JPM Holdings LTD v. Minister of National Revenue, Pondent., [1976] CTC 2338

The Assistant Chairman:—The appellant herein has appealed to this Board from assessments for tax for the 1972 and 1973 taxation years. On a schedule attached to its 1972 and 1973 income tax returns the appellant showed under the heading “Income Tax Information” that it had “Capital receipt on cancellation of lease” in the amounts of $14,568 and $17,432 respectively. The total amount is $32,000. The appellant was advised by Notices of Reassessment and attached T7W-T2R’s, one for each year, that the capital gain on the sale of the lease had been added to income. Shortly thereafter the appellant objected to each reassessment. While many facts were stated in the objections, the basic contention was that the lease in question had a value on Valuation Day equal to the amount received by the appellant and so there was no amount to be taxed. The objections were filed around October 22, 1974. By letter dated January 7, 1976 to this Board, the appellant appealed from those reassessments as more than 180 days had elapsed since its objection to them had been filed and no reply had been received. In due course a Reply to the Notice of Appeal was filed by the respondent. In summary fashion the reply stated that as of January 1, 1972 the lease “had a value of nil” and the sum received by the appellant for the surrender of the lease was “a gain accruing to the appellant after January 1,1972”. Consequently the issue in this case is not whether or not the appellant had, with respect to the lease in question, an adventure in the nature of a trade so that the profit therefrom was income to the appellant in each of the years, but rather, did the appellant have a capital gain and, if so, what was the amount thereof? Of course, if the appellant did have a capital gain in 1972 and the subsequent taxation year, it is only subject to tax on one-half of the gain. It follows therefore since the amount received by the appellant is known, $32,000, it must be ascertained what was the value of the lease on Valuation Day. The difference between the two, being the capital gain, will be subject to tax as is provided in the Income Tax Act. ..h

To consider the value of the lease one must consider the facts as they relate to the appellant. The appellant was a tenant in what, at that time, was known as the Greyhound Building in Calgary. if I recall the evidence correctly, the appellant was incorporated in 1969 and by indenture dated September 5, 1969 it signed its first and only lease with Greyhound Lines of Canada Ltd covering the premises in question. The area covered in the lease (Exhibit A-1) was 450 square feet, the term for five years commencing on September 1, 1969 and to be completed on August 31, 1974 with a monthly rental of $152. During the course of the argument, as well as the presentation of the evidence, no reference was made to any clause of the lease by either party except that of clause (e), a covenant by the lessee that it (in summary fashion) will not sublease without leave. If my recollection is correct a caveat with respect to the lease was filed on the title to the property. There was no suggestion in the evidence that there was a term in the lease giving an option to renew. Prior to the appellant becoming the tenant in September 1969, a Mrs McDonald had carried on a similar business (optometrist) as a proprietorship since 1963 under the name of J P Mitchell Optometrist. Prior to this date, since 1949, Dr J P Mitchell had carried on the same business in his own name. It should be mentioned, Dr J P Mitchell represented the appellant at the hearing. He stated he was not a beneficial shareholder of the appellant; he was a shareholder, I believe he stated, to be an officer and director of the appellant.

To lead into the events giving rise to the transaction which is the subject matter of this appeal, further detail must be given. The Greyhound Building had been built just before World War I. It was nonetheless the bus terminal for the Greyhound Bus Line and, while the schedule of Greyhound was not established, it was stated to be the focal point for many persons coming to and departing from Calgary. In the building on many floors were somewhere between 60 and 100 tenants. It was also stated the elevators in the building carried many thousands of persons a day. It was in the business area. It appears clearly to be a busy place with many pedestrians going into it or near it every day. In addition, according to the appellant’s evidence, there were in the area many other businesses which were sources for clients, an important feature. Also the address had been used for optometrist advertising over the years; the appellant’s glasses cases had that address. There was nearby a laboratory in which the appellant had an interest and an optical prescription company as well as a contact lens firm. Generally, in so far as the appellant was concerned it was an ideal place for a business. It was so ideal that in 1969 (the year the five-year lease was signed) the appellant made $6,500 worth of tenant improvements to his office.

In addition, reference must be made to Exhibit A-2 which the appellant’s representative called a letter of intent. It is said to be dated November 25, 1966 and reads as follows:

Mr Frank Selby

Greyhound Lines (Canada) Ltd

712 Greyhound Building

Calgary, Alberta

Confidential & Restricted

Dear Mr Selby:

As discussed in our meeting today the following space in the Greyhound Building is now rented by the AMR group.

1. Dr D J Akitt #807

2. Dr J P Mitchell #607

3. Dr E Ratledge #710

4. Dr J B Sklar Ground Floor

5. Dr J D Spence #1015

6. AMR Lab Ltd #703

In addition to the above, our group will require more space on the ground floor when Greyhound Lines (Canada) Ltd move to a new terminal. Our group plans on either expanding in the present building or moving the entire group to your new terminal.

This letter will confirm our understanding that the AMR group will have first refusal on available space when the Greyhound Lines (Canada) Ltd build their new terminal.

Agreed:	Yours truly,
(signed F Selby)	(signed J P Mitchell)
	J P Mitchell
Mr Frank Selby	Treasurer

lt was stressed in submission that this document gave the appellant a right of first refusal to get a lease from Greyhound in their new building at a rent which would go to show that it, together with the lease the appellant had (Exhibit A-1), would establish their value at January 1, 1972 at $32,000.

The evidence is not too clear but it appears, at least in 1970, the Greyhound Building was offered for sale. In any event on or about January 18, 1972 (Exhibit R-1) the appellant was advised by Greyhound that the Alberta Government Telephones (hereinafter referred to as “AGT”) had exercised its option to own the building. It indicated tenancies expiring on or before May 1, 1972 would be expected to be out by that date and a “Mr Hamilton will be talking to tenants holding longer leases”. The appellant moved to Palliser Square on June 1, 1972. It would appear that at about that time the condition of the Greyhound Building was such that it was not conducive to business in the manner contemplated by an optometrist or an optometrist’s customer.

In mid-1972 the appellant was offered $7,000 to release all claims it had against the AGT including the lease. To put it mildly, the amount was scorned by the appellant. Later in 1972 the appellant received from the AGT the sum of $14,568 and in 1973 the sum of $17,432. At the time of payment of the latter sum a letter was prepared on the letterhead of the appellant dated February 7, 1973 (Exhibit A-3) addressed “Alberta Government Telephone Commission and Alberta Government Telephones, PO Box 2411, Edmonton 15, Alberta. Attention: Mr H D Williamson, General Counsel” and it read as follows:

This confirms our understanding of your Offer made today. You are offering JPM HOLDINGS LTD the sum of $32,000.00 for a surrender of its lease with Greyhound Lines of Canada Limited and a release of any other claim, JPM HOLDINGS LTD may have down to the date hereof. The payment will be described as “for surrender of lease”. The above sum agreed upon less $14,568.00 already paid on account will be paid to JPM HOLDINGS LTD not later that the 17th day of February, 1973.

JPM HOLDINGS LTD do hereby accept your Offer and agree to execute such documents as you may reasonably require.

If this is a correct statement of your Offer, please confirm on copy of this letter.

Yours truly,

JPM HOLDINGS LTD

Per: (signed J P Mitchell

Sec. Secretary)

Alberta Government Telephone Commission and Alberta Government Telephones hereby confirm their Offer set out above.

(signed H D Williamson)

H D Williamson, Their General Counsel

The appellant attempted to establish that the value of the lease on January 1, 1972 was the amount received, namely $32,000. The respondent, while at the time of the reassessment said the lease on January 1, 1972 had no value, did at the opening of the hearing admit it had a value of $4,847. Consequently, in any event this appeal will have to be allowed and the assessment referred back to the respondent as a result of this admission to reduce the tax assessed the appellant, even if I do not further reduce it.

By way of comment may I mention the representative of the appellant was taken completely by surprise on the admission of value, as was the Board. I presume the quantum did not surprise the representative as it was not that great but the timing was very poor. This is especially so since the objections were filed around October 22, 1974 and no confirmation or reassessment was issued by January 7, 1976. However a “Departmental Appraisal” had been made with a report to the “Chief Appraiser” in Ottawa dated December 12, 1975. Till September 20, 1976, however, no notice of the appraisal and resultant change of position was made known to the appellant. The Reply to the Notice of Appeal was dated March 18, 1976, yet no reference was made to the appraisal or change of position by the Minister of National Revenue. Years ago a reassessment might have handicapped an appellant (I refer to the case of Coleman C Abrahams [No 1] v MNR, [1966] CTC 690; 66 DTC 5451) but it would appear that subsection 165(7) of the Income Tax Act, after the amendment of SC 1970-71-72, c 63, would have cured that drawback. In any event, if a valuation report is to be relied on by a party I believe, even though there is no statutory requirement, it should be provided to the other party to the litigation. In this manner the other party will know what it has to meet.

Based on the submissions I received, the issue can be resolved by ascertaining what was the fair market value of the appellant’s five-year lease at January 1, 1972. In the appellant’s submission I must (and do) include in this consideration the letter of intent (Exhibit A-2).

The appellant established, in its opinion by Exhibit A-6, that its position was correct. The Greyhound premises per lease cost $2,006.40 per year (annual rent of $1,824, plus 10% for city business tax). At the new premises (for 1976 not 1972) the total was $5,847.47 being rent of $330.41 per month, plus 12% of above, plus a tax escalation of $398.77, and a maintenance escalation of $1,080. It contended the annual increase is $3,841.07 with a resultant increase in costs for "12%2 years”, due to the relocation, of $48,013.37. In oral evidence the appellant’s agent stated the new area is one-third greater than the old so that the increase in cost for the 12%2 years for the same area is $32,000, the amount received for the lease. The "12%2 years” previously referred to is made up of the balance of the present lease (2%2 years) plus 10 years under the letter of intent (Exhibit A-2).

Under the most idealistic circumstances I cannot accept the appellant’s contention that the value of the lease and letter of intent on a per-square-foot basis for 12%2 years is $32,000. To me the letter of intent (Exhibit A-2) is a piece of paper which at the maximum means the former landlord will give to those whom Mr Mitchell, not the appellant, represents, the first refusal to lease property of an unknown quantity at the then current market prices in a new building. That is the rental price when, if ever, the lease supposedly covered in Exhibit A-2 is signed. I believe it is overvalued at $1. Consequently I must ascertain the value of the remaining portion of the lease (Exhibit A-1).

The respondent did not try to justify a valuation of nil dollars on January 1, 1972. He did change his position to admit a valuation of at least $4,847. That valuation was made up of two factors:

and relied on an appraisal dated December 12, 1975.

To find the value of the leasehold interest at $2,029 the appraiser relied on many factors, the basic one of which was, the appellant had (by Exhibit A-1) a lease at $4.05 per square foot and it would cost him $6 per square foot to replace it, an increase in cost of $1.95 per square foot. This is shown at page 11 of Exhibit R-2. The figure in the above computation ($6) is arrived at from page 9 of the same exhibit. While we must find the fair market value of the appellant’s lease, since the respondent is using page 9 to arrive at $6 which was clearly used on page 11 to arrive at the respondent’s results, the figures and the “Alternative Office Space for Professional and Other Tenants” (as page 9 is captioned) must be considered. As to the dollars per square foot for each of several buildings is concerned, there is no dispute. However, the buildings, the availability of them and the base rent per Square foot are to be considered and, if they are challenged, so is the "$6 per square foot (which) appears reasonable” which was used on page 11.

The appraiser for the respondent not only had not seen the Greyhound Building, he had not seen the offices referred to at page 9 of Exhibit R-2, although he had seen the outside of these buildings. At page 9 there are five buildings, one being the building the appellant is now in. It would appear the rent shown for the Palliser Square is not the appellant’s current (or 1972) rent.

Of what value is page 9 which produced the $6 figure? Had the $6 been $8, what would have been the effect? It should be noted that the appraiser stated, to reach a value of $32,000 for the lease, a rent of $325 per square foot would have to be concluded. This is, of course, based solely on the 2%2 years remaining on the lease.

The appelant’s representative stated, and he was not contradicted, that (a) the Gas Company Building had no professionals and did not want them, (b) the Medical Arts Building was being gutted and demolished, (c) the Medical Centre—the appellant’s profession was not accepted, and (d) at Bow Valley Square he had applied and was turned down. The appellant’s representative stated he had personally made inquiries with respect to some of the buildings referred to on page 9. He continued that the last one, Bow Valley Square (the highest per Square foot at $6.80) was not under construction in 1972.

I am of the view that to say those places on page 9 of Exhibit R-2 were available is wrong. However, Palliser Square was available. With respect to that Square, unlike the other buildings where a "Base Rent” was used, in that building an “Inside Base Rent” was taken as the basis. Per Exhibit A-6 the appellant’s rent for the first year was $3,964.92 plus $475.78, or $7.30 per square foot. This amount or something around it, in my opinion rather than $6 per square foot, should be used to get the fair market value of the appellant’s lease. Therefore the computation on page 11 of Exhibit R-2, the appraisal, should be changed so that the $6 should be replaced by $7.30 and the resultant effect follow. The increase will be $3.25 rather than $1.95. It thus follows that the computation of the appraiser on page 11 of Exhibit R-2 will have to be changed so that $7.30 per square foot is used rather than $6 and the increase will be $3.25 in lieu of $1.95. It would appear the value of the lease on this basis would be $3,382 and the total leasehold interest $6,200.

The appeal is allowed in part and remitted to the Minister of National Revenue for reassessment in accordance with these reasons.

Appeal allowed in part.