DR Arnold N Lane v. Minister of National Revenue, [1977] CTC 2264

Roland St-Onge (orally: March 24, 1977):—The appeal of Dr Arnold H Lane came before me on March 22, 1977 at the City of Victoria, British Columbia, and the question at issue is whether the recaptured capital cost allowance assessed by the respondent was properly included in the appellant's income within subsection 20(1) of the Income Tax Act, with respect to his 1971 taxation year.

The appellant was the owner of an undivided one-seventh interest in the assets of Meadowlark Court Syndicate, which assets comprised townhouses in Edmonton, Alberta.

On June 1, 1971 the appellant disposed of his interest in the said assets of Meadowlark Court Syndicate to Tri-A Developments Ltd for $159,427.

The respondent reassessed the appellant, adding recaptured capital cost allowance of $45,077 to his income, as being a disposition of an interest In a partnership. As a matter of fact, the appellant claimed $52,249 in respect of the said depreciated property for the 1967, 1968, 1969 and 1970 taxation years.

The undepreciated capital cost as at January 1, 1971 was $114,350 and the recaptured capital cost allowance was $45,077, or the difference between the undepreciated capital cost and the deemed proceeds of disposition.

Both parties agreed that the figures were not in dispute.

In his Notice of Appeal, the appellant contended that he did not dispose of depreciable property used in the business of a partnership.

The appellant testified that in 1966 he, together with six other individuals, acquired townhouses in different districts of Edmonton, under the name of Meadowlark Court Syndicate, and from time to time received dividends from the said syndicate. On June 1, 1971 the appellant sold his one-seventh interest in the assets of Meadowlark Court Syndicate, because he needed money to move from Edmonton to Victoria.

He received a down payment of $20,000 and $4,000 the second year, but thereafter the company Tri-A Developments Ltd ceased to make its payments. The appellant went to see a lawyer, who told him Tri-A Developments Ltd was only a shell company, and that he would be better off by accepting, as a settlement, the sum of $6,000.

Consequently, the appellant received a total amount of some $30,000 for his one-seventh interest in the syndicate, the last payment being $6,000 in 1973.

Upon cross-examination, the appellant admitted that the sole asset of the syndicate, namely the townhouses, was registered in the name of the seven members; that the same members had been the owners of the townhouses from the inception of the syndicate, and that from 1967 to 1970 inclusive the appellant had claimed and had been allowed capital cost allowance for a total of $52,249.

Counsel for appellant referred the Board to paragraph 6(a) of the respondent’s reply, which mentions that the appellant’s sale of his interest constituted a disposition of an interest in a partnership. Then he asked the Board to apply paragraph 20(6)(j) of the Act, which reads as follows:

(j) where a taxpayer has disposed of an interest in a partnership, an amount equal to the part of the consideration for the disposition of the interest of the taxpayer in the partnership that can reasonably be regarded as being in relation to the interest of the taxpayer in the depreciable property of a class that was used in the business of the partnership shall be deemed to be proceeds of disposition of depreciable property of that class and the person who acquired the interest of the taxpayer in the partnership shall be deemed to have acquired an interest in property at a capital cost equal to that amount.

He argued that the appellant did not sell depreciable assets, but only an interest in the partnership, and that he did not receive income from a business but from property.

On the other hand, counsel for respondent argued that the townhouses were in the names of the seven members of the syndicate as owners, that from the inception of the syndicate the appellant claimed and received a deduction for capital cost allowance as owner in a proportion of one-seventh of the total assets, and that he sold his share for an amount in excess of the undepreciated capital cost of the said total assets.

It appears to me that paragraph 20(6)(j) was enacted for partnerships which were carrying on business with various classes of assets, and in which the partners had unequal interests therein.

In the case at bar, it is self-evident that the members of the group, regardless of the name, partnership or syndicate, were in fact the registered owners of the townhouses. The seven members of the syndicate are simply co-owners of townhouses for which they have claimed and obtained capital cost allowance from the date of the acquisition up to 1970, when the appellant sold his interest in the said townhouses.

I do not see why the Minister of National Revenue should not be allowed to recapture the amount of $45,077, especially when a taxpayer transferred his ownership in two townhouses for an amount in excess of the undepreciated capital cost of the said buildings.

In this appeal, the Board prefers to rely on subsection 20(1), rather than on paragraph 20(6)(j), which paragraph was enacted to supplement subsection 20(1) of the Income Tax Act.

Consequently, the appeal is dismissed.

Appeal dismissed.