Guy Tremblay:—This case was heard at Halifax, Nova Scotia, on June 12, 1978.
1. Point at Issue
The point at issue is to know whether the respondent is justified in deeming that the appellant had disposed of his residence situated in Dartmouth, Nova Scotia, when he returned to Dartmouth in 1974, after living seven years in another owned residence in Newfoundland. As a result, the respondent included in the computation of the appellant’s income the amounts of $4,250 as a capital gain and $12,167.17 as recapture of the capital cost allowance.
2. Burden of Proof
The burden is on the appellant to show that the respondent’s assessment is incorrect. This burden of proof derives not from one particular section of the Income Tax Act, but from a number of judicial decisions, including the judgment delivered by the Supreme Court of Canada in R W S Johnston v MNR, [1948] CTC 195; 3 DTC 1182.
3. Facts
The facts are not disputed.
3.1 In March 1965, one month prior to the completion of the construction of a dwelling house at 33 Hazelhurst Drive, Dartmouth, Nova Scotia, the appellant received notification of his impending transfer for purposes of employment to Gander, Newfoundland.
3.2 For the period from March, 1965 to May 1967 the appellant and his family resided in rental accommodation in Newfoundland.
3.3 In May 1967 the appellant purchased a home in St. John’s, Newfoundland, and resided in that home with his family.
3.4 In January 1974, the appellant with his family left Newfoundland and came back to live in their residence in Dartmouth.
3.5 During the period between March 1965 and January: 1st, 1974, the appellant rented to various tenants the dwelling house owned by him at 33 Hazelhurst Drive, Dartmouth, Nova Scotia. In his income tax returns for the taxation years 1965 to 1973, both inclusive, he reported the rent received as income.
3.6 The residence at 33 Hazelhurst Drive had an original capital cost to the appellant of $22,703.50.
3.7 The appellant, when filing his income tax returns for the taxation years 1965 to 1973, both inclusive, represented to the Minister of National Revenue that the said property was depreciable property and claimed capital cost allowance on the said dwelling as being a Class 6 asset as defined in the Income Tax Regulations.
3.8 The fair market value on December 31, 1971 of the residence at 33 Hazelhurst Drive was $38,500.
3.9 The fair market value of the same residence on January 1st, 1974 (when the appellant commenced to occupy personally the said residence) was $47,000.
3.10 The total capital gain is ($47,000 — $38,500) $8,500.
3.11 The amount of capital cost allowance claimed by the appellant between 1965 and 1974 both inclusive is $12,167.17.
3.12 By assessment on December 17, 1976, the respondent included in the computation of the appellant’s income the amount of $12,167.17 as recapture capital cost allowance and $4,250 as taxable capital gain.
3.13 Following a notice of objection dated March 7, 1977, to the assessment, the respondent confirmed the said assessment by a notification dated June 13, 1977.
3.14 An appeal dated September 8, 1977, was lodged before the Tax Review Board.
4. Law, Jurisprudence, Comments
4.1 Law
The main sections involved are 45(1) and 54(b) of the new Act:
Sec 45. Property with more than one use.
(1) For the purposes of this subdivision the following rules apply:
(a) where a taxpayer,
(i) 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, or
(ii) 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
(iii) disposed of it at that later time for proceeds equal to its fair market value at that later time, and
(iv) immediately thereafter reacquired it at a cost equal to that fair market value;
(b) where property has, since it was acquired by a taxpayer, been regu- larly used in part for the purpose of gaining or producing income therefrom or for the purpose of gaining or producing income from a business and in part for some other purpose, the taxpayer shall be deemed to have acquired, for that other purpose, the proportion of the property that the use regularly made of the property for that other purpose is of the whole use regularly made of the property at a cost to him equal to the Same proportion of the cost to him of the whole property; and, if the property has, in such a case, been disposed of, the proceeds of disposition of the proportion of the property deemed to have been acquired for that other purpose shall be deemed to be the same proportion of the proceeds of disposition of the whole property; and
(c) where, at any time after a taxpayer has acquired property, there has been a change in the relation between the use regularly made by him of the property for gaining or producing income therefrom or income from a business and the use regularly made of the property for other purposes,
(i) if the use regularly made by him of the property for those other purposes has increased, he shall be deemed to have
(A) disposed of property at that time for proceeds equal to the proportion of the fair market value of the property at that time that the amount of the increase in the use regularly made by him of the property for those other purposes is of the whole use regularly made of the property, and
(B) immediately thereafter reacquired the property so disposed of at
a cost equal to the proceeds referred to in clause (A), and
(ii) if the use regularly made by him of the property for those other purposes has decreased, he shall be deemed to have disposed of property at that time and the proceeds of disposition shall be deemed to be an amount equal to the proportion of the fair market value of the property at that time that the amount of the decrease in use regularly made by him of the property for those other purposes is of the whole use regularly made of the property.
54. (b) ‘‘Capital property” of a taxpayer means
(i) any depreciable property of the taxpayer, and
(ii) any property (other than depreciable property), any gain or loss from the disposition of which would, if the property were disposed of, be a capital gain or a capital loss, as the case may be, of the taxpayer.
4.2 Jurisprudence
The judgments cited by the respondent are as follows:
W Robert Donaldson v MNR, [1976] CTC 2132; 76 DTC 1107;
Donald Tripp v MNR, 31 Tax ABC 357; 63 DTC 313;
J C Harel v Deputy Minister of Revenue of Quebec, 80 DLR (3d) 556;
[1977] CTC 441; 77 DTC 5438;
Taras T Hnatiuk v The Queen, [1976] CTC 632; 76 DTC 6376;
Gerald J Ryan v MNR, [1967] CTC 484; 67 DTC 5325;
Wilfred Dowbiggin v MNR, 40 Tax ABC 137; 66 DTC 97;
Estate of Albert Arthur Keir v MNR, 39 Tax ABC 303; 65 DTC 679;
Raymond Benedet v MNR, 9 Tax ABC 445; 54 DTC 541.
4.3 Comments
As already stated, the facts are not disputed. It is clear to the Board that the appellant had commenced in the fall of 1964 the construction of a dwelling house with the intention of making it his home, his personal residence. The appellant and his representative insisted on that point at the hearing.
The intention of the appellant however in the present case had not the same influence as if the crux of the matter would be to know whether the profit is a capital gain or a revenue. Then the intention at the time of acquisition of a property can become an important factor.
In the present case, the deemed disposition provided for in section 45 is based above all on facts: the changing of the use of a property ie from the use of the purpose of gaining revenue to the use of the purpose of non-gaining revenue and vice versa. On January 1, 1972, when the new Act applied, the property in Dartmouth had been producing revenue for 7 years. It is a proven and admitted fact that the first intention of the appellant at the time of the construction of the property cannot change. It is proven that the appellant, has had those advantages. During 6 years, the losses incurred by the deduction of the capital cost allowances were applied against his other income.
On January 1, 1974, the changing of the use of the property occurred, that is from a property which was producing revenue to a property of personal residence and which was not producing revenue.
The Board cannot see how the deemed transaction provided by subsection 45(1) cannot be applied, and consequently the taxable capital gain of $4,250.
4.3.2 Concerning the recapture of the capital cost allowance, it would have been applied in the case of actual transaction even if the old Act still applied.
The application of the new Act with the deemed transaction results merely to advance the recapture of the capital cost allowance in the amount of $12,167.17.
5. Conclusion
The appeal is dismissed in accordance with the reasons for judgment above.
Appeal dismissed.