H. Baur Investments Limited v. Minister of National Revenue, [1988] 1 CTC 2067, 88 DTC 1024

Taylor, T.C.J.: — These are appeals heard in Toronto, Ontario, on November 4, 1987, against income tax assessments for the years 1981 and 1982 in which the Minister of National Revenue had rejected the appellant's allocation of the selling price of a parcel of real estate, and substituted therefor a different breakdown between land and building. The critical information from the notice of appeal reads:

1. The Appellant purchased in 1973 certain real property comprising land and an apartment building located at 2850 Jane Street in the City of North York in Metropolitan Toronto (referred to herein as the ‘Jane Street Property'). The purchase price was $2,806,322 and was allocated as follows:

Land	$ 493,105
Building	2,259,450
Equipment	53,767
Purchase Price	42,806,322

2. The Appellant owned the Jane Street Property continuously from 1973 until December 1980 when it was sold for $3,000,000 to Kungs Trading Co. Ltd. (referred to herein as 'the Purchaser") . . .

3. The Agreement of Purchase and Sale between the Appellant and the Purchaser was dated September 8, 1980 and did not allocate the selling price as between land and building. The Appellant and the Purchaser signed a second document entitled "Interim Agreement Amendment" dated September 26, 1980 in which, inter alia, the selling price was allocated as follows:

Land	$ 460,000
Building	2,530,000
Equipment	10,000
Selling Price	$3,000,000

4. Although the Appellant signed the document dated September 26, 1980 allocating the selling price as in paragraph 3 above, the Appellant knew the neighbourhood well and honestly thought that the following allocation was more reasonable having regard to the relative values of Jane Street Property in September 1980:

Land	$1,000,000
Building	2,000,000
Equipment	—

5. After the Jane Street Property was sold to the Purchaser, the Appellant instructed a qualified appraiser to report on the value of that property as at December 1, 1980. The Appellant was advised that the fair market value of the Jane Street Property as at December 1, 1980. The Appellant was advised that the fair market value of the Jane Street Property as at December 1, 1980 was as follows:

Land	$1,246,000
Building	1,754,000
Equipment	—
Selling Price	$3,000,000

7. . . . the Minister of National Revenue reassessed, . . . and the Minister appears to have assumed that the Appellant's proceeds of disposition for the Jane Street Property should be allocated as follows:

Land	$ 460,000
Building	2,530,000
Equipment	10,000
Selling Price	$3,000,000
From the reply to notice of appeal:

The Respondent relied, inter alia, upon section 68 and subsection 13(1) of the Income Tax Act, R.S.C. 1952, chapter 148 as amended.

Further, it was the Minister’s position that:

The allocation of proceeds between the Appellant and the purchaser being a reasonable allocation arrived at by arm's length parties, was properly taken into account in computing the Appellant’s income pursuant to subsection 13(1) of the Income Tax Act, in the 1981 and 1982 taxation years.

It was agreed by both parties that this Court was competent to allocate the total amount at issue ($3 million) in accordance with the provisions of section 68 of the Income Tax Act. I agree with the following comment to be found in R.L. Petersen v. M.N.R., [1988] 1 C.T.C. 2071.:

The onus is on the appellant to prove the Minister's allocation under section 68 is unreasonable; it is incumbent on the appellant to provide the Court with evidence which not only supports a conclusion that the Minister’s allocation is unreasonable, but also to provide evidence to establish, with some degree of certainty, the allocation which the appellant submits is correct.

The appellant, at the hearing, took the position that the allocation should be determined in accordance with a Real Estate Appraisal Report prepared by Warren Stewart & Associates (1986) Ltd., Real Estate Appraisers & Consultants, and filed as Exhibit A-5, which provided the basis for the following request from the appellant:

That the appeal herein be allowed and the reassessments for the 1981 and 1982 taxation years be referred back to the Respondent for reconsideration and reassessment on the basis that the selling price of the Jane Street Property be allocated as follows:

Land	$1,241,847
Building	1,748,153
Equipment	10,000
Selling Price	$3,000,000

For reasons which will be outlined directly, I am not of the view that the Court need deal with the results of this appraisal report, even though it was well prepared, and the supporting testimony was very informative.

As I see it, the critical documents filed were:

Exhibit A-2 — Agreement of Purchase and Sale* [1]

Exhibit A-3 — Interim Agreement Amendment.

The thrust of the appellant's testimony was that Exhibit A-2 (above) was in reality a form of option agreement, rather than a purchase agreement, and that the three clauses of Exhibit A-3 (above) — were really “trade-offs” in the bargaining process to finalize the transactions. I am quite satisfied from the witnesses, that the circumstances — distance, time, pressure to finalize the sale, etc. — all impinged on the deal, but none of that affects the propriety of that which was ultimately consummated — a purchase and sale agreement consisting of both Exhibit A-2 and Exhibit A-3. The one critical clause (from Exhibit A-3) which is relevant to this appeal reads as noted in the pleadings filed:

3. It has been agreed that the distribution of cost price will be as follows:

Land	$ 460,000
Building	2,530,000+ [2]
Chattel	10,000

In argument, particular reference was made by counsel for the appellant to the cases of The Queen v. Golden et al., [1986] 1 C.T.C. 274; 86 D.T.C. 6138 (S.C.C.), and Humphreys Jones Realty Ltd. v. M.N.R., [1986] 2 C.T.C. 2429; 86 D.T.C. 1807 (T.C.C.). As noted above, the view of counsel for the appellant was that the break down of selling price (supra) (per Exhibit A-3) should not be considered as an agreement between the parties. But even if so considered, the case law did not require the Court to accept it as a reasonable allocation, and counsel quoted from the Federal Court of Appeal decision in Golden v. The Queen, [1983] C.T.C. 112 at 116; 83 D.T.C. 5138 at 5142 (F.C.A.):

. . . Where, as in this case, as found by the trial judge, the transaction is at arm's length and is not a mere sham or subterfuge, the apportionment made by the parties in the applicable agreement is certainly an important circumstance and one which is entitled to considerable weight.

Counsel's view was that while any "agreement" between the vendor and purchaser in this transaction should be taken into account by the Court, the allocation from such an "agreement" need not be the only, even deciding factor.

Analysis

I recognize that some comfort may be found by these appellants in certain comments to be found in the minority opinions expressed in Golden (supra) at the Supreme Court of Canada level, and in the Federal Court judgment for the same case. However, this Court must be guided by the majority view of the Supreme Court in Golden (supra). At the same time even the minority opinion in Golden (supra) written by Madam Justice Wilson noted on page 284 (D.T.C. 6145):

The majority of the Federal Court of Appeal was correct in holding that section 68 of the Income Tax Act is not policywise the successor to the repealed paragraph 20(6)(g) and that section 68 does not empower the Minister to reassess the contractual allocation of the proceeds of disposition of the Bel Air property between the depreciable and non-depreciable property included in the sale. The allocation agreed upon by the parties must therefore stand. [Emphasis mine.]

That comment, at best, provides little support for the proposition of the appellant in this instant appeal. Generally I agree with counsel's proposition that an "agreement" should not by itself be decisive — at least I have found nothing in the judgments of the higher courts (the minority opinion of Madam Justice Wilson to the contrary, as noted earlier) which would clearly dictate the allocation for such an "agreement" to be paramount.

For me, however, there is a further and very persuasive comment in Golden (supra) (F.C.A.) also to be found at page 116 (D.T.C. 5142) immediately preceding that quoted by counsel for the appellant noted above:

. . . It is my opinion that the correct approach to a section 68 determination would be as suggested by the above authorities to consider the matter from the viewpoint of both the vendor and the purchaser and to consider all of the relevant circumstances surrounding the transaction .. . .

Again, I find nothing in either the majority or minority opinion of the Supreme Court in Golden (supra) which would conflict with that view, arising out of Herb Payne Transport Ltd. v. M.N.R., [1963] C.T.C. 116; 63 D.T.C. 1075, nor did there appear to be any disagreement with this principle brought out by either party at this hearing. But, as I see it, the thrust of the argument of counsel for the appellant in these appeals would urge the Court to ignore the viewpoint of the purchaser of the subject real estate and substitute therefor the sole viewpoint of the vendor. I reach that conclusion from the basis that since I am required to take into account the viewpoint of the purchaser (Herb Payne (supra)) then the sole indication I have of that perspective (of the purchaser) with regard to that party's allocation of costs is to be found in point (3) (above) from Exhibit A-3:

Conclusion

It is quite clear from the documentation and testimony that both parties to the transaction signed the "Amendment" (Exhibit A-3) of which this is the clause most critical to these appeals. It may well be that this clause represented some "trade-off", or last-minute accord, or reflected particular circumstances, as now portrayed by the appellant in this matter. But that does not alter the basic fact that the Court must take into account the known view of the other party. The case law regarding section 68 does not dictate that an "agreement" on such allocation is the only or even the most important factor to be taken into account by the Court in usual circumstances. However, in this case, because it is the sole reflection of the purchaser's view, it cannot be overlooked and, in my opinion, must be the deciding factor for the Court. As I see the situation, it would be completely unreasonable for either the Minister, or this Court, to accept as an appropriate allocation any other breakdown of the selling price.

The appeals are dismissed.

Appeals dismissed.