Fernand Daoust v. Minister of National Revenue, [1990] 2 CTC 2195, 90 DTC 1697

Lamarre Proulx, T.C.J. [Translation]:—This is an appeal from an assessment made by the respondent which denies the appellant the deduction of a sum of $55,239 in the calculation of his income for the 1983 taxation year.

The facts may be summarized as follows: In 1979, Mr. Fernand Daoust guaranteed to the Caisse d'entraide économique de Mont-Laurier a sum of $25,000 with regard to a loan made by the caisse to Mr. Germain Lachaine to purchase a lot from the appellant and thus enable him to build a restaurant, "Le Manège", on the said lot. The restaurant's business did not go well and on October 23,1981 the Caisse demanded that the appellant, as the guarantor, pay the sum of $25,000. For a variety of reasons, the appellant decided to purchase the lot and the restaurant for a sum which he considers to be above market value. As for the difference between the sum paid, i.e. $177,414.51, and what he considers to be the fair market value, he is claiming a deduction in the amount of $55,239 in the calculation of his income for the 1983 taxation year as an expense incurred to earn income from a business within the meaning of paragraph 18(1)(a) of the Income Tax Act.

The respondent states that he was correct in denying the appellant the deduction of the sum of $55,239 in the calculation of his income for the 1983 taxation year, given that the said sum represents a sum paid out or a payment in the form of capital within the meaning of paragraph 18(1)(b) of the Income Tax Act and whose deduction is prohibited by the said section.

The question, therefore, is to determine whether this sum was paid out in the form of income or capital.

The appellant advances two methods for attempting to justify the deduction of $55,239 as an expense incurred to earn a business income. One of these methods was to argue that he was the owner of the buildings in question since April 15, 1982 and not since June 10, 1983, the date shown on the sales contract entered into on lune 21, 1983, and that because of this fact certain elements of the purchase price should be deductible when calculating his income for the 1983 taxation year.

Following the call made by the Caisse to the appellant on October 23, 1981, demanding that he serve as guarantor, on April 15, 1982 the Caisse signed a promise to sell the lot, the buildings erected upon it and the furnishings that happened to be on the site on behalf of the appellant for a price payable in cash upon the signing of the sales contract and comprising the following amounts:

(i) $144,644.10

(ii) accrued interest beginning on March 16, 1982 on the balance of the loans granted by the caisse to the restaurant (Mr. Lachaine) to the date on which the sales contract was signed;

(iii) all paid expenses incurred by the promising vendor to the date on which the sales contract was signed.

This promise to sell was on condition that the caisse become owner of the said premises. According to Mr. Daoust, the bank considered him as the true owner beginning on April 15, 1982, and all the rest was only the settlement of an existing situation. By verbal agreement with the Caisse d'entraide économique de Mont-Laurier, the appellant undertook to henceforth administer the premises and to rent the premises in order to reduce the sum owed to the caisse. The caisse had itself be declared owner of the building by dation of payment under the terms of a judgment of the Superior Court, on April 30, 1982. For reasons connected to the failure of the Le Manège restaurant, particularly the seizure of equipment, the act of sale was passed only on June 21, 1983. With the notarized contract dated June 21, 1982, the Société d'entraide économique de Mont-Laurier sold the building to the appellant for the sum of $177,414.51. One of the clauses of the sales contract provides that the purchaser shall become owner of the said building and shall take retroactive possession beginning on June 10, 1983.

In the deed of sale, it is mentioned that the value of the transaction is $177,414.51. In contrast to the promise to sell, there is no break-down in the sale price.

The appellant presented to the Court a declaration made before a notary by the Société d'entraide et d'etablissement du Québec Inc. and Mr. Fernand Daoust "in order to avoid any confusion or ambiguity in the interpretation of the sales contract" and is dated December 2, 1988. This document says that:

(a) The parties always intended that Mr. Daoust become and be considered the owner of the said business capital following the date on the promise to sell mentioned above, i.e. April 15, 1982, and that therefore the act of sale should have read “with retroactive possession beginning on April 15, 1982 rather than June 10, 1983."

(b) With regard to the price shown on the said sales contract, i.e. $177,414.51, the parties declared that it served to pay all sums due in capital, interests, taxes, insurance and costs to the said Société d'Entraide et d'Etablissement du Quebec for two loans granted to Restaurant Le Manège Inc. and whose break-down is as follows:

Balance of mortgage capital owed by the Restaurant Le Manège
Inc. on April 15, 1982:	$122,175
accrued interest, costs, insurance and taxes on the loan
instruments to April 15, 1982:	$ 22,469
accrued interest, costs, insurance and taxes due from April 15,
1982 to June 21, 1983:	$ 32,770.51

Therefore, the said sale price of $177,414.51 should have been distributed as follows:

—building	$ 72,175
—equipment	$ 50,000
—accrued interest, taxes, insurance and charges	$ 55,239.51

Counsel for the Minister objected to the presentation of this document because one cannot contradict or vary the terms of a valid written instrument in accordance with section 1234 of the Civil Code: "Testimony cannot in any case be received to contradict or vary the terms of a valid written instrument."

The principle is not as absolute as the wording of section 1234 would lead one to believe at first sight. On this, see Léo Ducharme, Précis de la Preuve, 2nd edition, page 179:

[Translation]

Can the parties to a contract, in their relationships with third parties, contradict their own written instruments through the use of witnesses. The solution by Quebec courts seems to be to deny them recourse to evidence by witnesses, but in tax matters a different case law prevails before the federal courts.

Strictly speaking here we are not dealing with evidence by witnesses, and, in any case, to settle the litigation I do not need to decide whether this evidence may be adduced because in my opinion this instrument is without effect. On the one hand, with regard to the description of the amounts which were taken into consideration by the caisse in order to arrive at its sale price, it is in agreement with the evidence and does not contradict the Deed of sale. On the other hand, with regard to the part concerning the retroactiveness of Mr. Daoust's ownership, I I consider this instrument as without effect. It does not correspond to the real legal situation of the parties. With regard to the interest, costs, insurance and taxes, it was the caisse which was their creditor or debtor and at no time was it Mr. Daoust. With regard to this interest, insurance and taxes, Mr. Daoust never had the responsibility of an owner. The said instrument was prepared only for tax purposes and in no way changed the legal situation of the parties. Therefore, the first method invoked by the appellant to deduct the sums paid in excess cannot succeed. Paragraph 18(1)(a) of the Income Tax Act is clear: it is the taxpayer who has incurred or made the expenditure or the disbursement who can claimit as a deduction. The appellant was not this taxpayer. On this, see Sutson Ltd. v. M.N.R., 8 Tax A.B.C. 104; 53 D.T.C. 108. In addition, part of these expenses were incurred during the 1982 taxation year and here we are dealing with the 1983 taxation year.

The second method invoked by the appellant was explained by the appellant during the hearing as follows:

[Translation]

Why take so many costs into account. It is because I owned everything around that restaurant, and that had to hurt the whole business somewhat.

I said: I will pay a little more, I will pay higher costs and still get the lot in question so I can comply with the new municipal by-laws, because the municipality said: you need ninety-two feet (92'). On our lot we had only sixty feet (60’). That meant that if the building was destroyed by fire, absolutely nothing could be built on it.

I had land in front, at the back, on the side, and so I could say: O.K., I can do something with that. That is why I took the loss. That is why I said that I would consider this loss as a capital loss because I could never, never resell that building if people got to know it.

It is a small building measuring thirty by sixty (30 x 60) which comes to the figure of sixty thousand plus. At seventy thousand ($70,000), it is the very maximum because it had been built for a summer ice cream outlet, so as you can imagine it is not very warm during winter and, you know, it is not a first-class building, you can be sure of that.

In so far as the appellant paid too much for the building in question in order to protect the value of the surrounding lots which are his property and his business, I am of the opinion that the expense cannot be allowed since it is a sum disbursed as capital whose deduction is not allowed by paragraph 18(1)(b). It is not an expense resulting from the current operation of the business as is the case in Johns-Manville Canada Inc. v. The Queen, [1985] 2 S.C.R. 46; [1985] 2 C.T.C. 111; 85 D.T.C. 5373 where the lands acquired somehow disappeared as the depth of the mine increased and its surface entrance expanded. This was a sum paid for the acquisition of a permanent asset for the protection of other permanent assets. The loss, if there is a loss, must occur during the disposal of the lot or through capital cost allowance of depreciable property.

For the aforementioned reasons, the appeal is dismissed.

Appeal dismissed.