Estate of the Late Viola L Campbell v. Minister of National Revenue, [1983] CTC 2229, 83 DTC 197

Guy Tremblay:—This case was heard on July 14, 1982, at the City of St John’s, Newfoundland.

1. The Point at Issue

The point at issue is whether the appellant is correct in not including the recaptured capital cost allowance in the amount of $22,051 in the computation of its income for the 1979 taxation year.

2. The Burden of Proof

2.01 The burden is on the appellant to show that the respondent’s assessment is incorrect. This burden of proof results particularly from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

2.02 In the same judgment the Court decided that the assumed facts on which the respondent based the assessment or reassessment are also deemed to be correct. In the present case the assumed facts are described in the reply to notice of appeal as follows:

4. In so reassessing the Appellant’s income tax liability for her 1979 taxation year the Respondent relied, inter alia, upon the following assumptions of fact:

(a) The Appellant’s husband (Mr Alexander Campbell) died on October 27, 1941;

(b) The Appellant acquired the leasehold interest in the real property located at 350 Water Street in the City of St John’s, Newfoundland under her husband’s will for her life;

(c) On or about February 2, 1954 the Appellant purchased the freehold estate in the land and buildings located at 348 and 350 Water Street in the City of St John’s, Newfoundland;

(d) Since 1949 the Appellant has claimed a deduction for capital cost allowance on the building located at 350 Water Street;

(e) Since 1954 the Appellant has claimed a deduction for capital cost allowance on the building located at 348 Water Street;

(f) On June 27, 1979 the Appellant died and by operation of law was deemed to have disposed of her property; and

(g) As a result of the deemed disposition of her depreciable property referred to in paragraph 4(f) the Appellant recaptured capital cost allowance in the amount of $22,051.00.

3. The Facts

3.01 The only witness for the appellant was Mr Raymond J Connors, CA, a member of the firm Touche Ross & Co and co-executor and trustee of the last will of Mrs Viola Louise Campbell. He admitted the assumptions of fact described in subparagraphs (a), (b), (d), (f) and (g) of paragraph 4 of the reply to notice of appeal and denied subparagraphs (c) and (e) of the same paragraph, all of which facts are quoted above (paragraph 2.02).

3.02 The recapture of capital cost allowance which is involved in the present case concerns two buildings located on Water Street in the City of St John’s, Newfoundland.

3.03 The land on which the two buildings were built was originally owned by Arthur Frederick Holdsworth. Two separate leases were issued by the Holdsworth Estate to William Campbell.

(1) one for a piece of land located on Holdsworth Street, the lease being dated January 2, 1898, for a period of 22 Z? years and subsequently extended to 99 years for an annual rental of $50 (Exhibit A-1-5);

(2) the other one for a piece of land located on Water Street, the lease being dated August 1900 for a period of 99 years at an annual rental of $275 (Exhibit A-1-1).

3.04 The lessee, Mr William Campbell, pursuant to one requirement of the lease, built, before the end of August 1901, a building . . at a cost of four thousand dollars at least . . Also, as required by the lease, Mr Campbell and his heirs had to pay the taxes and . . to keep the said building and premises in good and substantial repair . .the ownership of the said building being to the lessor, Mr Holdsworth or his heirs, who could repossess the premises in case of non-payment, or at the end of the lease.

3.05 The leases continued, as outlined above, for many years with several sub-leases and arrangements being entered into, none of which are relevant except that the leasehold interest in 348 Water Street was ultimately acquired by one, Sterling. The result of the subdivision of the leases was that there was a parcel of land situated at 350 Water Street which contained the building erected by William Campbell, and a further parcel of land at 348 Water Street, the lease of which was transferred to Sterling.

3.06 Upon the death of William Campbell in 1935 (Exhibit A-1-2), the remaining leasehold interest in the Holdsworth Street lease and the remaining leasehold interest in the Water Street lease situated at 350 Water Street passed to Alexander Campbell (son of William Campbell and husband of Viola Campbell). Indeed, William gave to Alexander . . all right, title and goodwill, in the butcher business conducted by (him) on Water Street, together with the store and dwelling house thereon . .

3.07 Upon the death of Alexander Campbell in 1941 (Exhibit A-1-3), both leasehold interests passed to Viola Campbell as a life tenant and then to James Campbell and Patricia Dalton in equal shares. Subsequent to the death of Alexander Campbell, Mrs Viola Campbell, as the life tenant, made additions to the leasehold property of $10,337 in 1962 and $1,026 in 1972.

3.08 In Exhibit A-1-3 one can read:

I give and bequeath to my Wife, Viola L Campbell, all right title and goodwill in the Butcher business carried on by me at 350 Water Street under the name of WILLIAM CAMPBELL, together with Store, Dwelling thereon, furniture, fittings, etc.

Upon the death of my Wife it is to be understood that the above property and goods is to be divided as to ownership between my Son James and my Daughter Patricia.

3.09 In 1949, Newfoundland became a province of Canada and Mrs Viola Campbell commenced filing federal income tax returns. For reasons which are not now determinable, the undepreciated capital cost of the building situated at 350 Water Street was included in the tax return of Mrs Viola Campbell at that time. Capital cost allowances from that point in time were reported and claimed in the income tax return of Mrs Viola Campbell. The basis for the capital cost allowances was the value in 1949 plus the additions made subsequently by Mrs Viola Campbell.

3.10 In 1954, Mrs Viola Campbell purchased the freehold title to the land at 348 and 350 Water Street from the Holdsworth Estate (Exhibit A-1-5). The leasehold interest continued to be held by the Estate of Alexander Campbell. One can read in the purchase contract:

AND WHEREAS The vendor has agreed to sell to the vendee the freehold interest in the said land and premises NOW THIS INDENTURE WITNESSETH That in consideration of the sum of six thousand five hundred dollars paid by the vendee to the vendor on or before the execution of these presents the receipt whereof is hereby acknowledged the vendor as executrix as aforesaid doth hereby convey unto the vendee ALL THOSE Pieces or Parcels of land hereinbefore described To Hold the same (subject to the covenants and conditions in the said Indentures of lease) unto the vendee forever in fee simple.

3.11 Mrs Viola Campbell died in 1979. In her will (Exhibit A-1-4) one can read:

To transfer and convey all my interest in the Campbell premises situated No 350 Water Street, including the shop and land, to my said son, James Alexander Campbell, for his own use absolutely.

3.12 Upon the death of Mrs Viola Campbell, a terminal return was filed for her showing as recapture the capital cost allowances claimed on the additions made by her in 1962 and 1972. The balance of the recapture, which occurred as the result of the death of the life tenant, was reported in a T3 for the Estate of Alexander Campbell.

3.13 By notice of reassessment dated November 5, 1981, the respondent reassessed the appellant’s income tax liability for her 1979 taxation year by increasing the amount of recapture of capital cost allowance determined on the deemed disposition of a building by the amount of $15,511.

4. Law—Cases at Law—Analysis

4.01 Law

4.01.1 The main provisions of the Income Tax Act, SC 1970-71-72, c 63, as amended, involved in the present case are subsections 13(1), 70(5), 104(16) and paragraph 20(1 )(a). If it is required, those provisions shall be quoted in the analysis.

4.01.2 Counsel for both parties also referred to:

(a) The City of St John’s Act (consolidation 1952)

Section 2 — definition of “Building Lease”

“Building Lease” shall mean, with reference to leases made after August 2nd, 1921, a lease of a vacant piece of land on which the lessee covenants to erect a building or to pull down an old building and erect a new one on the site; and, with reference to leases made before August 2nd, 1921, shall mean a lease of a vacant piece of land on which the lessee or his assigns has erected a building or has pulled down an old building and erected a new one, and shall include any extension of an original lease whether the extension is expressed to be an extension or not of the said original lease.

Section 100

100. Every building lease of land within the City limits made after the 2nd day of August, 1921, shall, any clause or condition of such lease contained to the contrary notwithstanding, be subject to a condition that the lessee or his assigns shall at any time during the currency of the lease be entitled to purchase the freehold of the said land upon payment to the lessor or his assigns of a sum equal to twenty times the amount of the annual rental payable for the said land under the said lease.

Section 101

101.(a) Every such Building Lease made before August 2nd, 1921, shall, any clause or condition therein contained to the contrary notwithstanding, be subject to a condition that the lessee or his assigns shall during the currency of the lease have the right—

(i) to purchase the freehold of the land at its fair market value as if it were vacant land.

(b) The City of St John’s Act (consolidation 1970)

Section 113

113. Every building lease of land within the City limits made after the 2nd day of August, 1921, shall any clause or condition of such lease contained to the contrary notwithstanding, be subject to a condition that the lessee or his assigns shall at any time during the currency of the lease be entitled to purchase the freehold of the said land upon payment to the lessor or his assigns of a sum equal to twenty times the amount of the annual rental payable for the said land under the said lease.

Section 114

114. (1) Every such building lease made before August 2nd, 1921, shall, any clause or condition therein contained to the contrary notwithstanding, be subject to a condition that the lessee or his assigns shall during the currency of the lease have the right

(a) to purchase the freehold of the land at its fair market value as if it were vacant land;

(b) to obtain an extension of the lease for a period of ninety-nine years to commence and be computed from the end of the current term, at a fair annual rental for the freehold of the said land as if it were vacant land;

(c) if the lessee does not desire an extension of the lease and the lessor desires to repossess the premises, to be paid at the end of the term of the lease the then unexhausted value of the buildings and erections on the land; or

(d) if neither the lessor nor the lessee desires to renew the lease and the lessor does not desire to repossess the premises, to have the same sold by auction and the proceeds divided between the lessor and the lessee in such proportions that the lessor will receive the realized value of the land and the lessee will receive the realized value of the buildings thereon,

and it is hereby expressly declared that any of the above rights may be exercised by such lessee or his assigns, who is still in possession as lessee of property originally held by him or his predecessors in title under a building lease, notwithstanding that he or they may have obtained from the lessor a new lease or extension of lease since the 2nd day of August, 1921.

(2) The holder by assignment or otherwise of any subdivision of any land held under a head building lease shall have and enjoy with respect to such subdivision, and to the exclusion of any rights of the original lessee or his assigns thereover, the same rights to which the original lessee or his assigns are entitled with respect to the whole of such land under this and the next preceding section.

(3) A sub-lessee of any land held under a head building or of any subdivision of land so held shall be deemed to be an assignee of the original lessee for the purposes of this and the next preceding section, provided the term under such sub-lease is for the whole or substantially the whole of the balance of the term granted under the head building lease, and such sub-lessee shall have and enjoy with respect to such land or subdivision thereof and to the exclusion of any rights of the original lessee or his assigns thereover the same rights to which the original lessee or his assigns are entitled under this and the next preceding section, and the sub-lessor shall be deemed to hold the balance, if any, of the said term in trust for the sub-lessee.

(4) In any case where the original lessee or his assigns has obtained at any time subsequent to the 2nd day of August, 1921, an extension of lease or purchased the freehold of land held under a building lease, he or they upon demand shall assign and transfer to any assignee of a subdivision of the said land, or to any sub-lessee of the said land or subdivision thereof as defined in subsection (3) of this section, the full benefit and advantage of such extension or purchase, in so far as it affects the land held by such assignee or sub-lessee, upon and subject to the same terms and conditions as those upon which such extension of lease or purchase of freehold was acquired by the lessee or his assigns: Provided that, where the assignment or transfer relates to any subdivision of land, the rent or the purchase price payable shall be such proportion of the entire rent or purchase price paid by the original lessee or his assigns in respect of the whole of the said land as the area of the sub-division bears to the area of the whole land.

(5) The City of St John’s as assignee of any building lease of land within the City shall not, any clause, covenant or condition to the contrary contained in such lease, be subject to the performance or observance of any of the covenants or conditions contained in any such lease from the date upon which notice is given by the City to the lessor or his assigns of the desire of the City to exercise its right to purchase the freehold of the land comprised in such lease under the provisions of this section; and upon the giving of such notice the freehold of the said land shall vest in the Council and compensation for the said land shall be determined and payable to the owner in accordance with the provisions of this Act relating to building leases.

(c) The Leaseholds in St John’s Act (1977)

Section 2(1)

(a) “ancient lease” means a lease of vacant land within the City that was made before the 2nd day of August, 1921, on which land the lessee or his assign has erected a building or has pulled down an old building and erected another and includes any extension of an original lease whether the extension is expressed to be an extension or not of that original lease:

(h) “modern lease” means a lease of vacant land within the City that was made after the 1st day of August, 1921, and before the 1st day of June, 1977 on which land the lessee or his assign covenants to erect a building or to pull down an old building and erect another building, and includes any extension of an original lease whether the extension is expressed to be an extension or not of that original lease.

3. Notwithstanding any clause or condition to the contrary in the lease, every modern lease of land is subject to a condition that the lessee may at any time during the currency of the lease purchase the freehold in the land upon payment to the lessor of an amount of money equal to twenty times the amount of the annual rental payable for the land under the modern lease.

4. (1) Notwithstanding any clause or condition to the contrary in the lease, every ancient lease of land not being occupied for a commercial use is subject to a condition that the lessee

(a) may at any time during the currency of the lease purchase the freehold in the land upon payment to the lessor of an amount of money equal to forty times the amount of the annual rental payable for the land under the ancient lease; or

(b) may obtain an extension of the lease from time to time, for a period of years specified in each case to commence and be computed from the end of the current term, at a fair annual rental for the freehold in the land as if the land were vacant land.

5. (1) Every ancient lease of land that is being occupied for a commercial use is subject, notwithstanding any clause or condition to the contrary in the lease, to a condition that the lessee, during the currency of the lease, at his option

(a) may purchase the freehold land at its fair market value as if the land were vacant land;

(b) may obtain an extension of the lease for a period of ninety-nine years to commence and be computed from the end of the current term, at a fair annual rental for the freehold in the land as if the land were vacant land;

(c) may be paid, if the lessee does not desire an extension of the lease and the lessor desires to repossess the premises, at the end of the term of the lease the then unexhausted value of the building on the land; or

(d) may, if neither the lessor nor the lessee desires to renew the lease and the lessor does not desire to repossess the premises, have the land sold by auction and the proceeds divided between the lessor and the lessee in such proportions that the lessor will receive the realized value of the land and the lessee will receive the realized value of the buildings thereon.

4.02 Cases at Law

Counsel for both parties also referred to the following cases at law:

1. Louis Reitman v MNR, [1967] CTC 368; 67 DTC 5253;

2. Nathan Cohen and Hyman Zalkindv MNR, [1967] CTC 254; 67 DTC 5175;

3. Plan A Leasing Limited v The Queen, [1976] CTC 261; 76 DTC 6159;

4. Arthur Rudnikoff v The Queen, [1975] CTC 1; 75 DTC 5008;

5. Roywood Investments Limited v The Queen, [1981] CTC 206; 81 DTC 5148;

6. The Queen v Mount Robson Motor Inn Limited, [1981] CTC 345; 81 DTC 5188;

7. Jean-Pierre Lafontaine v MNR, 19 Tax ABC 330; 58 DTC 357;

8. Louis M Felsenthal v MNR, 33 Tax ABC 375; 63 DTC 892;

9. The Queen v Wilchar Construction Limited, [1979] CTC 117; 79 DTC 5086;

10. H Eric Feigelson et al v The Queen, [1973] CTC 17; 73 DTC 5056;

11. Bessemer Trust Co et al v MNR, [1972] CTC 473; 72 DTC 6404;

12. Hopgood v Brown, [1955] 1 All ER 550;

13. Maclaine v Gatty, [1921] 1 AC 376;

14. Greenwood v Martins Bank Limited, [1933] AC 51.

4.03 Analysis

4.03.1 In brief, the main contention of the appellant’s counsel is that from 1949 to 1979 Mrs Viola Campbell was not the owner of the building and therefore she was not authorized to deduct capital cost allowance; thus the recapture of capital cost allowance does not apply.

4.03.2 Counsel for the respondent contends that Mrs Campbell was the owner of the building from 1954 to 1979. Even if she were not the owner of the building, the fact that she claimed the capital cost allowance and that she has consistently represented to the respondent that she was the owner means she is estopped, for income tax purposes, from claiming that she was not the owner.

4.03.3 Counsel for the appellant contends that even after the purchase of the freehold interest in the land in 1954 (paragraph 3.10), the appellant was not the owner of the building. Indeed, counsel for the appellant referred to the different provisions of The City of St John’s Act (consolidation 1952), The City of St John’s Act (consolidation 1970) and of The Leaseholds in St John’s Act (1977), as they are quoted above in paragraph 4.01.2. Counsel for the appellant referred more precisely to subsection 5(1) of The Leaseholds in St John’s Act (1977) where it is stipulated that the lessee of a lease of land, including land and building on it, made before August 2, 1921, may purchase the freehold land at its fair market value as if the land were vacant land. Therefore, counsel for the appellant contends that when Mrs Campbell made the purchase in 1954, she was bound by this section and she could only buy the land. That was all she could buy.

In Newfoundland, it has been only since 1921 that the legislature recognized that the lessee (or his assigned) that constructed a building has been the one who owns the building, but the lessor owns the land and can sell it to the lessee later on.

The position of the Newfoundland law is similar to the Civil Code of Quebec on this point and is different from the common law position of the other provinces.

4.03.4 Counsel for the appellant referred to the Louis Reitman case, (Supra), where Mr Justice Dumoulin stated that, under the common law of Ontario, the appellant and his associate who had leased land and built a building on it were not owners of the building, therefore, they were not entitled to Class 3 Capital Cost Allowance, but were entitled to Class 13 because they had merely acquired a leasehold interest in the building.

However, Mr Justice Noel in the Cohen and Zalkind case (supra), stated that, according to the Civil Code of Quebec, articles 567 to 571, emphyteutic lease carried with it ownership, full and complete, of lands and buildings.

Mr Justice Gibson in the Plan A Leasing Ltd case (supra), stated:

In law, the title of lands and the title to the buildings on such lands can be conveyed separately when parties have made a special contract to do so.

and referred to Mr Justice Jackett in the Rudnikoff case (supra). In the said Rudnikoff case, the terms of the lease in question were not sufficiently clear and precise to separate the ownership of the building from the ownership of the land beneath it. The appellant was entitled to capital cost allowance of Class 13 only. The appeal was dismissed. In the Plan A Leasing Limited case (supra), the subject building was classified as a Class 3 asset because the documents conveying the building and assigning the lease unequivocally demonstrated that the company was to hold a freehold interest in the building.

In the Mount Robson Motor Inn Limited case (supra), the terms of the lease were not sufficiently clear and precise that building and improvement were to remain at all times the property of the taxpayer.

In the Lafontaine case (supra), and the Felsenthal case (supra), it was decided that the recapture of the capital cost allowance must be made against the official and registered owner of the building and not against the alleged co-owners without written agreement to confirm the ownership.

4.03.5 Board’s opinion (1954-1979)

The Board is surprised that counsel for both parties have not referred to the words of the contract of purchase made by Mrs Viola Campbell in 1954 (Exhibit A-1-5), which clearly stipulates that the building was also purchased by her:

AND WHEREAS The vendor has agreed to sell to the vendee the freehold interest in the said land and premises . ..

It seems clear to the Board that the word “premises” means building in these circumstances. Moreover, there is nothing in the Acts quoted above that prevents the owner from selling and somebody else from purchasing the said premises. Therefore, because it is clear and because of the decisions referred to above, the Board cannot arrive at any other conclusion but that Mrs Viola Campbell became the owner of the subject building in 1954. At least, since that purchase Mrs Campbell was entitled to claim capital cost allowance and the respondent to claim recapture.

4.03.6 Board’s opinion (1949-1954)

There is no doubt that when Newfoundland became a province of Canada in 1949 that Mrs Viola Campbell was not the owner of the building. However, as a new taxpayer of Canada, and despite the absence of ownership, she unduly claimed capital cost allowance for the subject building.

The main legal reason alleged by counsel for the respondent to base the recapture of the capital cost allowance is the estoppel by representation. Counsel for the respondent referred to “The Law Relating to Estoppel by Representation”, by George Spencer Bower, quoted four definitions of the estoppel by representation. The first one is one of the author which emerges from the doctrine from 1837 to 1932 (the author referred to 9 cases at law). Quoted in the first edition of his book, this definition was adopted by Mr Justice Evershed, MR in the Hopgood v Brown case (supra). This definition is as follows:

where one person (“the representor”) has made a representation to another person (“the representee”) in words or by acts or conduct, or (being under a duty to the representee to speak or act) by silence or inaction, with the intention (actual or presumptive), and with the result, of inducing the representee on the faith of such representation to alter his position to his detriment, the representor, in any litigation which may afterwards take place between him and the representee, is estopped, as against the representee, from making, or attempting to establish by evidence, any averment substantially at variance with his former representation, if the representee at the proper time, and in the proper manner, objects thereto.

Concerning the three other definitions, the author continues as follows:

Lord BIRKENHEAD succinctly states the essentials of the doctrine in Maclaine v Gatty as follows:

“Where A has by his words or conduct justified B in believing that a certain state of facts exists, and B has acted upon such belief to his prejudice, A is not permitted to affirm against B that a different state of facts existed at the same time. Whether one reads the case of Pickard v Sears, or the later classic authorities which have illustrated this topic, one will not, I think greatly vary or extend this simple definition of the doctrine.”

Again in Greenwood v Martins Bank Limited Lord TOMLIN defined the essential factors as (i) a representation or conduct amounting to a representation intended to induce a course of conduct on the part of the person to whom the representation is made; (ii) an act or omission resulting from the representation, whether actual or by conduct, by the person to whom the representation is made; (iii) detriment to such person as a consequence of the act or omission. In Nippon Menkwa Kabushiki Kaisha v Dawson’s Bank Ltd (1935), 51 LI L Rep 147, J C Lord RUSSELL OF KILLOWEN defines estoppel at p 151 as being “a rule of evidence which comes into operation if (a) a statement of the existence of a fact has been made by the defendant or an authorised agent of his to the plaintiff or someone on his behalf

(b) with the intention that the plaintiff should act upon the faith of the statement, and (c) the plaintiff does act upon the faith of the statement.

In the present case, it is admitted that Mrs Viola Campbell, in filing her income tax return pursuant to the Income Tax Act, made representations to the respondent that she was entitled to claim capital cost allowance and hence she was the owner. Moreover, it is on the faith of this statement that the respondent allowed the capital cost allowance.

In applying the Act in 1979, upon the death of Mrs Viola Campbell, the respondent was entitled to claim the recapture of the capital cost allowance. The appellant is estopped from arguing that she was not the owner of the building from 1949 to 1954, and therefore that the respondent cannot claim the recapture of the capital cost allowance.

Even if the appellant’s representations were made in good faith, the respondent acted on the said representations and allowed the capital cost allowance.

5. Conclusion

The appeal is dismissed in accordance with the above reasons for judgment.

Appeal dismissed.