Normand Gilbert v. Her Majesty the Queen and Robert Côté v. Her Majesty the Queen, [1996] 3 CTC 2377, 97 DTC 619

Bowman J.T.C.C.: — These appeals, which were heard together on common evidence, concern the Minister of National Revenue’s refusal to allow the deduction of soft costs with respect to an investment in a multiple-unit residential building (MURB) in calculating the appellants’ income for the 1981 taxation year.

In making the assessments of the appellants Côté and Gilbert the Minister disallowed the deduction of amounts of $52,131 claimed by each of them as soft costs on the ground that these expenses were part of the cost of purchasing the immovable property and thus constituted capital costs which should be added to the cost of the property.

Counsel for the appellants raised the question of the validity of the assessment notices as a preliminary objection. They argued that the Minister should have given their clients more specific details of the grounds for the assessments. For this reason, they argued that I should vacate the assessments or, if I do not think this a proper remedy, should at least shift the burden of proof.

The notices of assessment contained the following notice:

An explanation of the foregoing tax adjustments will be sent to you under separate cover within 10 days of the dispatch of this notice.

[Translation.]

Additionally, a T7W-C form was attached to the notice of assessment including inter alia the following information:

Apparently the explanation for the adjustments which the appellants were promised in their notices of assessment was not sent to them. However, they had enough information to file detailed notices of opposition.

I cannot accept the argument that the notices of assessment were deficient or void. The Minister definitely had a duty to provide the taxpayer with a complete statement of his reasons, but not necessarily in the notice of assessment. I therefore dismiss the preliminary objection as to the validity of the assessments.

Further, I do not feel that the fact that the Minister did not set out the reasons for his assessment in greater detail in the notice has the effect of shifting the burden of proof. The taxpayer has a duty to establish that the assessment is in error: the Minister has no duty to show it is correct.

The only circumstances in which the Minister has the burden of proof (except for the assessment of penalties or assessments made after the regular deadlines) are those in which the respondent seeks to justify the assessment by relying on assumptions on which the Minister did not rely at the time he made the assessment (Minister of National Revenue v. Pillsbury Holdings Ltd., [1964] C.T.C. 294, 64 D.T.C. 5184 (Ex. Ct.)). In the case at bar it does not appear that the Minister changed the reasons on which he relied in making the assessments. The reasons given in the reply to the notice of appeal to justify the assessments appear to be the same as those on which the Minister relied in making the assessments.

Turning now to the substantive issue in these cases, the appellants met one Claude Deschênes in 1981 and discussed investments with him. They were looking for an investment which had tax advantages. Mr. Deschénes recommended purchase of the immovable property known as “Repentigny I” from a builder known as “Habitations Au Clair Logis Inc”. A draft plan was produced. One thing is quite clear: the decision to invest in Repentigny I was based on the assumption that one of the advantages of this investment was that the appellants would be able to deduct the entire amount of the soft costs in calculating their income for the year of purchase. I mention this not to criticize the appellants’ reasons but to point out that they made this purchase in good faith, relying on the advice of tax experts who in their turn relied on what they understood to be administrative policies of the Department of National Revenue.

The immovable property was purchased on the assumption that the soft costs incurred by the builder would be transferred to the buyers, that the latter could deduct them and that the payment received by the builder would represent “a full gain income from the transaction”. (This expression is contained in the contract which Habitations Au Clair Logis Inc. required the buyers, including the two appellants, to sign.

The soft costs in question are the following:

The appellants deducted their share (2/12, that is, $52,131 for each one) in calculating their income. The Minister disallowed this deduction and added the amount disallowed to the cost of the immovable property.

According to the evidence the costs in question were incurred by the builder before the appellants purchased the immovable property. The bills for these costs were all sent to the seller. Further, the amount of $144,500, claimed as “brokerage, development and sales costs”, represents commissions on sale of the immovable property which were paid to a broker and legal fees for supervision, consultation and real estate development.

I am convinced that these costs were not deductible expenses by the appellants in calculating their income from a business or property. Instead, they were expenses which the seller incurred and which he did try to transfer to the buyers, which expenses were an integral part of the price of the immovable property. In the promise to purchase (Exhibit A-ll), the total price of $1,665,000 includes the soft costs. The appellants did not incur these costs as soft costs. It was the builder who incurred them and added them to the selling price, just like the other building costs.

The facts in these cases are almost identical to those considered by my colleague Judge Lamarre in Laurence v. Minister of National Revenue, [1990] 1 C.T.C. 2567, 90 D.T.C. 1489 (T.C.C.). It is not necessary for me to repeat her legal conclusions. I need only say that I agree with her reasoning. Similarly, there is the decision in Tertulliani v. Minister of National Revenue, [1988] 2 C.T.C. 2068, 88 D.T.C. 1445 (T.C.C.), by the Chief Judge of this Court, that in Fortin v. Minister of National Revenue, [1993] 2 C.T.C. 3009, 94 D.T.C. 1599 (T.C.C.), by Judge Dussault and the decisions in J.H. Kuhlmann v. R. (sub nom. Kuhlmann v. Canada), [1995] 1 C.T.C. 2910 (sub nom. Kuhlmann v. R.), 95 D.T.C. 417 (T.C.C.) and in Besse v. Minister of National Revenue, [1996] 1 C.T.C. 32 (sub nom. Besse v. R.), 95 D.T.C. 5208, by the Federal Court Trial Division. No distinction can be made between those cases and the instant cases.

There are two other points I should mention. The appellants noted that the seller was required to treat the reimbursements of the soft costs he received as a “full gain income from the transaction”. This is not surprising since the seller was operating a business engaged in construction and the sale of immovable property. However, that does not make the part of the selling price attributable to soft costs incurred by the builder deductible by the buyers.

The appellants further argued that the Minister allowed other taxpayers to deduct soft costs in similar circumstances. I admit this may be possible, but the fact that another taxpayer received a different treatment from that accorded the appellants cannot affect the conclusion at which I must arrive, based on the evidence and the law, in the instant cases (see Hokhold v. R. (sub nom. Hokhold v. Canada), [1993] 2 C.T.C. 99, 93 D.T.C. 5339, at pages 105-6 (D.T.C. 5344)).

It is not clear, based on the evidence, that in making the assessments the Minister allowed the appellants an additional capital cost allowance in respect of the soft costs he added to the price of the immovable property. The taxpayers are entitled to claim an additional capital cost allowance if it has not already been given to them.

The appeals are allowed in so far as, if he has not already done so, the Minister must give the appellants an additional capital cost allowance in respect of the soft costs added to the cost of the immovable property, provided that the appellants request it.

The respondent is entitled to her costs.

Appeal allowed in part.