William R Schultz v. Minister of National Revenue, [1979] CTC 2328, 79 DTC 279

Guy Tremblay:—This case was heard at Saskatoon, Saskatchewan, on October 12, 1978.

1. Point at Issue

The main point is whether the capital cost allowance can be claimed on a non-completed apartment building at the end of the 1975 taxation year.

2. Burden of Proof

The appellant has the burden of showing that the respondent’s assessment is not justified. This burden of proof is based not on a particular section of the Income Tax Act but on several judicial decisions, among them a decision of the Supreme Court of Canada rendered in R W S Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

3. The Facts

3.01 The appellant, as purchaser, entered into an agreement for sale dated September 17, 1975 with Mr Frank Remai and Mr Joseph Remai.

3.02 This agreement (Exhibit A-1) reads as follows:

BETWEEN:

FRANK REMAI and JOSEPH REMAI,

both of Saskatoon,

in the Province of Saskatchewan,

to each an undivided one-half interest,

— hereinafter called the Vendor OF THE FIRST PART,

and

WILLIAM SCHULTZ,

of the City of Saskatoon,

in the Province of Saskatchewan,

—hereinafter called the Purchaser OF THE SECOND PART.

WHEREAS the Vendor is constructing on land presently owned by them and hereinafter set forth an apartment building.

AND WHEREAS the Vendor has agreed to sell and the Purchaser has agreed to purchase the said apartment building including the land, building and equipment, as hereinafter set forth SUBJECT to the terms and conditions hereinafter set forth.

NOW THEREFORE THIS AGREEMENT WITNESSETH that in consideration of the premises and of the covenants of the parties hereto and hereinafter set forth IT IS MUTUALLY UNDERSTOOD AND AGREED AS FOLLOWS:

1. The Vendor hereby sells to the Purchaser and the Purchaser hereby purchases from the Vendor the Vendor’s apartment building with equipment as set forth in Schedule “A” hereto and the said land which may be more particularly described as follows:

Lot Ten (10) and the Westerly 83.04 feet in perpendicular width throughout of Lot Nine (9), in Block Six Hundred and Eighty-four (684), in the City of Saskatoon, in the Province of Saskatchewan, in the Dominion of Canada, according to a Plan of Record in the Land Titles Office for the Saskatoon Land Registration District as No. 71-S-05615,

hereinafter called ‘‘the said land’’.

2. The Purchaser shall be entitled to possession of the said land, building and equipment forthwith upon completion of the said apartment building and payment in full of the purchase price hereinafter referred to.

3. The Purchaser covenants and agrees to pay to the Vendor as consideration for the said sale the sum of $1,352,500 being the sum of $52,000 for the said land, $1,255,500 for the said building and $45,000 for the said equipment as set forth in the said Schedule “A” hereto. The purchase price above mentioned shall be paid at the City of Saskatoon, in the Province of Saskatchewan, or such other place or places as the Vendor may designate as follows:

(a) The sum of $10,000 upon the execution hereof by way of deposit.

(b) The sum of $177,500 on or before October 15, AD 1975.

(c) The balance of $1,165,000 by way of a first mortgage on the said land and building (hereinafter called the “said mortgage”).

4. The Vendor covenants and agrees to convey and assure or cause to be conveyed or assured to the Purchaser the said land with appurtenances as aforesaid by a transfer under The Land Titles Act, such transfer to be executed forthwith upon the completion of the said apartment building by the Vendor and advancement of the final advance except for seasonal holdback on the said mortgage and such transfer to be delivered to the Purchaser for registration at his expense.

5. The Vendor will:

(a) Provide all the materials and labour (including sub-trades) to perform all the work shown on the drawings and described in the specifications.

(b) Do and fulfill everything indicated by this Agreement; the specifications and the drawings.

6. The Vendor will complete the construction in acordance with CMHC approved plans and specifications relating thereto, reserving the right to minor deviations from CMHC approved plans and specifications, up to the stage of construction reached at the date of this Agreement.

7. It is agreed that the anticipated date of completion is March 1, 1976, and the Vendor will use their best and earnest endeavours to complete it by the said date; the Vendor shall not be liable for any damages due to delays.

8. This Agreement is subject to the following general conditions:

(a) Neither party to this agreement shall assign the same without written consent of the other.

(b) The Vendor shall assume the following costs where applicable:

(i) Mortgage insurance fee on NHA mortgage

(ii) NHA mortgage application fee

(iii) Legal costs and disbursements in connection with the preparation of transfer and mortgage

(iv) Costs of survey for loan purposes.

(c) The Purchaser will pay to the Vendor interest at 12% per annum on all overdue payments.

(d) The Vendor convenants and agrees to pay all municipal taxes to the date of possession or completion, whichever is earlier.

(e) The Vendor covenants and agrees to maintain and pay for fire insurance with standard supplemental risks endorsement totalling not less than 80% of the total value of the building to the date of possession or completion, whichever is earlier.

(f) The Purchaser covenants and agrees that from the date of possession or substantial completion, whichever is earlier, he will pay interest on so much of the purchase price as has not been received by the Vendor.

(g) The Purchaser will be entitled to occupancy of the said building

(i) Upon payment in full of the cash down to mortgage and all extras, tax and interest adjustments, and

(ii) On the issue of a written occupancy clearance.

(h) Changes in specifications and extras may be accepted by approved Change Order signed by both parties.

(i) It is agreed that in the case of discrepancies between the plans and specifications, the specifications will govern.

(j) If the Purchaser fails to make any payments as required of him hereunder or is dissatisfied in any way with the performance by the Vendor of his obligations hereunder, the Vendor may, within a period of one year, at his option, cancel this Agreement and elect to refund to the Purchaser all monies paid hereunder without interest. It is agreed that the Purchaser shall execute all documents necessary to reconvey the property to the Vendor on receipt of refund of the monies aforesaid and the parties do hereby agree to execute such further documents as may be necessary to give effect hereto. For the purpose of this provision, payments made by the Vendor for taxes, interest and principal shall be considered as rental paid.

(k) It is further agreed that any materials necessary to complete the building which may not be available due to circumstances beyond the control of the Vendor may be substituted by materials of similar quality.

(l) It is further agreed that I, the undersigned Purchaser, in consideration of the Vendor conveying the title to the said property to me before the purchase price and/or contract price has been paid, do hereby irrevocably nominate, constitute and appoint JOSEPH A REMAI my true and lawful attorney in my name, place and stead to do, perform and execute all acts, deeds, matters and things including, without restricting the generality of the foregoing, to receive, negotiate and endorse all cheques issued or to be issued by CMHC payable to me or to me and to any other person, firm or corporation as shall be requisite or by the attorney deemed expedient and necessary to fully secure payment to the Vendor of all money payable or to become payable on account of said mortgage ratifying and confirming and agreeing to ratify and confirm all and whatsoever our attorney shall do or cause to be done by virtue hereby and I do hereby order the solicitors acting for CMHC to deliver the said cheques to the Vendor.

9. The parties hereto covenant and agree with each other that they will at any and all times upon request, execute or cause to be executed, such further and other assignments, transfers and other documents and will do all the said actions as may be requisite or necessary to carry out the covenants and provisions of this agreement so as to give full effect thereto.

10. It is mutually understood and agreed by and between the parties hereto that this agreement and all covenants, agreements, undertakings and provisos shall be binding upon and shall enure to the benefit of the parties hereto and their heirs, executors, administrators and proper assigns.

11. Time shall be of the essence of this agreement.

IN WITNESS WHEREOF the parties hereto have hereunto set their hands and

seals the day and year first above written.

SCHEDULE“A”

70 24” Westinghouse fridges or equivalent—Gold or Avocado

70 24” Westinghouse ranges or equivalent—Gold or Avocado

6 Inglis commercial washers complete with coin boxes or equivalent

6 Inglis commercial dryers complete with coin boxes

70 Single speed charcoal type range hoods.

3.03 In execution of subparagraphs 3(a) and (b), the appellant has produced as Exhibit A-2 the following cheques:

3.04 The appellant produced as Exhibit A-3 a cheque to Joe and Frank Remai, dated November 3, 1975, in the amount of $10,000 with note “landscape” written on it. A receipt was also produced as Exhibit A-3 in the amount of $10,000 signed by Remai Construction Company (1971) Ltd with reference: “Landscaping payment—3170 & 3176 Laurier St”. In cross- examination, the appellant informed the Board that the landscaping was made during the spring of 1976.

3.05 As Exhibit R-1, a certified copy of Certificate of Title No 75-S-30742 was produced as establishing that the seventeenth day of November 1975, Mr Frank Remai and Mr Joe Remai were the owners of all lot 10 in block 684 in the City of Saskatoon, according to a Plan of Record in the Land Titles Office for the Saskatoon Land Registration District as Plan No 71-S-05615.

On the same document is written:

I certify the within to be a true and correct copy of Certificate of Title No 75-S-30742 of record in the Land Titles Office for the Saskatoon Land Registration District at Saskatoon, Saskatchewan, as at the registration of the last instrument on October 4, 1978 as No 78-S-38263.

(signed) Registrar.

3.06 Another certificate No 71-S-05616 T produced as exhibit R-2 certifies that the City of Saskatoon, on March 22, 1971, was the owner, among others, of lot 10 in Block 684 in the City of Saskatoon, according to a Plan of Record in the Land Titles Office for the Saskatoon Land Registration District as No 71-S-05615.

3.07 The construction was completed by the contractor and occupied by the appellant in June 1976.

3.08 In filing his return for the 1975 taxation year, the appellant claimed the capital cost allowance in the amount of $49,618 with regard to the incompleted building on December 31, 1975, and with regard to the equipment installed on the premises. The appellant also claimed $10,000 for landscaping.

3.09 By reassessment dated June 21, 1977, the respondent disallowed the said expenses.

3.10 On July 21,1977, the appellant filed a notice of objection to the respondent’s reassessment dated June 21, 1977. The latter on January 27, 1978, maintained the reassessment.

3.11 On April 19, 1978, the appellant lodged an appeal before the Tax Review Board.

4. Law—Jurisprudence—Comments

4.1 Law

The main sections of the new Act involved in the present case are paragraphs 20(1)(a) and 20(1)(aa), and subsection 1100(1) of the Income Tax Regulations.

4.2 Jurisprudence and Doctrine

The parties cited the following jurisprudence and doctrine:

a) by the appellant

1. Daniel Kimmel et al v MNR, [1976] CTC 443; 76 DTC 6259;

2. Church (1923), WWR 409 (SCC);

3. Halsbury’s Laws (3rd Edition) Vol 34, paragraph 484;

4. Butterworth’s—The Encyclopedia of Forms and Precedents (4th Edition) Vol 18, paragraph 550;

5. Di Castri, The Law of Vendor and Purchaser, chapter 1, page 6;

6. CED (Western), Vol 5A, paragraph 425;

7. Halsbury’s Laws (3rd Edition) Vol 11, paragraph 672;

8. Halsbury’s Laws (3rd Edition) Vol 34, paragraphs 491 and 493.

b) by the respondent

9. MNR v Wardean Drilling Limited, [1969] CTC 265; 69 DTC 5194;

10. Her Majesty the Queen v Henuset Bros Ltd (No 1), [1977] CTC 227; 77 DTC 5169;

11. 19 CED (Western) 479;

12. 19 CED (Western) 451.

4.3 Comments

4.3.1 Capital Cost Allowance on Building

It is the Board’s opinion that the appellant, according to the Common Law (and it is the same according to Civil Law, Province of Quebec) that the transfer of the property is at the date of the contract. In the present case, paragraph 1 is clear:

The Vendor hereby sells to the Purchaser and the Purchaser hereby purchases from the Vendor the Vendor’s apartment building with equipment as set forth in Schedule ‘A’ hereto and the said land .. .

However, is that transfer of the property sufficient so that the capital cost allowance can be applied? In the Board’s opinion, the application of the capital cost allowance implies by someone that he is not only to be the owner in equity of the property but also to have its legal possession. The notion of depreciation indeed is so closely related to the property itself that at least legal possession is required.

Judge Cattanach in the case MNR v Wardean Drilling Limited, [1969] CTC 265 at 271; 69 DTC 5194 at 5198, says:

As I have indicated above, it is my opinion that a purchaser has acquired assets of a class in Schedule B when title has passed, assuming that the assets exist at that time, or when the purchaser has all the incidents of title, such as possession, use and risk, although legal title may remain in the vendor as security for the purchase price as is the commercial practice under conditional sales agreements. In my view the foregoing is the proper test to determine the acquisition of property described in Schedule B to the Income Tax Regulations.

On that basis, the taxpayer was not entitled to capital cost allowance because a term of the agreement reads ‘title to pass and notes issued as at the date of shipment”. This clause indicated that the intention of the parties was that the taxpayer would acquire the property on the date of shipment which was after the end of the taxation year.

The same principle of Judge Cattanach quoted above was applied in the Henuset Bros Ltd (No 1) case cited above. In this case, the taxpayer was entitled to the capital cost allowance because he had gained the construction possession of the property of the 10 tractors, object of the deed, before the end of the year.

In the present case, it is not possible to have in fact and in law the possession of the building before its completion. The completion provided for March 1976 was in fact in June 1976 (paragraph 7 of the deed).

As indicated above, it is the Board’s opinion that the capital cost allowance must apply only when the taxpayer has the legal acquisition and legal possession of the property (moveable as equipment or immoveable as building).

The Board dismisses the appeal concerning the capital cost allowance.

4.3.2 Landscaping

It is obvious that the landscaping concerns the land. The legal property of the land was transferred in September 1975. The payment for the landscaping was made in November 1975 but the landscaping, according to the evidence, was done only during the spring of 1976 (paragraph 3.04 of the Facts).

What says paragraph 20(1)(aa) of the new Act?:

20.(1) Notwithstanding paragraphs 18(1)(a), (b) and (h), in computing a taxpayer’s income for a taxation year from a business 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:

(aa) Landscaping of grounds—an amount paid by the taxpayer in the year for the landscaping of grounds around a building or other structure of the taxpayer that is used by him primarily for the purpose of gaining or producing income therefrom or from a business.

It seems clear that the deduction is authorized only in the year the amount was paid. it is not clear, however, that the landscaping of the ground must be done the same year as the payment is done.

Consequently, the Board must allow the appeal concerning that point. The respondent’s argument to the effect that the landscaping of the grounds was part of the price of the deed does not change the Board’s decision. According to the evidence, the sum of $10,000 was paid for landscaping. The expense is especially provided for in paragraph 20(1)(aa). The deduction is allowed.

5. Conclusion

The appeal is allowed in part and the matter is referred back to the respondent for reassessment in acordance with the above reasons for judgment.

Appeal allowed in part.