Nicholas Zavadiuk v. Minister of National Revenue, [1967] CTC 447, 67 DTC 5298

JACKETT, P.:—This is an appeal from a decision of the Tax Appeal Board dismissing the appellant’s appeal from his assessment under Part I of the Income Tax Act for the 1961 taxation year.

The sole question raised by the appeal is the correctness of the assessment in so far as it included in the appellant’s income for the year an amount as ‘‘recapture’’ of capital cost allowance under Section 20(1) of the Income Tax Act, which reads 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.

The respondent made the assessment, in so far as the question in issue is concerned, on the basis of information contained in the income tax returns filed under Part I of the Income Tax Act by, or on behalf of, the appellant. Those assumptions are reflected in the table appearing in paragraph 4 of the Reply to the Notice of Appeal and reading as follows :

Subject to subsidiary issues to which I will come later, if one assumes the correctness of the information so communicated by the appellant to the respondent when performing his statutory duty of filing his income tax returns, there is no question as to the correctness of the assessment.

What the appellant says, however, and he said it for the first time when confronted in 1964 with the possibility of a “recapture” assessment, is that the information communicated to the department by him or on his behalf for the purpose of earlier assessments was erroneous.

While there is no legal rule that prevents a taxpayer coming forward long after an event and saying that what he told the department at the time when information was fresh in his mind, or in the minds of those acting on his behalf, was false or erroneous, nevertheless, it is obvious that there is a considerable burden on one who endeavours to persuade a court that this was so. This must be particularly so when the attempt is based almost exclusively on self-serving evidence uncorroborated by any independent evidence and accompanied by no explanation as to why inconsistent statements were made when the matters concerned were still current.

In so far as relevant, the facts may be stated simply.

The appellant owned a hotel in a small Saskatchewan town that had cost him $1,000 and upon which he had spent $5,000 for improvements. He acquired adjoining land and with the aid of relatives erected and equipped a new hotel into which he in- corporated all that was reasonably usable when the old hotel was demolished. Much of the work in the creation of the new hotel came from unpaid family labour. Not only the appellant and his sons, but brothers-in-law as well, took part in the operation which was commenced in 1948 and completed in 1949.

The appellant’s income tax returns show that the structure — as opposed to the contents — cost a total amount of $10,767.73. (It is to be borne in mind that it was in his interest, and presumably in the interest of whatever member of his family actually prepared his returns, to show the full cost because his deductions for depreciation or capital cost allowance were larger the larger the capital cost and, therefore, his income tax was smaller the larger the capital cost. I think it is fair to assume that this is a fact of life that was well known to practically all business men and property owners at least by 1949).

In 1961 the appellant sold the hotel and its contents for $16,000. In due course, the tax assessors sought further information from the appellant with a view to a “ recapture ’ ’ assessment. At that time, I find on the evidence, although the appellant says that he cannot recall it, that the appellant told the assessor that his capital cost should be taken to be not less than $14,000 by reason of work done by members of his family. In his Notice of Objection, the appellant stated that the hotel cost him $14,000 and not $10,000 as he did not take into account the old hotel that had cost him $6,000. This was also, apparently, the position taken by the Notice of Appeal to the Tax Appeal Board.

It is now contended in this Court that the capital cost of the hotel — as opposed to the contents — was over $16,000. As appears from the table that I have read from the Reply to the Notice of Appeal, a finding that the capital cost was greater than that assumed by the Minister will not, by itself, alter the assessment unless the excess is more than $3,157.27, the amount characterized as a “capital gain”.

The only evidence relating directly to the actual cost of the hotel was that of the appellant himself who swore that the work done in 1948 cost him eleven to twelve thousand dollars and that the work done in 1949 cost him four to five thousand dollars. When he was pressed by the Court for some basis for these amounts, which were given obviously as very rough guesses, and which were unsupported by any papers or records of any kind, he came back, after an interval for consideration, and indicated that he thought that he would have spent in 1948 on

In addition, he said he spent, in 1948 and 1949, on a carpenter $3,000, and $5,000 to $7,000 on lumber. This makes a total of minimum amounts of over $15,000 not including any amount for certain work done in 1949, according to his evidence.

I did not find the appellant’s evidence persuasive. He was obviously doing his best to put forward a view of the facts that would support his appeal. His evidence seemed to me to be an example of how a person trying to recall events of the past can persuade himself that he actually remembers facts favourable to himself that did not actually occur. This is not an uncommon phenomenon in ‘the courts and, when it occurs, the person involved has frequently brought himself to the point where he honestly believes what he says.

The strongest argument in favour of 'the appeal, as I appraise it, is the fact that it seems unlikely that any hotel could have been constructed in 1948 and 1949 for less than $11,000. Such improbability is supported by the evidence of the witness, Robert Minshull, who gave an estimate of what a contractor would have been prepared to build the hotel for. However, I do not think one can overlook the fact that family enterprises frequently defy ordinary economic principles and manage to accomplish apparent miracles. In the absence of any evidence to the effect that there was an actual mistake in the returns showing the capital cost of the hotel, in the absence of any evidence of a more specific character than that which the appellant was able to give personally, and in the absence of any records or independent evidence, I must hold that it has not been established that the balance of probability is that the capital cost of the hotel was more than that which was reported on the appellant’s returns.

This case is to be contrasted with the case of Olynyk v. M.N.R.* [1] which I heard earlier this week and decided without giving prepared reasons. In that case, there was in issue a “recapture” assessment based on the information in the appellant’s income tax returns, but evidence was brought to show that that information was erroneous by reason of a misunderstanding, on the part of the person who prepared them, as to what was meant by capital cost. He thought that, for a person on a cash ’ ’ basis, this meant the cash paid for the property rather than its actual cost. Moreover, in that case, very persuasive evidence was brought that various substantial items had been omitted when reporting the capital cost of Olynyk’s hotel. The evidence was sufficient to satisfy me that, if the true facts were established as well as might be, the appellant would be entitled to some relief but was not sufficient to enable me to determine how much. I therefore referred the assessment back to the Minister for reconsideration and re-assessment. In this case, there is no evidence of the character that I have described in the Olynyk case.

I come now to what I have referred to as the subsidiary issues.

It is common ground that some part of the sale price of $16,000 should have been allocated to land. I can find no basis for allocating more to land than the purchase price of the land on which the new hotel was built, namely, $200. In my view, this should be subtracted from the $13,925 allocated to the building in the table that I have quoted from the Reply to the Notice of Appeal. When that is done, it does not affect the amount of the assessment.

The remaining issues do not require to be discussed.

One with reference to goodwill was abandoned by counsel for the appellant during argument, with good reason because, not only did the appellant not purport to sell goodwill, but as he was not himself operating the hotel he had no goodwill to sell.

Another had to do with the capital cost of the old hotel. That issue was not raised by the pleadings and the trial was expressly conducted by reference to issues of fact that would not have enabled it to be argued. In any event, it was abandoned by counsel for the appellant during argument when he concluded that, even if it was open to him, it would not result in any relief for the appellant.

The appeal is dismissed with costs.