Barry Derlago v. Minister of National Revenue, [1986] 2 CTC 2045, 86 DTC 1503

Goetz, T.C.J.:—The appellant is appealing his tax assessment for his 1980 taxation year. In 1966 he acquired residential property on West 27th Street, North Vancouver, B.C., with the intention, he says, of using the property for retirement purposes. In 1976 he subdivided the property and sold what was municipally known as 336 West 27th Street and declared a capital gain. He retained ownership of 338 West 27th Street on which was located an old house which he had rented out since 1966. In 1980 he evicted the tenant, tore down the house and built a new personal residence of about 2400 square feet in dimension. Revenue Canada has assessed him under subparagraph 45(1)(a)(ii) of the Income Tax Act, S.C. 1970-71-72, c. 63, as amended, on the basis that the purpose or use of the property changed in 1980.

The appellant is semi-retired and has lived since 1969 in a duplex which he owned and of which he rented out a half portion. In 1979 he sold the duplex and moved into an apartment. He maintains that in acquiring the property on West 27th Street in 1966, his sole purpose was to use the property for retirement purposes. In support of this contention, he called two witnesses, one of whom had been his brother's former girlfriend and who asserts that in 1965 the appellant told her that his purpose in buying the land was to build a retirement home. At this point in time the appellant was 40 years of age. A next-door neighbour, residing at 340 West 27th Street, testified that he tried to buy the appellant’s property in 1973 and in 1974, at a time when the property values in the area were increasing rapidly. The two attempts to purchase were purportedly turned down by the appellant and the reason given was that he wanted to build a house in which he would retire.

Counsel for the respondent produced real estate rental statements for the years 1976 to 1980 inclusive. These were taken, of course, from the appellant's tax returns for those years. The returns show that the appellant made a profit on the rental of the duplex and of 338 West 27th Street for the years 1976 to 1979 inclusive and the return for January 1980 related only to 338 West 27th Street wherein the appellant claimed a terminal loss for demolition of the old house.

The relevant provision of the Income Tax Act to be considered is subparagraph 45(1)(a)(ii) which reads as follows:

45. (1) For the purpose of this subdivision the following rules apply:

(a) where a taxpayer,

(ii) having acquired property for the purpose of gaining or producing income therefrom or for the purpose of gaining or producing income from a business, has commenced at a later time to use it for some other purpose,

he shall be deemed to have

(iii) disposed of it at that later time for proceeds equal to its fair market value at that later time, and

(iv) immediately thereafter reacquired it at a cost equal to that fair market value;

Counsel for the appellant contends that the acquisition of the property in 1966 was solely for the purpose of ultimately building a retirement home.

From 1966 to almost 1980 the appellant derived rental income from the property on which he paid tax. The position of the Minister is simply “that there was a deemed disposition of property on or about September 15,1980 due to the change in use of the property from rental property to principal residence”. The expressed intention of the appellant to acquire property for retirement purposes must stand against the objective fact of the use of the property for rental income. The actual use of the property belies the expressed intention of the appellant. The change in use of the property in 1980 from a property producing income to a personal residence brings the appellant's position clearly within the provisions of subparagraph 45(1 )(a)(ii) of the Act and the Minister's assessment thereunder was correct.

Counsel for the appellant suggested that if the Court found that there was a deemed disposition in 1980, the appellant would be entitled to a reserve under section 40 of the Act. On the other hand, counsel for the Minister contends that it is not a question of when proceeds would be received but rather it rests upon the question of when they were deemed to have been received. Taylor, T.C.J. in Hans Leib v. M.N.R., [1984] C.T.C. 2324; 84 D.T.C. 1302, says at 2326 and 1303, respectively:

It would seem to me that the fundamental assertion of the Minister in this matter — that deemed proceeds of disposition are no different than any other proceeds of disposition, for purposes of income tax — is patently correct.

and at 2327 and 1304 respectively:

. . . The fact that this taxpayer did not receive in "funds or other physical property" (mortgage, note, etc.), the proceeds of disposition in 1976 is not relevant to the determination of whether the deemed proceeds of disposition are taxable as a result of that transaction in 1976. They are so taxable.

The appeal is therefore dismissed.

Appeal dismissed.

Tax Court of Canada (Bonner, T.C.J.), June 11, 1986.

Income tax — Federal — Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72,

c. 63) — 40(1)(a)(i), 54(a)(i) — Sale of yacht — Calculation of capital gain — Adjusted

The taxpayer acquired a yacht in Florida in 1975. He embarked on a year-long voyage, which ended in Vancouver. He sold the yacht in 1979 and the Minister assessed a Capital gain. The taxpayer appealed the assesment on the grounds that the Minister had excluded certain expenditures in calculating the adjusted cost base of the yacht. These included the repair and replacement of the yacht’s transmissions and the refinishing of its exterior. At trial, the taxpayer’s representative argued that the vessel had been acquired for the purpose of resale at a profit. However, the taxpayer testified that he had acquired the yacht for personal enjoyment. Furthermore, the taxpayer sought to expand his claim to include three additional categories of costs: (1) pre-purchase and purchase trips to Florida; (2) supplies and equipment either consumed on the voyage or sold with the yacht; and (3) additional voyage expenses.

HELD:

The yacht was not acquired for the purpose of profitable resale. The profit realized was a Capital gain, which was properly computed under the special rules established by the Act, and not according to the rules that governed the computation of business or property income. The amounts expended to replace the transmission and refinish the exterior were not part of the yacht's capital cost; they were the cost of using the vessel for a pleasure cruise. Furthermore, the evidence did not support the taxpayer's contention that the refinishing cost was incurred “for the purpose of making the disposition" within the meaning of subparagraph 40(1)(a)(i). The purchase-trip costs and additional voyage expenses were similarly not part of the yacht's capital cost. The evidence did not establish that the amounts claimed in respect of supplies and equipment had not been allowed in the assessments. Appeal dismissed.

A. McKinney (Agent) for the appellant.

J. H. Kennedy for the respondent.

Bonner, T.C.J.:—This is an appeal from an assessment of income tax for the appellant's 1979 taxation year. Prior to 1975 the appellant resided in Vancouver. In 1975 he travelled to Florida where he bought a yacht. He and his wife then embarked on a voyage through the Caribbean to the Pacific by way of the Panama Canal and along the west coast of North America to Vancouver where they made their home. The voyage lasted for about a year. In 1979 the appellant sold the yacht. The respondent made the assessment now under appeal on the basis that the adjusted cost base of the yacht was $153,689.25 and that the appellant therefore realized a capital gain of $11,310.75 on the sale.

In this notice of appeal the appellant asserted that:

. . . after the boat returned to Canada and to put it in a more saleable condition we spent $5,000 refinishing the exterior and $6,000 to put in new transmissions.

It was his position that those expenditures formed part of the adjusted cost base.

The boat had twin motors and transmissions. During the voyage from Florida to Vancouver the transmissions were damaged. As a result it was necessary to replace one of them with a rebuilt unit and to make extensive and costly repairs to the other. The work was done after completion of the voyage.

With respect to the refinishing cost, the appellant testified that when purchased the yacht was six years old and after that period in the Florida sun the finish had reached 80 to 90 per cent of its life expectancy. He said that for that reason and in order to repair damage caused on the voyage from Florida to Vancouver he had the vessel refinished.

The evidence given by the witness Lanyon suggests that damage done to the finish during the voyage was rather severe. He referred to damage caused by spills of diesel oil, by rubbing against commercial refuelling docks, by tying down equipment by means of fasteners which penetrated the finish and, finally, by a dinghy which came loose, bounced around and broke through the finish. Thus, damage from use made a significant contribution to the need for the refinishing. I assume too that the new finish would have deteriorated, as finishes do, up to the time of sale.

The appellant’s representative argued that although the yacht was used for personal reasons,

. . . the prime purpose of buying the yacht in Florida and transporting it to Canada was to make a profit, therefore, the direct cost of transporting the yacht over and above personal use is part of the adjusted cost base.

She submitted further that:

... the adjusted cost base is the real cost to the taxpayer immediately before disposition which in fact includes all capital and transportation costs.

The first branch of the argument fails on at least two grounds. Firstly, it is inconsistent with the evidence. The appellant testified:

We went to Florida on the idea of staying out of the country for a year, making ourselves a non-resident, and bringing back a 50 foot Hatteras, and using it here and selling it, which we did. That’s basically it. At no time was it my intent to make any money out of it.

Secondly, the decision of the Federal Court of Appeal in Her Majesty The Queen v. Geoffrey Stirling, [1985] 1 C.T.C. 275; 85 D.T.C. 5199, is authority for the proposition that a capital gain is to be computed in accordance with the special rules laid down in the Income Tax Act and not according to the rules which govern the computation of income from a business or property. The ordinary meaning of the words .. the capital cost to him of the property .. to be found in the definition of the term “adjusted cost base” contained in subparagraph 54(a)(i) of the Income Tax Act does not encompass the cost of repairing or replacing or refurbishing parts of the property which have been worn or damaged or have deteriorated from use, misuse or the passage of time during the period of ownership. The amounts now in question, far from being part of the capital cost of the yacht, were quite simply part of the cost of using the yacht for a pleasure cruise.

The appellant's agent asserted as well that the refinishing cost was one made “.. . specifically for the purpose of making the disposition.” That claim rests, I assume, on subparagraph 40(1)(a)(i) of the Income Tax Act which permits the deduction in the computation of a taxpayer's gain for a taxation year from the disposition of any property of “.. . any outlays and expenses to the extent that they were made or incurred by him for the purpose of making the disposition.” The evidence does not support a finding that the refinishing work was done for the purpose required by subparagraph 40(1)(a)(i). This claim also fails.

At the hearing the appellant expanded his claim to encompass further costs falling into three categories. The first included the cost of a trip to Miami made prior to the purchase and with a view to determining whether a purchase was feasible, the cost of travelling to Miami to take delivery of the yacht and the cost of registering the yacht. None of these items, in my view, forms a part of the capital cost to the appellant of the property sold.

The second category included the amounts alleged to be the cost of supplies and equipment bought for or installed on the vessel after it was purchased and either consumed during the voyage or sold with the vessel in 1979. The appellant exhibited confusion when asked whether he had already been allowed deductions for the items included in this category. The respondent appended to his reply to notice of appeal a detailed listing of the costs which he assumed had formed part of the adjusted cost base of the property sold. In the absence of persuasive evidence that the amounts claimed were not allowed on assessment there is no basis for finding error in the assessment.

The final category is one described as “ADDITIONAL CLAIM FOR COST OF TRANSPORT”. It covers what is said to be a part of the cost of making the voyage from Florida to Vancouver. It includes wages paid to crew, offshore mooring costs, disposable fuel tanks and some repairs made as a result of damage which occurred during the course of the voyage. This claim fails for the reasons given previously with respect to the transmission repairs and refinishing costs.

For the foregoing reasons the appeal will be dismissed.

Appeal dismissed.