The Queen, v. Leclerc, 79 DTC 5440, [1979] CTC 527 (FCTD)

Walsh, J:—These six actions were by order pursuant to Rule 1716 joined for simultaneous hearing on common proof. The only issue is one of fact namely the appropriate division of the purchase price of property situated at 5110 to 5830 Second Avenue, Rosemount, Montreal, with the buildings thereon known as The Deauville Apartments between the amount attributable to the buildings and contents and that attributable to the land. The property in question was sold by deed of sale dated January 28,1969 by Messrs Peter S Wise, Myer Pollock, Sam Sokoloff and Louis Burnstein, the owners, to Messrs Georges E Lemay and Claude Leclerc for a price of $650,000 of which $350,000 was attributed to the depreciable assets. Because of the income tax consequences it was desirable for the vendors to establish the amount attributable to buildings and contents at as low a figure as possible to avoid taxation on recaptured capital cost allowance, while similarly it was in the interest of the purchasers to attribute as high a value as possible to the depreciable assets to be used as a tax base for capital cost allowance claims by them in the years following the purchase.

These are not cases in which the Minister made conflicting assessments, having assessed the value of the buildings and contents for capital cost allowance purposes at $429,000 in the assessments of all the parties, whereas the vendors used the figure of $350,000 agreed to in the deed of Sale and the purchasers used a different figure of $450,000. There is therefore a conflict between all the parties although the figure used by the Minister is substantially closer to that of the purchasers than the figure used by the vendors and shown in the deed of sale. By decision of the Tax Review Board on December 10, 1976, the appeal of the purchasers Doctor Claude Leclerc and Georges E Lemay was maintained and the assessments were referred back to the Minister of National Revenue for a new assessment based on attributing a value of $450,000 to the buildings and contents. In the present proceedings the Crown appeals from this decision and Similarly the four vendors, Messrs Burnstein, Sokoloff, Pollock and Wise, also appeal contending that the evaluation of $350,000 for the buildings adopted in the deed of sale and used in their respective tax returns should be accepted and the reassessments dismissed.

In making the reassessments the Minister relies on paragraphs 11(1)(a) and 20(6)(g) of the Act in effect at the relevant time, being the former Income Tax Act (RSC 1952, c 148 as amended) which read as follows:

11.(1) Notwithstanding paragraphs (a), (b) and (h) of subsection (1) of section 12, the following amounts may be deducted in computing the income of a taxpayer for a taxation year:

(a) such part of the capital cost to the taxpayer of property, or such amount in respect of the capital cost to the taxpayer of property, if any, as is allowed by regulation.

20.(6) For the purpose of this section and regulations made under paragraph (a) of subsection (1) of section 11, the following rules apply:

(g) where an amount can reasonably be regarded as being in part the consideration for dispostion 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.

and on Regulation 1100.

It was conceded that the Minister is not bound by the distribution of the purchase price of $650,000 between land and depreciable assets agreed to by the vendors and the purchasers in the deed of sale but is free to make his own assessments of the value of the depreciable property*. [1] While this case was argued on the basis of the issue being the portion of the purchase price attributable to the buildings and contents consisting of stoves and refrigerators, which also come under the classification of depreciable property, although at a different rate of depreciation nothing turns on this distinction since once the total figure for depreciable property has been established there is no issue before the Court as to distribution of same between the buildings and the said equipment.

During the course of the hearing counsel for vendors objected to the introduction by purchasers of any evidence tending to alter the figures agreed to by them in the deed of sale, a valid written document. This raises an interesting legal question as to admissibility of proof and in litigation between vendors and purchasers such evidence would certainly be inadmissible. In the present proceedings however although vendors and purchasers are in an adversary position there is no litigation between them the actions in each case being between them and the Crown. Since it is conceded that the Crown is in no way bound by the figures in the deed counsel for the Crown joined with counsel for the purchasers in contending that evidence attempting to establish how their figure of $450,000 was arrived at would have to be admitted as the Crown would be introducing evidence attempting to establish the figure of $429,000 and it would be manifestly unfair not to permit purchasers in the actions between them and the Crown to introduce any evidence in rebuttal of this. Although the introduction of such evidence is prejudicial to vendors’ contention that the figures used in the deed should be adopted it is difficult to see how they can validly object to the introduction of such evidence in the actions between the purchasers and the Crown, and since all actions are to be heard and adjudicated on common proof such evidence of necessity must be taken into consideration in support of the Crown’s assessments in the actions between the vendors and the Crown. While a substantial portion of the evidence was made under reserve of these objections I have concluded that the evidence heard is admissible in the somewhat unusual circumstances of the present joined proceedings.

I had occasion to comment on the question of admissibility of proof to contradict the contents of a valid written agreement in the case of MNR v Robert P Ouellette and John E Brett, [1971] CTC 121; 71 DTC 5094. The objection was based on Article 1234 of the Quebec Civil Code which reads:

1234. Testimony cannot in any case, be received to contradict or vary the terms of a valid written instrument.

The commentators and jurisprudence on this issue were discussed at pp 134 and 135 [5103] and I concluded as follows:

It must be remembered that in the present appeals, although they were argued as if Brett and Ouellette on the one hand, and Blauer on the other were adversaries, in actual fact it is the Minister of National Revenue who is the appellant and, as such, the adversary in the cases of Ouellette and Brett, and the respondent and adversary in the case of Blauer. To hold that the Minister is bound by the terms of an agreement entered into between Brett and Ouellette on the one hand and Blauer on the other, and cannot introduce evidence to show that use of the term “goodwill” in the agreement did not represent the true consideration for which the payment was made could open the door for all sorts of agreements to be drawn up in avoidance of taxation, though I do not suggest that this was deliberately done in the present case, and to hold further that this is a situation which only applies in the Province of Quebec because of the existence of Article 1234 in the Quebec Civil Code is a proposition which I cannot entertain. While Article 1234 of the Quebec Civil Code would have its full application in any litigation between Brett and Ouellette on the one hand, and Blauer on the other, arising out of the interpretation of the dissolution agreement, it can have no application in the present proceedings between the three parties respectively and the Minister of National Revenue and I therefore hold the verbal evidence introduced in an attempt to interpret the agreement to be admissible.

This as in line with the finding of Noel, J in Herb Payne Transport Limited v MNR, [1964] Ex CR 1; [1963] CTC 116; 63 DTC 1075, in which in commenting on the proper meaning to be given to the word “reasonably” in paragraph 20(6)(g) (supra) he stated at 8 [122, 1078]:

The above rule appears to be mandatory and would apply to any case where a disposal of depreciable property occurs. It also, in my opinion, would have the effect of permitting evidence with respect to the reasonableness of the consideration for such depreciated property to be adduced notwithstanding the ordinary rules of evidence which, as suggested by counsel for the respondent, might apply here to prevent contradiction by oral evidence of the terms of a written document.

While it is true that as counsel for vendors points out he also stated at 8 [122, 1078]:

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.

but again this depends on whether the apportionment appears to be reasonable or not. This decision was referred to with approval by Thurlow, J as he then was in the case of Klondike Helicopters Limited v MNR, [1966] Ex CR 251; [1965] CTC 427; 65 DTC 5253, where he stated at 254 [429, 5254]:

In applying this rule the matter for determination is not simply one of interpreting the contract or agreement or of giving effect to its provisions. Rather, when the rule applies the problem is to decide, having regard to all the circumstances of the transaction, what part of an amount representing the consideration for disposition of depreciable assets of a prescribed classs and for something else can reasonably be regarded as having been the consideration for the disposition of the assets of the prescribed class and for the purposes of the rule the amount so determined is to be regarded as the proceeds of disposition of such assets regardless of the form or legal effect of the contract or agreement. As pointed out by Noel, J in Herb Payne Transport Limited v MNR, in determining this question evidence will be admissible which would be excluded if the contract or agreement alone governed the rights of the taxpayer and the Minister as parties to the proceeding. 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.

This latter case in its turn was commented on by Smith, DJ in the recent case of Her Majesty The Queen v Sam Shok, Ben Luff man, Benjamin Stone and Waldorf Hotel (1958) Co Ltd, [1975] CTC 162; 75 DTC 5109 in which he Stated at 171 [5116]:

Here it is noted that in the Klondike case Thurlow, J did not say the weight of what is said in the agreement, concerning depreciable property, must be decisive, but only that it may well be decisive. He also stated that it was one of the circumstances to be considered.

In commenting on the decision of J O Weldon, QC in the Tax Review Board case of Boh un, Bohun and Reynolds Construction Limited v MNR, [1972] CTC 2325; 72 DTC 1268 in which the judgment stated at 2332 [1273]:

It is my opinion that paragraph 20(6)(g) is not in the Act for the purpose of authorizing the Minister to change the breakdown of a purchase price in an agreement unless such an agreement is a sham or subterfuge.

he states at 172 [5117]:

In my view, if this statement is intended to mean that in no circumstances can the Minister change the breakdown of a purchase price unless he proves that the breakdown is a sham or subterfuge, it is much too broad. The circumstances must be taken into account and may lead to a different conclusion.

Perhaps the best expression of the principle involved is found in the case of Canadian Propane Gas & Oil Limited v MNR, [1972] CTC 566; 73 DTC 5019 in which Cattanach, J stated at 577 [5028]:

I should think that “reasonable” as used in the context of paragraph 20(6)(g) does not mean from the subjective point of view of the Minister alone or the appellant alone, but rather from the point of view of an objective observer with a knowledge of all the pertinent facts.

It is true that he found that there had been no hard bargaining between the parties with respect to the allocation of the purchase price, stating at 579 [5029]:

For the foregoing reasons I have concluded that the apportionment between depreciable property and something else was in effect unilaterally done by the appellant and that there was in reality no genuine negotiated apportionment as a result of bargaining between the parties to the agreement from which it follows that the allocations in the agreements are not decisive of what is reasonable.

Here again this judgment is not authority for the proposition for which vendors contend that if there has been hard bargaining the result arrived at must be decisive. It is indeed only an element of proof to which considerable weight must be given but is in no way binding on the Minister in his determination of what is “reasonable”.

I have cited the above extracts at some length not only in connection with the question of admissibility on which in my view there can be no doubt, but also with respect to the effect of an allocation made in a valid written instrument after negotiations at arm’s length between the vendors and purchasers with nothing to indicate that the apportionment reached was a sham or a subterfuge. As vendors’ counsel contends that is the situation in the present case even though purchasers later, as he contends in bad faith, departed from figures reached, claiming a larger sum as the tax base for calculation of capital cost allowance of the depreciable assets. I believe that the proper conclusion to be reached is that while the terms of the written agreement must be given considerable weight the Minister is certainly not bound to accept allocation as being reasonable and that appropriate weight must be given to other evidence in determining from an independent point of view what was in fact a reasonable allocation.

The property is a block consisted of six subdivision lots and part of another with five three storey apartment buildings erected thereon four of which contained 24 apartment units and a fifth 30 or a total of 126 apartments. While the apartment buildings fronted on Second Avenue in Rosemount in the City of Montreal which was zoned as residential and limited to the construction of this type of building one end of the property had a 93 foot frontage on Masson Street which is zoned for commercial use. The apartments are what are known as cold water apartments, having no central heating and the total rental revenue for the 126 units in the year 1969, the year for which the reassessments were made, was $113,000, or approximately $75 per month per unit. Rosemount is a working class area of the city, and the western portion of same where the subject property is located, was at the time almost completely developed with low class rental housing of small apartment buildings such as the present, quadruplexes or row housing, with a few commercial streets for small stores and businesses. The apartment buildings in question had been built in the early 1950’s and had not been well maintained, but were structurally sound.

Mr Lemay who has been an architect since 1954 visited the premises and entered five or six of the apartments before making the offer on behalf of himself and his associate. The offer made on December 11, 1968 through a real estate agent Raoul Gauthier was for a price of $650,000 which was not broken down between land, buildings or contents. On December 13, 1968, the vendors accepted the offer but made a breakdown in price in the amount of $315,000 for land and $335,000 for buildings including equipment. Beside the typed figure there is a correction in ink initialled by Mr Wise who signed the offer on behalf of the vendors, changing the breakdown to $300,000 for the land and $350,000 for the buildings and equipment. This offer was accepted by Messrs Leclerc and Lemay. During the course of his evidence Mr Wise testified that since the counter offer was his the changes were initialled by him but evidently the purchasers neglected to initial them. During the course of his evidence Mr Wise testified that he had originally believed that the purchase price should be split equally between land, buildings and contents with $325,000 attributable to each. During the course of negotiations (presumably with the real estate agent) he submitted the counter-offer showing the evaluation of the buildings and contents, which is what is in issue at $335,000. The increase to $350,000 was requested by the purchaser. Mr Lemay during the course of his testimony stated that he was not really interested in the division of the price of $650,00 although he admitted that he and his associate had consulted their lawyer, accountant and notary none of whom seemed concerned about this division, according to him, before making the offer. He stated he does not recall any negotiations increasing the sum attributable to the buildings and contents by $15,000 though he conceded that this was to the purchasers’ advantage. He was categoric however in Stating that he did not consider the figure shown in the deed as binding him and his associate with regard to its fiscal consequences, contending that this was of no concern to the vendor. He went so far as to say that he would not have bought the property at all had he not felt that the figure of $450,000 could be used as a base for calculation of capital cost allowance.

I find this attitude difficult to condone and to say the least it casts considerable doubt on his credibility as a witness. He is not inexperienced in real estate matters and was prudent enough to consult his lawyer and accountant before purchasing and cannot have been unaware of the advantages of placing as high a figure as possible on the building and contents so as to increase the amount of the capital cost allowance deductions which could be made from income for taxation purposes. He may not have negotiated directly with the vendors to increase the valuation of the building and contents in the vendor’s counter-offer from $335,000 to $350,000 but if he did not do so personally certainly his agent must have requested the increase acting on his instructions or at least with his approval, asthevendors, also extremely experienced people in real estate transaction and the taxation consequences thereof, would certainly not have initiated the increase which in actual fact resulted in a small amount of recaptured capital cost allowance for them since their undepreciated capital cost of buildings and contents at the time of disposition was $343,470.

When vendors and purchasers show a valuation for depreciable assets in a deed and then both use this figure in their tax return the Minister may or may not disallow it. While he would still have the right to do so it is unlikely that he would intervene to change such a negotiated figure unless it is clearly unreasonable. This is the conclusion of the jurisprudence to which I have referred. However when one or other of the parties uses a different figure for his tax returns it immediately puts the Minister on notice and he clearly cannot properly accept the use of one figure by the vendor and a different one by the purchaser for the same assets and must disallow one or both of them and issue reassessments accordingly. In the present case the vendors in good faith used the figure shown in the deed. The same cannot be said for Mr Lemay who not only increased the figure by $100,000 but insisted that it had been his intention to do so all along. If the sale had been for $1 and other considerations, there might be some excuse for purchasers placing their own valuation on the buildings and contents so purchased, but having agreed to a negotiated figure, upon which vendors had every right to rely in their own tax returns, purchasers by refusing to use it placed the Minister in a position where he had no choice but to have an independent assessment made, as a result of which not only the purchasers were assessed but also the vendors.

Mr Lemay testified that he attributed $450,000 to the buildings and contents on the basis of taking the municipal valuation of approximately $180,000 for the land and attributing the rest to the depreciable assets. He also stated that the buildings were insured for $514,500 and produced a copy of the insurance policy to corroborate this. I do not attribute too much significance to the insured value of the buildings however as no doubt their replacement cost would be substantially higher than their market value, and especially in property of this sort it would be important to keep it fully insured. Except for this he submitted no expert or other evidence in support of the $450,000 evaluation. Aside from the fact that his evidence would understandably be of a self-serving nature, the fact that he is the author of two figures, that of $350,000 shown in the deed and that of $450,000 shown in his tax return, makes it apparent that very little weight can be attributed to his evidence as the valuation of the buildings and contents. He did testify that the buildings were fundamentally in sound condition with no foundation or wall cracks and that he considered that they would have a life of about 50 years.

On behalf of the vendors the proof is not much more satisfactory. They at least used the figure shown in the deed of sale. They failed to submit any very useful evidence as to the appropriateness of this figure however. Mr Peter Wise, CA one of the co-owners testified that they bought the buildings in 1958 and that they were rapidly deteriorating. They had a manager to administer them, but he found that they were beginning to look neglected like army barracks, with broken windows and other defects. The administrator only did repairs that were absolutely necessary postponing others so as to show a cash flow. His own personal contribution to the investment was $45,000 and in the six years prior to 1965 he had only withdrawn some $4,800, certainly a very poor return on his investment. This evidence as to his drawings is misleading however as the financial statement of the Deauville Apartments indicate his share of net earnings for the year ending December 31, 1967 would have been $5,280.44 and for 1968 $7,256. In 1967 $8,329.08 was spent on maintenance and repairs, $10,900 on painting the hallways and exterior painting and $3,607.47 on emergency sewer repairs and in 1968 $8,959.23 was spent on maintenance and repairs. He testified that he considered that to make proper repairs to all the apartment buildings would require about $100,000. He testified also that before selling the vendors had commissioned a valuation from Westmount Realties. Unfortunately Harold Besser the evaluator, a real estate agent with 30 years experience in commmercial and industrial property who made the report was not called as an expert witness. It was brought out in cross- examination that he is a brother-in-law of Mr Wise but I do not think his credibility is in issue. Since he was not testifying as an expert, however, when he produced his report and therefore could not be cross-examined the evaluation in the report of $319,530 as the depreciated value of the buildings and equipment and $291.090 as the valuation of the land or a total of $610,620 is of little evidential value. Production of the report was permitted only to corroborate the evidence of Mr Wise that they had a valuation not dissimilar to the values they used in the deed of sale, which he testified was based on the figures they had obtained from this report increased in proportion to the increase of the sale price to $650,000 over the valuation of $610,620.

Mr Wise also testified that four of the buildings were mortgaged by a CMHC loan at the low interest of 4 /4% with a separate mortgage on the corner property zones as commercial. Although the mortgage rate was attractive CMHC refused to divide the mortgage between the various properties which would have made them easier to sell as they could have sold them separately. They were therefore forced to sell the property in one block.

The Crown oddly enough introduced no evidence to establish how the Minister’s assessment allocating $221,000 to the land and $429,000 to the depreciable assets was arrived at, the assessor not being called as a witness. However the Crown did call as an expert Claude Bois a duly qualified appraiser whose qualifications were admitted by the opposing parties and whose affidavit and report were taken as read. He establised the value of $195,000 for the land and $455,000 for the buildings. While his report was very complete and detailed and his approach to the valuation was probably the best if not the only method which could be used under the circumstances his conclusions did not stand up well under cross- examination since the assumptions which he necessarily had to make to reach his conclusions were such that even a slight alteration in them would result in a vastly different end result in the distribution of the purchase price between land and depreciable assets. He was forced to use a capitalized revenue approach since, unlike evaluations for expropriation purposes in which comparable sales, if they can be found, after making proper adjustments, give the best indication of market value, this could not be done as such sales for the most part indicate only the price paid for the land and buildings with no breakdown of the purchase price between the two. Similarly when he made his report in October 1979 it would have been difficult for him to have evaluated the replacement cost of the buildings as of 1969 less depreciation to that date. He was therefore forced to rely on the less accurate capitalization of revenue approach which involved reaching a valuation of the land alone, determining the potential net revenue for the entire property including land and buildings, deducting from this the revenue which he attributes to the land alone based on his evaluation of it and the rate of interest which he selects, and then capitalize the resulting figure at the said rate of interest plus a further rate for depreciation. His conclusion resulted in the valuation of the land at $194,000 and of the buildings at $445,400 or a total of $639,400 and on the basis of this ratio he attributes 30% of the sale price of $650,000 to the land and 70% to the buildings to arrive at his conclusion. It is evident that the conclusion to be accurate depends on the accurate evaluation of the land alone, and of the rate of interest selected for capitalization and depreciation.

In preparation for his report he examined all sales in the area of vacant property from 1963 to 1971. He evaluated the commercially zoned property separately from the property zoned for residential purposes and in the case of the former bases his evaluation on the frontage rather than the area. The three sales he selects as most comparable netted the prices of $608.70, $773.20 and $688.07 a foot for frontage on Masson Street or an average of $690 a foot which he applies to the 93 foot frontage on that street of subject property given this portion of it a value of $64,170. He states that in this area of Rosemount most of the properties are old with few demolitions and little vacant land and that the market was stable and did not change greatly from year to year at that time.

With respect to the residential property on Second Avenue he selects four comparables one being a sale of a property of an area of 13,930 square feet at $2.90 a square foot, one of 18,000 square feet at $2.53 per square foot, one of 24,000 square feet at $2.33 per square foot, and on of 60,900 square feet at $1.80 per square foot. From this he concludes that the larger area of vacant lot the lower the value per square foot, which he attributes to the fact that most of the building was done on lost of less than 5,000 square feet as appears from other sales on his list which were at higher prices. He then draws an exponential curve based on these four sales to show that for the subject residential property which had an area of 86,480 square feet the potential price would be $1.41 per square foot. He takes into consideration the price of $1.80 per square foot paid for a property adjacent to but containing 25,580 square feet less than the subject property, and his theoretical figure of $1.41 per square foot and establishes the value of subject property at $1.50 per square foot which gives him a value of $129,720 for the 86,480 square feet. Adding this to the $64,170 evaluation for the commercial property gives him a total of $193,893 which he rounds out to $194,000 as the land value of such property.

In cross-examination it was pointed out that unfortunately all four of the sales which he uses as comparables were sales by the City of Montreal by auction. It was contended by vendors, and I believe not without justification, that land sales by auction by a public authority tend to result in lower prices than private sales between willing and informed vendors and purchasers. The witness Bois admitted this to be so and this was also corroborated in principle by an expert witness called in rebuttal by vendors whose experience in this area however is limited to text book knowledge. It was argued however that in an area such as this where vacant land is relatively scarce, and hence presumably more valuable to the potential purchaser the sales by auction might not necessarily result in lower prices. Vendors also contended that if vacant land is relatively scarce, as admitted, it should not follow that a larger area of vacant land would result in a lower price per square foot, since even admitting that it would only require 10,000 to 12,000 square feet to construct buildings such as those involved in the present proceedings, this should not necessarily deter a purchaser from acquiring a larger area which could be subdivided and on which five or six buildings similar to subject buildings, which are apparently the typical construction in the area, could be built.

While I do not necessarily conclude that the valuation of the land arrived at by the witness by his theoretical approach, using an exponential curve and based on assumption that the larger the area the lower the price per Square foot is necessarily wrong, especially since it is Supported by the municipal assessment which gives a comparable, though somewhat lower value for the land, there is at least some doubt as to its accuracy.

Even more serious is the interest rate chosen for capitalization purposes, and the figures used by the witness in his theoretical calculation of net revenue, in which he established the effective revenue allowing for vacancies and bad debts at $100,206 and expenses at a theoretical figure of 42%, which he stated is normal, amounting to $42,086 resulting in net revenue of $58,120. The actual financial statements for the property for the 1967 and 1968 taxation years show expenses at $79,710.27 before depreciation for 1967 and $65,267.01 before depreciation for 1968 resulting in net revenue before depreciation for two years in question of $26,402.22 and $36,280.02. The witness did not have these figures before him when he made his theoretical estimate, but obviously their use would have made a tremendous difference in the result.

The witness capitalized his figures at an interest rate of 7% on the basis of the rate on federal bonds as of January 1969 being 7.16%. Taking the chronological age of the buildings as 16 years and their normal economic life as 50 years, resulting in a remaining life of 34 years, he divided 100 by this to reach his figure of 3% for depreciation. Adding this to the 7% interest he uses a 10% capitalization figure for the net revenue of $44,540 he attributes to the buildings to reach their value of $445,400.

Considerable discussion took place as to whether the interest figures chosen were realistic for an investor in real estate. The vendors called an expert witness in rebuttal, Eric Solomon who has been a real estate broker and consultant since June 1966 and has been buying and selling invest- ment property for clients since 1971. He has a Master of Business Administration degree from Syracuse University with a major in real estate and has been associated with 30 to 40 purchases for clients and about 8 developments personally. He admitted however that he has no professional qualifications as an evaluator, and that he has only had one experience in the purchase of a residential block, some 10 years ago. While he can in no way be considered as an expert therefore with respect to the evaluation of Subject property, he has a substantial theoretical knowledge of rates of return normally sought or obtained on real estate investments which he states, as might be expected, depend on many factors, including the degree of risk, the type of real estate, the condition of the property, the quality of the tenants, repairs required, and so forth. While he agreed that there is no such thing as a normal rate of return he stated that in his view rates of return on investments in real estate should be higher than that from government bonds in view of the inherent risks involved. Low rental flats with multi tenant occupancy normally involve a high degree of mobility of the tenants and more risk than would be involved in an investment in a high class industrial property with a single substantial tenant. An investor would normally require a higher rate of return, which he would expect to be at least 5% more, over and above the capital cost allowance. In cross-examination he conceded that professional investors with other income such as the present purchasers might purchase property at a lower return in order to benefit from the capital cost allowance. Despite Mr Lemay’s contention that he and his associate would not have purchased at all had they been limited to calculating capital cost allowance on a $350,000 base it seems improbable that he and his associate would have bought the property for the primary purpose of benefiting from the additional capital cost allowance shared between them equally on a base higher by only $100,000, unless they also expected to get a reasonable return from their investment in the property. It seems doubtful therefore whether a return of 10%, which includes only 3% depreciation can be considered as a reasonable return by a well informed investor in real estate of this nature, taking into consideration all the problems involved in ownership and management of it.

A difference of only 1% or 2% in the interest rate for capitalization purposes makes a dramatic difference in the resulting evaluation of the buildings. Vendors’ counsel in argument submitted some very significant calculations on this basis. Taking the actual 1967 net revenue of $26,402.22 and adding the interest on mortgages in that year of $21,775.55 amounts to a total of $48,177.77, and similarly for 1968 the net revenue of $36,280.02 and the interest on mortgages of $20,977.55 form a total of $57,257.57. Averaging these two figures gives a figure of $52,717.67 as the average annual revenue net of all expenses except interest on mortgages. (This compares with Mr Bois’ theoretical figure of $58,120). Taking Mr Bois’ valuation of $194,000 for the land, his interest allowance of 7% on it results in a deduction of $13,580 which would leave $39,137.67 attributable to the buildings. Accepting his 7% figure plus 3% for depreciation and capitalizing this figure at 10% would give a valuation for the buildings $391,376.70. Making the same calculation at 11 % gives a valuation of $338,160.63 and at 12% of $293,813.91. If 4% were allowed for depreciation resulting in a capitalization rate of 11% the resulting value for the buildings would be $355,797 and at a rate of 12% the value would be $309,980.58. It is evident that using an interest rate of only 1% higher than that of the Crown’s own expert and even accepting his figures for the value of the land, brings the capitalized value of the buildings to approximately the same as or slightly less than the $350,000 shown in the deed of sale.

Another similarly prepared table using the vendors’ value of $300,000 for the land with capitalization of 7% plus 3% depreciation or a total rate of 10% would give a value of only $317,716.70 for the buildings and at 11% $261,069.72 for the buildings. At a 4% rate of depreciation the corresponding values would be $288,342.45 and $239,313.91 for the buildings.

In conclusion with respect to Mr Bois’ proof, and without in any way questioning his expertise or his approach to evaluation, the use of the theoretical considerations involved in the valuation of the vacant land, together with the substantial doubt cast on the rate of interest he used for capitalization of the net income attributable for the buildings, and the fact that the most recent revenue statements for the buildings, which were not available to Mr Bois, indicate substantially lower net revenue than that estimated by his allowance of 42% for expenses, combine to cast so much doubt on the resulting valuation which he attributes to the buildings as to make this evidence very inconclusive.

We are left with one other item of evidence and it may well be the most significant of all. The vendors had appealed to the board of revision of the city of Montreal from the tax assessments for the property for 1967-68 and 1968-69 tax years and the purchasers continued these appeals. While frequently there is no very close relationship between municipal assessments and market price, in the present case the total assessments were higher than the sale price of the property. The valuations are significant especially since, in municipal assessments there is a breakdown between land and building values. The members of the board of revision are of necessity familiar with properties in different areas of the city and have considerable expertise in establishing values. A summary of the hearing before them on January 5,1971 and the resulting decision was filed in evidence and it is apparent that the valuation was gone into very thoroughly and that this evidence must be considered as that of a neutral party with respect to the present litigants. The city expert testifying before them, after putting aside the revenue attributable to the land, taxes and interest as Mr Bois did, established the revenue attributable to the buildings and then capitalized this revenue at a rate of 11.95% including taxes, interest or yield and depreciation. It is not necessary for our purposes here to go into the details of evidence submitted but it appears that the replacement values of the buildings was taken into consideration less depreciation and additional depreciation for their state of repairs and a calculation was also made based on the capitalized value and economic return. Calculations were made for each of the five properties in question for each of the two years and the resulting decision in which for purposes of simplicity I have added the separate figures for each of the properties to make a total were as follows:

In the year 1969-70 after proceeding on the same basis the board reached the conclusion that the land values remained the same at $180,300 but that the buildings were now worth $560,200 or a total assessment of $740,500.

While it is true that most of the evidence submitted before the board of revision related to the valuation of the buildings, with there being little dispute as to the valuation of the land, the assessment by the decision of the value of the buildings exceeds the values claimed by purchasers as a cost base and substantially exceeds the values used by the Minister in his assessments of both vendors and purchasers.

The use of municipal assessments in distributing evaluation of a property between land and buildings was approved by Addy, J in the case of

Crown Trust Company in its capacity as Trustee of the Suburban Realty Trust and Her Majesty The Queen, [1977] CTC 320; 77 DTC 5173, in which he Stated at 323 [5174]:

No other expert real estate valuation evidence whatsoever was offered and the Court is left only with the valuations for municipal assessment purposes. The Court is permitted to use municipal assessments in arriving at a valuation of property. (See Turnbull Real Estate Company v The King; Corkey et al v The King; De Burry et al v The King, [1903] 33 SCR 677.)

and again on the same page:

In view of there being no evidence to the contrary, I find that, on the balance of probabilities, the proportion which the municipal valuation of the land for the year 1969-70 bears to that of the whole is the correct one. The municipal valuation or assessment for taxation year 1969-70 of $217,050 for the lands and $1,313,500 for the buildings, establishes a proportion of 14.18% of the value as being attributable to the lands.

While in the present case it cannot be said that there is no evidence to the contrary or that no expert valuation evidence was introduced it is nevertheless evident that considerable weight can and should be given to the municipal assessments established on appeal by the board of revisions.

In the Supreme Court case of the Turnbull Real Estate Company v The King, [1903] 33 SCR 677 at 678 the Court dismissed the appeal stating:

.. . the Exchequer Court Judge looked at the assessed valuation of the lands as shewn upon the municipal assessment rolls, not as a determining consideration, but as affording some assistance in arriving at a fair valuation of the property taken.

The burden of proof is always on the taxpayer seeking to set aside an assessment by the Minister. See for example the case of Noralta Hotel Limited v MNR, [1954] CTC 167; 54 DTC 1079, in which Thorson, P stated at 168-9 [1080]:

The assessments carry a statutory presumption of their validity and stand until they have been shown to be erroneous either in fact or in law. To succeed in the appeal from them the appellant must prove that the finding of the Minister that the capital cost of the depreciable property in question was $35,000 was erroneous. If it fails to discharge the onus of proof that the law casts on it its appeal must be dismissed.

In the Waldorf Hotel case (supra) Smith, J stated at 174 [5118]:

In the present case the defendants have produced no evidence to prove the Minister’s assessment wrong, other than the agreement to purchase, with its valuation table allocating the entire purchase price to land, building, contents and equipment, ie items of tangible property. As indicated earlier, in my opinion that is not a case in which the valuations in the agreement must be accepted as binding. Judgment might be given for the plaintiff on these facts alone.

see also the statement of Cattanach, J in the Canadian Propane Gas & Oil case (supra) at 580 [5029] where he said:

The onus of demolishing the Minister’s assumptions falls on the appellant and, in my view, for the reasons expressed, the appellant has failed to discharge that onus. Accordingly it cannot be said that the assumptions of the Minister in assessing the appellant as he did were not warranted.

An examination of the evidence which I have summarized above indicates that the four appellants, Peter S Wise, Myer Pollock, Louis Burn- stein and Sam Sokoloff have completely failed to discharge the burden of proving that the Minister’s assessment of $429,000 as the value of the depreciable assets was not reasonable pursuant to paragraph 20(6)(g) of the Act. If anything the weight of the evidence, unsatisfactory as it is, would indicate that perhaps a higher figure might have been reached by the Minister. Subsection 100(5) of the Act reads as follows:

The court may dispose of the appeal by

(a) dismissing it;

(b) allowing it; or

(c) allowing it and

(i) vacating the assessment,

(il) varying the assessment,

ii) restoring the assessment, or

(iv) referring the assessment back to the Minister for reconsideration and reassessment.

and the appeals of the four appellants named must be disposed of by simply dismissing them with costs. It would appear that it is only if an appeal is allowed that the assessment may be varied or referred back to the Minister for reconsideration and reassessment and this would certainly not include an increase in the assessment in the case of these appeals by taxpayers.

With respect to the appeals by the Crown in the cases of Doctor Claude Leclerc and Georges E Lemay from the decision of the Tax Review Board accepting their figure of $450,000 for depreciable assets rather than the Crown’s figure of $429,000 the situation is somewhat different. I do not believe that the fact that the Crown is the appellant alters the burden of proof on the said two respondents to submit evidence to dispute the reasonableness of the Minister’s assessments. The proceedings in this court is a trial de novo.

Although the appeals of the vendors and purchasers were joined to be decided on the same evidence it would not appear reasonable to force the Crown’s valuation of $429,000 on the said purchasers merely because the vendors have failed to discharge the burden of establishing that it was not reasonable, and the decision in their appeals could not result in a higher figure being used by the Minister in determining their reassessments as a result of increased recaptured capital cost allowance. On the other hand it is evident that one figure cannot be applied to the vendors and another to the purchasers.

Fortunately on the evidence I do not believe that this problem arises.

As I have already said although the figure of the Crown’s own expert, who was the only expert called as to evaluation, concluded at a figure of $455,000 for the buildings the exact accuracy of this figure is cast in considerable doubt by the assumptions on which it had to be based. While the decision of the city board of revision evaluated the buildings at a total of $488,200 for the 1968-69 taxation year it is apparant that very little consideration was given in the evidence before it to the valuation of the land as such which was left unchanged from the figure given in the assessments which were under appeal. According to the evidence of Mr Lemay the figure used by the purchasers of $450,000 was obtained by merely deducting the assessed value of the land from the purchase price of $650,000, although this would actually seem to have justified attributing a somewhat higher value than $450,000. This evidence adds nothing therefore to that obtained by examining the municipal assessment. Moreover as I have indicated his evidence is gravely tainted by his acceptance in the revised offer and in the deed of sale of a valuation of $350,000 for the depreciable assets. At best therefore his evidence can be said to indicate two different figures, one agreed to after negotiation in a valid written instrument, and a much higher one more or less picked out of the air. Naturally the said purchasers were more than happy to accept the evidence introduced by the Crown, and to adopt it in support of their contestation of the Minister’s assessment.

It is evident that valuations of this sort can never be completely exact and the difference between the Crown’s figure of $429,000 and that sought by the purchasers of $450,000 is not great. I conclude therefore that the purchasers Messrs Leclerc and Lemay have not discharged the burden of proof of establishing that the Crown’s assessment of $429,000 is not reasonable.

At trial counsel for the Minister stated that the tax in controversy did not exceed $2,500 for either of the said two respondents. Accordingly, the provisions of subsection 101(2) of the Act which reads as follows:

Where, on an appeal by the Minister, other than by way of cross-appeal, from a decision of the Tax Review Board, the amount of tax that is in controversy does not exceed $2,500, the court, in delivering judgment disposing of the appeal, shall order the Minister to pay all reasonable and proper costs of the taxpayer in connection therewith.

Shall be applied and the Minister will be required to pay all reasonable and proper costs of the said taxpayers. As all the actions were joined for hearing on common evidence only one set of costs shall be allowed to the Crown on the dismissal of the appeals of Messrs Wise, Pollock, Burnstein and Sokoloff and one set of costs allowed to Dr Claude Leclerc and Mr Lemay in connection with the successful appeals by the Crown in their cases.