Grandin Park Barber Shop & Beauty Parlour LTD v. Minister of National Revenue, [1984] CTC 2121, 84 DTC 1071

Sarchuk, TCJ:—Grandin Park Barber Shop & Beauty Parlour Ltd. (Grandin Park) is an Alberta private corporation incorporated under the laws of the Province of Alberta. it appeals from a notice of reassessment dated March 20, 1981, wherein it was reassessed for income tax in the 1977 taxation year by the addition to its income of the sum of $36,022.30 being a taxable capital gain upon disposition of property.

There is no dispute between the parties as to the essential facts. On or about August 31, 1976 the appellant disposed of a rental property described as Lots 23 and 24, Block 3, Plan (G) in the City of St Albert, Alberta, by way of expropriation under statutory authority by the said City, for a sale price of $136,000.

On October 31, 1977 the appellant purchased a rental property at 27 Glen- more Crescent, St Albert, Alberta, for a price of $63,910. Subsequently on April 26, 1978 the appellant acquired a 34 per cent undivided interest in a parcel of land in Caroline, Alberta, described as Pt NE 1/4 — 13 — 36 — 6 — W — SthM (the “Caroline property”) for a price to the appellant of $40,800. In acquiring its interest in the Caroline property the appellant did so by way of a partnership agreement with three other parties.

For the purposes of this appeal the respondent conceded that:

1. The original rental property owned by the appellant consisted of a single family residence located on a small parcel of land, and that the rental property acquired on 27 Glenmore Crescent was similar in nature and was acquired as a capital property in substitution for the use or function of the former property.

2. The disposition of the former property falls within the provisions of subparagraph 13(21)(d)(iv) of the Income Tax Act.

3. The Caroline property was in fact acquired by the appellant before the end of the second taxation year following the taxation year in which the proceeds of disposition of the former property became a receivable in accordance with subsection 44(1) of the Income Tax Act.

The parties differ in relation to the respondent’s contention that the appellant’s interest in the Caroline property was not property acquired as a capital property in substitution for the use or function of the former property.

The sections at issue are designed to allow a taxpayer to elect to defer the recognition of a capital gain when capital property is disposed of in certain circumstances, as in the case here, by way of expropriation.

The appellant called its two shareholders, Marcel Chartrand and Fred Zottl. Their evidence disclosed that the appellant acquired the former property in St Albert, Alberta, in 1975. It consisted of a three bedroom bungalow situated on a 70 by 130 foot lot. The purchase price of $27,000 was financed in part by a mortgage of $21,333 and by way of a bank loan of $2,485.

A tenant occupied the property at the time of purchase and continued to do so at least until the expropriation. Rental income was $375 per month. Following the taking of the former property both Chartrand and Zottl, having been made aware of the provisions of section 44 of the Income Tax Act, attempted to find replacement properties for the appellant. On October 31, 1977 the rental property at 27 Glenmore Crescent was purchased in St. Albert. However, both testified that they had substantial difficulty in locating another replacement property given the amount of money that remained. They looked in Edmonton and in St Albert without success. In due course they were introduced to the Caroline property by a friend who was in the real estate business. According to Mr Zottl it was not a property they could afford to purchase themselves and as a result an agreement was entered into with three other investors whereby the appellant acquired its 34 per cent interest.

The Caroline property consisted of a house and 113 acres situated on the edge of the Town of Caroline. Some minimal commercial development was evident nearby, Mr Zottl testifying that there was a country hotel approximately a block away. The Caroline property had frontage on a main thoroughfare, the highway leading from Innisfail.

The house itself was located on a side road with a small portion of the acreage in front of it. It was described by Mr Chartrand as a well constructed two bedroom residence with a finished basement containing two additional bedrooms. There were no other buildings of any nature or type. The Caroline property did not appear to have any agricultural value or use, aside from the fact that the vendor (and first tenant) Mr Weiland grazed a few cattle there. Mr Zottl described the acreage as being “some muskeg — some trees”.

The rental income at the time of purchase was $3,600 per annum increasing annually to the current $6,600. Mortgage payments amounted to $7,500 per annum. No evidence was given as to the amount of taxes, maintenance costs or any other expenses, but the evidence did disclose that the appellant in the first year following the purchase was required to pay an additional $117 every quarter. This situation has continued to this day albeit the amount of the annual subsidy has been reduced somewhat.

The appellant concedes the Caroline property did not produce a good return but insisted that it was satisfied with it as a replacement property bearing in mind that it had looked for a long time but was unable to find anything more suitable.

The appellant also maintained that at the time of purchase of the Caroline property it had no views as to any possible development and that had not changed over the years. Both Mr Chartrand and Mr Zottl conceded that it was the appellant’s intention to eventually dispose of the Caroline property, in that respect appellant’s intention being the same as it was in relation to other properties that it owned.

The appellant called its chartered accountant, Mr Isaiah Malach, who testified that following the expropriation he “was hounding the appellant” to buy a replacement property. He confirmed that it had some difficulty in finding an appropriate replacement property and further confirmed that following substantial pressure from him the appellant went ahead and purchased the Caroline property. Mr Malach testified that he did not know the other parties and was not otherewise privy to the transaction.

The issue before the Court is whether the Caroline property is a replacement of a former property within the meaning of subsection 44(1) of the Income Tax Act (as amended by SC 1976-77, c 4, s 11).

The section provides:

44. (1) Where in a taxation year an amount has become receivable, as described in subsection (2), by a taxpayer as proceeds of disposition described in subparagraph 13(2 l)(d)(iii) or (iv), 54(h)(iii) or (iv) of any capital property (in this section referred to as his “former property’’) and, before the end of the second taxation year following the taxation year in which such amount became receivable, the taxpayer has acquired a capital property (in this section referred to as his “replacement property’’) as a replacement for his former property and his replacement property has not been disposed of by him prior to the time he disposed of his former property, notwithstanding subsection 40(1)

(a) the gain, if any, from the disposition of his former property is the lesser of

(i) the gain therefrom otherwise determined, and

(ii) the amount, if any, by which the proceeds of disposition of his former property exceed the cost, or in the case of depreciable property the capital cost to him, determined without reference to paragraph (b), of his replacement property, and

(b) the cost, or in the case of depreciable property the capital cost to him of his replacement property, at any time after the time he disposed of his former property, shall be deemed to be the cost, or in the case of depreciable property the capital cost to him of his replacement property otherwise determined, minus the amount, if any, by which the gain described in subparagraph (a)(i) exceeds the amount, if any, determined under subparagraph (a)(ii).

There was no definition of the term “replacement property” in the Act at that time and none of the related sections offer any assistance.

It was suggested by counsel that the Court was entitled to look for assistance to the provisions of subsection 44(5) of the Income Tax Act as enacted by SC 1977-78, c 1, s 8(1), and applicable to dispositions of property after March 31, 1977. This section reads:

44. (5) Replacement property. For the purposes of this section, a particular capital property of a taxpayer is a replacement property for a former property of the taxpayer, if

(a) it was acquired by the taxpayer for the same use as the use to which he put the former property. (Italics added.)

The respondent argued that the amendments in 1977-78 merely codified the accepted and well understood meaning of the term “replacement property” and referred the Court to subsection 37(2) of the Interpretation Act, which reads:

37. (2) The amendment of an enactment shall not be deemed to be or to involve a declaration that the law under such enactment was or was considered by Parliament or other body or person by whom the enactment was enacted to have been different from the law as it is under the enactment as amended.

It should also be noted that by SC 1978, c 32, s 8(1), paragraph 44(5)(a) was once again amended to read:

44. (5) Replacement property. For the purposes of this section, a particular capital property of a taxpayer is a replacement property for a former property of the taxpayer, if

(a) it was acquired by the taxpayer for the same or a similar use as the use to which he put the former property. (Italics added.)

The foregoing sequence of amendments suggests that at the relevant time a deferral of a capital gain was available to a taxpayer simply upon the acquisition of a capital property as a replacement for his former property with no other qualifying or limiting terms.

Neither counsel was able to refer me to any cases interpreting the phrase “replacement property” as used in this section, nor was I able to find any in my own independent research.

The respondent’s position was that while the relevant section was enacted to permit a taxpayer to postpone a taxable capital gain in circumstances where the disposition was beyond the taxpayer’s control it was incumbent upon the taxpayer to bring himself squarely within the four corners of the section since this was an exempting provision. The respondent’s position further was that because the Caroline property did not bear a similar physical description and more particularly because it was a house situated on agricultural property it could not be a replacement property as contemplated by the Act. The respondent urged the Court to find that the Caroline property had a speculative character and that notwithstanding the rental of the house it was not acquired as a rental operation, was entirely speculative in nature and was not purchased as a “proper” replacement property.

The appellant contended that subsection 44(1) of the Income Tax Act as it read at the relevant time did not require a replacement property to be acquired for the same or similar use. I am of the view that the appellant’s position is reasonably well founded, for in fact the respondent appears to have adopted a similar view.

Paragraph 16 of IT-259R reads:

16. For dispositions prioer to April 16, 1977, a property is considered to be a replacement of a former property where it can reasonably be considered to have been substituted for the use or function of that former property.

Nowhere do the words “same” or “similar” appear.

The Concise Oxford Dictionary defines replace at page 951:

replace — “Put back in place; take place of, succeed, be substituted for; (in pass) be succeeded or have one’s or its place filled by, be superseded; fill up place of (with, by), find or provide substitute for.”

and substitute at page 1151:

substitute — “1. (Person or thing) acting or serving in place of another. 2. Make (person or thing) fill a place or discharge a function for or for another; (vlg) replace (person or thing) by or with another; put in exchange (for). 3. Act as substitute (for).”

Neither the former property nor the replacement properties produced much of a return on investment. I do not believe they were expected nor intended to by the appellant. All three acquisitions by the appellant appeared to be motivated primarily by a speculative urge. it seems clear that in each instance the appellant purchased the property solely with a view to its potential enhancement in value and eventual disposition at a profit. Can it be suggested that the replacement property should not in such circumstances reasonably be considered to have been substituted for the use or function of the former property? I think not.

Accordingly I find that the Caroline property was a capital property acquired as a replacement for the appellants’ former property within the meaning of subsection 44(1) of the Act.

It is therefore ordered and adjudged that the appeal is allowed and the matter referred back to the respondent for reconsideration and reassessment in accordance with the above reasons for judgment.

Appeal allowed.