivision b of Division B of the Act entitled "Income or Loss from a Business or Property" contains all the rules which govern business and property income. The leading section in this subdivision is s. 9 which provides that a taxpayer is taxable on the profit for a business or property for the year. Profit is not defined in the Income Tax Act .
7 Unlike business or property income which is fully taxable, income from capital sources was not subject to tax at all in Canada until 1972 and is still partially protected from taxation. Subdivision c of Division B of the Act entitled "Taxable Capital Gains and Allowable Capital Losses" contains all of the rules which apply to income derived from a capital source. The leading section in this subdivision is s. 38 which provides that a taxpayer is taxable on 3/4 of the capital gain from the disposition of property in the year.
8 The distinction between income from office, employment, business and property sources and that from a capital source and the preferential treatment of the latter has long been the subject of academic criticism: see B. J. Arnold, T. Edgar and J. Li, eds., Materials on Canadian Income Tax (10th ed. 1993), at p. 297; and Report of the Royal Commission on Taxation (Carter Report) (1966), vol. 3, at pp. 62-67. The distinction between amounts of an income nature and those of a capital nature was imported into the Canadian tax system from the United Kingdom where it is believed to have originated from a primarily agricultural economy whose concept of income was the fruits of productive source. In spite of the uncertainty of origins of the distinction between capital gain and other income and the criticisms of preferential tax treatment of capital gain, differential tax treatment of capital gain and income remains a fundamental feature of the Canadian taxation system.
C. Principles of Interpretation
9 The central question on this appeal of whether the appellant is entitled to take advantage of the inventory valuation method in s. 10 of the Act involves a careful examination of the wording of the provisions of the Act and a consideration of the proper interpretation of these sections in the light of the basic structure of the Canadian taxation scheme which is established in the Income Tax Act .
10 In interpreting sections of the Income Tax Act , the correct approach, as set out by Estey J. in Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536, is to apply the plain meaning rule. Estey J. at p. 578 relied on the following passage from E. A. Driedger, Construction of Statutes (2nd ed. 1983), at p. 87:
Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.
11 The principle that the plain meaning of the relevant sections of the Income Tax Act is to prevail unless the transaction is a sham has recently been affirmed by this Court in Canada v. Antosko, [1994] 2 S.C.R. 312. Iacobucci J., writing for the Court, held at pp. 326-27 that:
While it is true that the courts must view discrete sections of the Income Tax Act in light of the other provisions of the Act and of the purpose of the legislation, and that they must analyze a given transaction in the context of economic and commercial reality, such techniques cannot alter the result where the words of the statute are clear and plain and where the legal and practical effect of the transaction is undisputed: Mattabi Mines Ltd. v. Ontario (Minister of Revenue), [1988] 2 S.C.R. 175, at p. 194; see also Symes v. Canada, [1993] 4 S.C.R. 695.
I accept the following comments on the Antosko case in P. W. Hogg and J. E. Magee, Principles of Canadian Income Tax Law (1995), Section 22.3(c) "Strict and purposive interpretation", at pp. 453-54:
It would introduce intolerable uncertainty into the Income Tax Act if clear language in a detailed provision of the Act were to be qualified by unexpressed exceptions derived from a court's view of the object and purpose of the provision.... [The Antosko case] is simply a recognition that "object and purpose" can play only a limited role in the interpretation of a statute that is as precise and detailed as the Income Tax Act . When a provision is couched in specific language that admits of no doubt or ambiguity in its application to the facts, then the provision must be applied regardless of its object and purpose. Only when the statutory language admits of some doubt or ambiguity in its application to the facts is it useful to resort to the object and purpose of the provision.
D. Plain Meaning of Section 10
12 The primary section whose interpretation is in dispute is s. 10:
10. (1) For the purpose of computing income from a business, 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 regulation.
The plain reading of this section is that it is a mandatory provision requiring a taxpayer who computes income from a business to value the inventory at the lower of cost or market value or as permitted by regulation. Thus, prima facie, the taxpayer must meet two requirements in order to use this section: the venture at issue must be a "business" and the property in question must be "inventory".
(1) Is the Appellant's Venture a Business?
13 The definition of "business" in s. 248(1) specifically includes an adventure in the nature of trade:
"business", includes a profession, calling, trade, manufacture or undertaking of any kind whatever and, except for the purposes of paragraph 18(2)(c), an adventure or concern in the nature of trade but does not include an office or employment; [Emphasis added.]
An "adventure in the nature of trade" is not defined in the Act but is a term which has a meaning established by the common law.
14 Both parties in this appeal accept that the appellant's real estate venture constitutes an adventure in the nature of trade. Nevertheless, it is useful to briefly examine the requirements for an adventure in the nature of trade since these requirements serve to limit the scope of ventures which are eligible to use the provisions of s. 10(1) .
15 The concept of an adventure in the nature of trade is a judicial creation designed to determine which purchase and sale transactions are of a business nature and which are of a capital nature. This question was particularly important prior to 1972 when capital transactions were completely exempt from taxation. The question was succinctly stated by Clerk L.J. in Californian Copper Syndicate v. Harris (1904), 5 T.C. 159 (Ex., Scot.), at p. 166:
Is the sum of gain that has been made a mere enhancement of value by realising a security, or is it a gain made in an operation of business in carrying out a scheme for profit-making?
16 The first requirement for an adventure in the nature of trade is that it involve a "scheme for profit-making". The taxpayer must have a legitimate intention of gaining a profit from the transaction. Other requirements are conveniently summarized in Interpretation Bulletin IT-459 "Adventure or Concern in the Nature of Trade" (September 8, 1980) which references Interpretation Bulletin IT-218 "Profit from the Sale of Real Estate" (May 26, 1975) for a summary of the relevant factors when the property involved is real estate.
17 IT-218R, which replaced IT-218 in 1986, lists a number of factors which have been used by the courts to determine whether a transaction involving real estate is an adventure in the nature of trade creating business income or a capital transaction involving the sale of an investment. Particular attention is paid to:
(i)The taxpayer's intention with respect to the real estate at the time of purchase and the feasibility of that intention and the extent to which it was carried out. An intention to sell the property for a profit will make it more likely to be characterized as an adventure in the nature of trade.
(ii)The nature of the business, profession, calling or trade of the taxpayer and associates. The more closely a taxpayer's business or occupation is related to real estate transactions, the more likely it is that the income will be considered business income rather than capital gain.
(iii) The nature of the property and the use made of it by the taxpayer.
(iv)The extent to which borrowed money was used to finance the transaction and the length of time that the real estate was held by the taxpayer. Transactions involving borrowed money and rapid resale are more likely to be adventures in the nature of trade.
18 The factual record in this case reveals a legitimate "scheme for profit-making" with respect to the Styles Property. The appellant and his associates purchased the Styles Property with the intention of reselling it at a profit. The appellant and his associates planned to split the anticipated profit between designated charities and themselves on a pro rata basis. The persons involved in this venture were experienced business people who treated the transaction as a business venture. The land involved was undeveloped real estate which was suitable for resale but unsuitable as an income producing investment or for the personal enjoyment of the appellant or his associates.
19 I agree with Iacobucci J. that the appellant meets the tests which have been established in the common law for an adventure of trade. The speculative venture in which the appellant was involved was clearly an adventure of a business nature rather than an investment of a capital nature. Like my colleague, I respectfully disagree with the trial judge ([1992] 2 F.C. 552) and Marceau J.A. ([1993] 3 F.C. 607) that s. 10(1) does not apply to a business which is an adventure in the nature of trade: see Bailey v. M.N.R., 90 D.T.C. 1321 (T.C.C.), at p. 1328. I affirm the succinct summary of the law contained in IT-218R:
The word "business" is defined in subsection 248(1) so as to include, inter alia, an adventure or concern in the nature of trade. This definition can cause an isolated transaction involving real estate to be considered a business transaction. As a business, any gain or loss which arises therefrom is, by virtue of section 9 , required to be included in computing income or loss, as the case may be.
(2) Is the Styles Property "Inventory"?
20 In order to take advantage of the valuation method in s. 10(1) , a taxpayer must also establish that the property in question is inventory. A definition of "inventory" is contained in s. 248(1) of the 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;
The first point to note about this definition of inventory is that property is not required to contribute directly to income in a taxation year in order to qualify as inventory. Provided that the cost or value of an item of property is relevant in computing business income in a year that property will qualify as inventory. Generally the cost or value of an item of property will appear as an expense (and the sale price as revenue) in the computation of income.
21 Reduced to its simplest terms, the income or profit from the sale of a single item of inventory by a sales business is the ordinary tracing formula calculated by subtracting the purchase cost of the item from the proceeds of sale. This is the basic formula which applies to the calculation of profit before the value of inventory is taken into account, as is made clear by Abbott J. in Minister of National Revenue v. Irwin, [1964] S.C.R. 662, at pp. 664-65:
The law is clear therefore that for income tax purposes gross profit, in the case of a business which consists of acquiring property and reselling it, is the excess of sale price over cost, subject only to any modification effected by the "cost or market, whichever is lower" rule.
Thus, for any particular item:
Income = Profit = Sale Price - Purchase Cost.
22 It is clear from the formula above that the cost of an item of property sold by a business is relevant in computing the income from the business in the taxation year in which it is sold. As discussed above, an adventure in the nature of trade constitutes a business under the Act. Therefore, an item of property sold as part of an adventure in the nature of trade is relevant to the computation of the taxpayer's income from a business in the taxation year of disposition and so is inventory according to the plain language of the definition in s. 248(1) .
23 The respondent argued that even if the Styles Property were inventory in the year of disposition it would not qualify as inventory in preceding years. Specifically the respondent urged that the phrase "relevant in computing a taxpayer's income from a business for a taxation year" requires that the characterization of each item of property as inventory (or not) be made on an annual basis on the basis of the relevance of the item to the computation of income for that taxation year. The respondent relied on dicta to this effect in Canada v. Dresden Farm Equipment Ltd., [1989] 1 C.T.C. 99 (F.C.A.), at p. 105, a case which held that a taxpayer may not deduct an inventory allowance on goods in which the taxpayer has no property but merely holds on consignment. The respondent's argument on this point was accepted by Létourneau J.A. in the Federal Court of Appeal ([1993] 3 F.C. 607, at pp. 617-18) and is relied upon by Iacobucci J.
24 In my opinion, the interpretation urged by the respondent runs contrary to the natural meaning of the words used in the definition of inventory in s. 248(1) and to common sense. The plain meaning of the definition in s. 248(1) is that an item of property need only be relevant to business income in a single year to qualify as inventory: "relevant in computing a taxpayer's income from a business for a taxation year". In this respect the definition of "inventory" in the Income Tax Act is consistent with the ordinary meaning of the word. In the normal sense, inventory is property which a business holds for sale and this term applies to that property both in the year of sale and in years where the property remains as yet unsold by a business.
25 In addition to the plain meaning of the words, several other considerations militate against the respondent's interpretation of the definition of "inventory" in s. 248(1) .
26 First, an examination of other definitions in the Income Tax Act reveals that there is a particular phraseology used in the definition of things, amounts or concepts which must be determined on an annual basis. The definitions of income (in s. 9 ) and taxable capital gain (in s. 38 ), both of which must be determined on an annual basis, contain the characteristic phraseology which denotes that requirement:
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.
(2) Subject to section 31, a taxpayer's loss for a taxation year from a business or property is the amount of his loss, if any, for the taxation year from that source computed by applying the provisions of this Act respecting computation of income from that source mutatis mutandis.
38. For the purposes of this Act,
(a) a taxpayer's taxable capital gain for a taxation year from the disposition of any property is 3/4 of his capital gain for the year from the disposition of that property;
(b) a taxpayer's allowable capital loss for a taxation year from the disposition of any property is 3/4 of his capital loss for the year from the disposition of that property; [Emphasis added.]
This formulaic phraseology appears innumerable times in the definitions in the Income Tax Act : see for example: s. 3 "income"; s. 5 "income from office or employment" and "loss from office or employment"; s. 38 (c) "allowable business investment loss"; s. 39 "capital gain", "capital loss" and "business investment loss"; s. 41 "taxable net gain"; s. 63(3) (c) "eligible child"; s. 127.2(6) (a) "share-purchase tax credit"; s. 127.3(2) (a) "scientific research and experimental development tax credit"; s. 248(1) "appropriate percentage", "balance-due day" and "gross revenue".
27 The respondent is asking this Court to interpret the definition of "inventory" as though it read:
"inventory" [for a taxation year] means a description of property the cost or value of which is relevant in computing a taxpayer's income from a business for [the] taxation year;
The principal problem with the respondent's interpretation is that the bracketed words do not appear in the definition in the Income Tax Act . The addition of these words to the definition effects a significant change to the sense of the definition. It is a basic principle of statutory interpretation that the court should not accept an interpretation which requires the insertion of extra wording where there is another acceptable interpretation which does not require any additional wording. Reading extra words into a statutory definition is even less acceptable when the phrases which must be read in appear in several other definitions in the same statute. If Parliament had intended to require that property must be relevant to the computation of income in a particular year in order to be inventory in that year, it would have added the necessary phraseology to make that clear.
28 The second problem with the interpretation proposed by the respondent is that it is inconsistent with the basic division in the Income Tax Act between business income and capital gain. As discussed above, subdivision b of Division B of the Act deals with business and property income and subdivision c of Division B deals with capital gains. The Act defines two types of property, one of which applies to each of these sources of revenue. Capital property (as defined in s. 54 (b)) creates a capital gain or loss upon disposition. Inventory is property the cost or value of which is relevant to the computation of business income. The Act thus creates a simple system which recognizes only two broad categories of property. The characterization of an item of property as inventory or capital property is based primarily on the type of income that the property will produce.
29 As discussed above in the context of the definition of an adventure in the nature of trade, a comprehensive discussion of whether the sale of real estate will create income or capital gain can be found in Interpretation Bulletin IT-218R (September 16, 1986). The full title of this Interpretation Bulletin, "Profit, Capital Gains and Losses from the Sale of Real Estate, Including Farmland and Inherited Land and Conversion of Real Estate from Capital Property to Inventory and Vice Versa" emphasizes what the bulletin makes clear -- real estate, like other forms of property, must fall into one of two basic categories under the Income Tax Act : inventory or capital property.
30 IT-218R clarifies that real estate which is held by the taxpayer as capital property may be used as personal-use property or as an investment for the purpose of gaining or producing income. The sale of this kind of property creates capital gain or capital loss. On the other hand, real estate which is purchased for profitable resale value is inventory which creates business income or loss. In determining whether the gains from a sale of real estate are income or capital particular emphasis is placed on the taxpayer's intention at the time of the initial purchase of the real estate. Thus, a particular piece of real estate becomes either inventory or capital property in the hands of the taxpayer from the time of the original purchase.
31 The basic scheme of dividing property into one of two broad classes under the Income Tax Act is further assisted by ss. 13(7) and 45(1) . These sections make specific provision for the conversion of real estate from capital property to inventory and vice versa in particular circumstances. As IT- 218R explains, these circumstances arise only when the taxpayer's intention and use of the property change subsequent to the initial purchase. Sections 13(7) and 45(1) provide for the transfer to be made by means of a deemed disposition and reacquisition at fair market value. The deemed reacquisition at the time when the taxpayer's intention with respect to the property is materially changed reflects the fact that the category of the property is determined according to the taxpayer's intention at the time of acquisition.
32 The interpretation of "inventory" urged by the respondent is fundamentally incompatible with the statutory dichotomy between inventory and capital property in two respects. First, it would require a change in the characterization of particular items