John
B
Goetz:—This
is
an
appeal
by
the
appellant
with
respect
to
assessments
of
his
income
tax
liability
for
his
1974
and
1975
taxation
years,
whereby
the
respondent
reassessed
the
appellant’s
income
for
the
said
years
by
reducing
the
amount
of
capital
cost
allowance
claimed
as
a
deduction
from
income
by
$4,065
in
the
year
1974
and
$22,027
in
the
year
1975.
In
assessing
the
appellant,
the
respondent
relied,
inter
alia,
upon
sections
3,
4,
subsection
9(1),
paragraphs
18(1)
(a),
20(1)
(a)
and
section
67
of
the
Income
Tax
Act,
SC
1970-71-72,
3
63,
as
amended,
and
upon
section
1100
and
subsection
1100(14)
of
the
Income
Tax
Regulations.
The
respondent
maintains
that
under
subsection
1100(11)
of
the
Income
Tax
Regulations,
the
amount
of
the
deduction
in
respect
of
capital
cost
allowance
on
rental
property
is
limited
to
the
amount
of
income
earned
from
renting
or
leasing
rental
property
owned
by
him,
and
no
deduction
can
be
made
from
income
earned
from
other
sources.
Facts
Dr
Wylie
Verge
is
a
medical
doctor
having
graduated
from
Dalhousie
University
in
1935.
He
was
Vice-Chairman
of
the
Dartmouth
General.
He
was
co-chairman
of
the
fund
raising
committee
that
raised
$2,500,000
for
the
construction
of
the
new
Nova
Scotia
Hospital
across
the
period.
One
hundred
per
cent
of
his
practice
was
located
in
the
Dartmouth
General
area
and
he
has
a
habit
of
making
outside
calls
within
the
Dartmouth
area.
It
was
in
1970
that
the
new
hospital
was
proposed
and
his
office,
at
that
time,
would
be
located
approximately
11/2
miles
from
the
site
of
the
new
construction.
It
was
his
desire
in
early
1971
to
consolidate
his
office
and
practice
with
others
immediately
adjacent
to
the
proposed
hospital.
He
purchased
land
next
to
the
hospital
in
1972.
This
was
with
the
assistance
of
three
other
doctors
who
were
partners
and
it
was
the
appellant’s
wish
that
they,
plus
other
specialists
who
would
be
selected,
take
over
a
substantial
portion
of
the
building.
They
approached
drug
stores
and
banks
as
prospective
other
tenants.
Dr
Verge
found
that
once
having
purchased
the
property
it
would
have
cost
him
far
beyond
his
financial
means
and
as
a
result
he
approached
an
old
friend
who
was
in
the
rental
management
business
of
buildings,
who
acquired
80%
of
the
land
from
him
in
1973
for
$60,000.
This
left
the
appellant
holding
a
20%
ownership
in
the
property.
The
other
doctors
who
had
been
partners
with
him
relinquished
their
interest
and
were
paid
out
by
Joseph
Zatzman
who
was
the
one
knowledgeable
in
real
estate.
Zatzman
wanted
to
construct
a
much
larger
building
which
was
eventually
done.
No
certificate
of
title
was
filed.
The
respondent,
in
paragraph
3(b)
of
his
reply
to
notice
of
appeal,
alleged
that
“at
all
material
times
the
appellant
held
a
20%
interest
in
the
Dartmouth
Professional
Building”,
the
building
on
which
the
appellant
claims
a
capital
cost
allowance
in
1974
and
1974.
The
current
Dartmouth
Professional
Building
was
then
designed
and
constructed
and
the
appellant
and
his
colleagues
operated
under
the
name
“Dartmouth
Professional
Centre”.
The
whole
of
the
fifth
floor
was
occupied
by
medical
men
including
specialists
selected
and
invited
to
become
tenants
by
the
appellant.
There
are
also
dentists
and
physiotherapists.
In
the
years
1974
and
1975
the
building
was
under
construction
with
capital
cost
in
the
neighbourhood
of
$3,000,000.
No
money
was,
of
course,
derived
from
the
land
and
the
building
was
not
leased
and
as
yet
is
not
fully
leased.
Dr
Verge
says
that
he
retained
his
interest
so
that
he
would
be
able
to
maintain
an
office
in
close
proximity
to
the
new
hospital.
Zatzman
handled
all
financial
matters
and
Verge
moved
into
the
building
in
February
1976.
Dr
Verge
said
that
he
and
his
partners
paid
$48,000
for
the
land
originally,
having
to
borrow
money
to
make
that
purchase.
George
Murray,
a
chartered
accountant
who
acted
for
the
appellant
and
who
prepared
his
1974
and
1975
returns,
said
that
Zatzman
acquired
his
80%
interest
in
the
land
for
$60,000
but
he
does
not
know
how
the
appellant’s
20%
interest
in
the
land
was
arrived
at.
In
1973
title
to
the
property
was
registered
in
the
names
of
Zatzman
and
Verge
as
tenants
in
common.
He
states
unequivocally
that
the
capital
cost
allowance
of
$4,055
in
1974
was
arrived
at
while
the
only
gross
revenue
in
1974
was
$800
from
the
rental
of
an
old
house
which
was
still
on
the
land
and
destined
to
be
torn
down.
Capital
cost
allowance
claimed
of
$22,485
for
1975
was
also
claimed
by
the
accountant
in
the
appellant’s
tax
returns.
The
total
rental
from
the
old
house
which
was
still
there
in
1975,
was
$2,400.
The
capital
cost
allowance
was
taken
on
the
basis
of
20%
of
the
total
building.
The
sole
income
of
the
appellant
is
from
his
practice
of
medicine
and
he
has
not
acquired
any
revenue
from
the
building.
Findings
The
appellant
acquired
his
interest
in
the
property
ostensibly
for
the
sole
purpose
and
use
as
a
medical
facility,
close
to
the
hospital
and
securing
a
stable
flow
of
medical
patients
through
his
office.
In
the
relevant
years,
1974
and
1975,
the
building
could
not
be
used
for
the
purpose
of
earning
income.
Clearly,
the
building
is
a
rental
project.
Dr
Verge
pays
rent
for
the
use
of
his
area
of
the
building
in
which
he
practises
his
medical
profession.
Issue
The
relevant
sections
of
the
Income
Tax
Act
read
as
follows:
18.
(1)
In
computing
the
income
of
a
taxpayer
from
a
business
or
property
no
deduction
shall
be
made
in
respect
of
(a)
an
outlay
or
expense
except
to
the
extent
that
it
was
made
or
incurred
by
the
taxpayer
for
the
purpose
of
gaining
or
producing
income
from
the
business
Or
property;
20.
(1)
Notwithstanding
paragraphs
18(1)(a),
(b)
and
(h),
in
computing
a
taxpayer’s
income
for
a
taxation
year
from
a
business
or
or
property,
there
may
be
deducted
such
of
the
following
amounts
as
are
wholly
applicable
to
that
source
or
such
part
of
the
following
amounts
as
may
reasonably
be
regarded
as
applicable
thereto:
(a)
such
part
of
the
capital
cost
to
the
taxpayer
of
property,
or
such
amount
in
respect
of
the
capital
cost
to
the
taxpayer
of
property,
if
any,
as
is
allowed
by
regulation;
67.
In
computing
income,
no
deduction
shall
be
made
in
respect
of
an
outlay
or
expense
in
respect
of
which
any
amount
is
otherwise
deductible
under
this
Act,
except
to
the
extent
that
the
outlay
or
expense
was
reasonable
in
the
circumstances.
1100.
(11)
Notwithstanding
subsection
(1),
in
no
case
shall
the
aggregate
of
deductions,
each
of
which
is
a
deduction
in
respect
of
property
of
a
prescribed
class
owned
by
a
taxpayer
that
includes
rental
property
owned
by
him,
otherwise
allowed
to
the
taxpayer
by
virtue
of
subsection
(1)
in
computing
his
income
for
a
taxation
year,
exceed
the
amount,
if
any,
by
which,
(a)
the
aggregate
of
amounts
each
of
which
is
(i)
his
income
for
the
year
from
renting
or
leasing
a
rental
property
owned
by
him,
computed
without
regard
to
paragraph
20(1
)(a)
of
the
Act,
or
(ii)
the
income
of
a
partnership
for
the
year
from
renting
or
leasing
a
rental
property
of
the
partnership,
to
the
extent
of
the
taxpayer’s
share
of
such
income
exceeds
(b)
the
aggregate
of
amounts
each
of
which
is
(i)
his
loss
for
the
year
from
renting
or
leasing
a
rental
property
owned
by
him,
computed
without
regard
to
paragraph
20(1)(a)
of
the
Act,
or
(ii)
the
loss
of
a
partnership
for
the
year
from
renting
or
leasing
a
rental
property
of
the
partnership,
to
the
extent
of
the
taxpayer’s
share
of
such
loss.
1100.
(14)
For
the
purposes
of
this
section
and
section
1101,
“rental
property”
of
a
taxpayer
or
a
partnership
means
(a)
a
building
owned
by
the
taxpayer
or
partnership,
whether
jointly
with
another
person
or
otherwise,
.
.
.
if,
in
the
taxation
year
in
respect
of
which
the
expression
is
being
applied,
the
property
was
used
by
the
taxpayer
or
the
partnership
principally
for
the
purpose
of
gaining
or
producing
gross
revenue
that
is
rent,
but,
for
greater
certainty,
does
not
include
a
property
leased
by
the
taxpayer
or
the
partnership
to
a
lessee,
in
the
Ordinary
course
of
the
taxpayer’s
or
partnership’s
business
of
selling
goods
or
rendering
services,
under
an
agreement
by
which
the
lessee
undertakes
to
use
the
property
to
carry
on
the
business
of
selling
or
promoting
the
sale
of,
the
taxpayer’s
or
partnership’s
goods
or
services.
The
evidence
discloses
that
the
appellant
and
his
medical
colleagues
acquired
the
land
for
the
sole
purpose
of
constructing
their
offices
which
would
enable
them
to
operate
as
medical
practitioners
adjacent
to
the
existing
and
proposed
hospital
situtated
in
the
City
of
Dartmouth,
along
with
other
medical
and
associated
specialties
and
services.
The
gross
rental
income
from
the
little
house
on
the
property
in
1974
and
1975
is
insignificant
when
considered
with
the
gross
revenue
received
by
the
appellant
from
his
medical
practice.
The
evidence
indicates
that
as
a
form
of
investment
the
building
shows
a
rate
of
return
which
is
most
unfavourable
in
that
it
has
not
returned
a
profit
in
any
year
nor
is
it
likely
to
do
so
in
the
foreseeable
future.
The
following
two
cases
were
cited
to
me:
The
Canada
Trust
Company
v
MNR,
[1979]
CTC
2199;
79
DTC
177,
and
John
M
Turner
v
MNR,
[1975]
CTC
2198;
75
DTC
190,
which
I
find
particularly
appropriate
in
the
reasoning
and
application
to
this
case.
The
judgment
in
Turner
(supra)
was
delivered
by
the
former
Chairman
of
the
Board,
Judge
K
A
Flanigan,
QC.
At
that
time
Judge
Flanigan
indicated
that
subsection
(14)
of
Regulation
1100
was
fairly
new
and
surrounded
with
controversy.
I
quote
from
Judge
Flanigan’s
Judgment
at
2201
and
192
respectively:
The
crux
of
this
problem
lies
in
the
interpretation
of
the
words
of
that
clause
beginning
“If,
in
the
taxation
year
...
the
property
was
used
by
the
taxpayer
..
.
principally
for
the
purpose
of
gaining
or
producing
gross
revenue
that
is
rent”.
The
appellant’s
argument,
of
course,
is
that
the
principal
use
of
the
building
was
an
optometrist’s
office,
and
that
the
receipt
of
rental
income
was
a
secondary,
ancillary
or
auxiliary
part
of
the
main
or
principal
business
carried
on
in
the
building
and
in
no
way
could
it
be
said
that
the
principal
use
of
the
building
was
for
the
purpose
of
gaining
or
producing
gross
revenue
that
is
rent.
(Underlining
mine).
I
quote
fully
from
Judge
Flanigan’s
decision
at
2203
and
194
respectively:
I
am
satisfied
that
the
appellant,
exercising
sound
business
judgment,
decided
that,
in
order
to
profitably
operate
his
optometry
practice
in
this
prestige
location,
it
was
necessary
for
him
to
commission
the
construction
of
a
building
sufficiently
large
to
help
him
recover
a
major
part
of
the
cost
of
his
overhead,
and
that
this
was
foremost
in
his
mind
at
the
time
he
made
the
decision
to
build
the
building
in
question
not
only
to
provide
accommodation
for
himself
but
also,
hopefully
to
accommodate
therein
as
a
tenant
someone
in
a
related
business.
It
was
also
obvious
to
him
that,
in
addition
to
obtaining
this
desired
result,
it
would
be
necessary
for
him
to
rent
additional
space
to
unrelated
tenants.
This
may
have
been
only
an
unavoidable
sequel
of
the
overall
plan,
but
was
inevitable
in
order
to
alleviate
the
otherwise
too
heavy
cost
of
construction
in
this
expensive
location.
I
am
also
prepared
to
accept
the
appellant’s
statement
of
facts
to
mean
that
it
was
never
his
intention
to
invest
money
in
the
said
building
as
a
form
of
investment
in
rental
property,
but
that
he
considered
the
construction
of
the
building
and
the
rental
of
the
extra
space
therein
as
a
necessary
and
inevitable
condition
for
the
successful
operation
of
his
professional
business.
I
also
take
it
from
the
statements
of
both
parties
that
the
financial
success
of
the
appellant’s
business
in1972
proved
him
to
be
correct.
In
the
relevant
taxation
years,
1974
and
1975,
the
building
and
revenue
or
lack
thereof
fell
squarely
within
the
description
of
“rental
property”.
This
was
a
5-storey
building,
far
in
excess
of
the
purported
needs
of
the
appellant.
He
did
not
become
a
paying
tenant
until
1976.
Simply,
then
the
building
was
not
used
for
an
income
producing
purpose
in
the
relevant
taxation
years
and
the
appellant’s
major
interest
in
the
property
was
to
invest
money
in
the
form
of
investment
property.
The
building
was
constructed
and
used
principally
to
gain
investment
rental
income.
There
is
no
evidence
of
the
appellant
making
any
financial
contribution
to
the
capital
cost
of
the
building
eventually
constructed.
I
am
unable
to
follow
Judge
Flanigan’s
reasoning
in
light
of
the
facts
of
this
particular
case.
The
size
of
the
building
is
far
in
excess
of
the
avowed
wishes
of
the
appellant
to
use
a
comparatively
small
portion
there
for
the
dispensing
of
medical
services.
Furthermore,
during
the
relevant
taxation
years
the
building
was
a
mere
foundation.
When
the
appellant
did
move
into
the
building
in
1976
he
paid
rent
—
but
at
the
same
time
attempted
to
deduct
capital
cost
allowance
when
in
fact
he
played
no
part
in
the
capital
construction
of
the
building.
For
him
the
building
was
not
intended
for
the
purpose
of
earning
gross
income
that
is
rent.
Rental
income
such
as
it
was,
was
not
ancillary
to
his
basic
source
of
income,
namely,
the
practice
of
medicine.
Decision
For
the
above
reasons,
I
dismiss
the
appeal.
Appeal
dismissed.
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