Tom Jj. Zeiben v. Minister of National Revenue, [1991] 2 CTC 2008, 91 DTC 886

Taylor, T.CJ.:—These are appeals heard in Regina, Saskatchewan, on September 27 and 28, 1990, against income tax assessments for the years 1984, 1985, 1986 and 1987, which assessments were primarily based on the following assumptions:

. . . the capital cost of the 1983 Case 4690 tractor and the 1984 M.F. 850 combine has been determined to be $130,379 (tractor—$65,500, combine—$64,879) in accord- ance with paragraph 54(a) of the Act for purposes of paragraph 20(1)(a) and section 1100 of the Income Tax Regulations; . . .

The proceeds of disposition of the 1981 Case 2390 tractor and the 1973 M.F. 510 combine has been determined to be $57,874 (tractor—$45,000, combine—$12,874) for purposes of subsection 13(21), paragraph 20(1)(a) and section 1100 of the Income Tax Regulations; . . .

Sections of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") referenced by the parties

13, 18, 29(1)(a), 38, 39, 40, 53, 54, 68, 127, 127.1, 152 and 248(1).

Documentation

Because of the significant nature of the principle put in issue in this matter, I shall quote extensively from the pleadings.

The notice of appeal (N.A.) read:

From your letter of November 13, 1987 I find myself very disturbed to learn that the Taxation Department has re-opened the case involving trade-in allowances on my farm equipment. When your Department did not find me at fault in their specific audit project concerning trade-in allowances and they have cancelled their project since, how can they find me at fault now when nothing was changed?

I have to stress the fact that the prices for the farm equipment that you are concerned about were not set by me but by the dealers for the companies that they represent.

My farming operation involves many strategies for making it a viable and profitable business. These strategies concern decision making in crops to seed, use of fertilizers and chemicals, crop marketing, land management, purchasing of farm equipment and Income Tax planning.

When I go shopping for farm equipment I try to get the best deal I possibly can. The prices offered to me by the dealers on my trade-ins; the 1981 Case 2390 tractor ($104,500), the 1973 M.F. 510 Combine ($49,900) and the 1972 Double Disc ($8,500) were very attractive to me and that is why I traded. How the dealers can recover these prices is of no concern to me.

The Taxation Department offered an Investment Tax Credit on purchases of new farm equipment at the time when I purchased the new #4690 Case Tractor, #850 M.F. Combine and Kello Double Disc. The Investment Tax Credit was another very important reason for me to update this equipment.

In my lifetime of farming (25 years) I have always quoted on my Income Tax Returns the dealers prices that are listed on the sales contracts.

My major purchases such as farm equipment and farm land are planned five to ten years into the future to make this farm operative. With the lucrative deals offered to me in 1984 and the Investment Tax Credit incentive by Revenue Canada I committed myself in purchasing the new equipment stated previously. If I was quoted prices for my trade-ins in 1984 that you have quoted me in your letter on November 13, 1987 I would have never agreed to purchase the new equipment. I cannot understand how you are allowed to change these prices now, that will cause a substantial loss to me and very well put me out of the farming business. I have no authority in establishing farm equipment prices and could only accept offers that are made to me and that is what exactly happened in this case. It is my interpretation that you should direct your concerns to and with the Machinery Dealers and Companies involved. I thank you.

And from the reply to notice of appeal (R.N.A):

— In the 1984 taxation year, the Appellant purchased two pieces of new farm equipment. For one he paid some cash and traded a piece of used farm equipment. For the other he traded a piece of used farm equipment and financed the balance of the purchase price.

—As a result of the transactions referred to in paragraph 2, the Appellant completed his income tax return for the 1984 taxation year in the following manner:

— He declared a taxable capital gain in connection with the trade-in of the used equipment.

—He claimed an investment tax credit and a refundable investment tax credit in connection with the acquisition of the new equipment.

—He claimed capital cost allowance on the new equipment.

—The Minister of National Revenue (the "Minister") placed lower values on the used equipment than did the Appellant, which resulted in a lower cost for the new equipment. He then reassessed the Appellant for the 1984 to 1987 taxation years in the following manner:

—He reduced to nil the taxable capital gain in connection with the trade-in of the used equipment.

—He decreased the investment tax credit and the refundable investment tax credit in 1984 and 1986 in connection with the acquisition of the new equipment.

—He decreased the capital cost allowance on the new equipment.

Purchase of 1983 Case 4690 Tractor

—On 31 May 1984, the Appellant purchased a 1983 Case 4690 tractor (the "New Tractor") from Dutchyshyn Farm Machinery Ltd. ("Dutchyshyn") in Kamsack, Saskatchewan. . . .

—When purchasing the New Tractor, the Appellant paid $20,500 in cash, and traded a 1981 Case 2390 tractor (the "Used Tractor") for which he and Dutchyshyn agreed upon a trade-in value of $104,500.

Trade of 1981 Case 2390 Tractor

— The Appellant purchased the Used Tractor when it was new from Dutchyshyn for $65,500 on 19 March 1982.

Purchase of 1984 Massey Ferguson 850 Combine

—On 13 August 1984, the Appellant purchased a 1984 Massey Ferguson 850 combine (the "New Combine”) from Canora Central Motors Ltd. ("CCML") in Canora, Saskatchewan.

—When purchasing the New Combine, the Appellant traded a 1973 Massey Ferguson 510 combine (the "Used Combine”) for which he and CCML agreed upon a trade-in value of $49,900, and financed the amount of $52,005.

Trade of 1973 Massey Ferguson 510 Combine

—The Appellant purchased the Used Combine when it was new from CCML for $16,900 in 1973.

General

—The important factors to the dealers (Dutchyshyn and CCML) when selling the new equipment to the Appellant were the amount of cash being paid and the fair market value of the used equipment being traded.

— In agreeing upon the amount of cash being paid and the amount being financed for the new equipment, the Appellant and the dealers were dealing at arm's length.

— In agreeing upon the trade-in value for the used equipment being traded, the Appellant and the dealers were not dealing at arm's length.

—The agreement on the trade-in value for the used equipment was not bona fide, and that value was substantially inflated beyond fair market value.

—From a business, accounting and tax perspective, the trade-in value for the used equipment shown on the sales contract had no effect on the dealers.

—The only practical effect of inflating the trade-in value for the used equipment by $96,526 was to give the Appellant a higher cost figure for the new equipment, which he then used for calculating the investment tax credit and capital cost allowance.

— Farm equipment is almost always sold at substantial discounts from the manufacturer's list price.

—The manufacturer's list price for a piece of farm equipment does not constitute its capital cost to the purchaser.

—. . . the capital cost of an asset, where part of its purchase price is paid by means of a trade-in, is the total of the cash paid plus the fair market value of the asset traded.

Attached to the R.N.A., supra, the respondent included copies of the "contracts for the sale of new farm equipment"—one from Dutchyshyn, the other from CCML (Canora Central Motors Ltd.) referenced as the implement dealers in the above (R.N.A.).

Evidence and Comment

Mr. Zeiben, the appellant, and Mr. Dutchyshyn (representing the Dutchyshyn implement dealer above) were called by counsel for the appellant, testified and made reference to the above documents. It was agreed that for the critical purpose of these appeals, the CCML contract, supra, was similar to that of Dutchyshyn and no one from that company was called. The Dutchyshyn contract, attached to the R.N.A., was later introduced separately by the parties as Exhibit R-1 to this trial and contained the following information: (the information in standard type is that found on the contract itself, the information in italics represents that written in as part of the contract by the parties).

19. If the implement(s) is not delivered to the purchaser on or before the delivery date stated herein or any extension thereof mutually agreed upon in writing the purchaser may terminate this contract by giving notice in writing to the dealer. On such termination the dealer shall return to the purchaser any moneys paid, discharge any security interest taken, and shall return in the same condition the implement(s) traded in as listed above, but if the trade-in cannot be returned in the same condition as received, the dealer shall pay the purchaser the sum indicated as market value above. Time shall be of the essence.

20. This contract is made pursuant and subject to The Agricultural Implements Act (Saskatchewan) and shall be deemed to be made and shall be interpreted and enforced according to the laws of the Province of Saskatchewan.

	Tom Zeiben
B. Dutchyshyn
Dealer or Authorized Agent's Signature	Purchaser's Signature(s)

I have further highlighted the amounts (bold print) in the above excerpt from the contract of sale—“market value—$45,000", and "trade-in value $104,500”. The issue in these appeals, as I understand it, comes down to which one of these amounts is the proper one to be used in the determination of costs—for income tax purposes—as contrasted in the expressed views of the parties:

Mr. Zeiben testified that the opening event which led him to the purchase of the larger tractor was a visit to his farm from a sales agent of Dutchyshyn—at which time a difference of about $30,000 was suggested for Mr. Zeiben to trade his “2390 tractor" (above) for a larger and newer model. Several discussions later, and finally with Mr. Dutchyshyn himself, it was agreed that the amount of $20,500 would be the difference, and the vehicle would be the “4690 tractor" (above). Mr. Zeiben was informed by Mr. Dutchyshyn that the “list price" of the new tractor was $125,000. His evidence was that he had nothing to do with the determination of the $45,000 amount on the contract (above) although he agreed he had signed the contract containing that reference. His view was that the only reason the amount was included on the contract was to satisfy the Province of Saskatchewan regulations which required the inclusion on the contract of the cautions regarding the law, noted on the contract (above). According to Mr. Zeiben, this Saskatchewan legal requirement was not a consideration in his mind, because he kept his old tractor on his farm until the new one was delivered, and he would never have put himself at the risk of receiving only $45,000 compensation for. the old tractor for which he was receiving a trade-in allowance of $104,500—according to his calculation. If the contract had shown the respondent's numbers ($65,500 — $45,000 = $20,500) even though the difference would have remained the same ($20,500) he would not have agreed to or signed the contract. His explanations of why that situation would have deterred him from agreeing were somewhat confusing. He indicated that he was unaware of the "market value" of his old tractor, but at the same time he would not have accepted $45,000 as such value. He professed not to know the asking prices for similar used equipment—but was sure his own—apparently because it was in such good condition—could have been worth $104,500. It was quite clear that the main validity for the $125,000 amount on the contract was that this was shown as the “list price" in the dealer's catalogue, and Mr. Zeiben was aware of that fact. When confronted with the fact that the list price of the old tractor had only been $65,500 when he had acquired it a few years before, his answers were not helpful. (I should note at this point that the respondent's "cost" price of the new tractor—$65,500 is only by coincidence the same amount as the list price of the old tractor—there is no direct relationship between the amounts.)

Mr. Dutchyshyn agreed that this represented the standard type of contract, and that it was quite usual to have a substantial difference between the “trade- in value” (in this case $104,500) and the “market value" ($45,000). The $45,000 represented to him approximately the amount which he would hope to recover—in cash—from the old tractor. When asked how much he would have taken in a straight cash sale—no trade—for the new tractor—his answer was $63,000. Mr. Dutchyshyn agreed that Mr. Zeiben had made a good bargain in buying the new tractor and that the bargaining had always been at arm's length but related to the difference (eventually reached at $20,500) between the old tractor and the new tractor agreed upon before the actual preparation and signing of the above contract. His “list price" of $125,000 contained the prospect for him of several discounts, reductions and special sales attractions from his own supplier of the equipment—which accounted for his ability to sell (if he had the opportunity) for cash, at a much lower figure—in this case perhaps down to $63,000. He was fully conversant with the market for used tractors, and agreed—from his own records—that after three more successive trades "down" he had realized—in cash—$40,000 out of the old Zeiben tractor. Therefore his eventual cash receipts for the new tractor totalled $60,500—the $20,500 difference from Mr. Zeiben and the $40,000 he had received for the old tractor. Mr. Dutchyshyn stated that in his own accounts, the transaction had been recorded exactly as shown on the contract of sale with Zeiben—that being his regular practice.

Mr. John Dopko, an appraiser with JLK Agro Services Ltd. was called by the respondent, and concluded in his filed report that his estimate of the market value of the “1981 2390 Case Tractor" (the old tractor) as at May 31, 1984 (the date of the contract of sale for the new tractor, supra) would have been $24,000, not even the $40,000 finally received for it by Mr. Dutchyshyn, let alone the $45,000 shown on the contract of sale as “market value”. It could be concluded from Mr. Dopko's report and testimony that the respondent's valuation of $45,000 for the old tractor was certainly not too low, it was probably more generous to the appellant than could be supported.

Finally, the respondent introduced Mr. William G. Stephen, a chartered accountant, with his report on “the capital cost of a piece of farm equipment". Counsel for the appellant agreed that Mr. Stephen should be qualified as an expert witness, and accordingly through his testimony Mr. Stephen expressed opinion evidence on the general subject of "cost" as well as relating the circumstances of this particular case to the basic positions he adopted. I have selected certain extracts which I believe set out the thrust of his opinions, and the basic proposition behind them.

The issue in the case of Zeiben v. The Minister of National Revenue is whether the cost of the farm equipment acquired in trade-in transactions was determined in accordance with Generally Accepted Accounting Principles.

A trade-in transaction is the exchange of a used asset plus monetary consideration, usually cash, for a new asset, usually of a similar nature.

Many business transactions involve an element of barter. Goods or services are exchanged for other goods or services rather than for cash alone. In such transactions, accountants must look to the fair value of the consideration surrendered—that is, to the amount of money that would have been received had the goods or services been exchanged for cash alone.

[Emphasis added.]

(Granof, Michael H., Financial Accounting: Principles and Issues, Prentice Hall Inc., 1977, p. 175)

. . . it should be recognized that businessmen often inflate the allowance as a means of cutting price.. . . Trade-in allowances are thus questionable evidence of the real worth of a used asset.” (page 369)

. . . Intermediate Accounting, second Canadian edition (McGraw-Hill Ryerson Ltd., 1975, pp. 368-70) by Meigs, et al.

Certain questions arise when an asset replaces one previously owned. If the previous asset is traded in on the new one, the only objective figure in the exchange is the cash paid out over and above the trade-in allowance. Often a trade-in allowance is inflated, with a compensatory inflation in the contract price for the new asset. When it is suspected this may have happened, a realistic trade-in price should be substituted in the accounting to avoid inflating the cost of the new asset and misstating the gain or loss on the asset traded in. (Skinner, R.M., Accounting Standards in Evolution, Holt, Rinehart and Winston of Canada, Ltd., 1987, page 160)

The value at which the purchaser records the new asset determines the gain reported in the financial statements on the disposal of the used asset, and may also influence financing options and income taxes payable.

An overstatement of the asset value would inflate any investment tax credit available. An overstatement of the gain could also create a capital gain with a corresponding overstatement of the undepreciated capital cost.

. . . the use of inflated trade-in values or list prices in valuing assets acquired in a trade-in transaction has determinable economic consequences to the advantage of the purchaser and the detriment of the Minister of National Revenue.

Opinion

I have reviewed generally accepted accounting principles for trade-in transactions, and conclude that the preferred basis for valuation of a new asset acquired in a trade-in transaction is the fair market value of the consideration given in exchange. This value may be determined either as the cash sale price of the new asset, or as the fair market value of the asset given up plus monetary consideration.

He was not called upon to express any opinion regarding the validity of the contract itself, irrespective of the numbers thereon.

Argument

In argument, counsel for the appellant took the position that since the contract of sale had been negotiated between two parties—at arm's length— and showed the relevant amounts to be $125,000—$104,500—and $20,500, the respondent should not be permitted to disturb this contract, and substitute therefor his own determination of the relative figures—$65,500—$45,000 and $20,500. The contract of sale had been prepared solely at the determination of the vendor—Dutchyshyn—and had been accepted by Mr. Zeiben. There was little in the argument of counsel which addressed the issue as it was posed by the respondent—"the determination of the capital cost of an asset, where part of its purchase price is paid by means of a trade-in", since counsel for the appellant had not introduced valuation evidence regarding the old tractor, resting content on the amount attributed to it in the contract as sufficient for his purposes. Counsel also relied on section 68 of the Act and quoted several portions from The Queen v. Golden, [1986] 1 C.T.C. 274; 86 D.T.C. 6138 (S.C.C.) and H. Baur Investments Ltd. v. M.N.R., [1988] 1 C.T.C. 2067; 88 D.T.C. 1024; affd [1990] 2 C.T.C. 122; 90 D.T.C. 6371, which he believed aided his client. He noted certain other case law, Alex Pashovitz v. M.N.R., [1961] C.T.C. 288; 61 D.T.C. 1167 and Jacob P. Schellenberg and Ruth Schellenberg v. M.N.R:, [1986] 1 C.T.C. 2608; 86 D.T.C. 1463.

Counsel for the respondent set out for the Court the factors which he considered should be taken into account in the determination of the issue. A main point pressed by counsel was that even though the Act did not define “cost”, the jurisprudence led to the conclusion that cost could be regarded in terms supported by the report of Mr. Stephen, essentially that the cost of something in these circumstances is that which is given up to obtain it. In addition, as counsel saw it, the Court was entitled to take into account the "economic reality” or the “true substance” of the transaction at issue. While counsel agreed the first part of the transaction—characterized by him as the parties reaching agreement on the difference of $20,500—was at arm's length and bona fide, he did not agree that the second part of the transaction— reaching the “trade-in allowance” of $104,500 was as a result of two-party bargaining, and therefore it should be rejected by the Court. Counsel's witness, Mr. Dopko, had demonstrated that the amount of $45,000 was a fair and reasonable valuation, not the $104,500 and it should be accepted, thereby upholding the assessment. Counsel recognized that the major point relied upon by the appellant was simply that the contract at issue was a valid, binding one, properly negotiated as far as the appellant was concerned. But counsel regarded as a serious defect in the appellant's case that the amount of $104,500 had not been supported by either valuation or accounting evidence brought forward by the appellant—therefore it should be rejected by the Court as an element in the determination of the cost of the new asset. Counsel did not invoke the provisions of section 245 of the Act, which could taint the transaction as one to "artificially reduce the income", nor did counsel characterize the transaction as some form of "sham", but some of counsel's quotations in argument do demonstrate the general thrust of counsel's approach:

. . . Mr. Zeiben is still hanging tough to the position that he has a $125,000 tractor, and that just is not reality.

. . . but you and I know that that’s not true. He doesn't have a $125,000 tractor. It’s something that's way less than that.

. . . You look at fair market value of that old piece and you don’t look at this inflated, artificially enhanced, imaginary, deceptive, whatever you want to call it, trade-in allowance.

. . . Okay, $125,000 list, less $20,500. There we are. The trade-in allowance is simply the list minus the cash that changes hands. In other words, it’s the plug figure. And that, in my submission, is the only reasonable conclusion to arrive at how this figure of $104,500 was reached.

. . . This is clearly, in my submission, a nudge, nudge, wink, wink situation.

. . . As far as the actual hard bargaining of the amount of money changing hands, that's arm's length, but as far as any other charade going on, it's non-arm's length.

[Emphasis added.]

Analysis

In my opinion, the cases of Pashovitz, supra, and Schellenberg, supra, whatever principles of law may be contained therein, do not assist this appel- lant. The particular references to section 68 of the Act which were perceived as assistance by counsel for the appellant and having relevance between this appeal and those of Golden, supra and H. Baur, supra, Were inadequate as support for the appellant, at least as I understood them, but I will comment later on section 68. This leaves the basic proposition of counsel for the appellant to be reviewed—that the contract of sale and purchase itself should not be disturbed by the respondent. Counsel had defined the problem in the assessment—as he saw it—that the Minister could not simply substitute one number in a contract with another number (in this case $45,000 as opposed to $104,500) without first showing some defect in the contract such as "non-arm's length", lack of good faith, etc. That is a powerful argument, as far as I am concerned, and one upon which the Minister himself has stood steadfast in many other situations—but usually where the shoe was on the other foot.

Neither Mr. Zeiben nor Mr. Dopko contended that the amount of $104,500 was the "fair market value” of the old tractor, but they stood firm, as I recall their testimony, on the fact that it was the trade-in allowance determined by the known elements of the contract which they both had accepted—the list price of $125,000 and the difference of $20,500. While the direction taken by counsel for the appellant in presenting his client's case may not have suited the respondent, in that it did not deal with the question as framed and presented by the respondent—the capital cost of an acquired asset under these circumstances—I regard that as the appellant's right. Counsel for the appellant, in my view, did not choose to fight the assessment on the respondent's grounds—he simply took the position that the appellant's records showed and used the financial information taken directly from the contract negotiated, as the appellant stated in good faith. The appellant's testimony certainly would lead to the conclusion that the amounts contained in the contract were much more acceptable to him than other amounts which might be suggested. But I am not aware that constitutes a contravention of any of the provisions of the Act which were brought into play in this appeal. Indeed it might be argued that the accounting and income tax result obtained (beneficial though it might be to the appellant) was perfectly available to him in view of the lack of specific prohibition or even contrary direction in the Act. It should be remembered that there was at least some modest "down-side" to this transaction for the appellant—he was required to recapture all the capital cost allowance taken in previous years on the old tractor, and he did have a capital gain on the trade-in of the old tractor, as he recorded it. I assume both of these amounts were adequately reflected in his income tax reporting—nothing contrary was brought to the attention of the Court. Also, the vendor Dutchyshyn recorded in his own books and records and reported for income tax purposes the mirror side of the same amounts at issue here $125,000, $104,500 and $20,500. I see nothing in principle about the contract itself or the circumstances surrounding its negotiation which should lead the Court to discard it as the main evidence in this trial. Certainly the testimony and evidence regarding it highlighted by counsel for the appellant leave it relatively undamaged.

Turning then to the respondent's examination of the contract, counsel only attacked it in oblique ways—first attempting to divide it into the two sets of negotiations, one set at arm's length, the other not at arm's length, and then casting a certain reflection on it in describing some elements of it in terms which were rather disparaging. In my view, that is not good enough. There were two amounts known and agreed to by both parties to the contract before it was prepared and signed—the "list rice” of $125,000 and the difference of $20,500. The obvious result is the much disputed amount of $104,500 regarded by the appellant as his “trade-in allowance”. There is no evidence that this amount as such was ever negotiated— I can think of no reason why it should ever have been the subject of any negotiations—and that, in my mind, dis- poses of the effort of counsel for the respondent to somehow break the contract into two separate sets of negotiations or question its “bona fides", and thereby discredit it.

I would summarize my view of the appellants presentation in this matter, by saying that whether he disproved the respondent's contention regarding the cost of the new asset may be irrelevant—the respondent has not shown reason why the contract at issue, as it was signed, should be disregarded or discounted. Unless the respondent can show conclusively in some other way that an amount other than $125,000 must be regarded as "cost", the appellant is entitled to use the "list price" as cost.

We must turn then to the evidence provided by the respondent to see if "cost" or “capital cost" has been established by the respondent in a more acceptable way than the position taken by the appellant. That comes down to two points—the valuation evidence of Mr. Dopko and the accounting evidence of Mr. Stephen. I am quite prepared to agree that if that evidence is sufficient to establish a more supportable "cost" amount under the circumstances of this case, and for purposes of the Act, then that should be decisive in favour of the respondent, even against the prima facie evidence of the contract itself submitted by the appellant. Also I am quite prepared to agree that $45,000 represents a fair and reasonable market value for the old tractor, and that $104,500 is not a fair and reasonable market value. But I am not aware of a basis upon which in the circumstances of this case the respondent is entitled to simply substitute that amount—$45,000—for the amount agreed upon by the parties in a contract that has not been discredited—$104,500. The only point to be determined then, is whether such a substitution may be made by the respondent based upon the conclusion reached by Mr. Stephen—and for the record I would repeat what I regard to be the essence of that conclusion:

I have reviewed generally accepted accounting principles for trade-in transactions, and conclude that the preferred basis for valuation of a new asset acquired in a trade-in transaction is the fair market value of the consideration given in exchange . . .

[Emphasis added.]

I do not wish to minimize Mr. Stephen's report, it was well researched and documented. Nevertheless, it is difficult to overlook the critical word above "preferred". For purposes of this appeal, however, I prefer not to give any substance to the word "preferred", and simply put the proposition very directly as I understand the report "—according to generally accepted accounting principles (GAAP), the basis for valuation of a new asset acquired in a trade- in transaction is the fair market value of the consideration given in exchange". As I read it, there must be added by implication,—"notwithstanding amounts agreed to by the parties in a bona fide contract". Certainly there is jurisprudence which permits, in fact advocates, the appropriate utilization of GAAP under given circumstances, and I recognize that. There is also sufficient support in the jurisprudence for the respondent to reject an amount designated as "cost" between parties to an agreement, based on the interpretation of the contract itself for any one of a variety of reasons, and I accept that. There are certainly some provisions in the Act permitting the respondent to apportion or alter agreed upon amounts under given circumstances, and that can be done. But I am not as clear that either the provisions of the Act relied upon by counsel for the respondent, or the jurisprudence relevant thereto, give the respondent the support sought for this assessment. Counsel is saying, as I understand it, for "cost" in this set of circumstances—where there has been an asset traded, and there is a difference between the "trade-in allowance” agreed to by the parties and the "fair market value" as determined by a subsequent valuation report, that the respondent is entitled to make a substitution in the respondent's interests and disregard the agreement of sale between the parties, and that such a procedure is warranted, in fact mandated, by GAAP. It would also seem to me that the way the respondent has posed the issue in this case, such a change in the "cost" could be applicable in all similar cases where a "trade-in" is involved, indeed perhaps in any situation defining "cost". I am not convinced that the jurisprudence regarding the use of GAAP goes that far. Since there is no definition of “cost” in the Act, it is my view that the legislation intended that "cost" should be determined in case of a dispute by all the facts surrounding the issue—including as a main factor any agreement between parties relevant to the issue.

As I see it, that still leaves the main argument of the appellant undamaged and the main evidence of the respondent unconvincing. Counsel for the respondent readily and frankly advanced that there was no case law or record directly on point, and I do recognize the challenge which faced him, and under the circumstances he is to be commended for the complete and detailed presentation he made. Much of the case law referenced dealt with questions regarding "capital" as opposed to "income" expenditures, or the determination of amounts of “capital costs" under given circumstances [1] and are not directly relevant in my view. There are no direct references to any comparable "trade-in" situation. However, I would note that in Souwesto Broadcasters Ltd. v. M.N.R., [1974] C.T.C. 2112; 74 D.T.C. 1081 (T.R.B.) there are comments on pages 2113 and 2115 (D.T.C. 1082-83) in a situation of some similarity which give me comfort:

The thrust of the respondent's argument is that there is no evidence of any value to what the appellant company gave up by virtue of agreeing to this change of frequency; I think it should be said at this stage that the two parties were unquestionably acting at arm's length. [2]

In this case, it is clear to me that what was given for the right to use this frequency had a value far in excess of the plant itself, and that the parties have arrived, by their own means, at what this asset, namely, the frequency of the appellant company, is worth . . .

On the other side of the coin, I have read with great interest the detailed case of Donald MacLean Lindsay and Jacqueline Lindsay v. M.N.R., [1990] 1 C.T.C. 2245; 90 D.T.C. 1085, a recent judgment of this Court. From that case, counsel for the respondent in this matter noted at page 2254 (D.T.C. 1092):

Furthermore, in circumstances where the parties are acting in concert and where a common purpose exists the transaction may not necessarily be at arm's length even though an interest may also be present. (See Zeal and Gold v. M.N.R., [1973] C.T.C. 129; 73 D.T.C. 5116; Swiss Bank v. M.N.R., [1972] C.T.C. 6470; 71 D.T.C. 5235 (S.C.C.)).

I have already indicated my dissatisfaction with counsel's efforts to provide a basis in the appeal for the "non-arm's length” charge. But I would also add that the learned judge in Lindsay, supra, expressed his rejection of the testimony heard, also on page 2254 (D.T.C. 1092) in a lengthy recital from which I shall only quote: “I do not for one moment believe that she was motivated to transfer the property to the Lindsays either because she was going on a religious crusade to India or because of their promise to provide her with shelter if the occasion ever arose." While Mr. Zeiben may not have been completely naive about the possible benefit available to him, I am certainly not prepared to reject his testimony in a manner similar to that of the Lindsay case, supra. Nothing was brought out which would indicate improper conduct or collusion between Zeiben and Dutchyshyn—at most Dutchyshyn wanted to sell the new tractor, and Zeiben wanted to dispose of his old tractor and acquire the new one, although under the most favourable circumstances which he could obtain, including any benefit available to him under the Act.

I would also note the words of caution regarding the role of the Court in interpretation, expressed in Stubart Investments Ltd. v. The Queen, [1984]

C. T.C. 294; 84 D.T.C. 6305, at page 316 (D.T.C. 6322-23): "The question comes back to a determination of the proper role of the court in construing the Income Tax Act in circumstances such as these where the Crown relies on the general pattern of the Act and not upon any specific taxing provision." I am guided also by comments such as those to be found in Foothills Pipe Lines (Yukon) Ltd. v. Canada, [1990] 2 C.T.C. 448; 90 D.T.C. 6607 (F.C.A.) wherein Mr. Justice Urie said on page 553 (D.T.C. 6612):

In Neonex International Ltd. v. The Queen, [1978] C.T.C. 485 at 499, I had occasion to express the principle in this way:

There is no doubt that the proper treatment of revenue and expenses in the calculation of profits for income tax purposes with a view to obtaining an accurate reflection of the taxable income of a taxpayer, is not necessarily based on generally accepted accounting principles. Whether it is so based or not is a question of law for determination by the Court having regard to those principles (see MNR v Anaconda American Brass Ltd [1956] AC 85; [1955] CTC 311; 55 DTC 1220; see also Associated Investors of Canada Ltd v MNR, [1967] Ex CR 96; [1967] CTC 138; 67 DTC 5096).

In this case, therefore, while the evidence of the three experts must be given due consideration and weight as matters of fact, their opinions are not determinative of the issue before us which is one of law for the Court to decide.

and

The problem was therefore strictly a legal one totally outside the expertise of accountants. There was nothing useful to be drawn from opinions that simply accepted as a promise a particular solution to the very problem to be resolved.

I believe my conclusion in this matter to be consistent with the findings regarding cost arising out of such jurisprudence as The Queen v. Sterling, [1985] 1 C.T.C. 275; 85 D.T.C.5199, and Bodrug v. Canada, [1990] 2 C.T.C. 324; 90 D.T.C. 6521, even though in those significant cases, the points at issue were somewhat different than that facing the Court in this instant matter. Further (and I repeat) there has been no evidence or argument presented by the respondent upon which the Court could clearly conclude that the very taxation result which the Minister of National Revenue finds unacceptable in this matter—the advantage under capital gains legislation, and the investment tax credit is not a result precisely determined by the Act to be available to taxpayers in the circumstances of Mr. Zeiben. I do not say such a result was intended by the drafters of the Act or that they considered it would arise, I merely note that it was not shown to me that such a result was illegal or that it could not arise out of the words in the Act. Again certain clear restraints may be seen in Stubart, supra, on the Court rejecting the results obtained by taxpayers from their own analysis and implementation of income tax legislation, as long as that result does not appear to the Court to violate the Act. Indeed, I find considerable comfort in a comment by Wilson J, (Ritchie J, concurring) who said in agreeing with the main observations of Estey, J., all of the Supreme Court of Canada, on page 318 (D.T.C. 6325) of Stubart, supra:

I am also of the view that the business purpose test and the sham test are two distinct tests. A transaction may be effectual and not in any sense a sham (as in this case) but may have no business purpose other than the tax purpose. The question then is whether the Minister is entitled to ignore it on that ground alone. If he is, then a massive inroad is made into Lord Tomlin's dictum that "Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it would otherwise be”: /.R.C. v. Duke of Westminster [1936] A.C. 1 at p. 19. Indeed, it seems to me that the business purpose test is a complete rejection of Lord Tomlin's principle.

In summary I am far from convinced that there is anything inherently improper with the agreement of sale at issue (Exhibit R-1); nor am I satisfied if it should require revision that alterations to it are warranted solely on the basis of GAAP.

Before finalizing these reasons and allowing the appeals, I feel it is necessary for the record to pick up the threads of certain references I have made therein to the possible application of section 68 of the Act and the perspective that might be taken of the contract at issue looking at it with that section of the Act in mind. Section 68 of the Act read as follows for the years under appeal:

Amounts in part consideration for disposition of property.— Where an amount can reasonably be regarded as being in part the consideration for the disposition of any property of a taxpayer and as being in part consideration for something else, the part of the amount that can reasonably be regarded as being the consideration for such disposition shall be deemed to be proceeds of disposition of that property irrespective of the form or legal effect of the contract or agreement; and the person to whom the property was disposed of shall be deemed to have acquired the property at the same part of that amount.

In argument, counsel for the respondent noted that the "economic reality" and the "true substance" of the contract should be examined. It would not be difficult to regard the "economic reality" of the contract to be one wherein Zeiben sold his old tractor to Dutchyshyn for $104,500, Dutchyshyn sold the new tractor to Zeiben for $125,000, and Zeiben paid Dutchyshyn $20,500 as the difference. Other than some limited inconclusive references of Mr. Zeiben to the contrary, there is nothing to support any finding that he entered into any direct negotiations with Mr. Dutchyshyn regarding the determination of the amount of $104,500 as fair market value in the disposition of the old tractor. On the other hand, there is clear evidence that Mr. Zeiben was aware from Mr. Dutchyshyn of the "list price" of the new tractor at $125,000. There is no question that there was "negotiation" regarding the difference of $20,500. It is difficult to conceive of the determination of a "price difference” to be paid without the price of at least one asset or the other—new or old—being taken into consideration, In this instance, it was the “list price" of $125,000 to which Zeiben agreed either explicitly or implicitly. In any event, the "list price" suggested by Mr. Dutchyshyn and accepted by Mr. Zeiben of the new tractor was known to Mr. Zeiben before he signed the contract, since it was the first amount entered on the contract. Accordingly, it would not be unreasonable to look at the contract in the following way:

The only critical amount in dispute is the $104,500 above—in effect taken directly from the contract and proposed by the appellant as the value to be attributed on the disposition of the old tractor for income tax purposes. The amount of $104,500 is the mathematical result from the two known figures $125,000 and $20,500 but it can also be regarded as the amount received by Mr. Zeiben as "proceeds of disposition” from his old tractor. The fair and reasonable market value of the old tractor has been independently established at the trial to be no greater than $45,000. As I see the evidence, Mr. Dutchyshyn would not have paid more than $45,000 for the acquisition of the old tractor in a straight purchase without the concurrent commitment from Mr. Zeiben to buy the new tractor at a price of $125,000. It is equally clear that Mr. Zeiben would not have paid $125,000 just for the new tractor without disposing of his old tractor for the amount calculated to be $104,500 on the agreement of sale. It could be argued that view deals with the "economic reality” and "true substance" of the transaction in an enlightened manner without scrapping the contract.

In light of the comments made in Canadian Propane Gas and Oil Ltd. v. M.N.R., [1972] C.T.C. 566; 73 D.T.C. 5019, regarding the application of paragraph 20(6)(g) of the previous Act (e.g., expectation), and in The Queen v. Golden, supra, (e.g., contract right) on the application of section 68 of the current Act regarding "something else”, it could be realistic to read section 68 for purposes of these appeals as follows:

Where an amount ($104,500) can reasonably be regarded as being in part consideration for the disposition of any property (the 2390 tractor) of a taxpayer (Mr. Zeiben) and as being in part consideration for something else (the commitment to purchase the 4690 tractor at a price of $125,000), the part of the amount that can reasonably be regarded as being the consideration for such disposition ($45,000) shall be deemed to be the proceeds of disposition of that property (the 2390 tractor) irrespective of the form or legal effect of the contract or agreement; and the person to whom the property was disposed of shall be deemed to have acquired the property at the same part of that amount.

As a result of a direct request from the Court for comments on the above view, counsel for the appellant expressed direct disagreement with both the rationale and the conclusion. Counsel for the respondent regarded section 68 in a somewhat more conventional way, dealing largely with the allocation of "an amount" between, for example, land and buildings. In a specific rejection of the rationale above counsel noted:

The “amount” in the first line of s. 68 is something that is received by one of the parties to the transaction. In the case at bar, the taxpayer did not receive an amount. He received a new tractor. It was the dealer who received an amount. To say that the taxpayer received $104,500 is to distort the transaction between the dealer and the taxpayer.

Section 68 of the Act, together with the enlightenment provided regarding it from the higher Courts, could be the vehicle through which the "true substance" of this contract might be more adequately examined. But that is not the proposition from the respondent directly before the Court at this time.

I readily admit, however, that I have been sorely tempted to further consider the provisions of section 68 of the Act as I believe they could obtain in these circumstance, in compliance with the comments of the learned judge in Graves v. Canada, [1990] 1 C.T.C. 357; 90 D.T.C. 6300 to be found at page 366 (D.T.C. 6307):

In my view, it is essential to consider those cases and whether it is appropriate to apply section 20(10), even though this was not directly addressed by the parties. To do otherwise would be to ignore the developing jurisprudence since the decision of the Tax Court in this case in 1983.

And while on a slightly different point, the House of Lords case of Trinidad Lake Asphalt Operating Co., Ltd. v. Commissioners of Income Tax for Trinidad and Tobago, [1945] A.C. 1 (P.C.) at page 10 thereof would lend considerable weight to this perspective of regarding the various elements of this contract separately:

Was there, then, such a transmission? No actual money passed. If the dividend had been transmitted by a banker's draft sent by the appellant to Barber it could not have been questioned that the dividend had been transmitted, but the two companies might do their own banking transactions between themselves and dispense with the intervention of banking facilities. The transaction involved the sending to Barber by the appellant, and receipt by Barber from the appellant, of the dividend. This was effected by the agreement that payment should be made by cancellation of the debt for goods supplied. This method had been mutually agreed before the dividend was declared. The agreement was carried out by each arty making corresponding entries in its books. These were not merely bookkeeping entries. They represented the actual receipt of the dividend by Barber, and the actual payment of it by the appellant to Barber, and concurrently, the actual receipt by the appellant from Barber of payment of his debt for goods supplied.

Conclusion

In the end analysis, the contract of purchase and sale between the parties should remain as the major item of evidence, and it has not been discredited in such a way as to warrant the Court rejecting it as such. The appeals are allowed and the entire matter is referred back to the respondent for reconsideration and reassessment. The appellant is entitled to party-and-party costs.

Appeal allowed.