Donald Ross v. Minister of National Revenue, [1977] CTC 2059, 77 DTC 50

Roland St-Onge:—The appeal of Donald Ross came before me on January 28, 1977 at the City of Calgary, Alberta, and the issue at stake is whether a terminal loss of $11,916.66 can be deducted in the appellant’s 1972 taxation year. It was agreed at the outset that this appeal and that of Robert W Wintemute (76-887) would be heard on common evidence and the decision would apply equally to both appeals.

In his Reply to Notice of Appeal the Minister admits that the reassessment arose as a result of the Minister’s disallowance of a claimed terminal loss in the sum of $11,916.66 on the disposition by the taxpayer of certain lands and premises situate in the City of Calgary in the Province of Alberta and legally described as Lots A and 1 and 2, Block 1, on Plan Meridian Industrial Calgary 7655 HF; that the taxpayer, in conjunction and as joint venturer with two other taxpayers, namely, Robert W Wintemute and Robert M Nesbitt, purchased the aforesaid lands on December 28, 1970, each as to an undivided one-third interest, from Lawrence R Herrington; and that on or about April 30, 1972 the taxpayer and his joint venturers disposed of the lands and building to Foremost Tracked Vehicles Ltd for the sum of $370,000, the purchaser having occupied the property as a tenant since December 30, 1970.

The other facts are as follows:

On January 5, 1971, as an adjunct to the lease, the appellant and his associates granted to Foremost Tracked Vehicles Ltd an option to buy the land in question for $370,000, the purchase price to be paid, inter alia, by (a) the assumption of the balance due and owing to Heinz Sander pursuant to an agreement for sale dated June 30, 1967; and (b) by the payment of $142,750 in cash. Clause 10 of the option agreement stated that it was agreed that the value of the building on the aforesaid lands should be $270,000 or the book value of the said building for tax purposes, whichever amount should be the greater.

By an agreement dated January 28, 1972 the option was extended and clause 10 was amended to value the building on the land at the greater of $265,000 or the book value of the said building for tax purposes as reflected by the accounts and records.

On April 30, 1972 the building and land was sold for a total price of $370,000.

In filing his return of income tax for the 1972 taxation year, the appellant claimed a terminal loss on the disposition of the building by valuing the land at $135,000 and the building at $235,000.

At the hearing, Mr Robert Nesbitt, a lawyer since 1952 and knowledgeable in real estate and company work, testified how he had become involved in this transaction. He learned at his office that Mr Herrington, then president of Foremost, wanted to sell his building because he needed money to finance the operation of his company, Foremost Tracked Vehicles Ltd. Being a factory, the building was of limited use. Mr Herrington wanted to sell but he also wanted to retain an option for his company to buy back the building.

Such option was granted on January 5, 1971. Mr Nesbitt explained that, in paragraph 10 thereof, there was a mistake in draftsmanship and the words “the greater’’ in the phrase “or the book value of the said building, whichever amount is the greater’’ should have read “the lesser’: that he had asked for a 3-year lease in case the company did not exercise the option; and that the option was later extended by amending clause 4 to show the new expiry date for accepting the option as April 30, 1972 instead of January 31, 1972.

In 1972 the financial position of Foremost Tracked Vehicles Ltd changed because, in that year, the federal government awarded a grant to the company in order to encourage the sale of its goods to foreign countries.

Mr Nesbitt also stated that in January 1972 the value of land was $25,000 an acre and that the total area of the land in the three parcels was 5.10 acres, but he did not give any value to the building.

On May 29, 1972 Foremost Tracked Vehicles Ltd, which had by then changed its name to Foremost International Industries Ltd (hereinafter called “Foremost”), sold the property to Lehndorff Management Ltd for $535,000. The parties agreed that the purchase price of the property would be reasonably apportioned, as follows:

Mr Nesbitt further stated that this value of $135,000 for the land was fair and was the best evidence in the circumstances because the two parties to the transaction were dealing at arm’s length and this value had been discussed with and accepted by Mr Herrington, who was still president of Foremost.

According to a statutory declaration, filed as Exhibit A-5, Mr Herrington solemnly declared that, in apportioning the purchase price of $535,000, the land was valued at $135,000 and the balance was allocated to the building. Mr Nesbitt explained that Foremost had made some improvements to the building at a cost in excess of $50,000. However, he was not aware of the actual cost and had not tried to value the building before apportioning the total price between land and building. The final transaction was not closed until June 30, 1972.

During cross-examination, counsel for the Minister filed as Exhibit R-1 a letter dated December 30, 1970 written by Mr Nesbitt to Mr Herrington, in which the consideration for the property when it was originally purchased by the appellant and his associates from Foremost was to be apportioned as follows:

On February 14, 1972 an assignment of option was granted by Foremost Tracked Vehicles Ltd to the new company Foremost International Industries Ltd in which it was mentioned that the option had been extended by agreement dated January 28, 1972.

Apparently, the original option was not exercised by Foremost Tracked Vehicles Ltd in due time and Mr Nesbitt explained that it was renewed by a telephone call and that, option or no option, Messrs Ross, Wintemute and himself were to carry out the terms of their Original agreement.

He also said that there was no formal appraisal of the land made and, in a belated attempt to do so, at the hearing he referred to two comparable sales of land: G Molson Construction and Lot 6 in the same blocks, which land was sold on the basis of $25,000 an acre, but he could not give any details as to the acreage, the dates and the total price of the sales.

Mr Nesbitt was also acting for Foremost, and counsel for the Minister told him that he was “wearing two hats’’.

The appellant, Mr Ross, an investor, testified and concurred with Mr Nesbitt’s evidence. He admitted that, in legality, the option had expired, and also admitted that Mr Nesbitt was acting as solicitor for him and his associates as well as for Foremost.

Mr Harold White, a real estate appraiser with the Department of National Revenue, stated his qualifications and was accepted as an expert witness. He filed his appraisal report as Exhibit R-3. He had inspected the property, verified the municipal assessment and utilized five comparables to arrive at a price of $20,000 an acre as of January 28, 1972.

The 1971-72 municipal assessment was $25,150 for the land and $100,520 for the building and the ratio of selling price to assessment was

370,000 2 94

125,670

Counsel for the appellant argued that the option was a part of the agreement, that the acquisition of the property was a good investment for the three associates, and that the expert witness, Mr White, had admitted that appraisal was not a precise science. He also argued that the amount of $135,000 for the land when it was sold to Lehndorff was arrived at by the two parties to the transaction, who were dealing at arm’s length, and that consequently it was consistent for the appellant to use this figure for income tax purposes.

Counsel for the respondent argued that there was no formal appraisal prepared by the appellant; that a few statements of opinion by Mr Nesbitt did not provide a sufficiently strong basis on which to appraise the building and claim a terminal loss; that the said building was specifically erected for use by Foremost and had a specific value to it; and that the ratio was too far out of line to be considered reasonable. He then referred to Exhibit R-1 as proof that on December 30, 1970 Mr Nesbitt had written to Mr Herrington and placed a value of $70,000 on the land.

The Board is not impressed by the evidence adduced by the appellant, who had the onus to show that the respondent was wrong in fact and in law in his reassessment.

As already mentioned, the appellant did not file any appraisal report at the hearing because at no time was a formal appraisal prepared for him.

The Board cannot rely on guesswork to appraise property, and consequently it cannot accept Mr Nesbitt’s evidence. On the other hand, unlike Mr Nesbitt, who provided only vague information, the respondent, who did not have the onus of proof, did file a formal appraisal report, which in fact established the value of the land at $20,000 an acre as of January 28, 1972.

The respondent’s expert witness explained his formal appraisal to the satisfaction of the Board, and consequently there is no reason that this report should not be given full weight.

For these reasons, the appeal is dismissed.

Appeal dismissed.