Schneider v. MNR, 89 DTC 198, [1989] 1 CTC 2295 (TCC)

Sarchuk, T.C.J.: —Keith E. Schneider appeals from reassessments of income tax for the 1981, 1982, 1983 and 1984 taxation years. In his returns of income for those years the appellant sought to deduct costs claimed to have been incurred by him in connection with the construction of a building on lands described as 1948 McKercher Drive in the City of Saskatoon. The actual amounts involved are not in dispute and are as set out in paragraph 2 of the respondent's reply to notice of appeal.

The deduction of the said costs was disallowed by the respondent who required that these amounts be capitalized in accordance with the provisions of the Income Tax Act (the Act). As well, a sum of $608 claimed as capital cost allowance was disallowed in the 1981 taxation year of the appellant. The reassessments were made on the basis that the costs were outlays or payments on account of capital for which a deduction was not permitted by virtue of the provisions of paragraph 18(1)(b) of the Act and that the appellant was not the owner of the said lands at the material time.

The sequence of events giving rise to the reassessments is not in dispute. In or about October 1981 Schneider began investigating the possibility of purchasing an investment property. He considered a prospectus for a residential real estate project to be developed by Cairns Home Limited (Cairns) (Exhibit A-1), and in due course decided to buy. On November 23, 1981 the following agreements were executed by the appellant and Cairns:

(a) an offer to purchase, attached to which was a promissory note in the amount of $5,930.00, representing the balance of the purchase price less the down payment and the amount of the proposed mortgage (Exhibit A-2);

(b) a land sale and building agreement (Exhibit A-3) (the Building Agreement).

On December 2, 1981 Cairns forwarded to the Royal Trust Corporation of Canada (Royal Trust) an application by the appellant to assume the mortgage together with his power of attorney appointing Cairns to draw down moneys under the mortgage loan to be obtained by it from Royal Trust (Exhibit A-4). Concurrent with the execution of these agreements the appellant paid the cash portion of the purchase price.

As certified by Canada Mortgage and Housing Certificate No. 41243 construction of the residential building on the said land actually commenced on November 5, 1981. The building constructed thereon was a semidetached housing unit and it is not disputed that it qualified for the exceptions set forth in subsection 18(3.5) of the Act.

Under the terms of the building agreement Cairns agreed to sell to the appellant the land in question for $12,000 and to build, in accordance with the plans and specifications, a house of the style and type known as Unit C, by March 1, 1982 for the price of $30,000. In addition Cairns agreed to provide certain appliances, paving and to arrange for and have approved a mortgage loan for the appellant. A further term of the building agreement was that Cairns was to pay certain fees and costs and to perform certain services, more particularly referred to in the building agreement as follows:

Breakdown of Soft Costs:

— Interest Rate Buydowns	$2,355
— Mortgage Application Fee	150
— Mortgage Insurance Fee	735
— Legal Costs — Mortgage Registration	200
— Interim Financing Costs	1,850
— Initial Services Fee	3,980
— Clean-up Costs	100
— Rent-up Costs	750
— Warranty Fee	570
— Landscaping	1,200
	$11,890

It was also a term of the building agreement that:

13. Upon the completion of the construction of the said building and full payment being made to the contractor as hereinbefore provided, the contractor shall execute a transfer under the provisions of The Land Titles Act where the lands are situate in favour of the purchaser. The contractor covenants that title to the said land shall issue in the name of the purchaser free and clear of all encumbrances for which the contractor or any of its predecessors in title are responsible except for a mortgage in favour of the lending institution in the principal amount as hereinbefore provided and/or such restrictions as airport zoning regulations, electrical, telephone or other utility easements or rights of way required or requested by the municipality in which the lands are situated or for the provision of utility services in the subdivision.

According to the testimony of the appellant and of Mr. Grant Robertson, the manager of Cairns, clause 13 was required by Cairns to secure to it payment of the balance of the amounts payable under the building agreement.

By letter dated January 21, 1982 Cairns advised the appellant that the building would be ready for occupancy on March 1, 1982 and that the balance of the purchase price, in the amount of $5,920, was due and payable on February 1, 1982. On or about January 28, 1982 the appellant paid the amount required. In due course Cairns caused the said land to be transferred to the appellant by transfer registered on March 2, 1982 in the land titles office for the Saskatoon Land Registration District. Cairns completed construction of the building and the appellant took possession on April 15, 1982.

It is the appellant's position that although the provisions of paragraph 18(3.1)(a) of the Act would ordinarily be operative to disallow the deduction relating to the costs incurred with respect to the conduction of the building as “a cost incurred during the period of construction" the appellant is entitled to rely on subsection 18(3.5) which provides an exception to the prohibiting provisions under paragraph 18(3.1)(a) and to deduct the said costs. It was conceded that the appellant must establish that he was the owner of the said lands at all relevant times if this argument is to be successful.

Counsel argued that Cairns was merely the contractor of the appellant and that pursuant to the building agreement undertook to construct a building and to provide certain services for which the appellant agreed to pay. Although legal title was maintained in the name of Cairns, this was done only to secure payment of the balance payable under the building agreement. Counsel contended that the evidence elicited from the appellant and from Mr. Robertson together with the documents filed, including the prospectus, the offer to purchase, the building agreement and the power of attorney established the "intention of the parties with respect to the consummation of this transaction". He said that the appellant became “an owner in law” of the property in question on November 23, 1981 and took "legal possession” on that date albeit the unit was not available for actual occupancy until 1982.

In counsel’s words:

All of the documentary requirements with the exception of assumption of mortgage were performed and executed by Mr. Schneider on November 23, 1981, and indeed as has been clearly indicated by both of the parties, certainly as they were concerned, and I appreciate Your Honour's earlier remarks in that regard, they considered that when the agreements were inked and signed, and all the documents signed and moneys paid, together with the promissory note, certainly the transaction as far as the transfer of ownership had been completed.

and:

Certainly the parties considered at that time when that documentation had all been signed and provided, that Mr. Schneider had become the owner of the property. Certainly, there is no issue he was not the legal titled owner, but certainly that was something direct, and the subsequent documentation and conduct of the parties supports that. Most importantly, the power of attorney, as I say, which stands out as a very odd and strange anomaly, and yet you will notice it was dealt with meticulously. It was sent to the lawyer acting on behalf of the mortgage company. It was clearly giving recognition that Mr. Schneider — I suppose you can quarrel — certainly that he had an interest in the property and indeed it is clear as well that Mr. Schneider had received the approval from Royal Trust to assume the mortgage, that approval was also introduced as an exhibit, and that also took place in 1981, and that notwithstanding I suppose that the mortgage in fact was not even technically in existence yet, at least so far as registration of the property goes.

He categorized the appellant's interest in the property as "beneficial ownership". Implicit in this submission was that Cairns held the property as trustee for the appellant during the taxation years in issue.

The respondent's position is that the appellant did not become the owner of the said property until March 2, 1982 at which time the terms of the said agreement were fulfilled and he was able to take title and possession of the property. Since the appellant had no interest in the property until after the construction of the buildings was completed, it was submitted that he is not entitled to deduct any of the construction costs incurred by the contractor. Furthermore, since the appellant was not the owner of the building in the 1981 taxation year, he is not entitled to the deduction of any capital cost allowance in connection with the building in that year.

I am satisfied that the respondent's assessment is correct. The determination of this appeal turns on the question as to when the appellant became the "owner" of the building. In M.N.R. v. Wardean Drilling Ltd., [1969] 2 Ex C.R. 166; [1969] CTC 265; 69 D.T.C. 5194 Cattanach, J. stated at page 271 (D.T.C. 5198):

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.

With respect to counsel's submission that the appellant obtained the right to possession on November 23, 1981, this being the date of the execution of the building agreement, it is necessary to took at the documents to ascertain the nature or character of the rights granted to the appellant therein. The building agreement is a contract of sale to be completed on a future date. I find that this agreement, and in particular clauses 4, 11, 13, 14, 16 and 23 thereof, establish that the right to possession remained in Cairns until construction was completed and full payment was made by the appellant in accordance with the terms thereof. Furthermore there is no evidence of any act of possession exercised by the appellant in the taxation year in issue. Changing the selections made by Cairns' interior designer of the floor covering colours, ceramic tiles and counter-tops is not, in my view, an act of possession. None of the other incidents of title were in the appellant. He did not obtain possession until April 1, 1982, he had no right to the use of the property until that day and on the evidence before me it is clear that he was not at risk.

Counsel for the respondent also submitted that a trust was created when the appellant and Cairns entered into the building agreement on November 23, 1981. He argued that the appellant's “beneficial ownership" could be determined from the conduct of the parties and the documents all of which disclosed an intention to create a trust.

The evidence adduced does not support this position. The following comments from Law of Trusts in Canada, Waters, 2d. ed., 1984, at page 107 are relevant:

For a trust to come into existence, it must have three essential characteristics. As Lord Langdale M.R. remarked in Knight v. Knight¹ in words adopted by Barker J. in Renehan v. Malone² and considered fundamental in common law in Canada, first, the language of the alleged settlor must be imperative; second, the subject matter or trust property must be certain; third, the objects of the trust must be certain. This means that the alleged settlor, whether he is giving the property on the terms of a trust or is transferring property on trust in exchange for consideration, must employ language which clearly shows his intention that the recipient should hold on trust. No trust exists if the recipient is to take absolutely, but he is merely put under a moral obligation as to what is to be done with the property. If such imperative language exists, it must, secondly, be shown that the settlor has so clearly described the property which is to be subject to the trust that it can be definitively ascertained.³ Third, the objects of the trust must be equally clearly delineated. There must be no uncertainty as to whether a person is, in fact, a beneficiary. If any one of these three certainties does not exist, the trust fails to come into existence or, to put it differently, is void.

¹ (1840), 3 Beav. 148, 49 E.R. 58.

² (1897), 1 N.B. Eq. 506.

³ The property interest which each beneficiary is to take must also be clearly defined.

In this case there is no certainty in the language used that a trust was intended. The appellant's claim to that effect is neither supported by probability nor is it supported by writing in any form. In my view no trust exists.

Accordingly the appeals are dismissed.

Appeals dismissed.