Date: 20001110
Docket : 2000-17-IT-I
BETWEEN:
FRANÇOIS MARTEL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor
Judgment
Tardif, J.T.C.C.
[1]
This is an appeal from an assessment for the 1996 taxation year
made as a result of information provided by the appellant. It is
appropriate to reproduce paragraph 3 of the Reply to the
Notice of Appeal (the "Reply"),which reads as
follows:
[TRANSLATION]
On March 29, 1998, the Minister received from the appellant
an amended return of income for the 1996 taxation year. The
appellant reported for the aforementioned land and building
proceeds of disposition of $54,000, an adjusted cost base of
$100,000 and a capital loss of $46,000. As the net capital loss
computed by the appellant was $34,500, he claimed a carry-back of
a portion—$22,500—of his net loss from 1996 to the
1994 taxation year.
[2]
In making the reassessment for 1996, the Minister of National
Revenue (the "Minister") made the following assumptions
of fact stated in the Reply:
[TRANSLATION]
(a)
During the 1994 taxation year, the appellant was employed by and
the sole shareholder of "Mécanique Auto M.F. de
St-Apollinaire Inc." (hereinafter the
"corporation") located at 83 rue Principale,
Saint-Apollinaire, Quebec.
(b)
On October 4, 1996, Mécanique Auto M.F. de
St-Apollinaire Inc., located at
83 rue Principale, Saint-Apollinaire, Quebec,
sold Érick Noël the following assets:
· the
corporation's clientele and goodwill for $1;
· all
merchandise on the premises for $8,900.72;
· all
its movables, accessories and equipment for $11,000;
· all
rights and privileges relating to the identification of the
business;
(c)
On October 4, 1996, the appellant sold to Erick Noël
for $54,000 a lot including a building whose street address was
83 rue Principale, Saint-Apollinaire, Quebec.
(d)
With his return of income for the 1994 taxation year, the
appellant filed an election in the prescribed form under
subsection 110.6(19) of the Income Tax Act
(hereinafter the "Act") for a deemed capital
gain in respect of certain property.
(e)
In the prescribed form referred to in the preceding paragraph,
the appellant stated that:
· the
election under subsection 110.6(19) was in respect of two
assets only: "land and garage building";
· the
appellant did not include goodwill in his election made under
subsection 110.6(19);
· on
February 22, 1994, the fair market value elected by the
appellant was $100,000 for the two properties, $50,000 for the
land and $50,000 for the building;
· the
adjusted cost base of the land and building was $70,000;
· the
proceeds of disposition of the land and building were
$100,000;
· the
taxable capital gain in respect of the land and building was
$22,500 (¾ of the capital gain of $30,000).
(f)
In his return of income for the 1994 taxation year, the appellant
claimed the deduction under subsection 110.6(3) of the
Act, that is, an amount of $22,500 in respect of the
deemed capital gain of $30,000.
(g)
In his valuation, the Minister determined that the fair market
value of the land and building was $55,500 on February 22,
1994.
(h)
It follows that on his prescribed form the appellant designated a
fair market value that exceeded 11/10 of the actual fair market
value of the land and building on February 22, 1994.
(i)
Under subsection 110.6(28) of the Act, the election
made under subsection 110.6(19) of the Act cannot be
revoked or amended where the amount designated in the election
exceeds 11/10 of the actual fair market value of the property on
February 22, 1994.
(j)
Consequently, the Minister:
·
determined a capital gain upon disposition of the assets in
question of $37,450 (see calculation in schedule);
·
calculated an additional taxable gain of $28,088 which he
included in the appellant's income for the 1996 taxation year
(see calculation in schedule).
[3]
The issue is whether the Minister correctly determined the fair
market value of the immovable held by the appellant to be $55,500
on February 22, 1994, as stated in the Reply as follows:
[TRANSLATION]
(a)
the fair market value of the property held by the appellant on
February 22, 1994 was correctly established by the Minister
at $55,500;
(b) a
taxable capital gain of $28,088 for the taxation year in issue
was correctly computed by the Minister;
(c)
the election made as at February 22, 1994 included the
appellant's land, the building and the goodwill of the
business.
[4]
The burden of proof was on the appellant and both he and his
agent, who was his accountant, testified in support of the
appeal. A number of documents were produced. The testimony and
documentary evidence sought to demonstrate that the goodwill
valued at $30,000 formed an integral part of the immovable.
[5]
To begin with, the appellant stated that the value of the
goodwill had been based on one year's salary. Then, the
appellant's agent tried to show that this amount was a
component of the value of the immovable in the same way as the
land and the building constructed thereon.
[6]
In his testimony, the appellant's agent explained at length
that, by virtue of the geographical location and the surroundings
of the building operated as a mechanical repair shop, the
goodwill was an essential component, an element that could not be
dissociated from the immovable's value.
[7]
In cross-examination of the respondent's expert
Yvon Bergeron, the appellant's agent returned to the
attack in an attempt to discredit the quality of the work done,
not with respect to the content of the appraisal but essentially
on the basis that the valuation had not taken into account or
assessed the value of the goodwill.
[8]
The evidence adduced by the appellant concerned only the question
as to whether the goodwill should or should not be part of the
value of the immovable.
[9]
The appellant's case was prepared by his agent, who took
charge of the various planning aspects and guided the appellant
in the election he had to make. Was this election the most
appropriate, the most advantageous one? For one thing, it is not
up to the Court to answer this question. For another, the
appellant ratified through his signature the work performed by
his agent and, as a result, must assume full responsibility for
it.
[10] The
correctness of the valuation prepared by a recognized expert was
not the subject of any valid challenge or grievance, although the
appellant's agent argued that it should have assigned a value
to the goodwill.
[11] I do not
doubt that the goodwill had an actual value which had to be taken
into account when the business was sold. That value had to be
included in the overall value of the business. The goodwill
definitely was not a part of, and could not be included in or
blended into, the immovable's value, as the appellant's
agent contended.
[12] An
immovable can be valued through a number of approaches, including
in particular the replacement cost method, the economic value
method, and lastly, the most appropriate approach, namely the
fairest and truest comparable sale. Each method must allow for a
number of adjustments for items such as depreciation, the
condition of the building, the year it was built, market
conditions, location, etc.
[13] The
notion of goodwill may be based on location, but that is an
objective reality which has nothing at all to do with the
talents, competence, energy, enthusiasm and personality of
whoever is exploiting the immovable.
[14] The
goodwill at issue in the instant case is strictly and solely an
element whose quality and value derived not from the immovable
but from what the appellant did with it through his work, his
competence and his interest in serving his clientele well.
[15] In this
case, the goodwill was closely linked to the person of the
appellant, who, over the years, was able to develop a large
clientele which benefited the business, thus increasing its
value, just as the inventory did, but definitely not enhancing
the material value of the immovable.
[16] Although
this is a notion or a subtle point which the appellant clearly
did not understand, he must take responsibility for that. The
appellant's agent, who described himself as an accountant,
argued that the consideration of $1 for the goodwill shown in the
notarized agreement dated October 4, 1996, meant nothing. He
also asserted that the goodwill constituted a fundamental
component of the valuation of the immovable.
[17] The Court
found that the appellant's agent had a very special and
original conception of the meaning of goodwill and, more
particularly, of the manner in which it is to be allocated in the
context of an overall appraisal of a business which owns an
immovable. The appellant's agent stubbornly contended that
the goodwill had to be included in the value of the immovable,
not of the business. Such a claim is all the harder to understand
since the agent himself contended that the value of the goodwill,
built up over the years, was the result of the appellant's
efforts and work and of the quality of the services provided by
him to the clientele which he had developed.
[18] The only
evidence adduced was to the effect that the value of the
goodwill, the amount of which was determined arbitrarily, had to
be included in the value of the immovable from which the capital
gain was realized. This evidence was moreover predictable since
the Notice of Appeal expressly stated that this was the sole
basis of the appeal. It is appropriate to reproduce that Notice
here:
[TRANSLATION]
St-Apollinaire, December 17, 1999
. . .
Dear Sir,
I hereby wish to institute an appeal before the Tax Court of
Canada from the Minister's decision of December 6, 1999,
sent from the Québec tax centre, concerning the 1996
taxation year. The grounds for the appeal are the following:
- The valuation of the
immovable as at February 22, 1994 took into account the
goodwill and that goodwill could not be dissociated from the
immovable.
I wish to appeal under the informal
procedure.
François Martel
19 chemin Lambert
St-Apollinaire, Quebec
G0S 2E0
Representation: I hereby appoint
Georges Bégin, C.M.A. to represent me.
155 route du Pont
St-Nicolas, Quebec
G7A 2T3
. . .
[19] The Court
must render judgment on the evidence adduced. The appellant did
not see fit to file any evidence apart from the contention that
the goodwill must be included in the valuation of the immovable
in issue. The claims of the appellant and his agent are not
admissible and thus may not be taken into account.
[20] The
appeal is accordingly dismissed.
Signed at Ottawa, Canada, this 10th day of November 2000.
"Alain Tardif"
J.T.C.C.
Translation certified true on this 28th day of December
2001.
[OFFICIAL ENGLISH TRANSLATION]
Erich Klein, Revisor
[OFFICIAL ENGLISH TRANSLATION]
2000-17(IT)I
BETWEEN :
FRANÇOIS MARTEL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on September 19, 2000, at
Québec, Quebec, by
the Honourable Judge Alain Tardif
Appearances
Agent for the
Appellant:
Georges Bégin
Counsel for the Respondent: Pascale
O'Bomsawin
JUDGMENT
The
appeal from the assessment made under the Income Tax Act
for the 1996 taxation year is dismissed in accordance with the
attached Reasons for Judgment.
Signed at Ottawa, Canada, this 10th day of November 2000.
J.T.C.C.
Translation certified true
on this 28th day of December 2001.
Erich Klein, Revisor
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