Douglas R. Kozan v. Minister of National Revenue, [1987] 1 CTC 2258, 87 DTC 148

Goetz, T.C.J.:—This is an appeal by the appellant from reassessments of his income tax for the 1979 and 1980 taxation years. The issue to be determined is as to when the appellant disposed of certain property — 1979 or 1980?

The appellant and the Estate of George Kozan (deceased) owned an undivided one-half interest in a 28-suite apartment block in Saskatoon. The owner of the other undivided one-half interest was Homestead Developments (1973) Ltd., otherwise known as “Homestead”, a company wholly owned by Douglas Kozan, the appellant. On September 28, 1979, the appellant and the executor of the Estate of George Kozan (deceased) entered into an agreement for sale of the apartment block for the selling price of $680,000. The purchaser agreed to assume the first mortgage of approximately $416,130 and the second mortgage of approximately $143,830, and to release $120,000 on closing day. Adjustments and closing date was set for November 1, 1979.

The solicitors for the purchaser wrote the solicitors for the vendors on October 15, as follows:

RE: Marion, Alex from Kozan

Purchase of 1002 Dufferin Avenue

Saskatoon, Sask.

We are solicitors for Mr. Alex Marion, the purchaser of the subject property. On reviewing the Offer to Purchase, it would appear that we will require from you, before closing, the following documents and material:

(1) Memorandum of Agreement covering allocation of purchase price, general assignment of leases and Vendor's covenant that the same are in good standing, detailed statement as to tenants security deposits and interest thereon, and representation as to compliance with The Residential Tenancies Act.

(2) Bill of Sale covering all chattels.

(3) Transfer of Title.

(4) Surveyor's Certificate.

(5) Original 10% Capital Cost Allowance Certificate issued by Canada Mortgage and Housing Corporation.

(6) Delivery of all subsisting Leases.

(7) Statement of Adjustments.

I do not yet have information respecting the proper description of the purchaser or the allocation of the purchase price. As to the latter, I understand the allocation is to be based on your client’s disclosure of original land cost, and I would appreciate receiving that information from you at your earliest convenience.

We have been advised by the City Assessor's office in Saskatoon, that the 1978 arrears in the amount of $7,041.61 are unpaid and we will require your confirmation that the same will be paid from the sale proceeds.

On November 1, 1979, the purchasers took possession of the property and at this time they received rents from the tenants in the apartments. On October 29, 1979, solicitors for the purchasers wrote the appellant's solicitors advising that they would extend the time for possession of registerable transfer to November 15, 1979, and at the same time advising that if such transfer was not provided by that date the purchaser could elect to cancel the contract of sale.

On November 2, 1979, the purchaser's solicitors forwarded the sum of $109,422.86 on certain trust conditions.

On November 19, 1979, the purchaser's solicitors again wrote the solicitors for the vendors revising the conditions set out in the letter of November 2, 1979, regarding the release of funds and again upon the following conditions:

RE: Marion from Kozan

Purchase of 1002 Dufferin Avenue

You were to call on November 16th and advise regarding the revised trust conditions discussed the previous day.

I am prepared to revise the conditions set out in my letter of November 2nd to permit you to release funds to the vendors, but only on the condition, first, that certain of the outstanding items are dealt with before release of funds and, second, that you undertake to fulfill the remaining conditions before December 15th. [Emphasis added.]

The items to be dealt with before release of the funds or use for any other purpose are:

(1) Pay taxes.

(2) Confirm that October 15 and November 1 mortgage payments have been made and that all utilities and services have been paid to October 31.

(3) Send original 10% Capital Cost Allowance Certificate.

(4) Acknowledge and confirm our statement of adjustments.

(5) Pay interest on security deposits (as discussed).

(6) Pay amount of November rentals to us.

Your release of the balance of funds to the Vendors will be your undertaking to provide the other items, to satisfy and discharge any encumbrances or writs of execution against the land or the chattels (other than those agreed to be assumed) immediately upon out registration of the Transfer and Bill of Sale, and in the event that you have not provided us with a registerable Transfer of Land by December 15, 1979, to pay to us on demand by trust cheque for unconditional release to our clients, the sum of $109,422.86 plus interest thereon at the rate earned on the funds before release less only the amount of interest on security deposits paid to us.

In connection with item number (4) in my letter of November 2nd, I have been advised by Mr. Gerry Parker that no Compliance Certificates will be issued until fire extinguishers have been installed in accordance with a work order previously issued to the Vendors. Your release of the funds will be your further undertaking to do what is necessary to obtain those Certificates.

I am sure that you will want to satisfy yourself in relation to the chattel encumbrances and writs of execution presently registered against the names of Douglas Kozan and George Kozan before releasing funds.

If you find these conditions acceptable, please confirm in writing. Should you decide not to accept these conditions, then I am quite prepared, in any event, to extend the date for providing a Transfer and Certificate to December 15th, 1979. I would insist, however, that you have the Vendors account to us immediately for the full amount of rent collected for the month of November, in accordance with condition number (5) of my letter of November 2nd. That is something which cannot be put aside any longer, since the mortgage payment to Royal Trust is now past due. Condition number (5) was and still is a trust condition upon which you received our cheque, and I must insist upon performance

I hope that there will be no difficulty in resolving the outstanding matters.

Yours truly,

Signed

PATRICK N. MCDONALD

On November 27, 1979 the purchaser's solicitors again wrote solicitors for the vendors saying among other things as follows:

As I see it, there are three aspects of the vendors' performance that are at the moment not adequately provided for. First, we do not have, and cannot expect to receive immediaely a Transfer of the land. Second, there are substantial claims against the property which the funds forwarded to you as the cash balance to close, may or may not be adequate to satisfy. I am referring to the third mortgage, the various writs of execution against George Kozan, interest on security deposits, taxes and improvements required under order of the Fire Marshall. Third, your client has collected the rents for the month of November and has not accounted to the purchasers in that regard. Ordinarily, of course, the purchaser would be prepared to adjust the November rents against the cash balance to close. However, we are not prepared to recommend that arrangement where a Transfer has yet to be provided (or undertaken to be provided) and where there is some uncertainty that the cash balance is sufficient to satisfy prior claims.

We have discussed these matters by telephone and I am writing simply to emphasize that the entire transaction is in jeopardy unless you are able to effect some immediate arrangements that will secure our client’s position.

For the moment, the position between us appears to be that we have proposed trust conditions by letter of November 19th that would extend the date for completion to December 15th and your most recent advice is that you cannot accept those conditions.

There were several claims and writs of execution against the property and the purchaser's solicitors insisted that these be cleared away.

On December 5, 1979, the solicitors for the vendors wrote the purchaser's solicitors enclosing all necessary documentation including the transfer of title. However, in that letter it was indicated that the transfer could not be used since transmission of title from the estate to the executor had not as yet been obtained. There was an undertaking by the vendors' solicitors as follows as contained in that letter:

Obviously, if we cannot transfer title to you as set out in the various agreements between the parties, we would be responsible for the sum of money forwarded by your offices to ours and we accept that responsibility. On the other hand, we believe that we are now armed with all of the necessary documentation to close this transaction, assuming that your clients execute the Memorandum of Agreement; therefore, we shall proceed at our own risk to begin disbursement of funds, in order to finalize this transaction, which we trust you find satisfactory. If there are any matters which we have overlooked, please advise forthwith.

Following that letter, the $109,422.86 held in trust by the vendors' solicitors was disbursed leaving in the trust account legal fees (not charged) and approximately $1,916.74 to be paid to the vendors. The Official Guardian certificate was not obtained until February 26, 1980. The Title was finally registered on March 27, 1980, and the balance of the trust account in the amount of $1,916.74 was forwarded to the appellant and legal fees were charged. I have detailed the exchange of key letters flowing between the solicitors for the vendors and purchaser to show the co-operation between them and the basic conditions and undertakings relevant to the completion of the sale.

The appellant took his income tax documentation to a firm of chartered accountants and on the information provided to them they prepared the appellant’s 1979 tax return on the basis that the land title transaction was completed in 1979. The appellant admits that he read the return before signing it on April 29, 1980, but said that he was in a hurry to meet the deadline. He was subsequently advised by his accountants that he should file an amended return on the basis that the transaction was not completed in 1979 and an amended return was filed on August 26, 1980. The appellant himself admits that he felt the transaction had been completed in 1979 but on the advice of his accountants reversed his position.

The Minister in his replies to the notices of appeal relied, inter alia, upon paragraph 13(21)(c), subparagraphs 13(21 )(f)(iv) and subsection 31(1) of the Income Tax Act, R.S.C. 1952, c. 148 as amended by S.C. 1970-71-72, c. 63, s. 1.

In short, the Minister says that the sale as such, for tax purposes, was completed in 1979, whereas the appellant-vendor, maintains the sale was not completed until 1980.

The vendors were unable to produce a transfer by November 1, 1979, and the purchaser's solicitors agreed in writing to defer obtaining title to November 15, 1979, and at the same time the vendors gave possession of the apartment building to the purchaser on November 1, 1979. The purchaser retained the right to cancel the agreement for sale or to extend the time in which the transfer was to be provided. The vendors could not deliver a registerable transfer by November 1, 1979 because:

(a) letters probate had to be resealed;

(b) the employees of the Land Titles Office were on strike;

(c) the appellant’s sister was a minor and an Official Guardian’s Certificate was required;

(d) the second mortgagee was hesitant to allow assumption by the purchaser.

On November 2, 1979 the purchaser's solicitors forwarded the sum of the $109,422.86 to the vendors’ solicitors according to the usual trust conditions as set out (supra), and based on the following statement of adjustments:

The property was also encumbered with a chattel mortgage, several executions and a third mortgage. On November 27, 1979, the “closing” date was extended to December 15, 1979, but as declared by the purchaser's solicitors “the entire transaction is in jeopardy”. Many phone calls were passed between solicitors in an attempt to expedite closing. Both solicitors for the vendors and purchaser were anxious to assist one another in closing the transaction. By letter dated December 5, 1979, the vendors' solicitors advised the purchaser that the trust funds sent to them on November 2, 1979, were being disbursed and that he would disburse these funds at his own risk.

Meanwhile the purchaser from November 1, 1979, had obtained possession, collected all rents, became responsible for taxes, assumed two mortgages and took on all the rights and privileges as owner of property. This was with the clear acquiescence of the vendors. Trust funds, other than for legal fees and a minor adjustment, were all disbursed by December 12, 1979, as shown by the trust ledger of the vendors' solicitors:

The appellant’s position is that there was no legal entitlement for the purchaser in the property until the transfer was registered in March 1980, and that in spite of the purchaser assuming full use and control and respon- sibility for the property in 1979, there was a condition precedent which had to be met before the actual title could pass.

In support of his position he cited a number of cases, the most relevant being:

Victory Hotels Limited v. M.N.R., [1962] C.T.C. 614; 62 D.T.C. 1378

M.N.R. v. Wardean Drilling Limited, [1969] C.T.C. 265; 69 D.T.C. 5194

Nauss v. M.N.R., [1978] C.T.C. 3122; 78 D.T.C. 1796

L.S. Ross Enterprises Limited v. M.N.R., [1984] C.T.C. 2338; 84 D.T.C. 1295

Laurentide Rendering Inc. v. The Queen, [1982] C.T.C. 400; 83 D.T.C. 5066

Scandia Plate Ltd. v. The Queen, [1982] C.T.C. 431; 83 D.T.C. 5009

The Queen v. Imperial General Properties Limited, [1985] 1 C.T.C. 40; 85 D.T.C. 5045

First City Trust Co. v. Friesen (1985), 38 Sask. L.R. 220.

Though these cases are helpful in determining the time when the vendors were entitled to receive the proceeds of sale and as to when a sale was completed and closed, the facts of this case force the Court to take a different route to reach its conclusion in determining when in fact disposition of the property was effected. Subparagraphs 13(21 )(d)(i) and 54(c)(i) of the Act appear to be applicable.

The sequence of events show that the agreement for sale was dated September 28, 1979. Full possession and use of the property was taken by the purchaser on November 19, 1979, who at the same time assumed full responsibility for taxes and for two mortgages registered against the land. Although, the purchaser accounted to the vendors for the November rents (because the conditions to effect the closing date had not been met) he took rents thereafter and acted and asserted the apparent rights of an owner.

He had all the incidences of ownership and had released the purchase moneys to the vendors and had acquiesced in the vendors disbursing such funds (other than for legal fees) by December 12, 1979. To all intents and purposes he had waived any objection to title by his conduct and by paying the purchase price to the vendors (see Burke v. Popoff, [1923] 2 W.W.R. 648 (C.A.)).

Further, the vendors filed their 1979 tax returns treating the transaction as between them and the purchaser as having been completed. The Minister, under the circumstances, was entitled to and did rely on this representation by the vendors (see The Queen v. Wilchar Construction Ltd., [1979] C.T.C. 117; 79 D.T.C. 5086).

The vendors, albeit, filed on advice of their accountant, amended 1979 tax returns which treated the sale as not being completed until 1980. The vendors had received the full purchase price which they used and disbursed in 1979.

The registration of title was delayed to March 1980, but what had to be done in 1980 were under the circumstances, mere housekeeping measures, to wit, the obtaining of the Official Guardian’s Certificate and transmission of title. Both treated this as an assured event. Both acted, in every way, as if the disposition was completed in 1979. It is clear then, that the Minister's reassessments for the 1979 and 1980 taxation years were correct.

The appeal is dismissed.

Appeal dismissed.