Ercole Tertulliani and Clement Cardin v. Minister of National Revenue, [1988] 2 CTC 2068, 88 DTC 1447

Couture, C.J.T.C. [Translation]: —By consent of the parties, these appeals were heard together.

These are appeals against assessments issued by the respondent for the taxation years 1981 and 1982. Although the dates of the notices of assessment are different and the amounts used to establish the assessments are also different, the legislative provisions on which the respondent relied to issue both assessments are the same.

In its assessments, the respondent disallowed a deduction for soft costs in the calculation of their respective incomes for the taxation years under appeal amounting to:

In addition, the respondent disallowed deductions for capital cost allowance for the taxation year 1982 in the amounts of $2,429 in the case of Clément Cardin and $2,405 in the case of Ercole Tertulliani.

At the hearing, the appellants consented to judgment with respect to their claims for capital cost allowance.

The evidence that was presented at the hearing related to Ercole Ter- tulliani’s situation. According to his tax return, he was sales manager at Xerox Canada Inc. at the time.

On February 24, 1981, the appellant signed an offer to purchase with Condominium Les Condors Ltée, designated as the "vendor" in the document, which offer was accepted on the same date by the vendor. In that document, the appellant offered to purchase from the vendor a condominium apartment and a parking space in a building to be constructed for the price of $96,000. The purchase of this residential unit by the appellant was for the purpose of earning rental income. The purchase price was to be paid as follows:

The sales contract between the "vendor" and the appellant was signed before a notary on October 1, 1982.

As mentioned earlier, the appellant claimed as a deduction in the calculation of his income the soft costs in respect of the purchase of his residential unit — $4,938 in 1981 and $5,981 in 1982 [sic].

The respondent disallowed these deductions on the basis:

(a) that the unit of the multiple unit residential building was acquired by the appellant in 1982 only;

(b) that the appellant did not show that he had incurred or paid before signing the sales contract in October 1982 the soft costs in question;

(c) that the soft costs which were disallowed form an integral part of the capital cost borne by the appellant as a result of the acquisition of his unit of the multiple unit residential building.

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 a way 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 appellant's 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.

A taxpayer who wishes to deduct certain expenses from income from a business or from property must comply with paragraph 18(1)(a) which reads:

18(1) In computing the income of a taxpayer from a business or property, no deduction shall be made in respect of:

(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property.

[Emphasis added.]

This provision would apply to some of the expenses claimed by the appellant, but would not apply to the interest on money borrowed by the vendor and included in the soft costs, given that the expense in question does not satisfy the requirements for the deduction of interest stipulated in subparagraph 20(1)(c)(i) :

20(1) Notwithstanding paragraph 18(1)(a), (b) and (h), in computing a taxpayer's income for a taxation year from a b usiness or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto:

(c) an amount paid in the year c dr payable in respect of the year (depending upon the method regularly followed by the taxpayer in computing his income) pursuant to a legal obligation to pay interest on

(i) borrowed money used for the purpose of earning income from a busi- ness or property (other than borrowed money used to acquire property the income from which would be exempt or to acquire a life insurance policy).

Given that the appellant did not pay any of the soft costs that he claimed, the provisions of paragraphs 18(1)(a) and 20(1)(c) leave no doubt that the amounts cannot be deducted in co nputing his income for the years under appeal.

Counsel for the respondent submitted to the Court two judgments of the Court* [1] which confirm the conclu ions to which I have come in these appeals.

For these reasons, the appeals ar e dismissed.

Appeals dismissed.