Adventure in the nature of trade.

• Author: John W. McClure

The Supreme Court of Canada decision in Jake Friesen v. The Queen, released September 28, 1995, overturned the Federal Court of Appeal decision by a slim 3-2 margin. The Court concluded that a single piece of real property held for the purpose of reselling at a profit is considered inventory, and therefore, a decrease in the value of the property in a year in which it was not sold could give rise to a business loss.

The facts were that Jake Friesen owned a single piece of land for several years for the stated purpose of reselling at a profit. In certain years prior to selling the property, Mr. Friesen claimed as a business loss the drop each year in the value of the property.

Mr. Friesen argued that the land was inventory in a business, and therefore, for the purpose of computing income, it could be valued at the lower of its cost and its fair market value as set out in subsection 10(1) of the Income Tax Act. Mr. Friesen claimed the decrease in fair market value of the land as a deduction from income, thus realizing a business loss. (A deduction for diminishing inventory value is known as a write-down.)

In order to understand the ramifications of the Friesen case, it is important to understand the concept of an "adventure in the nature of trade". The income tax system generally distinguishes between property held on income account (such as the inventory of a business) and property held on capital account (such as equipment used in the business).

There is, however, a class of property which fits into neither category. Income tax law has come to refer to such property as being held as "an adventure in the nature of trade". Land, such as that owned by Jake Friesen, purchased by an individual not in the land development business, for eventual resale at a profit would be considered to be acquired as an adventure in the nature of trade. This type of property is treated like business inventory, in that profits or losses from such property are recognized on income account.

Mr. Justice Major, writing for the majority of the Court in Friesen, held that any property whose sale gives rise to business income is "inventory" for the purposes of the Income Tax Act. He determined that this includes a single piece of property held for the purpose of resale at a profit. He concluded that since the venture was a business, and the land was inventory, then the lower of cost and market method of inventory valuation could be applied. This would allow the taxpayer...