Fortin v. MNR, 94 DTC 1603, [1993] 2 CTC 3009 (TCC)

Dussault, T.C.C.J.:—These appeals were heard on common evidence. For each of the appellants, they concern assessments for the 1981 and 1982 taxation years. By these reassessments the Minister of National Revenue ("the Minister") disallowed the deduction by each of the appellants of soft costs on a condominium located in the Les Jardins de I'Archipel complex on lie des Soeurs, Verdun, Quebec. Additionally, as regards the appellant Jean-Claude Fortin, the Minister also disallowed deduction of maintenance and repair costs and the capital cost allowance now referred to as "deduction for depreciation" for the 1982 taxation year. The expenses claimed by each of the appellants and disallowed by the Minister break down as follows:

The facts on which the Minister relied in arriving at the reassessments of Jean-Claude Fortin are stated in paragraphs 4(a) to (n) of the reply to the notice of appeal. These subparagraphs read:

(a) the corporations 108254 Canada Inc., Investissements Bilco Ltée and Jardins de I'Archipel Ltée formed a company known by the trade name “Les Jardins de I'Archipel" to construct a multiple unit residential building (Class 31);

(b) the total cost of the Les Jardins de I'Archipel project was about $30 million for the construction of a fifteen-storey building, including 201 condominium-type apartments;

(c) construction work apparently began on or about May 4, 1981 and December 17, 1982 was certified as the date on which work ended;

(d) apart from deposits received from customers interested in purchasing an apartment and to be applied against the selling price of the apartments, all financing for the project was provided by Jardins de I'Archipel Ltée, which negotiated a mortgage contract with the Société générale de France and made repayments;

(e) all construction costs, including the incidental, indirect and initial expenses commonly referred to as "soft costs", were incurred and paid for by and on behalf of Les Jardins del’Archipel Ltée and/or Les Jardins de I'Archipel (the company);

(f) there is no written agreement mentioning the existence of a limited partnership between the appellant and Jardins de I'Archipel Ltée or Jardins de l’Archipel (the company), and no agreement by which the appellant gave a mandate to Jardins de I'Archipel Ltée or Jardins de I'Archipel (the company) as a building contractor;

(g) on or about March 2, 1981 the appellant submitted an offer to purchase apartment No. 703 together with Mr. Tibor Bogri, and the said offer was accepted by Jardins de I'Archipel Ltée;

(h) the purchase offer contains no ambiguity as to the intent and undertakings of each of the parties, in light, among other things, of the following clauses appearing in that purchase offer:

Clause 17

17. The purchaser shall not be entitled to occupy the apartment before the date on which the deed of sale is executed or the date on which the apartment is regarded as substantially completed.

Clause 19

19. The purchaser shall not be entitled to sell, assign or transfer his rights in this offer or his acceptance without the prior written consent of the seller, which consent the seller shall not unreasonably withhold. The parties further acknowledge that neither this offer nor its acceptance may be registered at length or by abstract against the property, subject to invalidity of such registration and damages. Possession and ownership title in the property shall not be transferred to the purchaser until the time of the deed of sale.

22. If accepted, this offer constitutes the full and final agreement between the parties. No other representation or warranty is made by the seller, expressly or by implication, except those contained herein. Any other interpretation, any elevations, plans and/or other documents provided or shown previously to the purchaser shall not form part of this offer.

(i) in submitting his 1981 and 1982 tax return [sic] the appellant claimed a deduction for apartment No. 703, Jardins de I'Archipel, as his share of an alleged rental loss of $5,000 in 1981 and $10,343.70 in 1982, broken down as follows:

	1981	1982
soft costs	$5,000	$9,114.27
capital cost allowance		1,206.75
maintenance and repairs		22.68
Total loss claimed	($5,000)	($10,343.70)

(j) the appellant did not show that the soft costs were an outlay or expense made or incurred by the appellant to earn income from a business or property;

(k) the appellant did not acquire ownership of his apartment before March 1, 1983;

(l) before March 1, 1983 the appellant had no legal obligation and paid or incurred no outlays or expenses as owner, such as real estate taxes, mortgage interest, condominium fire insurance fees, electricity and other such expenses;

(m) as he was not owner of his apartment before March 1, 1983 the appellant (who purchased the apartment on March 1, 1983 to obtain rental income) could not deduct the capital cost allowance in 1982;

(n) the appellant consequently was not entitled to deduct soft costs, maintenance expenses and capital cost allowance for 1981 and 1982 in respect of an apartment in the Jardins de I'Archipel building.

[Translation.]

It may be noted that the purchase offer was dated February 13, 1981 and the deed of sale signed on March 7, 1983. The appellants René Loran and Jacques Laurin signed identical purchase offers in March 1981 and the deeds of sale for their respective condominiums were also concluded before a notary in March 1983. The soft costs claimed for 1981 and 1982 by each of them and disallowed by the Minister were mentioned above. The remaining facts on which the Minister relied in each of the cases are similar.

The appellants’ position was that they became owners as soon as the purchase offer was accepted. They alleged that this was the intent of the parties despite the wording of the purchase offer and in particular that of clause 19, since they had to make several instalment payments or investments before the deed of sale was signed. The appellant Jean-Claude Fortin added, when filing a cost "adjustment" document (Exhibit A-1), that he had to pay interest expenses, his share of electricity and heating costs, real estate and school taxes, fire and liability insurance for a period of 122 days preceding the signature of the deed of sale. Surveying costs of $300 had to be added to these "adjustments", making a grand total of $5,895.70. The document referred to clauses 9 and 20 of the purchase offer specifying an "adjustment" for these items from an "adjustment" date 45 days before the scheduled date of occupation. No connection was made between the payment of these expenses in 1983 and the deductions claimed in 1981 and 1982 for soft costs.

The appellants added that they invested in reliance on the promoter's representations, indicating that they could deduct soft costs in 1981 and 1982 pursuant to government policy offering a tax shelter to investors in multiple unit residential buildings ("MURBs"). They maintained that everything done to certify their respective condominiums as Class 31 buildings and establish the soft costs was duly completed before 1983. However, it should be noted that the documents entered in evidence provide no particulars as to the composition of soft costs for 1981 and 1982. A document originating with a firm referred to as Le Groupe Hanscomb Inc. (Exhibit A-5) indicates only the total of soft costs and their breakdown by square foot of living space. No further explanation was provided by the appellants.

In support of the argument that the transfer of ownership took place at the time the purchase offer was accepted, the appellant Jacques Laurin submitted that he in fact signed a lease with a tenant as of March 1, 1983, though the deed of sale for the condominium he had purchased was not signed until March 2, 1983.

The respondent's position is straightforward. Each of the appellants did not become owner until March 1983, at the time the deed of sale was signed before a notary. In his submission, the purchase offer and the deed of sale contained no ambiguity as to the time ownership was to be transferred. Accordingly, he submitted that art. 1234 of the Civil Code of Lower Canada must be applied and there should therefore be no question of contradicting a valid written instrument by testimonial evidence of a different intent. To determine the time ownership was transferred, he relied on a decision of Chief Judge Couture of this Court in Tertulliani v. M.N.R., [1988] 2 C.T.C. 2068, 88 D.T.C. 1447, in which the facts were similar to those of the instant case. He further submitted that there was no evidence the seller acted as the appellants’ mandatary and so incurred soft costs on their behalf. Finally, he considered that there was also no evidence that the appellants concluded a contract for services with the seller. In this regard, counsel for the respondent distinguished the facts of the instant appeals from those of Schuler v. M.N.R., [1990] 1 C.T.C. 2264, 90 D.T.C. 1078 (T.C.C.), in which Chief Judge Couture also rendered the decision, this time in favour of the appellants who after purchasing a lot had instructed the seller to build buildings on it.

In Tertulliani, supra, Chief Judge Couture analysed the situation of an appellant who had signed a purchase offer similar to that signed by each of the appellants in the instant case, and which moreover contained a clause identical to clause 19 mentioned above regarding the time of possession and the time transfer of the propriety title took place. At page 2070 (D.T.C. 1448-49) of his decision, he said:

The appellant admitted that all he had paid for his unit was the purchase price referred to in the sales contract of October 1, 1982 in accordance with the provisions in the offer to purchase of February 1981. It should be noted that the price of the unit referred to in the offer to purchase of $96,000 was subsequently reduced to $91,500 under the sales contract, due to changes made to the building. The appellant also admitted that he never directly paid any of the suppliers of materials or any other amounts paid for the construction of the building. He claimed that, by virtue of the offer to purchase, he was legally bound to the vendor and that the offer constituted in away a conveyance of the property rights in his unit. In fact, he added, the signing of the sales contract on October 1, 1982 was simply a formality and added nothing, from a legal point of view, to the offer to purchase.

The appellants' submission as to the legal effect of the two documents in question, being the offer to purchase and the sales contract, is fundamentally

wrong. An offer to purchase is not a conveyance of property, any more than the simple promise of sale provided in article 1476 of the Civil Code of the Province of Québec. Moreover, the provisions contained in the offer to purchase are specific as to the obligations they entail and as to the acquisition by the appellant of proprietary title to the unit. Without elaborating on these provisions, I would refer to clause 16 of the offer to purchase and I quote:

. . .Possession of and proprietary title to the property shall be transferred to the purchaser only upon execution of the sales contract.

This means that the appellant became the owner of his unit only after the soft costs had been paid or became payable by the vendor.

The appellant also argued that the Court should take into account the fact that he had been told by the vendor that he would be entitled to deduct the soft costs and that it seemed to him that such information was consistent with the government's policy of encouraging investments in the construction industry. Whether or not the proposition is well-founded, it cannot stand up against a precisely worded enactment.

The evidence showed beyond a shadow of doubt that the soft costs claimed by the appellant were in fact incurred by the vendor and, furthermore, before the appellant became the owner of his unit. These costs were an integral part of the construction costs of the building and were therefore proportionally reflected in the selling price of each unit.

[Translation; emphasis added.]

I can only subscribe to these observations, which completely answer the arguments raised by the appellants in the instant case. In accordance with clause 19 of the purchase offer and in view of the date on which the deed of sale was signed, they did not become owners of their respective condominiums until March 1983. The expenses claimed by each person as soft costs in 1981 and 1982 are therefore not deductible. The appellant Jean-Claude Fortin also cannot deduct the maintenance and repair costs and capital cost allowance he claimed in 1982. I do not have to rule on the deductibility of interest and other expenses paid in 1983.

I would simply add that if someone such as a promoter or seller wishes to enable investors to benefit from an otherwise authorized deduction, he must design the transaction and draft the legal documents so that this result be achieved. Mere intent does not suffice. In this connection we may recall the observations of Dickson, C.J. of the Supreme Court of Canada in Bronfman Trust v. The Queen, [1987] 1 S.C.R. 32, [1987] 1 C.T.C. 117, 87 D.T.C. 5059, at pages 54-55 (C.T.C. 129, D.T.C. 5067-68):

It was submitted — and the Crown generously conceded — that the Trust would have obtained an interest deduction if it had sold assets to make the capital allocation and borrowed to replace them. Accordingly, it is argued, the Trust ought not to be precluded from an interest deduction merely because it achieved the same effect without the formalities of a sale and repurchase of assets. /t would be a sufficient answer to this submission to point to the principle that the courts must deal with what the taxpayer actually did, and not what he might have done: Matheson v. The Queen, [1974] C.T.C. 186, 74 D.T.C. 6176 (F.C.T.D.), per Mahoney, J. at page 189 (D.T.C. 6179).

[Emphasis added.]

Similarly, in Friedberg v. Canada, [1992] 1 C.T.C. 1, 92 D.T.C. 6031, referred to by counsel for the respondent, Linden, J.A. of the Federal Court of Appeal, speaking for the Court, said the following at pages 2-3 (D.T.C. 6032):

In tax law, form matters. A mere subjective intention, here as elsewhere in the tax field, is not by itself sufficient to alter the characterization of a transaction for tax purposes. If a taxpayer arranges his affairs in certain formal ways, enormous tax advantages can be obtained, even though the main reason for these arrangements may be to save tax (see Canada v. Irving Oil Ltd., [1991] 1 C.T.C. 350, 91 D.T.C. 5106, per Mahoney J.A.). If a taxpayer fails to take the correct formal steps, however, tax may have to be paid. If this were not so, Revenue Canada and the courts would be engaged in endless exercises to determine the true intentions behind certain transactions. Taxpayers and the Crown would seek to restructure dealings after the fact so as to take advantage of the tax law or to make taxpayers pay tax that they might otherwise not have to pay. While evidence of intention may be used by the courts on occasion to clarify dealings, it is rarely determinative. In sum, evidence of subjective intention cannot be used to "correct" documents which clearly point in a particular direction.

[Emphasis added.]

For these reasons, the appeals are dismissed.

Appeals dismissed.