R. v. Shok, [1975] C.T.C. 162, 75 D.T.C. 5109

Smith, DJ:

1 These four cases come before this Court as appeals by way of trial de novo by Her Majesty The Queen from decisions of the Tax Review Board which set aside assessments against the defendants for income tax in respect of the income derived by the defendants as the owners (in varying percentages) of the Bell Hotel in Winnipeg.

2 On motion made by Mr Weinstein, counsel for the plaintiff, on December 18, 1974, this Court ordered that, as the facts and the issues were the same in all four cases they be heard together on common evidence, and fixed the time and place of the trials for January 15, 1975 at the City of Winnipeg in Manitoba, commencing at 10:30 a.m.

3 On motion made by Mr Soronow, counsel for the defendants, on the same day this Court ordered that Mr Soronow be permitted to retire as solicitor and counsel for Benjamin Stone, but continuing to represent the other three defendants. Mr Soronow was directed to notify Mr Stone that the trials would begin in Winnipeg on January 15, 1975 and that if he wished to be represented by counsel he should engage counsel for the trial of his case. Mr Stone was not present or represented by counsel at any time during the hearing of these appeals.

4 This Court further ordered that the costs of the plaintiff occasioned by the motion to consolidate the four trials be awarded against the defendant Benjamin Stone in any event of the cause and that the costs of the plaintiff occasioned by the said motion in respect of Sam Shok up to and including December 16, 1974 be awarded against the defendant Sam Shok.

5 The relevant facts in these cases are not the subject of much dispute and may be stated as follows:

6 The Bell Hotel is located at the north-west corner of Main Street and Henry Avenue, in Winnipeg, having a frontage on Main Street of 431/2feet and a depth along Henry Avenue of 1241/2feet. It was built in 1906 of brick construction with stone trim. It has four storeys above ground and a full stone basement. There are 62 residential rooms for rent plus a 4-room suite which has been occupied for a number of years by the hotel manager. The front portion of the main floor contains the lobby, hotel office and counter area, beer vendor sales counter and beer cooler rooms, also a licensed restaurant (36 person capacity) and kitchen area. In the rear, occupying much the greater portion of the main floor, are the men's and the mixed beverage rooms, with 168 seats and capacity for 135 persons. The basement contains beer coolers in addition to heating, refrigeration and compressor equipment.

7 For many years the hotel has been licensed for the sale of beer and wine in its beverage rooms and restaurant and through its beer vendor facilities, and since 1970 it has also been licensed for the sale of liquor for consumption on the premises.

8 In 1962 the hotel was purchased by Oswald La Freniere from Labatt's Brewery for $75,000 and sold by him in 1967 to the defendants Waldorf Hotel (1958) Co Ltd and Benjamin Luffman or their nominees for $415,000, reduced afterwards to $405,000. In the result the four defendants became the purchasers of the hotel. While he was the owner Mr La Freniere made capital expenditures on the building and new equipment of $80,000, so that his total investment in the hotel was about $155,000. For many years prior to purchasing the Bell Hotel Mr La Freniere had managed a succession of hotels for Labatts and in the recent years had been supervisor of several hotels for that brewing company. It seems clear that Labatts sold the Bell Hotel to him at a very low price.

9 The offer to purchase the hotel from Mr La Freniere (Exhibit 2 in these proceedings) was made after fairly lengthy negotiations in which price and terms had been discussed verbally, but Exhibit 2 was the only written offer submitted on behalf of the defendants.

10 From the evidence of the defendant Luffman and of Benjamin Stern, a long-time friend of his, who was, at the time of the purchase, and still is co-owner with a Mr Green of the Waldorf Hotel, the chief purpose in acquiring the Bell Hotel was to provide Luffman with a job. Prior to 1966 Luffman had been in the poultry business, but he sold that business in 1966. The idea was developed that a hotel be purchased of which Luffman would be manager though he had never been in the hotel business prior to this time. Stern, or the Waldorf Hotel, would provide part of the capital for the purchase as Luffman could not finance it on his own. In the end the defendants Shok and Stone also provided part of the capital, ownership of the Bell Hotel being divided among the defendants after the purchase as follows:

Waldorf Hotel (1968) Co Ltd           50%
              Benjamin Luffman                      25%
              Sam Shok                          12 1/2%
              Benjamin Stone                    12 1/2%

11 In this document, at the end of nine conditions to which the offer to purchase was stated to be subject, the following appears:

The price being offered for the said hotel is based on the following values:

Land           $ 15,000
                     Building        310,000
                     Contents         60,000
                     Equipment        30,000
                                    --------
                           TOTAL    $415,000

12 It is clear that the four items, as valued, make up the total purchase price for the hotel, nothing being allowed for goodwill, liquor or beer licences. According to Mr Stern and Mr Luffman, they made these values a condition of the purchase. When the total price was reduced to $405,000, the defendants reduced the value allocated to the building from $310,000 to $300,000. The defendants rely heavily on these values as having been agreed to by the sellers and purchasers negotiating at arm's length. The evidence on this question of the allocation of values will be examined almost immediately. At this point it is essential to note two facts because they are the cause of the whole issue in this case. First, all of the hotel assets valued above, with the exception of the land valued at $15,000, are items in respect of which capital cost allowances for depreciation are permitted under the Income Tax Act, the amount of such allowances being deductible from the taxpayer's income, thereby reducing the income tax payable by him. Second, good will and the value of licences are not depreciable assets for income tax purposes.

13 The Minister of National Revenue accepted the total price of $405,000 for the hotel, but did not accept that no value should be allowed for goodwill. He assessed the defendants for income tax for the 1968 taxation year on the basis that a reasonable allocation of the purchase price was:

Land                      $ 45,000
                   Building                   160,800
                   Contents and equipment     102,850
                   Goodwill                    96,350
                                             --------
                                      Total  $405,000

14 The Tax Review Board allowed the appeals and referred the assessments for 1968 back to the Minister for reassessment. The present appeals are from that decision.

15 As stated above, the defendants rely heavily on the accepted offer to purchase the hotel (Exhibit 2) and particularly on the allocation of values of the hotel assets contained therein, which allocation is found at the end of a list of conditions to which the making of the offer is stated to be subject.

16 The defendants do not rely alone on the simple presence in the offer of this allocation of values provision. Both Luffman and Stern gave evidence that during the negotiations there had been discussions about this matter and that Mr La Freniere had no objection to the allocation. In addition their counsel submitted that on the evidence this was clearly a case of a bona fide agreement made between people dealing at arm's length. He further submitted that under the law, if an arm's length bona fide agreement is made between parties who are knowledgeable in their business, the onus is on the Minister to show that there was some sham or subterfuge in the transaction, and that otherwise the valuations in the agreement must govern as to the depreciable assets.

17 On the other hand Mr Luffman, who stated that the negotiations for the purchase of the hotel extended over a period of approximately three months, with discussions occurring about four times a week, said that the price and the amount of the down-payment were the main things discussed. He did not recall what the breakdown of values was, either during the course of the negotiations or in the offer to purchase.

18 Mr La Freniere stated that the allocation of values of assets shown in the offer to purchase was never discussed with him. He didn't know how the valuation figures were arrived at. He did recall discussions about $10,000 worth of repairs being required by the Liquor Commission, as a result of which he agreed to reduce the price of the hotel from $415,000 to $405,000. The only things he was concerned about were the price and the amount of the down-payment. If the purchasers wanted those values stated in the offer it was all right with him. On these matters he had no doubts and his evidence was not shaken on cross-examination.

19 Both Luffman and Stern were questioned about goodwill, and the value of the beer licences. Neither agreed that any value should be allotted to goodwill or to the value of licences for alcoholic beverages, but when asked if they would have bought the hotel without these licences Luffman said: “No, we couldn't run the hotel without the licences.” Stern's evidence on this point was to the same effect. The clear inference is that, in Luffman's and Stern's opinions, the licences had a value. Mr La Freniere was questioned about the value of the licences to the hotel. He stated that the hotel, without the liquor licences was worth half the price he got. He was emphatic on this point. In his view clearly the licences added a great deal to the value of the hotel.

20 The defendants pointed to the fact that a holder of a beer or liquor licence cannot assign it to anybody and that a purchaser of a licensed hotel must satisfy the Liquor Commission that the premises are satisfactory and that he is himself a suitable person to be granted such licences, for which he must make application. All this is true, but it does not follow that beer and liquor licences have no value. The number of licences that the Liquor Commission will grant in any given area is limited, and there is nothing to prevent a hotel owner wishing to sell his hotel as a going concern from capitalizing what he considers to be the value of his existing licence and including that value in his asking price. This is what Mr La Freniere did and thus obtained, according to his evidence, about twice as much as the hotel was worth without the licences. Mr La Freniere impressed me as being an honest witness. He had been in the hotel business for many years and it is safe to assume that he knew how those in the business regard the value of liquor licences to a hotel. He was also an independent witness in so far as the issues in this action were concerned. I see no reason to doubt his evidence and I accept it as being substantially correct. I am satisfied that there were no real negotiations between him and the defendants about the allocation of values to land, buildings, contents and equipment, and that though he accepted the offer containing the values given to those items by the offerors, those values do not represent his own opinion. He was not concerned about the allocation of values but only about the price for the hotel as a going concern and about the amount of the down cash payment. If the purchasers wanted to place values on various items of property that was, in his view, their business and he had no objection.

21 I attach considerable importance to the evidence of Mr La Freniere. He was not called as a witness before the Tax Review Board, which therefore did not have the benefit of his evidence in their deliberations.

22 In these circumstances I do not consider that the Minister is bound by the allocation of values contained in the offer to purchase or that he is prohibited from considering whether goodwill or other items having a monetary value were in fact included in the property purchased though not mentioned in the offer to purchase, and assessing the value of such goodwill or other items.

23 That the defendants themselves attached much importance to the liquor licences is further shown by a clause in the offer to purchase, as it was finally accepted. By this clause it was provided that the offer to purchase was “subject to the Purchasers being approved as Licensees by the Liquor Control Commission and should the Purchasers not be approved, the Offer to Purchase is to be considered cancelled, null and void and the Purchasers' deposit returned to them”.

24 This clause obviously indicates that unless the purchasers could obtain liquor licences they would not purchase the hotel.

25 One additional opinion is cited here, that of Mr E Karl Farstad & Associates Ltd. Mr Farstad, an expert real estate appraiser and member of the Appraisal Institute of Canada, of long and varied experience, including much experience in valuing hotel properties in the downtown area of Winnipeg, made an appraisal of the Bell Hotel for the Department of National Revenue. Both his preliminary report, dated January 18, 1972 (Exhibit 7) and his final updated report (18 single-space typewritten pages plus appendices) dated December 24, 1974 (Exhibit 6) contain the following paragraph:

The subject property does not, however, depend upon its income producing ability from rooms but rather from the sale of beer and liquor. With the difficulty of obtaining a licence today for new hotels with 40 to 60 rooms and beer parlors, older hotels such as the subject property do have a value not so much for land, building and chattels as for the value of the license for the sale of beer and wine.

26 Strong support for the conclusion that the liquor licences for the Bell Hotel have been of considerable value is found in the annual financial statements certified by its auditors for the years since the present owners took possession and in the unaudited financial statement (Exhibit 3) for the last full year of Mr La Freniere's ownership. Exhibit 3 shows that in the year September 1, 1966 to August 31, 1967 sales of beer and wine totalled $196,065.51, with a gross profit of $88,130.60. The total revenue from room rentals for the year was $35,476.08 and the gross profit on food and tobacco $1,428.55. Thus, on the basis of business done the sales of beer and wine were about 51/2times the room rentals and the gross profit from the sale of beer and wine about 21/2times the total revenue from room rentals. The total operating expenses of the hotel are stated at $86,353.99, which is less than the gross profit on beer and wine by $1,776.61. Thus all operating costs could have been paid out of liquor profits, leaving a small profit, apart from interest on debt and depreciation.

27 Unfortunately, neither on Exhibit 3 nor on the audited statements for succeeding years (Exhibits 4 and 5) is there any breakdown of operating expenses between the liquor business, room operation, restaurant, kitchen, tobacco stand, management or any other part of the hotel's business, but it is obvious that a substantial part of the $86,353.99 of operating costs is properly chargeable against other things than the beer and wine business.

28 The picture shown by the later auditors' reports is very similar to that indicated by Exhibit 3.

29 Exhibit 5 covers the 9-month period from February 1, 1968 to October 31, 1968. It shows (Schedule B) beer and wine sales totalling $133,121.83, with a gross profit of $52,531.23. Schedule B also shows food sales of $1,586.37 with a gross profit of $996.57 and cigarette sales of $7,538.96 with a gross profit of $774.66. Schedule A shows room rentals of $26,636.67.

30 Exhibit 4 is the financial statement for the year ending October 31, 1970, with the comparative figures for the previous year. In the year ending October 31, 1969 sales of beer and wine totalled $167,372.17 with a gross profit of $66,328.19. Sales of food were $2,569.43 with a gross profit of $993.46. Sales of tobacco were $12,232.73, with a gross profit of $1,323.48. In the year ending October 31, 1970 spirituous liquors were sold in addition to beer and wine. Schedule C to the Exhibit shows sales of beer, wine and liquor of $172,630.62 with a gross profit of $68,491.96. Sales of food were $2836.79 with a gross profit of $1,483.50. Sales of tobacco were $12,495.70 with a gross profit of $1,888.10. Room rentals for the year ending October 31, 1969 are shown in Schedule B at $37,026.06 and for the subsequent year at $33,014.05.

31 Financial statements for years subsequent to that ending on October 31, 1970 were not put in evidence. Exhibits 4 and 5 show that while sales and gross profits on beer and wine declined in each of the first three years of the new owners' operation of the hotel, the addition of spirituous liquor to the beverages sold in 1970 (sales $13,057.82 and gross profits $6,929.81) resulted in total sales and gross profits on alcoholic beverages being a little higher than in 1969. There is no doubt that the sale of alcoholic beverages continues to be by far the biggest item of business and source of revenue in the hotel's operation.

32 Goodwill is often regarded as the likelihood that the customers who have been attracted to a place where business is carried on and have bought its products or services will continue to do so. The likelihood that this will happen has a value to the owner of the business. When he sells the business the owner's estimate of this value is commonly added to the asking price of the physical assets and the purchaser commonly agrees to pay a price that includes an amount not greater than he thinks the asset of goodwill is worth. In the case of the Bell Hotel very little could be allowed for goodwill in respect of room rentals. For the 4 years for which room rental figures were quoted above the total room rental varied from about $33,000 to $37,000 per year or an average annual total revenue of about $35,000. The hotel has 62 rooms for rent. Multiplying this number by 365, produces a total of 22,630 room days in a year. Gross revenue of about $35,000 per year represents an average daily rent receipt per room of a little over $1.50. The defendants' evidence was that the rooms rented at from $3 to $7 per day, but that a number of them were actually rented by the month at rates less than $3 per day. Whether or not these figures indicate a fairly high level of vacancy in the rooms it is clear that rental receipts are very low for the number of available rooms. Unquestionably, from the evidence, many customers have continued to patronize the beverage rooms and beer vendor facilities in the hotel. Unquestionably also the value to the hotel's business, of the several licences for alcoholic beverages, is considerable. It seems likely that with reasonably good management, this state of affairs will continue. Having in mind the great increase in building costs that has taken place in recent years it seems unlikely that a new hotel could be built in the area near the Bell, particularly one of comparable size and be operated at a profit, even if it were certain (which is not the case) that similar licences could be obtained for such new hotel. This circumstance adds to the likelihood that the licences held by the Bell and by other hotels in the area will continue to be valuable assets.

33 The question then arises: how much value should be attributed to the licences, or goodwill, whichever term is used? All parties seem to be in agreement that $405,000 was a fair price for the hotel as a going concern. This price was arrived at after lengthy negotiations between Mr La Freniere and the purchasers. The Minister accepted the figure of $405,000, so arrived at, as fair. Mr Van Iderstine, chief of the Estates and Trustee Section, Department of National Revenue, Winnipeg, clearly assumed that $405,000 could be taken as a fair value for the hotel as a going concern. So also did Mr Farstad, in preparing his company's report.

34 I see no reason to differ from this unanimous view.

35 The question then resolves itself into making a proper allocation of values of the various items of the hotel property, so as to arrive at a total of $405,000.

36 I was much impressed by the scientific methods for ascertaining values adopted by Mr Farstad and shown in his report. His explanations of his methods and the values resulting therefrom stood up well under cross- examination. In my view his appraisal method was much more thorough than that followed by Mr Iderstine and his staff. No evidence of this expert kind was tendered by the defendants, who relied entirely on the agreement to purchase and the allocation figures contained therein ascribing the whole purchase price of $405,000 to physical property items. After studying all the evidence at length I have come to the conclusion that Mr Farstad's valuations are more likely to be substantially correct than either those in the agreement or those of Mr Iderstine and his staff. Mr Iderstine's valuations were those adopted by the Minister in assessing the defendants for income tax for the 1968 taxation year.

37 Mr Farstad's valuations are:

Land                         $ 25,000
               Building                      200,000
               Contents of building           75,000
               Goodwill                      105,000
                                            --------
                              Total value   $405,000

38 Mr Farstad had come to the conclusion that “I cannot see a value for goodwill of less than $100,000”. As his valuations of land, building and contents totalled $300,000 he fixed the value of goodwill at $105,000, thus making his overall total $405,000. I think this was reasonable.

39 Mr Weinstein, counsel for the plaintiff, and Mr Soronow, counsel for all the defendants except Stone, who was not present or represented by counsel, cited a number of cases to the Court. Several of these cases I shall now consider, first quoting the relevant provisions of the Income Tax Act, which are:

11. (1) Notwithstanding paragraphs (a), (b) and (h) of subsection (1) of section 12, the following amounts may be deducted in computing the income of a taxpayer for a taxation year.

• (a) such part of the capital cost to the taxpayer of property, or such amount in respect of the capital cost to the taxpayer of property, if any, as is allowed by regulation;

20. (1) Where depreciable property of a taxpayer of a prescribed class has, in a taxation year, been disposed of and the proceeds of disposition exceed the undepreciated capital cost to him of depreciable property of that class immediately before the disposition the lesser of

• (a) the amount of the excess, or

• (b) the amount that the excess would be if the property had been disposed of for the capital cost thereof to the taxpayer,

shall be included in computing his income for the year.

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;

40 The first case referred to by Mr Soronow was Bohun, Bohun and Reynolds Construction Limited v Minister of National Revenue, [1972] C.T.C. 2325, 72 D.T.C. 1268. This is a Tax Review Board decision, the case being heard by J O Weldon, QC. The Bohuns were vendors of a construction business and Reynolds was the purchaser. The agreement of sale allocated 50% of the purchase price to depreciable assets and 50% to non-depreciable assets. In its income tax returns Reynolds disregarded the allocation set out in the agreement and claimed capital cost allowance on the basis that the full purchase price had been paid for the depreciable assets. The Minister disallowed this deduction. It was held by the Tax Review Board that the allocation in the agreement must govern.

41 In his reasons for the decision J O Weldon, QC cited Klondike Helicopters Ltd v Minister of National Revenue, [1965] C.T.C. 427, 65 D.T.C. 5253, an Exchequer Court case in which Thurlow, J, in considering the application of paragraph 20(6)(g) of the Income Tax Act, said, pages 429–30 [5254]:

... if the contract purports to determine what amount is being paid for the depreciable property and is not a mere sham or subterfuge its weight may well be decisive.

1. Since the above Agreement dated July 13, 1965 [the agreement between the Bohuns and Reynolds] is, obviously, not a sham or subterfuge, it should be regarded, in accordance with the decision in the Klondike Helicopters case (supra), as establishing the relative values of the property sold ...

42 Here it is noted that in the Klondike case Thurlow, J did not say the weight of what is said in the agreement, concerning depreciable property, must be decisive, but only that it may well be decisive. He also stated that it was one of the circumstances to be considered.

43 Nor did J O Weldon, QC say that in all cases the agreement must be decisive. He went on to say (at page 2330 [1272]) that the agreement had been drawn by Reynolds' own solicitors and then proceeded:

3. The evidence before me in this matter makes it clear beyond all peradventure of a doubt: that the breakdown of the purchase price in the said agreement was, unquestionably, intended by the vendors (Dick Bohun and Peter Bohun) and similarly accepted by the purchasers (Reynolds) as an important and essential term of the said agreement and one that went to the very root thereof, ... that the vendors (Dick Bohun and Peter Bohun) and the purchaser (Reynolds) under the said agreement were fully and completely aware at all relevant times of the tax implications flowing from the breakdown of the purchase price in the said agreement, and that the said breakdown in the purchase price governed, first, the amount of recapture of capital cost allowance which would be added in due course to the taxable incomes of the vendors (Dick Bohun and Peter Bohun) in their respective 1965 taxation years, and secondly, the amount of depreciation or capital cost allowance which the purchaser (Reynolds) would be entitled to claim as a deduction from its income in its 1966 and subsequent taxation years.

44 In the present case I am satisfied, on the evidence of Mr La Freniere, that the breakdown of values was not of his doing but was placed in the offer to purchase by the purchasers and that there was no real bargaining about it, certainly nothing that could possibly be designated “hard bargaining” such as clearly occurred in Bohun and Reynolds. Further, though Luffman and Stern admitted that they knew the breakdown of values in the present case might have tax implications, there is no evidence that La Freniere was aware of it. If he had known, he would likely have been concerned about the tax implications of the breakdown for him, but he was not concerned in any way about the breakdown or its effect.

45 One other circumstance should be noted. In the Bohun and Reynolds case a party to a breakdown of values, agreed to after hard bargaining, sought to change that breakdown, unilaterally, to his own tax advantage, and to the detriment of the other party. That is not the situation before me. Thus the circumstances of Bohun and Reynolds differ materially from those in the present case.

46 J O Weldon, QC did say, at page 2332 [1273] in the Bohun and Reynolds case:

It is my opinion that paragraph 20(6)(g) is not in the Act for the purpose of authorizing the Minister to change the breakdown of a purchase price in an agreement unless such an agreement is a sham or subterfuge.

47 In my view, if this statement is intended to mean that in no circumstances can the Minister change the breakdown of a purchase price unless he proves that the breakdown is a sham or subterfuge, it is much too broad. The circumstances must be taken into account and may lead to a different conclusion.

48 Coopérative Agricole de Granby v. MNR, [1970] Tax A.B.C. 969, 70 D.T.C. 1620, is a Tax Appeal Board decision and is, so far as relevant to the case before me, similar to the Bohun case (supra). The appellant cooperative purchased a dairy business for $410,000. In the deed of sale it was agreed by the appellant and the vendor that the depreciable machinery and equipment were being sold at their undepre ciated capital cost as defined by the Income Tax Act. Their undepreciated capital cost was $107,217. A few months after the purchase the appellant had an expert appraisal made of the machinery and equipment, which resulted in an appraised value of $256,472. The appellant then claimed in its income tax return, capital cost allowance based on the $256,472 figure. The Minister disallowed the claim, granting capital cost allowance on $107,217 only.

49 Mr Maurice Boisvert heard the case before the Tax Appeal Board. He stated (pages 973–4 [1623]):

There is no doubt that the contracting parties were dealing at arm's length and that the property sold included some which was depreciable. That has been admitted and proven. Nor is there any doubt that the consideration ($410,000) covered certain depreciable property and other undepreciable assets. The total price must therefore be apportioned among the various assets purchased. That was done by the grantor and the grantee. I do not see how, for income tax purposes, the value allotted to the various assets would be changed on the basis of an appraisal subsequent to the purchase.

50 Later, on page 974 [1623] he referred to the appellant's claim that the value of the depreciable assets as agreed to by the parties was not reasonable and should be increased to the expert appraised value of $256,472. He then said:

Whether it is reasonable or not is irrelevant provided that the contracting parties have reached agreement on the value, as is the case here. The appellant agreed to pay $107,217 for the depreciable property and it cannot henceforth change its valuation. Allowing such a change would mean that property which has benefited by a capital cost allowance in order to take depreciation into account would enjoy, at the expense of the tax authorities, a further capital cost allowance on what has already been depreciated. This is what the legislator wanted to prevent and avoid.

51 His decision was clearly founded on the fact that the parties had negotiated in good faith, at arm's length, and that in the course of so doing, they had agreed upon and fixed the value of the depreciable assets.

52 In the present case, as stated supra, there was no real bargaining about the value of the depreciable assets. It is also noted that in the Coopérative Agricole case “goodwill” was expressly and separately listed among the items being purchased while in the present case all the purchase price of $405,000 was divided among certain specified items, with no mention being made of “goodwill”.

53 Kamsack Hotels Limited v. MNR, 40 Tax A.B.C. 1, 66 D.T.C. 9, is a Tax Appeal Board decision of a case heard in November 1965. Three hotels were purchased, together with furniture and equipment. No mention was made of goodwill. The Minister rejected the company's valuations for capital cost allowance purposes, claiming somewhat different valuations in certain classes of property and including an amount for goodwill, all on the basis of appraisals made for the Minister. It was held that no goodwill had been established. To that extent the appeal was successful. However, the matter was referred back to the Minister for reconsideration and reassessment of the apportionment of the purchase price among the various tangible assets.

54 Sylvio Chartrand v. MNR, 35 Tax A.B.C. 438, 64 D.T.C. 433, was a Tax Appeal Board case heard by Mr Maurice Boisvert. In this case also it was held, on the evidence, that no value whatever had been shown for goodwill and that the buildings were worth about what they cost the appellant. The appeal was allowed.

55 The earliest case referred to by Mr Weinstein was Noralta Hotel Limited v Minister of National Revenue, [1954] C.T.C. 167, 54 D.T.C. 1079. This was an Exchequer Court case decided by Thorson, P in 1954. It was cited by Mr Weinstein chiefly because it contains a statement concerning assessments made by the Minister. In that case the appellant had claimed that the cost of furniture and equipment bought with a hotel was $100,000 as stated in the agreement to purchase, and that it was entitled to a capital cost allowance based on that amount. The Minister had determined that the actual cost of the furniture and equipment was $35,000. At page 168 [1080] the learned President said:

The assessments carry a statutory presumption of their validity and stand until they have been shown to be erroneous in fact or in law.

56 In the present case the defendants have produced no evidence to prove the Minister's assessment wrong, other than the agreement to purchase, with its valuation table allocating the entire purchase price to land, building, contents and equipment, ie items of tangible property. As indicated earlier, in my opinion this is not a case in which the valuations in the agreement must be accepted as binding. Judgment might be given for the plaintiff on these facts alone. But the plaintiff went further. In addition to the allocation of values made within the Department by Mr Van Iderstine and his staff, on which the Minister based his assessment, the Department engaged an expert independent appraiser, Mr Farstad, to value the property purchased. His report and the valuations in it constitute the most cogent and reliable evidence of fact and opinion before this Court.

57 The plaintiff's counsel placed much reliance on two other cases: Canadian Propane Gas & Oil Limited v Minister of National Revenue, [1972] C.T.C. 566, 73 D.T.C. 5019; Herb Payne Transport Limited v Minister of National Revenue, [1963] C.T.C. 116, 63 D.T.C. 1075.

58 In both these cases there was a good deal of discussion about paragraph 20(6)(g) of the Income Tax Act, RSC 1952, c 148. Before dealing with the two cases I think it worth while to note that paragraph 20(6)(g) speaks of “depreciable property” and “of something else”. It does not identify “goodwill” or any other kind of property that is not depreciable. Thus, where this provision is applied it is only necessary to show that, in addition to “depreciable property”, “something else” was included as being bought for the purchase price.

59 The Canadian Propane Gas case was heard in November 1972 by Cattanach, J in the Federal Court—Trial Division.

60 The essential facts and the reasons for judgment are well summarized in the headnote [DTC]:

Capital cost allowances—Acquisition of businesses by purchase of assets—Expectation of purchaser of succeeding to vendors' customers—Part consideration attributable to depreciable assets and part to “something else”—Fair market value of such assets—Onus of proof—Income Tax Act, RSC 1952, ss 11(1)(a) and 20(6)(g) [see s 20(1)(a) of the new Act].

The appellant corporation carried on the business of dealing in liquid and gaseous hydrocarbons, principally in selling propane gas to consumers. It expanded its business by acquiring the businesses of other retailers of the gas by purchasing the assets of such other businesses and, if necessary, by purchasing their shares as well. Having completed the purchases of three such businesses, two of which were reassessed for the recapture of capital costs by reason of their having received from the appellant more than the depreciated figure for the assets in question, the appellant used the figures in the written agreement for its capital cost allowances. The Minister, in assessing the appellant, invoked the provisions of section 20(6)(g) and reduced the capital cost of certain of the depreciable assets. He did this by ascertaining the fair market value of the relevant assets and treating the balance of the consideration as being for “something else” within the meaning of the section. The appellant appealed to the Federal Court—Trial Division, contending that the negotiated values between the parties to each agreement, attributable to the depreciable property, were the correct figures and that the section invoked by the Minister was not applicable.

Held: The appeal was dismissed. There were provisions in each agreement designed to ensure that the customers of the vendors would become the customers of the appellant and that was sufficient to constitute “something else”, to which part of the consideration might reasonably be regarded as attributable and accordingly, the section was applicable. The businesses were bought and sold as going concerns, the consideration being tailored to fit each vendor's price for its business and as there was no hard bargaining as to the attribution of amounts to depreciable property, the figures in the agreements were not decisive of what was reasonable. The Minister's figures, having been accepted as accurate by the appellant, the onus for demolishing the assumptions upon which his calculations were based fell on the appellant and it had failed to discharge such onus. Accordingly, it could not be said that the Minister's assumptions were not warranted and the amounts allocated by him to the depreciable property were correct.

In applying principles outlined in the above section the matter for determination is not simply one of interpreting the contract or agreement or of giving effect to its provisions. The section states that the part of the amount that can reasonably be regarded as being the consideration for depreciable property shall be deemed to be the proceeds of disposition irrespective of the form or legal effect of the contract or agreement.

Rather the first problem to be decided is whether the amount can be regarded as being in part the consideration for depreciable property and as being in part consideration for something else. In short is paragraph 20(6)(g) applicable.

If the first problem is answered in the affirmative the next problem that arises for determination is what amount of the total can reasonably be regarded as consideration for the depreciable property and what amount of the total can be reasonably regarded as consideration for something else. It seems to me that the determination of the foregoing respective amounts can best be determined by ascertaining the reasonable value of the property and the deduction of that amount from the total consideration results in the amount attributable to something else.

61 In the Canadian Propane case no allowance had been made for “goodwill”, one of the appellant's principal witnesses stating that the appellant considered it had no value. But as Cattanach, J said, at page 576 [5027]:

The fact that no value is assigned to goodwill in the agreements is not conclusive of the matter.

It is not necessary for me to categorize such an expectation in the appellant as goodwill which is, of course, a non-depreciable asset. It was a factor present in the mind of the appellant in making the purchases and that is sufficient to constitute “something else” within the meaning of paragraph 20(6)(g) to which an amount may be reasonably regarded as attributable. This being so it follows that paragraph 20(6)(g) is applicable to the transactions here in question.

62 The paragraph just quoted has direct application to the present case. Certainly also, the expectation of succeeding to the licences held by Mr La Freniere was a factor in the minds of the defendants when purchasing the Bell Hotel. Put in another way, Mr La Freniere, in selling the hotel, was giving up his valuable licences and the defendants were to acquire them, as shown by the condition that unless they obtained the licences their purchase was to become null and void.

63 Cattanach, J in the Canadian Propane case took the view, I think correctly, that the crux of the issue between the parties was “what was a reasonable consideration for the depreciable property”. This is so by reason of the wording of paragraph 20(6)(g).

64 The appellant had argued that since the purchases had been negotiated on an arm's length basis and the prices at which the assets were sold were determined by bona fide bargaining, it followed that the resultant written agreements ascribing prices to the assets must be conclusive. The learned judge did not agree. In his view, the word “reasonable” in the context of paragraph 20(6)(g) did not mean the subjective view of the Minister alone or of the appellant alone, but the view of an objective observer with a knowledge of all the pertinent facts. His final conclusion is found in the following paragraph on page 579 [5029], which has particular applicability to the case before me:

For the foregoing reasons I have concluded that the apportionment between depreciable property and something else was in effect unilaterally done by the appellant and that there was in reality no genuine negotiated apportionment as a result of bargaining between the parties to the agreement from which it follows that the allocations in the agreements are not decisive of what is reasonable.

65 It was held that the appellant had failed to discharge the onus of demolishing the Minister's assumptions of value.

66 In the present case I also hold that the defendants have failed to discharge the onus of proving the Minister's assessment valuations wrong. However, after making his assessment on the basis of valuations submitted by people in his own department, the Minister engaged Mr Farstad to make a formal appraisal of the assets and report. Mr Farstad's report was filed as an exhibit by counsel for the plaintiff who also called him as a witness. In effect, the Court was invited to consider both the Minister's assessment and the valuations in Mr Farstad's report. This I have done, and as I have found that Mr Farstad's figures are more reliable, I would, but for one circumstance, fix the figures in his report as the correct figures to be used in assessing the tax payable. That circumstance is dealt with at the end of these reasons.

67 I consider that for the purpose of this judgment it is only necessary to turn briefly to the case of Herb Payne Transport Limited v. MNR, and only for the purpose of quoting a few paragraphs from the judgment of Noël, J in the Exchequer Court to indicate his views concerning the conclusiveness of prices of assets contained in an agreement of sale. At pages 121–2 [1078] we find the following:

There is no doubt that, ordinarily, the price of an asset arrived at by bona fide negotiations at arm's length in a commercial transaction should establish the value of that asset at that time and place.

However, as we have seen, the evidence discloses that in the present instance although values appear opposite all of the depreciated assets of the appellant they had not been agreed between the parties as establishing the value of the said assets. These values would, therefore, under the circumstances, be open for determination under Section 20(6)(g) of The Income Tax Act which, as we have seen, specifically states that: “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;”.

The above rule appears to be mandatory and would apply to any case where a disposal of depreciable property occurs. It also, in my opinion, would have the effect of permitting evidence with respect to the reasonableness of the consideration for such depreciated property to be adduced notwithstanding the ordinary rules of evidence which, as suggested by counsel for the respondent, might apply here to prevent contradiction by oral evidence of the terms of a written document and this would be especially so in a case such as we have here where the purchaser and the appellant, as we have seen, were never ad idem concerning the valuation of assets of the business for the purpose of the sale of assets.

68 Near the bottom of page 122 [1079], having referred to the matter of “reasonableness” of prices, Noël, J said:

There is also no question that if the purchaser and the vendor acting at arm's length, reach a mutual decision as to apportionment of price against various assets which appear to be reasonable under the circumstances, they should be accepted by the taxation authority as accurate and they should be binding on both parties.

However, in the present instance, the consideration for the fixed assets as set down in the re-assessment of the respondent appears to me to be most unreasonable for the following reasons.

69 Noël, J then proceeded to examine the evidence at length including that relating to goodwill, to show why the reassessment was unreasonable. In the end he allowed the appeal in part, but revalued many of the assets.

70 I deem it unnecessary to review any of the other cases referred to by counsel.

71 The cirmumstance referred to supra which prevents me from fixing the valuation figures in Mr Farstad's report as the ones to be used in assessing the tax payable is that by so doing it seems likely that the Minister's assessment would be increased. No breakdown of the nature and values of the contents of the building has been furnished that would suffice for me to fix the result with accuracy, but it appears that the higher depreciation or capital cost allowance percentages permitted on furniture, furnishings and fixtures than on buildings would lead to a higher tax assessment than that made by the Minister.

72 In the case of L J Harris v Minister of National Revenue, [1964] C.T.C. 562, 64 D.T.C. 5332, Thurlow, J, in the Exchequer Court, dealt with a similar situation. In that case the Minister in error had allowed $775.02 as a reduction for rental expense. On the other hand, it appeared that $525 should have been deducted as capital cost allowance. Counsel for the Minister argued that the proper course would be to refer the matter back to the Minister to correct both errors. Thurlow, J did not agree. He said, at page 571 [5337]:

I do not think, however, that this is the correct way to deal with the matter. On a taxpayer's appeal to the Court the matter for determination is basically whether the assessment is too high. This may depend on what deductions are allowable in computing income and what are not but as I see it the determination of these questions is involved only for the purpose of reaching a conclusion on the basic question. No appeal to this Court from the assessment is given by the statute to the Minister and since in the circumstances of this case the disallowance of the $775.02 while allowing $525 would result in an increase in the assessment the effect of referring the matter back to the Minister for that purpose would be to increase the assessment and thus in substance allow an appeal by him to this Court. The application for leave to amend is therefore refused.

73 The Harris case has been followed. I agree with Thurlow, J's view of the law on this point. Consequently, in the present case the assessment made by the Minister must stand. The appeals of the plaintiff are allowed, with costs, and the assessments are restored.