Malloney's Studio Ltd. v. R., [1975] C.T.C. 542, 75 D.T.C. 5377

Dubé, J:

1 The Minister of National Revenue has appealed from the allowance by the Tax Appeal Board of appeals of Malloney's Studio Limited from assessments to income tax in respect of its 1966 and 1967 taxation years which ended on May 31 in each year.

2 For convenience of reference, the Minister of National Revenue and Malloney's Studio Limited shall hereinafter be referred to respectively as “the Minister” and “the Company”.

3 At the opening of the trial, counsel for both parties agreed to tender a book of exhibits (A-1 to A-26) to be admitted without further proof. The Company called only one witness, its president John Egan who after university graduation joined his father and two brothers in purchasing 50% of the shares of the Company incorporated by letters patent on May 13, 1958 (Exhibit A-1). The owner of the other 50% was Dr Saul Simon, a retired dentist.

4 The purpose of the incorporation was to carry on the existing business of a well established licensed bar-restaurant owned and operated by Malloney's Art Gallery Limited. The purchase price of $205,000 included land, buildings, fixtures and equipment on the premises at 64-68 Grenville Street, Toronto (Exhibit A-2).

5 The opening balance sheet (Exhibit A-3) of the new company disclosed these fixed assets: land, $25,350, buildings, $101,450, furniture, fixtures and equipment, $76,068.95, for a total of $202,868.95, plus other assets. Listed under liabilities were five mortgages totalling $207,000.

6 Dr Simon who had managed the business from its incorporation suffered a heart attack and sold his shares to the Egans on September 13, 1962 (Exhibit A-4). The latter proceeded to renovate the buildings. Early in 1963 they carried out extensive improvements to the second floor.

7 In that same year they were approached by Murray Bosley, a real estate agent acting on behalf of Women's College Hospital, hereinafter called “the Hospital”, located immediately to the west of the Company's establishment, with a view to acquiring the Company's property for expansion purposes. At the request of the Company, Bosley, who was also a governor of the Hospital, obtained a letter setting out the intentions of the Hospital. The one paragraph letter dated July 25, 1963 reads as follows:

Dear Sirs: Attention Mr John Egan

The present plans for the expansion of the hospital indicate that it will be necessary to acquire the Malloney property and that construction should commence about the middle of the year 1964.

8 It is admitted by both parties that the Hospital possessed the power to expropriate under section 7 of The Public Hospitals Act of Ontario, RSO 1960, c 322, as listed under section 5 of The Municipal Act, RSO 1960, c 249, of the same province.

9 It does appear the owners were not interested in selling their freshly renovated buildings. The banquet business, their mainstay, was also quite prosperous. But, as vividly expressed by the witness “the gun was put to our heads”. If no agreement was arrived at, the power to expropriate could be exercised.

10 As a basis for negotiations the Company prepared a balance sheet (Exhibit A-6) showing a total value of $331,429.33. It included the purchase price of $205,000, repairs for $41,684.47, average loss of profit for one year and other items. There were offers and counter-offers with prices oscillating between the above request for some $331,000 and the initial Hospital offer of $250,000. The three successive agreements of purchase and sale (Exhibits A- 7, A-9, A-10) passing between the two parties included this proviso:

The transaction of purchase and sale is to be completed on or before the 1st day of July 1964 on which date vacant possession of the real property is to be given to the purchaser clear of all buildings.[FN1: <p>Italics mine.</p>]

11 In reply to the first offer John Egan on behalf of the Company wrote a letter which outlines the reasons behind the Company's request for a higher price. The letter appears to me to be a true reflection of the mind of the author at the time he was attempting to achieve an acceptable settlement:

Enclosed please find the original Offer to Purchase presented to Malloney's Studio Limited. You will notice that the purchase price has been changed from $250,000. to $300,000. and the offer duly signed and witnessed.

If this is agreeable to you please initial changes and return deposit of $25,000.00.

Our reasons for changing this offer are as follows:

When we purchased this property and business from Dr. Saul Simon in September 1962, it was with the understanding that this Company would not be bothered by the Women's College Hospital for at least a minimum of five to seven years. Dr. Simon guaranteed this after having discussions with Mr David Donaldson, Miss Dorothy Machem and the Women's College Hospital's Tax Consultant regarding a laneway agreement on lot 132 between the then proposed new addition and Malloney Studio Limited. During the course of these meetings Mr. Donaldson suggested that the hospital might buy Malloney's Studio, and a figure of $300,000. was discussed.

It was with this assurance from Dr Simon that I invested a considerable amount of money in renovating and re-decorating the complete second floor of this establishment in March of 1963. As you can appreciate this business has hardly started to re-pay its owners the money invested in it within the last year.

The Liquor License Board of Ontario does not allow its licenseholders to transfer lounge licenses unless it is within a radius of 500 feet of the establishment and in our case this is impossible. To replace this license in Metropolitan Toronto a minimum of 52 hotel rooms is required with a foreseeable investment of close to a million dollars. By purchasing this property you are declaring this license null and void and putting us out of business.

As you know, Malloney's is rather a unique business, its prosperity depends upon a banquet trade which has taken over fifteen years to develop. As you know to-day's customer in the entertainment business is becoming extremely more selective and to attract him under to-day's competitive situation only the best is required.

All things considered we feel that the minimum amount this business is worth under the conditions as set forth in the Purchase Agreement is $300,000.

Hoping this is acceptable to you and the hospital and hoping to hear from you soon, I am,

12 As it turned out, both parties finally accepted a purchase price of $280,000 by agreement dated September 4, 1963 (Exhibit A-10); the transaction was completed by deed dated in error October 29, 1963 and registered November 17, 1964 (Exhibit A-17).

13 During that period the Company fortunately acquired new premises across the street at 83-85 Greenville Street for which they paid $75,000 (Exhibit A- 11) and on which they invested some $160,000 in very extensive renovations. Since the new location was within the 500 feet transfer allowance the Liquor Licence Board of Ontario granted permission to transfer the all-important licence (Exhibit A-13). The transition between the old and the new premises was smooth. the old building was quickly demolished, the land levelled and turned over to the purchaser “clear of all buildings”.

14 Counsel for the Minister called two expert witnesses to appraise the market value of the property in question as of October 29, 1963, the date on the face of the deed, whereas the actual transfer took place in November 1964. The value was established by them at $180,000 for the land and $80,000 for the buildings (Exhibits A-26, A-27).

15 In computing its undepreciated capital cost for its Class 3 property for the years ending May 31, 1965, 1966 and 1967, the Company did not include any of the $280,000 as proceeds of disposition. The Company having reported a loss for its 1965 taxation year the Minister reassessed the 1966 and 1967 years assuming that of the $280,000 received by the Company for the sale of its Grenville Street property, the sum of $98,554.24 can reasonably be regarded as being the consideration for the depreciable property, that is the building.

16 Following the evidence of the expert witnesses, counsel for the Minister conceded that $80,000 was an alternative value for the buildings.

17 The first issue to be determined in this case is whether any part of the purchase price paid by the Hospital to the Company can be reasonably regarded as having been paid in respect of buildings which previously stood on the land but were demolished by the vendor before the purchaser completed the transaction and took possession. If the first question is answered in the affirmative, then it must be established what part is to be so regarded.

18 The governing section of the Income Tax Act, 20(6)(g), reads 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;

19 Bearing in mind that in the present case the “depreciable property of a taxpayer” is the buildings of the Company, it must then be found whether “an amount can reasonably be regarded as being in part the consideration for disposition” of these buildings. In Klondike Helicopters Ltd et al v Minister of National Revenue, [1965] C.T.C. 427, 65 D.T.C. 5253, Thurlow, J in dealing with the relevant statutory provision remarked at page 430 [5254]:

It is to be observed as well that the statutory rule applies only “where an amount can reasonably be regarded as being in part consideration for disposition of depreciable property of a taxpayer of a prescribed class and as being in part consideration for something else”. An initial question may thus arise as to whether a particular situation falls within the ambit of the provision as so defined.

20 In the preceding paragraph (pp 429–30 [5254], Thurlow, J explained his approach to the problem of applying the statutory provision 20(6)(g) to the facts before him:

In applying this rule the matter for determination is not simply one of interpreting the contract or agreement or of giving effect to its provisions. Rather, when the rule applies the problem is to decide, having regard to all the circumstances of the transaction, what part of an amount representing the consideration for disposition of depreciable assets of a prescribed class and for something else can reasonably be regarded as having been the consideration for the disposition of the assets of the prescribed class and for the purposes of the rule the amount so determined is to be regarded as the proceeds of disposition of such assets regardless of the form or legal effect of the contract or agreement. As pointed out by Noël, J, in Herb Payne Transport Limited v Minister of National Revenue, [1964] Ex. C.R. 1at p 8;[1963] C.T.C. 116at p 122, in determining this question evidence will be admissible which would be excluded if the contract or agreement alone governed the rights of the taxpayer and the Minister as parties to the proceeding. The making of a contract or agreement in the form in which it exists is, however, one of the circumstances to be taken into account in the overall enquiry and 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.

21 In the Klondike case the dispute was not as to the application of the provision but as to the amount which could be reasonably regarded as having been the consideration for the aircraft and equipment. But in the case before me, counsel for the Company claims that no amount can be reasonably allocated to the buildings as they were not transferred to the purchaser. The sale was for vacant land “clear of all buildings”.

22 In Herb Payne Transport Limited v Minister of National Revenue, [1964] Ex. C.R. 1, [1963] C.T.C. 116, 63 D.T.C. 1075, referred to by Thurlow, J in the above quotation the vendor and the purchaser made no allocation as to the manner in which the various assets of a trucking company should be divided. Noël, J stated at page 8 [122, 1078]:

The issue in this appeal is to determine what part of the amount of $200,000 which the appellant received from Mr Paxton can reasonably be regarded as being the consideration for the disposition of the appellant's depreciable property, ie its buildings, lights and light fixtures, machinery and equipment, furniture and fixtures, refrigeration units, asphalt driveway and automotive equipment. Whatever amount is so regarded shall be deemed to be the pro ceeds of the disposition of its depreciable property within the meaning of Section 20(1) of the Act.

If one should rely entirely on the documentary evidence produced and particularly Schedule “A” to Exhibit 3, which was signed by Mr Payne, the appellant's principal shareholder, the portion of the price attributable to each group of assets would have been conclusively determined by the arm's length agreement of the parties.

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.

23 Counsel for the Company alleges that there were bona fide negotiations at arm's length for the purchase of vacant land as vouched by the three agreements based on the transfer of premises “clear of all buildings”.

24 In Gateway Lodge Ltd v Minister of National Revenue, [1967] C.T.C. 199, 67 D.T.C. 5138, a profitable tourist business was operated until 1960 when the appellant was informed that it would have to surrender its leases because the land was required for a new roadway. Following negotiations in which the appellant refused to bargain except on the basis that the Crown would accept a surrender of the leasehold land with the buildings on it, the appellant received $155,000 from the Crown for the surrender of the leases including buildings and contents. The Minister concluded that at least $52,000 could be reasonably regarded as proceeds of the disposition of the buildings. The appeal was dismissed, but Jackett, P, as he then was, said at page 209 [5144]:

There is no doubt in my mind that what the appellant was bargaining about was the surrender of a leasehold interest in property that had a value as part of his business enterprise. That is what he was selling. He had a right to continue operating the business indefinitely. It was a profitable business. He valued his leasehold interest on that basis and it was because that was the nature of the asset that he had and that the Crown wanted that the Crown paid him $155,000. Had there been nothing but bare land, he could not have claimed, and the Crown could not have paid, any such amount.[FN2: <p>Italics mine.</p>]

25 Again the argument is made that in the case before me the agreements referred to land clear of all buildings and in fact nothing but bare land was transferred to the purchaser.

26 In Emco Ltd v Minister of National Revenue, [1968] C.T.C. 457, 68 D.T.C. 5310, the appellant company sold two properties (land and buildings) for lump sums, the buildings being demolished by the purchasers immediately after obtaining possession. The buildings, however, were disposed of because they were old and were found to be inadequate for the appellant's operations. The Minister took the position that part of the sale price should be treated as the proceeds of disposition of the buildings. In allowing the appeal, Noël, J said at pages 464–5 [5315]:

It is indeed a truism that where land values are rising, the best and most profitable use of the property is to get rid of the buildings in order to use it for parking or to erect thereon a larger and more profitable building. As a matter of fact, the evidence discloses in both cases here that at the exchange level, the appellant's buildings had only a nuisance value. Mr Brown of the Montreal Star even stated that if the building had not been on the Montreal property, the Star would have paid a higher price than it did and the same would apply to the Quebec City properties. The evidence also shows clearly that the purchaser of the appellant's properties had informed the appellant that they were being acquired for site purposes only and the buildings were demolished by the purchasers at their expense a few months after the sales had taken place and immediately after the appellant had vacated the premises.

Counsel for the respondent agreed that had the appellant in both cases prior to the sales demolished the buildings, there would have been no question that no amount could have been allocated to the buildings. I can see no reason to treat the matter differently merely because the purchaser demolished the buildings after purchasing the properties.[FN3: <p>Italics mine.</p>]

I must, I believe, conclude, that the evidence indicates clearly that the bargaining between the parties, the meeting of minds on both sides in these transactions, were exclusively attributable to the value of the land and nothing was attributable to the buildings. I am, therefore, satisfied that no amount of the selling price of these properties can be reasonably regarded as proceeds of disposition of the buildings and the appellant was right in adding back as it did in 1960 the undepreciated cost of its buildings. The facts here, in my view, are no different than those found by this Court in MNR v. Steen Realty Limited (supra) where no part of the sale price was attributed to the buildings and I see no reason to reach a different conclusion here.

27 It should be noted that counsel for the Minister in the Emco case who agreed that “if the appellant had demolished the buildings there would have been no question that no amount could have been allocated to the buildings” is now counsel for the Company in the case before us. Needless to say, he does not now disavow his admission.

28 The respondent company in MNR v Steen Realty Ltd, [1964] C.T.C. 133, 64 D.T.C. 5081, was held to be entitled to 1965 capital cost allowances on its buildings which were immediately destroyed by the purchaser who intended to erect a large office building on the parcel of land. Referring to its earlier decision in Ben's Ltd v Minister of National Revenue, [1955] C.T.C. 249, 55 D.T.C. 1152, the Court ruled that it was not reasonable to regard any part of the $395,000 sale price as being the consideration for the disposition of the buildings. The buildings were old and had no attraction to an investor seeking income. Ritchie, DJ concluded with these words at page 137 [5083]:

The buildings were old. They had no attraction to an investor seeking income. According to Mr Armstrong anyone desirous of acquiring the property as an investment would not have paid more than $210,500.00 for it. I am satisfied the company, in fixing the price at which it was willing to sell, had regard only to the land value. I also am satisfied Mr Peter regarded the buildings on the land as of no value to him and that his offer of $395,000.00 was based solely on the value of the land as a site for the modern twelve storey office building he had in mind. The cost of demolition increased his acquisition cost.

In the circumstances surrounding the sale of the property to Peter, it is not reasonable to regard any part of the $395,000.00 sale price as being the consideration for the disposition of the buildings. See Ben's Limited v Minister of National Revenue, [1955] Ex. C.R. 289, [1955] C.T.C. 249.

29 It was held in Baine, Johnston & Co Ltd v. MNR, [1968] Tax A.B.C. 1100, 68 D.T.C. 801, that the appellant company was entitled to the capi tal cost allowance it had claimed on its buildings in 1964 and 1965. No part of the proceeds of disposition of the property sold by the appellant to the City was attributable to the buildings standing hereon. The various buildings were of substantial value, yet the Tax Appeal Board decided that the meeting of the minds was with respect to the land alone and applied the Emco decision. W O Davis, QC said at page 1112 [808]:

In the present matter, the municipal government had offered to purchase the appellant's property for $300,000 provided the appellant would demolish its buildings before turning over the property for the desired purpose. In the alternative, the City was prepared to pay $275,000 for the entire property and to assume the responsibility for demolition of the buildings. It seems clear that the City was only interested in acquiring vacant land. The meeting of minds was in respect of a sale price of $275,000, being the mutually acceptable price for the land alone.

I can see no reason for distinguishing the facts of these appeals from those of the Emco case (supra). I would therefore allow the appeals and refer the matter back to the Minister of National Revenue for re- assessment accordingly.

30 My brother Cattanach sheds much light on the subject in Canadian Propane Gas & Oil Ltd v Minister of National Revenue, [1972] C.T.C. 566, 73 D.T.C. 5019. The appellant corporation was in the propane gas business. It expanded by acquiring the business of other retailers and used the figures in the written agreement for its capital cost allowances. The Minister, in assessing the appellant, invoked the provisions of paragraph 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 following are relevant extracts from the decision of Cattanach, J.

31 At page 575 [5026] he outlines the problem to be decided:

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.

32 At page 577 [5028] he defines the meaning of “reasonable” in the relevant section:

I should think that “reasonable” as used in the context of paragraph 20(6)(g) does not mean from the subjective point of view of the Minister alone or the appellant alone, but rather from the point of view of an objective observer with a knowledge of all the pertinent facts.

33 Further down (pp 578–9 [5028–9]) he looked at the negotiations between vendor and purchaser:

Normally to an informed vendor and purchaser of a business there is a conflict of interest between them. It is to the purchaser's advantage to have a high price allocated to depreciable property in order to claim a high capital cost allowance. It is to the advantage of the vendor to have the price of depreciable property as low as possible to avoid recapture of capital cost allowance.

In my view there was no hard bargaining between the vendors and the appellant in the transactions as to the allocation of amounts to depreciable property.

What the appellant was buying and what the vendors were selling were businesses as a going concern. What the vendors were interested in was getting as high a price for the businesses as they could extract from the appellant. It was the appellant's preference and decision to acquire those businesses by a purchase of assets rather than a purchase of shares. The price of the assets to the appellant was the price agreeable to each vendor for its business. Therefore the appellant tailored the price of the assets to fit the vendor's price for its business. In my opinion there is no question of this.

34 In his conclusion at page 579 [5029] he said:

In considering the problem as to the applicability of paragraph 20(6)(g) I concluded that not only was there a disposition of physical assets but “something else” as well. That “something else” might well be goodwill to which there was assigned in the agreements nominal amounts of $1.

35 In the case of Robert Adolphe Stanley v. MNR, [1967] Tax A.B.C. 1048, 67 D.T.C. 700, [1969] C.T.C. 430, 69 D.T.C. 5286, [1972] C.T.C. 34, 72 D.T.C. 6004, the Tax Appeal Board, the Exchequer Court and the Supreme Court all held that the appellant company was subject to recapture of capital cost allowances as assessed by the Minister. The appellant sold an office building and the land on which it was situated for $90,700 to a school board which demolished the building and used the land for the extension of the grounds of a high school. The sale price of the property was based on an appraisal made for the school board which valued the building at $61,500 and the land at $20,500 for a total of $82,000. In the negotiations leading to the sale, the school board agreed to add another $8,200 to cover the appellant's cost of relocating in other premises. The appellant objected to the recapture of any amount by the Minister contending that the board was interested only in the vacant land. In his decision, Sheppard, DJ of the Exchequer Court referred to Diggon- Hibben Ltd v The King, [1949] S.C.R. 712 at 714, and quoted Rand, J as follows:

There is no serious dispute that they should be allowed; that they must be such as can be brought within the scope of the “value of the land to the owner” has not been questioned; and what is at issue in the particular items is in reality a conceptual refinement which is devoid of practical significance.

The statement means, as Mr Varcoe on the argument frankly conceded, that the owner at the moment of expropriation is to be deemed as without title, but all else remaining the same, and the question is what would he, as a prudent man, at that moment, pay for the property rather than be ejected from it.

It is the value to the owner and not the market value or value to the purchaser that must be determined. In the determination of that value to the owner various items may be considered and these will vary according to the circumstances of particular cases.

36 The proper test therefore is not the value to the purchaser, but to the owner. If to the Hospital the buildings were but a nuisance, to the Company they were obviously essential in the operation of the business.

37 Then he concluded:

Finally, Section 20(6)(g) of the Income Tax Act states “Where an amount can reasonably be regarded as being in part the consideration for disposition of depreciable property;” these words of the section contemplate two things:

1. What can reasonably be regarded.

2. As part of the consideration for disposition of depreciable property.

In this instance the parties have agreed upon the value of the property at $90,200 on the basis of the Palmer evaluation (Ex R 27), therefore the consideration contemplated by Section 20(6)(g) is the Palmer report, plus $8,200. The part of that consideration which can reasonably be regarded as the price of the buildings is apparent from the report itself, namely $61,250 [ sic] (Ex R27, p 14) and therefore, under the circumstances of this case, the value of other properties cannot in any sense be relevant to prove the part of the consideration for the buildings here in question.

The appellant cited the following cases: MNR v. Steen Realty, 1964, Ex CR 543;[1964] C.T.C. 133; Emco Ltd. v Minister of National Revenue, [1968] C.T.C. 457; Baine Johnston Ltd. v. MNR, [1968] Tax A.B.C. 1100. In those cases the buildings had no value whatsoever and therefore the Court found they could not have been valued by the owner.

38 It was submitted that the overall question in this case was whether the Company can continue to deduct capital cost allowance on the undepreciated capital cost of the building at 66 Grenville Street after that building was destroyed.

39 The mere fact that the building ceased to exist is not a factor. The existence of the property is not necessary for the right to depreciation to subsist, provided there remains property of the same class. In the case at bar, the company had purchased other premises across the street during the relevant taxation year so there were other assets in Class 3. My brother Addy makes this quite clear in his recent decision in Compagnie Immobilière BCN Limitée v Her Majesty the Queen, [1975] C.T.C. 316, 75 D.T.C. 5198. He emphasizes the point at page 319 [5200] of his decision:

It is clear that in order to preserve the right to deduct yearly amounts calculated on the capital cost of specific property, the destruction or alienation of this property by sale or other means does not matter, provided that there has always existed and still exists, since the initial purchase, other property of the same class. Nor does it matter whether this other property was acquired concurrently with, before or after the acquisition of the destroyed or alienated property.

40 It was also forcefully argued that under subsection 338(12) of The Municipal Act of Ontario, RSO 1960, c 249, the compensation in expropriation shall be limited to the market value, the value of buildings, damages for disturbance and damages to property. Therefore the Hospital had no authority to compensate for anything else, hence part of the $280,000 compensation to the Company must be allocated to buildings.

41 That conclusion would be inescapable if the Hospital had expropriated the Company's property as it could have done. But it chose not to expropriate, presumably to maintain good relations and not to antagonize the community.

42 The point was raised that Mr Egan was aware that selling the Company's premises “clear of all buildings” might be advantageous from the capital cost allowance aspect. That was the only instance where Mr Egan, the president of the Company, otherwise alert and very credible, seemed to be less than totally sure of what transpired some 12 years ago. The matter was discussed with Murray Bosley and Mr Egan felt that selling the land clear of all buildings could be a distinct depreciation advantage, “a tax saving of $25,000”, to his Company. I am not bound to conclude however that, merely because he expected to improve his capital costs allowance position, the demolition of his buildings became a disposition thereof under paragraph 20(6)(g) of the Income Tax Act. Neither must I conclude that his anticipations were well founded.

43 The first question to be answered under the statutory provision remains whether or not any part of the consideration for disposition of the property can be reasonably allocated to the demolished buildings. Was there a disposition of the buildings?

44 Paragraph 20(5)(b) defines “disposition of property” as including “any transaction or event entitling a taxpayer to proceeds of disposition of property”. Counsel for the Company asserts that the event entitling to proceeds of disposition was the conveyance of the land, not the demolition of the buildings. Admittedly, the purchaser was not interested in the buildings, but in the land clear of all buildings. Thus the conveyance was the cause, and the demolition a condition precedent which gave rise to the proceeds.

45 Paragraph 20(5)(c) defines “proceeds of disposition” as follows:

20. (5) In this section and regulations made under paragraph (a) of the subsection (1) of section 11,

• (c) “proceeds of disposition” of property include

  • (i) the sale price of property that has been sold,

  • (ii) compensation for property damaged, destroyed, taken or injuriously affected, either lawfully or unlawfully, or under statutory authority or otherwise,

46 Thus proceeds of disposition include under (ii) compensation for property destroyed. So, even if the demolition was not the main event entitling to proceeds, was not the whole transaction a “transaction” entitling the Company to “compensation” for buildings destroyed? The question must be answered in the affirmative. Looking at all the circumstances one must conclude that the purchaser paid and the vendor received compensation for the buildings which, under the agreement of sale, he had to demolish before completing the transaction.

47 The owners of the Company did not want to sell, but they knew they had to, or face expropriation proceedings. So they negotiated the best possible price. They prepared a breakdown of valuation of Malloney's Studio Limited showing a total of $331,429.31, including the original purchase price of $203,000. That amount was taken from the Opening Balance Sheet which showed values of $25,350 for land and $101,450 for buildings.

• 1. when the Company purchased the property it did not expect to be bothered by the Hospital for at least five to seven years,

• 2. with this assurance, considerable amounts of money were invested in renovating the establishment,

• 3. the Liquor Licence Board of Ontario allows only transfers within 500 feet of the establishment,

• 4. Malloney's is a unique banquet business,

• 5. this business is worth at least $300,000.

49 The Hospital accepted these valid points and increased the offer eventually to $280,000. That presumably was not too far from the amount it expected to pay by way of expropriation, where compensation includes not only the market value of the land, but the value of the buildings and damages occasioned by disturbance to the business.

50 Under subparagraph 20(5)(c)(ii) of the Act, the Company received “compensation” for the buildings it “destroyed” and therefore a part of the proceeds of disposition under 20(6)(g) must be allocated to the buildings. What part?

51 As mentioned above, the Company valued its buildings in its opening balance sheet at $101,450. In its Schedule of Fiscal Assets, capital cost allowance (Class 3) at the request of the Minister was reduced by $17,460.92 (more allocation to land) to $83,989.08. The Schedule shows the annual additions and capital cost allowances from 1958 to May 31, 1964, when the undepreciated capital cost stood at $73,923.95. The buildings were covered by a $200,000 insurance policy (Exhibit A-17).

52 The Company did not call on any expert to value the buildings but argued firstly that “fair market value” of the buildings was irrelevant and that if it should be relevant, then the opinion of the expert witness, Jos Strung, was expressed with respect to the wrong date and based on the erroneous assumption that the sale was made on the open market.

53 It is true that 20(6)(g) does not prescribe a fair market value allocation, it merely refers to an amount that can reasonably be regarded as compensation.

54 In the Canadian Propane case (supra), Cattanach, J defined “reasonable” value as being the point of view of an objective observer with a knowledge of all the pertinent facts. In any event, apart from the values established by the Company on its books, the only appraisal before me is the expert opinion of Jos Strung, president of Strung Real Estate Limited and of FW Helyar & Associates Limited, chartered quantity surveyors and construction cost consultants.

55 It is true that, as instructed, the appraiser based the value as of October 29, 1963, the date on the face of the deed to the Hospital, and not as of November 1964, the actual date of transfer. I do not think that this factor voids the valuation. As a matter of fact a 1963 appraisal would favour the Company because of the uncontradicted evidence of Jos Strung that the value of buildings in Toronto increased by 6.95% in 1963.

56 The expert witness did not base his estimates on the erroneous assumption that the actual sale was or was not effected on the open market. He used reliable methods to arrive at the value of the land and buildings at the relevant period. The buildings having been demolished he was not able to inspect the premises, hence his valuation was carried out by indirect means. He used several well known techniques: the cost approach, the income approach, the comparative approach. His evidence stood uncontradicted. I therefore accept his estimate of $80,000 for the buildings. I also accept his valuation of $180,000 for the land, an appraisal based on the market data approach.

57 For the reasons expressed the appeals are allowed with costs and the assessments are referred back to the Minister for reconsideration and reassessment on the basis that $80,000 is the value of the depreciable property here in question.