Placements LTG Inc and Placements Eq Inc v. Minister of National Revenue, [1980] CTC 2714, 80 DTC 1637

Roland St-Onge [TRANSLATION]:—The appeals of Placements LTG Inc and Placements EQ Inc, formerly known as Evimbec Inc and Evaluations Immobilières du Québec Inc respectively, came on for hearing before me on January 28, 1980 at Quebec City, Quebec and were heard on common evidence.

It is necessary to determine whether the appellants unduly or artificially reduced their income for the following taxation years:

Placements LTG Inc: 1974, 1975;

Placements EQ Inc: 1972, 1973, 1974, 1975, 1976.

These are the facts, which are not in dispute: Each appellant had a business that operated in the field of real estate appraisal in the province of Quebec; the shares of these two companies were held by Mr Louis-Marie Gagne, a professional appraiser.

The appellant companies concluded the following transactions: in the course of his work as a professional appraiser for various municipalities in Quebec, under appraisal contracts valid for a period of at least three years, Mr Gagné proceeded in the first year to appraise property situated within the limits of the municipality, and in subsequent years his role as an ap- praiser was restricted to updating the appraisal register. He first prepared a detailed record containing all the information relevant to his appraisal of each of the properties; these records were called “F-15 calculation forms”, and a clause in each contract concluded with the municipality required that these forms remain the property of the appraiser, while allowing the client municipality free access to the information for the duration of the contract only.

After the deadline laid down in the contract or the new Act of 1972, some municipalities acquired these forms and the appellants invoiced them as though they had sold them to the municipalities. The proceeds of these sales were considered a capital gain. Once the invoice was issued or the payment received, the appellants gave as a gift to the municipalities a sum equal to the amount paid to the appellants. In this way the appellants reported one-half of the gain as a taxable capital gain and claimed the full amount of their gift to the municipalities as a deduction from their reported income in accordance with the provisions in the Income Tax Act governing gifts.

The amounts for the years in question are as follows:

(a) in the case of Placements LTG Inc:

(b) in the case of Placements EQ Inc:

The municipalities in question may be divided into two groups:

Placements LTG Inc: Daleluyville, Maddington and Baie-Comeau;

Placements EQ: Thetford Mines, Sept-lles, Pont-Rouge, Disraéli, East Broughton Station, St-Jean Port-Joli and St-Luc-de-Laval.

On February 13, 1979 the respondent issued reassessments imposing penalties on Placements EQ Inc for 1974 and 1975.

The Board accordingly must decide three issues:

1. Did the transactions, namely, the sales and gifts, constitute a ruse to unduly or artificially reduce the appellants’ income?

2. Did the account of Sonorex Ltée in the amount of $7,465.80. dated May 14, 1975, constitute an allowable expense for the appellant Placements EQ Inc for the purpose of earning income from its business?

3. Should the penalties against Placements EQ Inc be maintained?

At the hearing Mr Oscar Lamarre, an appraiser since 1969, gave the following explanation: In appraising a property it is necessary to prepare a record with a photograph, enter an appraisal number and refer to the date of construction, the construction permit and the sale title or, briefly, to cor- rectly identify the property on the lot. The coded identification of a property may be divided into two parts:

1. “static part’’—this part enables any appraiser to continue the appraisal of a property;

2. “on-site inspection’’—tasks such as measuring the lot and the buildings are performed; the value of the construction, the replacement value and the economic value are appraised so as to determine the value of the property in question.

The witness then filed a copy of an F-15 calculation form used by the appellants and gave the cost of preparing such a form as follows:

He concluded his testimony by saying that the appellants’ form contained more detail than his; that he himself had sold 1,200 records to the municipality of Dolbeau for the sum of $3,175 and 500 records to the municipality of St-Jean for the sum of $1,000. In 1965 he had insured his records for $3 per unit.

Mr Jacques Huot, a director of industrial promotion, testified as to the nature of the magnetic tapes used for recording information and stated that the preparation of the program for putting the records on magnetic tape costs from $25,000 to $30,000.

Mr Gagné testified that the F-15 forms and the information were the exclusive property of the appellants; that he had never ceased to be an appraiser for the municipalities of Sept-Iles, Thetford Mines and Baie- Comeau; that Placements LTG Inc had assigned 4,700 records to the municipality of Sept-lles and 2,500 to Thetford Mines and Baie-Comeau; that the cost of the F-15 form in 1973 was between $15 and $20 per record, and that since 1973 the Department had set the cost for a residence at $32 in an urban area and $37 in a rural area for grant purposes.

Mr Gagné also explained that the appellants were not required by their contract to supply the magnetic tapes to the municipalities, but that he had attempted to persuade them to use such a system since it was highly advantageous in the preparation of tax accounts; that in 1973 Placements EQ Inc had sold a magnetic tape to the municipality of Thetford Mines for $15,000. With respect to this last-mentioned transaction the cheque by which the gift was made was dated December 28, 1972, and the resolution of the municipality to purchase the magnetic tape was dated July 16, 1973. He stated that $15,000 was merely one-half of the cost of the magnetic tape sold and that the municipality of Thetford Mines did not wish to be invoiced for the sum of $15,000, that he had agreed to a sum of $8,000 on December 31, 1973 and that the invoice was dated February 8, 1973.

Mr Gagné concluded his testimony by saying that with the exception of the transactions to which the appeal relates, the appellant had never sold calculation forms and had never made gifts of this kind; that the account of Sonorex Ltée constituted an expense for the purpose of earning income but that he never intended to pay it unless he was sued.

In his cross-examination Mr Gagné admitted that in 1974 the appraisal had to be carried out by the county councils; that although the municipalities were interested in possessing the specifications of properties, the said municipalities did not wish to purchase them; and that he was interested in making a gift of them but by means of an invoice and a cheque so as to obtain a tax benefit.

He also admitted that Placements EQ Inc had an income of $95,000 in 1974 and that he had claimed the maximum of $19,000, that is, 20 per cent of $95,000, in gifts.

Counsel for the appellants pleaded as follows: like architects’ and engineers’ plans, calculation forms are eligible capital properties according to Interpretation Bulletin IT-187, and form part of the assets of the appellants’ business. The value of these records at the time of the sale was between $15 and $17 each and this evidence was not contradicted by the respondent. Furthermore, the existence of the gifts was proved by the cheques cashed by the municipalities. It is sufficient to prove that a usable asset has been transferred, regardless of whether the asset is used by the municipalities. According to counsel for the appellant, subsection 245(1) of the Act does not apply since this was a gift affecting the computation of taxable income and not a deduction under Division B Part I of the Income Tax Act. With respect to the account of Sonorex Ltée, he claimed that it was deductible since the appellants computed their income by using the accrual basis of accounting and it is an account payable and not a disputed right.

Counsel for the respondent contended that there had been neither a sale nor a gift since a cheque had been issued at the same time as an invoice and in the same amount; that the computer tapes no longer had any value since the appraisal contracts were to come to an end and there would no longer be any use for the data. There was no gift since the value of the assets transferred was not checked, and there is no evidence of a fair market value since the value was determined by Mr Gagne, who was not dealing at arm’s length.

The testimony of the first two witnesses must be set aside since they said nothing about the facts relevant to the case. Moreover, not a single witness from the municipalities testified to prove the value of these assets.

As for the amount owed to Sonorex Ltée, it was in dispute since Mr Gagne did not wish to pay it and expected legal action to be taken against him. It is impossible to determine the amount and accordingly it may not be allowed as a deductible expense.

The evidence revealed that the calculation forms could have a certain value, although it was absolutely impossible to determine it. The first two witnesses for the appellants explained many things but they did not succeed in proving the value of the assets transferred. Mr Lamarre said on two occasions that he had sold forms, but the exact nature of these transactions is not known.

In the case before us it is much more probable that the calculation forms had merely a nominal value, since in all cases the appraisal register was complete and these records had only a reference value.

Furthermore, the evidence showed that the municipalities were not interested in purchasing them, and that if there were transactions called sales and gifts, this was solely because the municipalities paid nothing to obtain them.

In deciding this case the Board must rely not on the form but on the substance of the transactions, which reveal that sales and gifts were not in question, since the municipalities did not wish to conduct transactions and the appellants merely wished to gain a tax benefit.

Moreover, the appellants, who had the burden of proving the value of the assets transferred, did not succeed in doing so satisfactorily before the Board, so that it was absolutely impossible to determine their value.

With respect to the second point, the Board feels that this is a disputed right, since it is impossible to determine the amount of the account payable and Mr Gagné still refused to pay or even to mention the amount he owed to Sonorex Ltée. In the circumstances, the respondent was justified in refusing to allow as a deduction an amount that could not be determined. No one is required to do what is impossible.

With respect to the third point, was the respondent justified in imposing penalties? The Board does not think so, because the respondent did not prove that Placements EQ Inc had knowingly or under circumstances amounting to gross negligence made a false statement in its tax return. In fact the appellant actually waived its claim to its calculation forms, which may have a certain value, and felt that it could proceed as it did in order to gain a tax benefit.

The appeal of Placements EQ Inc is accordingly allowed with respect to the penalties dismissed with respect to all the other points.

The appeal of Placements LTG Inc is dismissed.

Appeal allowed in part.