James E. Redmond v. Minister of National Revenue, [1991] 2 CTC 2369

Garon, T.C.J. [Orally]: —In this case the appellant appeals the reassessments dated July 18, 1986 with respect to the 1980, 1981 and 1982 taxation years.

In the chart below are shown for each of the years in issue, the amounts deducted by the appellant, the amounts allowed and disallowed by the respondent in respect of his investment in a project referred to as "Arbour Glen":

The disallowance by the respondent of the expenses in the amounts set out in the chart were made on the basis that these expenses were on account of capital, the deduction of which is prohibited by 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").

There is no dispute about the facts. The appellant is a lawyer and has been practising his profession for many years. He has been particularly active in the civil litigation area. On December 12, 1980 the appellant entered into an agreement with Laidley Development Group Ltd. (“Laidley”). In that agreement, Laidley is described as the “Project Manager" and the appellant as the "Owner". By this agreement the appellant purchased a fraction of an undivided interest in the lands described in the agreement, together with the right to receive a transfer of title to two 2-bedroom condominium units and four 3-bedroom condominium units once a condominium plan had been registered in respect of the Project and certain other conditions had been fulfilled. The buildings and improvements to be constructed on the lands in question in accordance with the above agreement were to constitute a “multiple-unit residential building" (MURB) within the purview of the Income Tax Regulations (the "Regulations"). A total of 58 condominium units were put up by Laidley in accordance with Article 3.01 of the agreement. It is common ground that the appellant had 6/58ths, roughly ten per cent, interest in the Project.

At all relevant times, the appellant was dealing at arm's length with Laidley. To the best of the appellant’s knowledge, the same type of agreement was entered into with the original owners of the other condominium units in the same Project. The appellant knew at the time that Laidley had been in the business of developing MURB Projects and that the person running the company was, in his view, an honest and competent businessman. The appellant had, a few years before, acquired an interest in another MURB and had therefore some familiarity with the type of agreement that is required for setting up such an investment vehicle. The Project contemplated by the agreement was completed some time in 1981.

At this point it is appropriate to study more fully certain clauses in this agreement. First of all, the Court was invited to consider certain definitions in the definition section, which is Article 1.01. Reference was made in particular to the following expressions and terms: "Arrangement of Financing Fee”, which definition embodies a reference to Article 4.01(b)(iii), "First Time Write-Offs", commonly known as soft costs, which includes eight specific elements, “Initial Rent-up Fee”, "Landscaping Fee", "Total Price", which is defined as meaning "the purchase price for the Land Unit plus the contract price for the development of the Project and the First Time Write-Offs", "Take-out Fee”, which refers to the fee charged by the Project Manager in consideration of its undertaking to assume all interest on all mortgages registered against the unit or units to be transferred to the appellant until the date of substantial completion of the Project.

In Article 4.01 it is provided, inter alia, as follows:

The parties hereto recognize and agree that the Owner is a developer of the Project and the Project Manager is acting as his agent for that purpose. The Owner hereby appoints the Project Manager to act as agent for the Owner and on behalf of the Owner to conduct and oversee all aspects of, and incur costs in connection with the financing, construction, and marketing of the Project.

Later on in this Article there is a description of the Project Manager's various functions and duties. Such duties and functions include "Construction Duties" and "Special Duties.” The latter expression, “Special Duties”, has in turn four components, which are: "Initial Rent-up Duties", "Take-out Duties", "Arrangement of Financing Duties” and “Landscaping Duties”. The scope of each of the four elements of the Special Duties to be carried out by the Project Manager is dealt with in some detail in paragraph (b) of Article 4.01 of the agreement.

Article 4.04 is also of some interest here. It reads thus:

The Project Manager agrees to use its best efforts to ensure that the Project qualifies as a “multiple-unit residential building” under any amendments that may be made to the Regulations under the Income Tax Act (Canada) pursuant to the proposal of the Finance Minister in his budget of October 28, 1980.

Article 5.01 sets out the prices for the two types of condominium units in the following terms:

The Total Price for each 2 bedroom condominium unit is $67,400. The Total Price for each 3 bedroom condominium unit is $71,900. The Total Price in all cases will be paid by the assumption of the unit mortgage or mortgages and by payment of the balance in cash as hereinafter provided.

Article 5.02 deals with the arrangements that are to be made by Laidley respecting the mortgages in the amount of 75 per cent of the purchase price relating to each 2-bedroom unit and with the times at which and manner in which the cash portion of the purchase price is to be paid. Article 5.03 deals with the same matters as Article 5.02 but in relation to each 3-bedroom condominium unit.

The evidence establishes that the appellant paid precisely the prices stipulated in Article 5.01 in respect of two types of condominium units that he bought, but not at the times set out in Articles 5.02 and 5.03. There was some negotiation about the dates of the various payments between Laidley and the appellant.

Article 5.05 of the agreement establishes an allocation of the total price to be paid for each type of condominium unit among the three constituent elements of that price in the following manner:

It is common ground that the appellant paid during the years in issue in relation to the first component described as “First Time Write-Offs" of the purchase price for the six condominium units a total sum of $90,480.

Article 7.04 is worth noting:

Nothing herein contained shall be nor shall it be deemed to create a partnership relationship, joint venture or association of any kind between the Owner or Owners and the Project Manager, and any right of ownership to property and assets shall be a separate, sole and individual right, and the Owners or any one Owner shall not be considered or deemed to be carrying on business with the Project Manager.

Counsel for the respondent also drew the attention of the Court to Article 8.01, which reads thus:

Since the provisions of the Income Tax Act (Canada) are complex and since the effect of such Act (including its effect in the event of the death of an Owner or the sale of a unit by an Owner) depends on the particular circumstances of each party, the Owner does hereby expressly acknowledge that the Project Manager has advised him to seek independent and professional advice on the tax consequences of an investment in a unit or units and shall not be responsible for any taxation consequences. Further, the Owner acknowledges that the Project Manager has made no representations or warranties as to the deductibility of any costs herein for income tax purposes.

Further information concerning this Project can be found in the following assumptions of fact made by the Minister of National Revenue in subparagraphs 6(a), 6(b) and 6(c) of the amended reply to the notice of appeal. These assumptions are couched in the following terms:

(a) the Arbour Glen Project cost $4,093,700, of which $3,693,597.86 was incurred on account of capital and $400,102.14 was incurred on account of current expenditures;

(b) the current expenditures of $400,102.14 consisted of the following expenses:

Interest	$103,760.63
Finance Fees	$152,138.83
Landscaping	$ 78,178.50
Rent-Up Fees	$ 44,970.00
Property Taxes	$ 16,857.18
Other	$ 4,196.00

(c) the Appellant has not established that any current expenditures were made by Laidley in the development of Arbour Glen other than those specified in paragraph 7(b) herein;

These assumptions in paragraphs 6(a), 6(b) and 6(c) of the amended reply to notice of appeal were not challenged by the appellant who simply said that he did not know about the total costs incurred by Laidley in carrying out this Project. Nor did he know about the breakdown of such costs between current expenses and capital expenditures. Laidley did not volunteer to give the appellant an accounting of these expenditures that he incurred in completing this Project, and the appellant had no right to demand such an accounting.

Counsel for the respondent submitted that the Minister of National Revenue was right in disallowing an amount of $30,192 out of a total sum of $90,480 because the appellant can only be entitled to deduct only 6/58ths (the fraction corresponding to his interest in the total Project) of the current expenditures incurred by Laidley which amounted to $400,102.14 out of the total costs of the Project. However, quite apart from the respondent's legal position that I have just outlined, the appellant was granted an additional deduction on revenue account of almost $20,000. In this connection it is worth reading paragraph 7 of the amended reply to the notice of appeal,

Notwithstanding that Laidley expended only $400,102.14 on current expenses, the respondent allocated from capital cost, as an additional deduction, on current account $184,185.00 to the Arbour Glen Project, thereby entitling the appellant to a further deduction of 6/58ths of $184,985.00.

The legal justification underpinning this additional deduction allowed to the appellant by the respondent was not explained. At first sight, this would appear to be arbitrary.

I cannot agree with the position adopted by the respondent. In my view, the issue here is not what portion of the total expenses incurred by Laidley in connection with this Project is on revenue account and what portion of Laidley's expenses represents capital expenditures. The taxpayer is not Laidley. What is relevant here is the nature of the payments or expenses for the purposes of the Act made or incurred by the appellant in the course of acquiring an undivided interest in the lands of the Project and title to the six condominium units. In this connection the evidence establishes that the appellant paid an amount of $90,480 in the years in question under Article 5.05 in respect of “First Time Write-Offs” in the course of acquiring the subject six condominium units. The respondent's assumptions reproduced earlier are aimed, in my view, at the wrong target and at another taxpayer.

The respondent has not made any assumption in the Amended Reply to Notice of Appeal that all or part of the expenses referred to in the first component of the purchase price described in paragraph (a) of Article 5.05 under the heading “First Time Write-Offs" are not expenses on revenue account. The “First Time Write-Offs" mentioned in paragraph (a) of Article 5.05 refers to "Special Duty Fees" and "Others". The phrase "Special Duties", as indicated earlier, is explained in some detail in paragraph (b) of Article 4.01 under the heading “Special Duties". The introductory portion of paragraph (b) of the latter Article reads as follows:

In consideration of the Initial Rent-up Fee, the Take-out Fee, the Arrangement of Financing Fee, and the Landscaping Fee, respectively, which fees form a portion of the First Time Write-Offs (which write-offs are part of the Contract Price as hereinafter set forth and are deemed to be earned by the Project Manager and payable by the Owner upon the execution of this agreement), the Project Manager covenants as follows: . . .

As appears from paragraph (b) of Article 4.01, the Project Manager agreed to perform certain types of duties for the account of the appellant. These duties are mentioned as being the “Initial Rent-up duties”, "Take-out Duties", "Arrangement of Financing Duties" and "Landscaping Duties". These types of duties to be performed by Laidley in respect of which "Special Duty Fees" were payable by the appellant involve four classes of expenses that have been considered by the respondent to be, as far as the appellant was concerned, expenses of a current nature. In effect, these expenses are described in paragraph 6(b) of the Amended Reply to Notice of Appeal, under the items "Finance Fees”, "Landscaping", “Rent-Up Fees" and “Interest”. The latter term, in my view, is equivalent to “Take-Out Fee" used in the agreement.

The "First Time Write-Offs" that make up the first component of the purchase price under Article 5.05 include, in addition to “Special Duty Fees", about which I have just commented, another item described as "Others". It would appear to refer to elements of the “First Time Write-Offs" other than the four elements covered by the “Special Duty Fees”, and it will be recalled that the “First Time Write-Offs" were defined in Article 1.01 as including eight elements. No evidence or discussion at the hearing of these appeals has centred on this second item of the First Time Write-Offs that is part of the first component of the purchase price.

It has not been suggested by Counsel for the respondent that some elements of “First Time Write-Offs" covered by the term "Others" in Article 5.05 could represent capital expenditures. Nor was there an assumption by the respondent or an allegation by him that the allocation of the total purchase price for each condominium unit, among these three elements, “First Time Write-Offs", "Construction and Purchase Price for Land", was not reasonable within the purview of section 68 of the Act.

The basic position of the respondent does not rest on the nature of particular types of expenditure that may have been incurred by the appellant, but rather on the point that the appellant can only claim its appropriate share of the current expenditures incurred by Laidley irrespective of the amount of current expenses that the appellant himself may have incurred. I have already indicated that in my view this is a wrong approach. The respondent's position is not improved either by the existence of an agency relationship created by the agreement dated December 12, 1980 between the appellant and Laidley. Counsel for the respondent added, in this connection, that the fraction of the costs on current account corresponding to the appellant's interest in the Project incurred by Laidley as agent of the appellant are the only costs, the deduction of which can be claimed by the appellant, because these were the only expenses on revenue account that were incurred by the appellant with respect to the completion of the Project. The short answer to this argument, as correctly pointed out by Counsel for the appellant, is that the key element in the matter is the total remuneration or compensation paid by the appellant himself to Laidley for the services included in the "First Time Write-Offs". This is the real measure and extent of the appellant's current expenditures relating to his interest in the Project. Nothing more, nothing less. The remuneration that the appellant agreed to pay for Laidley's services were in the nature of a fixed price arrangement for all services to be rendered by Laidley.

I therefore conclude that the appellant is entitled to the deduction of all expenses in issue that were disallowed by the respondent. The disallowed expenses amounted to $6,490 for the year 1980, $22,502 for the year 1981 and $1,200 for the year 1982. For these reasons the appeals are allowed with costs and the reassessments for the 1980, 1981 and 1982 taxation years are referred back to the respondent for reconsideration and reassessment on the basis that the appellant is entitled to the deduction in full of the expenses that were in issue in these appeals.

Appeals allowed.