Guy
Tremblay
[TRANSLATION]:—These
appeals
were
heard
in
Sherbrooke,
Quebec,
on
March
7,
1983.
1.
Point
at
issue
The
question
is
whether,
in
calculating
his
income
following
the
sale
of
his
farm,
the
appellant
was
correct:
(a)
in
claiming
$10,539
in
depreciation
and
in
not
including
$9,422
as
recapture
for
his
1976
taxation
year;
(b)
in
not
including
$3,267
in
taxable
capital
gains
and
$122,200
as
net
income
from
the
disposition
of
animals,
hay
and
straw,
for
the
1977
taxation
year.
The
real
issue
is
whether
the
sale
of
his
farm
legally
took
place
in
1976
or
in
1977.
2.
Burden
of
proof
The
appellant
has
the
burden
of
showing
that
the
assessments
of
the
respondent
are
incorrect.
This
burden
of
proof
results
not
from
any
particular
section
of
the
Income
Tax
Act,
SC
1970-71-72,
c
63,
as
amended,
but
from
several
judicial
decisions,
including
a
judgment
of
the
Supreme
Court
of
Canada
in
Johnston
v
MNR,
[1948]
CTC
195;
3
DTC
1182.
2.02
The
facts
assumed
by
the
respondent
are
stated
in
the
reply
to
the
notice
of
appeal,
in
summary
as
follows:
6.
In
reassessing
the
appellant
for
the
taxation
years
1976
and
1977,
the
Minister
of
National
Revenue
relied,
inter
alia,
on
the
following
facts:
(a)
During
the
1976
taxation
year
the
appellant
sold
his
farm
situate
at
St-
Valérien,
in
the
County
of
Shefford,
to
hissons
Dores
and
Germaine
Laflamme;
(b)
These
two
sons
of
the
appellant
took
possession
of
the
farm
on
November
1,
1976
pursuant
to
the
agreement
of
sale.
They
then
operated
it
for
their
own
profit
as
owners.
(c)
Even
though
the
sale
took
place
in
1976,
the
notarial
contrct
of
sale
was
not
signed
until
May
11,
1977
after
the
appellant’s
sons
had
received
an
agricultural
loan
in
the
amount
of
$75,000.00.
The
said
contract
was
registered
on
May
27,
1977
in
the
Shefford
registration
division
as
number
141821;
(d)
At
the
time
the
said
contract
was
signed
the
appellant
received
the
sum
of
$75,000.00
in
cash,
the
balance
of
$110,000.00
being
secured
by
a
mortgage;
(e)
The
total
sale
price
for
the
said
farm,
or
$185,000.00,
represents
the
fair
market
value
of
the
property;
this
sum
is
broken
down
by
the
Minister
as
fol-
lows:
|
—
land
|
$65,000.00
|
|
—
residence
plus
1
acre
|
10,000.00
|
|
—
buildings
|
31,500.00
|
|
—
equipment
and
vehicles
|
42,000.00
|
|
—
livestock
|
30,000.00
|
|
—
hay
and
straw
|
5,000.00
|
|
—
milk
quota
|
3,000.00
|
|
$185,000.00
|
(f)
Having
sold
his
farm,
the
appellant
was
not
entitled
to
capital
cost
allowance
for
1976
and
the
Minister
accordingly
included
the
amount
of
$10,539.00
in
his
income
for
that
year;
(g)
As
a
direct
result,
during
1976
the
appellant
received
back
$9,422.00
which
was
duly
included
in
his
income
as
taxable
recapture
on
the
farm
buildings
and
the
equipment
and
vehicles;
Having
regard
to
capital
gains,
the
proceeds
of
disposition
of
the
land
and
residence
were
set
at
$73,000.00,
from
which
sum
the
Minister
deducted
an
amount
of
$42,500.00
representing
the
fair
market
value
at
December
31,
1971
and
the
acquisition
cost
for
a
portion
acquired
in
1973,
and
a
further
amount
of
$6,000.00
for
the
years
of
use
as
the
residence,
resulting
in
a
capital
gain
of
$24,500.00;
(i)
The
taxable
capital
gain
in
1977,
after
the
reserve,
is
$3,267.00;
(j)
The
fair
market
value
of
the
farm
livestock
is
equal
to
the
proceeds
of
disposition
deemed
by
the
Minister,
or
$30,000.00.
Similarly
that
of
the
hay
and
straw
is
$5,000.00.
From
this
is
deducted
the
cost
of
$22,800.00,
with
the
result
that
the
Minister
duly
included
the
amount
of
$12,200.00
in
the
appellant’s
total
income
for
1977.
3.
Facts
3.01
Until
he
sold
his
farm
to
his
two
sons
Germain
and
Dorés
the
appellant
was
a
farmer
at
St-Valérien
in
the
County
of
Shefford,
Quebec.
3.02
At
the
beginning
of
1976
the
two
unmarried
sons
of
the
appellant,
Germain
and
Dorés,
then
aged
19
and
17
(the
two
youngest
of
five
children),
indicated
their
wish
to
buy
their
father’s
farm.
During
the
spring
the
appellant
agreed
in
principle
to
this.
3.03
On
the
advice
of
the
local
notary,
they
immediately
took
steps
to
obtain
a
loan
from
the
Quebec
Ministry
of
Agriculture
to
be
used
as
a
down
payment
on
the
purchase
of
the
farm,
going
in
May
of
1976
to
the
appropriate
government
office
to
apply
for
a
loan
in
the
amount
of
$75,000.
The
parties
had
set
the
price
of
the
sale
at
$210,000.
The
departmental
official
suggested
that
this
be
lowered.
Already
the
loan
seemed
certain.
3.04
Toward
the
end
of
July
and
the
beginning
of
August
1976,
the
inspector
from
the
loans
branch
came
to
look
at
the
farm.
It
was
agreed
at
this
time
that
the
sale
price
would
be
$185,000.
3.05
In
December
1976,
they
received
a
letter
from
the
Ministry
of
Agriculture
notifying
them
that
the
loan
had
been
approved.
If
there
had
been
no
loan
there
would
have
been
no
sale,
according
to
the
appellant.
3.06
According
to
the
appellant,
in
the
fall
of
1976
the
sons
wished
to
take
possession
of
the
farm.
He,
however,
wanted
to
wait
to
be
paid
before
they
should
become
owners.
The
appellant
had
been
advised
that
care
should
be
taken
in
view
of
his
children’s
youth.
However,
to
show
his
condifence
in
them
he
allowed
them
to
have
the
milk
revenues
and
the
bills
put
into
their
names.
Accordingly
the
sons
deposited
the
milk
receipts
in
an
account,
paid
for
feed,
and
so
on.
It
was
he,
however,
who
continued
to
make
the
decisions,
made
the
purchases
of
chemical
fertilizers
in
winter,
did
the
sugaring-
off
in
the
spring.
3.07
Up
to
the
point
when
he
handed
over
to
his
sons
the
specific
job
of
banking
the
receipts
and
paying
the
bills,
the
appellant
did
not
pay
his
sons
a
fixed
salary.
He
helped
them
when
they
needed
something.
He
even
bought
one
of
them
a
Car.
3.08
On
May
11,
1977,
after
the
notary
drawing
up
the
transfer
documents
had
received
the
$75,000
loan
moneys,
the
notarial
contract
of
sale
was
executed
(Exhibit
1-1).
The
sum
of
$75,000
was
remitted
to
the
appellant
less
an
amount
of
approximately
$10,000
to
be
returned
by
the
notary
to
the
Ministry
of
Agriculture
in
payment
of
the
balance
owing
on
a
loan
made
by
the
appellant
some
twenty
years
before.
3.09
The
balance
of
the
purchase
price,
or
$110,000
($185,000
-
$75,000)
owing
to
the
appellant
was
to
be
payable
by
yearly
installments
of
$4,000,
without
interest,
until
fully
paid.
3.10
A
clause
in
the
contract
(Exhibit
1-1)
entitled
“Possesion
and
occupation”
reads
as
follows
[translation]:
The
Purchaser
hereby
becomes
the
absolute
owner
of
the
aforementioned
property,
with
the
right
of
immediate
legal
possession
and
occupation.
3.11
A
statement
of
income
and
expenses
(Exhibit
I-2)
is
attached
to
the
appellant’s
1976
income
tax
return.
This
statement
is
for
a
ten-month
period
ending
October
31,
1976.
Two
notes
appear
at
the
bottom
of
this
financial
statement,
and
read
as
follows
[translation]:
Note
1
—
This
financial
statement
has
been
prepared
for
tax
purposes
only.
Note
2
—
Mr
Eustache
Laflamme
sold
his
farm
on
November
1,
1976
to
his
sons
Does
and
Germain.
3.12
The
appellant’s
balance
sheet
is
also
attached
to
the
return.
It
ends
on
December
31,
1976.
It
indicates
that
the
appellant
is
at
that
time
still
the
owner
of
the
farm
(livestock
inventory,
land,
farm
buildings,
farm
machinery).
At
the
bottom,
there
is
a
note
to
the
effect
that
this
statement
has
been
prepared
for
tax
purposes
only.
3.13
The
appellant’s
tax
returns
for
1976
and
1977
appear
to
have
been
signed
not
by
the
appellant,
but
by
his
accountant.
The
1977
tax
return
shows
an
income
of
$3,126
from
the
Dorés
and
Germaine
Laflamme
farm.
3.14
According
to
Mr
Fontaine,
the
departmental
auditor,
the
purchasers
of
the
farm
in
their
1977
tax
returns
calculated
their
capital
cost
allowance
on
the
basis
of
the
undepreciated
capital
cost
at
December
31,
1976,
or
that
of
the
appellant.
A
financial
statement
was
filed
as
Exhibit
A-1,
showing
how
the
capital
cost
allowance
claimed
at
December
31,
1977
was
computed
and
confirming
Mr
Fontaine’s
testimony.
1.
Act
—
case
law
—
analysis
4.01
Act
Sections
3,
9(1
)
and
10(1
)
of
the
Income
Tax
Act
are
the
principal
legislative
provisions
involved
in
the
case
at
bar.
They
will
be
set
out
in
the
analysis
if
necessary.
4.02
Case
Law
The
Board
was
referred
to
the
following
cases:
1.
Lord
Elgin
Hotel
Ltd
v
MNR,
36
Tax
ABC
268;
64
DTC
637;
2.
Her
Majesty
the
Queen
v
Compagnie
Immobilière
BCN
Ltée,
[1979]
CTC
71;
79
DTC
5068;
3.
Olympia
and
York
Developments
Ltd
v
Her
Majesty
the
Queen,
[1980]
CTC
265;
80
DTC
6184.
4.03
Analysis
4.03.1
The
question
is
whether
there
was
in
substance
a
disposition,
within
the
meaning
of
the
Income
Tax
Act,
of
the
appellant’s
farm
in
favour
of
his
sons
in
1976
or
in
1977.
4.03.2
In
1976,
there
is
no
written
contract
which
can
confirm
the
respondent’s
position.
However,
the
evidence
in
favour
of
a
verbal
contract
is
the
following:
(a)
the
appellant’s
admission
of
the
transfer
of
a
substantial
proportion
of
the
administration
of
the
farm:
banking
the
receipts
from
the
sale
of
milk
and
the
payment
of
expenses
(paragraph
3.06);
(b)
the
appellant’s
statement
of
income
and
expenses
for
1976,
which
is
for
a
period
of
only
ten
months;
(c)
notes
1
and
2
on
the
said
statement,
which
are
clear
on
their
face
(par
3.11).
4.03.3
The
appellant’s
position
that
the
contract
was
not
made
until
1977
is
supported
by
the
following
evidence:
(a)
the
appellant’s
submission
that
the
taking
of
possession
of
the
farm
by
the
sons
was
not
to
occur
until
after
the
payment
and
after
they
had
become
owners;
(b)
only
part
of
the
farm
administration
had
been
transferred
by
him;
it
was
still
the
appellant
who
made
the
major
decisions;
(c)
the
written
contract
executed
in
May
1977
contained
a
very
clear
clause
on
immediate
“possession
and
occupation”
(par
3.10).
If
possession
had
in
fact
been
taken
as
early
as
November
1976,
it
would
have
been
easy
to
make
it
retroactive
at
this
time.
4.03.4
It
appears
to
the
Board
that
the
fact
that
the
purchasers
were
the
appellant’s
sons,
and
that
they
were
not
yet
grown
up,
justified
the
father
in
making
a
partial
and
conditional
transfer
of
the
running
of
the
farm.
Clearly
everything
was
made
subject
to
obtaining
the
loan:
no
loan,
no
sale
said
the
appellant
(par
3.05).
If
the
purchasers
had
been
strangers
to
whom
the
appellant
had
transferred
in
this
way
a
substantial
portion
of
the
administration
of
the
farm,
it
could
perhaps
give
rise
to
a
different
interpretation.
Such
a
transfer
could
have
been
indicative
of
possession
and
sale.
4.03.5
If
the
transfer
of
the
administration
to
the
sons
had
been
effected
only
in
December
upon
officially
receiving
confirmation
of
the
loan
(par
3.05),
the
respondent’s
position
would
have
been
more
sustainable.
The
fact
that
the
transfer
took
place
more
than
a
month
earlier
seems
instead
to
confirm
the
appellant’s
position
—
he
was
dealing
with
his
own
children,
he
wanted
to
teach
them
something
of
the
running
of
the
farm
while
waiting
to
receive
the
loan
moneys.
4.03.6
In
the
Board’s
view
the
key
factor
for
deciding
whether
or
not
there
was
a
verbal
sale
is
the
condition,
again
verbal,
adduced
in
evidence
and
not
contradicted,
that
if
there
had
been
no
loan,
there
would
have
been
no
sale
(par
3.05),
and
that
possession
would
take
place
at
the
same
time
as
the
transfer
of
ownership
which,
according
to
the
appellant,
would
occur
when
the
loan
money
was
paid
(par
3.06).
This
is
also
confirmed
by
the
clause
in
the
contract
relating
to
“possession
and
occupation”
(par
3.10).
Such
a
condition
in
Quebec
law
(and
I
would
be
surprised
if
it
were
different
in
common
law)
is
fundamental:
in
civil
law
the
sale
could
not
have
taken
place
before
the
$75,000
payment
made
at
the
time
the
notarial
contract
was
signed.
4.03.7
However,
even
if
in
civil
law
the
sale
did
not
take
place
in
1976,
for
the
purposes
of
depreciation
as
contemplated
in
the
Income
Tax
Act
was
the
transaction
not
completed
in
1976?
In
Olympia
and
York
Developments,
supra,
Mr
Justice
Addy
of
the
Federal
Court,
Trial
Division,
quoted
from
the
judgment
of
the
Supreme
Court
of
Canada
in
Compagnie
Immobilière
BCN
Ltée,
supra,
as
follows:
The
substantive
definitions
of
“disposition
of
property”
and
“proceeds
of
disposition”
in
s.
20(5)(b)
and
(c)
are
a
clear
indication
that
the
words
“disposed
of”
should
be
given
their
broadest
possible
meaning.
The
main
evidence
on
which
a
decision
can
be
taken
on
this
subject,
evidence
which
was
the
basis
for
the
respondent’s
decision
to
issue
the
assessment
which
is
the
subject-matter
of
this
appeal,
comprises
the
financial
statements
attached
to
the
appellant’s
1976
income
tax
return
and
the
notes
that
appear
at
the
bottom
of
these
statements.
4.03.8
The
financial
statements
and
notes
are
difficult
to
understand.
How,
in
the
appellant’s
statement
of
income
for
1976,
can
one
explain
that
depreciation
of
$10,539
can
logically
be
taken
if,
as
note
1
says
at
the
bottom
of
the
financial
statement
ending
October
31,
1976,
the
farm
was
sold
on
November
1,
1976.
Depreciation
is
taken
at
the
end
of
the
year.
If
someone
sells
assets,
he
can
only
take
depreciation
in
the
form
of
a
terminal
loss,
and
then
under
certain
conditions.
This
cannot
be
easy
for
an
ordinary
taxpayer
to
understand;
for
an
accountant
it
is
elementary.
And
yet
the
financial
statement
is
signed
by
an
accounting
firm.
It
was
also
the
same
firm
which
prepared
the
appellant’s
balance
sheet
as
at
December
31,
1976
and
included
therein
all
the
farm
assets.
Thus
he
did
not
sell
the
farm
on
November
1,
1976.
And
yet
the
two
financial
statements
bear
notes
to
the
effect
that
they
are
for
tax
purposes
only.
If
the
notes
said
that
they
were
not
for
tax
purposes,
it
would
be
easier
to
understand.
May
such
documents
be
used
in
order
to
conclude
that
there
was
a
disposition
by
the
appellant
of
the
farm
in
1976
to
the
purchasers,
his
sons,
“for
tax
purposes
only”?
Can
it
be
required
that
the
appellant
could
have
understood
these
documents,
made
for
“tax
purposes
only”?
In
any
case,
the
Board
for
its
part
cannot
so
require.
It
consequently
declines
to
conclude
on
the
basis
of
these
notes
that
there
was
a
disposition
of
the
farm
“for
tax
purposes
only”
in
1976
4.03.9
Finally
the
fact
that
the
new
purchasers
continue
to
deduct
depreciation
using
as
a
basis
the
vendor’s
undepreciated
capital
cost
at
December
31,
1976
(par
3.14)
surely
shows
that
the
option
provided
for
doing
so
in
the
Act
was
utilized
by
the
purchasers,
and
that
accordingly
even
if
the
transaction
had
been
completed
on
November
1,
1976,
no
recapture
could
be
claimed
from
the
appellant.
5.
Conclusion
The
appeals
are
allowed
and
the
whole
referred
back
to
the
respondent
for
reassessments.
Appeal
allowed.
Email this Content