Hilda M Costen v. Minister of National Revenue, [1972] CTC 2372, 72 DTC 1311

W O Davis:—This is an appeal from an assessment to income tax dated September 14, 1970 in respect of the year 1966. The appeal was heard at Toronto, Ontario in April 1971 by the Tax Appeal Board as it was then constituted.

At all material times the appellant was a partner in two partnerships carrying on business as Tanner Gardens and Beacon Hill Estates respectively. The other partners in Tanner Gardens were Mej’s Realty Limited, Leicester C Forster, and C Eleanor Forster. The other partners in Beacon Hill Estates were Mej’s Realty Limited, Leicester C Forster, C Eleanor Forster, James Kaufman, Leslie C Rylett and Edwin J Lowrey. The fiscal year for both Tanner Gardens and Beacon Hill Estates commenced November 1 and ended October 31 of each year.

There is little, if in fact any, lack of agreement between the parties with respect to the facts involved herein. The business operations of the aforesaid partnerships consisted of the purchase of undeveloped land, the preparation and registration of subdivision plans thereof and the sale of serviced residential lots to building contractors.

Tanner Gardens was the owner of 100 subdivided lots on Plan 584 known as Country Squire Estates, which plan of subdivision was registered under The Planning Act on December 28, 1965. Of the said 100 lots, agreements for the purchase and sale of 94 lots were entered into between the Tanner Gardens partnership and various builders prior to the date of registration of Plan 584 on December 28, 1965. Agreements for the purchase and sale of 5 lots were entered into in the month of January 1966 and for the remaining 1 lot in August 1966.

Beacon Hill Estates was the owner of 38 lots in Plan 593 which plan was registered under. The Planning Act on September 13, 1966. Agreements of purchase and sale were entered into between Beacon Hill Estates and various builders for 36 lots in the month of April 1966 and for the remaining 2 lots in the months of August and September 1966 prior to the registration of Plan 593.

Purchasers were allowed to take possession of lots purchased at any time after acceptance of the agreements of purchase and sale. In general the agreements of purchase and sale provided for a deposit of 10% of the purchase price which was to be held pending completion or other termination of the agreement and to be credited on account of the purchase price on closing.

A second instalment of 10% of the purchase price was payable upon installation by the vendor of storm sewers, sanitary sewers, water services and road bases. The balance of the purchase price was payable on the completion of the sale which under the terms of the offer to purchase was required to be completed on or before a specified date.

Under the terms of the offer to purchase, the purchaser was entitled to receive the title deed to each lot upon payment of the full price of such lot.

It is in evidence that the practice generally followed was that when a builder, who had agreed to purchase a building lot and had then made mortgage arrangements for necessary financing in order that he might build without delay, received the first draw on a mortgage he applied it against the balance owing on the purchase agreement and obtained his deed to the property without further delay. In these circumstances it was clear that in the case of both partnerships some deeds were granted in the fiscal year ended October 31, 1966 and some were granted in the fiscal period ended October 31, 1967.

It seems from the evidence that instead of recording sales on either a cash or an accrual basis it was attempted to allocate profits over a period of three years.

In assessing the appellant the Minister compiled a statement of the profits and losses of Tanner Gardens for the year ended October 31, 1966 bearing in mind that the partnership, as a land developer, was not entitled to compute its income on a cash basis but was required by the provisions of the Act to report the total of all amounts payable pursuant to the aforesaid agreements of purchase and sale in computing its income for the fiscal period from which amount it was then permitted to deduct a reasonable amount as a reserve in respect of that unpaid part of the amounts so included in the computation of income that could reasonably be regarded as being a portion of the profits from the sales. (See paragraph 85B(1)(d).) On this basis the Minister determined the net income of Tanner Gardens for its 1966 fiscal year from the sale of Plan 584 lots to be $36,820.15. After taking account of a minor adjustment which is not an issue herein, Tanner Gardens’ income for the year was finally established at $40,917.31. Of this amount $10,229.33 was allocated to the appellant as her share as a partner.

By the same process the Minister computed the income of the Beacon Hill Estates partnership for its 1966 fiscal period to be $20,- 243.99 after having made provision for a reserve under paragraph 85B(1)(d) of $22,543.32. Of the net income of $20,243.99 the amount of $3,372.50 was allocated to the appellant herein as her share of the partnership profits for the year. (See subsection 15(1) of the Act.)

The complaint of the appellant is that in computing income as he did, the Minister included as revenues of the two partnerships. unrealized gains represented by amounts that were neither received nor receivable during the year. The appellant contends that in so proceeding the Minister adopted accounting techniques at conflict with generally accepted accounting principles and which conflict with the provisions of the Income Tax Act. On this premise the appellant contends that when there are conditions precedent to the obligation of a prospective purchaser to take up and pay for property no portion of the purchase price for the said property constitutes an amount receivable by the vendor.

As an extension to this line of reason the appellant further contends that amounts payable under uncompleted contracts of purchase and sale to a vendor are not income for tax purposes. And to go still one step further, the appellant has submitted that the reserve as calculated has not been properly made under the provisions of section 85B of the Act as such reserve presupposes that amounts not, in fact, paid are deemed to be paid merely by having been evidenced by promissory notes.

As a further ground for challenging the said assessment this appellant has submitted that any purported agreement of purchase and sale made in contravention of section 26 of The Planning Act, RSO 1960, c 296 is void and of no legal effect and any amount purported to be payable thereunder by a prospective purchaser is not, in fact, a legally collectable amount by the vendor. Here it must be remembered that all contracts have been paid in full, deeds have been given and registered and the subdivisions developed.

The Minister’s position as set out in his Notification under section 58 of the Act is that the taxpayer’s incomes from the two referred to partnerships for the fiscal periods ended October 31, 1966 have been properly determined and taken into account in computing the taxpayer’s income in accordance with the provisions of sections 3 and 4; para (c) of subsection (1) of section 6; subsection (1) of section 15; and para (d) of subsection (1) of section 85B of the Act.

It may be convenient to quote the provisions of subsection 85B(1) of the Act that are of relevance herein, viz:

85B. (1) In computing the income of a taxpayer for a taxation year,

(b) every amount receivable in respect of property sold or services rendered in the course of the business in the year shall be included notwithstanding that the amount is not receivable until a subsequent year unless the method adopted by the taxpayer for computing income from the business and accepted for the purpose of this Part does not require him to include any amount receivable in computing his income for a taxation year unless it has been received in the year;

(d) where an amount has been included in computing the taxpayer’s income from the business for the year or for a previous year in respect of property sold in the course of the business and that amount or a part thereof is not receivable,

(ii) where the property sold is land, until a day that is after the end of the taxation year,

there may be deducted a reasonable amount as a reserve in respect of that part of the amount so included in computing the income that can reasonably be regarded as a portion of the profit from the sale;

The basic issue herein is whether the Minister, in assessing as he did, employed the proper method in computing the income of the two partnerships which were engaged in the business of land subdivision. The fact emerges from the evidence heard that in determining their incomes for their 1966 taxation years both partnerships treated the dates of sale for each individual lot as the date when the deed was delivered and the evidence has established that the deed was only given when the final payment on account of the purchase price had been received by the vendor. The position adopted by the Minister, and in my opinion rightly so, is that the date of sale should have been recorded as and when the offers to purchase were executed.

Viewing the evidence as a whole with respect to this aspect of the matter, I am of the opinion that the Minister has properly interpreted and applied the provisions of the Act in reassessing as he did. I can detect no error on the part of the Minister in his computation of income or in his computation of the reserve which he computed and allowed under the provisions of section 85B of the Act. A useful consideration of the basis for computing such a reserve may be found in the judgment of this Board re Makis Construction Limited v MNR, [19721 CTC 2082; 72 DTC 1101.

As a secondary ground of appeal the appellant submitted that the two subdivisions, Tanner Gardens and Beacon Hill Estates, were under subdivision control for the purposes of subsection 26(1) of The Planning Act, RSO 1960, c 296, when offers to purchase were made and accepted. Practically all of the offers to purchase in issue were made and accepted prior to the date of registration of the relevant plans of subdivision and, therefore, the lands covered were not described in accordance with, and were not within, a registered plan of subdivision as required by the said paragraph 26(1 )(a). It was further argued that all of the offers to purchase which were entered into prior to the date of registration of the relevant plans of subdivision were void and could not effect a sale of land.

Pursuing this line of argument, the appellant submitted that in the circumstances as stated the offers to purchase could not have created a situation in which it could be said that the subdivision lots had been “sold” for any purpose whatsoever and it could not therefore be said that there was any basis upon which the Minister might compute the income of the two partnerships under the provisions of subsection 85B(1) of the Income Tax Act.

At this point it is useful to reproduce the relevant terms of subsection 26(1) of The Planning Act, viz:

26. (1) The council of a municipality may by by-law designate any area within the municipality as an area of subdivision control and thereafter no person shall convey land in the area by way of a deed or transfer on any sale, or mortgage or charge land in the area, or enter into an agreement of sale and purchase of land in the area or enter into any agreement that has the effect of granting the use of or right in land in the area directly or by entitlement to renewal for a period of twenty-one years or more unless,

(a) the land is described in accordance with and is within a registered pian of subdivision;

(4) An agreement, conveyance, mortgage or charge made in contravention of this section or a predecessor thereof does not create or convey any interest in land, but this section does not affect an agreement entered into, subject to the express condition contained therein that such agreement is to be effective only if the provisions of this section are complied with.

Relying on this submission, the appellant argued that all of the offers to purchase which were entered into prior to the date of registration of the relevant plans of subdivision were void and could not effect a sale of land.

For the Minister it was argued that the provision of subsection 10(3) of The Planning Act, SO 1967, c 75, which came into force on June 15, 1967, negated the above submission. Subsection 10(3) referred to is as follows:

10. (3) The contravention, before this section comes into force, of section 26 of The Planning Act or a predecessor thereof or of a by-law passed under section 26 or a predecessor of section 26 or of an order made under clause b of subsection 1 of section 27 of The Planning Act or a predecessor thereof does not have and shall be deemed never to have had the effect of preventing the conveyance or creation of any interest in land, provided that this section does not affect the rights acquired by any person from a judg- ment or order of any court given or made in any litigation or proceedings commenced on or before the day this section comes into force.

The appellant takes the position that the relevant issue in this appeal is the determination of the timing of the income inclusion in respect of the transfers of subdivision lots and submits that the earliest date upon which the offers to purchase, made and accepted prior to the date of registration of the relevant plans of subdivision, could have become legally enforceable was. June 15, 1967. In support of this submission reference was made to Orsi et al v Norming et al, [1971] 3 OR 185.

The submission of the respondent, the Minister of National Revenue, was that on the facts of this matter subsection 10(3) of The Planning Act (supra) had the effect of validating the offers to purchase entered into by Beacon Hill Estates and Tanner Gardens before registration of the plans of subdivision. It was argued that the Ors/ case (supra) must be regarded as a decision turning on its own particular facts and cannot be taken to stand for the proposition that all executory contracts entered into with respect to land in an area of subdivision control without the consent under The Planning Act are illegal and void notwithstanding the enactment by the Ontario Legislature of subsection 10(3) of The Planning Act, 1967.

A reading of the judgment in the Ors/ case indicates that the action was for specific performance of an agreement of sale and a counterclaim by the defendants Baxter that a registered assignment of an agreement of purchase was of no effect in the circumstances. The Court refused to exercise its discretion and dismissed the action for specific performance of the agreement for purchase and sale because of the delays of the plaintiffs caused by their initial and continued refusal to accept the conditions imposed by the Committee of Adjustment and the change in position of the defendants.

The facts of the Orsi case in my opinion distinguish it from the facts at issue herein. It appears to follow from the ratio decidendi of the Orsi case that in refusing to grant specific performance the Court was not prepared to deprive innocent third parties of their vested interest in the land in question.

In this instant matter the parties, that is the vendors and purchasers, have all treated the agreements of purchase and sale as being valid. The purchasers were allowed to enter into possession and commence construction as soon as building permits could be obtained and most in fact did. The vendors diligently worked toward their goal of having all of the subdivision lots serviced as promptly as possible so that building permits could be issued without delay. The vendors obtained the necessary consent to register the plans of subdivision as soon as possible. The builders would not have begun construction or arranged their mortgage financing had they not been aware that the vendors were acting as they in fact were.

It was recognized in the Orsi case that a contract for the sale of land created an interest in land. Part of the amending legislation in subsection 10(3) of The Planning Amendment Act specifically deals with the existing situation herein as follows:

The contravention before this section comes into force, of section 26 of The Planning Act . . . does not have and shall be deemed never to have had the effect of preventing the conveyance or creation of any interest in land . . .

(The italics are mine.)

It was the submission of counsel for the respondent that to hold in the present matter that the effect of subsection 10(3) of The Planning Amendment Act was to validate the offers to purchase entered into by the vendors and purchasers herein would not lead to the injustice or absurdity envisaged by the Court in the Orsi case but rather was the precise result which the Legislature intended in enacting the amending legislation. With this submission I am in agreement.

All things considered, I am unable to see any grounds upon which this appeal can succeed. For the above reasons therefore this appeal IS dismissed.

Appeal dismissed.