Roywood Investments Ltd. v. The Queen, 81 DTC 5148, [1981] CTC 206 (FCA)

Culliton, D J:—This is an appeal from the judgment of Grant, D J dismissing the appellant’s action in which it sought a declaration that it was entitled to deduct capital cost allowance in respect to the buildings on the land at 119-129 Adelaide Street West in the City of Toronto which it had purchased and to which it had title. The facts are set out in full in the judgment of the learned trial judge. The land on Adelaide Street, as stated in the agreed facts, was purchased by the plaintiff under an agreement dated January 8, 1965 for the sum of $589,312. On the property were two buildings. The plaintiff apportioned the purchased price as follows:

The land was subject to a head lease entered into on April 15, 1925 for a period of 966 years and 4 months. The rent in effect for the 21 year period, at the time of purchase, was $10,000 a year. The lease provided the rent would be renegotiated at the end of each successive 21 year period. It was a term of the lease that the rental of the said lands for the 2nd and each succeeding 21 year term be fixed on the basis of the value of the land only without buildings or improvements. The only income to the plaintiff is that which he received under this lease.

Under the terms of the lease the rental for the 21 year period, commencing August 1, 1967, was to be renegotiated. As no agreement could be reached, arbitration proceedings were undertaken which resulted in prolonged litigation. The issue was finally settled by agreement. The annual rent agreed upon for the period ending July 31, 1988 was $240,000.

The basis of the disallowance of capital cost allowance by the Minister was simply that there was no capital cost to the appellant in respect to the buildings which it acquired when it purchased the land in 1965. It is trite law, if the Minister was right in this decision, that he properly disallowed any deduction for capital cost allowance.

The sole issue at the trial was whether the value of the land was such that the whole purchase price was attributable thereto and none to the acquisition of the buildings. At the trial the Attorney General of Canada called two expert witnesses as to the value of the land. Mr J W Beaton testified the fair market value of the land at the time of purchase was such that no part of the cost could be attributable to the buildings. The second expert witness was Mr D H Bonham an accountant, who testified as follows:

the most appropriate treatment under generally accepted accounting principles on the books of the investor, Roywood Investments Limited, at the time of acquisition in 1965 would have been to allocate all or substantially all of the costs of the investment to land and nothing or merely a nominal amount to building.

The plaintiff called Mr M M Simmons, QC who was widely experienced, not only in the practice of law, but also in all aspects of the real estate, development and building business. He testified that the recognized practice in a situation such as prevailed in this case was to allot the purchase price 80% to the buildings and 20% to the land. This is what was done.

The learned trial judge accepted the evidence of Bonham and Beaton. In so doing he said:

I accept the testimony of the defendants two expert witnesses. Mr Simmons’ testimony was to some extent contrary to that given by him on the former occasion in respect to the valuations made by him and he has a direct financial interest in the outcome of these proceedings.

The trial judge went on to say:

From all of the evidence and the circumstances surrounding the purchase of such property I am convinced that at the time of such purchase by the plaintiff the buildings thereon were of little, if any, value and were an obstacle to the redevelopment of the land as they would have to be removed for such purpose and that in proper accounting practise the total amount of the purchase price should have been allocated to the purchase of the land.

The finding by the learned trial judge that the value of the land was such that none of the purchase price could be attributed to the buildings was a finding of fact.

This Court has no right to disturb that finding unless it can be established the learned trial judge was clearly wrong in his conclusion or that there was no evidence upon which he could find as he did. This Court cannot substitute its opinion for that of the trial judge merely because it might have come to a different conclusion.

Notwithstanding the very full and very able argument of Mr Rosenberg, I am not persuaded the learned trial judge was wrong in his conclusion. As well, I am satisfied there was evidence to support the decision which the learned trial judge arrived at. It cannot be said he overlooked any material evidence or took into consideration factors for which there was no evidence. In these circumstances therefore, there is no basis upon which the judgment of the learned trial judge should be disturbed.

Learned counsel for the appellant took strong exception to the following statement made by the learned trial judge.

I am further convinced by the testimony and the exceptional bargain that the purchase price provided that the sole purpose of the plaintiff in purchasing the same was to realize a substantial capital gain therefrom, when the opportunity to do so arose and the buildings were not acquired for the purpose of gaining or producing income.

The pertinent element in the foregoing finding is that the plaintiff did not acquire the buildings for the purpose of gaining or producing income. In my opinion that contention is supported by the evidence. The land when purchased by the plaintiff was subject to a head lease. It was the holder of that lease who received whatever income was generated by the buildings. The plaintiff had no direct interest in or any claim to that income.

Under the terms of the lease, the annual income payable thereunder, was to be determined at the respective negotiation period on the basis of the valuation of the land only without buildings or improvements. Thus, any interest which the plaintiff had in the buildings on the lands at the time of purchase, or in any buildings subsequently constructed thereon, was a contingent one which would vest only if the lease were terminated either by agreement or default. As long as the head lease prevailed the only income which the plaintiff could receive was that determined from time to time based on the valuation of the land. In these circumstances it is obvious the plaintiff did not purchase the land so as to acquire the buildings for the purpose of gaining or producing income. No doubt in purchasing the land the plaintiff did so for the purpose of realizing a gain, a purpose to which no one can take any exception.

I would dismiss the appeal with costs.

The Chief Justice:—I agree with Culliton, D J that there was evidence upon which the learned trial judge could find as he did that “the buildings on the property purchased by the appellant were of little, if any value, that they were an obstacle to redevelopment of the land as they would have to be removed for such purpose and that in proper accounting practice the total amount of the purchase price should have been allocated to the purchase of the land”. This finding, based as it is, at least in part, on the trial judge’s estimate of the credibility of the witnesses and his apparent preference for and reliance on the evidence of the respondent’s witnesses cannot properly be disturbed. In my opinion it follows that there is no capital cost to be attributed to the buildings and that the deductions claimed by the appellant for capital cost allowances were properly disallowed.

The appeal would fail on that ground alone. But I am also of the view, notwithstanding the fact that the buildings remained on the land for some years after the purchase by the appellant of the freehold in the land, that it was open to the learned trial judge to infer from the whole of the circumstances that the appellant’s purpose in acquiring the property was to realize a capital gain. While that particular inference in itself is not of significance the correlated finding of the learned trial judge that the buildings were not acquired for the purpose of gaining or producing income is also sustainable and constitutes a second ground for the conclusion that the appellant was not entitled under the regulations to deductions for capital cost allowances in respect of any part of the purchase price that could be regarded as cost of the buildings.

I would dismiss the appeal with costs.

Hyde, D J:—I concur.