David J. Groeneveld v. Minister of National Revenue, [1990] 1 CTC 2314, 90 DTC 1211

Kempo, T.CJ.:—These appeals concern the appellant's 1979, 1981 and 1982 taxation years and were heard on common evidence.

Part I

The 1979 Taxation Year Appeal

The appellant's 1979 taxation year appeal concerns the respondent's inclusion of the amount of $46,738.71 in the appellant's income for the year as having been appropriated from Dunbow Holdings Ltd., qua shareholder, pursuant to paragraph 15(1)(b) of the Income Tax Act (the "Act"). Penalties were also assessed with respect to the alleged appropriation pursuant to subsection 163(2) of the Act.

The facts are fairly straightforward. The appellant operated a farm on lands through the company, Dunbow Holdings Ltd. ("Dunbow") of which he was the controlling shareholder and, essentially, the sole manager and operator.

Three cheques totalling $46,738.71 representing income to Dunbow, drawn by Cargill Grain Co. Ltd., and made payable to the appellant were deposited to the appellant's personal bank account. These cheques were given to the bank manager who made the deposit. The April 1979 banking statements confirmed that this amount was put into the appellant's personal account on April 2,1979 and that on the same day his account was debited $40,000 which in turn was credited to Dunbow's account.

In the spring of 1980 the appellant provided his accountants with the information necessary for them to prepare the income returns of both himself and Dunbow. A two-page document, Exhibit A-14, was prepared by the appellant for his accountants in which he purported to itemize his income and its sources. There was an entry dated April 2 for $46,738.71 with the notation "rapeseed (Dunbow)" next to it. A summary that was prepared by the appellant's accountants from the documents provided by the appellant included that amount coming in as of April (Exhibit A- 17).

Mr. Donald Grant Buchanan gave evidence on behalf of the appellant. He is a chartered accountant of 38 years of experience in Calgary. The appellant and Dunbow had been clients of his firm since 1973. His evidence was that it was the error of his office in failing to have included the subject amount in either the appellant’s or Dunbow's returns of income. Upon viewing the April banking statements of the appellant and Dunbow, he said he had queried the appellant as to the $40,000 credit memo appearing in the Dunbow account. Mr. Buchanan said he was told by the appellant that it was a loan from himself. The appellant then proceeded to endorse a written explanatory notation thereon that it was a "loan from D. Groeneveld".

Having received this description, Mr. Buchanan entered it as a loan transaction in Dunbow's shareholder loan account.

The upshot of the above was that the $46,738.71 grain sales income had not been reported by anyone and that the shareholder account was overstated by $40,000 as of Dunbow's year end, October 31, 1979. The appellant acknowledged that the unreported amount was large and that it represented approximately 25 per cent of total sales. He also acknowledged that the $6,738.71 remained in his bank account and that it had not been either transferred back to Dunbow or actually put back into its account.

The whole matter was discovered during the respondent's tax audit conducted early in 1982. By letter dated April 22, 1982, Mr. Buchanan advised Revenue Canada as to Dunbow's understatement of grain sales and asked for an adjustment of the tax return to reduce its loss by that figure. By correspondence one year later Mr. Buchanan acknowledged to Revenue Canada that the reporting default was that of the firm and not of the taxpayer.

Following the discovery, Mr. Buchanan made a debiting entry on Dunbow's shareholder loan ledger of $46,738.71 following the October 31,1979 balance of $ 159,468.89 (which had included the $40,000 "loan") thus, ex post facto, reducing it to $112,730.18. The adjustment removed the whole amount from the loan account.

No evidence qua penalties was called by counsel for the respondent. Following the testimony of the appellant's case, counsel for the respondent advised that the penalties relating to the appropriation should be vacated. The Court concurs.

Counsel for the appellant submitted that no appropriation of any amount had occurred for two reasons. Firstly, at the time of the alleged appropriation the shareholder loan account was something in the amount of $159,000. Secondly, the whole matter arose solely by reason of the accounting firm's error.

Analysis

I will deal with the second argument first. The case of G.D.L. Simon v. M.N.R., [1985] 1 C.T.C. 2116; 85 D.T.C. 105 (T.C.C.) was cited as authority for the proposition that an error should not be held against a taxpayer where it was created by the taxpayer's accountant. With respect, I do not agree that the decision stands for such a broadly stated proposition. The facts of that case were that a series of accounting errors resulted in an overstatement of gas purchases resulting in an understatement of profit. Solely and deliberately for purposes of balance sheet reconciliation, the accountant on his own volition made a credit entry in the shareholder loan account. All entries were erroneous, and all were made without the taxpayer's advice, knowledge, input or approval. That judgment also factually noted the absence of movement of funds or property, and that neither party was (or could have been for that matter) the richer or poorer before or after the event.

The facts of the case at bar are materially different. The effect of what transpired was that the $40,000 did not go to Dunbow in the form of an income receipt but rather went in the form of a loan. The $6,738.71 remained with the appellant.

Counsel for the respondent in written argument put the situation in the following way with which I concur:

22. It is of no help to the Appellant that the company owed him more money than the amounts appropriated. Although the Appellant could have shown and recorded the amounts appropriated as a repayment of shareholder loans he did not record the appropriations in this fashion.

23. In Samuel Tobis v. M.N.R., 81 D.T.C. 126 (TRB) the failure to record amounts appropriated against shareholder loans meant those amounts were properly included in income. At page 131 the Court said:

In the Boards opinion, the principal of the application of the mutual debt does not automatically apply. The mutual debt must be known by the two parties and admitted by the two parties. A company is a legal entity different from the shareholder, even if a company acts through its officers and shareholders .. . .

. . . the mutual debt a principal cannot be applied in application of the Income Tax Act except if, in each year involved, the amounts retained would have been recorded in the accounting books of the company according to the general principles of accounting.

24. If not for the Respondent's auditors, the Appellant would have been free to take the $40,000.00 out of Dunbow as a loan repayment and escape any tax liability. ‘After the fact" (hearing transcript page 90) attempts by the Appellant's accountants to adjust the records to reflect a more favourable outcome, are of no help to the Appellant. The Court is not to determine the most favourable accounting treatment the Appellant could have used, but it must look to what treatment the Appellant in fact used. Similarly, the Appellant's accountants cannot, after the Respondent's auditors determine the Appellant failed to report income in his return of income, alter the records to reflect a more favourable treatment.

25. Clearly, in the 1979 taxation year, funds properly belonging to Dunbow were appropriated by one of Dunbow's most prominent shareholders being the Appellant, in the amount of $46,738.71. That amount is properly included in computing the income of the Appellant for the 1979 taxation year. Any other finding would require re-writing history.

Conclusion

In the result the paragraph 15(1)(b) shareholder appropriation assessment is upheld. However the appeal is allowed, in part, as conceded by counsel for the Minister, and the matter referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the penalties levied pursuant to subsection 163(2) of the Act be deleted.

Part II

The 1981, 1982 Taxation Year Appeals

The appellant's appeals with respect to his 1981 and 1982 taxation years concerned the issue of Valuation day value at December 31, 1971 (hereafter referred to as "V-Day value”) of approximately 1,576 acres of mixed farming land located some 15 miles southeast of Calgary, Alberta (hereafter sometimes referred to as the “subject property").

The appellant was raised on the land and had farmed it for the better part of his life. The property sold for $2,150,000 in 1981.

After speaking to his neighbour who had already sold land immediately adjacent to his own and also to his chartered accountant advisors, the appellant adopted a V-Day value of $500 per acre. This transposed to an overall value reported as $783,500. An additional amount of $236,000 was added thereto representative of the appellant's view of the V-Day value of the gravel reserve present on the river frontage portion of the subject property. The total amount reported therefore was $1,019,500.

The respondent, on his reassessment, considered the V-Day value to be in the area of $167.20 per acre, or $262,000, with no value being attributable to gravel deposits.

The respondent also assessed subsection 163(2) penalties under the Act on the premise of gross negligence being attributable to the appellant in his reporting the V-Day value of $1,019,500 when it was not more than $262,000 and that the appellant had grossly overstated the value by $761,173. The penalty was $25,646.59.

The respondent's counsel sought to file an amended reply to the notice of appeal before commencement of the hearing. The proposed amendment sought to obviate a value conceded in the reply of $275,000, and to substitute an amount of $215,000 which purportedly was to conform with the evidence about to be called by the respondent. The filing was refused as premature. It was also noted that the substituted amount of $215,000 was lower than the assessed amount of $262,000. Such a filing prior to the hearing would have permitted tacit recognition of the Minister appealing from his own assessment. Counsel for the respondent advised the Court as follows:

MR. BESLER: Perhaps if I can explain, and maybe perhaps alleviate some of my friend's difficulty with the second appraisal report that we have provided him. Unfortunately, the first appraiser which we would have liked to have presented to the Court is no longer available to us to present to the Court. Therefore, a second appraisal was done by a different appraiser, in order that we would be able to present something to the Court. The values changed, and we're just hoping to present something to the Court to reflect that.

I believe in any event the Court will be determining the value of the property. If the Court in its wisdom decides that the V-Day value was in excess of the $262,000.00, then it should be referred back to the Minister on that basis. If it was less than that, then the appeal with respect to that would be dismissed.

[T. 10, 1.26; T. 11, 11.1-15]

The appellant testified that Mr. Orville Rowland, who had land immediately south of the subject property, sold around 2,500 acres in 1976 and that he had taken a V-Day value of $575 per acre. The main reason for this related to an option transaction in the summer of 1971 on 5,500 acres of land abutting the Rowland lands at around $400 per acre. These optioned lands will hereafter be referred to as the “Zeus” property.

The respondent did reassess Mr. Rowland with respect to the V-Day issue of his property. An appeal was taken and a judgment was given October 13,1983 by Judge Tremblay of the Tax Court of Canada, Court file Number 82-1127(IT) wherein he found that the V-Day value of the Rowland farm land was $286 per acre.

The subject’s reassessment was made on June 25, 1984. The Rowland appeal had then been determined, and the Zeus sale was then known. Neither of these transactions was reflected in the respondent's appraisal of $262,000 upon which the assessment was based. However, the same omission pertained to the written narratives supplied by the valuators who gave evidence for each side. More will be said about this later.

The appellant had, on December 15, 1980, gained a written opinion (Exhibit A-4) that the quantity of recoverable gravel on the subject land abutting the Bow and Highwood Rivers was 600,000 cubic meters. He and his accountant, Mr. Buchanan, decided to use 60 cents a tonne applicable to the 1981 sale of the two-thirds of the gravel reserves and, after applying a present-value discount, arrived at a V-Day value for these gravel rights of $236,000. This aspect of the V-Day value was not pursued further at trial. The appraisers called for both sides agreed on only two things. First, the sand and gravel reserves had no indication of any commercial viability on V-Day. Second, the subject property's highest and best use at V-Day was a continuation of its existing use as an agricultural endeavour.

The Appellant’s Expert

Mr. W.M. Robertson, an accredited real estate appraiser with some 35 years experience, gave evidence for the appellant. He had done appraisals on a self- employed basis in the Calgary area since 1976.

In preparing for this case, Mr. Robertson gathered the market data he used in his written narrative, Exhibit A-12, from the file data at Revenue Canada, Calgary. Land titles searches were then done to verify the sale prices. Following his analysis of what he had perceived to be 11 different sales indicies, including application thereto of adjusting factors for time, location, soil ratings and cultivated land, the attributable V-Day value per acre was $402.18 at the highest and $179.86 at the lowest. He rated the two highest ones, $402.18 and $397.73 per acre respectively, as "inferior" to the subject land and the two lowest, $179.86 and $196.13 per acre respectively, as "average" compared to the subject. There were three rated as a "good" comparable. These, per acre, were $269.39, $286 and $310. He then concluded that $310 per acre was the appropriate value to be attributed at V-Day for a total of $486,780.

Mr. Robertson said he was unaware of the Rowland farms situation although he had driven by that land. He felt the location of the subject property, on the confluence of the Highwood and Bow River, made it more valuable because of its aesthetics and easy access to water for the cattle. He opined that his comparable number one property, being 137.6 acres located on the Bow River approximately one mile west of the subject, was a good one notwithstanding that this sale had occurred in March of 1973 to a known developer.

Mr. Robertson's comparable sale numbers 2 and 4, located immediately across the Bow River to the north of the subject property had been broken down into two separate sales. In fact, they were part of the same transaction which had included a further portion in excess of four acres at $2,500. Mr. Robertson's analysis in treating these as separate caused him, inexplicably, to time adjust one part at -6.89 and the other at -7.86 resulting in a time-adjusted price per acre amount of $198.11 for one and $226.14 for the other. All other adjustments were identical. Both had received an "average" rating to this subject. Matters of access to any of the comparables on the other side of the Bow River had not been examined.

Mr. Robertson relied on two information sources. The first was Revenue Canada's data bank. The second was the certificate of title. Had he obtained and examined the transfer documents registered at the land titles offices which created these titles, he would have readily seen that his sale comparables 2 and 4 were part of one sale, and that his sale comparable number 3 was also part of a larger sale transaction. Indeed sales 2, 3 and 4 were all to the same purchaser (Exhibits R-3 and R-4). Mr. Robertson's sale number 7 was sold by agreement for sale in 1968 and not as at the March 1971 date. This also was the case for sales numbers 8 and 9 in that they were one sale which happened in August of 1970 and not April 23,1971 as assumed by Mr. Robertson.

Mr. Robertson did not attempt to speak to any of the purchasers. He ignored the fact that sale numbers 1 and 6 were to purchasers in the development or construction business, and that sale number 5 was obviously to a syndication involving six apparently unrelated purchasers. He said that while he was appraising the subject land with agricultural-use as its highest and best use, the land had encompassed some aesthetic river-view aspects that "may" have made it amenable to some sort of development type of potential.

In summary, Mr. Robertson estimated the value of the subject property at $310 per acre or $486,780. As will be shown, the respondent's appraisers came in at $137 per acre, rounded out to $193,500. These figures exclude the house and other structural improvements located on the subject.

The Respondent's Expert

Mr. Robert Helmers, an accredited real estate appraiser since May of 1986, is an employee of Revenue Canada in the Real Estate Section. The Court ruled that his employment with Revenue Canada did not have the effect of compromising his integrity or professionalism as a duly qualified and experienced appraiser. Mr. Helmers was qualified to give expert testimony on the subject matters at issue. His paucity of experience in the Calgary area is only an element of weight.

Mr. Helmers had also considered Mr. Robertson's sales 2, 3 and 4. They were his sales 5 and 6. The purchaser of this property was Maldeghem Farming Company Limited who paid $750,000 for close to 4,000 acres of land across the Bow River and immediately north of the subject land. Mr. Helmers attributed higher time and agricultural adjustment factors than Mr. Robertson, he used the same location adjustor, and he applied an access adjustment of 2.5 per cent which Mr. Robertson had not considered. The net effect is that Mr. Helmers opined V-Day value (Mr. Robertson's amounts are in brackets) at $129.69 and $138.71 ($196.13, $179.86 and $223.88) respectively. Mr. Helmers concluded that these two represented the lowest value range; Mr. Robertson had viewed them as average.

Mr. Helmers considered a greater section of farm land some eight miles north of the subject as at the high range. Its transfer date was March 1971, it sold for $150 per acre and its adjusted value was $151.92 per acre. He acknowledged that it required adjustments totalling 27.5 per cent when compared to the subject.

To Mr. Helmers a property transaction which occurred on September 28, 1971 of 160 acres located two miles south of the subject was the most comparable. He made a ¢4.5 per cent adjustment for time, nil for location, -2.5 per cent for access and -10 per cent for agricultural capability. With adjustments totalling 17 per cent, he arrived at $137.16 per acre. He then estimated the value of the subject property at $ 137 per acre and rounded it out to an aggregate of $193,500.

Mr. Helmers said he was not aware of any matters regarding the Rowland V-Day value dispute nor of its judicial outcome. Similarly he was not aware of the Zeus transaction until it was brought to his attention after his written narrative had been completed. He acknowledged that the bulk of the Zeus property was closer to the subject than the bulk of his comparables. He was of the view, however, that he would not have employed it as a comparable in any event because its intended use, on purchase, was as a satellite town and that the investor-purchaser was marshalling that land for that purpose and not for agricultural-use purposes. This transaction had occurred via an August 13,1971 option payable over seven years at a nondiscounted “face value" of $381 per acre. Apparently, its proximity to a railroad right of way, water rights to the Highwood River and its view of the mountains were all desirable factors for that purchaser's purposes.

Analysis

The litigated V-Day value encompassed only the land. The record indicated that both parties had agreed that the amount of $130,000 was attributable to the V-Day value of the residence and improvements on the subject lands.

The Zeus property transaction is not to be accorded much weight in the whole matter essentially for the reasons described by Mr. Helmers which I will not repeat. It’s particular attributes are significantly dissimilar to that of the subject's. Further, the option amount has not been adjusted. Therefore the Zeus matter is viewed as a backdrop to the kind of activity that was going on in the general area. I discern that that activity, however, had no impact one way or another on the V-Day value of the subject.

Counsel have submitted that the other's expert's evidence and opinions should be discarded in toto for various and diverse reasons. There are, however, helpful and non-helpful matters encompassed in the testimony and opinions of both.

I have read the reasons for judgment given by Tremblay, T.C.J. in the Rowland Farms appeal and note that Mr. Dixon was also counsel for that taxpayer. The reasons do not give any particulars of any of the comparablesales indicies used apart from these words:

. . .The price of land, I apply the principle that the best comparable is the one, in this case, which is the next door of the subject property because the size, the soil and my experience is that in a case of this nature we always chose a comparable of this nature, so I ignore the other comparables, of the Appellant and the comparables of the Respondent. However, I have an adjustment to make.

The appellant made adjustment because of the option of 10%, an adjustment of 10%, and an adjustment of 5% concerning the location and especially based on the river, which in fact crossed the land. My opinion is that the river gave more value, or increased the value of about 15%. This means that there is an adjustment of 25% and the price per acre, fair market value is $286.00.

While I agree with respondent-counsel's submission that there was no evidence before me identifying the "property next door" nor any other comparable sales indicies employed, the decision nonetheless must, like Zeus and all the other transactions raised, be accorded some recognition in context of the whole.

The Rowland Farms property and the appellant's subject property are adjoining and are of almost identical size and use. I believe it would be unreasonable and perverse to ignore the decision of Judge Tremblay, and to tell the appellant that his property was worth $137 per acre while his neighbour's property was double that amount. Nothing came up in the evidence from which it may be inferred that the sales indicies employed by both appraisers in this case were not readily available for the Rowland Farm case.

In my view both the Zeus and the Rowland matters must be taken in context of the whole of the evidence. Each counsel so vigorously attacked the other side's comparables that the result was almost a demolishment of the value of any of it.

I have considered the strengths and weaknesses of all the comparables employed in this case, and have come to the opinion that $137 was too low and $310 was too high. The answer lies between Mr. Robertson's number 1 sale indicia of S 1/2 34-21-28 W4 adjusted to $269.39 per acre and Mr. Helmer's number 2 sale indicia of N 1/2 23-20-28-W4, a sale to Rowland Farms, adjusted to $135.18 per acre.

Conclusion

Given the evidence presented it is my opinion that, on a balance of probabilities, the V-Day value of the subject land excluding the home and improvements approached the $269 per acre amount and that it was $250 per acre. When multiplied by the 1,576 acres involved, it comes out to $394,000. Accordingly the appellant has succeeded on this issue in part.

At the conclusion of the hearing, counsel for the respondent announced no evidence would be called respecting the subsection 163(2) penalties levied and that they should be vacated. Given the testimony heard, I heartily concur.

Part III

Costs

The appellant has substantially succeeded in these appeals. It is obvious that this is so concerning the 1981 taxation year V-Day value issue, and consequentially so too as to the 1982 taxation year reserve issue. The appellant has also, in my view, substantially succeeded in the 1979 taxation year appeal. The subsection 163(2) penalty matter was a very substantive amount. One set of costs are awarded to the appellant on a party-to-party basis. The matter does not merit the requested costs on a solicitor-client basis as no misconduct connected with the litigation has been shown; see Amway Corporation v. The Queen, [1986] 2 C.T.C. 339 (F.C.A.).

Appeal allowed in part.