Duthie Estate v. MNR, 92 DTC 1043, [1992] 1 CTC 2099 (TCC)

Garon, T.C.C.J.:—In this case, the appellant appeals reassessments of income tax dated December 21, 1987, in respect of Dr. George Duthie for the 1981, 1982 and 1983 taxation years and a reassessment of income tax dated September 21, 1989, in respect of the 1984 taxation year, the year of Dr. Duthie's death.

In his income tax returns for the 1981, 1982 and 1983 taxation years, Dr. Duthie claimed the deduction of certain expenses in connection with the development of a certain property, which he considered to be business expenses. The deduction of similar expenses was made by the executors of Dr. Duthie's estate in the income tax return that was filed for the 1984 taxation year. Also, for the 1984 taxation year, the same executors claimed a business loss in the amount of $446,948 in respect of the deemed disposition of the same property pursuant to subsection 70(5.2) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

By the reassessments for the years 1981, 1982 and 1983, the respondent acted on the basis that no non-capital loss was available for carryback from 1984 since he assumed that no business loss had been sustained in 1984 by Dr. Duthie in respect of the deemed disposition of the subject property immediately before his death. In addition, by the reassessments for the 1982, 1983 and 1984 taxation years, the respondent also took the position that certain land development expenses in the amounts of $15,789.40, $10,509.13 and $8,674 respectively were not deductible on the ground that they were not incurred for the purpose of gaining or producing income from a business or property. The reassessment for the year 1984 raises, in addition to the issue of the deduction of certain land development expenses, a second question since the respondent assumed that there had been no change in the use of property to inventory and hence no business loss.

At the outset of the trial, counsel for both parties made preliminary observations that have a bearing on the matters in issue in these appeals. Counsel for the appellant said this:

Your Honour, if I may indicate to the Court as a preliminary matter my friend and I have been able to resolve some of the issues that are indicated in the pleadings such that the only issue that is before you at this hearing now is the question of the change of use of the particular piece of property in 1981 from a personal use capital property to inventory held for business purposes.

That is the only issue which you will need to address in these proceedings, and insofar as the valuation matters are concerned our agreement with counsel for the Minister is as follows; if the taxpayer is successful in its argument with respect to the occurrence of a change of use in 1981 then the following values should be used and the following findings made, that the value in 1981 of the parcel of real estate will be determined to be $746,948, the value in 1984 is $300,000. This would result in a business loss, inventory loss of $446,948.

In addition to that if the taxpayer is successful the expenses which were claimed in 1984 totalling $8,674 would be allowed and the amount of the losses determined as above would not be reduced by the amount of the capital gain resulting in 1981 from the deemed disposition of the property in 1981. This is in respect of the 1984 year.

In respect of 1982 and 1983 the expenses claimed and disallowed by the Minister would be allowed, because you will have found that there was a business in existence. Insofar—if the taxpayer is not successful in satisfying you that there was a change of use and accordingly a deemed disposition in 1981 then this particular parcel of land will have been a capital property to Mr. Duthie or Dr. Duthie until the time of his death in 1984 and in those circumstances in respect of the deemed disposition at the time of his death in 1984 again the value of the property would be $300,000 and that would be allocated $152,200 to the principal residence and the one acre of land and the balance, $147,800, would be the value of the land, remaining land.

As well the value in 1971 would be $60,000 of which $35,000 would be the principal residence portion and $25,000 would be the land portion. So in that circumstance, if you should decide that there was no change of use and deemed disposition in 1981 then the matter should be referred back to the Minister for reassessment on the basis of those figures, slightly different than the manner in which the assessments were raised.

As I have indicated, your Honour, the only issue now is whether or not there was in fact a change of use of this property from capital to inventory.

Counsel for the respondent expressed her agreement with the observations made by counsel for the appellant as to the different values attributed at various times to the items of property mentioned and stated that there was only one issue which is whether there was a change in use of the property in issue on March 1, 1981. She then applied for leave to amend the reply to the notice of appeal as follows:

1. Paragraph 2 of the Reply, by which the respondent admits various paragraphs of the Notice of Appeal, would include a reference to paragraph 13 of the Notice of Appeal, and paragraph 13 would accordingly be deleted from paragraph 5 of the Reply.

2. Paragraph 10 of the Reply would read as follows:

The respondent respectfully submits that there was no conversion of property from capital to inventory in 1981 and accordingly, the amounts of $15,789.40 in 1982 and $10,509.13 in 1983 and $8,674 in 1984 were not outlays or expenses incurred for the purpose of gaining or producing income from a business or property in accordance with the meaning of paragraph 18(1)(a) of the Act.

3. A new paragraph 13 reading as follows would be added to the Reply:

The respondent submits that if it is found that the property was converted from capital into income, which is not admitted, then the appellant is estopped from claiming a change in use in the 1981 taxation year as that year was statute barred.

Counsel for the appellant formulated certain objections to the proposed amendments to the reply to the extent that they would involve changes to be introduced in paragraph 10 and the addition of paragraph 13.

With respect to the amendment proposed for paragraph 10, counsel for the appellant made the following observations:

The first is in respect of the amendment to paragraph 10 where the indication is that the wording will now be that there was no conversion of property. I take it from that that my friend is in agreement that if in fact there was a conversion of property then there was a commencement of a business. Perhaps she could consider that and address that.

It may be possible that there was a commencement of a business without a conversion of property but I take it, at least she’s, that she's prepared to admit that if there was a conversion, and I think that that’s a logical conclusion, but we could, I just raise that at this point, I don't think that will be a problem.

His second objection, put with more force, related to the proposal of adding paragraph 13 to the reply for the purpose of raising the defence of estoppel. The matter of the addition of paragraph 13 to the reply will be dealt with later.

The proposed amendments to paragraphs 2, 5 and 10 of the reply to the notice of appeal are hereby approved.

In my review of the relevant facts relating to these appeals, I will be either reproducing verbatim or almost verbatim or paraphrasing the many excerpts from the narration of facts set out in the notice of appeal. Such narration will be supplemented, where appropriate, by other evidence adduced at the trial of these appeals.

On or about May 23, 1956, Dr. Duthie’s wife, Mrs. Barbara Ruth Duthie, acquired 4.44 acres of land located in the Village of Invermere, British Columbia. This land was located on the crest of a hill overlooking Lake Windermere.

On or about August 2, 1957, this property was subdivided into lots 1—8, inclusive. The subdivision was completed as a condition precedent to having the Village of Windermere supply water to this land. During 1957, lot 3 of the aforementioned property was conveyed to Dr. Duthie by Mrs. B.R. Duthie in order to facilitate financing and security arrangements required to build a house on that lot, which house became subsequently Dr. Duthie's principal residence. During 1959, an additional block of land adjacent to and immediately south of the above property also overlooking Lake Windermere and comprising approximately 4.5 acres was purchased by Mrs. B.R. Duthie.

It is to be noted that the Village of Invermere is located in the eastern portion of the Province of British Columbia, within the Regional District of East Kootenay in the Columbia-Windermere lakes area. It was established that the Village of Invermere was strategically situated in the vicinity of major tourist attractions and provided, according to the Thomas Report to which reference will be made later on, "an excellent location for the development of recreational condominiums”. The village was at the time, enjoying strong growth. The village proper had in the relevant years a population of close to 3,000 persons. During the summer the population could add up to 20,000 or 25,000 if the immediate area surrounding the village is included.

The parcels of land acquired by Dr. Duthie in 1957 and in 1959 were used exclusively at all relevant times by the Duthie family for personal purposes in connection with the principal residence.

In 1979, Mrs. B.R. Duthie died and all of the above property (with the exception of the principal residence which Dr. Duthie already owned) was conveyed by Dr. Duthie in his capacity as executor of Mrs. B.R. Duthie's estate to himself in his personal capacity.

On or about October 16, 1980, Dr. Duthie and his four sons began to give consideration to the development of the property. Three of Duthie's sons had experience in land development matters. By early March 1981, Dr. Duthie and his sons made a decision to undertake the development of the property and to seek professional assistance in order to enable them to determine the best way to proceed with the development of the property. In early May 1981, Dr. Duthie met with his sons John, Lome and Roger Duthie to discuss the various alternatives with respect to the property and their course of action. As appears from the following extract from Mr. John Duthie's testimony, a more businesslike approach was adopted in the course of the family meetings:

Yes. In 1981, starting I believe in May of 1981 the meetings took a very formal turn in that we organized times, we took minutes of the meetings, we assigned tasks which were recorded on the minutes and were sent out to accomplish those tasks and report back in a formal, business- like and formal manner. Obviously at this point in time my father was very close to making a decision as to whether or not we should develop and if so which of the three development options we would choose.

The three alternatives considered by Dr. Duthie and his associates were described as follows by Mr. John Duthie:

These were a number of options that he was considering with respect to the development of the subject property and basically he felt there were three routes, three options that we had; one, he could simply sell the property to a developer outright, invest those moneys and carry on . . .

The other option would have been to perhaps enter some sort of a joint venture with one of these developers . . .

Yes, to form a joint venture with an outside developer, contribute the land to the project, have the developer take care of the construction and probably marketing and a share of profits on that basis. The third option was to create a company within the family, including he himself, his father was a contractor and my father had developed two separate medical clinics within the Village of Invermere over the preceding years, myself having at that point several years, almost four years, experience in the industry and also I have one younger brother who has a formal education in the business and also would have been a contributor to the project.

We felt that we had, with the help of a little bit of outside professional help, the capacity within the family to proceed with and be successful at a project of this size.

Shortly thereafter, Dr. Duthie and other members of his family met with Le Blond Koch Partnership (the "Le Blond Partnership"). During that meeting it was determined that a market analysis for the Windermere valley and the property should be undertaken by a consultant to identify the quantity and type of unit suitable for the site and the viability of the project. The Le Blond Partnership delayed the preparation of the drawings for a development permit application until the market analysis was obtained from a consultant.

In or about the second week in May 1981, Dr. Duthie engaged Thomas Consultants Inc. to prepare a condominium study (the “Thomas Report") in respect of the project. In the course of their meetings during the remainder of May 1981, various aspects of the project were discussed but a firm decision on whether to proceed was held in abeyance pending receipt of the Thomas Report.

The Thomas Report was issued on June 19, 1981. The Thomas Report recommended, inter alia, that Dr. Duthie pursue the development of a 102-unit condominium development on the property. The report further recommended that Phase I, consisting of 35 units, commence immediately.

The evidence shows that Dr. Duthie attached considerable importance to the Thomas Report. The following excerpt from Mr. John Duthie's testimony leaves no doubt about this:

First of all, Mr. Thomas is very very well known in the North American industry as one of the better-known and often-quoted regularly, even today in the Globe and Mail you'll see him quoted on many different issues. His reputation is very very good.

Second of all, my father and Mr. Thomas formed a very strong personal relationship and Mr. Thomas became one of my father's confidants and in fact that, I believe it was the summer of 1981, Mr. Thomas holidayed at my father's house for a couple of weeks. They became very close and my father put a great deal of stock in Mr. Thomas' opinions.

The receipt of this report triggered off a series of actions on the part of Dr. Duthie and others. Speaking about the impact of the Thomas Report on his father, Mr. John Duthie said this:

It was a very profound impact because up until having received the report he, my father was very serious but he felt that he really needed to have a professional, as I've already stated, reaffirm his thoughts and feelings on the marketplace and the location of the property and all of other factors, the decisions that go into making a decision like this. Having received the report and having the report be so positive, at that point in time he clearly made a decision we were going ahead with this development. That's exactly what we did.

In or about the third week in June 1981, at a meeting among Dr. Duthie, his new wife, Thora Duthie, and his sons, John, Lome, Bruce and Roger, a decision was made to hire a project manager in connection with the develop- ment of the first 35 units of the project and the firm of Pacer Developments Ltd. ("Racer") was selected for this purpose.

In late June 1981, at a meeting in the Village of Invermere, B.C. attended by Dr. Duthie, Thora Duthie, two of Dr. Duthie's sons and representatives of the LeBlond Partnership it was decided that the Thomas Report would be adopted and the LeBlond Partnership was instructed to prepare a master plan for the property and a concept plan for the units to be constructed thereon. As a result of the acceptance of the Thomas Report, Mr. John Duthie, who had been involved in a large development project in Edmonton, moved back to Invermere to work on a full-time basis on this project. In mid-July 1981, a meeting was held in Calgary to review the preliminary design drawings of the property dated July 16, 1981. A decision was taken at that time to develop the project to its full potential. By early August, the design phase of this project was about to be completed. The project “had been frozen" at 102 units, to adopt the words of Mr. John Duthie. The critical path for the project was in its final stages.

Dr. Duthie organized his medical practice in 1981 so that he could pursue the project in August, September, October and November without interference. He actually did not practise medicine during August, September and October for this reason but returned to his medical practice in November approximately one month earlier than planned as it was clear by October that the project would be deferred in the short term.

In or about the third week of August 1981, a meeting was held with members of the Duthie family and representatives from Pacer, Thomas Consultants Inc. and the LeBlond Partnership. At this meeting it was agreed that the first phase of the development would include a minimum number of units. The LeBlond Partnership was instructed to proceed with the preparation of the requisite drawings. However, in late August 1981, Thomas Consultants Inc. cautioned Dr. Duthie that the escalating trend in interest rates over the course of the preceding months would have a significant adverse impact on the economics of the project if he proceeded in accordance with his earlier decision. Thomas Consultants Inc. suggested that Dr. Duthie should hold off on the project and give some consideration to restructuring the development plan for the property with a view to spreading some of the economic risk. During the first week of September 1981, at a time when interest rates were peaking at levels in excess of 24 per cent, Duthie made a decision to defer the project.

In order to appreciate fully the situation in which Dr. George Duthie and his sons were finding themselves in the latter part of August 1981, it is apposite to quote from the testimony of Mr. John Duthie:

What happened next is really a matter of history. The market began to change very very quickly, as the recession suddenly came down on everyone in Canada but particularly Alberta was hit very hard. Interest rates had reached 22 /4 per cent, the prime rate, the Royal Bank of Canada at that time. People were beginning to question some of the directions of the economy. I suppose people were beginning to see the light. We were looking at our logic network and in particular we began to zero in on the recommendations of the logic network with regard to financing.

Financing in the development business for the previous five or six years in this region, when you looked at financing, you went ahead, you did your design phase and financing came as a matter of course. It wasn't a major concern. But throughout this point in time we were in contact with banks and other forms of financial institutions and our initial discussions with them, they were quite positive, particularly as far as financing was concerned when we were talking to them in June and, May, June and even almost into early July.

The banks were, conventional financiers were showing interest in projects like this, particularly with regard to condominium projects. One of the sweeteners a developer could throw in would be to suggest to them that if they provided project financing then as a part of the marketing programs we would include mortgages as a sweetener for them, and we were getting positive responses. But as we were beginning to call these back, people back towards the end of August, well, we've sort of put things on hold, we're re-examining, were the typical types of replies we were beginning to run into.

We were beginning to realize that financing just may not come as a matter of course, financing might be something that we, we knew at that point we were going to have to go to a non-conventional, possibly tax-shelter type of concept for

inancing and that perhaps it might be time to, rather than follow the advice of a logic network to maybe consider looking at the financial aspects of a little bit earlier.

On September 30, 1981, Thomas Consultants Inc. wrote Mr. J.T. Caithness of Professional Realty Consultants Ltd. with a view to involving him in a joint venture with Dr. Duthie in connection with the property. Mr. Caithness was associated with an architect by the name of Jim Wesley. Messrs. Caithness and Wesley indicated their interest in the project but asked for some time before making a decision in the matter.

The final chapter in the history of this development, which took place in December 1981, is described in this way by the witness John Duthie:

Yes. Shortly thereafter, shortly being approximately three to four months later, around December it became obvious that the economy was falling faster and further than anyone had ever dreamed it would. It wasn't a case of a minor readjustment in the system, we were going into a full-blown recession. That combined with the fact that all forms of financing had dried up, including the possibility of some sort of limited partnership or a M.U.R.B. or a tax shelter, if you will, type of thing, that government had at that point announced that those programs were being discontinued as of January 1st, 1982.

Trevor and lan [referring to Messrs. Caithness and Thomas] got back to us and said, you know, for the next little while, for the foreseeable future, we don't know how long this recession is going to last, we don't know how deep it's going to be, that, we’ll see over the course of time, but it would not be wise to go ahead with the project at this time, let's put it on hold and hopefully we can get together in a year or two or six months or whatever and work together and bring this to fruition.

The evidence is abundantly clear that while Dr. Duthie wished to continue with the development of the property, the economic circumstances in the period 1982 through 1984 made the project economically non-viable in the short term. These circumstances did not prevent Dr. Duthie from pursuing the requisite approvals for the project. On June 13, 1983, Duthie attended a meeting of the Village of Invermere for this purpose. Approval for an amendment to By-law #392 to upgrade the property from R2 to R3 zoning was ultimately given on or about September 12, 1983. This approval allowed cluster residential developments" to take place on the property.

Dr. Duthie died on October 6, 1984. In the various steps taken with the view of developing the subject property, Dr. Duthie incurred the following expenses in respect of the years 1981, 1982, 1983 and 1984.

The evidence also discloses that the project was financed by Dr. Duthie personally up to the time of his death through a bank loan with a local bank. A bank account was opened in the name of Duthie Developments but a corporation was never formed.

It was also established that the services of other advisers or professionals were retained in the course of pursuing this project. For instance, a British Columbia land surveyor was commissioned to do a complete survey of the property. The firm of chartered accountants Price Waterhouse was also consulted.

Dr. Duthie expressed an interest in this project until the time of his death.

The evidence also establishes that Dr. Duthie and his wife continue to inhabit the property after 1981. The principal residence of Dr. Duthie continued to be located on the subject land until his death.

Submissions of the Parties

The appellants submission is that as the culmination of many years of study Dr. Duthie embarked in 1981 on the development of the 8.5-acre parcel of land in Invermere that he had acquired in the late 1950s and had lived on since that time. Counsel for the appellant urged on the Court that Dr. Duthie’s intention to dedicate the subject property to a real estate development project is clearly supported by the evidence.

For his part, the respondent submitted that there has been no conversion of capital property to inventory within the purview of subsection 45(1) of the Income Tax Act. Counsel for the respondent specifically stated that, in her view, the question in issue was not whether a business had commenced or not but whether there was a change in use of the property. She stressed that the change in use of the property would have required some physical change in the subject property.

Analysis

Having regard to the totality of the evidence, I agree with counsel for the appellant, that Dr. Duthie’s intention, at least from June 1981, was to proceed with the development of the subject property. The evidence is that the necessary structure had, by June 1981, been put in place to carry on the business of developing the Invermere property owned by Dr. Duthie. A team of professionals in various disciplines possessing the required degree of expertise had been assembled to manage this project and to bring it to its conclusion. As a matter of fact, the firm of Thomas Consultants Inc. produced a detailed report dated June 19, 1981, in which it was recommended, inter alia, that Phase I of a 102-unit luxury condominium project, consisting of 35 units and associated amenities, should commence immediately. Also, the firm of architects LeBlond Partnership had produced by September 1981, several designs and layouts of the building and facilities. This firm, in working under the instructions of Dr. George Duthie and in consultation with certain other members of the Duthie family and Mr. lan Thomas of Thomas Consultants Inc. and the representatives of Pacer, had reached definitive conclusions on the principal characteristics of the projected building although they had not actually reached the stage of the production of final construction drawings. Also, in May 1981, the services of the firm of Pacer Development Services had been retained as the project manager of this project. The latter firm prepared a logic network outlining the time table of the various phases of this project and by September 1981, a substantial number of steps in accordance with the logic network had been taken. As counsel for the appellant stated, “this logic network puts the work done in the development of this property clearly in perspective".

In my consideration of the total evidence, I also find that it is significant that Dr. Duthie made the necessary arrangements with respect to the practice of his profession of medicine so that he could spend on this project all his time for a period of four months beginning in August 1981. The evidence shows that Dr. Duthie was prepared to accept a substantial reduction of income in 1981 for the purpose of devoting all his time and energy to the project. It is also of more than passing interest to note that Mr. John Duthie decided to leave Edmonton and move to Invermere in July 1981, for the purpose of working on this project on a full-time basis.

The evidence shows that the firms Thomas Consultants Inc., LeBlond Partnership and Pacer Developments Inc., had the authority to proceed with the development of this project and each firm had undertaken a significant amount of activities towards the attainment of this objective. As a result, Dr. Duthie incurred in 1981, a significant amount of expenses, more than $40,000, towards the realization of this project.

However, because of the drastic turn of the economy specially in Alberta and British Columbia at a time where annual interest rates had reached 24 per cent, Dr. Duthie, in consultation with the team of professionals that he had put together and members of his family, decided in September 1981 to hold off on this project.

In my view, the evidence conclusively establishes that all these activities point to the commencement of business. In this connection, I am of the opinion that the requirement for the commencement of a business described in the Interpretation Bulletin IT-364, dated March 14, 1977, is fully satisfied in the present case. The following passage in this Interpretation Bulletin is of particular interest:

In order that there be a finding that a business has commenced, it is necessary that there be a fairly specific concept of the type of activity to be carried on and a sufficient organizational structure assembled to undertake at least the essential preliminaries.

Although the arguments of both counsel in this case centred mainly on the point whether there was a conversion of the property in issue from capital to inventory in the context of subsection 45(1) of the Income Tax Act, I find it useful, from an analytical viewpoint, to proceed first by making the finding that is, in my view, totally supported by the evidence to the effect that Dr. Duthie had, in 1981, commenced the business of developing a luxury condominium project.

Having regard to this finding, the first question that needs to be considered is whether the expenses incurred by Dr. Duthie in 1982, 1983 and 1984 in relation to the development of the subject property are deductible in computing his income.

In paragraph 10 of the reply, as amended, it is submitted by the respondent that these expenses were not incurred for the purpose of gaining or producing income from a business or property within the meaning of paragraph 18(1)(a) of the Income Tax Act since there had been no conversion of the property from capital to inventory.

I entertain no doubt that these expenses were incurred in connection with the business of developing the subject property. It has not been suggested that if a business had commenced in 1981 it had terminated prior to 1982. Although very little action had been carried out by Dr. Duthie in 1982, 1983 and 1984 in the furtherance of this business, the important fact remains that these expenses were connected with the operation of the development business and cannot be considered to be personal or living expenses. The deductibility of these expenses does not depend on whether or not there was a conversion of capital property to inventory but rather on the point whether the business of developing this property had commenced and I found on the evidence that it had commenced. I am therefore of the view that the deduction of these development expenses is not prohibited by paragraph 18(1)(a) of the Act.

I have, however, concluded that these expenses are on account of capital and are not deductible on account of paragraph 18(1)(b) of the Income Tax Act. In effect, these expenditures were made for the purpose of creating a business entity, the construction of a complex, with the required amenities, that was to contain a number of units or apartments to be offered for sale. In reaching this conclusion, I am relying on the decision of the Federal Court of Appeal in the case of D. Morgan Firestone v. The Queen, [1987] 2 C.T.C. 1, 87 D.T.C. 5237. This was a case where the Court, speaking through Justice MacGuigan, found that the expenses of investigating opportunities with a view to acquiring full control of companies in financial difficulty but having potential were on account of capital. The following passage of the judgment of the Court (at page

7) is of particular interest:

Counsel for the appellant acknowledged in the course of argument that the costs of the investigation of opportunities in relation to the four operating companies actually acquired were capital expenditures, and made it clear that they had in fact been capitalized here (Agreed Statement of Facts, Schedule B, Column 7, Appeal Book, Vol. 2, page 216). However, he submitted that the investigation costs of the other fifty-odd opportunities that did not lead to acquisitions must be regarded rather as expenditures of an operating nature.

I find it impossible to accept this contention. It seems to me that all of the expenditures relating to the investigation of opportunities must be considered on the same footing. They were the same kinds of expenses, and they were made for the same purpose. They were, in effect, all part of the same venture-capital business which, the appellant strenuously urged, existed from 1969 on. It makes no sense to separate off the few which led to acquisitions from the many that did not. All were equally part of the appellants plan of assembly of business assets. It was only to be expected, and indeed was the premise of the appellant's investigative method, that some possibilities would on examination turn out to be good risks, others too poor to be proceeded with. In my view, the very common-sense approach for which the appellant contended vitiates his attempted distinction.

The Federal Court of Appeal in the Firestone case also relied on its judgment in Neonex International Ltd. v. The Queen, [1978] C.T.C. 485, 78 D.T.C. 6339, where the question in dispute related to the deduction of legal expenses for a proposed takeover which ultimately aborted. The legal expenses in these circumstances were found to be on account of capital. On the other hand, I do not think that the decision of the Federal Court of Appeal in the case M.N.R. v. M.P. Drilling Ltd., [1976] C.T.C. 58, 76 D.T.C. 6028 is, on account of its particular facts, applicable to the present situation.

On this branch of the case, I therefore conclude that the development expenses in issue incurred by Dr. Duthie in the 1982, 1983 and 1984 taxation years cannot be deducted by virtue of paragraph 18(1)(b) of the Income Tax Act.

The second question which requires to be determined is whether there was a change in use of the subject property within the purview of subsection 45(1) of the Income Tax Act. If so, it would follow that there would be, by virtue of this subsection, a deemed disposition of the subject property.

Numerous cases have been cited to the Court. I have not found helpful references to trading cases since they do not deal with the situation of a change in use as contemplated by subsection 45(1) of the Income Tax Act but with a change of intention on the part of a given taxpayer. It is also to be noted that section 45 is, by its express terms, applicable only for the purposes of subdivision c of Division B of Part I of the Income Tax Act. That subdivision deals with taxable capital gains and allowable capital losses.

In considering the change in use question, I have found the decision of Judge Bonner of this Court in the case of Frederick L. Marshall v. M.N.R., [1983] C.T.C. 2664, 83 D.T.C. 592, to be of assistance. This was a case where the taxpayer transformed an orchard into serviced residential building lots. Judge Bonner decided that the change in use took place only when the taxpayer began installing the various services on the property in question.

This question relating to a change in use was also analyzed in the case of Allan P. Cantor, Norman S. Goltsman and Abraham L. Simkin v. M.N.R., [1985] 1 C.T.C. 2059, 85 D.T.C. 79. This was a case where the taxpayers involved purchased townhouses as a rental-producing investment but because of market conditions, made the necessary arrangements for the issue of a separate title for each unit of the multi-unit complex originally held under one title and sold each unit separately. In dealing with this question, Judge Cardin, as he then was, first observed that" Whether or not there was a conversion or change of use of the rental complex is a question of fact rather than law.” Later he concluded as follows (at page 2065 (D.T.C. 84)):

In the case at bar, there was no change in the character or indeed in the use made of the townhouses. Whether they were rented or owned by the occupier, their use was residential. The townhouses had been originally planned and built as self- contained residential units. The expenditures made on the property were clearly for renovations, repairs and landscaping—no structural changes were required or made.

In my assessment of the total evidence in this case, I am of the opinion that although a change in use was clearly contemplated by Dr. Duthie in the pursuit of his undertaking, an actual change in use has not effectively occurred in 1981 or at any time subsequently prior to Dr. Duthie's death in October 1984. As a matter of fact, Dr. Duthie and his wife continued to inhabit the family residence which was situated on the subject property. No actual construction work nor any other type of work had been carried out on his property. No physical alteration of that property had been done. In my view, paragraph 45(1)(a) of the Act contemplated, in a situation as in the present one, a physical change in the use of the property. In fact, at all times in 1981, the subject property continued to be used primarily, if not exclusively, for the personal use or enjoyment of Dr. Duthie and his family. In reality, the business in which Dr. Duthie had embarked had not reached the point where the subject property had to be used for the purposes of the business. From the evidence, that point was about to be attained when Dr. Duthie made the decision to defer action on the project but it had not actually been reached. The same property in respect of the same portions thereof cannotat the same time, be used for personal purposes and for income-earning purposes in the context of subsection 45(1) of the Income Tax Act.

I therefore conclude that there was no change in use of the subject property in 1981 and there was therefore no deemed disposition of this property in 1981.

In view of the conclusion I have arrived at, with respect to the issue relating to the change in use of the subject property, it is unnecessary for me to deal with the matter of adding of paragraph 13 to the reply to the notice of appeal, as proposed by counsel for the respondent, and with the defence of estoppel.

For these reasons, I would dismiss the appeals for the 1981, 1982 and 1983 taxation years. I would allow the appeal, without costs, for the 1984 taxation year to give effect to the agreement of counsel as to the values to be attributed at the times indicated below to the portions of the property hereinafter mentioned and refer the assessment back to the respondent for reconsideration and reassessment on the basis of the following:

(a) The value of the property at the time of Dr. Duthie's death is $300,000 of which $152,200 is to be allocated to the principal residence and the balance of $147,800 is to be allocated to the remaining portion of the property.

(b) The value of the subject property on December 31, 1971, was $60,000 of which $35,000 relates to the principal residence and $25,000 relates to the remaining portion of the land.

Appeal allowed in part.