Depaoli v. The Queen, 96 DTC 1820, [1996] 3 CTC 2640 (TCC)

Hamlyn J.T.C.C.: - The Appellants, Dario DePaoli and Sandra DePaoli, appealed the Minister of National Revenue’s (the “Minister”) reassessment for the 1990 taxation year that they failed to report the capital gain realized on the disposition of the original/former property. They appealed on the basis that the assessment is erroneous because the Minister has not taken into account, in calculating their capital gain, the cost of the replacement properties they acquired. The two files were heard on common evidence.

The parties filed the following Statement of Partially Agreed Facts:

1. Dario DePaoli and Sandra DePaoli are Canadian residents. Dario DePaoli was born in 1927. Sandra DePaoli was born in 1933.

2. On or about October 25, 1971, Dario DePaoli purchased real property located at 25 Highway, Concession 2, New Survey, Part Lot 4, Milton, Ontario (the “Original Property”). Title to the Original Property was transferred into the names of Dario DePaoli and Sandra DePaoli, as joint tenants, by deed registered on title on December 7, 1972.

3. At all material times the Original Property consisted of 33.47 acres of vacant unsevered land, without buildings.

4. The fair market value of the Original Property on December 31, 1971 was $33,500.00.

5. On May 9, 1990, a Certificate of Approval and Expropriation Certificate was issued to the Regional Municipality of Halton (the “Municipality”), thereby expropriating the Original Property and vesting title in the Municipality on May 10, 1990. On June 8, 1990, Dario DePaoli and Sandra DePaoli jointly received proceeds of disposition from the Municipality, as purchaser for the Original Property, in the amount of $1,004,100.00.

6. On or about December 28, 1990, Dario DePaoli and Sandra DePaoli purchased real property located at Part of the West Half of Lot 5, Concession 2, of the Town of Caledon (the “New Property 1”) as joint tenants.

7. The New Property 1 was acquired by Dario DePaoli and Sandra DePaoli for an adjusted cost base of $331,695.69.

8. On or about November 2, 1991, Dario DePaoli and Sandra DePaoli purchased real property located at Part Lot 6, Concession 2, in the Township of Caledon (the “New Property 2”) as joint tenants.

9. The New Property 2 was acquired by Dario DePaoli and Sandra DePaoli for an adjusted cost base of $232,923.12.

10. At all material times, each of the New Property I and New Property 2 consisted of approximately 10 acres of vacant unsevered land, without buildings.

11. Dario DePaoli and Sandra DePaoli did not include any taxable capital gain realized on the disposition of the Original Property in the computation of each of their incomes for the 1990 taxation year.

12. The Minister of National Revenue (the “Minister”) reassessed each of Dario DePaoli and Sandra DePaoli for their respective 1990 taxation years, the notices of which were each dated August 21, 1992, and included in each of their incomes the amount of $363,975.00 as a taxable capital gain. The Minister’s inclusion in income represented Dario DePaoli’s and Sandra DePaoli’s respective interests, as joint tenants, in the total taxable gain of $727,950.00 realized on the disposition, through expropriation and sale, of the Original Property.

13. At all material times, each of the Original Property, New Property 1 and New Property 2 were designated by the local zoning by-laws as agricultural land.

14. Each of the Original Property, New Property 1 and New Property 2 is a taxable Canadian property within the definition of paragraph 115(b)(i) of the Income Tax Act, R.S.C. 1952, c. 148, as amended.

15. Each of Dario DePaoli and Sandra DePaoli objected to the Minister’s August 21, 1992 reassessments by Notice of Objection, each dated November 18, 1992.

16. The Minister confirmed the reassessments for each of Dario DePaoli and Sandra DePaoli by Notification of Confirmation, each dated November 19, 1993.

17. The Appellants specifically deny subparagraphs 13(f), (m) and (n) contained in each Reply. However, the Appellants do not put in issue the remaining assumptions contained in paragraph 13 of each Reply.

The assumptions specifically denied are:

- the Appellants never put the property to any use;

- the new properties were not replacement properties;

- the new properties were not acquired for the same or similar use to which the Appellants put the original property.

Significant Evidence

The Appellant Dario DePaoli was the only witness.

He said that he bought the original property to eventually build a house and operate a farm upon his retirement. Both Appellants came from a farming background. Each year the witness arranged for local farmers to cultivate, plant and harvest crops. This arrangement operated throughout the period from 1971 to 1990, with the exception of two years. The first missed year was as a result of the death of the first farmer and the second missed year was as a result of the bankruptcy of the second farmer. In some years, the farmers paid the Appellants a very small sum for the use of the land and in other years the farmers paid nothing. The money received was never declared on the Appellants’ income tax returns. This was explained on the basis that the sum was so insignificant that it did not cover the taxes. The purpose of the cultivation, according to the witness, was to keep the land clean and workable. Some trees were planted by the witness but they did not survive. When the land was expropriated in 1990, Mr. DePaoli on behalf of himself and his spouse, through a real estate agent, found and bought new properties. The same farming arrangement continued with the same purpose to keep the land clean. The witness further stated that the new properties were one half mile apart and he still intended to build a home on one property and to farm both properties upon his retirement. This retirement plan has not happened because the new properties, apparently, are within a proposed perimeter of a land fill site and, as a consequence, the home and farm project is not feasible.

Issue

Are the two new properties purchased by the Appellants “replacement properties” within the meaning of subsection 44(5) of the Income Tax Act (the “Act”)?

Minister's Arguments

The Minister argues that the new properties were not “replacement properties” within the meaning of subsection 44(5) of the Act and that as the former property was not put to any use by the Appellants, the new properties were not acquired for the same or a similar use. Hence, the Appellants cannot elect to exchange these properties pursuant to subsection 44(1) of the Act.

Appellant's Arguments

The Appellants concede that a taxable capital gain on the proceeds of disposition of the former property should have been reported in 1990. They argue however, that the new properties are “replacement properties” within. the meaning of subsection 44(5) of the Act because the new properties were taxable Canadian properties acquired for the same or similar use as the use to which they put the original property. They submit that the word “use” in subsection 44(5) is a noun and is to be given a broad meaning which includes holding property as an investment and for personal use.

Analysis

The applicable legislation in 1990 was:

Subsection 44(1): Exchanges of Property - Where at any time in a taxation year ... an amount has become receivable by a taxpayer as proceeds of disposition of a capital property (in this section referred to as his “former property”) that is ...

(a) property the proceeds of disposition of which are described in subparagraph ... 54(h)…(iv)

and the taxpayer has

acquired a capital property (in this section referred to as his “replacement property”) as a replacement for his former property...

(e) the gain for a particular taxation year from the disposition of his former property shall be deemed to be the amount ...

(5) Replacement Property - For the purposes of this section, a particular capital property of a taxpayer is a replacement property for a former property of the taxpayer, if

(a) it was acquired by the taxpayer for the same or a similar use as the use to which he put the former property ;

(b) where the former property was used by the taxpayer for the purpose of gaining or producing income from a business, the particular capital property was acquired for the purpose of gaining or producing income from that or a similar business; and

(c) where the former property was taxable Canadian property...the particular capital property was taxable Canadian property....

Subsection 54(h) “Proceeds of Disposition” — “proceeds of disposition” of property includes,

(iv) compensation for property taken under statutory authority or the sale price of property sold to a person by whom notice of an intention to take it under statutory authority was given

Subparagraph 115(1)(b)(i) — “taxable Canadian property”

(i) real property situated in Canada.

Subsection 44(1) of the Act allows a taxpayer to make an election to defer the gain realized on the expropriation of a capital property if the taxpayer acquired a “replacement property”. “Replacement property” is defined in subsection 44(5). Subsection 44(5) specifies that a particular capital property is a replacement property if: (a) it was acquired by the taxpayer for the same or a similar use as the use to which the taxpayer put the former property ; (b) if the former property was used in earning income from a business, the replacement must be acquired for that use by the taxpayer in earning income from that business or a similar business; and (c) if the former property was “taxable Canadian property”, the replacement property must also be “taxable Canadian property”.

The only question therefore is what constitutes a “use” for paragraph 44(5)(a).

The Appellants argue that the word “use” in subsection 44(5) should be given a broad meaning which includes, in their interpretation, keeping the property “clean” for future personal use. The question, then, is whether keeping the property clean is a “use” for the purposes of paragraph 44(5)(a). The wording in paragraph 44(5)(a) is actually “the use to which he put the former property”.

In a recent decision of this Court, Glaxo Wellcome Inc. v. R., [1996] 1 C.T.C. 2904, 96 D.T.C. 1159 (T.C.C.), Judge Bowman, presents a concise discussion about legislative interpretation as well as an analysis of the interpretation of the word “used” in the context of paragraph 44(5)(b). This discussion and interpretation, I find are also useful for paragraph 44(5)(a). At page 1161 he writes:

Obviously one starts with the plain words of the statute. If the words of the legislation are clear and unambiguous and admit of but one interpretation one need look no further. If they are not and are susceptible of more than one interpretation one must look to the scheme of the act and its object and spirit. It is only when recourse to all of the other tools of statutory interpretation fails to yield a clear answer that one is entitled to invoke the principle that in case of ambiguity the benefit of the doubt must go to the taxpayer. As Fauteux, C.J. said in Ville de Montréal v. ILGWU Center, [1974] S.C.R. 59 at page 66:

The legislator is presumed to mean what he says; and there is no need to resort to interpretation when the wording is clear....

The same view was expressed by Chief Justice Isaac in R. v. Coopers & Lybrand Ltd., [1994] 2 C.T.C. 2244, 94 D.T.C. 6541, at page 6546:

But these principles are not invitations to Courts to ignore other well- accepted rules of construction, such as that which requires Courts to construe statutes so as “to ascribe some meaning to each word used by the legislature,” Atco v. Calgary Power Ltd., [1982] 1 S.C.R. 557 at 569.

Judge Bowman reasons:

Let us then start with the word “used”. About as garden-variety a word as one is likely to find anywhere. A company uses a piece of land on which it locates its factory, and carries on its business. A farmer uses land on which he plants crops. Indeed, I would extend the word “use” to cover land that a farmer summer-fallows for a season. Unless some principle of interpretation compels me to ascribe a broader meaning to the word, “use” connotes actual utilization for some purpose, not holding for future use.

In this case, I conclude that the Appellants had a plan with respect to the former property and followed through with that plan until stopped by expropriation. Their plan was to buy the former property (the farm land) to maintain them as farm land in order to keep it clean and with the object in retirement, to build a home and operate a farm. After expropriation the Appellants carried on with their plan by acquiring two other pieces of farm land and maintaining them as farm land until a further proposed government use prevented the realization of their plan.

The maintaining by the Appellants of farm land to keep it clean by arranging for farmers to cultivate, plant and harvest crops, is the “use” of former property by the Appellants. Further, I conclude that the use by the Appellants of the two new properties is the same use to which the Appellants put the former property. Therefore the two new properties are “replacement properties” within the meaning of subsection 44(5) of the Act.

The appeals are allowed and the reassessments are referred back to the Minister of National Revenue for reconsideration and reassessment for all the foregoing reasons.

The Appellants are entitled to one set of costs.

Appeal allowed.