Roland
St-Onge:—The
appeals
of
Nick
Fragis,
Chris
Smirnios
and
Fraldo
Restaurants
Limited
with
respect
to
the
1969
taxation
year
were
heard
at
London,
Ontario
on
May
4,
1976
and
the
judgment
was
rendered
the
next
day.
The
appeals
of
Nick
Fragis,
Chris
Smirnios
and
Fraldo
Restaurants
Limited
were
joined
following
an
order
of
this
Board
in
accordance
with
subsection
174(1)
of
the
new
Income
Tax
Act,
SC
1970-71-72,
c
63,
as
amended.
A
transaction
which
is
common
to
assessments
in
respect
of
the
three
taxpayers
is
described
by
the
respondent
as
follows:
3.
(a)
from
1965
until
August
1,
1969,
Nick
Fragis
and
Chris
Smirnios
each
owned
a
one-half
interest
in
and
operated
a
restaurant
and
tavern
business
known
as
The
Blue
Danube
Restaurant
Tavern,
in
Hamilton,
Ontario;
(b)
by
Agreement
dated
April
21,
1969,
Nick
Fragis
and
Chris
Smirnios
agreed,
inter
alia,
to
sell
their
interests
in
The
Blue
Danube
Restaurant
and
Tavern
to
Fraldo
Restaurants
Limited;
(c)
the
said
transaction
was
closed
on
August
2,
1969;
(d)
the
consideration
for
the
sale
of
The
Blue
Danube
Restaurant
and
Tavern
was
$55,000;
(e)
no
agreement
was
made
between
Nick
Fragis
and
Chris
Smirnios
and
Fraldo
Restaurants
Limited
as
to
the
allocation
of
the
said
$55,000
between
consideration
for
the
disposition
of
depreciable
property
of
The
Blue
Danube
Restaurant
and
Tavern,
being
property
described
in
Class
8
of
Schedule
B
to
the
Income
Tax
Regulations,
and
consideration
for
anything
else.
4.
In
computing
their
income
for
1969,
Nick
Fragis
and
Chris
Smirnios
allocated
$15,939.29
of
the
said
$55,000
sale
proceeds
as
being
the
proceeds
of
disposition
of
the
above
mentioned
depreciable
property.
5.
In
computing
its
income
for
the
1970
and
subsequent
taxation
years,
Fraldo
Restaurants
Limited
allocated
$50,000
of
the
said
$55,000
as
being
consideration
for
the
purchase
of
the
above
mentioned
depreciable
property.
9.
The
question
in
respect
of
which
the
Minister
requests
a
determination
is
what
part
of
the
said
$55,000
can
reasonably
be
regarded
as
being
the
consideration
for
the
disposition
of
the
Class
8
depreciable
property
of
The
Blue
Danube
Restaurant
and
Tavern
business
and
what
part
of
the
said
$55,000
can
reasonably
be
regarded
as
consideration
for
something
else.
10.
The
facts
on
which
the
Minister
relies
and
on
which
he
based
assessments
of
tax
payable
by
each
of
the
taxpayers
named
in
this
Application
are
as
follows:
(a)
the
capital
cost
of
the
Class
8
depreciable
property
of
The
Blue
Danube
Restaurant
and
Tavern
to
Nick
Fragis
and
Chris
Smirnios
was
$32,912.46
and
the
undepreciated
capital
cost
was
$15,939.29
immediately
prior
to
the
time
of
the
sale
of
the
said
business;
(b)
each
of
Nick
Fragis
and
Chris
Smirnios
owned
a
one-half
interest
in
The
Blue
Danube
Restaurant
and
Tavern;
(c)
the
part
of
the
said
$55,000
consideration
that
can
reasonably
be
regarded
as
being
the
consideration
for
the
disposition
of
the
Class
8
depreciable
property
as
set
out
above
is
$50,000;
the
amount
of
$8,486.59
is
to
be
included
in
the
computation
of
the
income
of
each
of
Nick
Fragis
and
Chris
Smirnios
for
the
1969
taxation
year
pursuant
to
paragraph
20(1)(a)
of
the
Income
Tax
Act
and
the
capital
cost
to
Fraldo
Restaurants
Limited
of
the
above
mentioned
Class
8
depreciable
property
required
by
it
is
$50,000.
Heard
as
a
witness,
one
of
the
appellants,
Mr
Smirnios,
filed
the
following
exhibits:
A-1
the
offer
to
purchase;
A-2,
the
lease
assigned
to
the
purchaser;
A-3,
the
chattel
mortgage;
A-4,
financial
statements
of
the
Blue
Danube
Restaurant
for
1968;
and
A-5,
its
balance
sheet
as
at
August
2,
1969.
He
then
testified
that
he
has
been
in
the
restaurant
business
since
1947
and
that,
with
his
partner
Nick
Fargis,
he
bought
the
Blue
Danube
Restaurant
and
Tavern
in
June
1965
for
$16,000.
Amongst
the
assets
acquired
were
some
equipment
and
a
licence
but
no
lease.
The
partners
had
to
negotiate
and,
actually,
they
obtained
a
5-year
lease
with
an
option
to
buy
the
property
for
$45,000.
They
bought
new
equipment
for
about
$6,000
and
each
one
worked
shifts
of
5
hours
a
day.
He
also
testified
that
they
sold
the
business
because
they
were
unable
to
agree
on
how
to
manage
the
restaurant.
A
list
of
the
equipment
sold
was
also
filed
to
show
the
age
of
different
items,
some
of
which
were
as
much
as
25
years
old.
Upon
cross-examination,
Mr
Smirnios
stated
that
the
gross
sales
amounted
to
some
$92,000
and
$94,000
for
the
1967
and
1968
taxation
years,
respectively.
Mr
Gallagher,
a
real
estate
broker
who
has
15
years’
experience
in
the
business
of
buying
and
selling
real
estate
in
the
City
of
Hamilton,
testified
that
the
lease
had
a
value
of
$45,000
to
$50,000;
that
the
building
was
well
constructed;
was
well
situated
on
a
corner;
and
that
the
land
and
building
together
had
a
value
of
approximately
$76,000
in
1970.
He
also
stated
that
it
would
have
taken
six
months
to
obtain
another
licence.
Mr
Paul
Francis
O’Neil,
solicitor
and
shareholder
of
the
purchasing
company,
Fraldo
Restaurants
Limited,
testified
that
the
company
was
incorporated
in
1969
to
buy
the
business
for
$55,000;
that,
prior
to
the
purchase,
Messrs
Fragis
and
Smirnios
were
very
unsuccessful
in
their
business
and
were
anxious
to
sell;
that
the
company
spent
some
$25,000
to
acquire
furniture;
and
that
the
equipment
purchased
from
the
former
owners
was
used
by
the
company.
He
also
stated
that
when
he
prepared
the
return
for
the
company,
he
put
a
value
of
$5,000
on
the
goodwill,
but
allocated
nothing
for
the
lease,
nothing
for
the
option,
and
nothing
for
the
licence.
Upon
cross-examination
he
admitted
that
the
lease
had
some
value,
but
he
could
not
place
any
value
thereon.
Before
signing
the
offer
to
purchase,
the
witness
had
visited
the
building
and
inspected
the
premises
and,
consequently,
was
aware
of
the
value
of
the
equipment,
which
was
the
only
thing
his
company
was
interested
in
buying.
In
argument,
Mr
O’Neil
stated
that
his
company
did
not
buy
the
business,
but
only
the
equipment,
for
$50,000
and
that,
when
he
prepared
the
offer
to
purchase,
he
was
not
aware
of
the
undepreciated
capital
cost
of
the
said
equipment.
His
intention
was
not
to
buy
the
restaurant’s
capability
of
making
a
profit,
but
only
its
equipment.
In
real
estate
transactions,
it
is
not
unusual
for
land
and
buildings
to
be
sold
for
much
more
than
they
cost,
but
very
seldom
does
this
happen
in
the
case
of
a
sale
of
equipment.
In
the
case
at
bar,
it
is
self-evident
that
equipment
which
had
Originally
cost
$32,912.46
and
some
of
which
was
as
much
as
25
years
old,
could
not
have
been
sold
to
the
company
for
$50,000.
Furthermore,
the
documentary
evidence
has
shown
that,
not
only
the
equipment
was
transferred
for
the
purchase
price
of
$55,000,
but
also
a
5-year
lease
at
a
monthly
rental
of
$350,
renewable
for
another
5
years
at
$500
a
month,
with
an
option
to
buy
the
property
for
$45,000.
Actually,
Fraldo
Restaurants
Limited
did
exercise
the
option
in
1970,
a
step
which
allowed
in
to
save
$150
a
month
for
a
5-year
period,
thereby
realizing
a
gain
of
$9,000.
It
is
quite
obvious,
also,
that
if
the
company
had
not
had
the
option
to
buy
the
building
for
$45,000,
the
asking
price
would
have
been
much
greater
than
$45,000
at
the
end
of
10
years.
As
a
matter
of
fact,
Mr
Gallagher
put
a
value
of
$76,000
on
the
land
and
building
in
1970,
which
indicates
that
even
5
years
later
the
price
could
have
been
much
greater.
All
these
comparisons
show
that
the
lease
and
the
option
had
a
substantial
value,
much
greater
than
the
value
of
the
equipment,
but
besides
the
transfer
of
the
lease
and
the
option,
there
was
also
the
transfer
of
goodwill,
which
was
valued
by
the
company
at
$5,000,
and
the
transfer
of
the
licence
would
also
represent
some
saving
for
the
company.
Mr
O’Neil
argued
that
prior
to
the
sale
the
business
was
not
successful.
The
uncontradicted
evidence
has
shown
that
the
partners
were
in
disagreement
on
how
to
manage
the
restaurant
but
there
is
nothing
to
support
the
allegation
that
the
business
was
not
successful
prior
to
the
sale
because
of
the
lease
being
too
expensive.
Cn
the
contrary,
the
evidence
has
indicated
that
the
business
was
very
successful
for
the
new
owners;
and
the
Board
is
convinced
that
a
great
part
of
this
success
was
due
to
the
transfer
of
the
lease,
the
option,
the
licence
and
the
goodwill.
For
all
these
reasons,
the
Board
concludes
that
the
amount
of
$39,060.71
was
paid
by
the
company
to
Nick
Fragis
and
Chris
Smirnios
for
the
transfer
of
the
lease,
the
option,
the
licence
and
the
goodwill,
which
leaves
an
amount
of
$15,939.29
as
the
price
paid
for
the
equipment.
Consequently,
the
appeals
of
Nick
Fragis
and
Chris
Smirnios
are
allowed.
As
to
the
case
of
Fraldo
Restaurants
Limited,
the
assessment
is
referred
back
to
the
Minister
for
reconsideration
and
reassessment
in
accordance
with
these
reasons
for
judgment.
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