Tremblay
J.T.C.C.:
—
This
appeal
was
heard
in
Québec,
Quebec
on
January
10,
1995.
1.
Point
at
Issue
According
to
the
introductory
proceedings,
the
point
at
issue
is
whether
the
appellants
were
correct
in
disputing
the
appraisal
of
$2,800,000
established
by
the
respondent
in
respect
of
the
building
located
at
190
Dorchester
Sud
in
Québec.
This
building
was
sold
by
Enrico
Inc.
(hereinafter
“Enrico”)
to
the
limited
partnership
Édifice
le
190
Dorchester
Sud
(hereinafter
“Édifice
Dorchester”)
for
the
price
of
$3,454,414.
Each
appellant
owned
three
shares
of
Édifice
Dorchester.
As
a
consequence
of
the
respondent’s
appraisal,
the
disallowed
depreciation
was
$1,059
per
share,
that
is
$3,177
per
investor.
Each
appellant
was
assessed
$1,588
for
1990.
The
appellants
contended
that
the
purchaser
and
the
vendor
were
dealing
with
each
other
at
arm’s
length
and
that
the
price
of
$3,454,414
actually
paid
must
be
considered
as
the
true
value,
particularly
since
the
respondent
admitted
that
the
building’s
fair
market
value
in
March
1987,
that
is
a
month
and
a
half
prior
to
the
sale,
was
$3,450,000,
that
is
only
$4,414.00
less
than
the
price
actually
paid.
According
to
the
respondent,
a
bid
submitted
by
André
Ledoux
to
purchase
the
building
for
$2,800,000
was
accepted
by
Enrico
Inc.
on
March
2,
1987.
On
March
18,
1987,
a
group
of
investors
submitted
a
bid
of
$3,454,414
for
the
same
building.
The
notarial
contract
was
signed
on
May
1,
1987:
the
purchaser
Édifice
Dorchester
undertook
to
pay
$3,454,414
to
Enrico
Inc.
The
latter
thus
received
3,454,414
class
B
shares
of
Edifice
Dorchester.
On
that
same
date,
a
rollover
was
made
by
means
of
a
T2059
form
under
subsection
97(2)
of
the
Income
Tax
Act
(the
“Act”).
The
amount
agreed
upon
was
fixed
at
$3,454,414.
On
May
4,
1987,
Enrico
Inc.
sold
its
3,454,414
class
B
shares
to
S.E.C.
Douxel
for
$2,800,000.
On
June
17,
1987,
21
investors
subscribed
a
total
of
3,326,910
class
A
shares
of
Édifice
Dorchester
for
$3,326,910.
The
respondent
contended
that
Enrico
Inc.
ultimately
received
only
$2,800,000,
that
is
the
selling
price
agreed
upon
on
March
2,
1987,
paragraph
85(1
)(a)
of
the
Act
stipulating,
according
to
the
respondent,
that
the
amount
that
a
purchaser
and
a
vendor
have
agreed
upon
is
the
actual
cost
of
the
property
to
the
purchaser.
The
respondent
further
argued
that,
should
the
price
agreed
upon
be
greater
than
the
fair
market
value,
the
amount
agreed
upon
is
deemed
to
be
equal
to
the
fair
market
value,
the
whole
in
accordance
with
paragraph
85(1)(c)
of
the
Act.
2.
Burden
of
Proof
2.01
The
burden
is
on
the
appellant
to
show
that
the
respondent’s
assessment
is
incorrect.
This
burden
of
proof
arises
from
a
number
of
judicial
decisions
including
a
judgment
by
the
Supreme
Court
of
Canada
rendered
in
Johnston
v.
Minister
of
National
Revenue,
[1948]
S.C.R.
486,
[1948]
C.T.C.
195,
3
D.T.C.
1182.
2.02
In
that
judgment,
the
Court
held
that
the
facts
assumed
by
the
respondent
in
support
of
the
assessment
or
reassessment
are
also
presumed
to
be
true
until
proven
otherwise.
The
facts
presumed
by
the
respondent
in
the
instant
case
are
described
at
subparagraphs
(a)
to
(i)
(denied
or
admitted
at
the
hearing
by
the
appellant
as
the
case
may
be)
of
paragraph
13
of
the
Reply
to
the
Notice
of
Appeal.
The
appellant
admitted
or
denied
those
facts.
They
read
as
follows:
13.
The
Minister
took
for
granted
the
following
facts
in
particular
in
order
to
make
this
reassessment:
(a)
on
March
2,
1987,
Enrico
Inc.
accepted
a
bid
of
$2,800,000.00
which
André
Ledoux
had
submitted
to
it
respecting
a
commercial
building
situated
at
190
Dorchester
Sud
in
the
city
of
Québec;
denied
(b)
on
March
18,
1987,
André
Ledoux
accepted
a
bid
of
$3,454,414.00
which
a
group
of
investors
had
submitted
to
him
respecting
the
building
situated
at
190
Dorchester
Sud
in
the
city
of
Québec;
admitted
(c)
pursuant
to
the
bids,
possession
and
occupation
of
the
building
were
planned
for
April
1,
1987;
admitted
(d)
on
May
1,
1987,
by
notarial
contract,
Enrico
Inc.
sold
the
builiding
to
S.E.C.
Dorchester
for
a
consideration
of
$3,454,414.00;
it
received
3,454,414
class
B
shares
of
S.E.C.
Dorchester
in
payment;
on
that
same
date,
a
T2059
form
was
filed
pursuant
to
subsection
97(2)
of
the
Act
and
the
amount
agreement
upon
was
fixed
at
$3,454,414.00;
admitted
(e)
the
transfer
of
Enrico
Inc.’s
property
to
S.E.C.
Dorchester
by
means
of
a
rollover
was
made
at
the
request
of
André
Ledoux;
denied
(f)
on
May
4,
1987,
Enrico
Inc.
sold
its
3,454,414
class
B
shares
to
S.E.C.
Douxel
for
$2,800,000.00;
knew
nothing
of
this
(g)
on
June
17,
1987,
21
investors
subscribed
a
total
of
3,326,910
class
A
shares
in
S.E.C.
Dorchester
for
$3,326,910.00;
admitted
(h)
the
Minister
appraised
the
market
value
of
the
property
transferred
from
Enrico
Inc.
to
S.E.C.
Dorchester
on
May
1,
1987
at
$2,800,000.00.
This
value
breaks
down
as
follows:
Land:
$
336,000
Building:
2,426,000
Equipment:
10,000
Parking:
28,000
$2,800,000
(Admitted
that
this
was
the
Minister’s
evaluation,
but
denied
that
it
was
correct.)
(i)
the
appellant’s
interest
in
S.E.C.
Dorchester
consisted
of
1.5
shares.
admitted
[Translation.]
3.
Facts
3.01
In
addition
to
the
aforementioned
admissions,
the
evidence
consisted
of
the
testimony
of
Réal
Faucher
and
Gaston
Laberge.
The
latter
was
the
respondent’s
appraiser.
3.02
A.
Réal
Faucher"
s
Testimony
Réal
Faucher
first
explained
what
had
led
him
to
form
a
group
of
investors
in
order
to
purchase
the
building
located
at
190
rue
Dorchester
Sud
in
Québec.
He
is
a
chartered
accountant.
After
working
for
the
accounting
firm
of
Clarkson
Gordon
in
Toronto
for
a
year
and
a
half,
he
went
to
work
for
the
federal
Minister
of
Revenue
in
Ottawa
in
1984.
He
remained
there
until
1987.
3.03
Being
aware
of
the
provisions
of
the
Income
Tax
Act
respecting
limited
partnerships,
he
decided
to
form
a
group
of
investors
in
order
to
amass
a
substantial
amount
of
money.
He
managed
to
gather
$460,000
from
21
investors
who
advanced
$30,000
each.
These
were
serious-minded
persons,
in
his
view,
some
working
among
other
things
for
the
Department
of
Transport,
the
Supreme
Court
of
Canada,
the
Royal
Canadian
Mounted
Police,
etc.
His
brothers
and
sisters-in-law
were
also
among
the
21
investors.
At
the
same
time
as
he
contacted
these
persons,
he
tried
to
find
a
building
to
purchase
which
would
meet
the
requirements
of
their
investment.
On
the
advice
of
the
notary
Gilles
Naud,
he
contacted
one
André
Ledoux
who
led
him
to
the
building
in
issue.
3.04
The
witness,
who
denied
paragraph
2.02:
13(a),
contended
that
at
the
time
of
the
transaction
(Exhibit
1-1),
he
was
completely
unaware
of
the
existence
of
Mr.
Ledoux’s
option
to
purchase
(March
2,
1987)
for
$2,800,000.
He
said
he
did
not
learn
of
it
until
two
years
later,
that
is
in
1989.
In
fact,
this
Mr.
Ledoux
was
a
real
estate
trader
proceeding
by
purchasing
and
subsequently
reselling
to
one
of
his
clients.
The
witness,
who
was
unaware
of
these
facts,
believed
that
Mr.
Ledoux
was
one
of
the
principal
shareholders
of
the
company
that
owned
the
building.
In
any
case,
the
witness
and
the
other
investors,
being
of
good
faith,
were
advised
by
the
international
firm
of
financiers
and
appraisers
Wood
&
Gundy.
Upon
thorough
study,
the
latter
had
advised
them
to
buy.
This
was
particularly
attractive
since
the
labour
centre
had
just
signed
a
five-year
lease
and
one-third
of
the
building
was
leased
by
a
government
tenant.
There
was
also
a
bowling
alley
administered
by
Mendes
Inc.
Lastly,
the
National
Bank
was
prepared
to
grant
them
a
substantial
loan
of
likely
as
much
as
$2,700,000.
However,
not
having
completed
its
market
study
at
that
point,
the
bank
agreed
at
that
stage
to
make
a
loan
of
$2,000,000.
3.05
When
the
investors
made
the
offer
(Exhibit
I-3)
of
$3,454,414
(2.02:13(b)),
Mr.
Ledoux
clearly
accepted
it.
3.06
On
May
1,
1987,
the
notarial
contract
(Exhibit
A-2)
was
signed
before
the
notary
Gilles
Naud.
The
vendor
was
Enrico
Inc.
It
was
paid
in
class
B
shares
and
the
building
was
transferred
by
means
of
a
rollover
at
the
vendors’
request
(2.02:13(d)(e)).
The
transfer
was
agreed
to
upon
the
consent
of
the
appellants’
advisers.
3.07
At
the
time
the
notarial
contract
was
signed
on
May
1,
1987,
the
National
Bank
had
as
yet
granted
a
loan
of
only
$2,000,000.
It
was
not
until
June
18,
1987
that,
following
its
study,
the
loan
was
increased
to
$2,700,000.
At
least
it
was
on
that
date
that
the
mortgage
was
registered
(Exhibit
A-3).
According
to
this
Exhibit
A-3,
which
represents
an
appraisal
by
the
respondent,
the
building
in
issue
had
real
gross
income
of
$557,998
and
net
income
of
$348,998.
INCOME
METHOD/MÉTHODE
DU
REVENU
INCOME/REVENU
ACTUAL
RÉEL
Office
and
commercial
rentals
(5
tenants)/
Locations
de
bureaux
and
commerciales
(5
locataires)
$409,453.00
26
apartments/
26
logements
$124,176.00
Parking
rentals
(according
to
financial
statements)/
Stationnement
locations
(selon
états
financiers)
$
41,627.00
GROSS
-
BRUT
$575,256.00
Vacancy
allowance
and
other
-
%/
Allocation
de
vacances
&
autres
%
3%
$
17,258.00
GROSS
-
ACTUAL/
BRUT
-
RÉEL
$557,998.00
Cost
(according
to
the
operating
expenses
contract)/
Cost
(selon
le
contrat
de
dépenses
d’exploitation
$209,000.00
Net
operating
income/
Revenu
net
de
l’exploitation
$348,998.00
3.08
Needing
working
capital,
the
investors
had
to
borrow
$350,000
from
the
two
Roussin
brothers
(Maurice:
$200,000
and
Félix:
$150,000).
On
July
8,
1987,
mortgages
were
registered
to
this
effect
(Exhibit
A-3).
3.09
At
the
time
of
the
sale
transaction
on
May
1,
1987,
Enrico
Inc.
agreed
to
accept
payment
in
the
form
of
3,454,414
class
B
shares.
On
May
4,
it
resold
all
of
those
shares
to
S.E.C.
Douxel
(Mr.
Ledoux’s
limited
partnership)
for
$2,800,000
(2.02:
13(f))
(Exhibit
1-4).
The
witness
contended
that
he
was
unaware
of
this
transaction
at
that
time.
However,
Edifice
Dorchester
received
the
information
to
register
S.E.C.
Douxel
as
the
holder
of
the
class
B
shares;
S.E.C.
Douxel
subsequently
required
that
its
shares
be
resold.
On
June
18,
1987,
a
$250,000
mortgage
was
registered
under
number
1,338,691.
On
July
8,
1988,
Douxel
Inc.
transferred
its
mortgage
priority
to
Maurice
Roussin
(Exhibit
A-3).
3.10
The
witness
also
explained
that
a
bridge
(a
numbered
company
representing
Édifice
Dorchester)
was
formed
until
the
National
Bank’s
final
decision
to
grant
a
maximum
loan
of
$2,700,000
was
made,
that
is
until
June
18,
1987.
3.11
The
witness
underscored
clause
7.3.4
of
the
contract
of
sale
(A-2)
of
May
2,
1987.
That
clause
appeared
under
the
heading
“Other
Guarantees”.
7.3.4
As
part
of
the
administration
of
the
vendor,
to
the
best
of
its
knowledge,
the
building’s
annual
operating
expenses
hereunder
shall
not
exceed
the
sum
of
$209,000.00.
[Translation.]
3.12
The
witness
also
emphasized
clause
10.3
of
contract
A-2.
It
reads
as
follows:
10.3
COMMON
FUND
SHARES
ISSUED
AND
PAID
UP
These
3,454,414
class
B
shares
will
be
entered
in
the
corporation’s
books
as
fully
subscribed
and
paid
up.
[Translation.]
3.13
Testimony
of
Gaston
Laberge:
Respondent's
Witness
The
chartered
accountant
Mr.
Laberge,
52
years
of
age,
has
been
a
member
of
the
Appraisal
Institute
of
Canada
since
1972
and
a
member
of
the
Association
des
évaluateurs
du
Québec
since
1974.
He
is
also
a
member
of
the
Association
of
Municipal
Assessors.
He
had
been
an
appraiser
for
20
years.
His
abilities
were
not
in
doubt.
3.14
The
witness
filed
the
appraisal
report
as
Exhibit
I-5,
whereas,
according
to
the
appellants,
the
building
in
issue
was
appraised
as
follows:
Land:
$
175,000
Building:
3,119,414
Equipment:
10,000
Parking:
150,000
$3,454,414.00
The
respondent’s
appraisal
report
(A-5)
offered
the
following
figures:
Land:
$
336,000
Building:
2,426,000
Equipment:
10,000
Parking:
28,000
$2,800,000
The
replacement
cost,
income
and
parity
techniques
yielded
the
follow-
ing
figures:
Replacement
cost
technique:
$2,900,000
Income
technique:
$2,695,000
Parity
technique:
$2,795,000
He
therefore
concluded
that
the
value
was
$2,800,000.
3.15
Réal
Faucher
emphasized
in
cross-examination
that
only
six
of
the
10
comparables
used
in
appraising
the
land
had
been
sold
after
May
1,
1987,
that
is
the
date
of
the
appraisal
of
the
building
in
issue.
3.16
To
a
question
from
Mr.
Faucher,
the
appraiser
answered
that
the
banks
lent
up
to
75%
of
the
value
of
a
residential
property
and
as
much
as
65%
of
the
value
of
a
commercial
property
such
as
the
building
in
issue.
3.17
The
appellants
did
not
file
an
appraisal
report.
4.
Act
-
Case
Law
-
Analysis
4.01
Act
The
provisions
of
the
Act
invoked
by
the
respondent
in
order
to
make
the
assessment
were
ss.
56(2),
para.
85(1
)(a)
to
(f),
s.
97(2)
and
para.
251(1)(b).
They
read
as
follows:
56(2)
Indirect
payments.
A
payment
or
transfer
of
property
made
pursuant
to
the
direction
of,
or
with
the
concurrence
of,
a
taxpayer
to
some
other
person
for
the
benefit
of
the
taxpayer
or
as
a
benefit
that
the
taxpayer
desired
to
have
conferred
on
the
other
person
(other
than
by
an
assignment
of
any
portion
of
a
retirement
pension
pursuant
to
section
64.1
of
the
Canada
Pension
Plan
or
a
comparable
provision
of
a
provincial
plan
as
defined
in
section
3
of
that
Act
or
taxpayer’s
income
to
the
extent
that
it
would
be
if
the
payment
or
transfer
had
been
made
to
him.
|
of
a
|
prescribed
provincial
pension
plan)
shall
be
included
in
|
computing
the
|
ARTICLE
85:
Transfer
of
property
to
corporation
by
shareholders.
(1)
Where
a
taxpayer
has,
in
a
taxation
year,
disposed
of
any
of
his
property
that
was
eligible
property
to
a
taxable
Canadian
corporation
for
consideration
that
includes
shares
of
the
capital
stock
of
the
corporation,
if
the
taxpayer
and
the
corporation
have
jointly
elected
in
prescribed
form
and
in
accordance
with
subsection
(6),
the
following
rules
apply:
(a)
the
amount
that
the
taxpayer
and
the
corporation
have
agreed
upon
in
their
election
in
respect
of
the
property
shall
be
deemed
to
be
the
taxpayer’s
proceeds
of
disposition
of
the
property
and
the
corporation’s
cost
of
the
property;
(b)
subject
to
paragraph
(c),
where
the
amount
that
the
taxpayer
and
the
corporation
have
agreed
upon
in
their
election
in
respect
of
the
property
is
less
than
the
fair
market
value,
at
the
time
of
the
disposition,
of
the
consideration
therefor
(other
than
any
shares
of
the
capital
stock
of
the
corporation
or
a
right
to
receive
any
such
shares)
received
by
the
taxpayer,
the
amount
so
agreed
upon
shall,
irrespective
of
the
amount
actually
so
agreed
upon
by
them,
be
deemed
to
be
an
amount
equal
to
that
fair
market
value;
(c)
where
the
amount
that
the
taxpayer
and
the
corporation
have
agreed
market
value,
at
the
time
of
the
disposition,
of
the
property
so
disposed
of,
the
amount
so
agreed
upon
shall,
irrespective
of
the
amount
actually
so
agreed
upon,
be
deemed
to
be
an
amount
equal
to
that
fair
market
value;...
|
upon
in
their
|
election
in
respect
of
the
property
is
|
greater
than
the
fair
|
97(2)
Rules
where
election
by
partners.
Notwithstanding
any
other
provision
of
this
Act,
other
than
subsection
85(5.1),
where
at
any
time
after
November
12,
1981
a
taxpayer
has
disposed
of
any
capital
property,
a
Canadian
resource
property,
a
foreign
resource
property,
an
eligible
capital
property
or
an
inventory
to
a
partnership
that
immediately
after
that
time
was
a
Canadian
partnership
of
which
the
taxpayer
was
a
member,
if
the
taxpayer
and
all
the
other
members
of
the
partnership
have
jointly
so
elected
in
prescribed
form
and
within
the
time
referred
to
in
subsection
96(4),
the
following
rules
apply:
(a)
the
provisions
of
paragraphs
85(1
)(a)
to
(f)
apply
to
the
disposition
as
if
|
(i)
the
reference
therein
to
|
“corporation’s
cost”
were
read
|
as
a
|
|
reference
to
“partnership’s
cost”,
|
|
(ii)
the
references
therein
to
“other
than
any
shares
of
the
capital
stock
of
the
corporation
or
a
right
to
receive
any
such
shares”
and
to
“other
than
shares
of
the
capital
stock
of
the
corporation
or
a
right
to
read
as
references
to
“member
of
the
partnership”,
and
|
receive
any
such
shares”
were
|
read
as
references
to
“other
|
than
an
|
|
interest
in
the
partnership”,
|
|
|
(iii)
the
references
therein
to
|
“shareholder
of
the
corporation”
were
|
(iv)
the
references
therein
to
“the
corporation”
were
read
as
references
to
“all
the
other
members
of
the
partnership”,
and
(v)
the
references
therein
to
“to
the
corporation”
were
read
as
references
to
“to
the
partnership”;
(b)
in
computing,
at
any
time
after
the
disposition,
the
adjusted
cost
base
to
the
taxpayer
of
his
interest
in
the
partnership
immediately
after
the
disposition,
(i)
there
shall
be
added
the
amount,
if
any,
by
which
the
taxpayer’s
proceeds
of
disposition
of
the
property
exceed
the
fair
market
value,
at
the
time
of
the
disposition,
of
the
consideration
(other
than
an
interest
in
the
partnership)
received
by
the
taxpayer
for
the
property,
and
(ii)
there
shall
be
deducted
the
amount,
if
any,
by
which
the
fair
market
value,
at
the
time
of
the
disposition,
of
the
consideration
(other
than
an
interest
in
the
partnership)
received
by
the
taxpayer
for
the
property
so
disposed
of
by
him
exceeds
the
fair
market
value
of
the
property
at
the
time
of
the
disposition;
and
(c)
where
the
property
so
disposed
of
by
the
taxpayer
to
the
partnership
is
taxable
Canadian
property
of
the
taxpayer,
the
interest
in
the
partnership
received
by
him
as
consideration
therefor
shall
be
deemed
to
be
taxable
Canadian
property
of
the
taxpayer.
SECTION
251:
Arm’s
length.
(1)
For
the
purposes
of
this
Act,
(a)
related
persons
shall
be
deemed
not
to
deal
with
each
other
at
arm’s
length;
and
(b)
it
is
a
question
of
fact
whether
persons
not
related
to
each
other
were
at
a
particular
time
dealing
with
each
other
at
arm’s
length.
4.02
Case
Law
(1)
Golden
v.
R.,
(sub.
nom.
Golden
v.
The
Queen),
[1986]
1
S.C.R.
209,
[1986]
1
C.T.C.
274,
86
D.T.C.
6138
(2)
Gagetown
Lumber
Co.
v.
R.
(sub.
nom.
Gagetown
Lumber
Co.
Ltd.
v.
The
Queen),
[1957]
S.C.R.
[1957]
44,
61
D.L.R.
(2d)
657
(3)
Connor
v.
R.
(sub.
nom.
Connor
v.
The
Queen),
[1979]
C.T.C.
365,
79
D.T.C.
5256
(F.C.A.)
4.03
Analysis
4.03.1
The
main
point
at
issue
is
whether
the
market
value
of
the
property
transferred
on
May
2,
1987
from
Enrico
Inc.
to
Édifice
Dorchester
was
$2,800,000.
Depending
whether
that
value
is
correct
or
not,
the
Minister
was
justified
or
not
justified
in
adding
$1,588
to
the
rental
income
from
Edifice
Dorchester
reported
by
the
appellant
for
1990.
4.03.2
The
Minister
contended
that
the
only
evidence
of
appraisal
was
the
one
that
was
done
by
the
appraiser
Gaston
Laberge
in
the
amount
of
$2,800,000
(3.13)
and
that
the
appellant
did
not
refute
that
evidence.
4.03.3
As
a
result
of
that
appraisal,
the
Minister’s
arguments
of
fact
and
of
law
as
they
appear
at
section
(c)
of
the
Reply
to
the
Notice
of
Appeal
are
as
follows:
C.
LEGISLATIVE
PROVISIONS,
ARGUMENTS
INVOKED
AND
CONCLUSIONS
SOUGHT
15.
He
relies
in
particular
on
subsections
56(2)
and
97(2)
and
paragraphs
85(1
)(a)
to
(f)
and
251(l)(b)
of
the
Income
Tax
Act
(the
“Act”)
as
amended
and
applicable
for
the
1990
taxation
year.
16.
He
contends
that
the
provisions
of
subsection
97(2)
of
the
Act
applies
since
Dorchester,
which,
immediately
upon
that
disposition,
was
a
Canadian
corpora
17.
He
contends
that
the
Minister
was
justified
in
appraising
the
market
value
of
the
property
transferred
from
Enrico
Inc.
to
S.E.C.
Dorchester
on
May
1,
1987
at
$2,800,000.00
since:
|
Enrico
|
disposed
of
capital
property
in
favour
of
a
|
corporation,
S.E.C.
|
|
tion
of
which
|
Enrico
was
a
member
and
that
a
T2059
form
was
duly
|
com
|
|
pleted.
|
|
(a)
the
bid
accepted
by
Enrico
Inc.
on
March
2,
1987
was
worth
$2,800,000.00;
(b)
the
market
value
of
3,454,414
class
B
shares
in
S.E.C.
Dorchester
received
by
Enrico
Inc.
in
payment
of
the
property
transferred
was
$2,800,000.00;
(c)
and
on
May
4,
1987,
Enrico
Inc.
sold
its
3,454,414
class
B
shares
in
S.E.C.
Dorchester
to
S.E.C.
Douxel
for
a
consideration
of
$2,800,000.00;
(d)
lastly,
the
sum
actually
received,
by
Enrico
Inc.
for
the
disposition
of
its
building
in
favour
of
S.E.C.
Dorchester
was
$2,800,000.00.
18.
He
contends
that
the
cost
of
the
property
to
S.E.C.
Dorchester
was
$2,800,000.00
since:
(a)
the
provisions
of
paragraph
85(1
)(a)
of
the
Act
stipulate
that
the
sum
agreed
upon
by
the
purchaser
and
the
vendor
was
the
cost
of
the
property
to
the
purchaser;
(b)
furthermore,
the
provisions
of
paragraph
85(1
)(c)
of
the
Act
provide
that
if
on
the
date
of
the
disposition
of
the
property,
the
sum
agreed
upon
was
greater
than
the
fair
market
value
of
the
property,
the
sum
agreed
upon
is
deemed
to
be
equal
to
the
fair
market
value
of
the
property.
[Translation.]
3.03.4
It
was
because
of
paragraph
16
cited
above
in
the
Reply
to
the
Notice
of
Appeal
that
the
Minister
referred
to
subsection
56(2)
of
the
Act
cited
above
(4.01).
The
Court
agrees
with
this
conclusion
that,
immediately
upon
the
disposition,
Édifice
Dorchester
was
a
Canadian
corporation
of
which
Enrico
Inc.
was
a
member
and
with
the
conclusion
that
a
T2059
form
was
duly
completed.
Moreover
the
appellants
were
also
of
this
view
and
were
among
those
who
admitted
the
validity
of
the
application
of
subsection
97(2)
and
of
the
T2059
form.
3.03.5
The
respondent
contended
that
even
though
the
vendor
Enrico
Inc.
received
3,454,000
class
B
shares
worth
$1.00
each
on
May
2,
1987
(2.02:13(d)),
it
ultimately
obtained
only
$2,800,000
since
it
was
this
sum
which
it
sold
to
and
received
from
S.E.C.
Douxel
Inc.
(Ledoux)
pursuant
to
the
contract
of
sale
of
May
4,
1987.
(2.02:
13(f))
3.03.6
The
appellants
answered
that
they
did
not
know
until
two
months
after
the
purchase
of
the
building
in
issue
that
Mr.
Ledoux
had
obtained
a
bid
for
that
building
on
March
2,
1987.
(3.04)
As
to
the
sale
of
the
class
B
shares
to
Douxel
Inc.
(Ledoux)
by
Enrico
Inc.,
the
latter
was
entitled
to
sell
them
to
whomever
it
wished
and
at
the
price
it
wished.
The
appellants
no
longer
had
any
control
over
this
transaction.
3.03.7
Even
if
the
appellants
had
known
that
Mr.
Ledoux
had
already
purchased
the
building
in
issue
for
$2,800,000,
would
this
fact
really
have
influenced
their
decision?
Had
the
firm
of
Wood
&
Gundy
not
advised
them
upon
careful
study
to
buy
at
the
price
offered
by
Mr.
Ledoux,
that
is
$3,450,000
(3.04)?
That
firm
must
certainly
have
known
the
gross
and
net
income
($557,998
and
$348,998)
(3.07)
of
that
building.
3.03.8
In
addition,
did
the
National
Bank
not
make
a
loan
of
$2,700,000
to
Immeuble
[sic]
Dorchester
without
having
conducted
a
careful
study?
Furthermore,
before
raising
the
loan
to
the
maximum
of
$2,700,000,
the
bank
first
lent
only
$2,000,000.
It
then
conducted
a
supplementary
study
from
May
1
to
June
18
(3.07).
Is
it
possible
that
the
bank
may
have
granted
a
loan
of
$2,700,000
in
respect
of
a
building
which
it
may
have
appraised
at
$2,800,000?
Applying
the
standard
of
65%
for
a
commercial
mortgage
(3.15),
it
obviously
arrived
at
$3,153,846
($2,700,000
-
[sic]
65
X
100),
which
would
rather
confirm
the
appellant’s
argument
or
at
least
that
it
was
reasonable
to
think
that
the
building
was
worth
$3,153,846.
4.03.4
Mr.
Faucher
further
submitted
that
the
group
of
21
was
not
in
a
hurry
to
buy
and
it
had
acted
freely
and
in
knowledge
of
the
facts.
Lastly,
this
transaction
between
the
vendor
and
the
purchaser
was
an
arm’s
length
transaction.
Mr.
Ledoux
was
merely
a
trader
who
benefitted
from
his
knowledge
of
a
vendor
wishing
to
sell
and
a
purchaser
wishing
to
buy
to
serve
as
an
intermediary
for
the
purpose
of
earning
a
profit.
4.03.5
The
appellant
referred
to
George
Golden,
supra,
(4.02(1))
which
confirmed
the
principle
that
when
a
purchaser
and
a
vendor
acting
at
arm’s
length
reach
a
mutual
agreement
to
apportion
the
price
paid
against
various
assets
and
that
that
apportionment
appears
reasonable
in
the
circumstances,
that
apportionment
should
be
accepted
by
the
Minister
as
correct
and
should
be
binding
on
both
parties.
(Herb
Payne
(Transport)
Ltd.
v.
Minister
of
National
Revenue,
[1963]
C.T.C.
116,
63
D.T.C.
1075
(Exch.)
at
pages
122-24
(D.T.C.
1079).
However,
this
principle
was
stated
in
the
context
of
section
68
of
the
Act.
The
same
was
true
in
Golden,
supra.
In
that
case,
the
taxpayer
had
sold
certain
apartment
buildings
for
$5,850,000.
The
part
allocated
for
the
land
was
$5,100,000.
The
balance
of
$750,000
was
allocated
to
the
buildings.
The
Minister
took
the
position
that
the
allocation
made
between
the
land
and
“something
else”
within
the
meaning
of
section
68
was
unreasonable.
The
Supreme
Court
confirmed
the
Appeal
Court
judgment
that
the
expression
had
to
be
construed
very
broadly.
4.03.6
The
issue
in
the
instant
case
was
not
the
application
of
section
68
of
the
Act,
which
addresses
the
allocation
of
the
price
paid
in
consideration
of
the
various
assets
purchased,
but
subsection
85(1)
which
addresses
the
overall
price
of
the
transaction
itself.
4.03.7
On
the
basis
of
the
evidence
adduced,
it
is
the
Court’s
view
that
it
is
reasonable
to
conclude
that
the
price
established
by
the
National
Bank
justifying
its
$2,700,000
loan
was
the
appropriate
market
value
in
the
circumstances,
that
is
$3,153,846.
5.
Conclusion
The
appeal
is
allowed
without
costs
and
the
assessment
varied
in
accordance
with
the
above
reasons.
Appeal
allowed
in
part.
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