Schaefer Brothers Inc v. Minister of National Revenue, [1979] CTC 2379, 79 DTC 288

Guy Tremblay:—This case was heard at Montreal, Province of Quebec, on July 11, 1978.

1. Points at Issue

The points at issue are:

(a) whether in 1972, the rights of the appellant company to have business on a certain property owned by the CPR in Drummondville, Quebec, constitute a “government right” in view of paragraph 21(3)(a) of the Income Tax Application Rules (an amount of $8,000 was included in the appellant’s income) and

(b) whether in 1974, the appellant company

(1) had a loss of goodwill of $15,000 according to the appellant and as decided in the agreement between the appellant company and the City of Drummondville by which it paid $46,000 to the appellant following an expropriation by the said City of the business of the appellant, or

(2) had a capital gain according to the respondent.

2. Burden of Proof

The appellant has the burden of showing that the respondent’s assessments were not justified. This burden of proof is based not on a particular section of the Income Tax Act but on several judicial decisions, among them a decision of the Supreme Court of Canada rendered in F? RWS Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

3. Facts

3.01 The appellant is a political and corporate body duly incorporated under the laws of the Province of Quebec, for the purpose of trading in scrap metals.

3.02 For many years prior to 1972, in fact since 1918, the appellant had carried on its business in two different locations within the limits of the City of Drummondville. The first location was on a certain property owned by the CPR and the second was on a piece of property held under lease on Dupont Street.

3.03 As each location poses a different problem, the facts concerning each one will be presented separately.

(A) Facts Concerning Rights on CPR Premises—1972

The major part of the facts concerning that first point alleged in the notice of appeal, was admitted by the respondent.

3.04 During the course of 1967, the City of Drummondville, through a by-law and legal proceedings, tried to have the business of the appellant on the premises owned by the CPR.

3.05 Those proceedings were unsuccessful. In a judgment rendered by Judge J-Robert Beaudoin of the Superior Court of the District of Drummond, No 1057 (Exhibit R-5) dated January 20, 1970, it was decided that the said by-law was ultra vires. In his notice of appeal (paragraph 5), the appellant alleged . . the Court recognizing that the appellant was the holder of ‘acquired rights’”.

3.06 Following negotiations between the City of Drummondville and the appellant, an agreement was reached in June 1972 whereby the appellant agreed to cease operating its business and in consideration of its renouncing to its “acquired rights” an amount of $40,000 became payable to it. The respondent, in its reply to the notice of appeal, admitted that the amount of $40,000 was paid for “acquired rights”.

3.07 In assessing the appellant for the 1972 taxation year, the respondent took the position that this amount constituted proceeds of disposition of eligible capital expenditure and added an amount of $8,000 to the appellant’s income; this sum of $8,000 is calculated as follows:

$40,000 x 40% - $16,000 (paragraph 21 (1 )(a) of the Income Tax Application Rules) and $16,000 x 50% = $8,000 (section 14 of the new Act).

(B) Facts Concerning the Expropriation on Dupont Street—1974

3.08 Before the year 1974, the City of Drummondville became interested in the expropriation of the business of the appellant as carried on at Dupont Street location.

3.09 In July 1972, a notice of expropriation (Exhibit R-6) was sent to the appellant advising it of their decision to expropriate the two pieces of land leased by the appellant and offering the amount of $13,900 for the interest the appellant had in the lease.

3.10 Further to negotiations between the appellant and the City of Drummondville an agreement (Exhibit A-1) was reached in 1974 whereby a total amount of $46,000 (plus legal fees and expert fees) became payable to the appellant, which amount represented:

3.11 In assessing the appellant, for the year 1974, the respondent first totalled the following items:

After a deduction of $8,550 representing the adjudged cost base of the leasehold interest, thus imputing a capital gain of $18,550, half of which the respondent included in the appellant’s income.

3.12 At the hearing, the appellant disputed the leasehold interest figure of “$12,000” to change it to “$10,602” according to the figure in Exhibit A-1. This point was admitted by the respondent.

3.13 The appellant’s contention is:

3.14 An appraisal report proving goodwill was not presented in testimony by the appellant. Mr Schaefer, however, testified that each point of the agreement was discussed and valued on its merit.

3.15 The respondent’s contention was that there was no goodwill at all. An accountant, representative of the respondent, came as witness to present an appraisal report. Counsel for the appellant made an objection to the presentation of the report because, in his opinion, the witness is not an expert. Despite the fact that the accountant had made about 100 valuation reports in two years, he had not attended courses of valuation nor was a member of an association of appraisers. The Board had taken the testimony under reserve. The Board maintains the objection of counsel for the appellant for the reasons given further in paragraph 4.3.2.1.

4. Law—Jurispurdence—Comments

4.1 Law

The sections of the law which mainly apply in the present case are 14 and 21 of the Income Tax Application Rules (ITAR).

4.2 Jurisprudence

The judgments cited by the parties are:

1. MNR v Pillsbury Holdings Limited, [1964] CTC 294; 64 DTC 5184;

2. R W S Johnston v MNR, [1948] CTC 195; 3 DTC 1182;

3. Crown Trust Company v The Queen, [1977] CTC 320; 77 DTC 5173;

4. Herb Payne Transport Limited v MNR, [1963] CTC 116; 63 DTC 1075;

5. Consumers Metal Corporation v Procureur général de la Province de Québec et Ministre de la Voirie, [1974] RTE 239;

6. Donald Hart Limited v MNR, [1959] CTC 268; 59 DTC 1134:

7. Walter M Logan Limited v MNR, 5 Tax ABC 393; 52 DTC 58;

8. Raymond Ducharme v MNR, [1978] CTC 2562; 78 DTC 1414;

9. Canadian Petrofina Limited v P R Martin & City of St Lambert, [1959] RCS 453;

10. City of Toronto Corporation v Trustees of the Roman Catholic Separate Schools of Toronto, [1925] AC 81;

11. N C Brewster v The Queen, [1976] CTC 107; 76 DTC 6046.

The parties also cited articles of doctrine:

— L’expropriation et le locataire commerçant, 1969 Revue du Barreau 286;

— Rénovation urbaine et droit de propriété, 1968 Revue du Barreau 641.

4.3 Comments

4.3.1 Concerning Rights of CPR Premises 1972

In that point the crux of the matter is whether the right of the appellant company on CPR premises constitutes “government right” in the meaning of section 21 of the Income Tax Application Rules (ITAR). If the Board had to apply section 21 ITAR as it existed in 1972 (year during which the settlement of $40,000 occurred) there would be no problem because the section did not speak about government right. The appeal would be allowed.

However, there were amendments by 1973-74 c 14, 1973-74 c 30 and 1974-75-76 c 26. These amendments are retroactive and applicable to January 1, 1972.

According to the appellant, indeed, if the rights of the appellant are “government rights” no amount has to be included in the appellant’s net income by the application of subsection 21(1) of the ITAR and section 14 of the Act.

It is important to quote paragraph 21(3)(a) ITAR giving the definition of “government right”:

(a) “Government right”—a “government right” of a taxpayer means a right or licence

(i) that enables the taxpayer to carry on a business activity in accordance with a law of Canada or of a province or Canadian municipality, to an extent to which he would otherwise be unable to carry it on in accordance therewith,

(ii) that was granted or issued by Her Majesty in right of Canada or a province or a Canadian municipality, or by a department, board, agency or any other body authorized by or pursuant to a law of Canada, a province or a Canadian municipality to grant or issue such a right or licence, and

(iii) that was acquired by the taxpayer

(A) as a result of a transaction occurring before 1972, or

(B) at a particular time for the purpose of effecting the continuation, without interruption, of rights that are substantially similar to the rights that the taxpayer had under a government right held by him before the particular time.

The evidence adduced that since 1918 the appellant’s business is carried on in Drummondville, according to the laws of the Province and the regulations of the City of Drummondville (licence, etc).

The judgment of the Superior Court indeed confirmed not only that the appellant had the right to carry on business but that the regulation the City of Drummondville had passed and by which it wished to take away this “acquired” right, was ultra vires. The Board is bound by the judgment of the Superior Court despite certain judgments (City of Toronto case and Canadian Petrofina Limited case) cited by counsel for the respondent which on certain aspects seem to contradict the judgment of the Superior Court. The Board must accept the judgment of the Superior Court concerning the appellant’s rights in the premises located in the City of Drummondville unless there is an obvious mistake in the judgment which is not the case.

In the Board’s opinion, the judgment of the Superior Court confirms that the appellant company had “a right or a licence that enabled” it “to carry on a business activity in accordance with a law of a Canadian municipality” (City of Drummondville) and issued by that Canadian municipality. Moreover, that right or licence was acquired before 1972.

Consequently, the appellant’s right is a government right in the meaning of subsection 21(3) of the ITAR.

Now let us quote subsection 21(1) of the ITAR and let us check if any amount must be included in its income according to his contention:

Goodwill and other “nothings”.

(1) Where as a result of a transaction occurring after 1971 an amount (in this section referred to as the ‘actual amount’) has become payable to a taxpayer in respect of a business carried on by him throughout the period commencing January 1, 1972 and ending immediately after the transaction occurred, for the purposes of section 14 of the amended Act the amount that has become so payable to him shall be deemed to be the aggregate of

(a) an amount equal to a percentage, equal to 40% plus the percentage (not exceeding 60%) obtained when 5% is multiplied by the number of full calendar years ending in the period and before the transaction occurred, of the amount, if any, by which the actual amount exceeds the portion thereof referred to in subparagraph (b)(i), and

(b) an amount equal to the lesser of

(i) the percentage, described in paragraph (a), of such portion, if any, of the actual amount as may reasonably be considered as being the consideration received by him for the disposition of, or for allowing the expiry of, a government right, and

(ii) the amount, if any, by which the portion described in subparagraph (i) exceeds the greater of

(A) the aggregate of all amounts each of which is an outlay or expenditure, made or incurred by the taxpayer as a result of a transaction occurring before 1972 for the purpose of acquiring the government right, or the taxpayer’s

original right in respect of the government right, to the extent that the outlay or expenditure was not otherwise deducted in computing the income of the taxpayer for any taxation year and would, if made or incurred

by him as a result of a transaction occurring after 1971, be an eligible capital expenditure of the taxpayer, and

(B) the fair market value to the taxpayer as at December 31, 1971 of the government right or the taxpayer’s original right in respect of the government

right, if no outlay or expenditure was made or incurred by the taxpayer for the purpose of acquiring the right or, if an outlay or expenditure was made or incurred, if that outlay or expenditure would have been an eligible capital expenditure of the taxpayer if it had been made (or) incurred as a result of a transaction occurring after 1971.

If after reading this section, one feels capable of making this computation, let him do so. Even if I do not feel capable, I must try. It is my duty.

Section 14 of the law would have to be quoted but for the purpose of the present case, it can be summarized as follows: 50% of an amount received by a taxpayer for the sale or in compensation of a “nothing” (and this included the amount received by the appellant company, this point is not in dispute) must be included in the net income of the taxpayer.

However, when the “nothing” existed before 1972, and that sale or compensation is done after 1971 and before 1984, the percentage is not 50%. It is determined in fact by section 21 of the ITAR.

21(1)(a)

Let us take the preliminary paragraph and subparagraph (a). The evidence showed that the amount of $40,000 was payable in 1972. Consequently, 40% of this amount ($16,000) must firstly be considered. However, because of the last words of subparagraph (a) “by which the actual amount exceeds the portion thereof referred to in subparagraph (b)(i)”, the actual amount is the part of the $16,000 which exceeds the amount provided in subparagraph (b)(i).

The computation of this subparagraph is $40,000 x 40% = $16,000.

Consequently there is no excess ($16,000 - $16,000) = 0).

21(1)(b)

To the figure 0, result of subparagraph (a), must be added (notice the word “and” at the end of that subparagraph (a)) another amount—the one which is the result of subparagraph (b).

“An amount equal to the lesser of” the figures resulting from subparagraphs (b)(i) or (b)(ii).

21(1)(b)(i)

As explained before

$40,000 x 40% = $16,000

21(1)(b)(ii)

“The amount, if any, by which the portion described in subparagraph (i) exceeds the greater of

(A) the aggregate of different kinds of expenses.”

As no evidence was given about those expenses, the figure is 0.

“(B) The fair market value at December 31, 1971 of the taxpayer’s specified right in respect of the government right.”

What is “specified right”?

section 21 (3)(c) gives the answer:

“Specified right”—a taxpayer’s “specified right” in respect of a government right owned by a taxpayer on December 31, 1971 that was

(i) an Original right, or

(ii) a government right that was acquired by the taxpayer in substitution for the original right or that was one of a series of government rights acquired by the taxpayer for the purpose of effecting the continuation, without interruption, of rights that are substantially similar to the rights that the taxpayer had under the original right.

The evidence has not shown that the government right was the one described in subparagraph 21 (3)(b)(ii). Maybe it is an “original right’’.

What is an “original right”?

Paragraph 21 (3)(b) gives the answer:

(b) a taxpayer’s “original right” in respect of a government right means a right or licence

(i) described in paragraph (a), and

(ii) acquired by the taxpayer as a result of a transaction occurring before 1972

for a purpose other than the purpose described in clause (a)(iii)(B),

if the government right was acquired by the taxpayer for the purpose of effecting the continuation, without interruption, of rights that are substantially similar to the rights that the taxpayer had under the right or licence.

Subparagraph (a) to which it refers is 21(3)(a), ie, the description of “government right” quoted above.

But it is not just any kind of “government right”, it is one which is not described in clause 21 (3)(a)(iii)(B) but for the reason given at the end of paragraph 21(3)(b).

In fact, the Board wonders whether prima facie evidence was given that the government right in the present case is one described at the end of paragraph 21(3)(b), ie, .. acquired by the taxpayer for the purpose of effecting the continuation, without interruption, of rights that are substantially similar to the rights that the taxpayer had under the right or licence”. But when it is understood that the proposition above means that the government right is not only one which lasts automatically but also one which must be renewed periodically, the Board must conclude that the right is the same which was the subject of settlement in 1972 between the appellant and the City of Drummondville. It is the Board’s opinion that the fair market value at December 1971 is quite the same as it was at the time of the settlement in 1972. Indeed the negotiations lasted from 1970 through 1971 and ended in June 1972. The final figure may apply inasmuch as to December 1971 than to June 1972. Consequently, the fair market is $40,000. The excess of $16,000 over $40,000 is 0. The lesser amount of $16,000 and 0 is zero, which is the final result. The summary of subsection 21(1) is as follows:

4.3.2 Concerning the Expropriation on Dupont Street—1974

4.3.2.1 Objection Concerning the Appraiser

The testimony of the witness for the respondent was subject to an objection as explained in paragraph 3.15 of the Facts. The witness who testified as an appraiser was not a member of an association of appraisers even if he was a member of an association of accountants. He had not attended courses in valuation. However, he had made 100 valuation reports in two years.

The Board thinks it is useful to repeat what it said in the case of Les Meubles de Maskinongé Inc et al v MNR, [1978] CTC 2285; 78 DTC 1235. There is no reason in 1978 that one can testify as appraisal expert without being member of an association of appraisers. The policy of the Board during the former years by accepting as expert a person who was not member of an association of appraisers, was only a temporary policy. It is the Board’s opinion that to give an expert opinion there is a presumption: only the members of an appropriate professional association are qualified to testify in court.

Because of the evolution of the appraisal science in Canada during the last seven years and the incorporation of appropriate associations, an appraisal report must be given in court by a member of an association of appraisers. It would be exceptional and on a strong evidence of a very great experience that this rule should be infringed.

The qualifications of the witness in the present case do not meet that criteria and his testimony is not accepted.

4.3.2.2 The Evidence and the Burden of Proof

As explained above, the appellant has the burden of proof. No appraisal expert testified for the appellant to prove that there was a goodwill which is valued at $15,000.

Mr Schaefer, however, testified that every figure of the agreement was negotiated with the City of Drummondville. “The City lawyer Beron, my accountant and myself we sat down and we negotiated figure before a final settlement was accepted’’. The two parties were at arm’s length.

There is no reason in fact that the City of Drummondville would have given $46,000 without negotiations when the City in the notice of expropriation originally offered $13,900.

Is this evidence sufficient to reverse the burden of proof?

In the case Herb Payne Transport Limited (supra) at 1079, Judge Noël Said:

There is also no question that if the purchaser and vendor acting at arm’s length, reach a mutual decision as to apportionment of price against various assets which appear to be reasonable under the circumstances, they should be accepted by the taxation authority as accurate and they should be binding on both parties.

The Board accepts that principle. However, in the present case, the appellant has not given evidence to the Board that the price of $15,000 appears to be reasonable. The fact that there was a long negotiation is a presumption that subjectively it seems a reasonable price. But it is not a proof that objectively the price is reasonable. The Board in fact has no objective evidence at all (figures, profits of former years, etc) to decide that the $15,000 has an appearance of reasonableness.

Prima facie, it seems to the Board that this “appearance of reasonableness’’ would have been easy to give but the fact that the appellant has not given it, perhaps proves that it was not so easy.

The appellant has not reversed the burden of proof and the Board dismisses the appeal concerning the 1974 taxation year.

5. Conclusion

The appeal is allowed for the 1972 taxation year and the matter referred back to the respondent for reassessment in accordance with the above reasons for judgment.

The appeal for the 1974 taxation year is dismissed in accordance with the above reasons for judgment.

Appeal allowed in part.