Kimmel v. Minister of National Revenue, [1975] C.T.C. 2045, 75 D.T.C. 59

Roland St-Onge:

1 This appeal is from a reassessment dated May 10, 1973 with respect to the 1968 taxation year.

2 The appeal came before me on January 30, 1975 at the City of Ottawa, Ontario. At the hearing the parties agreed that the evidence and arguments in the present appeal would also apply to the appeals of Saul Leese, Arnold A Portigal, Morris Schachnow and Jack Rabinovitch.

3 The undisputed facts are as follows: Daniel Kimmel (the appellant), together with the above-mentioned appellants among others, through a personal corporation known as Gailburn Holdings Limited, purchased land with an apartment building thereon known as 1670 Kilborn Avenue in the City of Ottawa, from a corporation known as Peer Investments Limited. Apparently, the agreement of purchase and sale was to be closed as at December 15, 1968, but due to certain difficulties the transaction was not registered in favour of the purchasers in conformity with The Land Titles Act for the Province of Ontario until January 23, 1969.

4 The appellant says that he was, prior to the expiry of the year 1968, the owner in law or in equity of the building and was therefore entitled to deduct capital cost allowance for the 1968 taxation year whereas the respondent says that the appellant, by not being the registered owner in 1968, was not entitled to capital cost allowance for that year.

5 The appellant, a barrister and solicitor with experience in real estate transactions, explained that the building in question was purchased as an investment for the specific purpose of taking capital cost allowance for the 1968 taxation year and that the intention of the parties to the agreement was to close the agreement of purchase and sale on December 15, 1968.

• 1. The sum of $10,000 was to be paid to Glenview Realty (Ottawa) Limited, agent for the vendor, as a deposit to be held by it pending completion or other termination of this agreement and to be credited on account of purchase price on closing.

• 2. It was also provided that the purchaser would assume an existing first mortgage in favour of the Huron and Erie Mortgage Corporation in the amount of approximately $380,000 at an interest rate of not more than 71/2%, per annum, maturing on May 1, 1976, with monthly payments on account of principal and interest in the sum of $2,890 plus 1/12th of the annual taxes.

• 3. The vendor agreed to take back a second mortgage to be prepared by and at the expense of the purchaser in the amount of $50,000 at an interest rate of not more than 9% per annum, maturing on December 15, 1973, with monthly payments of interest only.

• 4. The balance of the purchase price was to be made by way of cash or certified cheque on closing, subject to the usual adjustments.

7 According to Exhibit A-2, Mr R Keith Sullivan of the City of Ottawa, Chartered Accountant, trustee, was registered in accordance with The Lands Title Act as owner in 1968.

8 The appellant was told that Mr Sullivan was holding the property as trustee for Peer Investments Limited and he never learned about the existence of a leaseback agreement.

• 1. $65,000 payable to Cwinn, Brodie, Solicitors, as a deposit to be held by them pending completion of the agreement.

• 2. The assumption of the two existing mortgages.

• (1) the purchaser shall lease back the lands and premises to the vendor, Peer Investments Limited and Bernard Karp and Murray A Heit, realtor and dentist respectively ... for a 5-year term from March 22, 1967;

• (2) the vendor shall have the privilege to renegotiate the said first mortgage;

• (3) the purchaser shall not be obligated to covenant for payment of the said mortgage and the vendor shall be responsible for all costs and expenses incidental to such renegotiations;

• (4) the vendor when not in default or arrears under the leaseback herein shall have the privilege to repurchase the lands and premises herein at the purchase price of $494,338.39 plus $8,000 by way of bonus at any time after the expiration of 6 months from March 23, 1967, upon payment to the purchaser herein of the said sum in cash less the then outstanding balance of the aforesaid mortgage or mortgages as the case may be, which said mortgages it shall assume provided, however, that such repayment shall be deemed to have been made as of March 23 of the following year to the intent that the purchaser herein shall have the full depreciation for the year in which such repurchase is made under this privilege;

• (5) during the said 5-year period the purchaser shall be entitled to take full depreciation on the buildings and lands and for this purpose the value of the land is hereby fixed at $42,000 and the buildings at $452,338.39.

• (1) the purchase price was to be reduced by the sum of $5,000;

• (2) all adjustments are to remain as of December 15, 1968;

• (3) it was mutually agreed to postpone the closing of the transaction to Friday, December 27, 1968, at which time Mr Brodie, acting for Peer Investments Limited, would be able to close the said transaction;

• (4) the purchasers now accept the statement of expenses as shown and that there would be no recourse against the vendors for any other discrepancies related thereto.

12 According to Exhibit A-4, these stipulations were accepted the same day by Peer Investments Limited under the signature of Bernard Karp.

13 The appellant testified that all the interested persons, except Mr Sullivan, were anxious to close the transaction before the end of 1968; that the documents were locked in a vault and that Mr Sullivan refused to close the transaction before the end of the year; that on December 21 and 22 he met with Mr Karp but the latter was unable to obtain the document; that all the necessary documents to effectuate the transfer of the property had been prepared and sent to the vendor's solicitor before the end of 1968; and that the purchaser was credited for 17 days of rent in December 1968 in the amount of $4,219.84.

14 The appellant also stated that the income and expenses statement having put the purchaser in the position of owner, he had to declare the rents as income in his 1968 income tax return, which rental income was accepted by the Minister.

15 He then filed an affidavit which was signed by Mr Sullivan as trustee to transfer to Peer Investments Limited the property under discussion for the consideration of $1. This affidavit was dated December 12, 1968.

16 Another letter filed as Exhibit A-9 shows that Peer Investments Limited did not consider itself the owner at the end of 1968 and agreed not to take any depreciation against the building and chattels for the 1968 taxation year.

17 It also appears that in 1968 Peer Investments Limited and not Sullivan was registered as owner on the insurance policy.

18 Upon cross-examination the appellant stated that on December 27, 1968 Mr Brodie, solicitor for Peer Investments Limited, had not yet returned to Ottawa; that on December 30 he had requested Mr Sullivan to have the documents but the later deferred the matter to December 31, on which date he refused to close the transaction because the documents were still locked up and not accessible.

19 On January 14, 1969 the appellant instituted proceedings against Peer Investments Limited but at that time the lawyer for the vendor, Mr Cwinn, had returned from his trip.

20 The appellant also testified that he could not understand why Mr Sullivan did not want to close the deal; that he had no knowledge of the existence of the leaseback; that he thought Mr Sullivan was only a trustee and that for all intents and purposes a transfer for $1 would corroborate the fact that Mr Sullivan was indeed acting as a trustee.

21 Mr Bernard Karp, a real estate broker, testified that he and Dr Murray Heit incorporated Peer Investments Limited to have an active investment company. In the spring of 1967 their company had two mortgages and was still in need of $65,000.

22 He went to see Mr Cwinn and obtained a loan of $65,000 at an interest rate of 10%. In order to obtain this loan he had to pay a fee of $10,000 to Mr Cwinn to arrange a leaseback, and a penalty of $8,000 in case the $65,000 was repaid prematurely after a period of 6 months; that he was to lose the right to claim capital cost allowance until the sum of $65,000 was repaid.

23 He also stated that Mr Cwinn was his contact and that he never saw Mr Sullivan or asked for his approval in any way, shape or form; that he was anxious to close the transaction before the end of 1968 but that he could not find his solicitor at that particular time; that the latter was aware that Peer Investments Limited had agreed to allow the appellant to claim the capital cost allowance for the 1968 taxation year; that in 1968 it was immaterial whether or not Peer Investments Limited took capital cost allowance because it was losing money.

• (1) December 15, 1968 was the closing date of the transaction;

• (2) the appellant received the rents and paid the expenses from December 17, 1968;

• (3) the transaction with Sullivan appears to be more in the nature of a loan than a sale transaction;

• (4) Sullivan was not registered as an owner on the insurance policy;

• (5) appellant was dealing with Peer Investments Limited and never with Sullivan;

• (6) according to the documents filed, it appears that Sullivan was receiving interest payments rather than rental income;

• (7) Sullivan did not have the administration of the building;

• (8) on January 23, 1969 the appellant became the registered owner of the building.

25 Counsel for the respondent argued that the appellant had no costs in 1968 for a building acquired in early 1969; that he had only a right ad rem and not in re to become the owner of the property in 1968 and consequently he could sue to obtain damages; that he could not sue to become the owner of the property in 1968 because Sullivan was the registered owner in that year.

26 According to the evidence adduced and the existing law in Ontario, there is a strong possibility that the appellant would have been recognized as owner at the end of 1968 because everything which was necessary to be done to sell the building to the appellant was done in that period. There was a meeting of consent between the vendor and the purchaser as to the transfer of the property for a certain price and on a certain date, the purchaser was to benefit from the capital cost allowance for 1968 and was to recover the rents and pay the expenses from December 17, 1968.

27 The fact that Mr Sullivan was the registered owner at the end of 1968 is immaterial in the circumstances because he was registered as a trustee and the appellant had every reason to believe that he was representing Peer Investments Limited.

28 Furthermore, on December 12, 1968, Mr Sullivan had already signed an affidavit for transferring the property to Peer Investments Limited for $1, which shows that prior to 1968 Peer Investments Limited was free to transfer the property to the appellant.

29 What transpired early in 1969 was merely to complete the transaction and to permit the signature and registration of certain documents to allow the appellant to become the registered owner and by the same token to comply with The Ontario Land Titles Act Regulation for the protection of third parties.

30 Between the principal parties to the agreement, namely Peer Investments Limited and Mr Kimmel et al, the sale transaction was completed at the end of 1968 and consequently the appellant should be allowed capital cost allowance for that year.

31 For the above reasons the appeal is allowed.