Godfrey G S Moulds v. Her Majesty the Queen, [1977] CTC 126, 77 DTC 5094

Marceau, J:—The plaintiff appeals from the decision of the Tax Review Board dated March 17, 1976, which confirmed the assessment made by the Minister of National Revenue (thereafter the Minister) of his income tax for the years 1970, 1971 and 1972.

The question at issue is whether the plaintiff, in computing his taxable income for the said taxation years, may be allowed certain deductions for capital cost allowance on depreciable property of Class 3 of Schedule B to the Income Tax Regulations. By notices of reas- sessment dated August 23, 1974 the Minister disallowed the deduction claimed by the plaintiff of capital cost allowance in the amounts of $499.54 and $482.12 for the years 1970 and 1971; and by another notice of reassessment dated August 28, 1975 the Minister disallowed the deduction of a “terminal loss allowance’’ in the amount of $18,521 which the plaintiff had claimed for the year 1972 when he disposed of all his Class 3 depreciable assets.

The Facts Giving Rise to the Issue

The plaintiff is a physician, in practice since 1947, residing in the City of Ottawa. In 1961 he acquired, for a price of $66,000, a certain piece of real property on McLeod Street, in downtown Ottawa, consisting of land and two red brick veneer 5-apartment buildings standing thereon. Until 1964 he maintained the property and leased the apartments to various tenants. The plaintiff had long conceived the idea of constructing with co-practitioners a medical building which could accommodate other doctors or dentists as well as himself. It is his contention that he had that in mind in 1961 when he purchased the property. It was, in his view, ideal for such a project. In pursuance of that idea, he contacted other doctors and dentists. A group was formed and a plan was agreed upon. On April 14, 1964 an agreement for the sale of the property was entered into between the plaintiff as vendor and the plaintiff with two other doctors—acting in trust for a corporation to be incorporated—as purchasers (Tab 6 of the book of documents tendered by the parties at the opening of the trial). The selling price, stated to be for land value only, as the buildings were to be demolished, was $70,500. The arrangement was completed on August 20, 1964 by the plaintiff conveying the property to a newly incorporated corporation, Foxspar Realty Limited, in which he himself held 20% of the voting and 41/2% of the preferential non-voting shares. The buildings, which had in the meantime been vacated, were shortly thereafter demolished. The construction of the medical building was completed three years later.

In 1966 the Minister of National Revenue, after conducting an audit of the plaintiff’s affairs, including an examination of the capital cost allowance schedule reported by him, allocated an amount of $46,625.33 (out of the total sale price) to the buildings which previously stood on the land. The plaintiff, who had claimed an allowance for his 1964 taxation year based on the contention that he had been paid nothing for the buildings, was reassessed accordingly. He disputed the assessment. As a result of discussions between himself, his accountant and two department officials the amount allocated to the buildings was reduced to $44,625.33 subject to the plaintiff’s withdrawal of his notice of objection. His letter to that effect, dated November 18, 1966, read as follows:

Dear Sirs:

On condition that the amount of proceeds from disposition of a property at 334-336 McLeod Street, which I sold in 1964, be adjusted in your records to read as $44,625.33 instead of $46,625.33 as shown on the Capital Cost Allowance Schedule which was attached to Notice of Re-Assessment Number 1240221-1 issued on April 17, 1966 by the Department of National Revenue, I am prepared to withdraw my Notice of Objection dated July 14, 1966, relative to the above-noted Re-Assessment.

I wish to point out that the withdrawal of my Notice of Objection does not mean that I concur with the Minister’s view, in this case, that substantially the same amount should be credited on the sale of the Class 3 Asset as was set up at the time of acquisition. I still fail to see why any value should be attached to the building from proceeds of sale, when the purchaser is only buying land and had the building demolished immediately after purchase. However, I am anxious to finalize the matter and as stated above am prepared to accept the figure of $44,625.33 as being the proceeds of disposition attributable to 334-336 McLeod Street.

I trust the above information will enable you to complete my file relative to the year 1964.

Yours very truly, G GS S Moulds.

The issue, however, emerged again, some years later, in 1972, when the plaintiff disposed of all his remaining Class 3 assets. In his income tax return for that year he claimed a terminal loss allowance under paragraph 20(1 )(a) of the Income Tax Act and subsection 1100(2) of the Regulations, computing the undepreciated capital cost of his property of the said class as if no portion of the proceeds of disposition of the McLeod property was referable to the buildings standing on the land at the time of its sale back in 1964. The capital cost allowance claimed by him for the two previous years had also been calculated on the same basis. The Minister, of course, disallowed again the deductions and issued the notices of reassessment which are in question in this action.

The Plea of Estoppel

Counsel for the defendant urges, as his main contention, that the plaintiff cannot now dispute or change the allocation of the proceeds of the 1964 sale after having agreed to it in 1966. Under the theory of estoppel, he says, the plaintiff is now barred from raising again the specific issue which was directly put into question by the reassessment made in 1966 for the 1964 year. It is well settled in law, he submits, that where a person makes a representation to another who acts on it to his detriment, he is estopped from denying later the representation he made; and the rule, which is one of common sense, is particularly vital in matters such as the one at bar. Indeed, argues counsel, the position of the. Minister would be most prejudiced if a taxpayer were allowed to withdraw or resile from a representation of facts he made long before. In his view, the difficulties that may arise, years later, in trying to ascertain the true facts and the administrative problems involved are such that when an assessment is based on a specific fact and no appeal is taken to contest it, the whole matter must then be considered closed: the Revenue Department should not be faced with the possibility of a new challenge to the same fact in the taxpayer’s computation of his income for subsequent years.

I simply cannot agree with those contentions. In my view, the doctrine of estoppel, as I understand it, does not apply here. When the plaintiff agreed, in 1966, to withdraw his notice of objection, he did not, as I see it, make any representation as to the factual situation. In his original return he had taken the position that the buildings had, on the sale of the property, no value and he adhered to that position in his letter of withdrawal of November 18 wh^n he wrote: “I still fail to see why any value should be attached to the building from proceeds of sale.” For reasons of his own, he chose to settle or compromise his tax liability for that year rather than then pursue the matter further through the courts. But that can certainly not be construed as the representation of a fact which it ‘‘would be unconscionable to permit him to deny”, that being the very basis of the theory of the so-called “estoppel in pais” (Phipson on Evidence, 11th ed, page 927). Moreover, it can hardly be said that the decision of the plaintiff to withdraw his notice of objection led the Minister “to act to his detriment”. The amount allocated to the buildings was reduced by some $2,000 but it remains that if the objection had not been withdrawn and had been upheld, the plaintiff would have paid less taxes between 1964 and 1970 as he would have been entitled to claim greater amounts of capital cost allowance.

Some administrative problems might be involved but it is clear to me that they cannot be invoked to preclude a taxpayer from exercising his rights. As for the difficulties of proof raised, they are bound to prove an obstacle to the plaintiff’s case and not to the Minister’s. It is always for the taxpayer to rebut the facts assumed by the Minister in an assessment, and in a case such as this the onus may be particularly hard to meet because the taxpayer will have at the same time to convince the Court that his earlier conduct is not to be interpreted as a clear admission of the Minister’s assumptions.

Many of the cases cited by counsel on this issue of estoppel are not helpful as they relate to estoppel by record (res judicata) or by deed, whereas we are dealing here with a plea of estoppel by conduct or representation. But one that it very much in point is the well- known case of Emco Ltd v MNP, [1968] CTC 457; 68 DTC 5310, where such a plea was rejected even though the facts therein could, much more convincingly than here, lead to the conclusion that a “representation” had been made.

The plaintiff, in my view, was not barred in 1972 from correcting the amount of his pool of Class 3 assets, and, by so doing, raising again the 1966 issue which he had at that time chosen not to fight.

The Basic Issue

The plea of estoppel having failed, the question which must be examined is whether or not the plaintiff has established, on the evidence and the law, that no portion of his proceeds of sale of his McLeod property in 1964 should be treated as proceeds of disposition of some of his Class 3 assets, namely the buildings standing thereon. And the criterion to be applied in dealing with the matter is that of reasonableness since paragraph 20(6)(g) of the former Income Tax Act under the authority of which the allocation was made, provided as follows:

20. (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;

Is it “reasonable” to consider, in the circumstances which prevailed at the time of the sale in 1964, that any part of the price agreed upon was consideration for the buildings?

It is first to be noted that the defendant did not adduce any useful evidence to substantiate the Minister’s assumption. The only witness called on her behalf was the officer who handled the objection in 1974, and who had had nothing to do with the matter previously. It should also be noted that no appraisal was made by the Department in 1966 when the original reassessment was issued. The amount of $46,625.33 then allocated to the buildings was simply the value attributed to them by the plaintiff for the calculation of his Capital cost allowance in the years prior to 1964. We are therefore left with: (1) the documents produced, (2) the testimony of the plaintiff, and (3) the expert opinion of a professional real estate appraiser, who, relying on an appraisal he had done in 1961 of a property adjacent to the plaintiff’s, expressed his views that the buildings standing, in 1964, on the latter property, did not add any value to the fair market value of the land, since the highest and best use of the site was for redevelopment as an office building site.

Now, is that evidence sufficient to rebut the Minister’s assumption reinforced, so to speak, by the plaintiff’s withdrawal of his objection in 1966? After some hesitation I come to the conclusion it is.

It seems clear to me that when he suggested a price to the group of practitioners formed for the purpose of realizing the medical building project he had conceived, the plaintiff could not and did not ask for more than the value the land had to the group. And that value was the fair market value of the property at its highest and best use, redevelopment as an office or medical building.

It is true we are concerned here with the value to the vendor, and the mere fact that the purchasers were interested in land only is not conclusive that the buildings standing thereon had no value to the vendor. But such value, to be considered, must be demonstrable, real, economic value—as was obviously the case in the two decisions cited by counsel for the defendant, MNR v Malloney’s Studio Limited, [1975] CTC 542: 75 DTC 5377 and The Queen v William Baziuk, [1976] CTC 787; 77 DTC 5001. Here on the contrary, according to the evidence adduced, the value of the land alone to a developer far exceeded the capital amount necessary to produce the rental revenues that could be derived from the buildings. The plaintiff asserted that the leasing of the buildings prior to sale was, in his mind, primarily of a transitional nature; his statement to that effect is not to my mind contradicted by the fact that he carried insurance against fire and stipulated in the deed of sale itself, for some other normal precautionary measures with regard to them. In my view, in the negotiations leading to the agreement of 1964 and the fixing of the purchase price, the plaintiff was never able to obtain any additional advantage or value by reason of the presence of the buildings. All value had to relate exclusively to the land. The earlier mentioned stipulation in the agreement to the effect that the price was for land only may have been inserted at the request of the plaintiff and- for tax purposes (as stressed by counsel for the defendant) but it was, in my opinion, the mere truth.

The Tax Review Board upheld the Minister’s assessment on the basis that the sale by the plaintiff to Foxspar Realty Limited was a non-arm’s length transaction; that the provisions of subsection 17(2) and paragraphs 20(6)(g) and 20(5)(c) of the former Income Tax Act were applicable. I do not agree with the view that the transaction was negotiated on a non-arm’s length basis. Although the plaintiff was a member of the group of practitioners who had agreed to go ahead with the construction of the centre and became a minority shareholder in the company formed to realize the project, it does not follow that his dealings with the other doctors were not conducted at arm’s length; nor does it follow that he was induced to give away something and by so doing sacrificed his own economic interests. Be that as it may, in view of the fact that, in my opinion, the buildings had no value to any of the parties to the 1964 agreement, the question whether or not negotiations were held at arm’s length can have no bearing on the issue.

I am satisfied, on the evidence relating to the bargaining between the parties, the meeting of minds on both sides in the transaction— to repeat the words used by the then Associate Chief Justice of this Court in the Emco case referred to above—that the price arrived at was exclusively attributable to the value of the land and nothing to the buildings. I therefore conclude that no amount of the selling price in 1964 can reasonably be regarded as proceeds of disposition of the buildings.

The appeal will therefore be allowed with costs and the reassessments will be referred back for further reassessments not inconsistent with these reasons.