Gordon Glen Marshman v. Minister of National Revenue, [1978] CTC 2475, [1978] DTC 1350

The Chairman:—This is the appeal of Gordon Glenn Marshman from an income tax assessment dated August 3, 1976, confirmed by the Minister on January 4, 1977, by which the Minister included in computing the taxpayer’s income for the 1973 taxation year an amount of $5,620.54 as recapture of capital cost allowance pursuant to subsection 13(1) of the Income Tax Act, SC 1970-71-72, c 63, as amended and subsection 1101(1) of the Income Tax Regulations.

The pertinent section of the notice of appeal reads as follows:

The appellant owned a 55 acre farm in 1973 and agreed to rent the land and buildings to a neighbouring farmer. The buildings were used predominantly in connection with the rental agreement and therefore it is our submission on behalf of our client that the particular assets should be classed as rental assets and not as farming assets as submitted in the assessment.

In reply to the notice of appeal the respondent states:

A. STATEMENT OF FACTS:

1. In respect of the above-mentioned Notice of Appeal, the Respondent States that:

(a) he admits that Notice of Confirmation was sent to the Appellant by the Minister dated at Toronto, January 4, 1977, advising as to the confirmation of the assessment on the ground that ‘a recapture of capital cost allowance in the amount of $5,620.54 was properly included in computing the taxpayer’s income in accordance with the provisions of subsection 13(1) of the Act and subsection 1101(1) of the Income Tax Regulations’;

(b) he admits that the Appellant owned a farm in 1973 and rented a portion of the land;

(c) he does not admit any other allegations of fact contained therein.

2. The Appellant, in computing his income for the 1973 taxation year, did not include the amount of $5,620.54 as a result of recapture of capital cost allowance realized on the disposition of a rental property in 1973.

3. The Respondent, in computing the Appellant’s income for the 1973 taxation year, included the amount of $5,620.54 as a result of recapture of capital cost allowance realized on the disposition of a rental property in 1973.

4. The Respondent, in respect to the assessment of income tax for the Appellant’s 1973 taxation year, acted upon the following findings or assumptions of fact:

(a) the facts hereinbefore admitted;

(b) the Appellant, in 1973, disposed of a rental property located at 417 Byron Boulevard, London, Ontario;

(c) as a result of said disposition, the Appellant realized recapture of capital cost allowance in the amount of $5,620.54; calculated as follows:

Proceeds allocated to Class VI depreciable property:	$10,426.00
Less: Undepreciated capital cost Class VI depreciable
property:	$ 4,805.46
Recapture:	$ 5,620.54

(d) subsequently the Appellant, in 1973, purchased a 100 acre farm which included certain farm buildings;

(e) said farm buildings are also properly included within Class VI depreciable property;

(f) the Appellant, in 1973, rented 53 acres of said farm land;

(g) the Appellant, in 1973, used the remaining acreage and the farm buildings in the business of farming.

The Evidence:

The appellant testified that he disposed of rental property at 417 Byron Boulevard, London, Ontario, and had, on November 1, 1973, purchased a farm comprising 100 acres, two barns, one some 20’ x 40’ the other 38’ x 75’, a drive shed 20’ x 25’ and a silo. The appellant Stated that immediately after the purchase he had executed some repairs on the barns and shed and incurred an expense of some $2000.00. The evidence is that 54 acres of the land was leased by the appellant to a Mr Elliot at a price of $25.00 per acre in 1973, and $35.00 per acre in 1974 and 1975. No written contract was entered into by the appellant and Mr Elliot, the lease having been made as a result of an oral agreement between the parties.

In his evidence, Mr Elliot stated that he had, for several years prior to 1973, rented the land from the previous owner and continued doing so in the same fashion after the appellant became the new owner. Of the buildings on the land, Mr Elliot stated that he used a part of the shed to store his combine and the only discussion there was with the appellant in respect to the use of the buildings was to obtain permission to use part of the drive shed. One of the barns had a well in it and another well nearby. Mr Elliot admitted that he did use the water from the well inside the barn but that he did not need nor did he otherwise use either of the barns or the silo.

The shed in which Mr Elliot stored his combine was shared by other neighbours of the appellant who stored their farm equipment there also. The appellant admitted that there was no charge to the neighbours for such storage.

A lease dated September 1, 1975, between the appellant and a Mr Aubrey McCallum was introduced as Exhibit A-1. The lease, among other things, gave the lessee the right to occupy the barns and the silo and it was explained that the said lease was produced as a declaration of the appellant’s intention and could serve to indicate that the cost of the lease included the use of the barns even though it was calculated on an acreage basis.

Counsel for the appellant contends that the oral rental agreement between the appellant and Mr Elliot included the use of the buildings from which the appellant received rental income and therefore should be considered as rental assets and not farm assets or alternatively he submits that a portion of the value of the buildings estimated by Mr Woods, a chartered accountant and the appellant’s auditor, as being approximately $7,428.00 should be attributed to the shed used by Mr Elliot and an adjustment made in the amount of recapture of the capital cost allowance.

Counsel for the respondent, on the other hand, contends that the use of farm buildings by' Mr Elliot was not included in the lease agreement and that the buildings were not used to gain or produce income from property. He submits that the Byron Boulevard property, which was sold, and the said farm buildings form separate classes within the meaning of subsection 1101(1) of the Income Tax Regulations and that the recapture of capital cost allowance in the amount of $5,620.54 was properly included in the appellant’s income for 1973. Alternatively, counsel for the respondent submits that if the drive shed is to be considered as rental property, the adjustment in the recapture of capital cost allowance should reflect the value of only that part of the shed which was rented to and used by Mr Elliot.

On the basis of the evidence given by both the appellant and Mr Elliot it seems clear to me that the verbal lease agreement dealt exclusively with the lease of the land. Mr Elliot had no need for either of the barns as such. There is no evidence that any consideration was asked for Mr Elliot’s use of the drive shed and no amount was agreed to or paid for the use of the shed.

The lease agreement between the appellant and Mr McCallum, dated september 1, 1975, and produced as Exhibit A-1, has little pertinence to the instant issue. Even if one were to consider that lease agreement as an indication of the appellant’s intention it cannot, in my view, alter the facts and the circumstances that existed in 1973.

I conclude therefore that the appellant did not establish to the satisfaction of the Board that any of the said farm buildings were acquired or used in 1973 to produce income from property and consequently are not for the purpose of claiming capital cost allowance in the same class as the Byron Boulevard property. Therefore the recapture of capital cost allowance on the Byron Boulevard property in the amount of $5,620.54 was properly included in the appellant’s 1973 income.

The appeal must therefore be dismissed.

Appeal dismissed.