The Queen v. Moulds, 78 DTC 6068, [1978] CTC 146 (FCA)

Pratte J (concurred in by Ryan and Le Dain, JJ):—This is an appeal from a judgment of the Trial Division allowing the respondent’s appeal from a decision of the Tax Review Board confirming the reassessments made by the Minister of National Revenue of the respondent’s income for the years 1970, 1971 and 1972.

The question to be determined relates to the calculation of the Capital cost allowance to which the respondent was entitled for those years in respect of his depreciable property falling within Class 3 of Schedule B to the Income Tax Regulations.* [1]

Under Regulation 1100(1)(a) the capital cost allowance to which a taxpayer is entitled in respect of property of a given class is determined by reference to the “undepreciated capital cost” to the taxpayer “as of the end of the taxation year . . . of property of the class”. The definition of the expression “undepreciated capital cost” is found in paragraph 20(5)(e) of the Act: it reads in part as follows:

(e) “undepreciated capital cost" to a taxpayer of depreciable property of a prescribed class as of any time means the capital cost to the taxpayer of depreciable property of that class acquired before that time minus the aggregate of

(i) the total depreciation allowed to the taxpayer for property of that class before that time.

(ii) for each disposition before that time of property of the taxpayer of that class. . . .

(A) the proceeds of disposition thereof.

In order to compute the capital cost allowance to which a taxpayer may be entitled in respect of property of a prescribed class. it is therefore necessary to calculate the undepreciated capital cost to the taxpayer of that property. That calculation requires. first. that the capital cost of the property be established and. second. that there be deducted from that cost the amounts mentioned in subparagraphs (i) and (ii) of paragraph 20(5)(e). In certain instances. the determination of the quantum of the “proceeds of disposition” of a depreciable asset may. as in the present case. raise difficulties. Paragraph 20(6)(g) was enacted in contemplation of such a situation. It reads as follows:

.(g) where an amount can reasonably be regarded as being in part the consideration for disposition of depreciable property of a taxpayer of a prescribed class and as being in part consideration for something else. the part of the amount that can reasonably be regarded as being the consideration for such disposition shall be deemed to be the proceeds of disposition of depreciable property of that class irrespective of the form or legal effect of the contract or agreement: and the person to whom the depreciable property was disposed of shall be deemed to have acquired the property at a capital cost to him equal to the same part of that amount;

The facts which gave rise to these proceedings can now be briefly Stated.

The respondent is a doctor who is established in Ottawa. In 1961 he purchased for $66.000 a piece of land, on which two small apartment buildings were erected, because he considered that property to be a suitable site for the construction of a medical office building. He kept the property until 1964; during that time he rented the apartments and thus earned a modest income which was nevertheless sufficient to pay for the taxes and other expenses that the respondent had to incur as long as he held the property. In 1964 the property was sold to Foxspar Realty Limited, a company that had been incorporated at the instigation of the respondent and other members of the medical profession in order to carry out the respondent’s project of erecting a medical building. The sale price, specified in the deed to be for the land only since the buildings were to be demolished, was $70,500. Shortly after the sale, the two apartment houses were pulled down and the construction of the medical building began.

The respondent continued until some time in 1972 to own other buildings which were property of Class 3 of Schedule B. From 1961 to 1972, therefore, in computing the capital cost allowance to which he was entitled in respect of his Class 3 property, the respondent had, each year, to determine the capital cost of that property and, in particular, of the apartment buildings he had acquired in 1961. In all those years, the respondent valued that capital cost at $46,625.33; that valuation is not in issue in these proceedings. From 1964 the respondent also had to determine what were the proceeds of disposition of the two apartment buildings that he had sold in 1964 with the land on which they were erected for a consideration of $70,500. It is that determination, which had to be made in the light of paragraph 20(6)(g), which eventually gave rise to these proceedings.

When the respondent made his income tax return for the year 1964, he calculated the capital cost allowance to which he was entitled for that year on the basis that the whole price of $70,500 was to be regarded as having been paid for the land and that he had received nothing for the disposition of the buildings. The Minister of National Revenue took a different view and assessed the respondent on the basis that out of the price of $70,500, a sum of $46,625.33 was to be regarded as the proceeds of disposition of the buildings. The respondent contested that assessment and filed a notice of objection. After negotiations, it was agreed the respondent would withdraw his notice of objection and that the Minister would reduce to $44,625.33 the part of the price of $70,500 allocated to the buildings. On November 18, 1966 the respondent wrote to the Department of National Revenue confirming that arrangement. That letter read as follows:

On condition that the amount of proceeds from disposition of a property at 334-336 McLeod Street, which I sold in 1964, be adjusted in your records to read as $44,625.33 instead of $46,625.33 as shown on the Capital Cost Allowance Schedule which was attached to Notice of Pre-Assessment Number 1240221-1 issued on April 17, 1966 by the Department of National Revenue, I am prepared to withdraw my Notice of Objection dated July 14, 1966, relative to the above-noted Re-Assessment.

I wish to point out that the withdrawal of my Notice of Objection. does not mean that I concur with the Minister’s view, in this case, that substantially the same amount should be credited on the sale of the Class 3 Asset as was set up at the time of acquisition. I still fail to see why any value should be attached to the building from proceeds of sale, when the purchaser is only buying land and had the building demolished immediately after purchase. However, I am anxious to finalize the matter and as stated above am prepared to accept the figure of $44,625.33 as being the proceeds of disposition attributable to 334-336 McLeod Street.

I trust the above information will enable you to complete my file relative to the year 1964.

On the same day, the respondent’s accountant wrote a letter to the Department in which he expressed the wish of the respondent to take advantage of the additional capital cost allowance to which he was entitled as a consequence of the agreement of the Department to reduce from $46,625.33 to $44,625.33 the amount considered to be the proceeds of disposition of the two apartment buildings here in question. That letter read in part as follows:

It is our client’s wish that, when your records are being adjusted to incorporate the above change, the additional Capital Cost Allowance available to our client as a result thereof be used in 1964 and subsequent years.

Following this arrangement, the capital cost allowance to which the respondent was entitled for the years 1964 to 1969 was calculated on the assumption that the two buildings acquired in 1961 had been disposed of in 1964 for a price of $44,625.33. However, when the respondent made his income tax returns for the years 1970, 1971 and 1972 he adopted a different position. For each one of those years he claimed a capital cost allowance in respect of his property of Class 3 on the basis that the whole sum of $70,500 that he had received in 1964 was to be considered as having been the price for the sale of the land and that no part of that price was to be attributed to the two apartment buildings. The Minister disallowed that claim and assessed the respondent, for each one of those years, on the basis that the two apartment buildings had been disposed of for a price of $44,625.33. Those are the assessments which were set aside by the judgment of the Trial Division against which this appeal is brought.

In the Trial Division, the appellant had advanced two contentions:

(a) that the respondent was estopped, by reasons of the representation he had made to the Minister in 1964 when he had agreed to withdraw his notice of objection, from alleging and establishing that the whole of the price of $70,500 was to be regarded as the consideration for the disposition of the land, and

(b) that the circumstances surrounding the sale indicated that the sale price of $70,500 could reasonably be regarded as being in part the consideration for disposition of the two apartment buildings and that the amount of $44,625.33 was the amount that could reasonably be regarded as being the consideration for the disposition of those buildings.

The trial judge rejected both these contentions.

The trial judge disposed of the argument founded on estoppel by saying that it had not been proven that the respondent had made any representation of fact to the Minister and that, in any event, the evidence did not show that, as a result of those alleged representations, the Minister had acted to his detriment.

With respect to the appellant’s second contention, the trial judge first made reference to the uncontradicted evidence showing that. at the time of the sale, the buildings did not add any value to the fair market value of the land since the highest and best use of the property was for redevelopment as an office building. The learned judge then expressed his findings as follows:

It seems clear to me that when he suggested a price to the group of practitioners formed for the purpose of realizing the medical building project he had conceived, the plaintiff could not and did not ask for more than the value the land had to the group. And that value was the fair market value of the property at its highest and best use, redevelopment as an office or medical building.

It is true we are concerned here with the value to the vendor, and the mere fact that the purchasers were interested in land only is not conclusive that the buildings standing thereon had ho value to the vendor. But such value, to be considered. must be a demonstrable. real. economic value— as was obviously the case in the two decisions cited by counsel for the defendant, MNR v Malloney's Studio Limited, [1975] CTC 542; 75 DTC 5377 and The Queen v William Baziuk, [1976] CTC 787; 77 DTC 5001. Here on the contrary, according to the evidence adduced, the value of the land alone to a developer far exceeded the capital amount necessary to produce the rental revenues that could be derived from the buildings. The plaintiff asserted that the leasing of the buildings prior to sale was, in his mind, primarily of a transitional nature; his statement to that effect is not to my mind contradicted by the fact that he carried insurance against fire and Stipulated in the deed of sale itself, for some other normal precautionary measures with regard to them. In my view, in the negotiations leading to the agreement of 1964 and the fixing of the purchase price, the plaintiff was never able to obtain any additional advantage or value by reason of the presence of the buildings. All value had to relate exclusively to the land. The earlier mentioned stipulation in the agreement to the effect that the price was for land only may have been inserted at the request of the plaintiff and for tax purposes (as stressed by counsel for the defendant) but it was, in my opinion, the mere truth.

I am satisfied, on the evidence relating to the bargaining between the parties. the meeting of minds on both sides in the transaction—to repeat the words used by the then Associate Chief Justice of this Court in the Emco case referred to above—that the price arrived at was exclusively attributable to the value of the land and nothing to the buildings. I therefore conclude that no amount of the selling price in 1964 can reasonably be regarded as proceeds of disposition of the buildings.

In support of the appeal. counsel for the appellant also invoked two arguments. First. he reiterated his argument based on estoppel and, second, he presented a new argument which had not been advanced in the Court below.

With reference to the first argument based on estoppel, I merely wish to say that it was. in my view, rightly rejected by the trial judge and I could not add anything useful to the reasons he gave for reaching that conclusion.

The appellant’s second argument is not easy to formulate. I will, nevertheless, try to state it as I understood it. Counsel first acknowledged that, as found by the trial judge, the existence of the two apartment houses did not increase the fair market value of the land at the time of the sale; he also recognized that, if one had regard for the fair market value of the property, one could, as the trial judge, reach the conclusion that the whole price of $70,500 had been paid for the land. However, counsel stressed the fact, established at the trial, that even in 1961, when the respondent had purchased the property, the two buildings did not add anything to the fair market value of the land. In spite of that fact, the respondent had valued the capital cost to him of the two small apartment buildings at $44,625.33. It is clear, therefore, according to counsel, that the respondent had not, in making this valuation, adopted the “fair market value approach”; he had chosen to adopt another method of valuation. Counsel for the appellant concluded that the respondent, having made that election for the purpose of determining the capital cost of the two buildings here in question, could not repudiate it and adopt the fair market value approach for the purpose of determining the proceeds of disposition of those same buildings. In support of that contention, counsel invoked ‘‘the principle that a person may not approbate and reprobate” (see Halsbury's Laws of England, 4th ed, vol XVI. voo Estoppel, par 1507).

This contention appears to me to be untenable.

The sole issue to be determined in these proceedings relates to the allocation of the price of $70,500 received by the respondent in 1964. In view of the way in which the appellant pleaded to the respondent’s action, the determination of the capital cost to the respondent of the two buildings here in question was not an issue before the trial judge and is not an issue in this appeal. The only question is whether the trial judge was right in deciding that no portion of the sale price of $70,500 could reasonably be attributed to the disposition of the two small apartment houses. Moreover, the answer to be given to that question does not depend, in my view, on the way in which the respondent calculated the capital cost to him of those two buildings. Even if the fair market value of the property did not change between 1961 and 1964. it does not follow that the buildings had the same value for the respondent in 1964, at the time of the sale, as in 1961, at the time of his purchase. When the respondent acquired the property in 1961, the buildings had clearly a certain value for him since they produced an income that could enable him to keep the property until he found a purchaser willing to embark on the construction of a medical office building. Once that purchaser had been found, however. the situation was changed: having decided to part with the property, the buildings which enabled him to keep that property lost their usefulness and their value.

The principle invoked by counsel for the appellant that “a person may not approbate and reprobate” has no application in this case because the respondent never had the right to elect between two inconsistent courses of action. His only choice was to claim or not claim a capital cost allowance; once he had decided to claim it, he had to calculate its amount in the manner prescribed by the statute.

For these reasons, I would dismiss this appeal with costs.