Reed,
J.:
Facts
The
plaintiff
is
one
of
a
number
of
individuals
who
put
money
into
what
is
called
the
“golf
course
operation".
On
May
29,
1974
the
plaintiff
and
others
(all
of
whom,
except
for
two,
are
medical
doctors)
entered
into
an
agreement
which
anticipated
the
purchase
of
167
acres
in
Richmond
Hill.
The
property,
at
the
time,
was
being
run
as
a
golf
course
and
an
existing
agreement
for
its
purchase
by
a
corporation,
named
Charter
York,
had
been
signed.
Of
the
two
members
of
the
group
of
individuals
who
were
not
doctors,
one
was
a
dentist,
the
other
was
a
Mr.
Kotowski.
(This
group
is
sometimes
referred
to
as
"the
doctors"
or
"the
doctors'
group",
despite
the
fact
that
all
are
not
such).
Mr.
Kotowski
had
been
employed
for
twelve
years
as
a
tax
auditor
with
Revenue
Canada,
before
leaving
that
employment
to
establish
his
own
business.
In
the
course
of
establishing
this
business,
in
the
late
1960s,
he
was
introduced
to
the
plaintiff.
At
that
time
he
persuaded
the
plaintiff
and
some
of
the
other
doctors
that
a
legitimate
means
of
reducing
the
tax
payable
on
their
professional
income
was
to
take
part
ownership
in
certain
apartment
buildings.
The
plaintiff’s
evidence
was
that
prior
to
1973,
he
had
been
able
to
depreciate
the
buildings
against
his
professional
income.
Changes
in
the
tax
law,
in
1973,
made
it
no
longer
possible
to
do
so
and,
thus,
a
replacement
for
this
income
tax
reducing
technique
was
sought.
In
any
event,
the
May
29,
1974
agreement
which
led
to
the
purchase
of
the
golf
course
property,
was
one
whereby
the
doctors'
group
(through
trustees)
agreed
to
take
over
the
pre-existing
agreement
to
purchase,
under
which
Charter
York
had
agreed
to
purchase
the
golf
course
property
from
Schwartz
Schwebel
and
Dym
Limited,
the
vendors.
The
May
agreement
provided
that
two
corporations,
Downshire
Investments
Limited
and
John
Kotowski
and
Associates
Limited,
would
act
as
trustees
for
the
doctors'
group.
Downshire
Investments
can
be
thought
of
as
the
alter
ego
of
a
Mr.
DeCarlo.
Mr.
DeCarlo,
through
the
vehicle
of
various
corporations,
was
involved
in
the
construction
and
land
development
business.
(Among
his
companies,
for
example,
was
one
which
manufactured
precast
concrete
components
and
another
which
provided
certain
engineering
expertise.)
Kotowski
and
Associates,
as
the
name
implies,
was
Mr.
Kotowski's
alter
ego.
It
also
should
be
noted
that
a
portion
of
Charter
York's
shares
were
owned
by
DeCarlo
Engineering,
which
in
turn
was
wholly
owned
by
Mr.
DeCarlo.
The
May
agreement
provided
that
the
trustees,
having
stepped
into
Charter
York's
shoes,
would
complete
the
agreement
to
purchase
and
acquire
title
to
the
golf
course
property.
This
they
did.
The
trustees
were
to
act
on
behalf
of
the
doctors'
group
described
in
the
May
agreement
as
the
owners
of
the
property,
and
who
were
described
as
forming
a:
joint
venture
and
not
a
partnership
to
the
intent
that
each
of
the
owners
shall
hold
an
undivided
interest
in
the
lands
and
in
the
Agreement
of
Purchase
and
Sale
as
Tenants
in
Common
and
as
between
themselves
all
profits,
if
any,
and
loss,
if
any,
shall
be
borne
by
the
owners
and
each
of
them
in
the
proportions
set
out
opposite
their
names
.
.
.
The
group
was
obligated
to
pay
a
certain
maximum
amount
of
money
each
month
from
April
1,1975
to
December
1,
1977.
The
April
1,1975
payment
was
to
be
$135,000;
$33,000
was
to
be
paid
each
month
thereafter
from
May
through
November
1975
and
$25,000
for
each
of
the
months
January
1976
to
December
1976.
The
proportionate
share
of
these
sums,
which
each
member
of
the
group
paid
per
month,
depended
on
the
size
of
interest
which
he
held.
The
plaintiff,
Dr.
Ward,
held
a
nine
per
cent
interest.
The
May
29,1974
agreement
also
provided
for
financiers:
Asellus
Investments
Limited
(another
alter
ego
of
Mr.
DeCarlo)
and
Sellhurst
Developments
Incorporated
(another
alter
ego
of
Mr.
Kotowski).
The
financiers
agreed:
.
.
.
to
advance
to
the
Trustees
on
behalf
of
the
Owners
all
of
the
funds
required
to
acquire
the
lands
.
..
and
to
maintain
the
lands,
and
without
limiting
the
generality
of
the
foregoing,
this
shall
include
.
.
.
(a)
Payment
to
Charter
York
of
the
deposit
paid
by
it.
.
.;
(b)
The
balance
due
on
the
closing
of
the
transaction
.
.
.;
(c)
All
fees
of
every
nature
and
description
required
to
be
paid
in
the
acquisition
and
maintenance
of
the
said
lands;
(d)
All
transfer
taxes
and
disbursements
required
to
be
paid
in
the
acquisition
of
the
said
lands;
(e)
All
realty
taxes,
business
taxes
and
insurance
premiums
required
to
be
in
maintaining
and
holding
the
said
lands;
(f)
All
wages
and
salaries
required
to
be
paid
to
any
party
in
maintaining
the
said
lands
and
any
business
located
thereon;
all
of
such
advances
whether
made
upon
acquisition
of
the
lands
or
subsequent
thereto,
shall
oe
secured
by
the
Trustees
furnishing
unto
the
Financiers
a
mortgage
on
the
said
lands
.
.
.
which
mortgage
shall
bear
interest
at
a
rate
equivalent
to
the
prime
rate
charged
from
time
to
time
by
the
Bankers
for
the
Trustees,
plus
seven
(7%)
percent,
and
which
mortgage
shall
mature
on
the
31st
day
of
January
1978;
.
.
.
such
interest
to
be
payable
upon
maturity
of
the
mortgage
.
.
.
The
monthly
payments
by
the
doctors'
group
were
described
to
be
“in
partial
payments
[to
the
financiers]
for
the
advances
made"
by
the
financiers
on
behalf
of
the
doctors.
It
is
clear
that
what
was
contemplated
was
that
the
financiers
would
accept
significant
financial
responsibility
for
the
"golf
course
operation"
on
the
expectation
that
at
the
end
of
three
years
an
accounting
would
take
place
as
between
the
financiers
and
the
doctors'
group.
The
financiers
were,
at
that
time,
to
acquire
a
75
per
cent
interest
in
the
property
(the
doctors'
group
retaining
a
25
per
cent
interest).
A
preambular
paragraph
of
the
May
29,1974
agreement
provided:
AND
WHEREAS
the
Financiers,
in
consideration
of
their
ultimate
acquisition
of
an
interest
in
the
said
lands,
as
hereinafter
set
out,
have
agreed
to
advance
certain
funds
on
behalf
of
the
Owners
for
the
acquisition
of
the
said
lands;
The
above
mentioned
mortgage
(including
interest)
from
the
trustee
to
the
financiers
was
to
become
due
and
payable
on
January
31,
1978.
And,
paragraph
19
of
the
May
agreement
provided:
On
the
31st
day
of
January,
1978,
or
such
other
date
as
determined
by
the
Auditors
(which
other
date
shall
not
be
earlier
than
seven
days
prior
to
the
31st
day
of
January,
1978,
or
later
than
seven
days
after
the
31st
day
of
January,
1978)
(a)
the
sums
required
to
be
paid
as
determined
by
the
statement
of
the
Auditors
shall
be
paid
to
the
party
to
whom
a
net
balance
is
owing
by
way
of
cash
or
certified
cheque;
(b)
the
amount
required
to
be
paid
by
the
Financiers
to
the
Joint
Venture
in
order
to
obtain
an
undivided
75%
interest
in
the
lands
and
such
sums
shall
be
paid
by
the
Financiers
by
way
of
cash
or
certified
cheque
to
the
Joint
Venture;
(c)
the
Trustees
shall
furnish
a
good
and
proper
deed
in
equal
shares
to
the
Financiers
or
as
they
may
direct
of
an
undivided
75%
interest
in
the
lands
forming
the
subject
matter
of
the
within
transaction;
it
being
acknowledged
that
the
cost
of
preparing
same
shall
be
borne
by
the
Trustees,
and
the
cost
of
registering
same
shall
be
borne
by
the
Financiers;
(d)
in
making
the
calculation
above
noted,
any
interim
profit
shall
be
divided
as
follows:
|
to
the
Financiers
|
-
75%
|
|
to
the
Joint
Venture
|
-
25%
|
In
any
event,
the
acquisition
by
the
financiers
never
occurred.
The
agreement
providing
for
such
was
extended
to
January
31,
1980;
the
doctors'
group
agreed
to
continue
advancing
$25,000
a
month
during
1978
and
1979.
Before
January
31,
1980
arrived
foreclosure
proceedings
had
been
concluded
against
the
property;
Mr.
DeCarlo
had
filed
in
bankruptcy;
the
doctors'
interest
in
the
property
was
lost.
One
additional
factor
concerning
the
May
29,
1974
agreement
must
be
noted.
It
provided
for
managers.
These
were
to
be
Messrs.
DeCarlo
and
Kotowski.
It
was
their
responsibility
to
.
.
.operate
and
maintain
the
premises
upon
acquisition
thereof
without
charge,
and
that
all
decisions
pertaining
to
the
operation
and
maintenance
of
the
lands
shall
be
at
their
sole
and
arbitrary
discretion
save
for
any
limitations
as
to
sale
of
the
whole
or
any
portion
of
the
lands
.
.
.
.
.
.
carry
on
such
business
activity
as
they
may
deem
fit
on
the
subject
lands
.
.
.
.
.
.
shall
direct
the
financiers
to
advance
such
funds
from
time
to
time
in
accordance
with
the
above
noted
provisions
as
to
advancement
of
funds
.
.
.
.
.
.
make
such
decisions
as
they
may
deem
fit
with
regard
to
any
matters
arising
from
time
to
time
pertaining
to
the
use
or
intended
use
of
the
said
lands,
servicing
the
said
lands
.
.
.
demolition
of
any
structures
on
the
said
lands,
creation
of
any
easement.
.
.
the
dedication
of
any
of
the
said
lands
for
road
widenings,
parks,
or
for
any
other
municipal
or
provincial
uses
.
.
.
At
the
time
of
the
May
29,1974
agreement
there
were
two
mortgages
on
the
property.
One
was
from
Vaughan
Golf
and
Country
Club
to
the
Dominion
Life
Assurance
Company,
dated
August
25,
1971,
for
$430,000
(of
which
$270,000
was,
at
the
time,
still
outstanding).
The
second
was
from
Schwartz,
Schwebel
and
Dym
Limited
to
the
Vaughan
Golf
and
Country
Club
for
the
amount
of
$5,138,226.
This
was
dated
May
23,
1974.
The
purchase
by
the
trustees
(Downshire
Investments
Limited
and
Kotowski
and
Associates
Limited)
from
Schwartz,
Schwebel
and
Dym
was
for
a
price
of
$7.7
million.
This
was
financed
by
a
down
payment
of
$650,000
and
a
$6.65
million
"wrap
around"
mortgage
as
well
as
a
$400,000
mortgage.
The
$6.65
million
mortgage
was
a
"wrap
around"
of
the
first
and
second
mortgages
and
covered
an
additional
sum
of
$1,241,774,
which
was
advanced
as
principal
at
the
time.
This
wrap
around
mortgage
is
referred
to
in
the
evidence
as
the
third
mortgage.
A
fourth
and
fifth
mortgage
were
subsequently
placed
on
the
property
by
the
trustees.
The
fourth
was
to
Schwartz,
Schwebel
and
Dym
for
the
sum
of
$400,000.
It
"wrapped"
the
mortgage
of
the
same
amount,
mentioned
above,
which
had
been
given
by
Schwartz,
Schwebel
and
Dym
to
the
Vaughan
Golf
and
Country
Club
on
May
23,
1974.
The
fifth
mortgage
was
given
by
the
trustees
to
the
financiers
(Asellus
Investments
Limited
and
Sellhurst
Developments
Incorporated).
It
was
dated
June
31,
1974
but
registered
on
title
only
on
April
27,
1976.
It
was
for
the
amount
of
$1
million.
Both
doctors
who
gave
evidence
(the
plaintiff,
Dr.
Ward,
and
his
colleague
Dr.
Cook)
testified
that
they
paid
little
attention
to
what
Kotowski
was
doing.
They
trusted
him.
The
plaintiff,
for
example,
did
not
read
carefully
the
agreement
of
May
29,
1974,
before
he
signed
it.
Nor
did
he
seek
legal
advice
with
respect
to
it.
There
was
no
general
meeting
of
the
group
to
discuss
the
agreement,
its
implications,
nor
what
the
group’s
plans
for
the
property
would
be.
It
would
appear
that
Mr.
Kotowski
dealt
with
each
member
of
the
group,
individually.
Part
of
the
agreed
statement
of
facts
filed
by
the
parties
notes
that:
the
plaintiff,
Dr.
Ward,
did
not
become
aware
of
the
first,
second,
third
and
fourth
mortgages
until
April
1979;
the
May
29,
1974
agreement
called
for
the
written
consent
of
51
per
cent
of
the
joint
venture
interests
before
any
sale
or
mortgage
of
the
property
could
occur;
the
plaintiff
had
no
knowledge
of
any
written
consent
to
mortgage
the
property
having
been
given
subsequent
to
the
May
1974
agreement.
The
plaintiff
did
not
know
that
one
result
of
the
agreement
(by
virtue
of
stepping
into
Charter
York's
shoes)
was
that
the
Vaughan
Golf
and
Country
Club
had
the
exclusive
right
to
continue
to
run
the
golf
club,
until
at
least
December
31,
1977
and
that
the
managers,
Messrs.
DeCarlo
and
Kotowski,
were
not
directly
involved
with
that
operation.
Vaughan
was
to
pay
an
annual
rental
of
$75,000
for
a
lease
of
the
18
hole
golf
course
(126
of
the
167
acres).
As
noted
above,
Mr.
Kotowski
was
trusted
by
the
doctors
(at
least
by
the
plaintiff).
He
had
set
up
the
plaintiff's
office
accounting
system
and
in
the
early
years
made
out
the
plaintiff's
annual
income
tax
returns.
Kotowski
sent
the
doctors
an
annual
statement,
with
respect
to
the
“golf
course
operation",
setting
out
the
proportionate
share
each
would
be
expected
to
pay,
monthly,
during
the
year.
Dr.
Ward
sent
Kotowski
a
series
of
postdated
cheques
in
accordance
with
this
schedule.
At
the
end
of
the
year
Kotowski
provided
the
doctors
with
a
statement
showing
the
rental
income
received
from
the
golf
course
property,
the
amount
of
carrying
charges
and
other
expenses
that
had
been
incurred
during
the
year,
and
the
proportionate
share
of
the
loss,
consequent
thereon,
that
each
member
of
the
"doctors'
group"
could
claim
against
his
income.
Issues
The
issues
raised
by
these
facts
are:
(1)
the
proper
treatment,
for
tax
purposes,
of
the
carrying
charges
(taxes
plus
interest
paid
on
the
mortgage)
and
other
expenses
incurred
by
the
venture,
vis
à
vis
the
doctors'
taxable
income
for
the
taxation
years
1974-1978;
(2)
the
amount
of
loss
which
can
be
claimed
by
the
doctors
in
1979
as
a
result
of
the
foreclosure
proceedings.
With
respect
to
the
first
issue
the
plaintiff
(and
presumably
each
other
member
of
the
doctors'
group)
claimed
each
year,
his
proportionate
share
of
the
loss
which
had
arisen
as
a
result
of
the
rental
income
($75,000)
received
from
Vaughan
Golf
and
Country
Club,
always
being
less
than
expenses
incurred
with
respect
to
the
property.
The
Minister
of
National
Revenue
reassessed
the
plaintiff
so
as
to
prevent
the
claiming
of
a
loss.
The
Minister
proceeded
on
the
basis
that
subsection
18(2)
of
the
Income
Tax
Act
applied
to
limit
the
amount
of
expenses
which
could
be
claimed.
Subsection
18(2)
provides
that
in
some
circumstances
(e.g.
where
the
land
is
held
primarily
for
development
or
resale)
the
amount
of
carrying
charges
(mortgage
inter-
est
and
taxes)
which
can
be
claimed
for
tax
purposes
in
a
year
will
be
limited
so
that
they
can
not
exceed
the
revenue
obtained
from
the
property
for
that
year.
The
plaintiff
argues
that
subsection
18(2)
should
not
have
been
applied
to
limit
the
expenses
he
can
deduct
because
the
primary
purpose
of
the
acquisition
was
to
reduce
the
doctors'
taxable
income,
not
for
development
or
resale
purposes.
Secondly,
if
subsection
18(2)
is
applicable,
he
argues
that
subsection
18(3)
should
also
have
been
applied.
Subsection
18(3)
exempts
from
the
limitations
imposed
by
subsection
18(2)
amounts
which
relate
to
lands
subjacent
or
contiguous
to
buildings
or
structures
on
the
land.
Thirdly,
the
exact
amount
of
carrying
charges
which
should
be
taken
into
account
is
in
dispute.
The
Minister
argues
that
only
those
which
actually
came
out
of
the
plaintiff's
pocket
can
be
claimed.
The
plaintiff
argues
that
his
proportionate
share
of
the
expenses
incurred
by
or
on
behalf
of
the
group
as
a
whole,
which
will
include
amounts
paid
by
the
financiers
on
behalf
of
the
doctor
owners
should
be
allowed.
Lastly,
despite
the
fact
that
the
plaintiff
was
reassessed
on
the
basis
of
subsection
18(2),
the
Minister
now
argues
that
subsection
18(2)
does
not
apply,
at
all,
to
the
computation
of
the
plaintiff's
income
for
the
1974-1978
taxation
years.
This,
it
is
argued,
proceeds
on
the
ground
that
the
plaintiff's
activity
was
essentially
that
of
an
adventure
in
the
nature
of
a
trade,
a
joint
venture;
and,
the
expenditures
incurred
are
to
be
recognized
in
the
year
in
which
the
adventure
is
completed,
that
is,
in
1979.
With
respect
to
the
second
issue,
the
plaintiff
claims
that
the
golf
course
property
constituted
inventory
in
terms
of
subsection
10(1)
of
the
Act;
that
on
disposition
of
the
property
section
79
of
the
Income
Tax
Act
applies;
and,
that
a
proper
interpretation
of
this
section
enables
the
plaintiff
and
the
(c)
used,
in,
or
held
in
the
course
of,
carrying
on
a
business
by
the
taxpayer
other
than
a
business
in
the
ordinary
course
of
which
land
is
held
primarily
for
the
purpose
of
resale
or
development,
or
(d)
[Repealed.]
(e)
held
primarily
for
the
purpose
of
gaining
or
producing
income
of
the
taxpayer
from
the
land
for
that
year.
except
to
the
extent
that
the
taxpayer's
gross
revenue,
if
any,
from
the
land
for
that
year
exceeds
the
aggregate
of
all
other
amounts
deducted
in
computing
his
income
from
the
land
for
that
year.
other
members
of
the
doctors'
group
to
claim
as
a
non-capital
loss
their
respective
shares
of
the
$4.5
million
($4,162,000)
loss
which,
it
is
argued,
flows
from
the
application
of
that
section.
The
plaintiff's
share
thereof
would
be
$355,913.
The
defendant
argues
that
the
golf
course
property
was
not
inventory
in
the
hands
of
the
doctors'
group.
It
is
argued
that
it
was
the
trustees
who
were
the
owners
of
the
property
and
it
was
the
trustees
who
were
liable
for
the
various
mortgage
debts,
not
the
doctors.
Consequently,
it
is
argued,
the
doctors'
loss
must
be
assessed
only
by
reference
to
the
amount
actually
paid
out
of
their
own
pockets,
$1,130,314.30
(the
plaintiff's
share
being
$92,728.29).
As
noted
above
it
is
argued
that,
despite
the
manner
of
reassessment
for
the
1974-78
taxation
years,
subsection
18(2)
does
not
apply
to
the
computation
of
the
plaintiff's
income
at
all.
It
is
argued
that
the
appropriate
method
of
accounting
for
each
member
of
the
doctors'
group
is
to
treat
the
project
as
a
joint
venture
with
the
profit
and
loss
being
calculated
in
the
year
of
completion
1979,
and
only
by
reference
to
the
amount
paid
out
of
each
individual
member's
pocket.
Carrying
Charges
It
is
first
necessary
to
set
out,
in
an
abbreviated
version,
subsection
18(2)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
as
it
read
at
the
relevant
time:
.
.
.
in
computing
the
taxpayer's
income
for
a
taxation
year
from
a
business
or
property,
no
deduction
shall
be
made
in
respect
of
any
amount
paid...
as.
.
.
(a)
interest
on
borrowed
money
used
to
acquire
land.
.
.,
or
has
acquired
or
reacquired
the
beneficial
ownership
of
the
property
in
consequence
of
the
other
person's
failure
to
pay
all
or
any
part
of
an
amount
(in
this
section
referred
to
as
the
"taxpayer's
claim”)
owing
by
him
to
the
taxpayer,
the
following
rules
apply:
(c)
there
shall
be
included,
in
computing
the
other
person's
proceeds
of
disposition
of
the
property,
the
principal
amount
of
the
taxpayer's
claim
plus
all
amounts
each
of
which
is
the
principal
amount
of
any
debt
that
had
been
owing
by
the
other
person,
to
the
extent
that
it
has
been
extinguished
by
virtue
of
the
acquisition
or
reacquisition,
as
the
case
may
be;
(d)
any
amount
paid
by
the
other
person
after
the
acquisition
or
reacquisition,
as
the
case
may
be,
as,
on
account
of
or
in
satisfaction
of
the
taxpayer's
claim
shall
be
deemed
to
be
a
loss
of
that
person,
for
his
taxation
year
in
which
payment
of
that
amount
was
made,
from
the
disposition
of
the
property;
(e)
in
computing
the
income
of
the
taxpayer
for
the
year,
(i)
the
amount,
if
any,
claimed
by
him
under
subparagraph
40(1)(a)(iii)
in
computing
his
gain
for
the
immediately
preceding
taxation
from
the
disposition
of
the
property,
and
(ii)
the
amount,
if
any,
deducted
under
paragraph
20(1)(n)
in
computing
the
income
of
the
taxpayer
for
the
immediately
preceding
year
in
respect
of
the
property,
shall
be
deemed
to
be
nil;
(f)
the
taxpayer
shall
be
deemed
to
have
acquired
or
reacquired,
as
the
case
may
be,
the
property
at
the
amount,
if
any,
by
which
the
principal
amount
of
the
taxpayer's
claim
exceeds
the
amount
described
in
subparagraph
(e)(i)
or
(ii),
as
the
case
may
be,
in
respect
of
the
property;
(g)
the
adjusted
cost
base
to
the
taxpayer
of
the
taxpayer's
claim
shall
be
deemed
to
be
nil;
and
(h)
in
computing
the
taxpayer’s
income
for
the
year
or
a
subsequent
year,
no
amount
is
deductible
in
respect
of
the
taxpayer’s
claim
by
virtue
of
paragraph
20(1)(l)
or
(p).
(b)
property
taxes
.
.
.
if.
.
.
the
land
cannot
reasonably
be
considered
to
have
been
in
that
year,
(c)
used
in,
or
held
in
the
course
of,
carrying
on
a
business
by
the
taxpayer
other
than
a
business
in
the
ordinary
course
of
which
land
is
held
primarily
for
the
purpose
of
resale
or
development
.
.
.
except
to
the
extent
that
the
taxpayers
gross
revenue,
if
any,
from
the
land
for
that
year
exceeds
the
aggregate
of
all
other
amounts
deducted
in
computing
his
income
from
the
land
for
that
year.
Thus,
if
the
business
activity
of
the
plaintiff
taxpayer,
with
respect
to
the
land,
was
“a
business
in
the
ordinary
course
of
which
land
is
held
primarily
for
the
purpose
of
resale
or
development
.
.
.”
then
the
carrying
charge
limitations
apply
(the
interest
and
tax
expenses
to
be
deducted
from
income
cannot
exceed
the
revenue
received
from
the
land
during
the
year).
Both
counsel
agree
that
the
nature
of
the
business
in
which
the
doctors'
group
was
engaged
must
be
ascertained
by
reference
to
their
intention
in
acquiring
the
land.
Counsel
for
the
plaintiff
argues
that
if
a
primary
purpose
did
exist
with
respect
to
the
acquisition
it
was
to
acquire
a
replacement
for
the
apartment
buildings
which
previously
had
been
used
by
the
doctors
to
reduce
their
taxable
income.
He
argues,
however,
that
a
primary
purpose
simply
did
not
exist,
that
intentions
were
rather
fuzzy;
that
while
the
doctors
may
have
intended
some
time
down
the
road
to
sell
the
property,
or
a
part
of
it,
at
a
profit,
thoughts
were
not
crystallized
at
the
time
of
acquisition.
Alternatively,
counsel
argues
that
intention
is
something
that
must
be
assessed
on
a
year
by
year
basis.
The
decisions
in
Edmund
Peachey
Limited
v.
M.N.R.,
[1977]
C.T.C.
2564;
77
D.T.C.
410
(T.R.B.),
and
Kensington
Land
Developments
Limited
v.
The
Queen,
[1979]
C.T.C.
367;
79
D.T.C.
5283
(F.C.A.),
are
cited
for
the
proposition
that
a
taxpayer's
intention
can
change,
thereby
changing
the
basis
on
which
he
or
she
holds
property.
Counsel
argues
that
prior
to
1978
the
primary
intention
in
holding
the
golf
course
property
cannot
have
been
for
its
resale
or
development
because
the
applicable
zoning
regulations
at
the
time
prevented
such.
In
December
1977,
a
proposed
plan
of
subdivision
and
proposed
amendment
to
the
applicable
zoning
by-law,
was
filed
with
the
Richmond
Hill
Municipal
Council.
In
April
1978
these
were
turned
down
as
"premature"
because
the
existing
sewer
lines
were
inadequate
to
support
the
proposed
change.
Counsel
argues
that
whatever
may
have
been
the
original
intention
of
the
plaintiff
and
the
group,
that
intention
changed
in
September
1977,
when
the
doctors'
group
met
for
the
purpose
of
extending
the
January
31,
1978
deadline
(for
the
purchase
of
a
75
per
cent
interest
by
the
financiers).
At
that
time
the
group
discussed
the
possibility
of
the
golf
course
operation
being
run
as
a
"semi-private
course
with
pay-to-play
and
membership”.
Counsel
also
argues
that
once
the
doctors
found
out
about
the
foreclosure
proceedings,
whatever
may
have
been
their
previous
intention,
it
now
became
merely
to
salvage
what
they
could.
The
plaintiff
at
that
point
became
very
active
in
trying
to
ascertain
where
the
various
funds
had
gone
and
why
the
project
had
failed.
I
cannot
accept
the
desire
to
reduce
one's
taxable
income
as
a
primary
purpose.
A
desire
to
reduce
one's
taxable
income
immediately,
but
with
the
expectation
that
a
profit
will
arise
therefrom
at
a
later
date,
is
entirely
consistent
with
the
acquisition
of
a
property
for
the
purpose
of
development
and
resale.
And,
I
have
no
doubt
that
the
intention
to
obtain
a
profit,
from
development
and
resale,
will
always
take
precedence
over
the
desire
to
reduce
one's
taxable
income.
In
this
case
all
the
documentary
evidence
points
to
the
fact
that
the
property
was
being
purchased
for
development
and
resale
and
within
a
fairly
short
time
horizon:
three
years.
Vaughan
Golf
and
Country
Club
were
to
continue
to
operate
the
golf
course
under
an
exclusive
lease
for
three
years.
When
an
extension
was
granted,
in
1977,
to
the
financiers,
the
lease
arrangement
with
Vaughan
was
extended
on
a
year
to
year
basis.
One
of
the
major
players
in
the
scheme,
as
financier,
as
manager,
and
trustee,
Mr.
Decarlo,
was
involved
in
the
land
development
and
construction
business.
The
May
29,
1974
agreement
provided
that
at
the
end
of
the
three
year
period
the
financiers
would
acquire
a
75
per
cent
interest
in
the
project.
The
powers
given
to
the
managers
under
the
May
29,
1974
agreement
are
of
a
type
one
might
expect
to
give
individuals
engaged
in
land
development
(e.g.
power
to
dedicate
land
for
parks,
roads,
etc.).
Even
if
I
accept
that
the
plaintiff's
personal
intention
with
respect
to
the
use
of
the
property
might
have
been
somewhat
unfocused
I
cannot
believe
that
the
project
was
presented
to
him
other
than
as
one
for
the
subdivision
and
development
of
the
golf
course
property,
with
the
expectation
that
such
would
occur
within
a
reasonably
short
period
of
time
(three
years).
The
running
of
the
golf
course
was
clearly
an
interim
and
secondary
concern.
That
is
why
there
was
little
concern
that
a
profit
was
not
being
made
therefrom
in
the
short
run.
I
note
that
on
April
9,
1979
the
plaintiff
in
preparing
a
note
to
file
concerning
a
meeting
he
had
had
with
a
Mr.
Chung
of
the
Richmond
Hill
planning
office
wrote:
my
reason
for
wanting
information
was
to
see
for
myself
what
was
going
on
with
the
golf
course
and
what
our
developers
had
done.
For
the
reasons
indicated,
I
do
not
accept
the
plaintiff's
argument
that
the
intention
of
the
doctors
(or
the
intention
of
the
group
as
a
whole,
i.e.,
the
doctors
and
Messrs.
DeCarlo
and
Kotowski)
at
the
time
of
the
acquisition
of
the
business
or
at
any
subsequent
date
was
primarily
to
reduce
their
taxable
income
or
to
operate
a
golf
course.
In
my
view
the
property
was
acquired
for
the
purpose
of
development
and
resale
and
subsection
18(2)
was
properly
applied.
Another
argument
arises
out
of
the
wording
of
subsection
18(2)
as
it
existed
prior
to
the
1978
amendment
to
the
definition
of
business
in
subsection
248(1)
of
the
Act.
The
subsection
provided
that
the
expense
limitation
would
apply
to
"income
.
.
.
from
a
business
or
property"
if
the
land
could
not
reasonably
be
considered
to
have
been
“held
in
the
course
of,
carrying
on
a
business
by
the
taxpayer
.
.
.”.
The
term
"business"
by
definition
includes
an
adventure
in
the
nature
of
a
trade
but
it
is
not
synonymous
with
“carrying
on
a
business”.
This
latter
concept
requires
more
than
the
isolated
type
of
transaction
referred
to
as
“an
adventure
in
the
nature
of
a
trade.”
See
Tara
Exploration
and
Development
Co.
Ltd.
v.
M.N.R.,
[1970]
C.T.C.
557;
70
D.T.C.
6370
(Ex.
Ct.);
affirmed
[1972]
C.T.C.
328;
72
D.T.C.
6288
(S.C.C.)
and
Birmount
Holdings
Limited
v.
The
Queen,
[1978]
C.T.C.
358;
78
D.T.C.
6254
(F.C.A.).
Thus,
if
the
golf
course
operation
"can
be
characterized
as
an
adventure
in
the
nature
of
trade"
but
not
the
carrying
on
of
a
business
then,
regardless
of
the
purpose
for
which
the
land
was
acquired
or
being
held,
the
expense
limitation
would
apply.
I
think
a
proper
interpretation
of
the
"golf
course
operation”
as
it
has
been
called
is
that
it
was
an
adventure
in
the
nature
of
trade
and
not
the
"carrying
on
of
a
business".
Therefore,
the
limitation
imposed
by
subsection
18(2)
would
apply
for
a
second
reason.
The
second
aspect
of
the
carrying
charges
to
be
considered
is
the
application
of
paragraph
18(3)(c)
[sic].
That
subsection
provides
that
the
limitation
of
deductible
expenses
which
is
imposed
by
subsection
18(2)
does
not
apply
to
buildings
or
structures
on
the
property,
nor
to
land
subjacent
or
imme-
diately
contiguous
thereto,
which
last
is
necessary
for
the
use
of
the
buildings
or
structures.
The
purpose
of
this
subsection
when
read
together
with
subsection
18(2)
is
to
discourage
the
holding
of
vacant
land
for
speculative
purposes;
see
Hansen,
Krishna
and
Rendall,
Canadian
Taxation
(1981)
at
page
238.
The
sections
were
enacted
to
respond
to
a
“housing
crisis"
which
at
the
date
of
their
enactment,
it
was
thought,
was
being
created
by
real
estate
developers
and
speculators
holding
large
acreages
of
vacant
land.
Thus,
land
used
in
connection
with
a
building
or
structure
was
exempted
from
the
limitation
imposed
by
subsection
18(2).
It
is
common
ground
between
the
parties
that
paragraph
18(3)(c)
was
not
applied
in
calculating
the
expenses
allowed
to
the
plaintiff
and
the
other
members
of
the
group
(this
may
in
the
ultimate
calculation
not
matter
much).
It
is
common
ground
that
the
buildings
on
the
property
included:
(a)
a
dwelling
house
valued
in
1974
in
an
agreement
between
Vaughan
Golf
and
Country
Club
and
Schwartz
Schwebel
and
Dym
at
$90,000.00;
(b)
a
club
house
valued
in
1974
in
the
above
mentioned
agreement
at
$150,000.00;
and
(c)
a
pro
shop,
office
and
maintenance
shop
valued
in
1974
in
the
same
above
mentioned
agreement
at
$15,000.00.
The
Minister
has
valued
the
buildings
and
lands
thereunder
at
$320,000.
It
is
also
agreed
that
there
will
in
addition
be
a
value
which
should
be
attributed
to
the
subjacent
property
as
well
as
that
immediately
contiguous
to
those
buildings
and
which
amount
should
be
taken
into
the
computation
envisaged
by
subsection
18(3).
The
representative
for
the
defendant
(Mr.
Maid-
ment)
who
was
examined
for
discovery
indicated
that
an
amount
of
$40,000
per
year
had
been
calculated
as
attributable
to
the
carrying
charges
for
this
area.
I
would
note
that
both
parties
assumed
that
it
was
only
the
immediately
contiguous
area,
an
area
reasonably
restrained
in
size,
comprising
for
example
driveways
and
yards
adjacent
to
the
buildings
mentioned
which
fall
within
subsection
18(3).
No
argument
was
made
to
me
that
all
of
the
golf
course
property
might
have
been
considered
as
immediately
contiguous
to
and
necessary
for
the
use
of,
for
example,
the
club
house
or
pro
shop.
Certainly
there
was
no
evidence
adduced
by
the
plaintiff
to
support
such
a
contention.
Accordingly,
I
make
no
finding
as
to
whether
the
operating
golf
course
property
was
in
fact
the
kind
of
vacant
land
intended
to
be
covered
by
subsection
18(2).
Rather,
I
assume
that
it
was
not
the
case
and
that,
as
noted
above,
only
land
(parking
lots,
gardens,
yards,
etc.)
in
the
immediate
vicinity
of
the
above
mentioned
buildings
and
subjacent
thereto
fall
within
the
subsection
18(3)
exemption.
Since
the
defendant
has
made
no
reference
to
those
in
its
calculation
of
the
tax
payable
by
the
plaintiff
yet
did
a
calculation
of
its
own
that
$40,000
per
year
would
be
attributable
to
this
purpose
(refer:
examination
for
discovery
of
Mr.
Maidment
page
67-69)
an
order
will
be
issued
requiring
a
reassessment
to
take
account
of
at
least
this
amount
and
to
allow
it
to
be
deducted
as
a
business
expense
in
the
usual
way
before
applying
the
expense
limitation
set
out
in
subsection
18(2).
The
third
point
that
must
be
dealt
with
is
the
amount
of
carrying
charges
that
were
paid
with
respect
to
the
property
and
the
extent
to
which
those
which
were
paid
"on
behalf
of
the
doctors"
by
the
financiers,
might
enter
into
the
calculation
of
the
loss
which
the
doctors
may
claim
for
tax
purposes.
It
must
be
noted
that,
given
the
fact
that
section
18(2)
applies
to
limit
the
carrying
charges
which
are
deductible,
this
determination
is
somewhat
academic.
Nevertheless,
it
does
become
relevant
to
the
calculation
of
the
adjusted
cost
base
of
the
property
on
foreclosure.
Therefore,
I
shall
deal
with
the
issue.
I
will
deal
first
with
the
question
of
how
much,
as
a
factual
matter,
was
paid
as
carrying
charges
on
the
property.
It
is
clear
that
$1,130,314.30
was
paid
by
the
members
of
the
doctors'
group.
There
is
no
dispute
about
this
fact
and
the
defendant
accepts
it.
The
defendant,
however,
argues
that
that
is
all
that
can
clearly
be
shown
to
have
been
paid
as
carrying
charges
on
the
property.
The
doctors'
group
during
the
1974-1978
taxation
years
claimed
that
$2,201,876
had
been
paid
(this
is
the
amount
they
had
been
given
to
understand,
by
Kotowski,
had
been
paid).
This
sum
included
the
amounts
which
the
doctors
had
paid
out
of
their
own
pockets
as
well
as
the
amounts
paid
by
the
financiers
(Asellus
Investments
Limited
and
Sellhurst
Developments
Limited)
on
behalf
of
the
doctors.
Each
member
of
the
group
originally
claimed
his
proportionate
share
of
the
$2,201,876
sum,
before
such
losses
were
limited
by
the
department's
application
of
subsection
18(2).
The
evidence
at
trial
proved
that
at
least
$2,528,069.24
had
been
paid
as
carrying
charges.
The
defendant
disputes
both
the
$2,201,876
sum
and
the
$2,528,069.24
amount.
The
defendant
argues
that
the
evidence
respecting
the
determination
of
those
amounts
is
based
on
hearsay
and
on
unreliable
evidence.
Nevertheless,
the
evidence
of
Mr.
MacDonald
and
Mr.
de
Pellegin
establishes
to
my
satisfaction
that
the
amount
of
$2,528,069.24
was
paid
as
carrying
charges.
As
noted
above,
this
did
not
all
come
out
of
the
doctors'
pocket.
Indeed
it
is
clear
that
it
was
not
intended
to
do
so.
The
doctors
were
buying
themselves
into
a
loss
situation
for
a
few
years
with
the
expectation
that
they
would
eventually
make
a
profit
from
the
development
and
resale
of
the
property.
While
the
May
1974
agreement
contemplated
that
profits
(see
paragraph
19
of
that
agreement
set
out
above)
would
be
shared
75
per
cent
to
the
financiers
and
25
per
cent
to
the
doctors'
group,
such
an
arrangement
was
not
made
with
respect
to
expenses.
The
agreement
provided
that
the
financiers
would
make
such
outlays
on
behalf
of
the
doctors
and
this
they
did
although
the
record
keeping
was
poor
and
the
intercompany
transfers
at
times
somewhat
convoluted.
I
think
it
has
been
proven
that
an
amount
of
$2,528,069.24
was
paid
as
carrying
charges
for
the
property.
It
is
clear
that
the
joint
venture,
in
a
global
sense
encompassed
not
only
the
doctors'
group
but
also
Messrs.
Kotowski
and
DeCarlo
(in
both
their
personal
capacity
and
through
their
various
corporate
incarnations).
The
doctors'
group,
as
such,
while
referred
to
in
the
evidence
as
“the
joint
venture"
was
really
a
subset
of
the
joint
venture
proper.
It
is
clear
that
the
joint
venture
proper
was
structured
so
as
to
enable
the
doctors'
group
to
take
advantage
of
the
losses
which
would
be
incurred
in
the
early
years
of
the
development,
while
allowing
for
full
participation
of
all
members,
in
accordance
with
what
it
was
assumed
would
be
their
proportionate
share
of
the
venture,
once
profits
were
available.
This
raises
the
second
aspect
of
this
issue:
was
it
appropriate
for
the
doctors,
as
members
of
a
joint
venture,
to
claim
as
expenses
incurred
by
the
joint
venture,
amounts
in
excess
of
what
they
actually
paid
out
of
their
pockets.
The
defendant
argues
that
it
was
not,
that
each
should
be
restricted
in
the
amount
which
can
be
claimed
to
that
actually
paid
by
each:
the
"at
risk”
principle.
But
there
was
no
provision
in
the
Income
Tax
Act
at
the
relevant
time
which
so
provided.
(Refer:
subsections
96(2.1)-(2.7)
of
the
Act
relating
to
limited
partnerships,
which
were
added
to
the
Act
in
1986.)
See
also:
Watkins,
The
Demise
of
the
"Equity
Interest"
Rule?
(1984),
1
Can.
Current
Tax.
In
The
Queen
v.
Gelber,
[1983]
C.T.C.
381;
83
D.T.C.
5385
(F.C.A),
Mr.
Justice
LeDain
said
with
respect
to
capital
cost
allowance
which
might
be
claimed
by
a
taxpayer:
The
degree
to
which
an
investment
is
at
risk
is
not,
in
the
absence
of
a
provision
in
the
Act
or
the
regulations
to
that
effect,
a
valid
criterion
as
to
what
is
capital
cost.
And
in
the
United
Kingdom
case
Reed
(H.M.I.T.)
v.
Young,
[1986]
B.T.C.
242
(H.L.),
it
was
held
that
a
limited
partner
was
entitled
to
claim
as
losses
for
tax
purposes
amounts
in
excess
of
her
liability
obligations
under
the
partnership
agreement.
(It
was
this
case
which
led
to
the
1986
additions
to
section
96
of
the
Canadian
Income
Tax
Act;
subsections
96(2.1)
to
(2.7)
were
added
by
S.C.
1986,
c.
55,
s.
25(1),
applicable
after
February
25,
1986.)
In
this
case
it
is
the
income
and
expenses
of
a
joint
venture
which
are
in
issue,
not
those
of
a
limited
partnership.
Nevertheless,
there
is,
in
some
circumstances,
a
similarity
in
the
manner
in
which
tax
liabilities
is
calculated.
I
note
that
in
Grover
and
lacobucci’s
text,
Materials
on
Canadian
Income
Tax,
at
page
904,
it
is
said:
Joint
adventures
appear
to
be
almost
indistinguishable
from
partnerships.
A
rather
tenuous
and
questionable
distinction
may
be
suggested
in
that
a
partnership
does
not
necessarily
require
a
partner
to
contribute
labour
or
capital
whereas
a
joint
venture
by
its
very
nature
suggests
a
party
has
ventured
something.
In
this
case
the
doctors
submitted
tax
returns
during
the
1974-78
years
in
a
manner
similar
to
those
which
would
pertain
in
a
partnership
situation.
The
department
reassessed
on
that
basis.
The
agreement
between
the
joint
venturers
(i.e.
the
members
of
what
I
have
called
the
joint
venture
proper)
was
clearly
designed
to
allow
the
doctors'
group
to
take
the
benefit
of
the
losses
which
it
was
anticipated
would
arise
in
the
early
years
of
the
development
project.
(The
tax
consequences
for
the
doctors
disposition
by
them
of
a
75
per
cent
interest
to
the
financiers
is
a
matter
which
seems
not
to
have
been
addressed.)
During
the
1974-1978
taxation
years,
the
trustees,
financiers
and
managers
acted
in
accordance
with
the
agreement;
the
accounting
they
provided
to
the
doctors
flowed
the
losses
of
the
joint
venture
through
to
the
members
of
that
group.
The
Department
taxed
the
members
of
the
group
on
that
basis.
I
have
been
referred
to
no
authority
which
indicates
that
this
was
not
allowed
under
the
Income
Tax
Act
at
the
time.
It
accords
with
what
I
understand
to
have
been
the
rules
applicable
to
partnerships.
And,
as
noted
above,
the
department
during
the
1974-1978
taxation
years
treated
this
method
of
dealing
with
the
joint
venture
proceeds
as
appropriate.
That
leaves
for
consideration
the
fourth
argument
with
respect
to
the
carrying
charges.
The
defendant
argues
(refer
paragraph
18
of
the
statement
of
defence)
that
the
golf
course
operation
should
be
characterized
as
"an
adventure
in
the
nature
of
a
trade”
and
that
once
that
is
done,
then,
generally
accepted
accounting
principles
should
be
applied
to
require
the
plaintiff
to
deduct
all
expenses
incurred
with
respect
to
the
venture
as
expenses
for
the
year
in
which
the
property
was
disposed
of
("the
year
in
which
the
adventure
was
completed")
—
in
this
case
1979.
I
understood
this
argument
to
be
based
on
the
evidence
of
Mr.
Batch
who
testified
that
in
the
case
of
joint
ventures
the
recommended
method
of
accounting
was
of
this
nature.
Reference
was
also
made
to
the
decision
of
this
Court
in
Tobias
v.
The
Queen,
[1978]
C.T.C.
113;
78
D.T.C.
6028.
I
have
some
difficulty
with
this
argument.
In
the
first
place
the
Department
reassessed
the
plaintiff
for
the
1974-1978
years
on
the
basis
that
business
income
was
being
earned
during
those
years
and
the
losses
associated
therewith
were
claimable
to
the
extent
that
they
did
not
exceed
such
income.
Secondly,
as
I
understood
both
Mr.
Batch
and
Mr.
MacDonald's
evidence
it
was
that
the
applicability
of
the
generally
accepted
accounting
principles
referred
to
by
the
defendant,
depends
upon
whether
or
not
the
joint
venture
is
of
a
long
term
or
short
term
nature.
If
there
is
some
degree
of
certainty
that
the
joint
venture
will
be
completed
within
a
short
time
frame
then
accounting
for
all
expenses
in
the
year
the
venture
is
completed
is
appropriate.
Also
the
appropriateness
of
this
accounting
method
depends
upon
whether
or
not
revenues
are
earned
by
the
venture
in
the
short
term.
If
they
are
not
then
the
method
which
the
department
seeks
to
apply
may
be
appropriate.
In
any
event,
it
seems
to
me
that
in
this
case
the
argument
that
expenses
should
be
accounted
for
only
in
the
year
of
disposition
of
the
property
ignores
the
fact
that
there
was
no
guaranteed
short
term
conclusion
to
the
venture
and
that
there
were
annual
revenues
from
the
property
being
received.
Thus
accounting
for
the
expenses
in
the
year
in
which
they
occurred
is
in
my
view
appropriate.
The
conclusion
arising
from
the
above
is
that
subsection
18(2)
was
properly
applied
to
limit
the
expenses
attributed
to
carrying
charges
which
the
plaintiff
could
deduct
from
his
taxable
income
during
the
years
1974-1978,
except
that
subsection
18(3)
was
not
applied
to
exempt
from
that
limitation
an
amount
attributable
to
the
buildings
thereon
and
to
the
lands
subjacent
and
contiguous
thereto.
The
reassessment
will
be
referred
back
to
the
Minister
for
reassessment
on
that
basis.
That
leaves
tor
consideration
the
more
difficult
question
of
what
disposition
should
be
made
with
respect
to
the
losses
which
were
incurred
by
the
joint
venture
as
a
result
of
the
collapse
of
the
project
in
1979.
Section
79
-
Proceeds
of
Disposition
on
Foreclosure
As
noted
above,
the
second
mortgage
on
the
property
fell
into
arrears.
Vaughan
Golf
and
Country
Club
commenced
foreclosure
proceedings
in
October
1978.
The
doctors
first
learned
of
these
proceedings
in
April
of
1979;
they
(particularly
the
plaintiff)
took
numerous
steps
to
try
to
forestall
the
foreclosure,
to
find
alternate
buyers
and
to
salvage
the
situation.
These
were
to
no
avail;
the
foreclosure
was
concluded
and
the
Vaughan
Golf
and
Country
Club
repossessed
the
property.
The
plaintiff
argues
that
section
79
of
the
Income
Tax
Act
applies
to
determine
the
amount
of
the
loss
suffered
by
him
in
1979
as
a
result
of
the
foreclosure.
During
the
relevant
period,
section
79
read
as
follows:
Mortgage
Foreclosures
and
Conditional
Sales
Repossessions
79.
Where,
at
any
time
in
a
taxation
year,
a
taxpayer
who
(a)
was
a
mortgagee
or
other
creditor
of
another
person
who
had
previously
acquired
property,
or
(b)
had
previously
sold
property
to
another
person
under
a
conditional
sales
agreement,
has
acquired
or
reacquired
the
beneficial
ownership
of
the
property
in
consequence
of
the
other
person's
failure
to
pay
all
or
any
part
of
an
amount
(in
this
section
referred
to
as
the
"taxpayer's
claim”)
owing
by
him
to
the
taxpayer,
the
following
rules
apply:
(c)
there
shall
be
included,
in
computing
the
other
person's
proceeds
of
disposition
of
the
property,
the
principal
amount
of
the
taxpayer's
claim
plus
all
amounts
each
of
which
is
the
principal
amount
of
any
debt
that
had
been
owing
by
the
other
person,
to
the
extent
that
it
has
been
extinguished
by
virtue
of
the
acquisition
or
reacquisition,
as
the
case
may
be;
(d)
any
amount
paid
by
the
other
person
after
the
acquisition
or
reacquisition,
as
the
case
may
be,
as,
on
account
of
or
in
satisfaction
of
the
taxpayer's
claim
shall
be
deemed
to
be
a
loss
of
that
person,
for
his
taxation
year
in
which
payment
of
that
amount
was
made,
from
the
disposition
of
the
property;
(e)
in
computing
the
income
of
the
taxpayer
for
the
year,
(i)
the
amount,
if
any,
claimed
by
him
under
subparagraph
40(1)(a)(iii)
in
computing
his
gain
for
the
immediately
preceding
taxation
year
from
the
disposition
of
the
property
and
(ii)
the
amount,
if
any,
deducted
under
paragraph
20(1)(n)
in
computing
the
income
of
the
taxpayer
for
the
immediately
preceding
year
in
respect
of
the
property,
shall
be
deemed
to
be
nil;
(f)
the
taxpayer
shall
be
deemed
to
have
acquired
or
reacquired,
as
the
case
may
be,
the
property
at
the
amount,
if
any,
by
which
the
principal
amount
of
the
taxpayer's
claim
exceeds
the
amount
described
in
subparagraph
(e)(i)
or(ii),
as
the
case
may
be,
in
respect
of
the
property;
(g)
the
adjusted
cost
base
to
the
taxpayer
of
the
taxpayer's
claim
shall
be
deemed
to
be
nil;
and
(h)
in
computing
the
taxpayer's
income
for
the
year
or
a
subsequent
year,
no
amount
is
deductible
in
respect
of
the
taxpayer's
claim
by
virtue
of
paragraph
20(1)(1)
or
(p).
The
plaintiff
argues
that
he
and
the
other
members
of
the
doctors'
group
are
"other
persons"
(i.e.
the
debtors)
within
the
meaning
of
section
79.
That
the
carrying
charges,
disallowed
by
the
Minister
for
the
taxation
years
1974-1978
(as
being
in
excess
of
the
rental
revenue
received
from
the
property
during
those
years)
should
be
added
to
the
adjusted
cost
base
on
the
property,
in
accordance
with
sections
53(1)(f)
and
79.
The
plaintiff,
therefore,
calculates
the
loss
which
occurred
as
being:
|
(a)
original
cost
|
$7,778,661
|
|
(b)
carrying
charges
and
expenses
|
2,024,287
|
|
(c)
adjusted
cost
base
|
9,802,118
|
|
(d)
proceeds
of
disposition
|
5,640,192
|
|
(e)
non-capital
loss
|
$4,162,000
|
The
plaintiff's
share
(nine
per
cent)
of
this
is
claimed
by
him
as
a
non-capital
loss
for
the
1979
taxation
year
i.e.:
$355,913.
It
should
be
noted
that
the
$5,640,192
proceeds
of
disposition
is
calculated
on
the
basis
that
the
debts
extinguished
by
the
foreclosure
were
the
principal
amounts
outstanding
on
the
first
and
second
mortgages,
$270,000
and
$5,130,000
respectively,
making
a
total
of
$5,640,192.
The
defendant's
argument
is
simple;
the
doctor
owners
were
not
the
persons
who
owed
the
mortgage
money
to
Vaughan;
they
were
not
on
title
as
mortgagors.
It
was
the
trustees
(Downshire
Investments
and
Kotowski
and
Associates)
who
were
the
mortgagors.
It
was
the
trustees
who
were
the
owners
of
the
property.
It
was
the
trustees
who
held
the
property
as
inventory.
Therefore,
the
property
cannot
be
considered
to
be
inventory
in
the
hands
of
the
doctors
and
the
loss
which
occurred
to
them
can
be
no
greater
than
their
out
of
pocket
expenses
minus
revenue
received.
This
the
defendant
calculates
as
$1,130,314.30
which
the
doctors
paid
out
of
their
own
pockets
minus
the
$100,000
which
the
doctors
received
as
settlement.
The
plaintiff's
response
to
this
argument
is
that
if
the
doctors
are
not
the
"other
persons"
described
in
section
79
then
the
amount
of
the
loss
which
they
can
claim
is
the
whole
$7.7
million
or
$9.9
million
(depending
on
the
treatment
of
the
carrying
charges).
I
will
start
first
with
section
79.
That
section
is
what
I
will
call
a
calculation
section
only.
It
makes
no
reference
to
who
is
or
is
not
the
taxpayer.
It
refers
only
to
the
debtor
in
a
foreclosure
transaction
vis
à
vis
the
creditor
mortgagee.
In
the
case
at
bar
the
trustees
were
the
debtors,
but
they
were
not
the
taxpayers;
they
had
never
been
treated
as
such
by
the
Minister;
they
never
acted
as
such.
The
trustees
were
a
mere
conduit,
acting
on
behalf
of
the
beneficiaries
of
the
trust:
the
doctors'
group.
Section
79,
then,
provides
the
rules
which
govern
the
calculation
of
the
proceeds
of
disposition.
This
is
to
be
calculated
by
reference
to
the
original
cost
less
the
debt
extinguished
by
the
foreclosure.
It
is
clear
that
this
is
the
original
cost
of
$7,778,661
minus
the
amounts
extinguished
by
the
foreclosure
($5,640,192)
for
a
sum
of
$2,138,469.
I
think
it
is
clear
that
the
only
debts
extinguished
by
the
foreclosure
are
the
first
and
second
mortgagees.
Whatever
may
be
the
status
of
the
subsequent
mortgages,
counsel
for
the
plaintiffs
invites
me
not
to
speculate
thereon.
Indeed,
I
do
not
need
to
do
so.
It
is
fairly
trite
law
that
the
debt
on
the
covenants
with
respect
to
those
mortgages
could
not
be
extinguished
by
the
foreclosure.
As
to
who
is
liable
on
those
covenants
it
is
not
an
issue
I
need
to
decide.
In
addition,
while
I
have
referred
above
to
the
proceeds
of
disposition
being
$2,138,469
there
would
of
course
have
to
be
added
to
that
amount
the
expenses
which
were
disallowed
as
a
result
of
the
application
of
subsection
18(2).
Subsection
53(1)
of
the
Act
provides:
In
computing
the
adjusted
cost
base
to
a
taxpayer
of
property
at
any
time,
there
shall
be
added
to
the
cost
to
him
of
the
property
such
of
the
following
amounts
in
respect
of
the
property
as
are
applicable:
.
.
.
(h)
where
the
property
is
land
of
the
taxpayer,
any
amount
paid
by
him
after
1971
and
before
that
time
pursuant
to
a
legal
obligation
to
pay
(i)
interest
on
borrowed
money
used
to
acquire
the
land,
or
on
an
amount
payable
by
him
for
the
land,
or
(ii)
property
taxes
(not
including
income
or
profits
taxes
or
taxes
imposed
by
reference
to
the
transfer
of
property)
paid
by
him
in
respect
of
the
property
to
a
province
or
to
a
Canadian
municipality
to
the
extent
that
that
amount
was,
by
virtue
of
subsection
18(2),
not
deductible
in
computing
his
income
from
the
land
or
from
a
business
for
any
taxation
year
commencing
before
that
time;
Having
calculated
the
proceeds
of
disposition
it
is
then
necessary
to
turn
to
the
charging
sections
of
the
statute.
I
would
indicate
that
I
accept
that
the
doctors
were
the
"owners"
of
the
property.
They
were
described
as
such
in
the
May
29
agreement;
they
were
treated
as
such
by
the
financiers,
managers
and
trustees;
the
planned
acquisition
of
a
three-quarter
ownership
interest
by
Asellus
Investments
Limited
and
Sellhurst
Developments
Incorporated
never
materialized.
As
noted
above
the
trustees
were
a
mere
conduit
vis
a
vis
the
doctors.
Turning
then
to
sections
9
and
10
of
the
Act:
9
(1)
.
.
.
a
taxpayer's
income
for
a
taxation
year
from
a
business
or
property
is
his
profit
therefrom
for
the
year.
(2)
Subject
to
section
31,
a
taxpayer's
loss
for
a
taxation
year
from
a
business
or
property
is
the
amount
of
his
loss,
if
any,
for
the
taxation
year
from
that
source
computed
by
applying
the
provisions
of
this
Act
respecting
computation
of
income
from
that
source
mutatis
mutandis.
10(1)
For
the
purpose
of
computing
income
from
a
business,
the
property
described
in
an
inventory
shall
be
valued
at
its
cost
to
the
taxpayer
or
its
fair
market
value,
whichever
is
lower.
.
.
The
defendant
argues
that
under
the
May
29,
1974
agreement
the
cost
to
the
doctors
was
the
amounts
set
out
in
schedule
C
to
that
agreement.
These
were
the
amounts
they
were
bound
to
pay.
While
the
purchase
price
under
the
mortgage
was
$7.7
million,
and
the
doctors
were
to
be
the
owners,
it
is
argued
that
they
were
not
obligated
to
pay
the
full
purchase
price.
Under
the
terms
of
the
agreement
the
financiers
were
to
pay
the
amounts
in
excess
of
those
set
out
in
schedule
C.
The
defendant
argues
that
while
these
were
expressed
in
the
agreement
as
being
made
"on
behalf
of
the
doctors",
they
were
not
in
fact
such.
It
is
argued
that
they
should
be
seen
as
credit
towards
an
acquisition
which
never
in
fact
occurred.
It
is
argued
that
the
only
cost
to
the
doctors
was
the
cost
they
paid
out
of
their
own
pockets,
that
the
only
loss
to
them
was
this
amount.
I
find
the
Minister’s
position
in
this
case
somewhat
inconsistent.
He
reassessed
the
plaintiff
during
the
1974-1978
years
on
the
basis
that
the
joint
venture
was
earning
certain
revenues
and
incurring
certain
expenses.
The
net
result
(loss)
was
divided
among
the
doctors'
group
on
the
basis
of
their
percentage
share
in
the
venture
(albeit
limited
by
subsection
18(2)).
Yet
in
1979
when
the
property
was
lost
and
foreclosure
occurred,
the
Department
changed
the
focus
of
its
assessment.
Instead
of
computing
that
assessment
on
the
basis
of
the
loss
which
occurred
to
the
venture
and
dividing
it
among
the
members
of
the
group,
it
focused
on
the
cash
outlay
made
by
each
individual
doctor.
The
plaintiff
is
right
when
he
asserts
that
had
the
property
been
sold
in
1979
at
a
profit,
as
a
result
of
the
doctors'
efforts
of
that
year,
the
doctors
would
have
been
fully
taxed
on
the
profit.
The
defendant's
response
to
this
assertion
is
that
had
there
been
a
profit,
others
besides
the
doctors
(i.e.
Kotowski
and
DeCarlo)
would
have
been
asserting
a
right
to
share
in
that
profit.
Be
that
as
it
may,
that
did
not
happen.
The
acquisition
by
the
financiers
never
occurred.
The
financiers'
rights
never
crystallized.
And,
no
argument
is
made
respecting
a
deemed
proportionate
share
of
the
loss
that
should
be
attributed
to
the
financiers.
The
circumstances
in
this
case
are
unique
and
unusual.
But
it
seems
to
me
clear
that
under
the
May
1974
agreement
the
property
was
held
by
the
trustees
on
behalf
of
the
owners;
the
doctors
were
the
owners.
Whatever
may
have
been
the
arrangement
as
between
the
doctors
and
the
financiers,
inter
se,
when
the
mortgages
were
foreclosed
and
the
doctors
were
not
able
to
find
the
funds
to
pay
off
those
mortgages,
they
lost
the
property.
Thus,
in
my
view,
the
plaintiff
is
entitled
to
claim
his
respective
share
of
the
noncapital
loss,
which
occurred
as
a
result
of
the
disposition
of
the
property,
calculated
in
accordance
with
subsections
9(2),
10(1)
and
section
79
of
the
Income
Tax
Act.
The
assessment
of
taxes
owing
by
the
plaintiff
for
the
1974-78
years
and
for
the
1979
taxation
year
will
be
referred
back
to
the
Minister
for
reassessment
in
accordance
with
these
reasons.
Appeal
allowed
in
part.
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