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Citation: 2004TCC578
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Date: 20040924
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Docket: 2001-1102(IT)G
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BETWEEN:
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GIUSEPPE COLUBRIALE,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Angers J.
[1] The appellant is appealing an
assessment made by the Minister of National Revenue ("the
Minister") for the 1996 taxation year. Following a transaction
consisting of the sale of a property by the appellant to a
corporation in which he holds the majority of the shares, an
amount of $523,775 was added to the appellant's income, and this
amount is considered by the Minister to be a benefit conferred on
a shareholder according to subsection 15(1) of the Income Tax
Act ("the Act"). At the beginning of the hearing, the
Minister agreed to reduce the amount to $500,000 so that it would
be consistent with the amount identified in his expert's
appraisal. For his assessment, the Minister also denied the
appellant the deduction of a final loss of $124,619 resulting
from the adjustment the Minister had made to the fair market
value of the property.
[2] The corporation in question was
established in 1986 and carries out its business under the name
J.C. Fibers Inc. ("J.C. Fibers"). It operates a business for
recovering and recycling paper, which it collects mainly from
office towers as well as other places in the Montreal area. The
paper is sorted and packed into bales to be sent to local or
foreign plants. The J.C. Fibers facilities are found on the
Chemin de la Grande-Ligne in Chambly on the property that is in
dispute.
[3] The property in question is
11,500 m2 of land; although it is located in an
agricultural zoning area, it was put to industrial use under
vested rights. The building where J.C. Fibers is operated is
3,915 m2 in size, and it was built in 1990 after a
fire destroyed the first building. Prior to the purchase of the
property on February 2, 1996, J.C. Fibers was leasing the
land and the building as a tenant of the appellant and his wife.
Indeed, there had been a tenancy agreement (lease) between them
as of November 1, 1989; it was a 10-year lease with a basic
lease rate of $12,500 per month. At the time the property was
transferred to J.C. Fibers, the lease was $15,000 per month.
[4] The first building was destroyed
by fire in 1989. After consulting his family and his partner, the
appellant had decided to rebuild on the same location. The
condition of the land and its proximity to the highway influenced
that decision. After the construction and despite the fact that
J.C. Fibers was only a tenant, J.C. Fibers assumed the costs of
installing a weighing device and unloading docks, as well as the
costs of creating parking around the building.
[5] The appellant is also a
shareholder of some other companies whose activities are similar
to J.C. Fiber's activities. However, those other companies own
the land and buildings where they carry out their activities. For
that reason and owing to the fact that 1995 had been a good year,
the appellant decided that it was worth transferring the property
at issue to J.C. Fibers. Furthermore, his accountant had told him
that doing so would make it easier to sell the company if someone
ever became interested in purchasing it. In fact, one potential
purchaser had spoken to the appellant in 1995, but nothing
serious came of it. Some other potential purchasers also showed
an interest in 1999 and 2002, but nothing resulted from this. The
sale to J.C. Fibers would resolve the issue of whether the
appellant and J.C. Fibers had to assume the expenses for
improving the building. During the above-mentioned
discussions, moving J.C. Fibers had never been
mentioned.
[6] The transfer of the title of
ownership from the appellant to J.C. Fibers took place, as
indicated above, on February 2, 1996. Just prior to the transfer,
the appellant's wife had transferred her share in the property to
him in order to reduce the taxes applicable to the transfer of
title. The consideration was established with the assistance of
the chartered accountant of the appellant and J.C. Fibers,
Mr. Tony Spemsieri. Without taking into consideration the
expenses already paid by J.C. Fibers, the purchase price was
established at $1,500,000, an amount which, according to the
accountant, represented the fair market value of the
property.
[7] The appellant and his accountant
determined this fair market value after considering the appraisal
report completed in December 1995. That report had been prepared
to establish an insurable value for the building. The replacement
value for the building had been established at $1,392,610. They
also took into consideration the actual cost of rebuilding after
the fire, which amounted to $1,574,788. Those two values did not
include the land, which was assessed at $174,450. The transaction
took place based on that information. The proceeds of the sale
were used to pay back the mortgage loan of approximately
$800,000, and the balance was invested. For tax purposes, the
proceeds of the sale were distributed equally between the
appellant and his wife.
[8] J.C. Fibers still operates its
business at the same location. In 1998 and 1999, other
renovations were made, namely the installing of offices in the
building and the addition of a garage for truck repairs and a
place for oil changes. On May 21, 1998, further to an agreement
with J.C. Fibers and the municipality of Chambly, the value of
the property for purposes of the three-year appraisal for
1996, 1997, and 1998 was established at $971,500, that is,
$24,600 for the land and $946,900 for the building.
[9] Establishing the property's fair
market value is thus crucial to resolving this issue. Each party
produced an expert in real estate appraisal, and without going
into the details of those reports, it is possible for me to
conclude that the fair market value of the property was
$1,000,000. The appraisal the appellant had made was not the
result of an exercise to establish the fair market value of the
property in question. In the cross-examination, the appellant's
expert acknowledged that a value of $1,000,000 was appropriate.
His report was used instead to establish a suitability value,
since the value of the property had been determined based on its
occupant. In such a case, the value generally exceeds the market
value and includes, in addition to that, a specific value the
property has for the owner/user. In the instant case, it is a
matter of establishing a market value based on the concept of a
special purchaser, hence the argument of counsel for the
appellant.
[10] Benoît Egan is a chartered
appraiser. His report establishes a suitability value of
$1,500,000 for the property purchased by J.C. Fibers, and in his
report, Mr. Egan concludes that that appraisal satisfies the
special purchaser criteria. In order to arrive at that
conclusion, Mr. Egan took into consideration, among other things,
all of the value indicators, including the municipal assessment,
the cost recorded in the appellant's books, the appraisal report
for insurance purposes, and the report of the respondent's
expert. In his summary, we find two groups of values, the first
varying between $1,500,000 and $1,600,000 and representing the
value for a special purchaser, and the second varying between one
and $1,100,000 and representing the market value for a
typical purchaser.
[11] Within the context of a special
purchaser, Mr. Egan analyzed various options that may have been
available to J.C. Fibers. He reviewed the costs of building in a
similar environment, supposing that the agricultural zoning would
not have hindered the business's activities and taking it as an
established fact that that option would have required the
installation of an underground tank and a fire protection system.
That option represented costs of $1,430,000. He also reviewed the
costs of building in the Chambly industrial park. That park
provides utilities, which would save money in terms of the fire
protection system. However, the cost of the land is higher, as
are the taxes. That option represented costs of $1,250,000. Then,
if the new building were placed in an industrial park in an urban
setting, the cost would reach $1,650,000.
[12] Mr. Egan added a cost for moving the
business, which he appraised at $600,000, to the cost
corresponding to each of these options. Therefore, the three
options represent a cost that exceeds or comes very close to
$2,000,000, which led him to conclude that J.C. Fibers had saved
money by purchasing the property for $1,500,000. He concludes his
report by saying that that comparative analysis shows that J.C.
Fibers received cash benefits by purchasing the property at issue
at the price it paid and that that situation is not surprising,
even though the market value for another user would have been
approximately $1,000,000. Therefore, he qualifies J.C. Fibers as
a special purchaser, which justifies the fact that it paid a
price that corresponds to a suitability value and eliminates any
cash benefit the appellant may have been considered to have
received.
[13] In the cross-examination, Mr. Egan
acknowledged that he had not established the fair market value of
the building because he had focussed on determining a suitability
value. He also admitted that his opinion is based on the options
that J.C. Fibers could have considered because, in actual fact,
those options had not been considered before deciding to purchase
the property. Some of the information had been questioned during
the cross-examination, particularly the expenses Mr. Egan assigns
to moving and the costs associated with the interruption of
operations during the move. Mr. Egan acknowledged that he is not
an expert in this field, and he said that he relied on the
information he had been given. Finally, the lease price used to
make certain calculations was also questioned.
[14] The respondent had Mr. Gaston Laberge
testify. Mr. Laberge estimates that the market value of the
property as of February 2, 1996, was $1,000,000. In order to
obtain that final estimate, he used three recognized appraisal
methods: cost, parity, and income. These methods gave values of
$1,000,000, $1,009,000, and $990,000 respectively. He also
analyzed and commented on Mr. Egan's report. According to
Mr. Laberge, contrary to what Mr. Egan claims, depreciation
cannot be ignored when establishing a suitability value. A number
of other issues were raised, particularly in relation to vested
rights in terms of zoning, comparable sales, depreciation, the
water tank, the lease price, the facilities paid for by J.C.
Fibers, and the appraisal of the business. All in all, on the
strength of the two experts' opinions, I am convinced that the
market value of the property was $1,000,000 as of
February 2, 1996, the date it was purchased.
[15] Is it then possible, given the
circumstances of this case, to add a premium to this market value
to justify the fact that J.C. Fibers paid a price greater than
the market value in the context of a genuine commercial
transaction between non-arm's length parties? Counsel for
the appellant maintains that it was fully to J.C. Fibers'
advantage to pay the purchase price of $1,500,000, since then it
did not have to consider moving expenses or incur losses in
revenue owing to the interruption such a move would cause. J.C.
Fibers would have also incurred the loss of the facilities it had
built on the appellant's property, such as parking, the unloading
docks, and the device for weighing its trucks. J.C. Fibers had
acquired zoning rights, and those rights would have facilitated
its possible sale. Construction costs and costs to move the
building are, according to counsel for the appellant, factors
that justify paying a price greater than the market value. He
also argues that, in order for there to be a benefit within the
meaning of subsection 15(1) of the Act, J.C. Fibers must
have had an intent to confer the benefit on the appellant. In
this case, the purchase represented a business decision, and its
only purpose was to facilitate the possible sale of the
business.
[16] Counsel for the respondent asked
whether the instant case involves a genuine commercial
transaction. According to the facts, there was nothing that
forced J.C. Fibers to purchase the property from the appellant on
February 2, 1996. No purchase offers had been made that could
force the conclusion of this type of transaction. Furthermore, he
maintains that, if this type of transaction had taken place
between third parties, they would certainly have consulted two
experts to determine the market value of the property. The
concept of a suitability value applies when a seller is obliged
to sell his property, particularly in the case of an
expropriation. This is a concept that is in favour of the
owner/user, not the purchaser. In the case at hand, on February
2, 1996, J.C. Fibers had no obligation to purchase the property
at issue.
[17] This Court dealt at length with the
concept of market value in relation to the concept of the
purchaser having a special interest, and it acknowledged that it
is possible, in certain circumstances, for a purchaser to have a
special interest in acquiring property for a price higher than
what others would be prepared to pay. In Morneau v.
Canada, [1998] T.C.J. No. 680 (Q.L.), Dussault J. set out
a number of doctrine and case law passages dealing with this
issue, in particular, the comments made by Joyal J. in
Dominion Metal & Refining Works Ltd. v. The
Queen, 86 DTC 6311 (F.C.T.D.). Moreover, in Morneau,
Dussault J. concluded in the existence of a special purchaser and
spoke of how to deal with the issue of persons not at arm's
length:
43 Since in our law the concept
of market value presupposes an open and unrestricted market, it
is also wrong to say that the value which property would have for
a potential purchaser desiring to use it for different purposes
can be disregarded on the ground that he is the only one who
wants to use it for those purposes, there is no competition in
the market for this use and the value is thus purely
subjective. To do so would be to disregard one aspect of
the situation, with the result that the appraisal exercise would
become highly theoretical, disconnected from the specific
circumstances of the case under consideration and so very
questionable.
44 Several other
decisions mentioned or analysed by Joyal J. in Dominion Metal
& Refining Works Ltd., supra, establish that two relevant
factors in determining the value of property are the possibility
of using the property in accordance with its special features and
its use contemplated by a special purchaser. Two such
decisions are those of the House of Lords in Vyricherla Narayana
Gajapatiraju v. The Revenue Divisional Officer, Vizagapatam,
[1939] A.C. 302, and the Supreme Court of Canada in Fraser v. The
Queen, [1963] S.C.R. 455. Joyal J. also mentioned Laycock
v. The Queen, 78 D.T.C. 6349 (F.C.T.D.), and 931 Holdings Limited
v. M.N.R., 85 D.T.C. 388 (T.C.C.), and he analysed the Tax Review
Board's decision in Lakehouse Enterprises Ltd. et al. v.
M.N.R., 83 D.T.C. 388. The least that can be said on
reviewing these decisions is that it is impossible to disregard
the special interest which a potential purchaser may have in
acquiring property for a value higher than what others would be
prepared to pay, in view of the special circumstances in which it
finds itself and the use it intends to make of the property, to
the extent that such an interest can be demonstrated at a given
date.
[...]
47 While the
determination of fair market value presupposes a transaction
between people who are dealing with each other at arm's
length, I agree with the view that this question must be answered
by looking at the particular circumstances of a given case, and
not by reference to the presumption stated in s. 251(1)(a) of the
Act that related persons are deemed not to deal with each other
at arm's length.
[18] In Morneau, Dussault J. reminds
us of what is required to apply subsection 15(1) of the Act.
I will set out his comments on this issue, which are found in
paragraphs 31 and 32 of his reasons:
31 It should be noted that under
s. 15(1) the Court must first determine whether a benefit was
conferred on a shareholder in that capacity. Such a finding
can only be made by looking at all the particular circumstances
surrounding a given transaction. If a benefit was so
conferred, its value must then be determined. It is
primarily at this stage that the application of certain accepted
principles of appraisal becomes truly relevant. The fact
that a transaction between a company and a shareholder does not
at first sight appear to have been made at the fair market value
does not necessarily mean that a benefit was conferred by the
company on its shareholder qua shareholder. Having said
that, I hasten to add that although a transaction such as a sale
of property which at first sight appears to have been made for an
amount below or above the fair market value may of course be an
indication in this regard, it must still be established that in
the circumstances this transaction was not a genuine commercial
transaction between the parties.
32 In the recent Federal Court
of Appeal judgment in Canada v. Fingold, [1998] 1 F.C. 406,
Strayer J.A. referred on this point to the classic comments of
Cattanach J. in Minister of National Revenue v. Pillsbury
Holdings Ltd., [1965] 1 Ex. C.R. 676 (Ex. Ct.), at p. 684, on the
real meaning to be given to the equivalent provision of the Act
as applicable prior to 1972, namely s. 8(1)(c). These
comments read as follows, at p. 413 of Fingold:
. . . in my view, there can be no conferring of a benefit or
advantage within the meaning of paragraph (c) where a corporation
enters into a bona fide transaction with a shareholder. For
example, Parliament could never have intended to tax the benefit
or advantage that accrues to a customer of a corporation, merely
because the particular customer happens to be a shareholder of
the corporation, if that benefit or advantage is the benefit or
advantage accruing to the shareholder in his capacity as a
customer of the corporation. It could not be intended that
the Court go behind a bona fide business transaction between a
corporation and a customer who happens to be a shareholder and
try to evaluate the benefit or advantage accruing from the
transaction to the customer.
On the other hand, there are transactions between closely held
corporations and their shareholders that are devices or
arrangements for conferring benefits or advantages on
shareholders qua shareholders and paragraph (c) clearly applies
to such transactions . . . It is a question of fact whether
a transaction that purports, on its face, to be an ordinary
business transaction is such a device or arrangement.
[19] The facts and circumstances
inMorneau enabled Dussault J. to conclude that the price
negotiated for the purchase of Mr. Morneau's residence was
completely normal and reasonable, and it represented the fair
market value. To come to this conclusion, Dussault J. took into
consideration the fact that Mr. Morneau's children had taken
over management of the company, and that the interests of the
company and Mr. Morneau were separate and opposing. It must be
remembered that, in that case, Mr. Morneau's company had a real
need for office space, and the residence in question was located
at the entrance to the lot owned by the company, which adjoined
the residence on three sides. Prior to making the purchase, the
company had obtained estimates of the costs of new construction.
It had reviewed all of the possibilities, and the location of the
residence was a unique advantage for the company, given its
facilities. Mr. Morneau had not been interested in selling at a
price that corresponded to the market price, since it would have
cost him twice as much to settle elsewhere.
[20] In the instant case, according to the
testimonies of the appellant and his accountant, the transaction
of February 2, 1996, had been motivated by the desire to
facilitate a possible sale of the business, in that it would be
more worthwhile to purchase it if the business owned the property
where it carried out its activities, as was the case with the
appellant's two other businesses. Furthermore, the company had
spent money to improve its operations on a piece of land it had
leased, and according to the appellant, 1995 had been a good year
financially, which had enabled J.C. Fibers to purchase the
property at issue.
[21] Yet the evidence did not show that
serious negotiations had taken place for the sale of J.C. Fibers,
or that the fact that J.C. Fibers was not the owner of the land
and the building could have been an obstacle to the sale of the
business. The expenses incurred for the unloading docks, the
parking, and the weighing device were leasehold improvements that
are normal in that type of situation, and the evidence did not
reveal that this was a major inconvenience requiring the purchase
of the appellant's property on February 2, 1996.
[22] In fact, on the date of the
transaction, the two parties were bound by a lease that ended on
December 31, 1999, nearly 3 years and 11 months later. The
business had no obligation to purchase the property, and the
appellant had no obligation to sell the property. J.C. Fibers and
the appellant complied with the conditions of the lease, and
neither party seems to have been caught in a situation that may
have compelled them to negotiate the purchase of the appellant's
property.
[23] In the instant case, the evidence does
not show that actual negotiations took place between the parties.
To establish the selling price, the appellant and his accountant
first used an appraisal made for insurance purposes, which
established a replacement cost for the building, and then used
the total cost of the new construction, which the appellant paid
after the fire. These two factors are undoubtedly important to
the seller, but they are far from important to the purchaser.
This case does not show the reasoning and analysis a purchaser
would demonstrate if faced with this kind of scenario. As a
matter of fact, this case has none of the factors the appellant's
expert carefully analyzed and applied to establish a fair market
value for a special purchaser.
[24] Contrary to Morneau, in the
instant case we do not find an actual need to purchase the
property at a particular time, namely February 2, 1996. The facts
in this case do not reveal that there was an urgency to conclude
this transaction before the end of the lease. Even though J.C.
Fibers had taken into consideration all of the possibilities
listed in its expert's report to justify adding a premium to the
market value, it should have also taken into consideration the
seller's expected vulnerability in that type of situation. That
is, in fact, the very essence of the negotiations that must take
place between persons at arm's length. In Morneau,
Dussault J. summarized the determination of a fair market value
as follows in paragraph 46:
When the interests of a seller can be reconciled with those of
a buyer, albeit a special one, after a mutual compromise
consistent with each side's bargaining power, a price which
has been negotiated and finally accepted may be regarded as
representing a value which could be obtained on the market.
[25] The facts in this case do not show that
these types of negotiations took place; however, this does not
mean that the selling price of the appellant's property would not
still have surpassed the fair market value established by the
respondent's expert, but only genuine negotiations could have
enabled us to know this. The facts in this case lead me to the
conclusion that the fair market value of the property was
$1,000,000, and there are no points here that can justify adding
a premium to this value.
[26] The appellant's counsel maintained
that, for the application of subsection 15(1) of the Act,
there must be an intent to confer a benefit on the shareholder.
He bases his argument primarily on Chopp v.Canada,
[1995] T.C.J. No. 12 (Q.L.), confirmed by the Federal Court of
Appeal in [1997] F.C.J. No. 1551 (Q.L.), which upheld the
decision of Morgan J. of our Court, who stated the following in
paragraphs 15 and 19:
I cannot accept the Respondent's argument so broadly
stated that a bookkeeping error which benefits a shareholder to
the disadvantage of his corporation is a benefit within
subsection 15(1) even if the error was not intended and was not
known to the shareholder. In my opinion, if the value of a
benefit is to be included in computing a shareholder's income
under subsection 15(1), the benefit must be conferred with the
knowledge or consent of the shareholder; or alternatively, in
circumstances where it is reasonable to conclude that the
shareholder ought to have known that the benefit was conferred. I
am supported in this view by the decisions of this Court in
Simons v. M.N.R., 85 DTC 105 and Robinson v.
M.N.R., 93 DTC 254.
[...]
I would not go as far as Judge Rowe in stating that the words
used in subsection 15(1) refer to some form of action with a
strong component of intent. I think a benefit may be conferred
within the meaning of subsection 15(1) without any intent or
actual knowledge on the part of the shareholder or the
corporation if the circumstances are such that the shareholder or
corporation ought to have known that a benefit was conferred and
did nothing to reverse the benefit if it was not intended. I am
thinking of relative amounts. If there is a genuine bookkeeping
error with respect to a particular amount, and that amount is
truly significant relative to a corporation's revenue or its
expenses or a balance in the shareholder loan account, a court
may conclude that the error should have been caught by some
person among the corporate employees or shareholders or outside
auditors. Shareholders should not be encouraged to see how close
they can sail to the wind under subsection 15(1) and then plead
relief on the basis of no proven intent or knowledge.
[27] There were then a number of different
decisions referring to subsection 15(1) of the Act that were
rendered by our Court. I need only cite Smith v.
Canada, [1996] T.C.J. No. 838 (Q.L.), Hehr v.
Canada, [1997] T.C.J. No. 997 (Q.L.), Cano v.
Canada, [1996] T.C.J. No. 1745 (Q.L.), Duchesneau
v. Canada, [1997] T.C.J. No. 1152 (Q.L.),
Cribb-McKeown v. Canada, [1998] T.C.J. No. 263
(Q.L.), and Long v. Canada, [1997] T.C.J. No. 722
(Q.L.).
[28] In paragraph 12 of Long, Bowman
J. stated his support for the Robinson, Simons, and
Chopp decisions and added that "each case under subsection
15(1), however, as stated in Pillsbury, turns on its own facts."
Under that case law, the application of subsection 15(1) of the
Act does not require an intent to confer a benefit on the
shareholder. It is enough that the shareholder knew or should
have known, given the facts in the case, that he was receiving a
benefit further to the transaction at issue.
[29] In light of my conclusion that the
transaction between the appellant and J.C. Fibers was not a
genuine commercial transaction and that the sale was made for an
amount greater than the fair market value, I am able to conclude
that, in this case, a benefit was conferred by J.C. Fibers on the
appellant. The appellant and his accountant made no effort to
determine the property's fair market value prior to the transfer.
No appraisers were consulted to assist the parties in setting a
purchase price. The appellant and his accountant attempted to
establish a construction cost based on the actual amount of the
expenses and the appraisal of the replacement cost for insurance
purposes rather than determining the property's market value. In
those circumstances, the appellant knew or should have known that
a benefit could be conferred on him.
[30] The appeal is allowed in order to
reflect the fact that the market value of the building is
$1,000,000, the benefit conferred on the appellant is $500,000,
and the necessary adjustments will need to be made in terms of
calculating losses.
[31] The respondent will be entitled to its
costs.
Signed at Ottawa, Canada, this 24th day of
September 2004.
Angers J.
Translation certified true
on this 20th day of January 2005.
Colette Dupuis-Beaulne, Translator
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