Moses Deitcher v. Minister of National Revenue, [1978] CTC 2002, 78 DTC 1024

Roland. St-Onge (orally: November 4, 1977):—The appeal of Mr Moses Deitcher came before me on November 2, 1977, at the City of Montréal, Québec, and the issue is whether, during his 1971 taxation year, the amount of recapture claimed by the appellant, while a resident of Canada, is subject to taxation in his hands as a non-resident of Canada, pursuant to subsections 110(1) and (5) of the Income Tax Act.

At the hearing, counsel for the respondent filed an agreed statement of facts which reads as follows:

1. From the period of 1961 to 30 November 1971 Appellant owned a 50% interest in a property located in Chomedey, Laval, which was known as Chomedey Plaza and earned income from property within the meaning of the Income Tax Act.

2. The property consisted of a building constructed on land owned as to 50% by the Appellant with the remaining 50% interest owned by Pearl Josephson.

3. Construction of the building was commenced in 1961 and was completed in 1962.

4. On 18 May 1970, the Appellant ceased to be a Canadian resident and became a resident of Freeport, Grand Bahama, Bahamas.

5. As a non-resident of Canada, Appellant elected under subsection 110(1) of the Income Tax Act, RSC 1952, c 148 to be taxed on his rental income in accordance with the said provisions. The said election was applicable to the 1970 taxation year.

6. On 30 November 1971, Appellant disposed of his 50% interest in Chomedey Plaza. The proceeds of disposition received by Appellant was $112,000 which was allocated as follows:

$ 10,838.23 Land

$101,161.77 Building

7. In the 1961 to 1969 taxation years, Appellant claimed capital cost allowance of $30,580.35 on the building and parking lot comprising the subject property.

8. In the 1970 taxation year, Appellant claimed $2,262.43 as capital cost allowance.

9. In computing his income for the 1971 taxation year, being the year in which the subject property was disposed of, Appellant included the amount of $2,262.43 as recaptured depreciation, being the full amount of capital cost allowance claimed by Appellant in the 1970 taxation year. . . .

Counsel for the appellant argued:

1. In the absence of an election under section 110 of the Income Tax Act, the provisions of subsection 20(1) do not apply to non-residents of Canada earning income from property.

See: Lea-Don Canada Ltd v MNR, [1970] CTC 346 at 349: 70 DTC 6271 at 6274:

“A non-resident not carrying on business in Canada is not a person entitled to such a deduction and therefore section 20(4) cannot properly be said to be ‘applicable’ to him.”

2. The Appellant having elected in the 1970 taxation year for the provision of section 110 to apply, is liable for recaptured depreciation by virtue of subsection 110(5) as computed by subsection 20(1).

See: MNR v Bessemer Trust Company et al, [1973] CTC 12 at 16; 73 DTC 5045 at 5048:

‘‘I cannot escape the conclusion that, having elected to pay tax for the 1969 taxation year as though its sole source of income for that year was its real property in Canada, section 20 operates to require that the ‘recapture’ amount be included in computing the respondent’s income for the year.”

3. However, the amount of recaptured depreciation for which the Appellant is liable is restricted to the amount of depreciation deducted by the nonresident in his quality as a non-resident.

See: subsections 110(1), (5).

4. The Income Tax Act in 1971 did not contain a prevision whereby a nonresident having previously claimed depreciation in his quality as a resident of Canada, would have a liability for depreciation taken by him as a resident of Canada. This interpretation has been recognized by the Supreme Court of Canada and followed by the Department of National Revenue in administra tive practice.

See: Lea-Don Canada Ltd v MNR, [1970] CTC 346 at 349; 70 DTC 6271 at 6274; advance income tax ruling issued by the Department of National Revenue.

By electing under subsection 110(1) in the 1970 taxation year, it is only the amount of depreciation deducted by virtue of the said subsection that is subject to recapture under subsection 20(1).

5. A taxing statute must be strictly interpreted. An individual cannot be liable for tax unless he comes within the expressed provisions of the statute. Where there is any ambiguity, it must be interpreted in favour of the taxpayer.

See: MNR v Maclnnes, [1954] CTC 50 at 52, 53; 54 DTC 1031 at 1032 and 1033];

MacLaren v MNR, [1928-34] CTC 135 at 145;

The King v William Shelly, [1935-37] CTC 48 at 57.

6. By subsequent legislation, Parliament has amended the Income Tax Act so that a non-resident will be liable for recaptured depreciation even if the amount of depreciation in question was claimed by him in his quality as a resident of Canada thereby creating the specific statutory provisions whereby a liability in the present case would therefore exist. However, this provision in the form of an amendment to subsection 216(5) (formerly 110(5)), is effective for a disposition taking place after 6 May, 1974.

See: Resolution 121—Ways and Means Motion, Fall 1974 and commentary;

Bill C-49, subsection 216(5).

7. Conclusion

In conclusion, Appellant submits that the capital cost allowance of $30,580.35 claimed by Appellant as a resident of Canada is not subject to recapture in 1971 pursuant to subsection 110(5) by virtue of the fact that Appellant was a non-resident at the time the subject property was disposed of and the only amount claimed by him as a non-resident and subject to recapture by virtue of subsection 110(5) is $2,262.43.

Counsel for the respondent argued that the decision in Lea-Don Canada Ltd does not apply to the case at bar because the appellant company, not being subject to assessment under Part I of the Income Tax Act, was not entitled to apply subsection 20(1) of the Act, whereas Mr Deitcher, by using the election under section 110, was able to do so. The subsequent legislation amended the Act to render the nonresident liable to recaptured depreciation, even if the amount of depreciation was claimed by him in his capacity as a resident of Canada, and also as to the comments made at the time of the amendment and filed as Exhibit. Counsel for the respondent said that such evidence was irrelevant and the Board should look rather at the relevant sections of the Act.

Referring to the decision in Bessemer Trust Company cited by the appellant, he said that this decision was relevant to the case at bar and read the following at page 15 [5047], and I quote:

In the first place, it is common ground that, if subsection 110(5) as enacted in 1955 is applicable, then section 20 does apply. I agree with the learned trial judge that subsection 110(5) does not apply in this case because the provision from the tax convention quoted above excludes it.

Apart from the convention, as it appears to me, the situation is that, at the time of the tax convention, a non-resident could elect, in respect of a year when he was paid an amount as rent on real property in Canada, to file a return under Part I, in which event he became. liable to pay tax under Part I as though the real property in Canada were his only source of income and he was not bound to file such a return in respect of a subsequent year when he disposed of the property so as to become liable to “recapture”, but, after 1955, if a non-resident so elected to pay tax under Part I In respect of a year when he was paid such an amount as rent, it carried with it a liability, by virtue of the new subsection 110(5), to file a return in respect of the year of disposition and to pay any tax arising from the “recapture” provision in subsection 20(1). In my view the application of section 110, including subsection (5), involves “tax treatment” of “rentals from real property derived from sources within Canada” . . .

Then he referred to the notice of appeal to show that the appellant had taken as capital cost the amount of some $60,000, being undepreciated capital cost of the asset and said that the relevant section mentions that capital cost cannot be undepreciated capital cost.

As may be seen, the appellant, in trying to avoid being taxed on the depreciation he took when he was a resident in Canada, had great difficulty in finding a proper figure to use, in order to take his depreciation for the 1971 taxation year. It shows that the non-resident appellant did not properly use the relevant section to compute his taxable income in his 1971 taxation year.

It has to be noted that in the Advance Income Tax Ruling issued by the Department of National Revenue, the taxpayer did not exercise his option under subsection 110(1) and, consequently, this ruling cannot be utilized in favour of the appellant.

Furthermore, as stated in the case cited and following a careful examination of subsections 110(1) and (5), once a non-resident has chosen to pay tax under subsection 110(1), he is considered to be a Canadian resident. Under both subsections 110(1) and (5), it is written respectively:

(1) . . . thereupon be liable, in lieu of paying tax under this Part . . . [which is Part III]

(5) . . . to pay tax under Part I for that subsequent taxation year as though

(a) he were a person resident in Canada, . . .

As may be seen in both subsections, the taxpayer is presumed to be resident in Canada.

For these reasons, I have no hesitation in deciding that once a nonresident has chosen to pay tax under subsection 110(1), he falls under subsection 110(5) when he disposes of his property and should be taxed on the depreciation he took while he was a Canadian resident.

For these reasons, the appeal is dismissed.

Appeal dismissed.