Hans Leib v. Minister of National Revenue, [1984] CTC 2324, 84 DTC 1302

Taylor, TCJ:—These are appeals heard in Toronto, Ontario, on December 5, 1983, against income tax assessments for the years 1975, 1976 and 1977 in which the Minister of National Revenue assessed a taxable capital gain against the appellant. The notices of appeal read as follows:

1. On March 30th, 1972 I purchased a single family dwelling known municipally as #275 Greenwood Avenue. I did not occupy the house as a principal residence but rented the entire house to a tenant. Attached and marked Exhibit “A” is a photocopy of my solicitors reporting letter in connection with the said purchase. Attached and marked Exhibit “B” is a copy of the statement of adjustments for the said purchase.

2. On April 12th, 1976 I was about to be married, I purchased a single family dwelling known municipally as #72 Don Valley Drive, Toronto, with the intention of occupying it as the principal residence of myself and my wife. Attached and marked Exhibit “C” is a copy of the offer to purchase. Attached and marked Exhibit “D” is a copy of the reporting letter. Attached and marked Exhibit “E” is a copy of the Statement of Adjustments.

3. In order to finance my purchase of 72 Don Valley Drive I listed 275 Greenwood Avenue for sale but was unable to sell 275 Greenwood Avenue at a reasonable price. Unfortunately, I was also unable to arrange permanent financing for 72 Don Valley Drive and I was forced to sell this home on May 27th, 1976 before I actually moved into it. Attached and marked Exhibit “F” is a copy of the agreement of sale. Attached and marked Exhibit “G” is a copy of the reporting letter. Attached and marked Exhibit “H” is a copy of the statement of adjustments. 72 Don Valley Drive was vacant during my ownership of it.

4. Because I had nowhere else to live with my new wife I gave notice to my tenant at 275 Greenwood Avenue and after the said tenant vacated the said home, July 31, 1976, my wife and I moved into 275 Greenwood Avenue in August of 1976. Attached and marked Exhibit “I” is a copy of the appraisal of 275 Greenwood Avenue as of July 31, 1976.

5. Although the use of 275 Greenwood Avenue has changed from a tenant occupied to a principal residence I have not sold the said house. My wife and I continue to live at 275 Greenwood Avenue to the present time.

6. Since I have not sold 275 Greenwood Avenue I have not received the proceeds of any sale and therefore have not actually received any benefit from it. No gain has as yet been realized by me. I submit that no capital gain has as yet taken place and therefore I should not be reassessed as if a capital gain had occurred.

The position of the Minister was:

. . . the appellant, having acquired the property known for municipal purposes as 275 Greenwood Avenue, for the purpose of gaining or producing income therefrom (rental) and commenced to use it as his principal residence on July 31, 1976, he is deemed by subsection 45(1) of the Income Tax Act, R.S.C. 1952, Chapter 148 as amended, to have disposed of the property for proceeds equal to the fair market value at July 31, 1976.

Before examining the precise question before the Court, as I understand it, it is noted for the record that counsel for the Minister did agree at the outset of the hearing that the history of this matter had been somewhat complicated by assessments which could have duplicated certain years and that at least a further amount of $290 in costs associated with the alleged disposal by the taxpayer should be accorded to the appellant. Rather than the Court entering into a detailed review of these points (since there did not appear to be any dispute on them between the parties), the Court accepted the undertaking of counsel for the Minister that to whatever degree reassessments were warranted, he would ensure that these were struck by Revenue Canada after the judgment on the main question was given by the Court, and that he would also ensure that any tax assessed was not “duplicated”.

It would seem to me that the fundamental assertion of the Minister in this matter — that deemed proceeds of disposition are no different than any other proceeds of disposition, for purposes of income tax — is patently correct. However, since the matter does not appear to have been previously addressed directly, some amplification might be in order.

The basic contention of counsel for the appellant was that the word “his” (as in "his capital gain” (paragraph 38(a)) in the various relevant sections of the Act was particularly significant since “proceeds” did not become “his” (the taxpayer’s) until a much later point in time when the real property might be sold to a third party and then such proceeds of disposition in the form of taxable funds or other property would become “his”. The basis of that argument, as I see it, must be that even the “right” to the “proceeds of disposition” did not vest in this taxpayer at the time in 1976 when he took possession of the house as his principal residence. When asked by the Court to indicate the source of the funds (or in whatever other manner) the taxpayer “reacquired” the property (subparagraph 45(l)(a)(iv)) if not by the utilization of the deemed proceeds of disposition, counsel’s view was that that point should not enter into the determination of this particular question. The point at issue, according to counsel, was only the nature and taxability of the “proceeds of disposition” (subparagraph 45( l)(a)(iii)). I do not agree — subparagraphs (iii) and (iv) of paragraph 45(1 )(a) are vitally interrelated.

Both counsel agreed that if the transaction at issue (“disposed of it” (subparagraph 45(l)(a)(iii) ) had developed under a different set of circumstances in which the taxpayer had sold the house to a third party, there would have been a capital gain rightly taxable in the appellant’s hands as such. I believe it can be postulated from that common ground between the parties that (leaving aside other considerations) income tax would have been paid. Using simple numbers for illustration purposes, if the taxpayer had paid $50,000 for the property in 1972, and sold it in 1976 to a third party for $100,000 and paid $10,000 income tax on the $50,000 gain, he would then have ended up with $90,000 net.

Now, let us assume that there were only two houses available — the subject one at 275 Greenwood, and an identical one at 277 Greenwood, all other things were equal and he had a choice between the two houses — he could have reclaimed 275 Greenwood as his principal residence, and faced the problem before the Court, or he could have sold 275 Greenwood, and acquired 277 Greenwood instead. Since 277 Greenwood would cost him $100,000, he would only have $90,000 available and would be required to put up $10,000 of his own funds (or provide some other satisfaction) in order to acquire 277 Greenwood and make it “his” house. In simple terms, he would have found it necessary to replace the $10,000 income tax he had paid in order to have an equivalent property. As I see it, section 45 of the Act as it applies to these appeals merely ensures equal treatment (no less and no more) to taxpayers changing the use of a property with those taxpayers who acquire a principal residence in the manner outlined in this matter. The fact that this taxpayer did not receive in “funds or other physical property” (mortgage, note, etc.), the proceeds of disposition in 1976 is not relevant to the determination of whether the deemed proceeds of disposition are taxable as a result of that transaction in 1976. They are so taxable. The proposition put forward in these appeals by the taxpayer would not result in any “cruel and unusual treatment” (since the Charter of Rights was also raised as a defence) but rather could result in inequitable and discriminatory income tax treatment to all taxpayers who fell under the normal capital gain provision of the Act rather than those covered by such “deeming” sections as section 45.

The appeals are dismissed.

Appeals dismissed.