Tremblay, T.C.j. [Translation]:—These two appeals were heard on common evidence in the city of Sherbrooke, Québec.
1. Point at Issue
According to the notices of appeal and the replies to the notices of appeal, the issue is whether the appellants, a husband and wife purchasing a farm as partners in 1983, were right, in computing their income for that year to deduct expenses pertaining to the purchases of livestock and to the milk quota according to an after-purchase valuation stating that the livestock was worth $87,400 and the milk quota $88,076.
The respondent argued that the apportionment stipulated in the contract must be used, namely $40,000 for the livestock and $30,000 for the milk quota.
There is also the issue of a tax credit for the year 1984. Resolution of the latter point depends on resolution of the former.
2. Burden of Proof
2.01 The appellants have the burden of showing that the respondent's assessments are incorrect. This burden of proof results from several judicial decisions, including a Supreme Court of Canada judgment rendered in Johnston v. M.N.R., [1948] S.C.R. 486; [1948] C.T.C. 195; 3 D.T.C. 1182.
2.02 In this same judgment, the Court decided that the assumptions of fact on which the respondent bases the assessments or reassessments are also presumed to be true until proven otherwise. In the case at bar, the facts presumed by the respondent are described in subparagraphs (a) to (1) of paragraph 7 of the reply to the notice of appeal of the respondent with respect to the appellant Gérald Léonard. This paragraph reads as follows:
In assessing the appellant for the taxation years 1983 and 1984, the respondent Minister of National Revenue based himself inter alia on the following presumptions of fact:
(a) Gérald Léonard and his wife, Suzette Léonard, jointly operate a farm under the names and business names of Ferme Gérald et Suzette Léonard Enr.;
(b) during February 1983 the appellant and his wife sold their farm, located in Earlton, Ontario;
(c) during July 1983 they purchased a new farm, located in St-Valérien;
(d) on July 19, 1983, the appellant and his wife signed a notarized deed of sale for the purchase of the said farm;
(e) pursuant to the terms of the said notarized contract, the appellant and his wife agreed with the sellers, on page 9 of the notarized contract, on the following apportionment of the purchase price:
Residence | $ 75,000.00 |
Building | $ 45,000.00 |
Equipment | $ 28,000.00 |
Rolling Stock | $ 5,000.00 |
Livestock | $ 40,000.00 |
Milk quota | $ 30,000.00 |
Plot of land | $227 ,000.00 |
(f) after purchasing the farm in question, the appellant and his wife unilaterally drew up a new apportionment of the price, without considering the apportionment provided in the notarized contract on which they had agreed with the sellers;
(g) during 1983 the appellant and his wife claimed an expense for the purchase of livestock in the amount of $87,400.00, although according to the notarized agreement the livestock had been purchased for $40,000.00;
(h) during 1983 the appellant and his wife reported the profit from the sale of the milk quota of the farm in Ontario in the amount of $21,348.00, giving the cost of purchasing the milk quota as $88,000.00 rather than the $30,000.00 indicated in the notarized contract;
(i) during 1983 the appellant and his wife also reported a capital gain on the disposal of a plot of land in the amount of $5,708.00, pursuant to s. 44(1) of the Income Tax Act, giving the purchase price of the plot of land as $133,300.00 in their computation, rather than the $227,000.00 contained in the notarized contract;
(j) the respondent disallowed the appellant's share of expenses pertaining to the purchase of livestock in the amount of $23,700.00/2, based on the apportionment provided in the notarized contract on which there had been agreement between the parties;
(k) during 1983 the respondent included in its computation of the appellant's income the latter's share of the sale of the milk quota in the amount of $14,500.00 (50% of $29,000.00), based on the apportionment provided in the notarized contract listing the value of the milk quota at $30,000.00;
(l) the investment tax credit deferred to 1984 was reduced by the respondent to account for the additional tax credit deducted in the appellant’s computation of income for the 1983 taxation year.
3. Facts
3.01 At the start of the trial both counsel agreed that the key issue was apportioning the value of the property purchased, as everything else de- scribed in the pleadings is based on this apportionment. The evidence was thus concerned exclusively with the apportionment of the property and its consequences.
3.02 Most of the material facts described above in paragraph 7 of the reply to the notice of appeal, and showing the various data, computations and dates, are not in dispute.
3.03 The appellant filed a table of taxable income of the appellants according to their tax returns and their assessments for 1983, 1984 and 1985 as Exhibit A-1. It reads as follows:
Suzette Léonard
| 1983 | 1984 | 1985 |
Taxable income according to the return | 5,132 | 26,607 | (18,708) |
Taxable income according to the | |
assessment | 41,520 | 26,607 | (18,209) |
Gérald Léonard | |
| 1983 | 1984 | 1985 |
Taxable income according to the return | 6,962 | 26,106 | (19,000) |
Taxable income according to the | |
assessment | 43,502 | 26,106 | (18,502) |
Ferme G. et S, Léonard | |
| 1983 | 1984 | 1985 |
Optional inclusion of livestock at the | |
close (for the company as a whole) | 76,700 | 76,700 | 0 |
Sale of the quota and the livestock in 1985. | |
3.04 The appellants filed the offer of purchase for the farm, dated March 11, 1983, as Exhibit A-3, and the notarized contract dated July 19, 1983 as Exhibit A-4.
Accordingly, a price of $450,000 was paid for this 162-acre farm, including 153 acres under cultivation, located in the parish of St-Valérien de Milton in the province of Québec.
3.05 Section 4 of the contract reads as follows:
4. The sellers hereby provide a valuation of the farm broken down by livestock, machinery, equipment, the quota, the plot of land and the buildings, and the purchasers accept this valuation, which shall remain annexed to this agreement after being acknowledged as authentic and signed by the parties with and in the presence of the undersigned notary.
The apportionment is as appears above in paragraph 2.02.7(e).
3.06 A valuation report dated December 1, 1983, prepared by Mr. Lucien Beaudry, agronomist and certified appraiser, whose competence was never in doubt, was filed as Exhibit A-2. The apportionment of the property valuation, according to Mr. Beaudry, appears below, along with that listed in the notarized contract (Exhibit A-4):
3.07 Mr. Beaudry explained that his valuation was based on a statistical analysis of the results of public auctions held in Québec. This analysis was published in a report prepared by a committee consisting of representatives of the Ministère de ('Agriculture, the Canadian Farmers Association, the Office du crédit agricole and the Faculty of Agriculture and Food Science. The report concerns the economic aspects of agriculture in Québec.
Contract | | Valuation | Difference |
Residence | 75,000 | 45,000 | 30,000 |
Building | 45,000 | 55,900 | (10,900) |
Equipment | 28,000 | 40,400 | ( 7,400) |
Rolling stock | 5,000 | |
Livestock | 40,000 | 87 ,400 | (47,400) |
Milk quota | 30,000 | 88,000 | (58,000) |
Plot of land | 227,000 | 133,300 | 93,700 |
| $450,000 | $450,000 | |
According to Mr. Beaudry the 1983 figures, based on statistics, were confirmed in the appellants 1985 auction of their farm. Prices had apparently not fluctuated since 1983. Mr. Beaudry stated that he was commissioned by the appellants around November 25, 1983 to prepare the valuation report.
3.08 The appellant Suzette Léonard testified that, at the time of the initial offer to purchase dated March 10, 1983, an apportionment had not been made. Only a total price of $450,000 and the terms of payment were in question. On the following July 19 she and her husband arrived at the notary's office at 2:30 p.m. The contract still had not been read by 4:30 p.m. At that time the seller, who had to leave to take care of his cows, signed a blank contract. The appellants remained for the reading of the contract and to find out the apportionment.
In cross-examination, the witness confirmed the substance of a letter signed by herself and her husband and sent to the respondent at the same time as the report of the appraiser Beaudry, Exhibit 1-1.
The following is an excerpt from that letter:
Pursuant to the offer to purchase the farm of Mr. Flueler, the latter wanted to provide his own apportionment of the selling price for each of the farm's assets.
A few weeks before signing the contract, we asked him for a copy of this apportionment, but did not succeed in obtaining it.
The day that the contract was signed, the apportionment was presented to the notary, and the latter entered it in the contract. We nonetheless signed the contract, having only a very limited understanding of the fiscal consequences of doing so and in order to avoid any pointless delays in acquiring the farm.
Several consultations with experts revealed that the prices included in the contract are totally out of line with reality and, as the seller did not wish to come to an agreement, we therefore decided to assign the values provided by the certified appraiser on the financial statements.
3.09 Mrs. Suzette Léonard also made particular mention of the auction sale that occurred at their farm on January 17, 1985. The auction brought in a total of $105,290, with $89,325 for the cows and $11,000 for the embryos. The report of the auction has been filed as Exhibit A-5.
The witness also explained that in 1974 they had purchased a farm located in Earlton, in northern Ontario. They received a purchase offer on February 14, 1983 and sold it in April 1983. This farm had more land than the one in St- Valérien, but a lower value. They moved to Québec on June 26, 1983. She said that her father and both of her grandfathers were farmers.
4. Act—Case Law—Analysis
4.01 Act
The key provisions of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the"Act") which apply to these appeals are sections 68 and 69. They read as follows:
68. Amounts in part consideration for disposition of property.—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.
69. (1) Inadequate considerations.—Except as expressly otherwise provided in this Act,
(a) where a taxpayer has acquired anything from a person with whom he was not dealing at arm's length at an amount in excess of the fair market value thereof at the time he so acquired it, he shall be deemed to have acquired it at that fair market value;
(b) where a taxpayer has disposed of anything
(i) to a person with whom he was not dealing at arm's length for no proceeds or for proceeds less than the fair market value thereof at the time he so disposed of it, or
(ii) to any person by way of gift inter vivos,
he shall be deemed to have received proceeds of disposition therefor equal to that fair market value; and
(c) where a taxpayer has acquired property by way of gift, bequest or inheritance, he shall be deemed to have acquired this property at its fair market value at the time he so acquired it.
4.02 Case Law
The parties referred the Court to the following case law:
1. Canadian Propane Gaz v. M.N.R., [1972] C.T.C. 566; 73 D.T.C. 5019;
2. The Queen v. Shok, [1975] C.T.C. 162; 75 D.T.C. 5109;
3. D. Bohun v. M.N.R., [1972] C.T.C. 2325; 72 D.T.C. 1268;
4. Robbins v. M.N.R., [1978] C.T.C. 2928; 78 D.T.C. 1669;
5. R.L. Petersen v. M.N.R., [1988] 1 C.T.C. 2071; 88 D.T.C. 1040;
6. Herb Payne Transport Ltd. v. M.N.R., [1964] Ex. C.R. 1; [1963] C.T.C. 116; 63 D.T.C. 1075;
7. Georges Golden v. M.N.R.,
7.1: [1983] 2 F.C. 599; [1983] C.T.C. 112; 83 D.T.C. 5138;
7.2: affd [1986] 1 S.C.R. 209; [1986] 1 C.T.C. 274; 86 D.T.C. 6138;
8. H. Baur Investments Ltd. v. M.N.R., [1988] 1 C.T.C. 2067; 88 D.T.C. 1024;
9. Damon Developments v. M.N.R., [1988] 1 C.T.C. 2266; 88 D.T.C. 1128;
10. Emco Ltd. v. M.N.R., [1969] 1 Ex. C.R. 241; [1968] C.T.C. 457; 68 D.T.C. 5310;
11. Klondike Helicopters Ltd. v. M.N.R., [1965] C.T.C. 427; 65 D.T.C. 5253.
4.03 Analysis
4.03.1 The appellants contend that, in order to determine if the apportionment of the purchase price in a contract is reasonable within the meaning of section 68 of the Act, the Minister of National Revenue must take the positions of both parties into account. Counsel first cited paragraph 7 of Interpretation Bulletin IT-220R:
7. Although section 68 might be interpreted as requiring a determination only in respect of the vendor with such determination applying automatically to the purchaser, the Department normally obtains and considers the options and representations of the purchaser before a final determination is made.
Secondly, he referred to Canadian Propane Gaz, supra, Shok, supra, Robbins, supra, Golden, supra, and Peterson, supra.
4.03.2 The respondent's general position is that no apportionment is required to make an assessment under section 68. If there is an apportionment between two parties dealing at arm's length, the apportionment used in the contract must be accepted.
The position of the respondent is based primarily on Golden, supra, as well as on Baur, supra, and Damon, supra, which followed Golden.
It is, in fact, the latter decision rendered by the Supreme Court in 1986 which sets out the current state of the case law.
4.03.3 The facts in Golden, supra, are summarized at page 209 of the Supreme Court judgment:
Respondents sold in an arm's length transaction a plot of land containing apartment buildings for $5,850,000. The Agreement of Purchase and Sale expressly provided that of this total price $5,100,000 was allocated to land and $750,000 was allocated to "equipment, buildings, roads, sidewalks, etc.” Pursuant to s. 68 of the Income Tax Act, the Minister of National Revenue reassessed the respondents' allocation of proceeds with the result that substantial amounts of recaptured capital cost allowances were added to their incomes. The respondents appealed the Minister’s assessment to the Federal Court. The Trial Division dismissed their appeal but the Court of Appeal unanimously set aside the judgment with the majority holding that s. 68 had no application to this transaction.
Case: The appeal is dismissed.
The Court ruled on two points: first, on the meaning of “something else” which appears in section 68. A majority of the Supreme Court maintained that it should be given a very broad meaning, thereby including other assets.
The second point regards the apportionment. On this issue, a majority of the Supreme Court affirmed the Federal Court of Appeal ruling that the apportionment arrived at by the parties was a reasonable one.
4.03.4 At 116 (D.T.C. 5141; F.C. 608-10) the Federal Court of Appeal referred to Herb Payne, supra, where Noël, J. set out the following rule:
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 purchaser 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 should be binding on both parties.
Somewhat later, referring to another decision by Noël, J.:
In 1968, Mr Justice Noël 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.
(4.02(10))
Section 20(6)(g) of the old Act is similar to the current section 68. Still on the same point, the Court of Appeal continued:
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.
Thurlow, C.J. finally drew his conclusion on this point, based on these various decisions:
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.
Basing his decision inter alia on the fact that the trial judge had held that the price of $5,100,000 that the parties had assigned to the land in the contract was not an unreasonable price for the buyer to pay, Thurlow, C.J. allowed Mr. Golden's appeal.
4.03.5 In the instant cases the sellers and buyers have also dealt with each other at arm's length, as in Golden, supra. In the instant cases, both parties similarly agreed on the prices to be allocated to various items. It might even be added that both appellants had been farmers for about ten years, and that the forebears of at least the appellant Suzette Léonard were also farmers (paragraph 3). Could the appellants have been unaware of the fiscal implications of such a transaction, after having just sold a farm in Ontario?
On the other hand, can we ignore the circumstances of the sale, which must be given due consideration according to Thurlow, C.J. of the Court of Appeal, supra 7 . Although the appellants should have been informed of the apportionment of the value of the assets several weeks prior to signing the contract, it was only provided to them at the last minute after a wait of more than two hours. It cannot be said in the instant cases that there were serious negotiations between the parties. Even if the appellants had been farmers in Ontario, that does not mean the prices were the same. Nonetheless, can it be said that the apportionment appears reasonable on the face of it?
The basis of the appraiser Beaudry's valuation appears reliable to me. Prices set by buyers in auction sales are good criteria for determining true market prices. I am ignoring that true market value, which is the applicable criterion for section 69, is not the applicable criterion for section 68, which is that of reasonableness; but true market value may be one factor in determining reasonableness.
With respect to the livestock, the difference between the market value and the price in the contract is $47,400 ($87,400 — $40,000), or 120 per cent. As for the milk quota, the difference is $58,000 ($88,000 — $30,000), or 193 per cent. Can such an apportionment be seen as reasonable?
I must respond in the negative. Accordingly, as agreed with counsel for the parties, these matters are referred back to the respondent for review so that a reasonable apportionment can be arrived at.
5. Conclusion
The appeals are allowed and the matter is referred back to the respondent for reconsideration and reassessment.
Appeals allowed.