Schuler v. MNR, 90 DTC 1078, [1990] 1 CTC 2264 (TCC)

Couture, C.J.T.C.:—The above appeals were heard on common evidence at the request of counsel. While some of the facts may be slightly different in each of these appeals the differences are not substantial and have no bearing on their determination.

By the terms of an agreement in writing dated October 1, 1981 Wolfe & Gloeden Ltd. as vendor agreed to sell a parcel of land in the City of Saskatoon to Donald Hoffman, to Pow City Mechanical Ltd. and to Ralph and Rick Schuler jointly, as purchasers, on which land three duplexes were to be constructed. These duplexes were to qualify as a multiple-unit residential building, that is property in Class 31 of Schedule II of the Regulations under the Income Tax Act (the Act) for capital cost allowance purposes.

The appeal that was dealt with at the hearing was in respect of Donald Hoffman (the appellant) and I will therefore summarize the facts relevant to this appeal bearing in mind that with a minor exception the other appeals were based on similar facts and identical documentary evidence.

In filing his return for the 1981 and 1982 taxation years, the appellant claimed certain deductions in computing his income. For the 1981 taxation year, he deducted expenses in the amount of $13,611.40 commonly referred to as “soft costs" and for 1982 an amount of $13,836.60 for similar costs. There is no dispute about the accuracy of the quantum of these deductions. [1] In addition to the above expenses the appellant also claimed an amount of $2,036.91 as a deduction in respect of capital cost allowance for the taxation year 1981 and $2,568 for the taxation year 1982.

In assessing the appellant for 1981, the respondent disallowed the expenses as claimed in the amount of $13,611.40 according to the information on form T7W-C attached to the notice of reassessment, but no deduction appears to have been made in respect of the claim for capital cost allowance.

In his notice of objection, the appellant specifically objected to a disallowance for capital cost allowance even though there is no apparent such disallowance according to the documents filed with the Court. The respondent in confirming the assessment by way of a notification of confirmation did not deal with the appellant's claim for capital cost allowance. In his notice of appeal the appellant again deals with the disallowance of capital cost allowance, but the reply to the notice of appeal is silent on the position of the respondent regarding the appellant's capital cost allowance.

For the taxation year 1982, the appellant claimed an amount of $2,568 as an allowance for capital cost, but was allowed $513.37 as far as I can make out from the unclear information on form T7W-C. The appellant objected to this disallowance and again no reference was made to it in the notification of confirmation by the Minister or in his reply to the notice of appeal. The same deductions were claimed by Rick Schuler and Ralph Schuler and were also ignored by the respondent in processing the confirmation of these assessments and in replying to the notice of appeal. This issue does not, however, appear to be a concern with respect to the appeal of Pow City Mechanical Ltd.

The Court therefore assumes that the respondent has conceded the validity of the appellants’ deductions for capital cost allowance and therefore, notwithstanding the decision in the appeal, they must be allowed to the appellants wherever applicable.

In assessing the appellant for the taxation years under appeal, the respondent disallowed the expenses as claimed on the assumption that they were incurred during the construction of the duplex at a time when he was not the owner of the property. They were in fact expenses of Wolfe.

In reaching that conclusion it appears that the respondent relied solely on a provision of the Agreement captioned Transfer of Title which says, and I paraphrase, that upon payment by the purchaser (the appellant) the contractor will convey or cause to be conveyed to the purchaser title to the land free and clear of all encumbrances except those specifically referred to in the Agreement.

If the failure to transfer title in a contract of sale is the sole guiding feature that determines the rights of the parties in applying the provisions of the Act most contracts of sale entered into by taxpayers would not qualify as bona fide sales for that purpose. The vast majority of commercial sales are not completed on a cash basis, but payments by the purchasers are effected over a period of months or years. It is a well accepted practice that is commercially sound that in a contract of sale legal title to what is purchased is often transferred to the purchaser upon final payment of the purchase price. The purpose of such an arrangement is to provide the vendor with security on the subject of the sale in the event that the purchaser defaults on his obligations under the contract. What must govern in interpreting any contract is the intention of the parties on making the Agreement. The name assigned to the contract or the words used in drafting it are not necessarily conclusive regarding its true nature. In some instances, parties may designate a contract as one of leasing using therein expressions such as lessor, lessee, rent etc., when in law and in fact the contract is one of sale and purchase.

The evidence at the hearing oral and documentary has disclosed the following facts: The contractual obligations of the appellant and Wolfe with regard to the acquisition of the parcel of land and the construction of his duplex are defined in paragraphs 1 and 10 of the Agreement which read as follows:

1. Work to be Completed

The Purchaser hereby agrees to Purchase from the Contractor and the Contractor hereby agrees to sell to the Purchaser an undivided one hundred (100%) percent interest in the said lands and to construct a building on the said land in good and workmanlike manner on an absolute turnkey basis in accordance with the plans and specifications set forth in Schedule "A" hereto.

10. Mortgage

The parties hereto agree that the Contractor shall act as agent for the Purchaser and on behalf of the Purchaser shall conduct and oversee all aspects of, and incur costs in connection with the financing and completion of the work.

The Contractor shall use its best efforts, and on behalf of the Purchaser, conduct all negotiations and obtain a mortgage on the security of the lands and buildings to be constructed thereon in the maximum amount available (herein referred to as the "mortgage").

The mortgage is to provide for construction draw downs and shall be used to finance and pay the purchase price. The Purchaser agrees that he will assume the mortgage and be responsible for all obligations therein effective from the date hereof. The Purchaser agrees and does hereby assign to the Contractor the proceeds of the mortgage and the same shall be applied to the purchase price. The Purchaser hereby agrees to indemnify and save harmless the Contractor from any and all damage, liability or causes of action resulting from the mortgage. The Purchaser further acknowledges and agrees that he shall be responsible for all costs and expenses which are necessarily incidental to the preparation and registration of the mortgage, these costs and expenses shall include but not be limited to the following:

(a) Legal fees and disbursements;

(b) Interest on mortgage draws;

(c) Insurance fee.

In pursuance of its obligation under paragraph 10 of the Agreement, Wolfe obtained the funds for the construction of the building from Kinross Mortgage Corporation on November 25, 1981 secured by a mortgage registered against the property as evidenced by a copy of a certificate of title issued by the Land Titles Office for Saskatoon.

The appellant on his part registered a caveat against the property to disclose his alleged proprietary interest in the property. This document registered on December 10,1981 reads:

TAKE NOTICE that I DONALD OTTO HOFFMAN, of the City of Saskatoon, in the Province of Saskatchewan,

CLAIMING AN INTEREST as Purchaser pursuant to an Agreement dated the 1st day of October, A.D. 1981

IN THE FOLLOWING LAND, that is to say:

Lots Three A (3A) and Three B (3B), in Block Nine Hundred and Sixty-one (961), in the City of Saskatoon, in the Province of Saskatchewan, in the Dominion of Canada, according to a Plan of Record in the Land Titles Office for the Saskatoon Land Registration District as No. 79-5-16566.

MINERALS EXCEPTED by Allocation No. 79-5-16567.

FORBID THE REGISTRATION of any transfer or other instrument affecting such land or the granting of a certificate of title thereto except subject to the claim herein set forth.

According to a copy of a certificate of title issued by the same Land Titles Office, an instrument was registered on May 4, 1982 attesting that Donald Hoffman was the owner of the property. It reads:

THIS IS TO CERTIFY that DONALD HOFFMAN of Saskatoon, in the Province of Saskatchewan

is now the owner of an estate in fee simple

of and in Lot THREE a (3A),

in Block NINE HUNDRED AND SIXTY ONE (961), in the City of SASKATOON,

in the Province of Saskatchewan, in the Dominion of Canada, according to a Plan Record in the Land Titles Office for the Saskatoon Land Registration District as No. 79-S-16566,

MINERALS EXCEPTED by Allocation No. 79-S-16567.

SUBJECT TO THE ENCUMBRANCES, LIENS AND INTERESTS NOTIFIED BY MEMORANDUM NOW OR HEREAFTER UNDERWRITTEN OR ENDORSED HEREON, OR WHICH ATTACH BY IMPLICATION UNDER THE LAND TITLES ACT.

The appellant contends that he acquired a proprietary interest in the land as of October 1, 1981, date that the Agreement was executed by the parties, and that thereafter he had a similar interest in the building as it was being constructed by Wolfe as his agent.

The respondent's position is expressed in paragraph 5 of the reply to the notice of appeal as follows:

5. The Respondent submits that the deductions claimed as soft costs in the amount of $13,611.40 for 1981 and $13,836.60 for 1982, incurred during the construction of the building prior to the full payment of the price and transfer of title, are not deductible expenses for the Appellant as they were incurred prior to the acquisition of the property by the Appellant.

Both counsel were asked to submit written notes at the hearing. In his written submission counsel for the appellant suggests that the Court should have regard to the following:

1. The manner in which the Agreement should be interpreted;

2. When property is considered to have been acquired for the purposes of the Act;

3. The pertinent rules governing registrations in respect of real property in the Province of Saskatchewan.

According to his interpretation of the Agreement, it is clear that the appellant purchased a parcel of land from Wolfe and that the latter was to construct a duplex on this land on his behalf, a proposition that was supported by the testimony of the appellant Ralph Schuler and the witness Gordon Gloeden, a former officer of Wolfe. In explaining their understanding of the Agreement and the objective of entering into it, they agreed that the intention was that the appellant became the owner of the property on the date of its execution and that thereafter Wolfe was acting as his agent in the construction of the duplex.

Counsel says in his notes that the reason why the Agreement provides that Wolfe would retain legal title to the property until such time as the purchase price had been paid in full was to provide Wolfe with security in the event that the appellant should default under the Agreement.

Paragraph 12 of the Agreement deals with the transfer of title:

12. Transfer of Title

The Contractor agrees that upon payment by the Purchaser of the purchase price in full, in the manner herein set forth, the Contractor will convey or cause to be conveyed to the Purchaser by good and sufficient transfer under the Land Titles Act and amendments thereto, title to the said land free and clear of all encumbrances whatsoever, excepting only those encumbrances referred to as follows:

(a) those encumbrances as may be occasioned or permitted by the Purchaser; (b) mortgage to be registered against the said lands pursuant to paragraph 10 hereof;

(c) those easements as may be required or registered against the land by any public utility for the purpose of supplying services to the land or lands adjacent thereto.

The cost of preparation of the transfer of title and all disbursements necessarily incidental to the registration of the same will be the responsibility of the Purchaser.

As to his second point that the Court should consider in arriving at its determination dealing with the acquisition of property for the purposes of the Act, he makes reference to the comments of Brulé, J. of in Ryan et al. v. M.N.R., [1986] 1 C.T.C. 2142; 86 D.T.C. 1108, at page 2145 (D.T.C. 1110) in which he says:

As to when property is "acquired" within the meaning of the Income Tax Act there is no definition found in the Act, but it undoubtedly has broader implications than having "legal title".

He also refers the Court to what Cattanach, J. held as to the meaning of the word “acquired” in paragraph 20(5)(e) of the Act in force at the time in M. N. R v. Wardean Drilling Ltd., [1969] 2 Ex. C.R. 166; [1969] C.T.C. 265; 69 D.T.C. 5194 at page 271 (D.T.C. 5197):

In my opinion the proper test as to when property is acquired must relate to the title to the property in question or to the normal incidents of title, either actual or constructive, such as possession, use and risk.

Another reference is the decision of the Federal Court of Canada-Trial Division in The Queen v. Henuset Bros. Ltd. (No. 1), [1977] C.T.C. 228; 77 D.T.C. 5169 in which Bastin, D. J. accepted the concept of Cattanach, J. in Wardean Drilling Ltd. as to the meaning of the word "acquired".

Counsel for the respondent in her notes submits, if I understand clearly her submission, that the decision in M.N.R. v. Wardean Drilling Ltd., supra, is not applicable in the situation of the appellant because under the provisions of the Agreement since title to the property was to be transferred to the appellant upon full payment of the purchase price it stands to reason that the possession date had to be the completion date of the building and therefore until that date the appellant did not enjoy all the normal incidents of title. In support of her position she refers the Court to the judgment of the Court of Appeal of Saskatchewan in Mansell v. Smith, [1931] 1 W.W.R. 563 in which it was held that:

The right to possession in the purchaser is not a necessary incident to an executory contract for the sale of land. On the contrary, this right remains in the vendor until full payment of the purchase price, unless express provision to the contrary is made in the contract.

She also refers the Court to a decision of the Tax Review Board in Schultz v. M.N.R., [1979] 1 C.T.C. 2328; 79 D.T.C. 279, in which it was stated at page 2333 (D.T.C. 283):

In the present case, it is not possible to have in fact and in law the possession of the building before its completion.

[Emphasis added.]

As to the alleged agency relationship under the Agreement between the appellant and Wolfe she says:

It is the Respondent's position that neither the Agreements nor the actions of the parties to the Agreements created an agency relationship. It is the Respondent's position that the contractor was an independent contractor.

Her submission with respect to the requirements of the provisions of the Land Titles Act of Saskatchewan is as follows in paragraphs 27 and 28 of her notes:

27. In order to register a caveat, the caveator must indicate the type of interest being claimed.

28. The purchasers in the present appeal all registered their caveats as ''Purchasers" under the Agreements not as beneficiaries pursuant to the Agreements.

I will deal first with the submission of counsel for the respondent regarding possession of the building prior to its completion.

Ralph Schuler, in his evidence, said that throughout the construction period the appellants had access at all times to the construction sites and that no impediment to this access existed. In fact the appellants did the mechanical, plumbing and heating work themselves. This evidence was also corroborated by Mr. Gloeden. In answer to this evidence Counsel for the respondent suggested in her oral argument that the appellants in the performance of the work on the buildings were acting as subcontractors of Wolfe. There is no evidence whatsoever for this proposition and furthermore the question to be answered is what is the true meaning of the Agreement. From the answer to this question, the application of the provisions of the Act will follow accord- ingly.

In Anson's Law of Contract, 26th (1984) Ed., we read at page 136:

An agreement ought to receive that construction which its language will admit, which will best effectuate the intention of the parties, to be collected from the whole of the agreement, and greater regard is to be had to the clear intent of the parties than to any particular words which they may have used in the expression of their intent. The proper mode of construction is to take the instrument as a whole, to collect the meaning of words and phrases from their general context, and to try and give effect to every part of it.

Applying this to the construction of the Agreement, what intention is to be attributed to it?

The evidence has disclosed that the appellants were interested in acquiring a rental property that would qualify as a multi-unit building for the purposes of the relevant provisions of the Act and Regulations. To this end they acquired parcels of land from Wolfe and they engaged its services to construct buildings thereon. The documentary evidence is unequivocal about this. However, a mere intention expressed in a provision of an Agreement does not by itself establish the relationship that is intended by the parties. The whole of the Agreement must reflect contractual obligations on their part that are consistent with their objective and also in attempting to meet this objective their conduct must comply with the legal requirements that are generated by the intended objective.

In the present appeals, I am of the opinion that the whole of the Agreement clearly expresses what the parties intended to achieve and its provisions created legal and contractual obligations that are consistent with this intended objective.

That the title to the property remained in the name of Wolfe for registry purposes has been clearly explained by counsel for the appellant and the reason given is also supported by Cattanach, J. in his comments in M.N.R. v. Wardean Drilling Ltd., supra, at page 271 (D.T.C. 5198) when he says:

As I have indicated above, it is my opinion that a purchaser has acquired assets of a class in Schedule B when title has passed, assuming that the assets exist at that time, or when the purchaser has all the incidents of title, such as possession, use and risk, although legal title may remain in the vendor as security for the purchase price as is the commercial practice under conditional sales agreements.

[Emphasis added.]

While the mortgage deed was registered in the name of Wolfe, as mortgagor, and again valid reasons have been explained for this requirement, the appellants had assumed as provided in paragraph 10 obligations which are normally incumbent upon a mortgagor. They held themselves responsible for the mortgage and accepted responsibility for all obligations under it; they had assigned the proceeds of the mortgage to the contractor; they had agreed to indemnify and save the contractor harmless from any and all damages, liabilities or causes of action resulting from the mortgage; they had agreed to be responsible for all costs and expenses which are necessarily incidental to the preparation and registration of the mortgage including legal fees and disbursements, interest on mortgage draws and insurance fee. In addition, under paragraph 14, they had assumed the responsibility for the fire insurance and the property taxes. The aggregate of these obligations do in my opinion corroborate the contention of the appellants that an agency relationship existed between themselves and Wolfe under the Agreement and that in the course of the implementation of these obligations they acted as principal.

One last provision of the Agreement which seems to eliminate any doubt as to its true nature is found again at paragraph 14 dealing with the fire insurance. It contemplates that the appellant may register a mortgage against the property and in such event it provides for an endorsement on the policy by the appellant whereby any loss would be firstly payable to the mortgage company and then to the contractor. The mere fact that the parties acknowledged that the appellant could register a mortgage against the property appears to me conclusive that the relationship between them was one of principal and agent because if the appellant had no proprietary interest in the property such a process would have been legally impossible.

In so far as the registration requirements of the Land Titles Act of Saskatchewan are concerned, I am satisfied] that the procedure followed by the appellant and Wolfe in registering the various instruments was in compliance with the various provisions of that Act and do not in any way disturb the basic contention of the appellant. In my opinion the appellants had acquired the property from the date of the execution of the Agreements and Wolfe was acting as their agent for the construction of their respective building.

For these reasons the appeals are allowed and the assessments are referred back to the respondent so that the deductions for expenses claimed by them in computing their income be allowed and also the claims for capital cost allowance in so far as Ralph Schuler, Rick Schuler and Donald Hoffman are concerned.

The appeals are allowed with costs, but with only one counsel fee for the hearing.

Appeals allowed.