Park Mobile Home Sales Ltd, Lawrence Stanley York v. Minister of National Revenue, [1983] CTC 2635, [1983] DTC 566

St-Onge, TCJ:—The appeals of Lawrence Stanley York and Park Mobile Home Sales Ltd came before me on June 23, 1983, in the City of Penticton, British Columbia and the issues are whether:

(1) Mr York realized a capital gain of $33,042.50 in 1973 on the sale of 50 shares of the appellant company, Park Mobile Home Sales Ltd;

(2) whether Mr York suffered a capital loss of $1,000 in 1973;

(3) whether the amount of $75,834.27 was expended by the company, Park Mobile Home Sales Ltd, or by the appellant, Mr York, in 1973;

(4) whether some deductions claimed by the company in respect of capital cost allowance were properly done.

The appellant company’s taxation years under appeal are 1974 and 1975.

The facts of these appeals are set down in Mr York’s reply to the notice of appeal at paragraphs 2 to 5 inclusive and in the amended reply to the notice of appeal in Park Mobile Home Sales Ltd at paragraphs 1 to 6 inclusive which read as follows:

2. Says in assessing the Appellant for 1973 he recomputed his reported income of $552.00 to add thereto a taxable capital gain of $36,792.50 realized on the sale of 50 shares of a Company called Park Mobile Homes Sales Ltd and to add as well a claimed capital loss of $1,000.00.

3. Says he reassessed the Appellant for 1973 on 1st March, 1978, to reduce the taxable capital gain on the sale of shares of Park Mobile Home Sales Ltd to $33,042.50 but left undisturbed his previous disallowance of the $1,000.00 capital loss, which the Appellant had claimed in his return of income.

4. Says in assessing the Appellant he assumed, inter alia, that the Appellant had not suffered any capital loss, any part of which was deductible in computing income for 1973.

5. Says with respect to the Notice of Appeal it has not been shown that all or any part of an alleged $60,000.00 expense plus interest which the Appellant claims has been charged as a development expense by a Company called Park Mobile Homes Sales Ltd should be allowed as an expense by the Appellant.

1. As the Notice of Appeal does not set out specifically the facts and grounds upon which the Appellant appeals in accordance with Rule 2(1 )(a) of the Tax Review Board Rules of Practice and Procedure, the Respondent, can only deny in general any facts as alleged.

2. In reply to the allegation that $75,834.27 of improvements has been disallowed, he says the amount of $75,834.27 was disallowed in the 1973 taxation year; and that the Appellant has not filed an appeal with respect to 1973, therefore it is submitted that this Honourable Board has no jurisdiction to adjudicate on any matter effecting the 1973 taxation year.

3. By Notice of Reassessment dated July 12, 1977 the Respondent revised certain deductions claimed by the Appellant in respect of capital cost allowance and expenses for the 1973 to 1975 taxation years.

4. The Appellant filed Notices of Objection on September 7, 1977 for the three taxation years.

5. On April 17, 1979 the Respondent confirmed the 1973 taxation year and varied the 1974 and 1975 taxation years with respect to capital cost allowance which is set out in Schedule 1 attached hereto.

6. Inso assessing the Appellant’s income for 1974 and 1975 he assumed, inter alia, as follows:

(a) In 1972 the Appellant acquired a lease of land from the Department of Indian Affairs and the West Bank Indian Band for the purpose of developing a mobile home park;

(b) the leasehold properties reclassified from Class 1 and Class 6 to Class 13 were not “structures” within the meaning of the Income Tax Act.

The Facts

Mr York was the supplier of all the mobile homes for a company called Trojan Developments Ltd (“Trojan”) in which company he had no shareholding. In 1971, he personally lent some $60,000 to Trojan and 60,000 shares of another company called Inland Empire Resource Ltd (“Inland”) were held in trust to guaranty the said loan.

On February 15, 1972, West-Kel Holdings Ltd (“West-Kel”) the lessor of Trojan, sent a letter to the latter saying that the lease would be terminated within 10 days of February 15, 1972. In fact, the lease was terminated and another lease between West-Kel and Park Mobile Home Sales Ltd (“Park Mobile”) was entered into on October 12, 1972 (Exhibits A-4 and A-5).

The lease was transferred from Trojan to Park Mobile with all the improvements (the sole asset was the lease or sublease). In another agreement between Mr York, Inland and Trojan, Mr Charles Satiacum paid $75,000 for 50% of the shares of Park Mobile to Mr York.

From December 15, 1971 up to January 19, 1973 no development took place.

Counsel for the appellants argued on two major issues:

(1) How to treat the amount of $75,834.27;

(2) in which class should the various assets be placed.

On the first issue, he stated that the amount should be treated as a shareholder loan of Larry York to Park Mobile and consequently, it should be considered as an asset carried over from Trojan to Park Mobile because the amount was used to develop the site by Trojan. He also explained that there was some continuity from Trojan to the books of Park Mobile and that West- Kel, the lessor, never benefited by clause 10 of the lease because it never became the owner of the improvement.

Mr York viewed the development assets as his and the “Santiacum Agreement” (Exhibit A-2) dated January 19, 1973 shows that the sole assets transferred to Park Mobile was a sublease identical to the lease between Trojan and West-Kel. In short, Mr York and the purchaser of 50% of the shares in Park Mobile considered the amount of $75,834.27 as belonging to park Mobile by virtue of Larry York placing the amount into the said company.

In the alternative, counsel submits that it should be considered as a capital loss.

On the second issue, counsel for the appellants submitted that the improvements have substantially changed the nature of the leased property which was raw land. Now it is a residential mobile home park with buildings, a pool, under ground wiring, septic tanks and plumbing, pads and various roads.

As to the first issue of $75,834.27, counsel for the respondent contends that the Court has no jurisdiction since the appellant, Park Mobile has never filed an appeal with respect to the 1973 taxation year. However, the Court can look to see whether or not the capital cost allowance as carried forward should perhaps be greater by that amount ($75,834.27). In that respect, the Minister answered in the negative since Park Mobile never paid anything for the assets nor had Mr York sold anything in setting up the shareholder loans.

Furthermore, the agreement dated December 15, 1971 shows an amount of $60,000 given by Mr York to a friend, Moe Young, who was the president of Trojan. There was no receipt or agreement or promissory note or provision for interest from Trojan to Mr York and the $15,834.27 was interest paid by Mr York personally to the Canadian Imperial Bank of Commerce for a loan of $60,000. This interest is a carrying charge that should have been deducted by Mr York in his 1969 to 1972 taxation years. It has nothing to do with the $60,000 advance to Trojan.

There was also a notice of default dated February 15, 1972 by West-Kel to Trojan and according to the lease all the improvements were to revert to the lessor if the lessee had not comply with the notice within 90 days of the expiration of the said lease. In other words, the improvements were to become the property of the lessor, West-Kel.

Counsel for the respondent also argued that the loan was not made for the purpose of earning income since there was no provision for payment of interest and consequently, according to subparagraph 40(2)(g)(ii) of the Income Tax Act, SC 1970-71-72, c 63, as amended, the capital cost is nil; that the continuity was broken when the lessee was in default and West-Kel granted a new lease in October, 1972 to Park Mobile.

As to the second issue, counsel for the respondent argued that all leasehold interest should be amortized over the period of the lease according to Class 13 unless excluded by Regulation 1102(5). Clause 10 of the lease between park Mobile and West-Kel says that Park Mobile is entitled to recover the building. Therefore, the Minister recognizing the so-called ownership concept gave the appellant the right to write off the office building, swimming pool, and other assets in Class 8 and Class 10. Clause 10 is the same in both leases and it states:

10. THAT at the expiration or other sooner determination of the said term, the Grantee will peaceably surrender and yield up unto the said Grantor the demised premises with all appurtenances, together with all the fixtures made by the Grantee thereon, in good and substantial repair and condition reasonable wear and tear and damage by fire, lightning and tempest only excepted; and further that the Grantee shall have the right to remove any buildings erected by it on the demised premises during the term hereof or within ninety (90) days after its expiration or termination; PROVIDED THAT if they are not so removed at the expiration of the said time, they will revert to and become property of the Grantor.

For this reason the Minister allowed the appellant a higher rate of capital cost allowance for the buildings at the surface but everything else was regarded as fixtures in the land and to be reverted to the grantor and therefore constitutes only a leasehold interest. Consequently, the Minister reclassified everything in Class 13 as leasehold interest amortized over the period of the lease. In other words, Park Mobile is never going to get that back at the end of the 45 years because it will go back to the owner of the land.

Judgment

In his argument counsel for the appellant dealt with two issues and consequently the Court will decide on these two issues only. Namely:

(1) How to treat the $75,834.27;

(2) the various classes.

On the first issue, the appeal is dismissed for the simple reason that there was no notice of appeal filed by the company for the 1973 taxation year and since Park Mobile never paid anything for the assets not did Mr York sell anything in setting up the shareholder loans, the capital cost allowance should not be enhanced by the amount of $75,834.27.

As to the capital cost allowance, the Minister confirmed the assessment with respect to the 1973 taxation year and, since there was no notice of appeal filed by the appellant company with respect to that year, the appeal for the 1973 taxation year is dismissed.

With respect to the 1974 and 1975 taxation years, the Court believes that the appellant company should be happy to have its buildings classified by taking into account the ownership concept which allowed the Minister to place them as he did in his Schedule 1 of the amended reply to the notice of appeal. This is not completely in conformity with the decision in The Queen v Mount Robson Motor Inn Limited, [1981] CTC 345; 81 DTC 5188.

Whereas the systems within the ground, such as water system, electrical system, sewer system are all fixtures in land to be reverted to the grantor at the end of the lease, they constitute only a leasehold interest for the appellant company and should be classified in Class 13 as leasehold interest to be amortized over the period of the lease. This reclassification is in conformity with the decision in Mount Robson Motor Inn Limited (supra) and I quote in part the reasons given by Mr Justice Pratte at 5190:

The law on the subject seems to be reasonably clear. When chattels are phsyically attached to land they may either retain their identity and remain chattels or become part of the land, in which case they are called fixtures. As fixtures are really part of the land once attached to the land, they become the property of the owner of the land; and this is true, as long as the articles remain attached to the land, whether or not the person who affixed them to the land has retained the power to sever and remove them.

For these reasons the appeals of Lawrence Stanley York and Park Mobile Home Sales Ltd are dismissed.

Appeals dismissed.