Lawrence v. MNR, 90 DTC 1491, [1990] 1 CTC 2567 (TCC)

Lamarre Proulx, T.C.J.:—This is an appeal by the appellant respecting the 1981 taxation year.

On December 31, 1981, the appellant with some other individuals made a purchase of multiple unit residential buildings in class 31 of the Income Tax Regulations. In calculating his income for 1981, he deducted certain expenses relating to these buildings as expenses made or incurred by him for the purpose of gaining income from property. These expenses were disallowed by the respondent because they were not made or incurred by the taxpayer.

The expenses are claimed under paragraph 18(1)(a) of the Income Tax Act (the Act) and concern expenses relating to taxes and licences, insurance, public utility services, commission, sale, survey, inspection, mortgage guarantee and landscaping.

The invoices relating to these expenses were all produced in evidence. The evidence disclosed that they were addressed to the builders and that they were paid by the builders either during construction or at the time of the sale. In the latter case, the moneys were withheld by the notary and paid by the notary to the creditors.

The appellant is a doctor. At the time in question, his tax and financial adviser was Claude Deschênes, who had assembled a group of investors for the purpose of purchasing three buildings known collectively as Place Repen- tigny. The appellant purchased an undivided 3/20 of the property. Mr Deschênes retained the notarial services of Sarto Blouin for negotiating and completing the purchase of the buildings in question. Counsel for the appellant argued during the hearing and in his submissions that a distinction had to be made between expenses relating to the property and expenses relating to Mr Blouin's services.

He submitted that while there is less firm support in law for deducting expenses relating to the property, it is clearer that the expenses relating to Mr Blouin’s services may be deducted. In his opinion, Mr Blouin’s services were provided to the investor-purchasers and not to the vendors. On this point, the following situation emerged from the evidence:

Mr Deschênes did not submit accounts. The appellant, while uncertain on this point, believed that Mr Deschênes took a reasonable payment out of the total amount that he negotiated. Mr Blouin was known to the builders. He had been introduced to them by the real estate agents. He was not known to the appellant. He had an agreement with the builders according to which his fees would be added to the sale price along with the commission fees. He had no such agreement with the appellant. The builders knew that they had to pay Mr Blouin’s professional fees in the event that the buildings were sold. The important point for each builder was to be able to realize a specific amount from the sales of their buildings. So long as that amount was obtained, the amount of Mr Blouin's professional fees was not important to them, since in fact these fees would be paid by the purchasers. Mr Blouin determined what the fees were to be.

Mr Blouin's accounts were addressed to the builders. They were paid either by the builders directly or by the acting notaries at the time of sale. The accounts are not identical, but the professional services described are sufficiently similar that I can set out the contents of only one in order to describe the nature of the documents. The services rendered were described as follows:

[Translation]

Supervision, consultation and real estate promotion

Representation fees, legal opinions, title searches

Income tax research

Legal opinions

Telephone calls, long distance, correspondence/couriers

Drafting contracts, general assistance

Support staff; photocopies, interviews, verifying accounting

BLOCK FEE: $35,180.00

THANK YOU

While it appears from the description of these services that some services were rendered to Mr Deschênes rather than to the vendors, nonetheless the ultimate goal of these services was the sale and purchase of the buildings. It probably appeared reasonable for the vendors to pay for the services in question, just as they pay the commission. In any event, it is clear from the testimony and documentary evidence that legally these amounts were payable by the vendors and not the purchasers.

The legislative provision under which the expenses in issue may be deducted is paragraph 18(1)(a) of the Act, which reads as follows:

18(1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property.

“Made or incurred" refers to the person who contracted the expense, that is, the debtor. The appellant never was and never became the debtor of the amounts for which he claimed a deduction in calculating his income. I have already discussed Mr Blouin's fees. With respect to the expenses relating to the property, the taxpayer only became the owner of the buildings in question on December 31, 1981 and all the expenses had been made and incurred by that time. They had already been paid or they were subsequently paid by the vendors out of the sale price of the buildings.

The appellant was the debtor for the purchase price only. We must give effect to the legal instruments selected by the parties unless we are faced with tax evasion. Here, the legal instruments are consistent with the facts and there is no reason not to follow them.

I was referred to articles discussing government undertakings with respect to the deductions that purchasers may claim.

In Allard, Domico, Paquin v. M.N.R., an unreported judgment dated June 23, 1986, Judge Cardin considered the works of various authors relating to government undertakings with respect to the deduction of start-up costs. At page 5 of his judgment, he stated:

[Translation]

. . . it appears that the introduction of the deduction of initial expenses with respect to multiple unit residential buildings (MURBs) brought with it a number of problems. One of these problems was precisely that investors who were claiming the deductions had not acquired the property before the initial expenses were incurred.

And at pages 5 and 6, he concluded:

[Translation]

In other words, only those people who were the owners of the buildings at the time the initial costs were paid are entitled to the deductions. For any other subsequent purchaser or investor these expenses are part of the capital cost of the property.

In none of the articles cited to me have I read that purchasers who did not incur the expenses were entitled to deduct them.

These articles discuss the principle that it would be desirable for some expenses to be deductible as being expenses relating to income rather than having to include them in the capital cost of the building. However, it is not stated that such expenses can or should be claimed by persons other than those who made or incurred them.

Because the evidence very clearly indicated that it was not the appellant who made or incurred the expenses for which he is claiming a deduction, never having been legally the debtor, I can only conclude that the appellant's position is not consistent with paragraph 18(1)(a). These expenses are part of the purchase price of the buildings. For the purchaser, they are included in the capital cost of the buildings.

The appeal is accordingly dismissed.

Appeal dismissed.