W Robert Donaldson v. Minister of National Revenue, [1976] CTC 2132, 76 DTC 1107

A W Prociuk:—The appellant, W Robert Donaldson, appeals from the respondent’s reassessment of his income for the taxation year 1971 wherein capital cost allowance for the taxation years 1969 and 1970 totalling $4,750 was added to the appellant’s 1971 income on the ground that it was deemed recaptured; and wherein capital cost allowance claimed for the first eight months of 1971 in the sum of $1,383.36 was disallowed and added back to income on the ground that the appellant had no remaining assets in any class of depreciable property at the end of the said years within the meaning of subsection

(1) of section 1100 of the Income Tax Regulations and paragraph (a) of subsection (1) of section 11 of the Income Tax Act as it was then in force.

The facts of this appeal are not in dispute, and are as follows. The appellant, at all material times, was employed by the British Columbia Telephone Company as an administrator and is presently manager of marketing and development with that corporation. In or about the month of August 1960, the appellant purchased a house at 1653 Peters Road in North Vancouver, British Columbia, which he and his family occupied as a residence until the end of December 1968, at which time he was transferred to Montreal by his employer.

From January 1, 1969 until August 31, 1971 the appellant rented out the said house. On completion of his assignment in Montreal in August of 1971, he and his family returned to North Vancouver and reoccupied the said house as their residence as of September 1, 1971. In filing his income tax return for the taxation year 1969 the appellant deducted from the rental income capital cost allowance in the sum of $2,500 determined on the value of $25,000 that he placed on his said house as of January 1, 1969. In the taxation year 1970, he claimed a deduction in respect of capital cost allowance in the sum of $2,250. In the taxation year 1971 he claimed a capital cost allowance deduction for the period from January 1 to August 31 in the sum of $1,383.36.

The respondent’s Notice of Reassessment is dated December 14, 1973. The appellant filed his Notice of Objection on March 1, 1974. On or about August 27, 1974 the respondent caused one of his appraisers, Mr Gerald Folstad, to do an appraisal as to the fair market value of the said home as of January 1, 1969 and August 31, 1971. Mr Folstad was called as a witness on behalf of the respondent and his appraisal report, based on the market data approach, was filed as Exhibit R-1. His estimate of the fair market value of the said house as of January 1, 1969 was $18,000, and as of August 31, 1971 $18,500.

The respondent confirmed his reassessment on January 3, 1975.

The relevant sections of the Income Tax Act, as it was then in force, read as follows:

20. (1) Where depreciable property of a taxpayer of a prescribed class has, in a taxation year, been disposed of and the proceeds of disposition exceed the undepreciated capital cost to him of depreciable property of that class immediately before the disposition, the lesser of

(a) the amount of the excess, or

(b) the amount that the excess would be If the property had been disposed of for the capital cost thereof to the taxpayer,

shall be included in computing his income for the year.

(6) For the purpose of this section and regulations made under paragraph (a) of subsection (1) of section 11, the following rules apply:

(a) where a taxpayer, having acquired property for the purpose of gaining or producing income therefrom or for the purpose of gaining or producing income from a business, has commenced at a later time to use it for some other purpose, he shall be deemed to have disposed of it at that later time at its fair market value at that time;

(b) where a taxpayer, having acquired property for some other purpose, has commenced at a later time to use it for the purpose of gaining or producing income therefrom, or for the purpose of gaining or producing income from a business, he shall be deemed to have acquired it at that later time at its fair market value at that time.

1100. (1) Under paragraph (a) of subsection (1) of section 11 of the Act, there is hereby allowed to a taxpayer, in computing his income from a business or property, as the case may be, deductions for each taxation year equal to

Rates

(a) such amounts as he may claim in respect of property of each of the following classes in Schedule B not exceeding in respect of property

(i) of class 1, 4%,	(x) of class 10, 30%,
(ii) of class 2, 6%,	(xi) of class 11, 35%,
(iii) of class 3, 5%,	(xii) of class 12, 100%,
(iv) of class 4, 6%,	(xiii) of class 16, 40%,
(v) of class 5, 10%,	(xiv) of class 17,	8%,
(vi) of class 6, 10%,	(xv) of class 18, 60%,
(vii) of class 7, 15%,	(xvi) of class 22, 50%,
(viii) of class 8, 20%,	(xvii) of class 23, 100%,
(ix) of class 9, 25%,	(xviii) of class 25, 100%, and
	(xix) of class 26,	1%,

of the amount remaining, if any, after deducting the amounts, determined under section 1107 and 1110 in respect of the class, from the undepreciated capital cost to him as of the end of the taxation year (before making any deduction under this subsection for the taxation year) of propery of the class;

The appellant took the position throughout that his situation was not covered by the provisions of the Act and paragraph (a) of subsection (6) of section 20 in particular and that he was not subject to assessment on recaptured capital cost allowance. In support of his argument, he cited the case of Tripp v MNR, 31 Tax ABC 357: 63 DTC 313, where W S Fisher, Esq, QC, Member of the Tax Appeal Board as it was then constituted, says at page 363 [317]:

In this case, however, the appellant did not acquire his property for the purpose of gaining or producing income therefrom, and therefore I. am of the opinion that the provisions of the said paragraph (a) are not strictly applicable in the circumstances of this appeal. If parliament had intended to cover the appellant’s case, it could very easily have provided that: “where a taxpayer, having acquired property or being deemed to have acquired property for the purpose, etc.”; but it has not done so.

In the final paragraph Mr Fisher states as follows:

It has been established by the Courts in a large number of cases that, where there is any doubt in connection with the application of the provisions of any legislation enacted by parliament, that doubt should redound to the benefit of the taxpayer rather than that of the taxing authority. In my opinion, in applying the provisions of subsections (1) and (6) of section 20 of the Income Tax Act and of section 1100 of the Regulations thereto, there is sufficient doubt that the respondent has been able to bring the appellant within the specific provisions of the legislation as laid down by parliament to justify the allowance of this appeal.

In the instant case the situation in the main is similar to that in the Tripp case with the exception of the capital cost allowance claimed by the appellant for the eight-month period in the taxation year 1971.

The appellant repeated time and again that he had not acquired the house originally for the purpose of gaining or producing income therefrom and therefore paragraph (a) of subsection (6) of section 20 does not apply. The respondent took the position that the appellant’s situation fitted into paragraph 20(6)(b) where he is deemed to have acquired the house for the purpose of gaining or producing income therefrom as of January 1, 1969 at its fair market value. The respondent further submits that the appellant, in reoccupying his house as a personal residence as of September 1, 1971 is deemed io have disposed of it at its fair market value at that time pursuant to the provisions of paragraph 20(6)(a).

With deference to the respondent’s submission, I do not think that paragraph 20(6)(a) covers the appellant’s situation as of September 1, 1971. I agree with the interpretation placed on this paragraph by Mr Fisher when he says:

If parliament had intended to cover the appellant’s case, it could very easily have provided that: “where a taxpayer, having acquired property or being deemed to have acquired property for the purpose, etc.”; but it has not done so.

I note that paragraph 13(7)(a) of the current Income Tax Act contains the same wording as that of paragraph 20(6)(a) discussed herein. It may be that the interpretation of the word “acquired” as it is used in the section referred to above was meant to include the phrase “deemed to have acquired” but nowhere does the Act say so.

In the circumstances, I am of the opinion that the appellant has discharged the onus of establishing his position that paragraph 20(6)(a) does not apply in his case, and that he is entitled to succeed on the ground that there was no recaptured capital cost allowance in the amount of $4,750.

With regard to the capital cost allowance of $1,383.36 claimed by the appellant for the period from January 1 to August 31 of the taxation year 1971, I am of the opinion that subsection 1100(1) of the Regulations does not permit him to do so because, on his own admission at the hearing of this appeal, he had no depreciable property as of December 31, 1971. This part of the appeal is therefore dismissed.

Accordingly, the appeal is allowed in part, and the matter is referred back to the respondent for reassessment in accordance with the reasons for judgment herein stated.

Appeal allowed in part.