Mogan,
J.T.C.C.:—The
appeals
of
Cochrane
v.
M.N.R.
(Court
Number
88-1879)
and
Jerram
v.
M.N.R.
(Court
Number
88-1880)
were
heard
together
on
common
evidence.
Cochrane
and
Jerram
were
equal
partners
in
the
ownership
of
approximately
600
acres
of
land
along
Lily
Lake
Road
in
rural
Alberta,
about
30
miles
north
of
Edmonton.
Cochrane
and
Jerram
each
owned
50
per
cent
of
the
issued
shares
of
Lily
Lake
Ranches
Ltd.,
an
Alberta
corporation.
During
the
years
1983,
1984
and
1985,
the
corporation
constructed
a
house
on
land
which
I
shall
refer
to
as
the
512%
of
section
30,
part
of
the
lands
owned
equally
by
Cochrane
and
Jerram.
The
total
cost
of
the
house
was
$233,439
accumulated
at
the
following
rate
over
the
three
years
of
construction:
For
the
years
1983,
1984
and
1985,
the
Minister
of
National
Revenue
added
to
the
reported
incomes
of
Cochrane
and
Jerram
one-half
of
the
above
construction
costs
on
the
basis
that
each
had
received
a
shareholder
benefit
within
the
meaning
of
subsection
15(1)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the
"Act").
For
some
years,
the
Minister
also
disallowed
as
deductions
in
computing
income
certain
amounts
which
Cochrane
and
Jerram
had
deducted
with
respect
to
property
taxes
paid
on
the
600
acres
of
land
along
Lily
Lake
Road.
Against
a
background
of
somewhat
complicated
facts,
the
basic
issues
are
(1)
whether
the
appellants
did
in
fact
receive
shareholder
benefits
under
subsection
15(1)
of
the
Income
Tax
Act
with
respect
to
the
house
construction;
and
1983
|
$101,607
|
1984
|
123,393
|
1985
|
8,439
|
|
$233,439
|
(2)
whether
the
appellants
may
deduct
in
computing
income
the
property
taxes
which
were
paid
to
the
rural
municipality
with
respect
to
the
600
acres.
William
Cochrane
was
born
in
Ontario
in
1939
and
raised
on
a
farm.
Walter
Jerram
was
born
in
Alberta
in
1932
and
raised
on
a
farm.
Cochrane
and
Jerram
met
in
Alberta
around
1960
when
Cochrane
was
working
for
Dominion
Stores
and
Jerram
was
working
for
the
CNR.
In
1963,
they
decided
to
buy
some
land
for
the
purpose
of
raising
cattle.
They
purchased
for
$6,500
a
quarter
section
of
land
on
Lily
Lake
Road
having
the
legal
description
SW
29-57-23-W4th
and
comprising
160
acres.
Two
years
later
in
1965,
they
purchased
for
$14,000
the
adjoining
lands:
the
NW
quarter
of
section
20
(directly
south
of
the
SW
quarter
of
section
29)
and
the
NE
quarter
of
section
20.
They
bought
a
few
head
of
cattle
and
immediately
commenced
raising
cattle
on
these
lands.
In
1966
they
purchased
for
$9,000
the
SE
quarter
of
section
30
(directly
west
of
the
SW
quarter
of
section
29).
They
built
their
herd
up
to
400
head
of
cattle
but,
in
1974,
the
price
of
beef
took
a
dramatic
drop
and
they
had
to
sell
their
entire
herd.
Having
regard
to
the
manner
in
which
Cochrane
and
Jerram
used
their
lands
in
1975
and
subsequent
years
following
the
disposition
of
their
cattle,
it
is
important
to
keep
in
mind
the
configuration
of
the
various
parcels
of
land.
Set
out
below
is
a
rough
map
showing
the
approximate
location
of
the
appellants’
lands.
[Not
reproduced]
The
road
running
north
and
south
between
the
SE!/4
of
section
30
and
the
SW
A
of
section
29
is
known
as
the
Lily
Lake
Road.
I
have
already
described
the
appellants’
purchases
of
the
SW
A
of
section
29
(1963),
the
NW
A
of
section
20
(1965),
the
NE'/4
of
section
20
(1965)
and
the
SE
/4
of
section
30
(1966).
To
complete
the
story
of
their
land
acquisitions,
they
purchased
in
1977
about
10
acres
described
as
the
SE
A
of
section
29,
and
in
1980
they
purchased
the
NW
A
of
section
29.
For
the
northern
half
of
section
20
and
the
southern
half
of
section
29,
they
owned
the
land
running
east
from
the
Lily
Lake
Road
to
the
west
shore
of
Lily
Lake
itself.
Most
of
the
money
needed
to
purchase
the
land
and
cattle
had
been
borrowed
from
the
bank
and,
in
the
mid-1960s,
Walter
Jerram
had
given
up
his
job
at
the
CNR
because
the
bank
had
insisted
that
he
or
William
Cocnrane
be
in
attendance
full-time
to
look
after
the
cattle.
After
the
forced
sale
of
the
cattle
in
1974,
the
appellants
were
looking
for
a
way
to
use
their
600
acres
of
land.
They
came
up
with
the
idea
of
constructing
and
operating
a
big
dance
hall
to
be
called
“The
Red
Barn”.
The
building
was
constructed
in
1975
with
a
very
large
floor
(160
ft.
by
40
ft.)
specially
designed
for
dancing.
They
poured
a
concrete
pad;
covered
it
with
layers
of
heavy
duty
rubber
to
a
thickness
of
about
six
inches;
and
then
laid
the
dance
floor
as
a
“floating
deck"
on
the
rubber
pad.
The
Red
Barn
was
built
as
a
dine,
dance
and
entertainment
complex
with
more
than
20,000
square
feet
of
which
6,400
square
feet
were
for
the
dance
floor
alone.
It
opened
for
business
in
July
1975
and
was
dedicated
to
old
time
dancing.
For
a
fixed
price,
each
patron
could
dance
all
evening
and
was
served
a
basic
dinner
of
steak,
baked
potato,
beans,
salad
and
roll.
There
was
a
balcony
surrounding
the
dance
floor
and,
of
course,
there
was
a
bar.
The
Red
Barn
was
an
instant
success
from
the
times
it
opened.
It
operated
every
Saturday
evening
and
could
be
booked
at
other
times
for
special
functions.
On
a
really
busy
night,
there
could
be
1,600
patrons
requiring
a
part-time
staff
of
50-55
persons
hired
from
the
local
area.
Exhibit
A-3
is
a
brochure
advertising
the
Red
Barn
with
a
colour
photograph
of
the
dance
floor
crowded
with
patrons
[not
reproduced].
Most
of
the
patrons
came
from
Edmonton
because
the
Red
Barn
was
located
only
28
miles
from
the
north
city
limits.
The
Red
Barn
is
located
toward
the
north
west
corner
of
the
SW‘/4
of
section
29
which
was
the
first
parcel
of
land
purchased
by
the
appellants
in
1963.
Lily
Lake
Ranches
Limited
('The
company")
was
incorporated
in
1975
or
1976
to
own
and
operate
the
Red
Barn.
The
company's
first
financial
statements
at
June
30,
1976
snow
buildings
at
an
aggregate
cost
of
$263,460
and
a
bank
loan
of
$173,750.
By
June
30,
1979,
the
company
showed
buildings
at
an
aggregate
undepreciated
cost
of
$662,055
with
a
bank
loan
of
$312,900
and
loans
from
the
two
shareholders
of
$270,500.
In
the
absence
of
any
contractual
arrangement
between
the
company
and
its
shareholders
in
the
period
1975
to
1979,
the
question
would
arise
as
to
whether
there
were
shareholder
benefits
in
those
years
under
subsection
15(1)
of
the
Act
as
the
company
constructed
buildings
on
land
owned
by
the
shareholders
but
that
question
is
not
relevant
in
these
appeals.
Soon
after
the
Red
Barn
opened,
the
company
started
bison
ranching
so
that
it
could
provide
bison
meat
upon
request
for
special
functions.
By
1980,
the
company
had
250
head
of
bison
requiring
a
seven-foot
fence
around
the
land
where
the
bison
were
pastured.
In
1980,
Walter
Jerram
helped
the
province
of
Alberta
to
capture
large
numbers
of
elk
which
were
damaging
farm
crops.
As
compensation,
the
province
gave
him
a
number
of
elk
which
he
turned
over
to
the
company.
The
elk
herd
was
built
up
to
125
head
and
maintained
by
the
company
on
the
appellants’
lands
from
1980
to
1990.
The
elk
also
needed
seven-foot
fencing
which
was
constructed
by
the
company.
The
Red
Barn
required
so
much
meat
for
its
weekly
dances
and
other
functions
that
it
purchased
meat
in
bulk
from
the
packing
houses
and
hired
butchers
(part-time)
to
cut
the
meat
for
consumption.
As
a
sideline,
the
Red
Barn
sold
some
beef
and
bison
at
retail
for
the
surrounding
community.
In
1978,
William
Cochrane
left
his
full-time
job
with
Heintz
in
order
to
work
with
Walter
Jerram
in
the
operation
of
the
Red
Barn.
Cochrane
was
responsible
for
purchasing
supplies,
hiring
staff
and
marketing
the
Red
Barn
as
an
entertainment
centre.
Jerram
was
responsible
for
booking
the
dance
band
or
other
entertainment
and
for
the
care
of
livestock
(bison
and
elk).
There
was
only
one
dwelling
on
all
the
lands
purchased
by
the
appellants.
At
the
north-west
corner
of
the
NW!/A
of
section
20,
there
was
an
old
white
farm
house.
After
Jerram
left
his
job
with
the
CNR
to
look
after
the
cattle,
he
lived
in
that
old
house
from
1965
until
September
1985.
It
was
his
only
residence
during
that
time.
Cochrane
continued
to
live
in
Edmonton
but
he
would
frequently
stay
in
the
old
farm
house
on
nights
when
the
Red
Barn
was
operating.
If
there
was
a
“full
house”,
the
gross
proceeds
at
the
Red
Barn
on
a
given
night
could
be
as
much
as
$30,000
to
$40,000
in
cash,
credit
card
vouchers
and
cheques.
When
the
Red
Barn
closed
for
the
night,
they
would
carry
the
money
to
the
old
house
around
two
o'clock
in
the
morning
(taking
precautions
against
theft)
and
count
it
the
next
day.
In
1980,
the
appellants
became
engaged
in
a
new
venture
which
almost
ruined
them
financially.
At
that
time,
a
man
named
Al
Oeming
was
operating
an
exotic
animal
centre
under
the
name
“Alberta
Game
Farm”
containing
the
largest
collection
of
exotic
animals
in
the
province.
When
Oeming
announced
that
he
was
going
to
sell
his
animals
and
close
down
the
Game
Farm,
there
was
public
pressure
on
the
government
to
keep
these
animals
within
the
province.
Oeming's
collection
of
African
animals
(lions,
giraffes,
etc.)
was
larger
than
that
of
the
Toronto
Zoo.
Cochrane
and
Jerram
decided
that
they
would
acquire
Oeming's
animals
and
operate
a
wildlife
park
to
compliment
the
business
of
the
Red
Barn.
In
January
1980,
they
purchased
Oeming's
animals
for
$650,000
and
immediately
embarked
on
a
programme
to
construct
fences
and
shelters
to
contain
and
house
the
new
animals.
Over
the
next
18
months,
they
constructed
about
55
shelters
all
on
the
SW
/4
of
section
29
and
the
NW
A
of
section
20.
The
wildlife
park
was
operated
on
lands
within
these
two
quarter
sections.
The
appellants
opened
their
new
business
on
August
17,
1980
under
the
name
“Alberta
Wildlife
Park”.
The
wildlife
park
needed
a
staff
of
35
full-time
or
part-time
workers
and
could
stay
open
only
from
May
24
to
the
end
of
September.
In
some
years,
the
appellants
had
as
many
as
79,000
persons
come
to
visit
the
wildlife
park.
The
wildlife
park
lost
money
from
the
start.
In
the
fiscal
years
ending
June
30,
1982,
1983
and
1984
it
lost
$613,216;
$457,575
and
$392,809
respectively.
In
each
year,
these
amounts
far
exceeded
the
profit
from
the
Red
Barn.
Although
the
company
had
received
some
financial
assistance
from
the
Alberta
Opportunity
Corporation
("AOC")
because
there
had
been
public
pressure
to
keep
the
exotic
animals
within
the
province,
the
company
could
not
afford
to
continue
losing
money
at
this
rate.
In
the
winter
of
1984-85,
the
appellants
and
the
company
worked
out
an
arrangement
with
the
province
under
which
the
province
would
assist
in
the
establishment
of
a
foundation;
the
foundation
would
purchase
the
wildlife
park
as
a
going
concern;
and
the
price
was
fixed
at
$3,696,487.
The
company
did
not
in
fact
receive
any
net
cash
from
this
transaction
because
the
purchase
price
was
paid
as
follows:
the
foundation
assumed
the
company
indebtedness
to
AOC
in
the
amount
of
$2,753,469;
the
foundation
assumed
the
company's
indebtedness
to
Recreation,
Parks
and
Wildlife
of
the
province
of
Alberta
in
the
amount
of
$43,081;
and
the
foundation
paid
$900,000
to
the
Royal
Bank
of
Canada
to
obtain
the
release
of
its
security
on
the
purchased
assets.
A
man
named
Jim
Poole
had
worked
for
Al
Oeming
as
the
manager
of
his
game
farm.
When
the
appellants
decided
to
purchase
Oeming's
exotic
animals,
it
was
agreed
that
they
would
hire
Jim
Poole
to
manage
their
wildlife
park
because
of
his
experience
with
and
knowledge
of
the
animals.
Jim
Poole
became
an
employee
of
Lily
Lake
Ranches
Ltd.
in
1980
when
the
company
acquired
the
animals
from
Al
Oeming.
One
of
the
conditions
of
his
employment
was
that
the
company
would
provide
a
house
for
him
and
his
family
on
the
premises
because
the
animals
frequently
needed
round-the-clock
care.
Mrs.
Poole
refused
to
live
in
the
old
farm
house
occupied
by
Walter
Jerram
because
it
was
not
a
modern
home.
The
appellants
therefore
promised
to
build
a
new
house
for
the
Poole
family.
They
acquired
plans
which
were
acceptable
to
Jim
Poole
and
his
wife.
Construction
of
the
new
house
could
not
begin
immediately
because
the
appellants
were
racing
against
time
to
construct
shelters
which
would
be
adequate
to
protect
the
new
animals
during
the
winter
of
1980-81.
It
was
decided
that
the
new
house
would
be
built
by
the
employees
of
the
company
in
their
spare
time
when
they
could
be
freed
from
the
construction
and
maintenance
of
shelters
and
fences
for
the
animals.
Although
I
refer
to
the
appellants
as
promising
to
build
a
house
for
Mr.
and
Mrs.
Poole,
I
use
the
appellants
and
the
company
interchangeably
because
they
owned
all
the
shares
of
the
company.
It
should
be
clear,
however,
that
the
company
owned
all
of
the
assets
and
employed
all
of
the
staff
at
the
Red
Barn
and
the
Wildlife
Park
and
operated
those
two
businesses
as
separate
divisions
within
the
one
corporation.
The
crucial
fact
in
these
appeals
is
that
the
appellants
owned
all
of
the
underlying
lands
on
which
the
Red
Barn
and
Wildlife
Park
operated
and
the
company
owned
no
land
at
all.
It
was
agreed
that
the
new
house
for
the
Poole
family
would
be
built
at
the
south-east
corner
of
the
SE'/s
of
section
30
(diagonally
across
from
the
old
white
farm
house).
The
foundation
was
excavated
in
1981
but
it
caved
in
during
the
winter
of
1981-82
and
had
to
be
started
fresh
in
1982.
In
the
meantime,
the
appellants
had
concluded
that
they
could
not
afford
to
retain
Jim
Poole
to
manage
the
Wildlife
Park
because
of
its
continuing
losses.
Neither
Cochrane
nor
Jerram
were
certain
as
to
whether
Jim
Poole
left
their
employment
in
the
spring
of
1982
or
1983
but,
given
the
rate
at
which
the
losses
were
accruing,
I
shall
infer
that
he
left
in
the
spring
of
1982.
This
means
that
he
was
no
longer
employed
by
the
company
when
it
decided
to
proceed
with
the
construction
of
the
new
house
in
the
summer
of
1982
(during
the
company's
1983
fiscal
period).
In
evidence,
there
were
other
reasons
given
for
the
construction
of
the
new
house.
It
was
a
high
quality
dwelling,
better
finished
than
the
average
modern
house,
with
skylights
and
a
natural
wood
interior.
It
had
a
large
living
room
which
could
be
used
for
a
small
meeting.
It
could
provide
accommodation
for
a
special
entertainer
who
was
performing
at
the
Red
Barn.
Apparently,
Johnny
Cash
had
performed
at
the
Red
Barn
in
the
late
1970s
before
the
new
house
was
built.
It
could
be
used
as
a
country
setting
for
a
small
group
who
wanted
to
meet
in
proximity
to
the
Wildlife
Park.
It
could
be
used
in
an
emergency
as
overnight
shelter
for
the
staff
of
the
Red
Barn
if
a
winter
storm
prevented
them
from
getting
home
late
at
night.
It
could
be
used
as
a
more
secure
place
to
keep
the
revenue
from
the
Red
Barn
before
it
was
taken
to
the
bank.
None
of
those
reasons
sounded
very
convincing
to
me.
Even
the
superstar
performer
could
have
his
or
her
own
trailer
for
temporary
refuge
during
a
performance
and
then
travel
the
30
miles
to
Edmonton
to
stay
overnight.
Notwithstanding
the
questionable
utility
of
the
new
house
to
the
company,
there
is
no
evidence
that
the
appellants
made
any
personal
use
of
the
new
house
apart
from
functions
connected
with
the
operation
of
the
Red
Barn
or
Wildlife
Park.
In
any
event,
the
new
house
was
constructed
between
1982
and
the
summer
of
1985
at
a
cost
of
$233,439
but
never
used
by
Cochrane
or
Jerram
as
a
personal
residence.
Walter
Jerram
had
resided
in
the
old
white
farm
house
from
1965
to
the
end
of
September
1985
when
he
moved
into
Edmonton
to
assist
a
sick
friend.
It
is
an
interesting
coincidence
that,
after
living
on
the
partnership
lands
for
20
years,
Jerram
would
move
into
Edmonton
on
September
30,
1985
just
a
few
weeks
after
the
new
house
was
completed.
He
estimated
that
between
1985
and
1992,
he
would
have
stayed
in
the
new
house
overnight
about
45
or
50
times
always
[in]
connection
with
functions
at
the
Red
Barn
or
problems
at
the
Wildlife
Park
which
he
was
managing
for
the
foundation.
William
Cochrane
estimated
that
between
1985
and
1992,
he
would
have
stayed
in
the
new
house
overnight
about
ten
times
in
connection
with
functions
at
the
Red
Barn.
This
evidence
from
the
appellants
concerning
their
limited
personal
use
of
the
new
house
(always
in
connection
with
a
commercial
function
at
the
Red
Barn
or
a
problem
at
the
Wildlife
Park)
was
not
seriously
challenged
except
for
an
affidavit
sworn
by
Walter
Jerram
in
April
1989
that
he
resided
on
land
adjoining
the
company’s
elk
herd.
That
affidavit
was
prepared
to
support
an
injunction
to
prevent
the
rural
municipality
from
building
a
road
across
Lily
Lake.
Mr.
Jerram
acknowledged
that
the
statement
about
his
"residence"
was
not
true.
Also,
it
was
in
conflict
with
other
evidence
(Exhibit
A-27)
that
in
1989
Mr.
Jerram
lived
on
a
farm
near
Morinville.
Gerald
Wasylyshen
is
a
chartered
accountant
who
was
the
first
person
retained
by
the
appellants
to
prepare
financial
statements
for
the
company.
When
he
realized
that
the
Red
Barn
was
constructed
by
the
company
on
lands
owned
by
the
appellants,
he
advised
them
to
enter
into
a
lease
with
the
company
to
avoid
the
very
problem
which
later
developed
with
the
new
house.
There
was
entered
in
evidence
as
Exhibit
A-11
a
nine-page
lease
between
the
appellants
as
lessors
and
Lily
Lake
Ranches
Ltd.
as
lessee
containing
the
following
provisions:
(i)
the
subject
of
the
lease
was
the
SW
quarter
of
section
29;
(ii)
the
parties
confirmed
that
an
oral
lease
had
existed
since
May
1,
1975;
(iii)
the
term
of
the
lease
was
five
years
expiring
on
May
1,
1980;
(iv)
the
rent
was
set
at
$5,000
per
year;
(v)
the
lessee
was
to
pay
the
municipal
taxes;
and
(vi)
title
to
the
Red
Barn
was
to
be
vested
in
the
company
as
tenant
and
not
in
the
appellants
as
lessors.
Although
the
company
(as
lessee)
had
the
right
to
lease
the
land
for
a
further
period
of
five
years
at
a
rent
to
be
negotiated,
the
lease
was
allowed
to
lapse
on
May
1,
1980
but
the
company
continued
to
pay
substantial
rent
to
the
appellants
thereafter
in
amounts
whicn
will
be
described
below.
Mr.
J.
Tollovsen,
an
auditor
employed
by
the
income
tax
department,
was
instructed
in
November
1986
to
perform
an
audit
of
Lily
Lake
Ranches
Ltd.
Upon
reviewing
the
relevant
documents,
he
learned
that
the
origina
lease
(Exhibit
A-11)
had
expired
and
that
the
new
house
had
been
constructed
on
land
not
included
in
the
original
lease.
After
significant
negotiations
between
Revenue
Canada,
Taxa-
tion
and
the
appellants’
auditors,
reassessments
were
issued
making
the
following
adjustments:
The
cost
of
the
new
house
was
allocated
equally
between
Cochrane
and
Jerram
and
added
to
their
reported
incomes
as
that
cost
was
incurred:
|
Cochrane
|
Jerram
|
1983
|
$50,803.50
|
$50,803.50
|
1984
|
61,696.50
|
61,696.50
|
1985
|
4,219.50
|
4,219.50
|
The
municipal
taxes
which
the
appellants
had
paid
with
respect
to
their
partnership
lands
and
deducted
in
the
computation
of
their
incomes
were
disallowed
as
deductions
in
the
following
amounts:
|
Cochrane
|
Jerram
|
1983
|
6,293
|
6,293
|
1984
|
6,309
|
6,309
|
1985
|
9,673
|
9,673
|
The
Minister
of
National
Revenue
relied
on
subsection
15(1)
of
the
Act
to
add
the
cost
of
the
new
house
to
the
appellants’
reported
incomes
because
it
was
built
by
the
company
on
land
owned
by
the
appellants;
that
land
was
not
leased
to
the
company;
the
new
house
as
it
was
constructed
vested
immediately
in
the
appellants
as
owners
of
the
land;
and
the
appellants
were
the
only
shareholder
of
the
company.
The
Minister
disallowed
the
deduction
of
property
taxes
because
those
taxes
related
to
all
the
lands
other
than
the
one
quarter
section
which
was
leased
to
the
company.
If
the
remainder
of
the
lands
not
described
in
the
lease
were
not
earning
any
rent,
then
the
municipal
taxes
paid
by
the
appellants
with
respect
to
those
lands
were
not
expenses
incurred
for
the
purpose
of
earning
income
and,
therefore,
not
deductible.
During
the
negotiations
between
the
appellants’
auditors
and
Revenue
Canada,
Taxation
before
the
reassessments
were
issued,
the
appellants
decided
to
sign
an
amended
lease
and
to
obtain
a
court
order
rectifying
the
original
lease
to
include
the
NW'/4
of
section
20,
the
NE‘/4
of
section
20
and
the
SE‘/4
of
section
30
(the
"missing
lands").
On
December
14,
1989,
the
appellants
made
a
petition
to
the
Court
of
Queen's
Bench
of
Alberta
asking
for
an
order
rectifying
the
original
lease
to
include
the
missing
lands.
In
support
of
that
petition,
the
appellants
stated
that
the
missing
lands
were
omitted
from
the
original
lease
as
a
result
of
inadvertence
or
negligence.
On
January
8,
1990,
Mr.
Justice
Agrios
of
the
Court
of
Queen's
Bench
made
an
order
that
the
original
lease
be
rectified
by
adding
the
missing
lands
to
the
SW'/s
of
section
29
described
in
the
original
lease.
The
petition
to
rectify
the
original
lease
was
made
by
the
appellants
in
their
capacity
as
landlords
and,
as
might
be
expected,
it
was
not
disputed
by
their
company
as
tenant.
According
to
the
documents
entered
as
exhibits
in
these
appeals,
there
was
no
affidavit
before
the
Court
of
Queen's
Bench
from
any
party
disputing
the
petition.
Having
heard
the
testimony
of
six
witnesses
in
these
appeals
and
having
reviewed
most
of
the
84
documentary
exhibits
herein,
I
find
it
difficult
to
believe
that
the
omission
of
those
three
quarter
sections
of
land
in
the
original
lease
was
the
result
of
inadvertence
or
negligence.
In
1978,
the
company
was
newly
incorporated
and
its
only
business
was
the
operation
of
the
Red
Barn
on
the
SW‘/4
of
section
29
—
the
only
quarter
section
described
in
the
lease.
The
Red
Barn
had
already
been
built
in
1975;
it
was
on
the
company's
balance
sheet;
and
the
original
lease
was
made
retroactive
to
May
1,
1975.
The
purpose
of
the
original
lease
was
to
avoid
an
income
tax
assessment
against
the
appellants
under
subsection
15(1
)
of
the
Act
as
a
consequence
of
the
Red
Barn
being
constructed
on
their
land,
and
it
accomplished
that
purpose.
Given
the
fact
that
the
appellants
had
owned
four
quarter
sections
of
land
since
1986,
there
were
two
ways
for
the
original
lease
to
accomplish
its
purpose.
First,
the
draughtsman
could
have
included
all
lands
owned
by
the
appellants
to
ensure
that
the
land
under
the
Red
Barn
was
leased.
Secondly,
the
draughtsman
acting
on
appropriate
instructions
could
have
isolated
the
particular
quarter
section
on
which
the
Red
Barn
was
constructed
from
the
other
quarter
sections
and
inserted
only
that
particular
quarter
section
in
the
lease.
It
is
apparent
that
the
draughtsman
followed
the
second
way.
It
is
also
apparent
that
he
was
carefully
instructed
because
he
did
in
fact
isolate
and
lease
to
the
company
only
the
quarter
section
on
which
the
Red
Barn
was
constructed.
The
company
had
not
constructed
any
buildings
on
the
remaining
three
quarter
sections
which
in
1978
were
used
in
part
for
grazing
bison
in
much
the
same
way
that
the
appellants
had
grazed
cattle
from
1964
to
1974.
In
1978,
the
appellants
probably
looked
upon
the
expanding
herd
of
bison
as
similar
to
their
former
cattle
operation
even
though
the
bison
were
in
fact
owned
by
the
newly
incorporated
company.
In
my
opinion,
the
original
lease
drafted
by
a
lawyer
on
instructions
from
the
appellants
and
Mr.
Wasylysnen
stated
exactly
what
the
appellants
intended
at
that
time;
and
the
remaining
three
quarter
sections
of
land
were
not
omitted
through
inadvertence
or
negligence.
Having
concluded
that
the
original
lease
reflected
the
real
intention
of
the
appellants
in
1978
to
lease
only
one
quarter
section
of
land
to
their
company,
I
find
it
difficult
to
regard
the
document
as
a
binding
legal
agreement
because
the
parties
did
not
adhere
to
its
basic
terms.
The
company
always
paid
more
rent
than
the
$5,000
annual
amount
provided
in
the
lease.
After
1979,
the
company
used
the
SW‘/4
of
section
29
and
part
of
the
NW'/4
of
section
20
to
operate
the
Red
Barn
and
Wildlife
Park:
and
used
the
NE'/4
of
section
20
and
the
SE'/s
of
section
30
for
the
grazing
of
bison
and
elk
without
any
documented
amendment
to
the
lease,
although
there
was
a
significant
adjustment
to
the
rent.
An
agreement
between
parties
who
are
not
at
arms
length
may
be
legally
binding
but,
having
regard
to
the
original
lease,
when
the
tenant
is
a
corporation
controlled
100
per
cent
by
the
landlord
and
when
the
basic
terms
of
the
document
are
not
followed,
the
lease
becomes
less
of
a
binding
agreement
and
more
like
a
declaration
of
intent
or
policy.
I
regard
the
original
lease
as
a
serious
declaration
of
intent
or
policy
to
the
effect
that
the
appellants
would
lease
to
their
company
any
land
used
by
the
company,
particularly
if
the
company
were
to
construct
a
building
or
other
fixture
which
might
otherwise
vest
in
the
appellants
as
owners
of
the
land.
For
its
fiscal
periods
ending
the
30th
day
of
June,
the
company
paid
to
Cochrane
and
Jerram
rents
which
were
allocated
between
the
Red
Barn
and
the
Wildlife
Park
as
follows:
|
Red
Barn
|
Wildlife
Park
|
Total
|
Total
|
1978
|
$10,000
|
$
|
0
|
|
$10,000
|
1979
|
$15,600
|
|
0
|
|
$15,600
|
1980
|
$14,000
|
$
5,680
|
|
$19,680
|
1981
|
0
|
$25,000
|
|
$25,000
|
1982
|
0
|
$25,000
|
|
$25,000
|
1983
|
0
|
$25,200
|
|
$25,200
|
1984
|
0
|
$25,400
|
|
$25,400
|
1985
|
0
|
$21,500
|
|
$21,500
|
1986
|
$16,700
|
|
0
|
|
$16,700
|
For
each
of
the
years
1981
to
1985,
the
operating
loss
at
the
Wildlife
Park
exceeded
the
profit
at
the
Red
Barn
by
an
amount
which,
on
average,
was
approximately
$240,000.
Therefore,
it
may
not
be
material
that
the
rent
in
those
years
was
allocated
100
per
cent
to
the
Wildlife
Park.
There
was
no
explanation
as
to
why
the
rents
paid
in
1978
and
1979
were
so
much
higher
than
the
annual
rent
($5,000)
stated
in
the
original
lease
which
was
signed
in
1978.
The
rent
increased
in
1980
because
the
Wildlife
Park
was
operated
for
part
of
the
year
on
land
beyond
the
quarter
section
on
which
the
Red
Barn
was
located,
and
the
company
had
acquired
a
herd
of
elk
which
was
grazing
with
the
bison
on
additional
lands.
The
rent
reached
its
maximum
in
the
years
1981
to
1984
because
the
company
was
usine
practically
all
of
the
appellants’
lands
at
that
time
to
operate
the
Red
Barn
and
Wildlife
Park
and
to
graze
its
bison
and
elk
herds.
The
rent
declined
in
1985
because
the
Wildlife
Park
was
sold
toward
the
end
of
that
fiscal
period
and
there
was
included
in
the
sale
70.62
hectares
(approximately
175
acres)
containing
the
shelters
and
fencing
for
the
exotic
animals
and
the
old
white
farm
house.
After
1985,
the
company
used
all
of
the
remaining
lands
to
operate
the
Red
Barn,
to
graze
its
bison
and
elk
and
to
maintain
the
new
house
for
possible
use
by
featured
performers
or
special
guests.
For
each
of
the
years
1986
to
1991,
the
company
paid
rent
of
$16,700
to
the
appellants.
Because
the
new
house
was
substantially
completed
in
the
summer
of
1984,
the
appellants
began
paying
to
the
company
in
its
1985
fiscal
year
the
amount
of
$12,000
($6,000
from
Cochrane
and
$6,000
from
Jerram)
with
respect
to
any
benefit
they
may
have
derived
from
personal
use
of
the
new
house
even
though
neither
Cochrane
nor
Jerram
used
the
house
as
a
residence.
On
the
company's
books,
this
amount
of
$12,000
was
set
off
against
the
rent
payable
to
Cochrane
and
Jerram
so
that
the
company
showed
a
net
rent
expense
of
only
$4,700
($16,700
less
$12,000).
This
practice
was
followed
from
1986
through
to
1991
(and
possibly
later).
For
the
years
under
appeal
(1983,
1984
and
1985),
Cochrane
and
Jerram
each
reported
one-half
of
the
rent
paid
by
the
company
with
respect
to
all
of
the
partnership
lands
and
they
each
deducted
one-half
of
the
municipal
taxes
paid
with
respect
to
those
lands
other
than
the
quarter
section
on
which
the
Red
Barn
was
constructed.
The
company
paid
and
deducted
the
municipal
taxes
on
the
SW
/
of
section
29.
The
relevant
amounts
reported
and
deducted
by
each
appellant
are
as
follows:
|
one-half
|
|
one-half
rent
|
municipal
taxes
|
1983
|
$12,600
|
$6,293
|
1984
|
$12,700
|
$6,309
|
1985
|
$10,750
|
$9,673
|
The
first
issue
is
whether
the
cost
of
the
new
house
should
be
included
in
computing
the
income
of
the
appellants
during
those
years
(1983,
1984
and
1985)
when
the
new
house
was
being
constructed.
The
Minister
of
National
Revenue
relies
on
subsection
15(1)
of
the
Act
from
which
I
shall
set
out
only
the
relevant
words
as
they
applied
to
the
years
under
appeal:
15(1)
Where
in
a
taxation
year
(a)
a
payment
has
been
made
by
a
corporation
to
a
shareholder
otherwise
than
pursuant
to
a
bona
fide
business
transaction,
(b)
funds
or
property
of
a
corporation
have
been
appropriated
in
any
manner
whatever
to,
or
for
the
benefit
of,
a
shareholder,
or
(c)
a
benefit
or
advantage
has
been
conferred
on
a
shareholder
by
a
corporation,
otherwise
than
the
amount
or
value
thereof
shall,
except
to
the
extent
that
it
is
deemed
to
be
a
dividend
by
section
84,
be
included
in
computing
the
income
of
the
shareholder
for
the
year.
For
reasons
which
are
set
out
below,
I
have
concluded
that
the
appellants
should
succeed
on
this
first
issue
and
no
amounts
should
be
included
in
computing
their
income
under
subsection
15(1)
with
respect
to
the
construction
of
the
new
house.
The
basic
theory
of
the
respondent's
case
is
that
the
new
house
(being
a
"fixture"
in
the
law
of
real
property)
vested
in
the
appellants
as
owners
of
the
land
while
the
house
was
being
constructed
in
the
years
1983,
1984
and
1985.
For
the
specific
words
of
the
Act
to
apply,
the
respondent
relies
on
paragraph
15(1
)(c)
to
argue
that
a
benefit
(i.e.,
the
new
house)
has
been
conferred
on
the
appellants
by
the
company.
To
support
the
assessments,
the
respondent
must
also
argue
that
the
value
of
the
benefit
is
equal
to
the
cost
of
construction
because
it
was
that
cost
which
was
allocated
equally
between
the
appellants
and
added
to
their
reported
incomes.
The
leading
case
in
support
of
the
respondent's
position
is
St-Germain
v.
M.N.R.,
[1969]
S.C.R.
471,
[1969]
C.T.C.
194,
69
D.T.C.
5086,
a
decision
of
the
Supreme
Court
of
Canada.
In
St-Germain,
the
taxpayer
owned
a
commercial
building
and
the
underlying
land
which
was
rented
under
an
oral
lease
to
a
corporation
in
which
the
taxpayer
owned
all
the
shares.
When
the
corporation
constructed
a
shed
and
substantial
additions
to
the
main
building
in
1959-61,
the
Minister
of
National
Revenue
added
the
cost
of
such
improvements
to
the
taxpayer's
income
under
subsection
8(1)
of
the
Income
Tax
Act
(the
predecessor
to
the
present
subsection
15(1)).
In
1962,
the
taxpayer
sold
all
of
his
shares
in
the
corporation
for
$318,000
and
his
land
and
building
(including
the
additions
constructed
by
the
corporation)
for
$275,000.
The
Supreme
Court
dismissed
the
taxpayer's
appeal
holding
that
he
had
received
a
shareholder
benefit
under
subsection
8(1).
Abbott,
J.
writing
for
the
majority
stated
at
page
476
(C.T.C.
197,
D.T.C.
5088):
Under
article
413
and
following
of
the
Civil
Code,
additions
and
improvements
of
this
kind
are
presumed
to
have
become
the
property
of
the
owner
of
the
immovable
by
accession.
While
this
presumption
can
be
rebutted
either
expressly
or
tacitly,
I
can
find
I
nothing
in
the
circumstances
of
this
case
which
would
justify
holding
that
such
legal
presumption
had
been
rebutted.
On
the
contrary,
the
letter
of
August
3,
1962
and
the
terms
of
the
deed
of
sale
of
the
immovable
property
indicate
clearly
that
appellant
intended
to
convey
and
did
convey
the
whole
of
the
immovable,
including
the
buildings
in
question.
The
mere
fact
that
the
cost
of
the
improvements
and
additions
had
been
paid
for
by
a
company
controlled
by
appellant,
and
appear
to
have
been
carried
as
an
asset
in
its
books,
is
not
sufficient
to
rebut
the
presumption
to
which
I
have
referred.
Although
the
property
in
St-Germain,
supra,
was
located
in
the
province
of
Quebec
and
governed
by
the
Civil
Code,
the
Chief
Justice
of
the
Federal
Court
indicated
in
Rudnikoffv.
The
Queen,
[1975]
C.T.C.
1,
75
D.T.C.
5008
(F.C.A.),
that
the
same
principle
applied
in
common
law
provinces
when
he
stated
at
page
2
(D.T.C.
5009):
However,
in
my
view,
while
the
general
rule,
both
in
the
common
law
provinces
and
in
the
province
of
Quebec
is
that
a
substantial
building
becomes
a
part
of
the
land
and
belongs
to
the
owner
of
the
land,
this
situation
may
be
changed,
by
contract
or
otherwise,
so
that
ownership
of
the
building
is
separate
from
ownership
of
the
land
and
the
building
would
not
be
a
part
of
the
subject
matter
of
the
lease.
Such
a
result
would,
however,
follow
only
as
a
result
of
clear
language
and,
in
my
view,
in
this
case,
the
terms
of
the
emphyteutic
lease
are
not
such
as
to
produce
such
a
result.
It
is
interesting
to
note
from
the
passages
quoted
above
that
in
St-Germain,
supra,
Abbott,
J.
stated
that
the
presumption
could
be
rebutted
"either
expressly
or
tacitly”
and
in
Rudnikoff,
supra,
Jackett,
C.J.
stated
that
the
situation
could
be
changed
“by
contract
or
otherwise"
but
that
such
a
result
would
follow
only
from
“clear
language".
In
my
opinion,
there
is
more
than
enough
evidence
in
these
appeals
to
rebut
any
presumption
in
law
that
the
new
house
vested
in
the
appellants
as
owners
of
the
land.
Unlike
the
circumstances
in
St-Germain,
supra,
and
The
Queen
v.
Neudorf,
[1975]
C.T.C.
192,
75
D.T.C.
5213
(F.C.T.D.),
there
was
a
written
lease
(Exhibit
A-11)
signed
by
the
appellants
and
their
company
long
before
construction
of
the
new
house
commenced.
I
have
already
stated
above
why
I
find
it
difficult
to
regard
the
original
lease
as
a
binding
legal
agreement
but
it
is
a
serious
declaration
of
intent
in
writing
and
it
contains
the
following
provision
in
“clear
language":
4.
The
title
to
and
ownership
of
the
building,
and
all
alterations,
additions,
changes,
substitutions
or
improvements
thereto,
shall
at
all
times
during
the
term
hereby
granted
be
vested
in
the
tenant,
notwithstanding
any
rule
of
law
as
to
immediate
vesting
of
the
title
to
and
ownership
of
the
building
in
the
lessors
as
owners
of
the
freehold
title.
I
conclude
from
the
above
provision
in
Exhibit
A-11
that
it
was
always
the
appellants’
intention
to
lease
to
their
company
any
land
used
by
the
company,
particularly
if
the
company
were
to
construct
a
building
or
other
fixture
which
might
otherwise
vest
in
the
appellants
as
owners
of
the
land;
and
it
was
also
their
intention
that
any
fixture
constructed
by
the
company
at
its
cost
would
be
owned
by
the
company.
My
conclusion
is
supported
by
the
following
evidence.
The
appellants
addressed
their
minds
to
this
specific
problem
when
they
drafted
the
original
lease
as
a
direct
consequence
of
constructing
the
Red
Barn.
All
items
constructed
by
the
company
on
the
appellants’
lands
(i.e.,
the
Red
Barn,
high
fences
for
the
bison
and
elk,
shelters
and
pens
for
the
exotic
animals,
and
the
new
house)
were
paid
for
by
the
company
and
recorded
in
its
books
and
records
as
its
own
assets.
Although
the
Supreme
Court
stated
in
St-Germain,
supra,
that
the
"mere
fact"
that
the
cost
of
such
items
was
paid
for
by
a
corporation
and
entered
in
its
books
as
an
asset
was
not
sufficient
to
rebut
the
legal
presumption,
such
fact
is
obviously
relevant
and
may
be
joined
with
other
facts
collectively
to
rebut
the
legal
presumption.
The
rent
was
adjusted
upward
as
the
company's
business
activities
expanded
to
utilize
virtually
all
of
the
appellants’
lands
in
the
period
after
the
original
lease
had
lapsed
ana
before
it
was
amended
in
1987
or
rectified
by
court
order
in
1990.
The
rent
was
never
high
enough
to
justify
a
conclusion
that
the
company
was
paying
for
the
use
of
the
items
which
it
had
constructed
at
its
own
cost
because,
as
can
be
seen
in
a
table
above,
the
rent
for
1983
and
1984
was
only
double
the
amount
of
municipal
taxes
(paid
by
the
appellants)
and,
for
1985,
the
rent
was
only
marginally
greater
than
the
taxes.
And
finally,
Cochrane
and
Jerram
each
paid
$6,000
to
the
company
for
each
year
commencing
July
1,
1984
with
respect
to
any
possible
personal
benefit
from
the
new
house
because
it
was
substantially
completed
at
that
date.
Although
the
first
fiscal
year
when
the
company
received
such
payments
ended
on
June
30,
1985,
the
financial
statements
for
that
year
were
completed
and
the
company's
1985
income
tax
return
was
filed
by
December
31,
1985,
ten
months
before
Mr.
Tollovsen
commenced
the
income
tax
audit
which
resulted
in
this
appeal.
In
other
words,
the
$6,000
payment
by
each
appellant
was
not
an
ex
post
facto
arrangement
to
avoid
any
income
tax
problem
raised
by
Mr.
Tollovsen's
audit.
In
my
view,
the
evidence
summarized
above
justifies
my
conclusion
that
ownership
of
the
fixtures
constructed
by
the
company
(the
Red
Barn,
high
fences
for
the
bison
and
elk,
and
the
new
house)
remained
with
the
company
and
did
not
vest
in
the
appellants.
When
these
appeals
were
heard,
the
appellants
still
owned
the
land
underlying
the
Red
Barn
and
the
new
house
and
all
of
their
other
lands
except
for
the
175
acres
(part
of
the
southern
half
of
section
29
and
part
of
the
northern
half
of
section
20)
which
had
been
sold
in
1985
to
the
new
foundation
to
operate
the
Wildlife
Park.
If
at
some
future
time
part
or
all
of
this
property
is
sold
and
the
appellants
do
not
allow
their
company
to
receive
its
fair
share
of
the
proceeds
of
disposition
representing
the
value
of
the
fixtures,
at
that
time
there
may
be
a
shareholder
appropriation
or
benefit
within
the
meaning
of
subsection
15(1)
but
my
determination
of
these
appeals
for
the
taxation
years
1983,
1984
and
1985
cannot
be
predicated
upon
what
may
happen
in
some
subsequent
transaction
long
after
the
years
in
question.
I
do
not
put
much
weight
on
the
order
rectifying
the
original
lease
issued
by
Mr.
Justice
Agrios
of
the
Court
of
Queen's
Bench
of
Alberta
on
January
8,
1990.
There
was
entered
in
evidence
as
Exhibit
A-24
copies
of
the
order,
the
petition
of
the
appellants,
and
the
affidavits
in
support
of
the
petition.
The
main
thrust
of
the
petition
and
the
affidavits
was
that
the
omission
of
the
"missing
lands”
(the
NW'/4
of
section
20,
the
NE'/s
of
section
20,
and
the
SE'/s
of
section
30)
from
the
original
lease
was
the
result
of
"inadvertence
or
negligence”.
There
were
no
documents
put
before
the
Court
of
Queen's
Bench
opposing
the
petition
and
the
order
appears
to
have
been
obtained
ex
parte
except
for
a
recital
in
the
order
that
counsel
for
the
Minister
of
National
Revenue
attended
at
the
application
and
made
representations.
It
is
my
impression
that,
if
the
learned
judge
who
issued
the
order
had
heard
the
six
witnesses
who
testified
in
these
appeals
over
a
three-day
period,
and
if
he
had
reviewed
many
of
the
84
documentary
exhibits
filed
herein,
he
may
have
been
more
reluctant
to
conclude
that
the
missing
lands
were
omitted
from
the
original
lease
through
inadvertence
or
negligence.
There
was
an
amended
lease
signed
by
the
appellants
around
1987
(Exhibit
A-23)
which
specifically
stated
(paragraph
8)
that
ownership
of
the
buildings
vested
in
the
company
and
not
in
the
appellants
as
owners
of
the
freehold,
but
I
do
not
place
much
weight
on
that
amended
lease
because
it
was
signed
as
a
consequence
of
the
income
tax
audit
commenced
by
Mr.
Tollovsen.
I
prefer
to
draw
my
conclusions
concerning
what
the
appellants
and
their
company
really
intended
in
the
years
under
appeal
by
reference
to
documents
which
existed
prior
to
October
1986
(when
the
income
tax
audit
began)
and
by
reference
to
the
conduct
of
the
appellants
and
their
company
prior
to
1986.
The
original
lease
is
a
serious
declaration
of
intent
"before
the
fact"
even
if
the
parties
did
not
regard
it
as
a
binding
legal
agreement.
The
recording
of
all
fixtures
on
the
company's
books
and
the
annual
payment
of
$6,000
by
each
appellant
commencing
in
1984/85
are
also
significant
facts.
There
was
much
evidence
and
argument
concerning
certificates
of
title
and
whether
the
original
lease
(1978)
had
been
"registered"
against
the
SW'/4
of
section
29
and
whether
the
amended
lease
(1987)
or
the
rectified
lease
(1990)
had
been
"registered"
against
additional
lands.
When
a
shareholder
landlord
owns
all
of
the
shares
of
the
corporate
tenant,
the
mind
of
the
tenant
is
the
same
as
the
mind
of
the
landlord
and
there
is
not
the
same
need
for
registration.
In
such
circumstances,
I
would
assume
that
the
shareholder
landlord
is
not
going
to
sell
or
lease
again
the
underlying
land
to
the
detriment
of
the
corporate
tenant
if
the
use
of
the
land
is
important
in
the
commercial
life
of
the
tenant.
If
1
should
be
wrong
in
holding
that
the
evidence
justifies
a
conclusion
that
the
new
house
and
other
fixtures
constructed
by
the
company
did
not
vest
in
the
appellants,
there
may
be
a
different
reason
for
allowing
these
appeals
on
the
first
issue.
Subsection
15(1)
assumes
that
the
corporation
and
its
shareholder
are
different
persons
because
it
applies
only
when
the
corporation
confers
a
benefit
on
its
shareholder;
and
it
is
the
value
of
the
benefit
which
is
included
in
computing
the
shareholders's
income.
If
a
corporate
tenant
as
primary
debtor
borrows
money
from
a
third
party
bank
to
construct
a
new
building
on
land
owned
by
its
shareholder
landlord,
there
could
easily
be
a
shareholder
benefit
within
the
St-
Germain
principle
if
the
new
building
vested
in
the
shareholder
as
landlord.
But
if
the
shareholder
as
owner
of
the
land
had
granted
a
mortgage
to
the
bank
to
secure
the
corporate
loan,
and
if
the
shareholder
(as
distinct
from
the
corporation)
had
not
received
any
proceeds
from
the
loan,
can
it
be
said
that
the
shareholder
has
received
a
benefit
of
any
value
if
the
fresh
mortgage
to
the
bank
is
equal
in
amount
to
the
value
of
the
new
building
which
vested
in
the
shareholder?
For
example,
if
the
corporation
became
insolvent
immediately
after
completing
the
building
and
before
making
any
payments
as
primary
debtor
on
the
loan,
the
shareholder's
land
would
be
encumbered
with
a
charge
equal
to
the
value
of
the
building.
When
Lily
Lake
Ranches
Ltd.
had
lost
money
in
each
of
the
years
1982,
1983
and
1984
because
the
losses
from
the
Wildlife
Park
were
significantly
greater
than
the
profits
from
the
Red
Barn,
there
was
no
certainty
that
the
company
as
primary
debtor
would
be
able
to
repay
its
loans.
From
June
30,
1980
to
June
30,
1984,
the
retained
earnings
of
the
company
shrank
from
$372,407
to
a
deficit
of
$285,693;
and
the
company’s
long-term
debt
grew
from
$1,171,741
to
$4,075,515.
If
the
new
house
did
in
fact
vest
in
the
appellants
as
it
was
constructed,
and
if
the
value
accruing
to
the
appellants
was
equal
to
the
construction
costs,
it
would
appear
that
such
value
was
offset
by
mortgages
and
other
encumbrances
placed
on
the
lands
to
secure
loans
to
the
company.
With
some
reservations,
I
am
inclined
to
the
view
that
any
benefit
accruing
to
the
appellants
with
respect
to
the
new
house
would
have
no
value
until
the
company
as
primary
debtor
caused
the
mortgages
to
be
partially
or
completely
discharged.
At
that
time,
there
would
be
a
benefit
of
value
as
the
appellants
acquired
an
equity
in
the
new
house.
If
at
that
time
the
appellants
attempted
to
avoid
such
a
benefit
by
participating
in
the
repayment
of
the
company's
loans,
it
would
be
important
to
review
the
manner
in
which
the
repayment
transaction
was
recorded
in
the
books
and
records
of
the
company.
Note
No.
5
to
the
company's
financial
statements
at
June
30,
1984
indicates
that
the
land
and
buildings
were
mortgaged
or
otherwise
encumbered
to
the
Royal
Bank
and
the
Alberta
Opportunity
Corporation
in
the
aggregate
amount
of
$4,069,949.
It
is
true
that
the
appellants
as
owners
of
the
land
would
have
had
to
grant
the
mortgages
and
permit
the
encumbrance
of
their
lands
but
the
documents
indicate
that
all
proceeds
from
the
mortgages,
loans
and
encumbrances
went
to
the
company;
and
there
was
no
evidence
that
any
amounts
appearing
as
debts
of
the
company
had
been
deflected
into
the
hands
of
the
appellants
as
shareholders
or
otherwise.
For
each
of
the
years
under
appeal,
the
appellants
reported
relatively
modest
employment
income
of
not
more
than
$26,000
as
salary
from
the
company
and
no
other
significant
income
(including
the
net
rent
from
the
company
for
their
lands).
There
was
no
suggestion
in
evidence
or
argument
that
the
appellants
had
ever
appropriated
funds
from
their
company.
Having
regard
to
the
company’s
financial
statements
(Exhibit
A-2)
and
a
1981
mortgage
to
the
Royal
Bank
(Exhibit
A-20),
I
conclude
that
in
the
years
under
appeal
the
appellants’
lands
and
the
attached
fixtures
were
mortgaged
and
encumbered
to
secure
loans
to
the
company
in
amounts
far
exceeding
the
cost
of
the
new
house
and
any
other
new
(post
1980)
fixtures.
Therefore,
assuming
that
the
company
received
the
funds
advanced
by
the
secured
creditors
under
the
mortgages
and
other
encumbrances
(and
there
is
no
evidence
that
the
company
did
not
receive
such
funds),
there
was
no
value
in
1983,
1984
and
1985
to
the
benefit
which
the
appellants
obtained
if
the
new
house
vested
in
them
as
owners
of
the
land.
As
stated
above,
I
accept
this
proposition
with
some
reservations
because
it
was
not
the
primary
issue
argued
before
me.
On
this
question
of
valuing
the
benefit,
counsel
for
the
respondent
referred
me
to
the
recent
decision
of
the
Federal
Court
of
Appeal
in
Youngman
v.
Canada,
[1990]
2
C.T.C.
10,
90
D.T.C.
6322,
in
which
the
Court
stated
at
page
14
(D.T.C.
6325):
In
order
to
assess
the
value
of
a
benefit,
for
the
purposes
of
paragraph
15(1
)(c),
it
is
first
necessary
to
determine
what
that
benefit
is
or,
in
other
words,
what
the
company
did
for
its
shareholder;
second,
it
is
necessary
to
find
what
price
the
shareholder
would
have
had
to
pay,
in
similar
circumstances,
to
get
the
same
benefit
from
a
company
of
which
he
was
not
a
shareholder.
If
the
new
house
vested
in
the
appellants,
I
assume
that
they
would
have
had
to
pay,
in
similar
circumstances,
the
same
costs
as
the
company
in
fact
paid
for
the
construction
of
the
new
house
but,
if
the
appellants
were
paying
that
amount
to
an
independent
contractor,
would
they
have
granted
a
mortgage
on
their
lands
as
collateral
security
for
the
private
borrowings
of
the
independent
contractor?
Counsel
also
referred
to
the
decisions
of
Guilder
News
Co.
v.
M.N.R.,
[1973]
C.T.C.
1,
73
D.T.C.
5048
(F.C.A.),
and
Vine
Estate
v.
Canada,
[1990]
1
C.T.C.
18,
89
D.T.C.
5528
(F.C.T.D.),
but
I
fail
to
see
how
the
decisions
in
Youngman,
Guilder
News
or
Vine,
all
supra,
affect
the
proposition
which
I
accept
with
respect
to
the
value
of
the
benefit.
In
the
amended
reply
to
the
notice
of
appeal,
the
respondent
alleged
that
when
issuing
the
reassessments
which
are
under
appeal
the
Minister
of
National
Revenue
assumed
the
following
facts:
7(c)
the
residence
constructed
by
the
corporation
enhanced
the
value
of
the
land
of
the
appellant(s)
upon
which
it
was
situated
in
an
amount
equivalent
to
the
cost
of
construction;
7(g)
the
appellant
structured
his
affairs.
.
.in
order
to
establish
that
the
appellant
and
Walter
Jerram
were
the
owners
of
the
residence
during
each
of
the
taxation
years
following
construction
of
the
residence
and
thereby
were
in
a
position
to
claim
full
exemption
from
capital
gains
taxation
upon
the
sale
of
the
residence;
7(h)
at
the
time
of
the
construction
of
the
residence
the
corporation
was
a
commercially
viable
concern.
With
respect
to
paragraph
7(c),
any
enhanced
value
was
offset
by
mortgages
and
encumbrances
to
third
parties
like
the
Royal
Bank
and
AOC
from
which
the
company
received
all
the
borrowed
funds.
In
paragraph
7(g),
I
assume
that
the
words
“full
exemption
from
capital
gains
taxation
upon
the
sale
of
the
residence"
refer
to
the
principal
residence
exemption
in
paragraph
40(2)(b)
of
the
Act
because
the
so-called
$100,000
lifetime
capital
gain
exemption
did
not
become
law
until
after
1984.
I
am
satisfied
on
the
evidence
that
neither
Cochrane
nor
Jerram
has
ever
used
the
new
house
as
a
residence
(principal
or
otherwise)
from
the
date
of
its
completion
until
the
time
of
hearing
these
appeals.
And
with
respect
to
paragraph
7(h),
it
is
doubtful
if
the
company
was
a
commercially
viable
concern
in
1983,
1984
and
1985
because
its
losses
from
the
Wildlife
Park
in
those
years
exceeded
the
profits
from
the
Red
Barn
as
it
went
into
a
deficit
position.
It
appears
to
me
that
the
appellants
have
demolished
the
main
facts
upon
which
the
reassessments
under
subsection
15(1)
were
issued.
I
now
turn
to
the
second
issue:
whether
the
appellants
may
deduct
in
computing
income
the
property
taxes
which
were
paid
to
the
rural
municipality
with
respect
to
all
of
their
lands.
When
deciding
the
first
issue,
I
concluded
(i)
that
it
was
always
the
appellants’
intention
to
lease
to
their
company
any
land
used
by
the
company
for
its
business;
(ii)
that
the
company
in
fact
used
all
of
the
appellants'
land
by
1982-83;
and
(iii)
that
the
rent
paid
by
the
company
to
the
appellants
in
1982,
1983,
1984
and
1985
was
for
the
use
of
all
of
their
lands
but
none
of
the
fixtures
constructed
thereon.
Having
reached
those
conclusions,
it
follows
that
in
the
years
under
appeal
the
appellants
were
using
all
of
their
lands
for
the
purpose
of
earning
rental
income.
Accordingly,
the
municipal
taxes
paid
with
respect
to
those
lands
(excluding
the
SW‘/4
of
section
29
on
which
the
company
paid
the
taxes)
are
deductible
by
the
appellants
in
computing
income.
Before
the
hearing
commenced,
the
appellants
brought
a
motion
to
have
me
view
the
property
(the
new
house).
The
motion
was
opposed
by
the
respondent.
I
reserved
on
the
matter
until
the
conclusion
of
the
evidence
and
then
ruled
that
I
would
not
view
the
property.
In
all
of
the
circumstances
of
this
case,
it
did
not
seem
necessary.
In
particular,
I
accept
the
evidence
of
Cochrane
and
Jerram
that
neither
one
has
ever
used
the
new
house
as
a
personal
residence.
For
the
above
reasons,
the
appeals
of
both
appellants
are
allowed
for
all
three
taxation
years.
They
are
awarded
costs
as
if
this
were
one
appeal.
Appeals
allowed.