Norman Baron v. Minister of National Revenue, [1972] CTC 2511, 72 DTC 1432

Roland St-Onge:—This appeal is from a reassessment made by the respondent in respect of the taxpayer’s 1968 taxation year.

In that year the appellant sold to the City of Ottawa his property situated at 281-283 York Street, Ottawa for the sum of $19,000 — the said property having been purchased for $5,400 in the year 1944.

In 1968 the capital cost of the buildings and additions thereto was $7,885.05. On December 31, 1967 the undepreciated capital cost was reported as $4,081.01.

When the property was sold in 1968 the appellant considered the total sale price of $19,000 to be solely in respect of the land whereas the respondent made the following apportionment:

(a) $ 7,220 for land

(b) 11,780 for buildings

$19,000

One of the respondent’s main allegations was that the appellant in 1968 could have received a gross rental income from the buildings of almost $3,000.

A professional appraiser of the City of Ottawa testified that the appellant’s property was acquired for the land alone and the house thereon was demolished nine months later; that the land value in the relevant district was between $1.70 and $2 a square foot, and if the City paid more for the property it was because of the presence of the buildings; that one of the methods of evaluating properties was the income approach.

In argument counsel for the appellant referred the Board, inter alia, to Emco Ltd v MNR, [1969] 1 Ex CR 241; [1968] CTC 457; 68 DTC 5311, to say that the appellant’s house had only a nuisance value because its demolition before transferring it to the City would have cost the appellant more money. There cannot be any comparison between the cost of demolition of the appellant’s buildings and those of Emco because the Emco buildings were so large that the cost had to be taken into consideration, whereas in the present appeal the cost was so nominal that it could not disturb the apportionment estimated by the respondent. According to the evidence adduced, the land value was between $1.70 and $2 a square foot (3,267 sq ft at $2 $6,534) and the City of Ottawa paid more because of the buildings which were yielding a gross rental income of almost $3,000 a year. Such evidence is sufficient to rule that the apportionment established by the respondent is not too far from reality.

To reach a decision in this appeal I prefer to rely on the Supreme Court judgment in Robert Adolphe Stanley v MNR, [1972] CTC 34; 72 DTC 6004, to conclude that, of the sum of $19,000 received by the appellant in the sale of his property to the City of Ottawa, at least the sum of $11,780 could reasonably be regarded as the proceeds of disposition of his depreciable property.

Consequently, the appeal is dismissed.

Appeal dismissed.

KATIE ESAR and REUBEN ESAR, Appellants,

and MINISTER OF NATIONAL REVENUE, Respondent.

Tax Review Board (Roland St-Onge, QC), July 10, 1972.

Carrying charges on unproductive real property.

The Minister disallowed the deduction of property taxes on an improved but unproductive property acquired by Katie Esar in 1955 and on vacant land in which Reuben Esar acquired a 25% interest in 1955. The latter property was transferred to a corporation in 1961 for shares that were later sold at a loss.

HELD:

The properties had not been acquired to earn income and the carrying charges were not deductible. Appeals dismissed.

P Vineberg, QC for the Appellant

J Potvin for the Respondent.

Roland St-Onge:—These appeals relate to the disallowance of what is referred to in the reassessment as “carrying charges on unproductive real property” with respect to the 1967, 1968 and 1969 taxation years.

There are two properties involved, both of which are located in the Parish of St Vincent de Paul, Province of Quebec: Lot 335 which was purchased in 1955 with a house thereon, and Lot 351 which was vacant land acquired in association with others.

Heard as a witness, Mrs Katie Esar explained that from 1955 to 1964 she rented the house on Lot 335 for about $40 a month, but upon cross-examination she had to admit that the rents were not reported as such in her returns because the rents received were always less than the expenses and only the difference between the rents and the expenses was reported in her financial statements. She testified that, because of the undesirable types of tenants, the house was demolished about the year 1964, but according to her returns for the years 1961 to 1967 the Minister disallowed the property taxes because there was no gross income shown for those years. She also testified that Lot 335 was acquired for the purpose of resale; that because the property taxes were very low at the beginning she did not care about deducting them but now that they are high she seeks their deduction; that Lot 335 was not acquired for personal use or to build thereon and, consequently, no architect was hired and no survey made.

On June 10, 1955 the other lot (351) was acquired by Max Esar, Reuben Esar and Julius Kugler for $80,000, $50,000 of which was to be paid in cash and the balance in five equal consecutive annual instalments (Exhibit A-1). The said purchase price was to be paid in proportions of 50% by Max Esar, 25% by Reuben Esar and 25% by Julius Kugler. To enable Mr Kugler to acquire his interest in the said property he negotiated a loan from the Dominion Bank in the sum of $15,000, which loan was guaranteed by Messrs Max and Reuben Esar. Meanwhile the property title was to be taken in the name of Max Esar alone with the right on the part of the said Reuben Esar at any time to obtain a conveyance to him of an undivided one-quarter interest in such property. The share of Julius Kugler was to be pledged in favour of Max and Reuben Esar to guarantee the due payment of the said bank loan of $15,000, and Julius Kugler would have no right to demand any title or deed for his one-quarter interest in the said property until the bank loan had been paid in full.

After that transaction the land was subdivided by the group. By a deed of transfer dated April 11, 1961, and filed as Exhibit A-2, Max Esar transferred to Reuben Esar and Katie Shapiro Esar an undivided one-quarter interest in Lot 351. Then on December 29, 1961, by deed of sale filed as Exhibit A-3, Max Esar, Reuben Esar and Katie Shapiro Esar sold to Bonjour Investment Corporation the said Lot 351 for the price of $160,000, $400 of which was paid forthwith. On the same day, by a deed of sale filed as Exhibit A-4, Bonjour Investment Corporation transferred to Eliteville Development Corporation 49 lots for. $49,000, on account of which the vendor received $500 cash. By virtue of this deed the purchaser had the right to obtain from the vendor release and mainlevée of its privileges, hypothecs and benefits of the resolutory clause with respect to any subdivision lot sold, on payment on account of the balance of price the sum of $1,000 for every such lot so released.

Mrs Katie Esar explained that in 1961 Eliteville Development Corporation carried on its business to the extent that Bonjour Investment Corporation received $4,000 for lots sold, but apparently this money served to pay the company expenses. Later on Eliteville Development Corporation did not pay and 20 lots were returned in payment of the debt. After this experience, Bonjour Investment Corporation entered into negotiation with Campeau Corporation and 113 lots were optioned in 1966. Campeau got into difficulties with by-laws, used two lots and let the option run out. In 1968 the City of Laval sued Bonjour Investment Corporation for taxes and finally a company bought the shares of Bonjour Investment Corporation for $100. The shareholders received nothing for the accounts receivable. Consequently, the appellant lost personally $19,900.

Counsel for the appellant argued that it is immaterial whether those lots were acquired for capital investment purposes, and in his verbal submissions he elaborated on the following paragraphs of the Notice of Appeal:

2. For the reasons set forth in the judgments in the Mettarlin and Morris cases before the Tax Appeal Board, these charges should have been allowed.

3. The expenses related primarily to interest and taxes on property and these are annual, recurrent expenses in connection with the holding of property acquired to earn income.

4, It is not necessary to trace any expense to a particular item of income, the whole as was established years ago in the judgment in Consolidated Textiles and the Minister of National Revenue.

5. The expenses, being of an annual, recurrent nature and being laid out to earn income, should be recognized as deductible.

All the above is true in law as long as the properties were acquired to earn income. According to the evidence adduced, I am convinced that Lots 335 and 351 located in the Parish of St Vincent de Paul were not acquired by the appellant to earn income.

For the years under appeal, even though Lot 335 was held by the appellant personally, it had become unproductive vacant land, whereas Lot 351 was not held by the appellant personally but by a corporation

— the Bonjour Development Corporation which had to pay the carrying charges.

Consequently, the expenses claimed in 1967, 1968 and 1969 with respect to Lot 335 were not laid out to earn income, and those claimed with respect to Lot 351 were incurred by a corporation and therefore cannot be claimed by the appellant personally.

The reasons for judgment in this case will also apply to the case of Reuben Esar.

For the reasons given, the appeals are dismissed.

Appeals dismissed.