Derlago v. The Queen, 88 DTC 6290, [1988] 2 CTC 21 (FCTD)

Martin, J.: —The plaintiff has been reassessed for his 1980 taxation year because, in the view of the defendant, in that year he commenced to use his property at 335 West 27th Street in North Vancouver for a purpose other than for gaining or producing income within the meaning of paragraph 45 (1)(a) of the Income Tax Act, S.C. 1970-71-72 c. 63 as amended, the relevant portions of which, for the purposes of this action, are as follows:

45 (1) For the purpose of this subdivision the following rules apply:

(a) where a taxpayer,

(ii) having acquired property for the purpose of gaining or producing income therefrom or for the purpose of gaining or producing income from a business, has commenced at a later time to use it for some other purpose

he shall be deemed to have

(iii) disposed of it at that later time for proceeds equal to its fair market value at that later time, and

(iv) immediately thereafter reacquired it at a cost equal to that fair market value;

In 1966 the plaintiff acquired a house and land at the above noted address. He rented the entire property from 1967 to 1976 at which time he subdivided the property in two equal parts and sold the half without the house. Thereafter he continued to rent the half with the house from 1976 to 1980 at which time he obtained vacant possession of the house and land. In 1980 he demolished the house on the property and started construction of a new home for himself, one which he refers to as “his retirement home" and in which he now lives.

He says that through visiting friends in North Vancouver prior to the time he purchased the property, he became familiar with and attracted to the area. Although his work made it impractical for him to live there he decided, even though he was only 43 years old at the time, that he would like to live there when he retired. With that in mind he looked for, eventually found and, in 1966, bought the property which has given rise to this action.

The plaintiff sets these facts out in the first two paragraphs of his statement of claim in the following terms:

1. In 1966, the Plaintiff purchased residental real estate at 336 West 27th Street, North Vancouver, British Columbia, with the intention of renting it out until it was appropriate for him to establish his retirement home, at which time he intended to build such a home for himself on the property.

2. He carried out his original intention by renting the house to a tenant until September, 1980, at which time his health and age suggested that it was time to establish his retirement home. Therefore, he regained possession and in December, 1980 he had the house on the property demolished so that he could build his retirement home.

In paragraphs 7 and 8 of the statement of claim he submits the following:

7. The Plaintiff should be subjected to the deemed disposition rule only if he acquired the property for the purpose of gaining or producing income therefrom or from a business. He acquired the property for the purpose of providing himself with a retirement home and the earning of income from the property was merely incidental to that purpose.

8. The Plaintiff should be subjected to the deemed disposition rule only if he changed the purpose for which he was using the property. He has never changed that purpose. His purpose throughout was to provide himself with a retirement home.

In my view, the facts set out in paragraph 1 and 2 of the statement of claim bring the plaintiff's actions within the meaning of paragraph 45(1)(a) of the Act. The plaintiff admits that he bought the property with the intention of renting it, i.e. for the purpose of providing income. In fact, he did rent the property for a period of some 13 years and did receive income from the property. The fact that he might have been able to charge higher rent that he did is not relevant.

The plaintiff says that the property was acquired for the purpose of renting it until he decided to retire, at which time he would no longer use the property for the purpose of producing income but would use it for the purpose of locating his retirement home, i.e. a purpose other than for producing income.

The plaintiff says he should be subjected to the deemed disposition rules only if he changed the purpose for which he was using the property. This is precisely what he did do. From 1967 until 1980 he was using the property for the purpose of producing income. In 1980 he ceased to use the property for that purpose and began to use the property as a location for his retirement home. It follows that these actions by the taxpayer bring him within the deeming provisions of paragraph 45(1)(a).

In this respect the plaintiff says that even if he is deemed to have disposed of the property for proceeds equal to its fair market value, he is not deemed to have received those proceeds. Furthermore, he submits, that until he is deemed to have received the proceeds, or until he actually receives them, he is entitled to claim, in any year, a reasonable amount as a reserve in respect of such of the proceeds as are not due to him until after the end of the year. He then goes on to claim thereby such 'a reserve for his 1980 taxation year in the full amount of the deemed proceeds.

As I understand this submission, the plaintiff is asking me to conclude that because paragraph 45(1)(a) does not expressly provide that the proceeds of the deemed disposition are deemed to be received by the plaintiff at the time of the deemed disposition, they are not due to him until some time later than the end of his 1980 taxation year.

I am unable to assign that meaning to paragraph 45(1)(a). By that section it is provided that if, at a later time, the plaintiff begins to use the property for some other purpose, he shall be deemed to have disposed of it at that later time for proceeds equal to its fair market value.

As applied to this matter it means that when the plaintiff changed the purpose for which he was using the property in 1980, he was deemed to have sold it in 1980 for an amount equal to its fair market value. I can find nothing in that which would lead me to conclude that some portion or all of the deemed proceeds should be deemed to be payable after the end of the plaintiff's 1980 taxation year. If I am to deem that the plaintiff sold his property in 1980 for a specific sum of money, I would assume, in the absence of any provision to the contrary, that he received the proceeds at the time of the disposition. My view in this respect is reinforced by subparagraph (iv) of paragraph 45(1)(a) which provides that immediately after the taxpayer is deemed to have sold the property, he is deemed to have reacquired it for the same price. This indicates to me, in this fictional world of taxation, that Parliament must have intended the deemed proceeds to have been received by the plaintiff because it provided for the expenditure of the proceeds by the plaintiff immediately after their creation.

Counsel for the plaintiff has drawn my attention to other sections of the Act which refer to deemed dispositions. In those sections it is provided as well that the taxpayer is deemed to have received the proceeds of the disposition. He submits that the absence of such a provision in paragraph 45(1)(a) should lead me to conclude that the proceeds should not be deemed to have been received by the plaintiff in this case.

Once again, I do not agree with counsel's submission. In my view subparagraphs (iii) and (iv) of paragraph 45(1)(a) when read together make it unnecessary to provide that the taxpayer shall be deemed to have received the proceeds of the disposition. By these subsections the taxpayer is deemed to have disposed of and reacquired the same property on the same day and for the same price. This indicates to me that the proceeds of the disposition are intended to fund the reacquisition and should be deemed to have been received by the taxpayer at the time of or immediately after the deemed disposition.

In view of the above findings, the taxpayer's appeal is dismissed with costs.

Appeal dismissed.