Morris Besney v. Minister of National Revenue, [1972] CTC 2052, 72 DTC 1078

Roland St-Onge:—This appeal was heard at Edmonton, Alberta, on July 6, 1970, by the Tax Appeal Board as it was then constituted. The problem herein is whether Dr Besney is entitled, for the taxation years 1964 to 1967 inclusive, to deduct 100% of the capital cost allowance in respect of an apartment building in Edmonton known as the John F Kennedy Towers. The Minister of National Revenue, in reassessing the appellant, allowed a 50% deduction only.

At the hearing Mr Milton Sorokin, the contractor who built the said towers, testified that in the summer of 1963 when he was looking for someone to be his partner in an apartment building project he met Dr Morris Besney who was interested in investing some money. After considering what Mr Sorokin had to offer, the appellant decided to advance the money required to initiate the John F Kennedy Towers project, and on November 15, 1963, the witness sent him a letter of intent which stated, in substance, that the appellant was to supply the money to acquire the land and that a company to be incorporated by the contractor was to look after the acquisition of the land, arrange the financing, erect and manage the building.

After receiving this letter Dr Besney invested $115,000 to acquire the lots and the titles thereof were registered in the names of the appellant and a company incorporated by the contractor under the name of Milton Developments Limited (hereinafter referred to as “Milton”). The contractor, as stated in the letter, looked after everything. He obtained a first mortgage of $900,000 from Montreal Trust Company and interim financing from Atlantic Acceptance Corporation. When the latter collapsed in June 1965, the bank immediately called upon Dr Besney demanding that the interim loan of $130,000 be repaid forthwith. This incident so highly disturbed the doctor that he immediately consulted his lawyer only to learn that he did not have sufficient protection for his investment. Consequently, a formal agreement between Milton Developments Limited, Morris Besney and Milton Sorokin was drafted in November 1965, the relevant clauses being as follows:

1. Besney covenants and agrees to supply a maximum of ONE HUNDRED AND FIFTEEN THOUSAND DOLLARS ($115,000.00) towards the cost of acquiring the land and constructing the apartment building known as “JOHN F KENNEDY TOWERS” on the following lands:” (Description of land is irrelevant.)

2. Sorokin and Milton covenant and agree to be solely responsible for the acquisition of the lands required, for the construction of the said apartment building in all respects until completion, for the management of the said building, and to arrange all financing required for the said project other than the funds to be contributed by Besney as aforesaid. PROVIDED HOWEVER, that all the costs for the said project, the type of construction, the terms of all financing, and the rental income and management methods are all to be approved and consented to by Besney from time to time, which approval and consent is not to be unreasonably withheld.

3. It is agreed by and between the parties hereto that the entire project is to be solely owned by Besney until Sorokin has fulfilled his covenants contained in paragraph 2 hereof and when the said apartment building generates sufficient income to meet all its financial obligations as and when they become due and payable Milton shall be deemed to have earned an undivided one-half interest in the said project.

4. Notwithstanding the foregoing, it is understood and confirmed by the parties hereto that prior to the parties hereto reaching the agreement herein set forth, Sorokin and Milton had made certain arrangements for a mortgage and other financing for the said project which involved Milton being shown as one of the owners thereof and Sorokin guaranteeing repayment of the funds to be borrowed, and accordingly it is agreed that the Title to the said project shall show that each of Milton and Besney own an undivided one-half interest therein, but only for the purpose of satisfying the representations made by Sorokin and Milton for the said financing, and in actual fact ownership of the said project rests completely with Besney until Milton has acquired an interest therein as hereinbefore provided.

5. It is agreed by and between the parties hereto that upon demand being made by Besney, at any time prior to Milton having earned its one-half interest in the said project, Milton will transfer its registered ownership in the said project to Besney, but if such demand is made Milton shall be entitled to place a Caveat on the Title to the said project to protect the rights it has under this Agreement.

6. It is agreed by and between the parties hereto that in the event Milton acquires an undivided one-half interest in the said project as hereinbefore provided that all monies advanced to the project by Besney shall be repayable to him, out of all monies on hand from time to time which are not required to meet financial commitments of the project and Besney is to be repaid in full before any distribution of funds to the then owners Besney and Milton.

7. It is further agreed by and between the parties hereto that in the event Milton shall acquire an undivided one-half interest in the said project as hereinbefore provided, and in the event that a third party shall submit a bonafide offer in writing, “the offer’, to Besney and Milton, or either of them, for the purchase of any or all of an interest in the said project and neither Milton nor Besney is prepared to accept such offer, then the following procedure shall apply:—

This “procedure” mentions the formalities and the steps to be followed by Milton and Dr Besney when accepting or refusing a purchase offer made by a third party. It states that in the case of a refusal of an offer the refusing party shall purchase the assets from the partnership at a price based on the offered price, and that otherwise the other party is at liberty to complete a sale of such assets to the third party within three months. At the time this document was drafted (November 1965) the appellant had already invested $115,000 (a substantial portion thereof being borrowed money) to acquire the land, and Milton became a registered owner along with Dr Besney upon the request of the Montreal Trust Company as this company was more in favour of making a loan to an experienced developer than to a professional person who had no experience whatsoever in the building trade.

During the construction the partnership (Dr Besney, Mr Sorokin and Milton) encountered all kinds of difficulties — to name a few: the reduction of the first mortgage from $1 million to $900,000; the collapse of Atlantic Acceptance Corporation; the rental losses suffered by virtue of vacant apartments; and the fact that the building was not finished until about four months after the scheduled completion date. As a result of the collapse of the Atlantic Acceptance Corpora- tion, the partnership had to pay $50,000 to Universal Carpets for the installation of the carpets, at the rate of $1,000 a month. The building did not generate enough income to meet its financial obligations. Its operation started in a loss position and even in 1970 it could not pay its debts. Any additional obligations, wherever necessary, were guaranteed either by Dr Besney, Milton Developments Limited or Mr Sorokin.

Upon cross-examination, counsel for the respondent asked the witness why Dr Besney would not be fully liable for all the debts if he alone was the owner of the project. In answer, Mr Sorokin explained that the appellant did his utmost to help realize the project but when the doctor was in difficulty he (Mr Sorokin) felt that it was his duty to help him out because he was committed to see that this project was successful.

The respondent filed an insurance policy to show that both Milton Developments Limited and Dr Besney had insured the property. Upon cross-examination Mr Sorokin admitted that he was aware of the use of investment properties of this nature as a tax shelter, but he was not sure whether or not he had discussed this matter with the appellant at the outset of the project. He also admitted that Milton did not need such a shelter because it did not have any income. Mr Sorokin further stated that the intention was that the doctor alone would own the project until the building was completely erected and rented and the money advanced by him to acquire the site completely reimbursed, and that only then would the contractor be allowed to get his one-half interest in the property. Furthermore the evidence showed that in 1968 Milton was still one of the insured parties under the policy.

As may be seen from the evidence an arrangement existed between the parties which shows that each had a one-half interest in the property and in the case of its sale to a third party each was going to get his one-half interest in the proceeds. Consequently, the clause in the agreement to the effect that the appellant alone would be the owner is redundant and is useless unless their intention at that time was to permit the appellant to use the building as an investment shelter for tax purposes.

This arrangement between the parties has nothing to do with the Minister and when the latter, like any other citizen, wishes to find out who legally owns a property, he must obtain the information at the registry office. When this was done for the years under consideration, the appellant’s name appeared as the one-half owner of the property and consequently vis-a-vis a third party, as is the Minister herein, the appellant was such an owner.

Consequently, I do not see how the appellant may claim more than one-half of the capital cost allowance in respect of the above-described apartment building, and for the above reasons the appeal is dismissed.

Appeal dismissed.

LESLIE FARKAS (now deceased), Appellant,

and

MINISTER OF NATIONAL REVENUE, Respondent.

Tax Appeal Board (Maurice Boisvert, QC), December 13, 1971.

See the Headnote to Andrew Gaty v MNR, [1971] Tax ABC 300.

Maurice Boisvert:—When this appeal came on for hearing at Montreal, on May 12, 1970, counsel for the appellant did not disclose the fact that said appellant had passed away on November 18, 1969.

As a result of the hearing held on May 12, 1970, I disposed of the appellant’s associate’s appeal only, that of Andrew Gaty v MNR.

When this appeal came on for hearing again on May 21, 1971, counsel informed the Board that he had no mandate to proceed with the appeal. I then ruled that a registered letter be sent to Mrs Vera Farkas, the only heir of the late appellant, ordering her to continue the appeal within a delay of thirty days.

The above-mentioned heir having failed to comply with the order, the appeal is dismissed for the reasons for judgment rendered on March 3, 1971 in the case of Andrew Gaty v MNR, [1971] Tax ABC 300.

Appeal dismissed.