Malloney’s Studio Limited v. Her Majesty the Queen, [1978] CTC 385, 78 DTC 6278

Urie, J:—This is an appeal from a judgment of the Trial Division allowing with costs an appeal from a judgment of the Tax Appeal Board, which Board had allowed appeals from re-assessments of the appellant under Part I of the Income Tax Act for the 1966 and 1967 taxation years.

To understand the relevant facts and proceedings, it is of assistance to have in mind, in a general way, the particular aspect of the scheme of the Income Tax Act and Regulations involved in the appeal as applicable to those years.

While the general rule in computing profit from a business for the purposes of Part I was that it was to be computed in accordance with business and commercial principles, paragraph 12(1)(a) expressly excluded any deduction in respect of depreciation or obsolescence. In place of any such allowance, there was what was provided for in paragraph 11(1)(a), which authorized as a deduction, in computing income of a taxpayer for a taxation year, “such part of the capital cost to the taxpayer of property . . ., if any, as is allowed by regulation’’. While the statute leaves to the Regulations the definition of the amounts to be deducted, there is, in section 20 of the statute, a series of definitions of arbitrarily selected concepts that are to be used in the Regulations as well as the statutes. Those that should be had in mind here are to be found in the following part of section 20:

(5) In this section and regulations made under paragraph (a) of subsection (1 ) of section 11,

(a) “depreciable property” of a taxpayer as of any time in a taxation year means property in respect of which the taxpayer has been allowed, or is entitled to, a deduction under regulations made under paragraph (a) of subsection (1) of section 11 in computing income for that or a previous taxation year;

(b) “disposition of property” includes any transaction or event entitling a taxpayer to proceeds of disposition of property;

(c) “proceeds of disposition” of property include

(i) the sale price of property that has been sold,

(ii) compensation for property damaged, destroyed, taken or injuriously affected, either lawfully or unlawfully, or under statutory authority or otherwise,

(iii) an amount payable under a policy of insurance in respect of loss or destruction of property, and

(iv) an amount payable under a policy of insurance in respect of damage to property except to the extent that the amount has, within a reasonable time after the damage, been expended on repairing the damage;

(d) ‘‘total depreciation” allowed to a taxpayer before any time for property of a prescribed class means the aggregate of all amounts allowed to the taxpayer in respect of property of that class under regulations made under paragraph (a) of subsection (1) of section 11 in computing income for taxation years before that time; and

(e) “undepreciated capital cost” to a taxpayer of depreciable property of a prescribed class as of any time means the capital cost to the taxpayer of depreciable property of that class acquired before that time minus the aggregate of

(i) the total depreciation allowed to the taxpayer for property of that class before that time,

(ii) for each disposition before that time of property of the taxpayer of that class, the least of

(A) the proceeds of disposition thereof,

(B) the capital cost to him thereof, or

(C) the undepreciated capital cost to him of property of that class immediately before the disposition, and

(iii) each amount by which the undepreciated capital cost to the taxpayer of depreciable property of that class as of the end of a previous year was reduced by virtue of subsection (2).

(6) For the purpose of this section and regulations made under paragraph (a) of subsection (1) of section 11, the following rules apply:

(g) where an amount can reasonably be regarded as being in part the consideration for disposition of depreciable property of a taxpayer of a prescribed class and as being in part consideration for something else, the part of the amount that can reasonably be regarded as being the consideration for such disposition shall be deemed to be the proceeds of disposition of depreciable property of that class irrespective of the form or legal effect of the contract or agreement; and the. person to whom the depreciable property was disposed of shall be deemed to have acquired the property at a capital cost to him equal to the same part of that amount;

The actual definition of what may be deducted as ‘‘capital cost allowance” (to use the popularly accepted expression for this statutory allowance), is so far as this appeal is concerned, is to be found in Regulation 1100(1} which defines it; in effect, as a certain percentage of the “undepreciated capital cost to him as of the end of the taxation year” of property of the particular class. For present purposes it may be said that this case concerns a class of property (Class 3) consisting of buildings but not the land to which they are affixed.

As we understand the facts and proceedings, they may be summarized, for present purposes, as follows:

(a) as of the year prior to the taxation years in question, the appellant was carrying on business in a building, which fell within Class 3, and as of the end of the 1963 taxation year there existed, within the statutory definition, “undepreciated capital cost” to it of Class 3 property;

(b) on September 4, 1963, the appellant entered into an agreement to sell the property (described by reference to street address and land survey description), the sale to be completed at a time that was subsequently extended to November, 1964, when, according to the Agreement, possession was to be given “clear of all buildings’’;

(c) after entering into the agreement, the appellant caused the building on the property in question to be demolished and thereafter, in November, 1964, conveyed title to. the described property, and delivered possession thereof, to the purchaser ‘‘clear of all buildings”;

(d) the assessments attacked were made on the assumption that a part of the sale price received by the appellant was “proceeds of disposition’’ of the building within paragraph 20(5)(c), which must be deducted in the calculation, under paragraph 20(5)(e), of its undepreciated capital cost of Class 3 property as of the ends of the taxation years in question;

(e) the judgment of the Trial Judge from which this appeal is brought, in effect, upholds the assessments attacked subject to a variation in amount.

As we understand it, the judgment attacked is supported on the basis that a part of the sale price was, in effect, “proceeds of disposition” of the building because it was, in effect,

(a) “compensation” for destruction of the building within subparagraph 20(5)(c)(ii) supra, or

(b) alternatively, if it does not fall within subparagraph (ii), payment for the destruction of the building falling within the ordinary meaning of “proceeds of disposition” in paragraph (c).

If a part of the sale price was, as argued, “proceeds of disposition” of the building, paragraph 20(6)(g) would then supply a rule for determining what part that was.

In so far as subparagraph 20(5)(c)(ii) is concerned, in our view, it has no application. As we read it, the “compensation” for property “damaged”, “destroyed”, “taken” or “injuriously affected” there referred to is an amount received or receivable from a third person who has damaged, destroyed, taken or injuriously affected property of the taxpayer.* [1] When the appellant sold land “clear of all buildings”, the sale price, in our view, was payment for the land and no part of it can be regarded as “compensation” for buildings that the appellant had to remove between the making of the agreement for sale and its completion in order to carry out the agreement in accordance with its terms.t [2] By a parity of reasoning, no part of the sale price can be regarded as a payment for the destruction of the building that does not fall within paragraph (c)(ii).

In so far as paragraph 20(6)(g) is concerned, we are of the view that it has no application. As we read that section it only applies where there is a single price for a disposition of

(a) depreciable property, and

(b) something else.

For such a case, it provides for the allocation of that single price as between the depreciable property and the “something else’’ on a “reasonable” basis “irrespective of the form or legal effect of the . . . agreement”. It does not apply unless there actually is a disposition of inter alia “depreciable property” and the words “irrespective of the form or legal effect . . .” are not found in a context that would justify reading the sentence as permitting something to be regarded as a disposition of depreciable property if it is not actually such a disposition.* [3]

We are of the view that the appeal should be allowed with costs in this Court and in the Trial Division, that the judgment of the Trial Division should be set aside and that the judgment of the Tax Appeal Board should be restored.