Salt v. The Queen, 84 DTC 6395, [1984] CTC 414 (FCTD)

Cattanach, J:—These are three appeals from decisions of the learned member of the Tax Review Board, as he was at that time, involving the assessments to income tax directed to the three plaintiffs herein by the Minister of National Revenue.

These assessments were consequent upon the disposition of land, parcels of which were owned exclusively by the plaintiff, Salt, and the other parcels were owned by Messrs Howlett and Jamieson.

All of such parcels of land lie within a triangular block on the northern outskirts of the city of Vernon, British Columbia.

The triangle is bounded by 48th Avenue to the south, on the east by Highway 97, the Kamloops-Vernon Highway and a main entrance to the city of Vernon from the north and on the west by the Canadian Pacific Railway. All lands within the triangle were sought by Dominion Construction Company Limited to assemble as a site for a regional shopping centre.

The lands within the triangle owned by the respective plaintiffs were ultimately disposed of to Dominion following upon the grant of options in May 1972 and the exercise of those options in 1973.

Basic to the three appeals is the market value of the parcel of land owned by the respective plaintiffs on December 31, 1971, Valuation Day, from which the capital gain realized upon subsequent sales can be computed but there are subsidiary issues as well.

Accordingly much of the evidence adduced both before the Tax Review Board and before me was common to all three appeals which was the appraisals by expert witnesses.

Before the Tax Review Board the expert witness on behalf of Her Majesty was R L de Pfyffer and by Henry Desnoyer and M G Koeper on behalf of the plaintiffs.

The learned member of the Board accepted the appraisals given by R L de Pfyffer as preferable to those of Messrs Desnoyer and Koeper.

On appeal evidence was given by Mr de Pfyffer on behalf of Her Majesty and on behalf of the plaintiffs by L E Rivard.

The appeal is, of course, by way of a trial de novo.

Prior to trial each of the plaintiffs and Her Majesty agreed upon a statement of facts through their respective solicitors.

Accordingly I shall reproduce the agreed statement of facts with respect to the plaintiff, Arthur Salt. Because of much duplication it would not be necessary to reproduce the other agreed statement of facts in their entirety.

AGREED STATEMENT OF FACTS

The parties hereto, by their respective solicitors hereby admit the following facts provided that such admission is made for the purpose of this appeal only and may not be used against either party on any other occasion or by any other party.

1. The plaintiff, who has resided in the Vernon area of British Columbia since 1923, was at all material times the president and major shareholder of Coldstream Auto Wreckers Limited (hereinafter “Coldstream”).

2. Prior to 1971, Coldstream carried on an auto wrecker business on property legally described as Lot 1, Section 10, Township 8, O.D.Y.D., R.P. 14167 (hereinafter “Lot 1”) and Lot 1, Section 10, Township 6, O.D.Y.D., R.P. 11687 (hereinafter the “Haller property’’) which lands were not serviced with water or sanitary sewers, and were located North of the City of Vernon. Lot 1 and the Haller property are marked as Numbers 1 and 2 on Exhibit “A” hereto.

3. In April 1971, the Plaintiff purchased Lot 9, Section 10, Township 8, O.D.Y.D., R.P. 2347, except those parts thereof included within the boundaries of Plans 9371, 10548, 11687 and 14167 and except that East Part of Vernon/Kamloops Highway on Plan H 433 (hereinafter “Lot 9”) to be used by Coldstream in its business. This land was not serviced with water or sanitary sewers and was located North of the City of Vernon at that time, is marked as Number 3 on Exhibit “A” hereto.

4. During July 1971, it was announced that a major hotel, the Village Green Inn, would be constructed on the southeast corner at the junction of Highway 97 and 48th Avenue provided that the property optioned for the construction would be annexed and brought into the City of Vernon and drinking water and sanitary sewer services were made available. The proposed site is located on the opposite side of Highway 97 and to the South of Lots 1 and 9.

5. On February 10, 1972, the proposed site for the construction of the Village Green Inn and other properties, but not including the subject properties, were formally incorporated into the City of Vernon, and on February 17, 1972, the Village Green Hotel exercised its option and purchased this property for the construction of the hotel. The property purchased for the construction of the Village Green Hotel is marked as Number 4 on Exhibit “A” hereto. The new City boundaries are shown on Exhibit Al and A2 respectively.

6. Construction of the Village Green Hotel commenced on April 20, 1972.

7. On or about May 1, 1972, the Plaintiff purchased Lot 7, Section 10, Township 8, O.D.Y.D., Plan 2347 (hereinafter “Lot 7”) for $17,900.00 and Lot 8, Section 10, Township 8, O.D.Y.D., Plan 2347 (hereinafter “Lot 8”) for $16,000.00. Both these parcels of land were unserviced and located North of the City of Vernon. Lot 7 is marked as Number 5 and Lot 8 is marked as Number 6 on Exhibit “A” hereto.

8. On May 17, 1972, ther Plaintiff granted an option to Tradeland Realty Ltd. (hereinafter “Tradeland’*), acting for a then undisclosed principal, (The Dominion Construction Company Limited, hereinafter “Dominion”) to purchase Lots 1, 9, 7 and 8 which Option Agreement provided that:

(a) the Tradeland would advance to the Plaintiff $5,000.00;

(b) the option was to expire on November 18, 1972;

(c) the option could be extended for an additional 180 days from 18 November 1972 upon payment of an additional $7,500.00;

(d) a total of $300,000.00 was payable on the exercise of the option.

This Option Agreement is attached as Exhibit “B” hereto.

9. During the Summer of 1972, a sanitary sewer and a natural gas line were installed down 48th Avenue to service the Village Green Hotel.

10. On September 1, 1972, the option referred to in paragraph 8 above was amended to include a reference to Lot 1, Section 10, Township 8, O.D.Y.D., Plan 14167. A copy of the Amended Option Agreement is attached as Exhibit “C” hereto. As a result of this amendment, and an agreement between the Plaintiff and Ernest Haller, the Plaintiff was to receive the sum of $240,000 upon the exercise of the option as follows:

(i) $4,000.00 on the initial granting of the option;

(ii) $6,000.00 on an extension of the option;

(iii) the balance on the exercise of the option.

11. On November 2, 1972, Lots 7 and 8 were formally incorporated into the City of Vernon.

12. By an Indenture dated November 13, 1972, the option to purchase Lots 1, 7, 8 and 9 was extended an additional 180 days from November 18, 1972, on Dominion paying to the Plaintiff the sum of $6,000.00. A copy of the Indenture dated November 13, 1972 is attached as Exhibit “D” hereto.

13. By an Indenture dated April 4, 1973, the Plaintiff as Grantor once again extended the option to purchase Lots 1, 7, 8 and 9 for an additional 180 days from May 18, 1973 upon receiving from the Grantee, Dominion, the sum of $15,000.00 plus an agreement to pay an additional monthly amount equal to 9 per cent per annum of $240,000.00 Until the expiry or the exercise of the option. A copy of the Indenture dated April 4, 1973 is attached as Exhibit “E” hereto.

14. Lots 1 and 9 were officially incorporated into the City of Vernon on November 1, 1973.

15. Dominion exercised the option to purchase Lots 1, 7, 8 and 9 on November 19, 1973 for the purpose of constructing a shopping centre.

16. In preparing his Tl Income Tax Return for the 1973 taxation year, the Plaintiff reported:

(a) a taxable capital gain in the amount of $1,100.20 on the sale of Lots 1, 7, 8 and 9 to Dominion Construction Co. Ltd.;

(b) interest received from Dominion Construction Co. Ltd. in the amount of $10,479.50.

17. By Notice of Reassessment dated July 26, 1976, the Minister of National Revenue reassessed the Plaintiff in respect of the 1973 taxation year increasing the amount of tax payable from $11,960.28 to $62,517.36 On the basis inter alia that:

(a) the adjusted cost base of Lots 1 and 9 was $33,535.00 and $47,770.72 respectively with the consequence that the taxable capital gain on the sale of these Lots was $26,220.66;

(b) the gain of $60,349.84 realized on the sale of Lots 7 and 8 was business income.

18. The Plaintiff filed a Notice of Objection dated September 16, 1976, wherein he objected to the Minister’s reassessment dated July 26, 1976.

19. The Minister of National Revenue reconsidered the reassessment of July 26, 1976, and by Notice of Reasessment dated April 6, 1978, reassessed the Plaintiff in respect of his 1973 taxation year reducing the amount of tax payable from $62,517.36 to $48,148.70 on the basis inter alia that:

(a) the adjusted cost base of Lots 1 and 9 was $46,530.00 and $48,502.00 respectively, with the consequence that the taxable capital gain on the sale of these Lots was $26,489.00;

(b) the gain of $46,090.00 realized on the sale of Lots 7 and 8 was business income.

20. The Plaintiff appealed to the Tax Review Board on June 16, 1978, and the Appeal was heard in Vancouver, British Columbia on November 8 and 9, 1978.

21. By Judgment dated April 20, 1979, the Tax Review Board ordered and adjudged that the Appeal in respect of the 1973 taxation year be allowed and the reassessment be referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the gain realized on the disposition of Lots 7 and 8, Plan 2347 is on capital account.

22. By Amended Statement of Claim dated April 7, 1983, the Plaintiff appeals from the Minister of National Revenue’s reassessment of his 1973 taxation year.

Exhibit A to which reference is made in paragraphs 2, 3, 5 and 7, and which is a map of the area showing the triangle of land and the location of lots 1, 9, 7 and 8 therein as well as the site of the Village Green Inn, is not reproduced, nor are Exhibits A-l (showing the zoning plan as at October 25, 1972, the location of lots 1, 9, 7 and 8 and the city boundary extension in 1972, 1973 and 1974 which visually illustrate the descriptive language in the Agreed Statement); Exhibit B being the option granted on May 17, 1972 referred to in paragraph 8; Exhibit C referred to in paragraph 10 being an amended option whereby Haller and the plaintiff, Salt, were separated as to the purchase price to be payable; Exhibit D referred to in paragraph 12 being an extension of the option; and Exhibit E referred to in paragraph 13 being a further extension of the option.

The issue is raised in the pleadings as to the fair market value of lots 1 and 9 as at December 31, 1971 (Valuation Day).

That is not the quite accurate statement of the issue although the issue is predicated upon the fair market value of these lots at that time. That would be an accurate statement of the issue if this were an expropriation matter. But it is not. It is an appeal from the assessment of the plaintiff to income tax by the Minister and the issue is more accurately whether the plaintiff has discharged the onus cast upon him of demolishing the assumption made by the Minister in paragraph 8(e) of the amended statement of defence reading:

8. (e) The sale of Lots 1 and 9 gave rise to a capital gain the amount of which has been correctly determined on assessment on the basis that the fair market value as at December 31, 1971 of Lots 1 and 9 was not greater than $46,530.00 and $48,502.00 respectively.

The issue is also raised as to whether the amount received by the plaintiff for the extensions of the option agreement are taxable.

There is a third issue also raised as to whether the Minister properly allocated the proceeds from the sale of lots 1, 7, 8 and 9 amongst those various lots.

The salient facts, particularly with respect to the first issue, that is the market value as at Valuation Day, December 31, 1971, may be summarized.

In 1972 the plaintiff owned four lots. Lot 1, (briefly so described) which was owned in conjunction with a Mr Haller, was purchased on April 18, 1967 and was used to carry on an auto-wrecking business.

In April 1971 the plaintiff purchased lot 9 on March 15, 1971 for $38,820 made up of a down payment of $8,820 and a mortgage for $30,000. That was the listed and asking price from Nobember 7, 1970 to April 13, 1971.

This lot was purchased for use in the auto-wrecking business.

The plaintiff was in need of further space for automobiles bought for wrecking purposes and the salvage of usable parts.

Lot 8 (which is not contiguous to lots 1 and 9) was listed for sale from October 12, 1971 to December 31, 1972 for $22,000. It was also listed on the multiple listing service of real estate brokers.

Lot 8 was purchased by the plaintiff on April 19, 1972 for $16,000.

Lot 7, which together with lot 8 forms a parcel, was purchased by the plaintiff for $17,900 with $7,900 down and the balance at $2,000 per year for five years with interest at seven per cent.

An assumption which was made by the Minister when he assessed the plaintiff as he did was that lots 7 and 8 were acquired by the plaintiff for the purpose of being turned to account for resale.

The learned member of the Tax Review Board, on the basis of uncontroverted evidence, found that the plaintiff bought those lots for the purpose of storing automobile bodies, that he used it for that purpose and accordingly the lots were not purchased with the view to turning them to account for profit but as a capital asset.

I am in complete agreement with that finding and by the pleadings that finding is not the subject matter of appeal by the respondent.

The gains realized on the sales of lots 7 and 8 give rise to capital gains as do the sales of lots 1 and 9.

On May 17, 1972 the plaintiff granted an option to Tradeland Realty Ltd., acting for a then undisclosed principal, to purchase the four lots.

The option agreement provided that the plaintiff was advanced $5,000, the option was to expire on November 18, 1972 but it could be extended from that date for a further 180 days on the payment of an additional $7,500.

The total purchase price of $300,000 was payable on the exercise of the option.

On September 1, 1972 the option was amended to make specific reference to lot 1 of section 10 which was owned by Ernest Haller and to effect a segregation of that property from that of the plaintiff.

In the result the plaintiff was to receive $240,000 on the exercise of the option, $4,000 on the initial granting of the option, $6,000 on the extension of the option and the balance on the exercise of the option.

The difference, $60,000 on the purchase price, $1,000 on the initial grant and $1,500 on the extension, went to Ernest Haller.

The balance was exclusively that of the plaintiff.

By an agreement dated April 4, 1973 the plaintiff once again extended the option to purchase the four lots for a still further 180 days from May 18, 1973 (the expiry of the 180-day extension from November 18, 1972) which would be to November 1973, for which extension the plaintiff received $15,000 plus an additional monthly amount equal to nine per cent per annum on $240,000 until the expiry date or the exercise of the option.

Dominion, the purchaser, exercised the otion on November 19, 1973. The amount paid by Dominion to the plaintiff in interest was $10,479.50.

So how much did the plaintiff realize by capital gain?

That would be the difference between the fair market value of the four lots as at December 31, 1971 and the amount received for those lots by the plaintiff on November 19, 1973.

The starting point is the determination of the fair market value. But it is not a simple case of subtraction when that has been done.

The purchase price was for the four lots. There then arises the question of the allocation of the proceeds from the total sales among the four lots which comprise the total.

Added to this is the contention on behalf of the plaintiff, that, while conceding the initial option payment of $4,000 received by the plaintiff is properly included in computing the capital gain by reason of section 49 of the Act, the payment of $6,000 for the first extension of the option and $15,000 on the second extension and the additional amount computed at nine per cent per annum on $240,000 payable monthly until the expiry or exercise of the option being in the amount of $10,479.50 are not.

That amounts to a difference of $21,000 plus $10,479.50 totalling $31,479.50 between the parties.

As previously mentioned two expert witnesses were called, Mr Rivard by the plaintiff and Mr de Pfyffer by Her Majesty, both of whom filed appraisals in accordance with Rule 482.

Mr Rivard placed valuations on lot 9 and lot 1 as follows:

In his amended statement of claim the plaintiff claims in paragraph 12(a) thereof that the plaintiff be reassessed on the basis that the fair market value of lots 1 and 9 on December 31, 1971 was that precise amount, $176,490.

Subject to the claim in paragraph 12(b) for such further and other relief as to the Court may seem meet as well.

That no doubt includes a diminution in the amount received by the amount of $31,479.50 as being for the renewal of options and not part of the purchase price.

On the other hand Mr de Pfyffer reached a valuation of the four lots as follows:

In reassessing the plaintiff the Minister did so upon the allocation of the proceeds of the sale of lots 1, 9, 7 and 8 by the plaintiff to Dominion on November 19, 1973 being in the amount of $240,000 as follows:

On the basis of that allocation the Minister then computed the capital gain on lots 1 and 9 as follows:

As previously mentioned the decision of the Tax Review Board was that the disposition of lots 7 and 8 by the plaintiff was not a venture in the nature of trade but was the disposition of a capital asset with which decision I am in complete agreement.

It is my interpretation of the statement of defence that the Minister accepts and does not dispute that decision.

This is so by reason of the prayer for relief that the plaintiffs appeal be allowed in this respect and the assessment be referred back to the Minister for recommendation and reassessment on the basis the sum of $46,090 be treated as a capital gain so that one half thereof be included in the plaintiffs income for 1973 taxation year.

That should be done but the amount of the capital gain being in the amount of $45,090 remains in issue.

The plaintiff does not dispute the valuation of lots 7 and 8 as being respectively $17,900 and $16,000 plus costs of $4,210 for a total of $38,110 but the plaintiff does dispute the allocation of $84,200 of the sum of $240,000 as the proceeds of the sale are $240,000 rather than $240,000 less the amounts paid for the extensions of the option being $6,000, $15,000 and $10,479.50 for a total of $31,479.50 or that the proceeds of the sale were $208,520.50.

The plaintiff, as previously mentioned, in addition disputes the fair market value of lots 1 and 9 being $91,532 on Valuation Day as was accepted by the Minister rather than $176,490 being the valuation reached by the plaintiffs appraiser.

It has been a constant and remaining source of amazement to me how two appraisers with virtually the same qualifications and experience can look at the same parcels of property and come up with such divergent valuations as is usually the case and the present case is no exception.

Both Mr Rivard and Mr de Pfyffer in reaching their respective evaluations did so on the basis of the comparable approach. The efficacy of that method depends on comparing the sales of like properties identified as the “comparables”.

The weakness in the method, which is the best devised, is that it is virtually impossible to find an exact comparable. In my experience it has happened but once and the event was characterized as an “appraiser’s dream”. That the matter came to trial was because of the rival appraiser’s complete misunderstanding of an arm’s length transaction.

But there must be similarity in the conditions regarding the properties to be compared, the location, proximity, size, topography, likeness in use or potential use, zoning and the sales should be recent and under like conditions.

Because ideal comparables cannot be found requires the making of adjustments and the making of adjustments introduces a subjective factor as contrasted with objectivity and this is the only explanation of the divergence in evaluations by different appraisers.

Thus the more adjustments which must be injected to achieve comparability the less reliable is the resultant estimate.

These remarks are more appropriate for an action to determine the compensation for lands which have been expropriated.

The present matter is one involving the assessment of plaintiffs to tax on income which introduces an overriding circumstance to which consideration must be given and that is whether a plaintiff has discharged the onus cast upon him by “demolishing” the assumption of facts upon which the Minister raised the assessment to income tax.

In James v CNR, ([1965] Ex. C.R. 71) I had occasion to make some general comments with reference to real estate experts to the effect that a person qualifies to express an opinion on land values by having had experience in the market as a broker or dealer. By reason of that experience, he is in a position to express an opinion as an “expert” as to what buyers would have paid for the expropriated property at the time of expropriation and as to what sellers would have sold the expropriated property for at that time.

In this respect Mr de Pfyffer enjoys a distinct advantage over Mr Rivard.

Mr de Pfyffer had been resident in Vernon since 1959 and had been engaged in the real estate and appraisal business for twenty-nine years in that area. He had a personal knowledge of the topographical features, the market conditions and all developments in that area as they existed at December 31, 1971. He had personally visited the properties in November 1971 and accordingly he brought to bear his personal knowledge of the properties at that time as to the value thereof at that time.

Mr Rivard, on the other hand, did not become a resident of Vernon until 1977. He never saw the lands, the proceeds of which give rise to the assessments and the comparables selected by him as they existed at December 31, 1971. Thus he was obligated to apply his experience in other areas to the Vernon area and had to reconstruct the conditions in that area as at December 31, 1971. His difficulties in appraising the lands were compounded thereby. His difficulties in appraising the lands were compounded thereby and by the circumstance that he was forced to delve for information some twelve years passed.

Real estate appraisal is not a science but a matter of opinion based upon experience.

The general remarks that I made about the experience of appraisers in the real estate trade may also be extended to real estate transactions in a particular area as contrasted with such transactions in a different area.

Mr de Pfyffer placed particular reliance on comparables identified by him as comparables 4 and 5 and, in my view, he was justified in doing so.

Comparable 4 is the lot at the apex of the triangle formed by Highway 97 and the railroad.

Comparable 5 is the lot immediately adjacent to the plaintiffs lot 9 on the south.

Such lots have access to the highway as do lots 1 and 9 owned by the plaintiff, Salt.

Those comparables are similar to lots 1 and 9 in respect of zoning, availability of municipal services dependent upon being brought within the city boundaries (which happened later), topography, condition, size, shape and development. For that reason there would be minimal adjustments for time but I must delete the “shape” of comparable 4 as being dissimilar in shape.

Since the adjustments, which are subjective, are less, the objectivity is correspondingly greater.

Neither can it be overlooked that Mr Salt purchased lots 7 and 8 in May of 1972, some five months subsequent to December 31, 1971, Valuation Day, for $17,900 ($0.21 per sq ft) and $16,000 ($0.19 per sq ft) respectively.

Messrs Howlett and Jamieson purchased lot 4 and parcel A on December 8, 1971, three weeks prior to Valuation Day for $55,000 ($0.36 per sq ft).

Messrs Howlett and Jamieson purchased lot 3 for $40,000 ($0.23 per sq ft) on May 20, 1972.

Lots 3, 4 and parcel A were under option to Howlett and Jamieson granted in July 1971 and August 1971 at which time the plans for the construction of the Village Green Inn had been announced.

There is no evidence to indicate that the potential use of the lands within the triangle as components of the triangle for use as the site of a regional shopping centre was recognized on or before Valuation Day.

The purchaser, which had that object in mind, took options which it was not prepared to exercise, and did not exercise, unless the lands were annexed by the city, with the resultant provision for water and sewage services and the rezoning of the site. It was only when this was done that the purchaser, Dominion, exercised its options. In my view that cannot be construed as reflecting a substantial rise in property values prior to Valuation Day generated by the July 1971 announcement of the Village Green plan.

Thus the unit values settled upon by Mr de Pfyffer accord more closely with the transactions prior to 1972 within the triangle and indicate that the Valuation Day value accepted by the Minister was not too low.

That being so it follows that the plaintiff has not discharged the onus of showing that the assumption by the Minister as to the value of the land at Valuation Day was an assumption he was not justified in making.

The next ensuing issue for consideration is whether the amounts received by the plaintiff for extensions to the initial option granted by him to the purchaser were properly included as proceeds of the disposition.

The position taken by the plaintiff, as I understand it to be, is that the Income Tax Act as applicable to the plaintiffs taxation year included no provision permitting the taxation of payments received by the grantor upon the extension of an option.

The contrary contention by the defendant is, as I understand it to be, that by virtue of the agreement between the parties the payments for the extensions of the options were made payments of the purchase price if the option were exercised and so properly treated as part of the proceeds of disposition and if not part of the purchase price, despite the agreement, then by reason of the operation of subsection 49(3) of the Income Tax Act are payments received in respect of the options deemed to form part of the proceeds of disposition and if each extension of the option must be treated as a separate transaction then the payments received by the vendor in the year of the disposition are deemed to be proceeds of the disposition by virtue of subsection 49(1) of the Income Tax Act.

As I appreciate the purpose and object of section 49, which is applicable to the 1972 and subsequent taxation years and had no counterpart in the former Act, it is to require that as a general rule a taxpayer who grants an option to buy or sell capital property the grantor must treat the consideration which he receives as a capital gain in the year the option was granted. If the option expires then his position is unaffected. But if the option is exercised he is no longer required to treat the consideration received by him as a capital gain and if necessary, the taxpayer may file an amended tax return for the relevant taxation year. Instead, the consideration paid for the option must be taken into account in determining the proceeds of disposition to the vendor and the cost to the purchaser of the property to which the option relates.

It is expedient at this point to repeat and elaborate upon the salient facts.

By instrument dated May 18, 1972 described as an “Option to Purchase Land”, Arthur Salt entered into an agreement with Tradeland Realty Ltd (for an undisclosed client) whereby in consideration of $5,000 whereby he granted an option to the undisclosed principal to purchase the four lots in question for $300,000, the balance of the purchase price to be $295,000 which is arrived at by deducting the $5,000 paid to Salt, the option to expire on November 18, 1972. The form includes a typewritten insertion reading:

If the Option is not exercised on November 18, 1972, the purchaser shall, upon payment of a further $7,500.00 to the vendor, be entitled to a further extension of the Option for a period of 180 days on the same terms and conditions as the original Option Agreement.

(see Tab 36, Book of Combined Documents introduced as Exhibits)

This instrument was obviously prepared by laymen and being fraught with inaccuracies was corrected and replaced by an indenture dated September 1, 1972 and included property owned by Ernest Haller (see Tab 37, Combined Book of Documents).

The result of this amendment and an agreement between Arthur Salt and Ernest Haller, Arthur Salt was to receive $240,000 upon the exercise of this option which was to expire on November 18, 1972:

(i) $4,000 on the grant of the option,

(ii) $6,000 on an extension of the option,

(iii) the balance ($230,000) on the exercise of the option.

Paragraph 3 of this indenture dated September 1, 1972 reads:

Upon this option being exercised as herein before provided, there shall be a binding agreement for the sale and purchase of the lands and premises herein from the Grantor to the Grantee for the sum of Three hundred thousand dollars ($3,000,000.00) [sic] payable in cash or certified cheque (of which the sum paid for the option or any extension pursuant hereto shall form a part) on the further terms and conditions as herein set out.

Paragraph 13 of the Agreement made provision for the extension of the option for a further period of 180 days from September 1, 1972.

There was no undisclosed principal in this Agreement. Dominion was a party.

By indenture dated November 13, 1972 the option to purchase the four lots was extended an additional 180 days from November 18, 1972 to May 18, 1973. Dominion paid $6,000 to the plaintiff. (see Tab 38 — Combined Book of Documents)

By indenture dated April 4, 1973 the option was again extended for a period of 180 days from May 18, 1973 in consideration of $15,000 paid to the plaintiff by Dominion pursuant to paragraph 13 of the immediately prior agreement.

This agreement contained a further provision reading:

In addition to the end price, the Grantee agrees to pay to the Grantor $1,800.00 per month from May 18, 1973. This sum being 9% on $240,000.00. The said payments are to accumulate and be paid upon the exercising or expiry of the Option.

(see Tab 39 Combined Book of Documents)

Mr Salt, the plaintiff, admits having received $4,000 on the initial grant, $6,000 on the first extension, $15,000 on the second extension, all being deducted from the plaintiffs share of the total price, his share being $240,000. Mr Salt also received $1,800 per month from May to November 19, [sic] 1973.

Dominion exercised the option by letter dated November 7, 1977. (see Tab 40 Combined Book of Documents)

The purchasers’ statement of adjustments reads as follows:

It is clear from the paragraph quoted from the indenture dated April 4, 1973 (Tab 39 Combined Book of Documents) that the accumulated total of $1,800 per month from May 18, 1973 is an addition to the purchase price.

This is confirmed in the statement of adjustments that the purchase price was increased from $240,000 by the addition of $9,000 plus $1,479.50 for a total of $10,479.50.

While the monthly amount of $1,800 is computed at the rate of nine per cent per annum on $240,000 it is not interest but merely the means of measurement of the increment to the purchase price payable to the plaintiff consequent upon the extension of the time to exercise the option or the delay in exercising that option.

Thus, in my view, the amount of $10,479.50 is properly included in the proceeds of disposition.

The express agreement between the parties to the sale and purchase of the property was that the sum of $5,000 paid for the option (of which the plaintiffs share was $4,000) should form part of the purchase price as also would any amounts paid for any extensions of the option likewise form payment in part for the purchase price.

It is not disputed that the $4,000 paid to the plaintiff is in payment of the purchase price. The dispute revolves about the payment for the first extension in the amount of $7,500 of which the plaintiff's share was $6,000 and the amount of $15,000 for the second extension which was the plaintiffs in its entirety — for the total amount of $21,000.

In my view paragraph 3 of the agreement between the parties dated September 1, 1972, which paragraph is quoted above clearly reflects the intention of the parties thereto. The intention, so expressed by each party is that the price paid for the initial option — and those for the first and second extensions thereof as they are characterized and treated by the parties should also constitute payments in part of the purchase price in the event of the exercise of the option.

The option was exercised and as is evidenced by the statement of adjustments (reproduced above) that the payments of $6,000 and $15,000 in addition to the initial payment of $4,000 to the plaintiff becomes part of the proceeds of the disposition of the property in November, 1973.

For those reasons I conclude that the amounts totalling $21,000 received by the plaintiff in the circumstances outlined are properly part of the proceeds of the disposition of the property.

Because of that conclusion it is not incumbent upon me to determine whether the payments of $6,000 and $15,000 subsequent to the payment for the perpetuation of the first option are part thereof, so as to form but one option, or are two further options separate and distinct from the initial option rather than merely extensions of the first option and so not options at all.

Different considerations might well have arisen if the purchase and sale had not been culminated. In that event, if there were three options, the question of the capital gain realized thereon would require determination. A difficulty would also arise if the plaintiff had reported the option or options as capital gains in the years they were received but neither is an issue before me on the pleadings and I am therefore not required to consider those questions.

The remaining issue in this appeal by the plaintiff, Arthur Salt, is the allocation of the proceeds of the disposition in the amount of $240,000 among the four lots.

The agreement to purchase made no such allocation. The purchase price was $300,000 for the four lots.

The plaintiff, in a schedule to his income tax return for his 1973 taxation year and in Tab 2 of the Combined Book of Documents being the vendor’s statement of adjustments attributed the proceeds to the four lots as follows:

The purchaser in its statement of adjustments (Tab 43 of the Combined Book of Documents) made no allocation of the proceeds to particular lots but on the basis of the allocation of the entire purchase price to the four lots as a whole.

On the other hand the Minister in reassessing the plaintiff made the following allocation of the proceeds of disposition among the four lots as follows:

The allocation to lots 1 and 9 was based on the average selling price per square foot of $.6496 of adjacent lot 1, plan 10548 to the south and lot 1, plan 11687 to the north (the Haller property). Lot 1 to the south was comparable 5 in Mr de Pfyffer’s report.

Upon receipt of the plaintiffs tax return the Minister reassessed the plaintiff on a notice of reassessment dated July 26, 1976 with an explanation of the changes appended.

The plaintiff lodged a notice of objection to that reassessment dated April 6, 1978 for a lower amount of tax payable.

To that second notice of reassessment there was appended thereto a computation revised taxable gain with respect to lots 1 and 9 and a computation of the gain on the sales of lots 7 and 8.

That computation and the particulars thereof are reproduced in paragraph 6 of the amended statement of defence.

I am in complete agreement with the submission by counsel for the defendant that a taxpayer is entitled to know the basis upon which the Minister assessed the plaintiff as he did.

In my view, that basis has been made clear to the plaintiff first by the explanatory notes appended to the notices of reassessment and secondly by the allegations in the pleadings.

It is the assessment which is under appeal and not the reasons by which the assessment has been arrived at. However if the reasons are fallacious then the likelihood of the assessment being correct is remote. The stark fact is that it is the assessment which is under review on appeal.

Thus the onus is upon the taxpayer to show the assessment to be wrong.

The contract for the purchase and sale of the lots in question between the vendor and the purchaser does not attribute parts of the total purchase price to the individual lots which make up a composite whole.

The plaintiff did make such allocations as did the Minister. There was no evidence adduced as to indicate upon what basis that allocation was made.

The Minister arrived at an average price per square foot and applied that average per square foot price to the area of lots 1 and 9. There do not appear to be physical features of the lots which would dictate a different basis applicable to the different lots. Certainly not from the purchaser’s point of view. What the purchaser wanted was the entire area of the triangle. Therefore I can see no impediment to the assumption that the purchaser paid the amount per square foot to be arrived at by dividing the total area into the total price to reach that average.

That was not quite the process adopted by the Minister. He found the average price per square foot of the two adjoining lots to lots 1 and 9 and then computed the price of these two lots. The price of lots 7 and 8 were found by the simple formula of subtracting the price of those two lots from the total price and the remainder he attributed to those lots.

There was no feature of topography or elevation of lots 7 and 8 which would dictate a basis other than the application of an average price per square foot to the whole area.

Therefore, in my opinion, the plaintiff has not discharged the onus which lays upon him to show that the process adopted by the Minister to determine the allocation of the proceeds of the whole disposition to the individual component lots was incorrect in fact or in law.

For the foregoing reasons, and in accordance with the disposition of appeals outlined in section 177 of the Income Tax Act, the appeal of the plaintiff, Arthur Salt, is allowed and the assessment is referred back to the Minister for reconsideration and reassessment on the basis that the sum of $46,090 is a capital gain and that one half of that amount shall be included in computing the plaintiffs income for his 1973 taxation year and that the amount of $10,479.50 received by the plaintiff on the exercise of the option shall be included in the computation of the proceeds of disposition from the sale of lots 1, 7, 8 and 9.

In all other respects the assessment dated April 6, 1978 is confirmed with costs to the defendant.

In the appeals by Elwin E. Howlett and Eldred Edward Jamieson from their respective assessments to income tax for the 1973 taxation year by the Minister of National Revenue as in the Salt appeal, the parties filed agreed statements of facts. Naturally because the lands owned by Messrs Howlett and Jamieson were within the same triangle of land as that owned by Mr Salt, all of which triangle was ultimately acquired by Dominion Construction Company Limited as the site for a regional shopping centre the general facts recited in the agreed statement of facts in the Salt appeal are the same as in the agreed statement of facts filed in the Howlett and Jamieson appeals and the statement of facts in the Howlett and Jamieson appeals are the same except that Mr Howlett owned one half of the lands in question and Mr Jamieson and his spouse owned the other half. From that it follows the differences in the agreed statements of facts with respect to their appeals are those which follow from the proportions of their ownership and amounts thereof.

For that reason the facts in these two appeals can best be set forth in narrative form, those facts applicable to both and reciting the differences.

The plaintiffs, Howlett and Jamieson were both residents of Vernon, BC and equal shareholders in a company called, Twin Elves Fuel-O-Mat Ltd, engaged in the bulk sales of petroleum products to farmers.

On July 5, 1971 Jamieson and his wife together with Howlett obtained an option to buy two parcels of land, the north half of lot 4 (both within the triangle) and parcel A. Parcel A was a narrow stip of land adjoining the north half of lot 4 and facing the major Highway 97 and was an ideal site for their petroleum business.

The purchase price was $32,500.

Difficulty was encountered by the vendor in separating of the north half of lot 4 from the southern half.

Accordingly the option agreement with respect to the north half was amended to include the south half and parcel A for a total price of $55,000.

This option was exercised on December 8, 1971.

On August 31, 1971, Howlett and Jamieson (with Mrs Jamieson) acquired an option to purchase lot 3, contiguous to lot 4 on its western boundary.

The option agreement was to expire on May 31, 1972.

This option was exercised on May 30, 1972. The purchase price for lot 3 was $40,000. Two months prior to May 30, 1972, on March 29, 1972, Howlett and the Jamiesons listed lot 3 for sale at $70,000 because they had encountered difficulty financing their business expansion.

By an agreement dated May 18, 1972, Mr and Mrs Jamieson for a consideration of $5,000 granted an option to Tradeland, acting for Dominion, to purchase lots 3 and 4 and parcel A for $230,000 subject to the condition that the vendors might establish a service station with frontage on Highway 97. The purchasers had the right in the exercise of the option to pay an additional $100,000, a total purchase price of $330,000 to the vendors and the vendors would forego their right to establish a service station. The option was to expire November 18,1972.

On August 15, 1972, the option agreement was amended to include the interests of the plaintiff, Howlett.

On November 13, 1972 the option expiring on November 18, 1972 was extended for a period of six months, May 18, 1973, in consideration of $7,500 paid to the grantors.

On April 4, 1973, the option was extended for a further period of six months from May 18, 1973 in consideration of $5,000. In addition the grantee paid to the grantors the sum of $8,100 on May 18, 1973 (being interest on $90,000 at nine per cent for one year) and the sum of $675 per month from May 18, 1973 (being nine per cent per annum on the sum of $90,000) to accumulate and be paid to the grantors upon the exercise or the expiry of the option.

On November 7, 1973 Dominion exercised the option for the purchase price of $330,000.

The Minister assessed the plaintiffs, Howlett and Jamieson, tax on the basis that each had realized a capital gain on the sale of lots 3 and 4 and parcel A.

The capital gain imputed to the plaintiff, Howlett, was $47,090.33.

The capital gain imputed to the plaintiff, Jamieson, was $23,545.17.

These gains were computed as follows:

Lot 4, Parcel A

Lot 3

Proceeds of Sale			$330,000.00
Deduct: Adjusted cost base		$110,000.00
Legal expenses		264.75
Interest and bank charges		11,366.25
Land fill		3,115.90
Property taxes		2,991.76
Sales commission		13,900.00	141,638.66
Capital Gain			$288,361.34
Taxable capital Gain (50%)			$ 94,180.67
Allocation of taxable capital gain:
Elwin E. Howlett	50%		$ 47,090.33
Eldred Jamieson	25%		25,545.17 [sic]
Lillian Jamieson	25%		25,545.17 [sic]
			$ 94,180.67

In assessing as he did, the Minister made the following assumptions with respect to the plaintiff, Howlett:

(1) that the fair market value of lots 3 & 4 and parcel A as at December 31, 1971 (VD) was not greater than $110,000;

(2) that the proceeds of the sale of the lots for $330,000 the net to the plaintiffs was $188,361.34 and the taxable capital gain was $94,180.66 of which the plaintiff received:

(a) $2,500, being his share of the consideration of $5,000 for the grant of the original option as amended dated August 15, 1972,

(b) $3,750 being his share of first extension of the option on November 17, 1972,

(c) $2,500 on the second extension of the option on April 4, 1973,

(d) the balance on the exercise of the option on November 17, 1973,

(e) that the consideration so received become part of the purchase price on the exercise of the option for a total of $8,750, and

(f) in addition the plaintiff received $6,014.88 [sic] on the exercise of the option being his share of the amount of $8,100 (computed as interest on $90,000 for one year to May 18/73), and

(g) $1,904.88 being his share of the accumulation of $675 per month from May 18, 1973 to November 17, 1983.

The contention on behalf of the Minister was that the consideration for the options formed part of the purchase price and that the total consideration received as consideration for the extension of the option beyond May 18, 1973 to the exercise or expiry of the option. That part of the purchase price is consideration for the disposition of an option and as such is a taxable capital gain, the plaintiffs share of which was $6,014.88.

A like contention as was made with respect to the plaintiff, Howlett, was made with respect to the plaintiff, Jamieson.

The taxable capital gain was $94,180.67 of which 25 per cent was allocated to the plaintiff, Jamieson, which comes to $23,545.17.

Of that taxable gain of $94,180.67 the plaintiff, Jamieson, received:

(a) $1,250 his share of the first option dated August 15, 1972;

(b) $1,875 his share of the first extension dated November 17, 1972;

(c) $1,250 his share of the second extension dated April 4, 1973.

The Minister assumed that the total of $4,375 became part of the purchase price.

In addition the plaintiff, Jamieson, received on the exercise of the option on November 17, 1973, a total of $3,007.44 [sic] being his one-quarter share of $8,100 paid on that date and his equivalent share of the accumulated monthly payment of $675 from May 18, 1973 to November 17, 1973 In the total of $982.44.

Mr Rivard, called on behalf of the plaintiffs, expressed the opinion that the fair market value of lots 3, 4 and parcel A as at Valuation Day was $237,820 allocated as follows:

On the other hand the opinion expressed by Mr de Pfyffer, called on behalf of the defendant, was that the fair market value of the property on December 31, 1971 was $110,000.

In reaching that estimate he divided both lots and parcel A into three parts.

Mr de Pfyffer then made a second estimate based upon a single sale, that being the sale to the Village Green Motel of land almost identical in all respects of lots 3 and 4 and parcel A.

Thus he found a value of $.33 per sq. ft. which when applied to the entire area of lots 3 and 4 and parcel A together with the value of improvements resulted in a valuation of $112,000.

He then made a correlation and reached his final estimate of $112,000.

The issues between the parties in the appeal by Mr Howlett and that by Mr Jamieson closely parallel that in the appeal by Mr Salt.

The main issue is the determination of the fair market value of the property disposed of by them subsequent to Valuation Day, December 31, 1971, that had been owned by them prior to that day in different proportions.

To this issue there followed a second issue as to whether payments made to the plaintiffs in respect to the extensions of the option agreements are taxable.

For the reasons expressed in the Salt appeal plaintiffs have not discharged the onus of showing that the assumption by the Minister as to the value of the land at Valuation Day was an assumption he was not warranted in making.

It is conceded by counsel for the respective parties that the $5,000 received by the plaintiffs for the initial options in the agreement dated August 15, 1972, constitutes and becomes part of the purchase price upon the exercise of the option.

For the reasons also expressed in the Salt appeal so too do the payments of $7,500 on November 17, 1972 and $3,000 [sic] on April 4, 1973 for extension of the options constitute part of the purchase price on the exercise of the option by virtue of the terms of the agreements between the parties.

With respect to the amount of $8,100 described as interest on $90,000 at nine per cent per annum for one year to May 18, 1973 and paid on the exercise of the option and the accumulation of $675 per month from May 18, 1973 to November 17, 1983 [sic], which I have computed to be five months at $675 per month and 26 days at $22.19 per day for a total of $3,939.75 [sic] that was originally assessed as income to plaintiffs, Howlett and Jamieson in the aliquot parts to which they were entitled, counsel for the Minister has conceded that those respective amounts are properly part of the proceeds of disposition and as such are capital gains and taxable as such rather than income which would be taxable as a whole and not only 50 per cent thereof as a capital gain.

Likewise for the reasons expressed in the Salt appeal it is my view that these amounts are capital gains in the hands of the respective plaintiffs and taxable as such but not as interest income.

The question of the allocation of the proceeds of the dispositions among lots 3 and 4 and parcel A does not arise in these appeals as it arose in the Salt appeal.

However in the appeals of Howlett and Jamieson another issue arises and that is the relevance of the Valuation Day value of lot 3 in determining the adjusted cost base of that property.

In the agreed statement of facts it is agreed that in August 1971 the plaintiffs, Howlett and Jamieson, together with Mrs Jamieson acquired an option to purchase lot 3 which option was to expire on May 31, 1972.

Upon reference to Tab 49 in the Combined Book of Documents I find the option granted by the vendor, Jack Muller, the then owner of that property to Tradeland Realty Ltd. for an undisclosed client (whom I assume to be Mr Howlett and Mr and Mrs Jamieson) for the purchase price of $40,000 payable by the assumption of the first mortgage for $10,000, $1,000 on deposit to be allowed as part payment of the purchase price leaving a balance of $29,000 to be paid on the exercise of the option.

That option was exercised on May 25, 1972.

My assumption that the optionees were Howlett, Jamieson and Mrs Jamieson, is confirmed by the statement of adjustments on the sale of lot 3 from Muller to Howlett and Jamieson which is Tab 50 in the Combined Book of Documents. The $1,000 “deposit” of “consideration for the option” is included as part of the purchase price as at May 18, 1972 and the balance of $39,000 was paid on May 25, 1972 prior to the expiry date of May 31, 1972.

I do not have available the income tax return for either Howlett or Jamieson for their 1972 taxation year — only those for their 1973 taxation year.

I do not find a claim for a capital loss or gain with respect to $1,000 paid for the option in that year.

Thus as at Valuation Day Messrs Howlett and Jamieson did not own lot 3 as at that time.

What they did own was the privilege of acquiring property at the consideration set forth in the option or of declining to do so for which privilege they paid $1,000.

That option is a capital property and the grantor must treat the consideration he receives therefor in the year the plan is granted as capital revenue.

If the option expires the grantee is deemed to have disposed of the options at the time of expiry and his capital loss is determined in the usual manner. I cannot envision a capital gain.

If the grantee, as happened in this instance, exercises the option, the original grant and the exercise of it are deemed not to be dispositions of property by either the vendor or the purchaser.

But should the purchaser of the property be the grantor rather than the grantee the cost of the property must be reduced by the consideration received by the grant of the option.

The circumstance of the plaintiffs herein is covered by the agreement. Upon exercise of the option the consideration for the option is to constitute and did constitute part of the purchase price.

On the facts of those two appeals therefore I fail to follow how the capital cost of the option as at May 25, 1972 could have been other than nil. Had the option expired the capital cost would be in the 1973 taxation year.

Therefore, the capital cost of lot 3 to the plaintiffs would be the purchase price paid therefor on May 25, 1972 which was $40,000. The adjusted cost would be the purchase price less the costs of acquisition.

The appraiser called by the Minister found the fair market value of lot 3 to have been $41,024 on Valuation Day.

The Minister accepted that valuation and I have concluded that he was warranted in doing so.

That amount was combined with the fair market value attributed to lot 4 and parcel A to form the basis of the adjusted cost base.

As I view the matter the capital gain to the plaintiffs would be the difference between the cost of the land to the plaintiffs which was $40,000 and the price they received for lot 3.

There has been no allocation of the purchase price in the statement of adjustments, Tab 65 — Combined Book of Documents, specifically to lot 3. The purchase price is for lots 3 and 4 and parcel A.

The distinct likelihood is however, that since the adjusted cost base would be lower by approximately $1,034 the capital gain and consequent tax liability would be higher.

That would be tantamount to the Minister appealing his own assessment which he cannot do.

Accordingly the appeal of Elwin E Howlett from his assessment to income tax for his 1973 taxation year is allowed and the assessment dated April 24, 1978 is referred back to the Minister of National Revenue for reassessment on the basis that the amount of $6,014.88 is a capital gain rather than income and in all other respects the assessment dated April 24, 1978 is confirmed with costs to the defendant.

For like reasons the appeal of Eldred Edward Jamieson from his assessment to income tax for his 1973 taxation year is allowed and the assessment dated April 20, 1978 is referred back to the Minister of National Revenue for reassessment on the basis that the assessment of $3,007.44 is capital gain rather than income and in all other respects the Minister’s assessment dated April 20, 1978 is confirmed, with costs to the defendant.