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Docket: 2004-4520(IT)I |
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BETWEEN: |
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BARRY D. DIVALL, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
Appeal heard on August 10, 2005 at Saskatoon, Saskatchewan
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Before: The Honourable Justice D.W. Beaubier |
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Appearances: |
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Agent for the Appellant: |
Al Aessie |
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Counsel for the Respondent: |
Penny Piper |
JUDGMENT
The appeal from the reassessment made under the Income Tax Act for the 2000 and 2002 taxation years is dismissed.
Signed at Regina, Saskatchewan, this 26th day of August, 2005.
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"D.W. Beaubier" |
Beaubier, J.
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Citation:2005TCC551 |
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Date:20050826 |
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Docket: 2004-4520(IT)I |
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BETWEEN: |
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BARRY D. DIVALL, |
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Appellant, |
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And |
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HER MAJESTY THE QUEEN, |
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Respondent. |
REASONS FOR JUDGMENT
Beaubier, J.
[1] This appeal pursuant to the Informal Procedure was heard at Saskatoon, Saskatchewan on August 10, 2005. The Appellant was the only witness.
[2] Paragraphs 8 to 18 of the Reply to the Notice of Appeal outline the matters in dispute. They read:
8. The Appellant was reassessed for the 2000 and 2002 taxation years. The Notices of Reassessment were dated December 1, 2003.
9. In reassessing the Appellant for the 2000 Taxation Year, the Minister of National Revenue ("Minister") increased the Appellants net business income to increase recapture of capital cost allowance ("CCA") by the amount of $12, 712 pursuant to subsection 13(1) of the Income Tax Act (the "Act"), and reduced the Appellants capital loss claimed on the disposition of the Property by the amount of $18, 869 pursuant to paragraph 39(1)(b) of the Act. In reassessing the Appellant for the 2002 Taxation Year, the Minister reduced the Appellants capital loss carry forward from the amount of $6,930 to $2,204 pursuant to paragraph 39(1)(b) of the Act.
10. The Appellant objected to the reassessments by notice received January 23, 2004.
11. The Minister reassessed the Appellant by notices dated September 24, 2005.
12. In reassessing the Appellant the Minister reduced net business income by the amount of $7, 254 in the 2000 Taxation Year to reduce the amount recaptured CCA included in income and denied the Appellant's capital loss carry forward in the amount of $2,204 in the 2002 Taxation Year.
13. In so reassessing the Appellant for the 2000 and 2002 Taxation Year the Minister assumed the following facts:
(a) The Appellant purchased 633 Ave. N South (the "Property") in 1983;
(b) The Appellant used the Property in his autobody business which was known as BD Autobody and operated as a proprietorship;
(c) The Property was purchased for $78,285, and the cost was allocated Land $19,190 and Building $59,095;
(d) In 1994 the Appellant filed an election with the Minster to report a capital gain on the Property;
(e) Upon filing the election with the Minister in 1994 the Appellant elected that the Fair Market Value of the Property at the end of February 1994 was $115,000;
(f) The Appellant did not provide any allocation between land and building upon filing the election with the Minster;
(g) In his 1998 Taxation Year the Appellant entered a lease agreement with an option for the lessee to purchase the Property;
(h) The term of the agreement was two years, from July 15, 1998 to July 15, 2000;
(i) During the term of the agreement, the Property was rented for $1,200 per month;
(j) The option to purchase the property was valued at $14,000 and was applied against the purchase price;
(k) The Appellant sold the Property in the 2000 Taxation Year for an amount of $112,000;
(l) The proceeds in respect of the Property were allocated as follows:
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Land |
30,000
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Building |
54,466
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Total Proceeds of Disposition |
84,466
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Rental Payments Previously Reported |
27,534
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Total Received |
112,000 |
(m) The adjusted cost base of the land on the election filed in 1994 was $30,000.
(n) There was no resulting capital gain or loss on the disposition of the land in the Appellants 2000 Taxation Year;
(o) The undepreciated capital cost ("UCC") of the Appellants building and equipment in the 2000 Taxation Year prior to disposing of the Property was $34, 588;
(p) The Appellant was entitled to CCA in the amount of $482 in the 2000 Taxation Year;
(q) The Appellant had recaptured CCA in the amount of $19,396 in the 2000 Taxation Year calculated as follows:
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Proceeds of Disposition - Building |
$54,466
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UCC - Building and Equipment |
34,588
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Allowable CCA |
482
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Recapture |
19,396 |
B. ISSUES TO BE DECIDED
14. The issues are whether:
(r) The Minister has correctly determined the Appellants net business income in the 2000 Taxation Year;
(s) The Appellant incurred a capital loss in his 2000 Taxation Year;
(t) The Appellant is entitled to a capital loss carry forward in the 2002 Taxation Year and, if so, the amount he is entitled to.
C. STATUTORY PROVISIONS, GROUNDS RELIED ON AND RELIEF SOUGHT
10. He relies on subsection 13(1) and paragraphs 39(1)(b) and 111(1)(b) of the Act as amended for the 2000 and 2002 Taxation Years.
11. The Appellant had a recapture of CCA in his 2000 Taxation Year in the amount of $19,396 pursuant to subsection 13(1) of the Act.
12. The Appellant is not entitled to a capital loss in his 2000 Taxation Year in respect of the disposition of the Property pursuant to paragraph 39(1)(b) of the Act.
13. The Appellant does not have a capital loss available for application to his 2002 Taxation Year pursuant to paragraph 111(1)(b) of the Act.
[3] The evidence did not rebut assumptions 13(a) to (p) inclusive. No expert appraiser testified on behalf of the Appellant to refute the values set out in the assumptions.
[4] As a result the question the Court must decide is the meaning of the lease option agreement entered into by the Appellant on 9 November, 1998 with an option to be exercised effective June 15, 2000 (Exhibit A-2). If the agreement is clear, it is not necessary to look outside of that document.
[5] The lease is from 15 July, 1998 to 15 July, 2000 of the bodyshop portion of the premises. The rent for the body shop is $1,200 per month plus GST, payable in advance commencing 15 July, 1998. The Appellant rented another part of the building during the term of the Exhibit A-2 lease to a third party for $550.00 per month. The Appellant paid the property taxes throughout the lease.
[6] Paragraphs 3 to 7 of the lease option set out the purchase price, terms of payment and its allocation. They read:
PURCHASE PRICE
3. The purchase price for the property is the sum of One Hundred and Twelve Thousand ($112,000.00) Dollars, in lawful money of Canada.
TERMS
4. The purchase price shall be paid by the Purchasers to the Vendors as follows:
(a) The sum of $14,000.00 paid for the option to purchase the property shall be credited to the purchase price.
(b) All sums paid for rent under the lease between Barry David Divall and Donna Gail Divall, as Landlords, and Leonard Ekvall and Greg Stock, as Tenants, for the rental of the premises at 633A Avenue N South, Saskatoon, Saskatchewan, shall be credited to the purchase price.
(c) The balance to be provided by way of a new mortgage.
5. The purchasers agree to pay the Goods and Services Tax (G.S.T.), in addition to the purchase price. All sums paid for GST on rent payments under the aforementioned lease shall be credited to the Purchasers as GST payable on the sale.
PAYMENT OF PURCHASE PRICE
6. The purchase price is to be paid by the Purchasers to the Vendors, plus or minus the adjustments referred to hereinafter, to the Vendors' solicitors on or before the date of closing, to be held in trust by the Vendors' solicitors pending completion or termination of this agreement.
ALLOCATION OF PURCHASE PRICE
7. The purchase price shall be allocated as follows:
Lands and Buildings $107,000.00
Chattels $5,000.00
Total Purchase Price $112,000.00
[7] Thus:
1. The $14,000 for the option was paid on November 9, 1998 and was forfeit if the option was not exercised according to the terms. If the terms were met, the $14,000.00 was applied to the purchase price.
2. The rent paid each 15th day by the tenants had to be paid on time as rent. If it was, the option remained open to be exercised and the amount of rent paid was credited to the balance due on June 15, 2000 for the purchase price. If it was not, it was simply rent paid and received on an expired lease and was forfeit to the Appellant.
3. The parties to the agreements were at arm's length. Thus, the fair market value of the property at all times material to this appeal was that set by the terms of the lease option.
[8] The question before the Court is whether the $14,000 for the option and the $1,200 per month rent payments in reality constituted payments of which reduced the price or not. In Viceroy Rubber and Plastics Limited v. The Minister of National Revenue 93 DTC 347 at page 353, Brulé, J. appears to have adopted three factors to consider. They are:
1. Reasonable assurance that the lessee would exercise the option. In this case the long delay in executing the lease was because the lessees could not get financing to purchase in the first place. Because of their financial weakness, the Appellant insisted on a large option payment up front (the $14,000) and the largest rent he could get from them. This was about twice what his other tenant was paying. There are two aspects to these facts: first, the lessees were not well funded and it was very possible they might not get the financing to purchase; second, by the end of the lease they had reduced the amount to be financed substantially. The Appellant admitted that until he was sure of the second aspect, he would not execute the lease option.
2. The lessee acquired substantially all of the benefits and risks incidental to ownership of the property. This did not happen. The Appellant received other rent from the property and paid the property taxes. However it should be noted that these may have offset one another; there is no evidence on this possibility.
3. The true intention of the parties acquiring this leasehold interest. The Appellant's intention is admitted to be to sell. The lessee's paid more than 10% of the $112,000 for the option and paid excessive rent; obviously they intended to buy. Thus the intent of both parties from the beginning was that the option would be exercised: a sale.
[9] The result is that, on balance the $14,000 paid for the option and the sums paid for rent were on account of the purchase price. On both sides, the effort and agreement was to pay as much as possible as early as possible so that the balance upon exercise of the option would be as low as possible so that the purchasers could obtain a mortgage for the balance due.
[10] In substance, the transaction was a sale.
[11] There is no evidence by an appraiser indicating that the land value should be other than the $30,000 assessed. The remainder of the reassessment turned on the finding of the Court respecting the transaction itself. That finding confirms the reassessment described in the Reply.
[12] The appeal is dismissed.
Signed at Regina, Saskatoon on this 26th day of February 2005.
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"D.W. Beaubier" |
Beaubier, J.
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CITATION: |
2005TCC551 |
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COURT FILE NO.: |
2004-4520(IT)I |
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STYLE OF CAUSE: |
Barry Divall v. The Queen |
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PLACE OF HEARING: |
Saskatoon, Saskatchewan |
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DATE OF HEARING: |
August 10, 2005 |
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REASONS FOR JUDGMENT BY: |
The Honourable Justice Beaubier |
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DATE OF JUDGMENT: |
August 26, 2005 |
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APPEARANCES: |
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Representative for the Appellant: |
A J Aessie |
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Counsel for the Respondent: |
Penny L Piper |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
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Firm: |
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For the Respondent: |
John H. Sims, Q.C. Deputy Attorney General of Canada Ottawa, Canada |