Club De Courses Saguenay Limitée, La Piste Pré Vert Inc v. Minister of National Revenue, [1979] CTC 3022, 79 DTC 578

Guy Tremblay [TRANSLATION]:—These cases were taken under advisement on November 22, 1978 based on the pleadings filed. They were heard on October 20, 1977.

1. Point at Issue

1.01 Le Club de Courses Saguenay Limitée

The question is whether the appellant, Le Club de Courses Saguenay Limitée (hereinafter referred to as Le Club de Courses), is correct in appealing from an assessment made by the respondent on January 3, 1975, including in its income for 1973 the sum of $11,015.30 as interest. This sum, received from the appellant La Piste Pré Vert Inc (hereinafter referred to as La Piste), was part of a total amount of $18,000 pursuant to a contract concluded on May 13, 1967, in which Le Club de Courses sold to La Piste (formerly known as Le Club de Courses Centenaire Inc and appearing as such in the contract) assets primarily consisting of what may be roughly described as land and buildings (clubhouse, sheds and stables). This sale was for $360,000, $18,000 of which was paid in cash and the balance of $342,000 was “payable, without interest only until the due date, in equal and consecutive instalments of $6,000 each, on July 1, September 1 and November 1 of each year from July 1, 1968 onwards”. Pursuant to subsection 16(1) of the new Income Tax Act, the respondent assumed that the amount of $18,000 included a portion of interest, namely $11,015.30

1.02 La Piste

Further, as to La Piste, the respondent considered the entire amount of $18,000 paid in 1973 as capital, thereby refusing any deduction for interest for the sum of $11,015.30, which was nevertheless regarded as interest and taxable in the same year for Le Club de Courses. This approach by the respondent for 1973 is contrary to that taken by him in the earlier years, 1971 and 1972, when he admitted a portion of interest.

Orginally (in 1968 and subsequent years), La Piste regarded the payment of $18,000 as capital in its tax returns. In order to reduce its income, it used the depreciation of the buildings. When the respondent considered in 1971 that a part of the payment of $18,000 was for interest, this part was applied as a deduction. However, the respondent refused to allow the depreciation as a deduction. When the respondent refused deduction of the interest in 1973, he did not as a result allow the depreciation.

La Piste is appealing from the assessment for the taxation year 1973 because it would like the respondent, in the words of its counsel, “to take a position once and for all”.

1.03 The respondent: interest equal to overvaluation of assets

The respondent argued that the value of the assets is $204,000, not $360,000, the difference being the interest overcharged.

2. Burden of Proof

The burden is on the appellants to show that the respondent’s assessments are incorrect. This burden of proof derives not from one particular section of the Income Tax Act, but from a number of judicial decisions, including the judgment of the Supreme Court of Canada in R RWS Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

3. Facts

3.01 On May 11, 1967 Le Club de Courses sold various assets to another corporation which subsequently became “La Piste”, the whole as appears from a contract filed as Exhibit AS-1.

3.02 (a) The sale was for the sum of $360,000: $18,000 on signature of the contract and the balance, $18,000 a year ($6,000 three times a year) for the next 19 years, the whole without interest.

(b) The purchaser had the right of paying in advance, but without a reduction of the price.

(c) In the paragraph titled “Valuation of assets”, the first sentence read as follows: “the parties hereto have valued by mutual agreement the assets sold hereby”.

(d) The seller’s shareholders undertook not to carry on a similar business within a ten-mile radius for twenty years.

3.03 The assest which were the subject of the sale and their prices were broken down as follows:

3.04 it was admitted that the parties to the contract were acting at arm’s length within the meaning of the Income Tax Act.

(B) General valuation of Le Club de Courses

3.05 Dallaire, Laforte and Bouchard, a firm of chartered appraisers in Jon- quière, submitted a valuation report (Exhibit AS-2) on the value in May 1967 of the assets which are the subject of the case at bar. This report was prepared on September 21, 1972.

The assets were valued as follows:

3.06 On April 25, 1975 the appraisers made the following observations (Exhibit AS-3) concerning the said report, the whole confirmed by the testimony of Mr Bernard Dallaire at the hearing:

The value of $289,559 stated in this report represents the market value of the property, that is, in this case the depreciated replacement value of the land in this sector.

This market value does not take into account the added value which may be attributed to this property on the basis that it is the only one of its kind in the entire area, its economic potential, its exceptional site for this type of business, and so on.

This value also does not take into account the compensation which might be awarded in the event of an expropriation, which would have to take into account all the loss caused to the owner.

Finally, it is understood that the municipal valuation cannot be taken into consideration for this property, because it is a gross valuation and in addition, in this particular case, no service or improvement on the land, and so forth, is considered in this case.

(C) Respondent’s general valuation

3.07 Furthermore, in his testimony the respondent’s witness Mr Gaston Laberge, a chartered appraiser, filed a valuation report (Exhibit 1-1) dated

November 1975 in which the property was valued by two different methods: the cost method and the income method.

3.08 The cost method is the one used by the appraiser Dallaire (see paragraph 3.05), namely the replacement cost of the buildings on the day of the valuation (May 11, 1967), less accumulated depreciation. The actual market value of the land must also be added.

The use of this method by the respondent’s appraiser produces the following results:

3.09 The respondent’s valuation using the income method

This method is explained in report 1-1 (pp 53 and 54):

The use of this method is intended to transform into a present value the sum of the net income which a property may produce based on a normal typical operation for each year of its useful life.

Applying this method to a specific property, it is essential to consider what similar property, located in the same surroundings and subject to the same influences, produced, in order to have an accurate idea of the normal gross income from a typical operation, or in other words the normal economic return. In short, this is what a prudent investor would do if he were considering the purchase of an income-producing property.

In estimating the value by the income method, four (4) steps must be taken:

(a) determining the economic gross income;

(b) estimating the net income from the property;

(c) establishing the appropriate capitalization rate;

(d) capitalizing the net income.

Thus, this method consists of determining the typical operation and the normal economic return in order to obtain an estimate of the most likely future gross income, and deducting operating expenses therefrom in order to arrive at a net income. The capitalization rate selected is then applied to this net income, taking into account the special characteristics of this income and the component parts of the property, namely the land and the building. In the case of the present appraisal, since the property under consideration has a very specific use, the appraiser is of the opinion that it is very difficult to estimate the economic return from similar properties, as the scope of the enterprise is dependent on the region and its population.

To apply the income method to valuation of the property under consideration, the statements and income of the owner must simply be analysed and standardized.

3.10 The results of the respondent’s application of this income method are the following:

3.11 The respondent’s appraiser obtained $179,000 as the final result of the two methods used. The Board cannot see how he arrived at this figure. It is certainly not an average of the arithmetical result of the two methods used ($154,700 + $195,000 + 2 = $175,200). He simply stated in his report, on p 60, that this was a figure somewhere between the two previously mentioned.

However, on p 61 he broke down the assets as follows:

(D) General valuation according to the original assessment

3.12 The first assessment made pursuant to conclusion of the 1967 contract, probably for the year 1967, was made on the basis that the capital value of the property sold on May 11, 1967 was $204,000. The difference between $360,000 and $204,000, $156,000, constituted interest (transcript p 167) within the meaning of subsection 16(1). However, no information was provided giving the value of each asset in detail. This value of $204,000 affected in turn the amount of interest established by the 1973 assessment.

(E) Land: detailed valuation, discrepancy

3.13 With regard to valuation of the land (contract: $62,000; Lapiste appraiser: $39,000; the respondent’s appraiser: $19,200 and $17,560 (see paragraph 3.11)), both appraisers agreed in theory on the area: 25 acres.

However, their calculations differed. According to Mr Dallaire, the Club de Courses appraiser:

Principal Part

500,000 sq ft at $0.07	= $35,000
10 acres at $400	$ 4,000
	$39,000

First, the Board notes that 500,000 sq ft comes to only 11.48 acres (500,000 -:- 43,560 sq ft = 11.48). Mr Dallaire’s calculations for La Piste are therefore short by 3.5 acres. Second, the Board notes that the part making up the actual running track, namely 500,000 sq ft, has a greater value ($0.07 a sq ft) as compared with the residue, the second part of 10 acres (less than $0.01 a sq ft—transcript, pp 58 and 59).

Mr Dallaire based the $0.07 a sq ft (which he said was very conservative) on the expropriation of a piece of land, having a surface area somewhat Similar to the subject land, and dealt with in a judgment of the expropriation tribunal (Commission scolaire régionale Lapointe v Paul Emile Desbiens, No 2981-X, SC, Chicoutimi district 41,736), dated December 3, 1973 (Exhibit AS-4). The tribunal allowed $0.13 a sq ft. The said land was located about a thousand feet from the subject land (transcript, p 92). The expropriated party claimed $0.45 a sq ft, the selling price of an adjacent piece of land.

3.14 According to Mr Laberge, the respondent’s appraiser:

Mr Laberge then went down to $17,560 (see paragraph 3.11).

Mr Laberge considered $0.18 a sq ft (based on two sales of pieces of land adjoining the subject land) for the part with 200 ft of frontage on the street and a depth of 200 ft (transcript, p 193). The residue (24 acres) was treated like farmland which had been sold in the vicinity (one transaction, 100 acres for $35,000, or $350 an acre, and a second transaction, 55 acres for $23,000, or $418 an acre). After certain adjustments, because the subject land was only 25 acres in size, Mr Laberge set the price at $500 an acre (transcript, pp 194 to 197), or a little more than $0.01 a sq ft.

(F) Buildings: detailed valuation, discrepancy

3.15 With regard to valuation of the buildings: according to the contract, $211,738; according to the Dallaire valuation (La Piste), $172,409; according to the appraiser Laberge (respondent), $113,980, using the actual market value method and $104,250 in the final conclusions (see paragraph 3.11).

The Board has listed below the various buildings, areas and depreciated cost allowed by Le Club de Courses (CC) and by the respondent (RES):

3.16 According to the reports the improvements to the land were broken down as follows:

3.17 The respondent valued the rolling stock and equipment at $12,500 and Le Club de Courses valued it at $12,320.

4. Act—Case Law—Comments

4.01 Act

The chief statutory provision concerned in the case at bar is subsection 16(1) of the new Income Tax Act, which reads as follows:

Income and Capital combined

(1) Where a payment under a contract or other arrangement can reasonably be regarded as being in part a payment of interest or other payment of an income nature and in part a payment of a capital nature, the part of the payment that can reasonably be regarded as a payment of interest or other payment of an income nature shall, irrespective of when the contract or arrangement was made or the form or legal effect thereof, be included in computing the recipient’s income from property.

4.02 Case Law

The cases cited by the parties are the following:

1. Vanwest Logging Co Ltd v MNR, [1971] CTC 199; 71 DTC 5121;

2. J Emile Groulx v MNR, [1967] CTC 422; 67 DTC 5284;

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

4.03 Comments

The principal basic facts which must be considered by the Board are the following:

—the parties to the contract of May 13, 1967 were at arm’s length within the meaning of the Income Tax Act (paragraph 3.04 of the facts);

—the valuation of the assets listed in the contract was made by mutual agreement between the parties (paragraph 3.02(c) of the facts).

4.04 In making the appellants’ assessments, the respondent created a presumption that they were correct in fact and in law, placing the burden of proof on the appellant (paragraph 2).

4.05 Noël, J, of the Exchequre Court of Canada, in Herb Payne Transport Ltd, (supra), laid down a principal which has often been cited by the courts:

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.

4.06 In accordance with the establishment of this principle, the appellants Still have the burden of proof, but it is considerably attenuated: it is only necessary to show that “the prices seemed reasonable in the circumstances”, including the total of the sale.

4.07 The appellant, Le Club de Courses, the seller in the contract of May 13, 1967, made a valuation of the material assets totalling $289,559 (paragraph 3.05 of the facts). From this fact alone it appears that the valuation of the material assets at $360,000 in the contract does not seem to be “reasonable in the circumstances”. It was the appellant vendor which in fact established the lowered cost itself. Accordingly, in valuing the material assets the Board cannot arrive at any amount greater than $289,559. The Board will deal with the intangible assets below (paragraph 4.14).

The respondent, on the other hand, submitted one valuation at $195,700 (paragraph 3.08 of the facts) using the cost method, one at $154,700 (paragraph 3.10 of the facts) using the income method, and a third, a combination of the other two, $179,000 (paragraph 3.11 of the facts).

Additionally, the first assessment made after the contract of May 13, 1967 rested on an overall valuation of the material assets at $204,000 (paragraph 3.12 of the facts), and the assessment for 1973 was a consequence of this same valuation, so the Board cannot arrive at an overall valuation lower than $204,000. The Board may only amend an assessment to reduce the tax burden, at the request of the appellant, Le Club de Courses, and not make the tax greater than that imposed by the assessment.

Moreover, there was no evidence for a detailed breakdown of the $204,000.

4.08 Where the land is concerned, the Board is of the opinion that the appellant (Le Club de Courses) discharged the burden of proof by setting its value at $39,000. Although the respondent allowed $0.01 a sq ft on the majority (paragraph 3.13 of the facts), the appellant claimed $0.07 a sq ft, which included the running track, and the Board regards this as reasonable, as is the price of $0.07 a sq ft. This $0.07 a sq ft is in fact based on the judgment of the expropriation tribunal (Commission scolaire régionale Lapointe v Paul Emile Desbiens) concerning a piece of land located 1,000 ft from the subject land (paragraph 3.13 of the facts). The respondent omitted to take this sale into account. It also should be remembered that the respondent allowed $0.18 a sq ft for a part (200 ft x 200 ft) located near the public road. The appellant only allowed $0.07 a sq ft for this.

The appellant accordingly discharged the burden of proof concerning the value of the land, which it estimated at $39,000.

4.09 Regarding the improvements to the land described in paragraph 3.16 of the facts, the total estimate is $65,830 by the appellant and $50,014 by the respondent. At the start of the hearing, counsel for the respondent and counsel for Le Club de Courses agreed that they would resolve this difference at $60,000. Counsel for La Piste simply took the position of admitting nothing. The Board feels that in light of the various items and figures given with a supporting basis in paragraph 3.16, the figure of $60,000 is an amount which fairly represents the actual market value.

4.10 With regard to the value of the rolling stock and equipment, set at $12,500 by the respondent and at $12,320 by Le Club de Courses, the Board sets this at $12,400.

4.11 Concerning the buildings, the valuations are broken down in paragraph 3.15 of the facts. The total of the estimates is $172,409 for the appellant and $113,980 for the respondent.

4.11.1 On the one hand, the appellant submitted that its appraiser had a considerable advantage over respondent’s, in that he saw all the buildings (except one) and so was in a position to make a better valuation of them. He did his investigation and valuation in 1972. However, in the submission of the respondent, its appraiser worked on the basis of the fire insurance file, which contained a sketch and a description of each of the buildings and of the municipal valuation record. Nevertheless, he did not see the clubhouse, the platform, the restaurant and the stable, in the condition they all had in 1967. He did not do his investigation and valuation until 1975.

In the appellant’s submission it is clear that in these circumstances there could be ample scope for error in the valuation of the assets and depreciation. The respondent’s appraiser indeed admitted as much in cross- examination.

In examining Exhibits 1-1 and AS-2 (see paragraph 3.15 of the facts), the Board found that the respondent had allowed an average depreciated value of 10% less.

4.11.2 In his process of arriving at the depreciated value of the buildings, the respondent’s appraiser first established the replacement value at December 31, 1971, then the replacement value in May 1967. These amounts were as follows:

Replacement Value According To Respondent

Replacement Value		Depreciated Value
	31/12/71	7/5/67	7/5/67
2. Clubhouse and attached office	56,827	39,990	29,992
4. Stable (1) Annex	23,291	16,119	9,672
5. Stable (2) Annex	12,470	8,630	6,040
6. Stable (3) Annex	32,370	22,401	13,441
7. Stable (4)	12,672	8,770	5,262
8. Stable (5)	12,000	8,314	4,988
9. Stable (6) Annexes	16,448	11,383	6,830
10. Forge	2,785	1,927	1,542

11. Cover and shed	1,766	1,218	972
12. Shed (paddock)	17,343	1,201	8,401
13. Stable (7)	17,561	12,153	6,076
14. Stable (8) and Annexes	18,706	12,952	8,814

4.11.3 An examination of the table contained in paragraph 3.15 of the facts will show that in fact the difference in the depreciation taken is on the order of 10%. This slight difference, however, cannot explain the margin of $60,000 between the total of the depreciated values of the buildings.

The difference in fact results from the original valuation. This can be seen simply by examining the table in paragraph 3.15 and the table in paragraph 4.11.2 preceding.

In the case of building No 2 (Club House), the respondent’s replacement value at December 31, 1971 (56,837) is even less than the replacement value set by the appellant in May 1967 ($75,600). Nevertheless, the residual rate is the same, 75%.

The same is true of building No 7 ($13,500 and $12,000—residual rate 60%).

In the case of buildings Nos 4 and 5, the replacement values in 1971 are Similar.

The Board is of the opinion that someone who was able to visit the buildings to value them, as the appellant’s appraiser was able to do, is more likely to make a better appraisal. This fact must be taken into consideration by the Board. It cannot be forgotten, moreover, as appraisers often point out to the Board, that a valuation is an opinion. One person’s opinion may be as good as another.

4.11.4 Before deciding on the total, the Board concluded that the depreciated value of building No 1 is $6,000. The respondent, who had valued it at $4,500 took into account only 900 sq ft of surface area, whereas the evidence showed that, as the appellant contended, there was 1200 sq ft.

The amount of $1,500 must therefore be added to $113,980, giving a total of $115,480.

4.11.5 Whereas the appellant’s appraiser had a considerable advantage from being able to examine the buildings to be valued in detail, an advantage which the respondent’s appraiser did not have, the Board places the respondent’s appraiser’s disadvantage at 25%. The replacement value set by the respondent concerning the following assets must therefore be increased by 25% (unless it overtakes the AV value of the appellant), and the depreciated value calculated as follows:

4.11.6 The respondent’s total depreciated value after adjustments thus amounts to $136,734.17.

4.11.7 Where a valuation is an opinion, and unless there is an obvious error, in theory one valuation can be as good as another;

Whereas one obvious error was corrected, and the total of each valuation amounts to $172,409 and $115,480 for the appellant and the respondent respectively;

Whereas a second error was corrected, increasing the repondent’s valuation to $136,734.17;

Whereas ordinarily a reasonable valuation would be the figure halfway between the two, that is $136,734.17 and $172,409;

The Board fixes the valuation of the buildings at $154,571.58.

4.12 Accordingly, the Board’s valuation of the material assets (physical and tangible) totals $263,884, broken down as follows:

4.13 As the sale in the contract of May 1967 totals $360,000 and the total of the fair market value of the tangible assets is $266,000, there is a difference of $94,000. In making his assessment, the respondent assumed that any difference between the sale price and the fair market value of the tangible assets may be reasonably regarded as interest.

What is the evidence in this regard, the burden being on the appellant?

In the appellant’s submission, the sale contract provided that there would not be any interest. Moreover, this difference may consist of an income type item, like a profit made on a sale, or a capital item like good will.

4.14 No interest as submitted by the respondent

The respondent calculated that there was $11,015.20 interest on the sum of $18,000 received by Le Club de Courses in 1973.

In the appellant’s submission, as the parties had provided clearly in the contract of May 11, 1967 that there would be no interest and the parties were dealing at arm’s length, the National Revenue Department cannot assume that there was interest. To begin with, it should be remembered that subsection 16(1) of the new Act clearly states that it shall apply “irrespective of the form or legal effect of the contract.”

Furthermore, in principle interest is ordinarily payable in a business transaction which involves payments spread over several years. The appellant has the burden of showing the contrary. What reasons were put forward by the appellant? The principal shareholder of the vendor company left the proceeds of the sale to his children. Because of certain personal and family reasons, the father did not wish his children to receive the money too quickly; rather, he wished it to be spread over several years.

There was even a Clause in the contract discouraging early payments.

This clause in fact prohibited a reduction of the price as the result of a payment of this kind.

The Board does not regard this as a valid reason justifying the abolition of interest. Moreover, the president of the vendor company, who had been managing businesses for several years, was an experienced businessman and could not have been unaware of the tax benefits of an absence of interest in the payments to be received.

4.15 Intangible assets

The appellant maintained that the difference may consist of other things than interest: subsection 16(1) says so.

What was the evidence submitted in this regard by the appellant?

In its pleading, the appellant cited the clause in the contract prohibiting the vendor and its shareholders from competition within a ten-mile radius for 20 years, the transfer of permits, the insurance premiums and the uncertainty as to the devaluation of money.

These points were mentioned but no quantum was indicated.

Moreover, it would have been somewhat difficult to quantify the clause prohibiting competition within a ten-mile radius. It is also somewhat unlikely that two racetracks could survive profitably with their public in such a limited area. Who would risk investing in a racetrack when there was already one within such a limited radius?

In any case, no specific evidence was submitted by the appellant, and the Board cannot in a general manner apply for intangible assets, including good will, the entire difference between the value of the tangible assets and the selling price.

4.16 Other income

The appellant also provided no evidence that, in the aforementioned difference, there was another kind of income, such as profit. In any case, such a profit would be taxable in the same way as interest.

4.17 La Piste Pré Vert Inc

It is quite clear that, in accordance with section 20 of the Act and the Regulations made thereunder, La Piste is entitled to take the appropriate depreciation following on the cost of the assets.

In addition, this company is entitled to deduct the interest included in the $18,000 paid each year.

5. Conclusion

The appeals are allowed in part and the matter referred back to the respondent for re-assessment in accordance with the foregoing Reasons for Judgment.

In the sale price of $360,000, the amount of $266,000 must be regarded as capital and $94,000 as interest. The appellant, Le Club de Courses Saguenay Limitée, shall include in its income for 1973 interest calculated proportionately based on the foregoing valuation.

La Piste Pré Vert Inc may deduct interest in 1973 (calculated as above) which is included in the sum of $18,000 paid in that year. It may also take depreciation on the assets in accordance with the price paid, allowing for depreciation already taken, if any.

Appeal allowed in part.