Donald Funk v. Minister of National Revenue, [1992] 1 CTC 2349, 92 DTC 1296

Hamlyn. T.C.C.J.:—Donald Funk the appellant, appeals from a reassessment of income tax for the 1981 taxation year. The Minister of National Revenue reassessed Mr. Funk, pursuant to paragraph 18(1)(b) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"), on the basis that certain outlays in the amount of $6,247 were capital in nature and could not be deducted. The costs were incurred in relation to the construction of two housing units.

At the trial the character of the costs was not considered in issue and both counsel submitted the sole issue before the Court was whether the appellant had acquired sufficient interest in the properties at the time the outlays were incurred to permit him to deduct the outlays in the computation of income for the 1981 taxation year.

Facts

On March 31, 1981, the appellant entered into two construction agreements with Plainsman Developments Ltd. (the "contractor") whereby the contractor would sell land to the appellant (the"purchaser") and construct buildings on this land for the appellant. The agreements provided in part as follows:

ARTICLE I: The building site will be provided by: The Contractor.

ARTICLE III: The Purchaser will:

(a) Pay the Contractor for the materials furnished and the work performed under this agreement, the sum of $56,000, subject however, to the additions and deductions (if any) to be made pursuant to this agreement, and payment shall be made in the proper manner following:

Price of land (if supplied by Contractor)	$13,000
Price of Building (See Schedule "A")	$43,000
Price of Extras	nil
Total Contract Price	$56,000 + M.L.F.
Deposit on execution of this agreement	$2,000
Balance of Contract Price	$54,000
Mortgage, if any (Estimated or Actual Amount)	$50,400
Balance of Cash Payment	$3,600
(Payable on approval or as per schedule)
ARTICLE IV:

(a) It is agreed that if the Purchaser is unable to secure a mortgage loan as hereinbefore provided or secure approval of the lending agency as a purchaser of the property, this agreement shall be null and void and the Purchaser entitled to refund of all moneys paid by him on account of the purchase price in execution of conveyance of the property to the Contractor and the parties each agree to execute such further documents as may be necessary to give effect to this Article.

ARTICLE VI: This agreement is subject to the following general conditions:

II. The Purchaser will pay to the Contractor interest.

As shown on the attached Schedule of Progress Billings. (Schedule" B")

(d) Fire Insurance: Until completion, the Contractor shall maintain and pay for the insurance with standard supplemental risks endorsement totalling not less than eighty percent (80%) of the total value of the building. The Purchaser shall assume the fire insurance policy and pay the unexpired portion of the premium on the date of possession or completion of the said building, or pay cancellation charges if he cancels the insurance policy.

(e) Occupancy: The Purchaser will take occupancy

(i) Upon payment in full of the cash down to mortgage and all extras, tax and interest adjustments and

(ii) On the issue of a written occupancy clearance.

(f) Tenant at Will: In the event the Purchaser shall take possession before payment in full and performance of all his obligations hereunder, the Purchaser shall be a Tenant at Will only and will vacate the premises immediately upon written notice from the Contractor to this effect. The Purchaser agrees to execute a Tenancy at Will Agreement on such terms as the Contractor may require.

(n) IT IS AGREED that we, the undersigned, in consideration of the Contractor conveying the title to the said property to us before the purchase price and/or contract price has been paid and other valuable considerations, do hereby irrevocably nominate, constitute and appoint FR. Kindred or R. Rogal of the Contractor, our true and lawful attorney in our names, places and stead to do, perform, and execute all acts, deeds, matters and things including, without restricting the generality of the foregoing, to receive, negotiate and endorse all cheques issued or to be issued by Canada Trust payable to us or either of us and to any other person, firm or corporation as shall be requisite or by the attorney deemed expedient and necessary to fully secure payment to the Contractor of all money payable or to become payable on account of said mortgage rate and confirming and agreed to ratify and confirm all and whatsoever our attorney shall do or cause to be done by virtue hereby and we do hereby order the solicitors acting for Canada Trust to deliver the said cheques to Plainsman Developments Ltd.

SCHEDULE B

Forming part of the Construction Agreement between

PLAINSMAN DEVELOPMENTS LTD. (THE CONTRACTOR)

and

Don Funk (THE PURCHASER)

Dated March 31, 1981.

It is agreed and understood that Progress Billings will be made as follows with interest charged at 14% per annum on unpaid Billings.

Interest
At Date of Agreement	$13,000	$760 (5 months)
60 Days alter Agreement	17,000	595 (3 months)
90 Days after Agreement	15,000	350 (2 months)
On Completion	9,000	0
Total Interest		$1,705

The appellant submits that on March 31, 1981, he acquired sufficient interest in the property to be able to deduct the outlays in question in the computation of income for the 1981 taxation year. He argues that a constructive trust was constituted at the time the agreements were signed and that the contractor was his agent. He attended the site on a daily basis, had input into change orders, selected colours, and was involved in interior and exterior changes. He could not remember when he had given personal information to the mortgage lending body but did remember that he had done so and that the contractor had arranged the mortgage.

The respondent submits that the appellant acquired the properties on October 1, 1981, the date of title transfer, and that the outlays in question were incurred and paid by the contractor before the property was acquired by the appellant.

Jurisprudence

Constructive Trust

At common law, the moment that a contract for sale and purchase is entered into and the relation of vendor and vendee is constituted, the vendor becomes a constructive trustee for the vendee. In Lysaght v. Edwards^ [1] it was decided that:

the moment you have a valid contract for sale the vendor becomes in equity a trustee for the purchaser of the estate sold, and the beneficial ownership passes to the purchaser, the vendor having a right to the purchase-money, a charge or lien on the estate for the security of that purchase-money, and a right to retain possession of the estate until the purchase-money is paid, in the absence of express contract as to the time of delivering possession.

In Rayner v. Preston [2] James, L.J. declared that:

But when the contract is performed by actual conveyance, or performed in everything but the mere formal act of sealing the engrossed deeds, then that completion relates back to the contract, and it is thereby ascertained that the relation was throughout that of trustee and cestui que trust. That is to say, it is ascertained that while the legal estate was in the vendor, the beneficial or equitable interest was wholly in the purchaser.

While an express trust arises out of the intention of the settlor, the constructive trust comes into existence, regardless of any party's intent, when the law imposes upon a party an obligation to hold specific property for another. The person obligated becomes by force of law a constructive trustee towards the person to whom he owes performance of the obligation. [3]

Acquisition of Property

The Tax Court of Canada in Ryan v. M.N.R. [4] considered a fact situation somewhat similar to this appeal. In that case, the appellant signed a form undertaking to invest in the project on October 30, 1980, and made a down payment at that time. On December 4, 1980, his acquisition in the project was closed. In his tax return for 1980 the appellant claimed his proportion of the "soft costs" that had been incurred in the project in 1980. The Minister disallowed the appellant's share of these “soft costs" on the grounds that because the appellant became an owner on December 4, 1980, he could only deduct "soft costs" incurred after that date.

Brulé, T.C.C.J. was of the view that the October 30, 1980, form would seem sufficient to allow the Court to arrive at the conclusion that the appellant had had an interest as of October 30, 1980. He stated that:

As to when property is "acquired" within the meaning of the Income Tax Act there is no definition found in the Act, but undoubtedly it has broader implications than having “legal title”. It would seem to extend to a taxpayer's interest under an executory contract wherein the taxpayer has an interest that gives him the right to obtain "legal title". [5]

However, the judge then looked to the actual documentation entered into by the appellant dated December 3, 1980, which stated that:

. . . Rockland warrants:

(a) That it is the sole beneficial owner of the project. [6]

Brulé T.C.C.J. concluded that by signing this agreement, the appellant had acknowledged that as of December 3, 1980, he had no actual interest in the property as an owner.

In Schuler et al. v. M.N.R. , the appellants sought to deduct “ soft costs" incurred in respect of a multiple unit residential building. The Minister disallowed the deductions on the grounds that the costs were incurred during the construction phase. Couture, T.C.C.J. allowed the appeal on the basis that although title was not intended to pass from the contractor until the purchase price had been paid, a proper interpretation of the agreement showed that the appellants had become the beneficial owners of the property upon execution of the agreement. M.N.R. v. Wardean Drilling Ltd was cited to determine the meaning of "acquired":

In my opinion the proper test as to when property is acquired must relate to the title to the property in question or to the normal incidents of title, either actual or constructive, such as possession, use and risk.

Couture, T.C.C.J. considered that the appellants had had access at all times to the construction sites, that they had done the mechanical, plumbing, and heating work themselves, and that they had assumed obligations normally incumbent upon a mortgagor. In addition, he looked at the documents to decide the true intention of the parties. From this, he decided that the appellants had had use or possession of the property, that an agency relationship had existed between the developer and the appellants, and that the title to the property had remained in the name of the developer for registry purposes. He cited again from Wardean Drilling , supra:

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.

Finally, in Schneider v. M.N.R.™ [10] the appellant entered into agreements on November 23, 1981, to purchase lands from Cairns Homes Ltd. Cairns Homes Ltd. was to erect a housing unit upon this land. Construction began on November 5, 1981, the balance of the purchase price was paid on January 28, 1982, the conveyance to the appellant was registered on March 2, 1982, and the appellant took possession on April 15, 1982. The appellant sought to deduct certain costs incurred by Cairns Homes Ltd., but these were disallowed by the Minister, who alleged that the appellant was not the owner of the property prior to the completion of construction.

Sarchuk, T.C.C.J., also following Wardean Drilling", supra, dismissed the appellant's appeal. The right to possession remained in the developer until construction was completed. There was no evidence of any act of possession exercised by the appellant, he had no right to the use of the property until the day he obtained possession (April 15, 1982), and he was not at any risk.

Analysis

The agreements for the sale of the land and the construction of the buildings were entered into by the appellant on March 31, 1981. Upon execution, the appellant acquired an interest in the property. At that point, Plainsman Developments Ltd. became a constructive trustee for the appellant. There is nothing in the agreements providing otherwise, thus the common law applies and the appellant became a beneficial owner of the equitable estate on that date.

The appellant attended the site on a daily basis, had input into orders, selected colours, and was involved in changes.

According to the agreements, the appellant was required to take occupancy upon payment in full of the cash down to mortgage and all extras, tax and interest adjustments and the issue of a written occupancy clearance. He could also take occupancy before completion of all matters by becoming a tenant at will subject to the direction of the contractor.

The tenant at will clause of the agreements did not derogate from the interests in the property granted to the appellant upon execution. The clause did protect the contractor in the event of default by the purchaser. However, the appellant's equitable interest in the property and his right to obtain the legal interest in the property prior to the completion of the building was still preserved. Moreover and notwithstanding the reservations to the contractor, the appellant had the right to obtain and register a mortgage against the subject lands.

Article VI(n) of the agreements provided that the appellant could have obtained legal title to the property before payment in full by granting power of

At 271 (D.T.C. 5198).

attorney to two specific individuals. The power of attorney specifically reserves to the contractor the right to mortgages advances. He did execute this power of attorney and relied on this power of attorney to hold the contractor as agent for the appellant as principal.

In terms of risk during construction, the contractor was responsible for 80 per cent of the building. The appellant therefore was responsible for the balance.

According to Article VI(b)(II.) and Schedule B, the appellant was responsible for progress payment interest to the contractor on unpaid billings.

All of these factors are consistent with the incidents of an interest acquired in the property and lead to the conclusion that the appellant had use and possession of the property, as well as certain elements of risk.

It is to be noted that no "offer to purchase" nor the significant clauses examined by the learned trial judge in Schneider, supra were before the Court in the documentation filed in this matter.

Conclusion

The specific findings in this case lead to the conclusion that the appellant acquired an interest in the property on March 31, 1981. He is thus entitled to deduct the outlays in question in the amount of $6,247 in the computation of income for the 1981 taxation year. The appeal is allowed and the matter is referred back to the Minister of National Revenue for reconsideration and reassessment on that basis. The appellant is entitled to his costs.

Appeal allowed.