Dawd v. MNR, 81 DTC 888, [1981] CTC 2999 (TRB)

M J Bonner:—The appellant appeals from assessments of income tax for the 1977 and 1978 taxation years. In October 1967 the appellant purchased a parcel of land, about six acres in area, located on the outskirts of Thunder Bay. He bought it, he said, with the intention of erecting a home for occupation by himself and his family. Subsequently he subdivided the land into residential building lots and, in 1977, he sold the lots to a company which he controlled.

The respondent assessed tax on the basis that the entire gain realized by the appellant in 1977 on the disposition of the lots was income. The 1978 appeal arises only because of reserves.

The appellant, in his notice of appeal, asserted that the entire gain was on capital account. At the trial, he asserted that in 1976 he commenced using the property for the purpose of gaining or producing income (in effect from the business of a land developer); that a disposition is deemed to have occurred at that time by operation of paragraph 45(1 )(a) of the Income Tax Act; and he sought judgment referring the assessment back to the Minister for reconsideration and reassessment on that basis.* [1] The Minister supported the assessment and argued in the alternative that, if the property was not a capital asset at the outset (in 1967), the time of conversion was much earlier than 1976.

In 1967 the appellant owned and operated a motel in Thunder Bay. He lived with his wife and family in a three-bedroom house in that city. The house was much too small, having regard to the number of the appellant’s children. In addition to operating the motel, the appellant engaged in prospecting for minerals. He appears to have been a man who loved the outdoors and he wanted a rural setting for his proposed new home. His wife, on the other hand, wanted a home close to schools and convenient to the diversions of urban life.

The land in question appears to have been ideally situated to meet the somewhat divergent requirements of the appellant and his wife. It was located in a relatively undeveloped area of McIntyre Township but was nevertheless almost on the boundary of the City of Thunder Bay. Schools and the amenities of urban life were nearby. The land offered a building area with a stand of mature trees which the appellant found aesthetically satisfying. As well there was a barn-like structure which, with minor repairs and modifications, was suitable for the storage of the appellant’s prospecting gear.

The appellant took steps which, if not directly corroborative of his stated intent, appear at least to be somewhat inconsistent with an intention to resell. Almost immediately after purchasing the property, he demolished and removed some dilapidated animal pens, cleared boulders, erected a fence and planted a large number of trees.

There was no suggestion that the appellant had, at any time prior to the purchase of the land, traded in real estate. The appellant’s ordinary activities

Where the employer delivers to a workman either all of the principal materials of a chattel on which the workman agrees to do work, there is a bailment by the employer, and a contract for work and labour, or for work, labour and materials (as the case may be), by the workman. Materials added by the workman, on being affixed to or blended with the employer’s materials, thereupon vest in the employer by accession, and not under any contract of sale.

Benjamin, at 162:—

The principles already discussed have shewn that a contract of sale is not constituted merely by reason that the property in the materials is to be transferred to the employer. If they are simply accessory to work and labour, the contract is for work, labour and materials.

Benjamin, at 163:—

Where a contract is made to furnish a machine or a movable thing of any kind, and (before the property in it passes) to fix it to land (or to another chattel), it is not a contract for the sale of goods. In such contracts the intention is plainly not to make a sale of movables as such, but to improve the land (or other chattel, as the case may be). The consideration to be paid to the workman is not for a transfer of chattels, but for work and labour done and materials furnished.

Counsel for the respondent referred to the definition of accession in Webster’s Third New International Dictionary:

The mode of acquiring property by which the owner of a corporeal substance (as land or cattle) becomes the owner of an addition by growth, increase or labour.

5.03.8 Mr Mah, counsel for the respondent, also referred to the case of Scott Maritimes Pulp Ltd v B F Goodrich Canada Limited, supra, in this case it was decided by the Nova Scotia Supreme Court that:

“A contract for installing a rubber cover on a press roll is a contract for labour and materials, not for the sale of goods, and the property in the materials passes to the owner by accession.

The description of what the $4,750 was to be paid for — “necessary labour and materials” — leads me with respect to the conclusion that the contract was not one of purchase and sale but for work and labour under which title to the new material that is, the rubber supplied and used by Goodrich to re-cover the roll, would pass by accession to Scott: see Sterling Engine Works v Red Deer Lumber Co (1920), 51 DLR 509, (1920) 2 WWR 194, 30 Man R 345. Where a contract for the repair of a locomotive engine was held by the Manitoba Court of Appeal to be one for work, labour and materials and that the new material supplied vested in the employer by accession and not under a contract for the sale of goods. I refer also to Stewart v Reavell’s Garage, (1952) 2 QB 545, where the contract there in question, to fit new brake linings to a car, was held to be one for work and materials as was the contract to renew and alter a ship’s engines and machinery in Anglo-Egyptian Navigation Co v Rennie (1875), LR 10 CP 271; and see also Benjamin’s Sale of Goods, 1st ed (1974), p 29, para 36.

C. Reply of the appellant

5.03.9 In his reply, Mr McKenzie contended that accession “is merely a description of a legal concept which relates to the transfer of title to property. It’s simply a rule of law which has evolved from Common Law, which deals with the transfer of title to property.” And this is not the problem in the present case, according to counsel for the appellant. Here, the expression “for sale” in paragraph 125.1 (3)(a) of the Act simply requires that the goods be sold.

D. Comments

5.03.10 First, the theory of accession is not “simply a rule of law which has evolved from Common Law”. The theory of accession also exists in Civil Law. Article 546 and so on of Code civil de Napoléon and article 408 and so on of Code civil de la Province de Québec are to the same effect.

Some jurists were of the opinion that accession was only the application of the right of property and, according to other jurists, it was a legal mode to acquire property as prehension, occupation, contact, will, etc. The French legislator and the Quebec legislator decided in favour of the latter opinion (article 712 (CCN and article 583 CCPQ).

In fact, this theory orginates from Roman Law ("Accessorium sequitur principale", “Major pars trahit ad se menorem”, etc). However, the courts’ Common Law System as the Courts of Civil Law system use it to determine the nature of a transaction. In paragraph 125.1 (3)(a) of the Act, the expression “for sale” is not defined and the Board must give the oridinary meaning.

In the cases quoted above by the respondent, the court arrived at the conclusion (especially in the Scott Maritimes Pulp Ltd v B F Goodrich Canada Ltd case) that the rubber used by the appellant to repair the casings was acquired by the customers by accession and not by contract of sale. The word “sale” is not defined in the Act. Only in its ordinary meaning can the word “sale” be assimilated with “accession”. The mode of acquisition “by accession” and the mode of acquisition “by contract of sale” are two different modes. Maybe it is useful to state that a mode of acquisition for one is necessarily a mode of alienation for another. The Income Tax Act says “for sale”. Can the Board forget the mode of acquisition (or alienation) and consider only in the word “sale” the general meaning of transfer or alienation of property, including will, accession, gift, etc.?

Counsel for the appellant, in his argumentation, listed “5 types of transactions or types of things” that could be done with manufactured goods: gifted, scrapped, self-consumed, leased or sold (para. 5.03.4 and SN p 69). From those five types of transactions he concluded that the things can only be sold.

However, those different types of transactions and the different modes of acquisition (or alienation) cannot be compared together even though, among the five types of transactions, two of them are modes of acquisition (gift, sell). The three other transactions (“scrapped”, “self-consumed”, “leased”) are rather modes of use of things. A mode of use is larger than a mode of acquisition or alienation. In the Act, the provision says “for sale or lease”.

One can say that alienation is also a mode of use and therefore that paragraph 125.1 (3)(a) of the Act applies in this case. It would be, then a wrong application of the rule "ejusdem generis", the fourth rule of Sir Courtenay llbert (Legislative Methods and Forms published in 1901 by the Clarendon Press). Indeed, there is not here a general term as “sue” or “transaction” after an enumeration. The word “sale” is used and in its ordinary meaning, is a mode of transfer, of alienation, or of acquisition. It is different from an alienation by accession.

The Board cannot see how, in the application of the general theory of transfer of property in Common Law (and even in Civil Law), a sale can be assimilated to a transfer by accession. It would be different if the evidence had shown that the appellant had acquired from the customer the casing for one dollar or for nothing before the processing; even if the same customer, a few days later had acquired the same casing after it had been retreaded. Then it would have been a sale.

With evidence shown before the Board, however, the respondent’s thesis is maintained concerning the tires which are owned by the customers and which are retreaded by the appellant.

5.03.11 Only the point about the casings being owned by the appellant, retreaded by the appellant and sold afterwards by the appellant remains. To meet the requirement provided in subparagraph 125.1 (3)(b)(x), the evidence given before the Board has not reversed the burden of proof which was on the appellant’s shoulders and the following repsondent’s assumptions of fact remain true:

That less than 10 per cent of the Appellant’s gross revenue was in respect to the sale or lease of goods manufactured and processed in Canada by the Appellant.

In fact, no evidence at all was produced about this point (see para 4.05)

6. Conclusion

The appeal is dismissed in accordance with the above Reasons for Judgment.

Appeal dismissed.