Golden v. The Queen, 83 DTC 5138, [1983] CTC 112 (FCA), aff'd supra.

Heald, J:—This is an appeal from a judgment of the Trial Division whereby the appellant’s 1973 income tax assessment was referred back to the Minister of National Revenue for further reassessment on the basis that the consideration for the disposition of the land alone, by the Bel Air Syndicate on March 14, 1973, was $2,320,000. In the Trial Division this action was heard on common evidence with the cases of John McGucken v The Queen, Eleanor Golden v The Queen and Leemar Holdings Ltd v The Queen. The rea- sons for judgment of the Trial Division in this action were made to apply to the other three actions referred to supra and the judgments in each case were identical, that is, the income tax assessment in respect of each of the above mentioned taxpayers was referred back to the Minister of National Revenue for reassessment on the same basis as in this case.

At the commencement of the hearing of this appeal, counsel for both parties agreed that the principles involved in all four appeals were identical and that the Court’s decision in this appeal would apply equally to the appeals of John McGucken (A-759-80), Leemar Holdings Ltd (A-758-80) and Eleanor Golden (A-757-80). The facts relevant and applicable to all four appeals follow.

This appellant along with the three other appellants referred to herein were the sole partners in Bel Air Syndicate. On March 14, 1973, this Syndicate, in an arm’s length transaction, sold the Bel Air Apartments in Edmonton to knowledgeable real estate operators,* [1] for $5,850,000 which was allocated pursuant to the agreement between the parties as follows: to land — $5,100,000 and to “equipment, buildings, roads, sidewalks etc” — $750,000. It should be noted that on March 7, 1973, Skalbania made an unsolicited offer for the same Bel Air Apartments without prior negotiation or consultation, of $5,600,000 subject to the following valuation breakdown: land — $2,600,000; buildings — $2,400,000; and “trucks, equipment, roads etc” — $600,000. The vendors rejected that offer. Negotiations then followed and as a result, the above described sale of March 14, 1973, took place with the resultant increase in the purchase price from $5,600,000 to $5,850,000, and with the changed allocation of that purchase price as detailed supra. The Minister of National Revenue, in reassessing this appellant and his syndicate partners, relied on the provisions of section 68 of the Income Tax Act (SC 1970-71-72, c 63). That section reads as follows:

68. Where an amount can reasonably be regarded as being in part the consideration for the disposition of any property of a taxpayer 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 proceeds of disposition of that property irrespective of the form or legal effect of the contract or agreement; and the person to whom the property was disposed of shall be deemed to have acquired the property at the same part of that amount.

The trial judge accepted the opinion of an expert appraiser called at the trial by the respondent, who concluded that, as of March 14, 1973, a reasonable allocation of the total value to land alone would have been $2,320,000 rather than the sum of $5,100,000 allocated to the land alone by the agreement entered into by the parties. On this basis, and relying on the provisions of section 68 supra, he ordered reassessments of the 1973 tax returns of this appellant and his three syndicate partners on the basis quoted earlier herein. These reassessments resulted in a substantial recapture of depreciation by the vendors.

When the appeal came on for hearing, the Court, ex proprio motu, raised a question as to the applicability of the provisions of section 68 of the Income Tax Act, supra, to the situation in this case. It seems evident, and counsel for both parties agreed, that the action in the Trial Division proceeded on the basis that section 68 did apply to this case and the three other related cases and that the question of the applicability of that section was not raised in the Trial Division proceedings. Likewise, the matter was not advanced as a ground of appeal in the appeal to this Court, nor was it alluded to in any way in the appellant’s memorandum of fact and law. In these circumstances, the Court heard counsel for both parties on the grounds of appeal which had been relied on in the appellant’s memorandum, thereafter adjourning to enable both counsel to prepare argument in respect of the applicability of section 68 to these appeals.

Two days later, the Court heard argument on this aspect of the appeal. In addressing the issue of the applicability of section 68 to the circumstances of these cases, I think it instructive to consider the legislative history of that section. Section 68 was first enacted as part of the 1972 Income Tax Act.

At that time, subparagraph 20(6)(g)t [2] of the pre-1972 Act, which was somewhat similarly worded, was repealed. It is important to note that that paragraph was one of the many provisions of section 20 of the Act which dealt with the recapture and inclusion into income of excess capital cost allowance on disposition of an asset in respect of which capital cost allowances had been claimed. It dealt with nothing else. Provisions similar to others with which it was associated are now found in a similar context in subsection 13(7).

The present section 68, however, is not found among the provisions for recapture of capital cost allowances. It appears in a different subsection entitled “Rules relating to the computation of income” between a provision limiting deductions to what is reasonable in the circumstances and provisions relating to situations where considerations on acquisition or disposition are inadequate. In interpreting and applying section 68, it must be borne in mind that the 1972 Act for the first time introduced and imposed a tax on capital gains. That, as it seems to me, is the reason section 68 is found in a group of general rules and is the area in which it can be expected to apply according to its terms and without straining the meaning of any of them.

When the wording of paragraph 20(6)(g) is compared with the wording of section 68, it will be seen that whereas the application of paragraph 20(6)(g) was restricted to the disposition of depreciable property, section 68 applies to the disposition of any property. In my view paragraph 20(6)(g) applied in circumstances where an amount received by a taxpayer could reasonably be regarded as being in part the consideration for disposition of depreciable property and as being in part consideration for something else other than depreciable property. Likewise, and applying the same criteria, it seems to me that section 68 can only apply in circumstances where an amount received by a taxpayer can reasonably be regarded as being in part the consideration for the disposition of any property and as being in part considera- tion for something else other than any property. Subsection 248(1) of the Act (as it was at all relevant times) defines property as follows:

248. (1) In this Act ... “property” means property of any kind whatsoever whether real or personal or corporeal or incorporeal and, without restricting the generality of the foregoing, includes

(a) a right of any kind whatever, a share or a chose in action,

(b) unless a contrary intention is evident, money;

In the case at bar, the property disposed of was land together with the buildings, equipment, roads and sidewalks, etc, situated thereon. Because of the very wide definition of property set out in subsection 248(1) supra, it seems clear that everything disposed of in subject sale is included in that definition. Thus the appellant taxpayer and his associates disposed only of “property” as that term is defined in the Income Tax Act. They did not dispose of anything which could be described as “something else” as that term is used in section 68. As stated supra, I think the “something else” referred to in section 68 means something else other than “property”. Since section 68 applies only where an amount is received partly as consideration for something else, it follows that it does not apply in the circumstances of the instant case. The situation was different under the pre-1972 section, paragraph 20(6)(g). Under that section, the requirement for applicability was that the consideration be in part the consideration for disposition of depreciable property and in part the consideration for something else. On these facts it seems evident that the provisions of paragraph 20(6)(g), had that section applied to the taxation year 1973, would apply here since subject consideration is partly for depreciable property (buildings, equipment, etc) and partly for something else other than non-depreciable property, namely land.

I find support for my opinion that section 68 cannot apply in the facts of this case in the reasons of Estey, J in the case of Her Majesty the Queen v Malloney’s Studio Limited, [1979] CTC 206; 79 DTC 5124. At 210, the learned Justice said:

. . . The rule therefore applies to the situation where the taxpayer has disposed of two types of property, first depreciable property and secondly, something else. When this factual situation occurs, the rule then permits the allocation of that part of the consideration received in the total transaction to depreciable assets as “can reasonably be regarded as being in part the consideration for disposition of depreciable property of a taxpayer”. The rule does not permit the Minister to characterize a transaction as one which could reasonably be regarded as being in part the sale of depreciable property and in part the sale of something else. The rule operates only as a second stage, the first stage being the agreement or valid determination that the sale involves both a sale of depreciable property and a sale of something else.

That case was dealing with the pre-1972 section, paragraph 20(6)(g). However, I think the same reasoning would apply to section 68.* [3] In my view, before there is any right to apportion the selling price on a reasonable basis, the initial condition precedent to the application of section 68 must be met. Put another way, the “reasonable apportionment” rule of section 68 only applies in cases where there is (a) property as defined by the Act, and (b) something else other than property.

The result of my conclusion that section 68 does not apply is that there is no statutory basis for fixing an amount to be brought into the computation of the appellant’s income under subsection 13(1) of the Act as the proceeds of disposition of the depreciable property and the amount that must be brought into the computation is the amount for which the depreciable prop erty was sold under the terms of the contract. The reassessment must therefore be set aside. Such a conclusion is sufficient to dispose of the appeal in favour of the appellant. However, I have reached the further conclusion that the trial judge erred further in deciding that the determination under section 68 is to be approached from the point of view of the vendor only. The trial judge was relying on the Exchequer Court decision of Dumoulin, J, in the case of Munday v MNR, [1971] CTC 585; 71 DTC 5321. That decision appears to me to be inconsistent with a number of other decisions of the Exchequer Court, the Trial Division of the Federal Court and the Federal Court of Appeal. In the case of Herb Payne Transport Ltd v MNR, [1963] CTC 116; 63 DTC 1075, Noel, J, (as he then was), in a determination under paragraph 20(6)(g), enunciated the following principles:

Because of the reciprocal effect on purchaser and vendor of any such finding here I am prepared to accept, as suggested by counsel for the respondent, that the matter should be considered from the viewpoint of the purchasers as well as from the viewpoint of the vendor.

There is also no question that if the purchaser and vendor acting at arm’s length, reach a mutual decision as to apportionment of price against various assets which appear to be reasonable under the circumstances, they should be accepted by the taxation authority as accurate and they should be binding on both parties.

In another case before the Exchequer Court involving a determination under paragraph 20(6)(g), Ritchie, DJ, in making the determination, considered the situation from the point of view of both the vendor and the purchaser. In 1968, Mr Justice Noel was called upon to again make a determination under paragraph 20(6)(g) in the case of Emco Ltd v MNR, [1968] CTC 457; 68 DTC 5810. Here also, in making the necessary determination, the learned Justice considered the evidence as to the bargaining between the parties and the evidence as to the meeting of minds on both sides in the relevant transactions. Then, in 1977, in the Trial Division of the Federal Court, Marceau, J, in the case of The Queen v Godfrey G S Moulds, [1977] CTC 126; 77 DTC 5094, in making a determination under paragraph 20(6)(g) followed the Emco decision of Mr Justice Noel and had regard to the bargaining between the parties and the meeting of minds on both sides in the transaction. The Federal Court of Appeal dismissed the appeal from the judgment of Marceau, J without specifically commenting upon the basis used by Marceau, J for making the determination under paragraph 20(6)(g).

A further decision of the Exchequer Court relevant to this issue is the decision of Thurlow, J (as he then was) in the case of Klondike Helicopters Limited v MNR, [1965] CTC 427; 65 DTC 5253. That was also a paragraph 20(6)(g) determination. At 5254 of the report, Thurlow, J said:

The making of a contract or agreement in the form in which it exists is, however, one of the circumstances to be taken into account in the overall enquiry and if the contract purports to determine what amount is being paid for the depreciable property and is not a mere sham or subterfuge its weight may well be decisive.

I find this series of cases to be persuasive when reaching a conclusion on the proper test to be utilized in making the determination required either under section 68 or its predecessor section, paragraph 20(6)(g). It is my opinion that the correct approach to a section 68 determination would be, as suggested by the above authorities, to consider the matter from the viewpoint of both the vendor and the purchaser and to consider all of the relevant circumstances surrounding the transaction. Where, as in this case, as found by the trial judge, the transaction is at arm’s length and is not a mere sham or subterfuge, the apportionment made by the parties in the applicable agreement is certainly an important circumstance and one which is entitled to considerable weight. Furthermore, in this case, the trial judge made a specific finding of fact (AB p 159) that the figure of $5,100,000 which the parties apportioned to land in the agreement was not an unreasonable price for the purchaser to pay for the land alone in March, 1973. Accordingly, based on that specific finding an on the other circumstances appearing from the evidence and addressing the question from the point of view of both the appellant and its purchaser, I am of the opinion that the amount that can reasonably be regarded as having been paid and received for the land apart from the buildings, etc, was $5,100,000 and for the buildings, equipment, roads, sidewalk, etc, was $750,000.

For these reasons I would allow the appeal, set aside the decision of the Trial Division and refer the appellant’s 1973 income tax assessment back to the Minister of National Revenue for further reassessment on the basis that the consideration for the disposition of the depreciable assets, by the Bel Air Syndicate on March 14, 1973, was $750,000.

The appellant is entitled to his costs both here and in the Trial Division.

Thurlow, CJ:—The relevant facts are set out in the reasons for judgment prepared by Mr Justice Heald and I need not repeat them. I am in general agreement with his reasoning and conclusions. There are, however, some further comments that I wish to make.

In a footnote to the judgment of the Court in The Attorney General of Canada v Matador Inc and Matador Converters Co Ltd, [1980] CTC 51; 80 DTC 6018, the view is expressed that in a situation where what is disposed of consists of land and buildings section 68 applies to authorize an apportionment of the consideration between land and buildings on the basis which the section sets out.

In that case the property had been sold for an amount that was less than the value of the land alone and also less than the value of the buildings alone and the contract had not purported to apportion the amount between land and buildings. As subsection 13(1) required the amount for which the buildings were sold to be brought into the computation of income that amount had to be ascertained whether section 68 applied or not. The parties appear to have dealt with the matter as if section 68 applied and it does not appear from the report that the applicability of the section in the particular situation was seriously argued.

In the circumstances I doubt that the view expressed in the footnote was necessary to the decision. Were the matter unaffected by the view so expressed I would be prepared to agree with Mr Justice Heald’s analysis and conclusion that in the present situation section 68 does not apply. However, as the parties in this case as well regarded section 68 as applicable until the matter was raised by the Court and as it is not strictly necessary to determine the point I prefer to rest my opinion on the other ground set out in the judgment of Mr Justice Heald.

The learned trial judge having, in my opinion, erred in approaching the determination to be made for the purposes of section 68 from the point of view of the vendor and not that of the purchaser it is, I think, open to the Court to reach its own determination of the amount that can reasonably be regarded as the proceeds of disposition of the depreciable property included in the subject matter of the sale. For this purpose the respective values of land alone and depreciable assets alone are no doubt relevant and may be taken into account in reaching a conclusion but it is to be remembered that the inquiry is not one as to reasonable value but as to proceeds of disposition. It is open to an owner to dispose of his property as he sees fit and for that purpose it is open to him, when he sees it to be to his advan- tage, to realize on the full potential of an asset of one kind even if as a result the greatest potential of a related asset cannot be realized in the transaction.

In the first offer an allocation of the price offered between land, building and equipment was proposed by the purchaser. The offer was rejected for several reasons including dissatisfaction with the proposed allocation. The vendors knew that the land was underdeveloped and believed that the purchaser’s interest was in the land. They wanted to realize the full potential price for it. The learned trial judge found that $5,100,000 was not an unreasonable price for the purchaser to pay for the land alone. It was also, in my view, not an unreasonable amount for the vendors, for their own reasons, to insist on receiving for the land. It is also not unreasonable to think that the vendors would not have sold for $5,850,000 without the term providing for all the allocation of that amount between land and other assets included in the transaction. It must I think be assumed that they knew that there would be recapture of capital cost allowances which had been claimed on the buildings and that they would have to include the recaptured amount in the computation of their incomes and pay tax on it. Without an agreement allocating the purchase price or with an agreement allocating a higher amount to the depreciated assets the offer would not have been as attractive or as beneficial to them. From their point of view the consideration for the buildings and equipment and the amount they can reasonably be regarded as having received for them was the $750,000 provided by the agreement.

The allocation has a reciprocal effect. Its consequence from the point of view of the purchaser is that the cost of depreciable assets is less and the amount of capital cost allowance he can claim on the buildings and equipment is accordingly less whether he keeps or demolishes them. The amount he can reasonably be regarded as having paid for them is thus the $750,000 provided for in the agreement, a result which as I view it is confirmed by the learned trial judge’s finding that the purchaser paid $5,100,000 for the land alone.

Given that the agreement was reached between parties who were dealing at arm’s length and that it is not a sham or subterfuge, it appears to me that, notwithstanding the evidence of respective values on which the learned trial judge relied, the amount that can reasonably be regarded as the proceeds of disposition of the depreciable assets included in the transaction, irrespective of the form or legal effect of the contract, operating as it does only to govern the rights of the parties inter se, was the $750,000 for which the vendors agreed to sell and the purchaser agreed to purchase them.

I would dispose of the matter as proposed by Mr Justice Heald.