Joseph Valevicius and Karl H Falk v. Minister of National Revenue, [1972] CTC 2490, 72 DTC 1407

A J Frost:—At the commencement of the hearing it was agreed by the parties that the appeals of Joseph Valevicius and Karl H Falk should be heard together on common evidence, as this was the most expeditious way to proceed. Two issues are involved, one of which does not concern Mr Falk while the other concerns both appellants. To clarify, we shall deal with each appeal separately. The appeals were heard at Hamilton, Ontario on November 23, 1971 by the Tax Appeal Board as it was then constituted.

The first appeal concerns Joseph Valevicius in respect of his 1967 taxation year wherein an amount of $8,250 was added to the income previously assessed on the ground that a benefit was conferred on him under subsection 8(1) of the Income Tax Act. Upon Notice of Objection duly signed and filed, the Minister of National Revenue reconsidered the assessment and confirmed it on March 10, 1971.

The appellant and his wife each owned a one-half interest in a building at 1051 Main Street in Hamilton, Ontario and leased the building to J Valevicius Limited (a company controlled by the appellant) for a period of five years. In 1967 Valevicius Limited made renovations to the building, including some structural changes, at a cost of $16,500. The dispute was partly resolved by counsel for the parties on the ground that the renovations to the building owned by the appellant and his wife and leased to Valevicius Limited, which renovations were paid for by the lessee, were of a lasting benefit and value to the owners and therefore the benefit conferred was income in the hands of the appellant by virtue of paragraph 8(1 )(c) of the Income Tax Act. Although counsel for the appellant in his argument agreed that on the facts a taxable benefit was conferred under subsection 8(1), nevertheless he contended that it was an open question as to when the said benefit was conferred. Work was commenced in 1966, and completed and paid for in 1967. An intervening tenancy, however, precluded any enjoyment of the conferred benefit until 1970 when the lease expired. The question is: Was the benefit conferred in 1967 or 1970?

In this instance the Board is bound by the decision reached in St- Germain v MNR, [1969] SCR 471; [1969] CTC 194; 69 DTC 5086, and, accordingly, concludes thai, since the building is owned by the appellant and his wife and not by J Valevicius Limited, the benefit con- ferred is taxable in the year the improvements were paid for. This appeal must therefore be dismissed.

In the second of the two appeals of Joseph Valevicius, the Minister added, by Notice of Reassessment, to his income for the 1968 taxation year the gain of $56,593.26 which he realized on the sale of a property known as the Pottruff farm, subject to revised capital cost allowances.

The appellant is a real estate manager for the Royal Trust Company. Prior to his appointment he was a realtor and mortgage broker, but did not trade in real estate for his own account. In 1958 he and a business associate, Mr Balys Kronas, inspected a number of farms in Saltfleet Township near the City of Hamilton, and jointly purchased two farms, namely, the 85-acre Rubinstein farm and the 46.88-acre Pottruff farm.

In 1962 the appellant and Kronas divided their realty holdings, Kronas taking the Rubinstein farm. Acreage considerations were disregarded in this division, as the appellant wanted the more picturesque Pottruff farm which had a creek and ravine running through it, and on which was located an old stone house in an attractive wooded setting. According to his evidence, the appellant intended to convert the stone house into a family country residence as soon as he could afford to do so. He obtained an estimate on refurbishing the house shortly after acquiring it, but did not proceed with his plans because of the cost. He rented the farm to help defray expenses, but clung to his idea of ultimate use.

In 1964 the appellant sold a one-half interest in the Pottruff farm to a friend, Karl H Falk, at cost price, on the understanding that the latter would erect a residence on the site. According to the evidence adduced, neither the appellant nor Falk offered or listed their interest in the farm for sale. The appellant held his interest for nine years.

In 1967 an offer was received from B Kronas Limited on behalf of Jon-Enco Limited and accepted. It was indicated during negotiations that the ravine and creek running through the property was so situated that its acquisition was essential to the future development of the area and that the farm would likely have to be expropriated in order to install sewage equipment to assist in the development of a planned subdivision. The agent told the appellant and Falk the property would be immediately resold to the Ontario Housing Corporation for planning and development purposes.

In my opinion the appellant was not holding the Pottruff farm as a speculator. If he had been thinking in terms of resale, he would not likely have parted with his interest in the Rubinstein farm which had twice the acreage, and then subsequently have sold a one-half interest in the Pottruff farm to his friend Karl Falk at cost, making no profit on either transaction. The fact that the Pottruff farm later proved to be in the path of development is also a factor of some importance as it clearly indicates that the appellant and Falk could not have expected to retain their property indefinitely after learning of its possible expro priation. Under the circumstances, the doctrine of frustration is open and gives some weight to the appellant’s position. In my view, the appeal should be allowed.

The appeal of Karl H Falk is similar to the second Valevicius appeal and must be allowed for the same reasons as stated above.

Appeals allowed in part.