Aaron Shtabsky v. Minister of National Revenue, [1990] 2 CTC 2113, 90 DTC 1621

Taylor, T.C.J.:—These are appeals heard in Edmonton, Alberta, on May 15, 1990, against income tax assessments in which the Minister of National Revenue had disallowed deductions in the following amounts:

The foundation for the appeals, as described in the notice of appeal, was:

— At all relevant times the Appellant held, directly or indirectly, interests in a number of rental properties and other types of properties.

— In the years 1976 and 1977 the Appellant incurred expenses in connection with the establishment of a multiple unit residential building in Edmonton, Alberta known as the Lakeview Project.

— . . . the amounts paid to the City of Edmonton are deductible as property tax expense.

— . . . the amount paid to Stanmore Financial Corp. qualify as deductions pursuant to the provisions of paragraph 20(1)(e) of the Act since the amount was paid in the course of borrowing money used by the Appellant for the purpose of earning income from a business or property and Stanmore Financial Corp did not act as a salesman, agent or dealer in securities in the course of borrowing the money.

— Alternatively, the disallowed expenses are deductible as ordinary operating expenses which are deductible in computing the Appellant's profit for the year as set out in subsection 9(1) of the Act.

For the respondent, from the reply to the notice of appeal, the situation was:

— the $6,000.00 payment to Edgehill Investments Ltd. in 1976 was a payment to the vendor of the subject property contingent on the vendor accepting the Appellant's offer to purchase and formed part of the price of the subject land.

— the amount of $11,641.00 paid to Stanmore Financial Corporation was a commission or bonus paid on account of services rendered by Stanmore Financial Corpo ration as a salesman, agent or dealer in borrowing money on behalf of the Appellant.

— the deductions of $71,400.00 and $1,020.00 in 1976 and 1977 respectively were not paid for utilities service connections to the Appellant’s place of business.

— the deductions of $71,400.00 and $1,020.00 were in substance payments to the City of Edmonton for his proportional share of total subdivision for offsite servicing which were in place before the Appellant acquired the land, calculated as follows:

i)	Storm sewers (mains)	$ 52,849.00
ii)	Sanitary sewer	$ 12,399.00
iii)	Waterline	$ 10,994.00
iv)	Paving	$ 35,871.00
v) Street lights		$ 2,131.00
vi)	Concrete curbs & gutters	$ 14,958.00
vii) Power		$ 1,539.00
viii) Annexation		$ 2,437.00
ix)	Walkways and Sidewalks	$ 3,100.00
x) Administration		$ 2,374.00
xi) Collector road		$ 3,548.00
xii)	Campus charge	$	620.00
	Total 1976 land service costs	$142,820.00
	Total 1977 land service costs	$ 2,040.00
	Total land service costs	$144,860.00
	Appellant's share of total	$ 72,430.00

— the amounts of $71,400.00 and $1,020.00 were not for property taxes paid to the City of Edmonton in respect of land that was used in, or held in the course of, carrying on business by the taxpayer other than a business in the ordinary course of which land is held primarily for the purpose of resale or development nor in respect of land held primarily for the purpose of gaining or producing income of the taxpayer from the land for that year.

— the amounts of $71,400.00 and $1,020.00 were outlays on account of capital.

— The respondent relies, inter alia, upon Sections 9(1), 18(1)(a), 18(1)(b), 18(2)(b), (c) and (e), 20(1)(e)(iii) and 20(1)(ee) of the Income Tax Act, R.S.C. 1952, c. 148, as amended by S.C. 1970-71-72, c63, 5. 1, applicable to the 1976 and 1977 taxation years of the Appellant.”

Evidence

Mr. Aaron Shtabsky described his business interests during the years prior to 1976 and during the years in question. He was a lawyer by profession, but gradually he had withdrawn from that career as he became interested in real estate. In some situations he was in partnership with other individuals, and other activities were conducted under a corporate format. The basis of these operations which were quite extensive was the earning of income from rentals—hotels, motels and apartments. Shtabsky testified that as trustee he purchased for $450,140, 3.17 acres of property in the City of Edmonton from Edgehill Investments Ltd. (“Edgehill”) by an agreement of sale dated October 15, 1976, and accepted by Edgehill on October 29, 1976, calling for all arrangements to be completed by April 15, 1977 (Exhibit A-1, Tab 1). Edgehill was the corporate operating format for a Mr. Wayne Florence ("Florence"). Shtabsky, according to his testimony, was acting for himself and for a Mr. Maynard Vollan ("Vollan"). The 3.17 acres involved was part of a larger parcel of land, described for purposes of this hearing as "the remainder of Block F" as described in the Certificate of Title 77P250, shown on subdivision plan 5255NY (SW3-52-24W4th). The larger parcel of land was the subject of an agreement (Exhibit A-1, Tabs 5 and 6) between the City of Edmonton and a Mr. William Pankiw ("Pànkiw") referred to in the agreement as "the owner". The agreement dated January 5, 1976, among other things, contained the following clauses:

— The Owner hereby consents to the replotting of the said land in the manner shown on the plans attached hereto and marked Exhibits “A” and “B” respectively.

— The Owner agrees to pay a frontage charge not to exceed Nine Dollars ($9.00) in the Meyonohk neighbourhood and Six Dollars and Seventy Cents ($6.70) in the Tipaskan neighbourhood per assessable front foot, on all land obtained by him under the aforementioned replotting schemes, such charge is to cover the cost of surveying the subdivision and registering the plan of subdivision; purchasing additional land for public purposes, planning costs of the City, incurred in preparation of the said replotting scheme, and such other costs incurred by the City in the implementation of the replotting scheme.

— Proceedings for registration of the replotting scheme may be instituted at such time as the City shall see fit.

(a) The City will use its best endeavours to supply the new replotted lots with utilities and usual services but without liability for unexpected delays caused by budgetary impossibility or matters beyond the City’s control.

(b) If the City will supply the said land with trunk sewers, water mains, local improvements and other public utility installations, the cost thereof may be amortized over a three (3) year period, and same will be payable in three (3) equal portions with interest thereon at 9 /s percentum per annum, commencing on January 1st following the year of the completion of construction of the particular utility.

(C) Notwithstanding the provisions herein, the City shall have the right to refuse the issue of a development and/or building permit for construction upon any parcel of the land outlined in red on Exhibit "A" and “B”, until the local improvements amortized under subparagraph (b) herein are paid in full with respect to the parcel affected by the application.

The transfer document for the 3.17 acres was made directly from Pankiw to Vol Ian and Shtabsky in 1977 for a stated amount of $491,350. No explanation of the difference between $491,350 and $450,140 noted earlier in these reasons was forthcoming at the trial. An “Affidavit of Intervening Transferee” dated April 15, 1977, was attached to the transfer document above stating that Edgehill had purchased the said lands from Pankiw on October 27, 1976, for $491,350 and that the "present value” was $462,140 and that the said lands were transferred directly to Vollan and Shtabsky above. No adequate explanation for the difference between $462,140 above and the $450,140 in Exhibit A-1, Tab 1 above was provided at the trial.

Exhibit A-1, Tab 7 was an invoice from Edgehill, signed by Wayne Florence for Edgehill, in the amount of $12,000: "Development Fee concerning 3.17 acre R-3 site in Mill Woods legally described as; Lot 1 Block 21, Plan 762,1725." No adequate explanation was provided which would alter the appearance that this $12,000 could be the same as the $12,000 difference noted above between $462,140 and $450,140. I would note merely for the record—but I place no reliance on it—that a copy of a letter from Florence to Revenue Canada, Taxation dated December 10, 1981, indicated the $12,000 fee to Edgehill was some form of review for Shtabsky and Vollan of feasibility studies for the property and assistance in obtaining financing.

Exhibit A-1, Tabs 9, 10 and 11 dealt with the record of the payment to Stanmore Financial Coloration ("Stanmore"). Basically, Stanmore had succeeded in obtaining some form of Canada Mortgage and Housing Corporation ("CMHC") loan guarantee for development of the property in 1977 under some form of arrangement of Mr. Vollan. It should be noted that the development of the subject property which did occur after the events of interest in this appeal did not use the specific financing arranged by Stanmore but did use the CMHC guarantee.

It was agreed between the parties that there was no income per se from the land in question during either of the years under review and that construction of the rental units eventually built there was not completed until 1978 at the earliest.

Mr. Antal Konye who at the times relevant to these appeals was the solicitor for the City of Edmonton, testified that the amounts at issue were taxes and the amounts were correct.

Argument

Counsel for the appellant asserted that the other "rental" business of Shtabsky should serve as a business “base” from which allegedly the deductions at issue could be claimed. Counsel for the respondent did not agree that there was any relationship between these two aspects of Shtabsky's affairs for income tax purposes. Considerable effort was expended by counsel for the appellant in describing for the Court, using the City of Edmonton bylaws and the Alberta Municipal Act, that the amounts paid to the City of Edmonton were local improvement charges and which, as such, “in common law, is a property tax”. Counsel had not produced documentation in Court which would have shown the basis for any “local improvement frontage assessment" for the total block of land sold by Mr. Pankiw. There was no indication of the method of calculation of the amounts at issue as some portion of that larger amount which was probably a larger one. Counsel minimized these deficient areas and basically urged the Court to accept the testimony of Mr. Konye. Counsel for the respondent took the position that the amounts paid to the City of Edmonton could not be local improvement taxes, since, in his view, the bylaws and acts referred to did not provide the City of Edmonton with the authority to assess, impose and collect these amounts as taxes.

Analysis

On the “local improvement taxes" question above, I accept that there is considerable merit in the argument of counsel for the respondent—from a purely legalistic viewpoint. If this case was being heard in another forum, on another point—the legal rights of Edmonton to so assess and collect the amounts as taxes—counsel might be upheld. But that is not my problem. Based on the fact that the taxpayer paid and the City of Edmonton collected the amounts, whether legally or illegally, I am prepared to accept that they were local improvement taxes of some sort. I have been unable to reach a conclusion that the amounts can represent anything other than property taxes. In the circumstances of this case—there is no evidence to show any other characterization for them. But it is at that point my problem begins, not where it ends.

I would quote a portion from the judgment in Ward v. The Queen, [1988] 1 C.T.C. 336; 88 D.T.C. 6212 at pages 343-44 (D.T.C. 6217):

Carrying Charges

It is first necessary to set out, in an abbreviated version, subsection 18(2) of the Income Tax Act, R.S.C. 1952, c. 148 as it read at the relevant time:

. . in computing the taxpayer's income for a taxation year from a business or property, no deduction shall be made in respect of any amount paid . . . as . . .

(a) interest on borrowed money used to acquire land . . ., or

(b) property taxes . . .

if . . . the land cannot reasonably be considered to have been in that year,

(c) used in, or held in the course of, carrying on a business by the taxpayer other than a business in the ordinary course of which land is held primarily for the purpose of resale or development. . .

except to the extent that the taxpayers gross revenue, if any, from the land for that year exceeds the aggregate of all other amounts deducted in computing his income from the land for that year.

Thus, if the business activity of the plaintiff taxpayer, with respect to the land, was "a business in the ordinary course of which land is held primarily for the purpose of resale or development . . ." then the carrying charge limitations apply (the interest and tax expenses to be deducted from income cannot exceed the revenue received from the land during the year).

And I would also refer to Bauerle v. M.N.R., [1986] 1 C.T.C. 2175; 86 D.T.C. 1131 at page 2176-77 (D.T.C. 1133):

Effect must be given to all the words of paragraph 53(1)(h) of the Act.

When the legislature enacts a particular phrase in a statute the presumption is that it is saying something which has not been said immediately before. The rule that a meaning should, if possible, be given to every word in the statute implies that, unless there is good reason to the contrary, the words add something which would not be there if the words were left out. [Hill v. William Hill (Park Lane) Ltd., [1949] A.C. 530 at p. 546.]

The appellant's argument improperly ignores the words ”. . . by virtue of subsection 18(2) . . ." which operate to exclude from the addition to adjusted cost base called for by paragraph 53(1)(h) any property taxes which were previously paid, but were not deductible for some reason other than subsection 18(2). That subsection, as is clear from its words, has application only when property taxes are relevant to the computation of the taxpayer's income, whether from business or property. Such a computation is not made where, as here, the land in question was not used or held in connection with the generation of income, whether from business or from the property itself. The non-deductibility of the municipal taxes in question here rested not on subsection 18(2), but on the fact that the taxes did not form any part of the cost of earning income.

A critical aspect of the position of counsel for the appellant is that this venture of Shtabsky's (the purchase of the land and the claimed expense) represented just one more aspect of the total business operation of the appellant, in hotel and apartment building rentals. I am not at all sure that the rental operation of the appellant could necessarily qualify as a "business" under the income tax provisions, but even if that hurdle was overcome, I see no relationship between this particular venture and the larger sphere of Shtabsky's operations.

As I see it, the appellant was holding the land in question for development and according to the legislation and the case law above, the deduction of property taxes is limited to "the taxpayer's gross revenue, if any, from the land for that year. . .” (subsection 18(2)). But whether based on subsection 18(2) or some other part of the Income Tax Act ("Act") the amounts claimed as payment to the City of Edmonton are not deductible, there simply was no revenue from the land. The purchase and holding the land for development in this set of circumstances must stand on its own and be judged accordingly.

I turn now to the question of the payment of $6,000 to Edgehill, and $11,641 to Stanmore. To the respondent, the payment of $6,000 to Edgehill looks strangely like some form of finder's fee or commission in the purchase of the property by the appellant. There was nothing in the way of substantive evidence advanced which would clearly refute that perspective, and there was a high degree of uncertainty regarding not only the payment itself but the alleged adjustments in connection with permits, zoning, etc. I heard no convincing evidence that Edgehill (or Florence) provided anything in the way of services that could have merit as a currently deductible expense from this development. In fact, I am unaware of anything that Florence could have done that was not already done, or would not have been done within the acknowledged talents and experience of the appellant himself in this matter, including feasibility studies, arrangements with the municipality, or finding appropriate capital for investment in the project. I am satisfied that if the amount was even paid, and the Court has little verification of that, it was at best a payment on account of capital.

With regard to the payment of $11,641 to Stan more, the circumstances surrounding any possible obligation which the appellant might have felt to pay that amount to Stanmore are of questionable relationship to its eligibility for deduction under paragraph 20(1)(e) of the Act, as it then read, in any event. But even if arguably so eligible, the amount is clearly caught within the restrictions of subparagraph 20(1)(e)(iii) of the Act. At best it was a payment of some form of “bonus or commission on account of services rendered . . . as a salesman or agent . . . in the course of . . . borrowing the money". The amount of $11,641 is only one half of the total amount paid to Stanmore resulting from some understanding with Vollan for the services rendered. Mr. Shtabsky, in his testimony, did not divorce himself from the actions taken by Vollan in connection with this project.

As a final note I would recognize that counsel for the appellant did attempt to align all or some of the above under the more general “deductibility provisions" of the Act. In my view the objections to any deductibility I have noted above for the individual items are even more concisely evident when viewed in that more general context.

Summary

The reasons for and circumstances surrounding the above payments remain vague, even after the trial. Such payments, however, fall far short of qualifying for deductibility from any income source made known to the Court at the trial, as I understand the legislation and the case law. The appeals are dismissed.

Appeals dismissed.