Matador Inc, Matador Converters Co Limited v. Minister of National Revenue, [1978] CTC 3174, [1978] DTC 1804

Guy Tremblay:—This case was heard in Montreal, Quebec, on January 19, 25, 26 and 27, 1978.

1. The~Crux of the Matter

The problem concerns the valuation of a building sold by the actual appellant to the deemed appellant in January 1973 for the price of $185,000. In its income tax return, the actual appellant alloted the entire amount of $185,000 to the disposition of the land and claimed a terminal loss of $129,079.88, the undepreciated capital cost of the building at the date of the sale. According to the respondent. and the deemed appellant, the value of the building was $124,000 and the value of the land $61,000.

2. Actual Appellant and Deemed Appellant

It is important to point out immediately that an Order was rendered by the Tax Review Board (Mr Roland St-Onge) on November 21, 1977, based on paragraph 174(3)(b), joining in the same hearing Matador Inc (the seller in the present case) hereinafter called ‘‘actual appellant” (because in fact the company appealed to the Board according to section 169), and Matador Converters Co Limited (the buyer in the present case) hereinafter called “deemed appellant” (because even if ‘that company has not appealed according to section 169, it is deemed to be an appellant according to the spirit of section 174). Matador Converters Co Limited must deem that the respondent approved the contention of the actual appellant. In fact, by rendering an Order joining the two parties in the same hearing, it is deemed on one hand that an assessment is issued against Matador Converters Co Limited establishing to nothing the value of the building and on the other hand, that the taxpayer has appealed to the Board (WNR v Les Meubles de Maskinongé Inc et al, [1978] CTC 2285; 78 DTC 1235.

3. Burden of Proof

The appellants have the burden of showing that the respondent’s assessment was not justified. This burden of proof is based not on a particular section of the Income Tax Act but on several judicial decisions, among them a decision of the Supreme Court of Canada rendered in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

4. An Objection in Law: Section 68

Counsel for the respondent in his Reply to the Notice of Appeal cites section 68 of the new Act (which is a deemed section) as the basis on which to authorize the respondent to issue the assessment in dispute in the case at bar. Counsel for the actual appellant denies the application of section 68 in the present case and affirms that there is no other section on which to base the assessment in dispute.

This objection is fundamental. If the Board concurs with the arguments of the actual appellant, its appeal must be allowed immediately without studying the facts proven before the Board.

Section 68 reads as follows:

Amounts in part consideration for disposition of property.

Where an amount can reasonably be regarded as being in part the consideration for the disposition of any property of a taxpayer 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 proceeds of disposition of that property irrespective of the form or legal effect of the contract or agreement; and the person to whom the property was disposed of shall be deemed to have acquired the property at the same part of that amount.

According to the respondent, section 68 of the new Act is similar to, but of a much wider scope than paragraph 20(6)(g) of the old Act. That paragraph 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.

The French version of those two sections reads as follows:

Art 68. Contrepartie partielle de la disposition d’un bien.

Lorsqu’une somme peut raisonnablement être considérée comme étant en partie la contrepartie de la disposition de tout bien d’un contribuable, et comme étant en partie la contrepartie de quelque chose d’autre, la partie de la somme qui peut raisonnablement être considérée comme étant la contrepartie de cette disposition est réputée être le produit de la disposition de ce bien, quelle que soit la forme ou les effets juridiques du contrat ou de la convention: et la personne qui a acquis le bien a la suite de sa disposition est réputée l’avoir acquis à un prix égal a la même partie de cette somme.

20. (6) Pour l’exécution du présent article et des règlements établis selon l’alinéa a) du paragraphe (1) de l’artcile 11, les règles suivantes s’appliquent:

g) lorsqu’un montant peut être raisonnablement considéré comme étant en partie la cause ou considération pour la disposition de biens d’un contribuable, susceptibles de dépréciation et appartenant à une catégorie prescrite, et comme étant en partie la cause ou considération pour d’autre chose, la fraction du montant qui peut être raisonnablement considérée comme étant la cause ou considération de cette disposition est censée être le produit de la disposition de biens susceptibles de dépréciation appartenant à cette catégorie, indépendamment de la forme ou de l’effet juridique du contrat ou de la convention; et la personne envers qui on a disposé des biens susceptibles de dépréciation est réputée avoir acquis les biens à un Coût en capital, pour elle, égal à la même fraction de ce montant.

According to counsel for the actual appellant, the words “for something else” can be applied to services but must not be applied to another property. On one side, there is “property”, on the other side there is “something else”. According to the counsel, the French version of “any property” “de tout bien” confirms his contention that the other side “for something else” cannot be construed as property.

According to the learned counsel for the actual appellant, if it is not the right interpretation, the section is not clearly written. As this section is a deeming section and a charging-section, the doubt must be construed in favour of the taxpayer and the appeal must be allowed.

The Board is ready to admit that at first reading, section 68 is not easy to understand. However, after careful scrutiny, it becomes obvious that on one side there is “any property” or “tout bien” ie “n’importe quel bien”, including depreciable property or a capital property, and also including a specific property and not necessarily all the properties of a taxpayer. On the other side, there is “something else’’ or ‘quelque chose d’autre’’. In the Board’s opinion, it can be another specific property. In sum, it can be on one side a depreciable property and on the other side, a capital property as in the case at bar. Consequently, the objection is rejected.

5. Facts

5.01 On January 12, 1973, the actual appellant sold to the deemed appellant a property, including land and building, located at 9450 and 9470 De I’Esplanade Avenue, City of Montreal, for a price of $185,000.

5.02 When counsel for the actual appellant wished to file an offer made in November 1972 to the deemed appellant to buy, among other things, assets of the said company, counsel for respondent made an objection on the basis that it was not relevant. The Board has taken the objection under reserve and allowed the production of the offer as Exhibit A-2.

The Board accepts the production of the offer on the ground that the Board was informed at the hearing that the sale of the property involved in the case at bar was part of other assets. It is important that the price written on Exhibit A-1 for the specified assets be the right price not contradicted by another document. The sale price of the specified assets is in fact very important in the case at bar.

5.03 On November 7, 1972, a person acting in trust for and on behalf of a company to be incorporated, offered to the actual appellant to purchase (Exhibit A-2) for the price of $987,747.85 a) its physical assets; b) the right to the use of the name “Matador” in the new company; c) the property located at 9450 and 9470 De I’Esplanade Avenue in the City of Montreal; d) the property located at 270 Louvain West in the City of St-Laurent; e) the 112 common shares owned by Matador Inc. in 9500 Building Incorporated; f) rights and obligations in leases.

5.04 In that offer, the price for the property located at 9450-70 De I’Espanade Avenue was fixed at $185,000.

5.05 On November 8, 1972, the offer was accepted by the actual appellant.

5.06 The deed of sale of the property on De I’Esplanade Avenue (Exhibit A-1) does not provide for the apportionment of the sale price of $185,000 between the land and the building.

5.07 At the time of the sale, the undepreciated capital cost of the above-mentioned depreciable property for the actual appellant was $129,079.88.

5.08 When Matador Inc filed its income tax return for the 1973 taxation year, it allotted the entire amount of $185,000 to the disposition of the land and claimed a terminal loss of $129,079.88 with respect to the disposition of the depreciable property.

5.09 The first witness for the actual appellant, Mr Samuel Lyon Sachs, explained first that the shareholders, mainly because of their advanced age and a diminution in the revenues, decided to sell the business before ceasing the operation. He also affirmed that the only consideration for the I’Esplanade property was $185,000.

5.10 Concerning the building on De I’Esplanade Avenue property, in 1973, it was an irregular two-storey concrete building (403’x 114’).

That building was built in seven different stages, from 1950 to 1966, as it appears on the plan (Exhibit R-1). In 1950, the surface of the building was about 1200 square feet (81’ x 114’). In 1973, there were in fact 9 additions to the first one built in 1950.

5.11 The land (120’ x 488’), part of the I’Esplanade property, was bought before 1950 for the price of $16,000.

5.12 The second witness for the actual appellant was Mr. David Alan Hughes, an appraiser since 1974. He is a member of the Appraisers Institute of Canada and Appraisers Institute of the United States. He filed his appraisal report as Exhibit A-5. The conclusion of his report is that the market value of the land is (57,088 sf x $3.50 sf =

$199,808) $200,000.

5.13 According to the witness, to arrive at that conclusion of the value of $200,000, he had to uncover 75 sales. From this initial search, he utilized six sales that appear to meet the criteria (highest and best use: “redevelopment with a medium rise industrial building: Industrial Class II building’’). The respondent’s valuator had the same opinion concerning the highest and best use.

5.14 According to Mr Hughes, the building was totally obsolete and non-functional. He said that it would have cost $15,000 to demolish the building. Therefore the sale cost of $185,000 was normal. In cross-examination, however, he admitted that he had not entered the building but he had examined only the outside of it and the plans of the architect.

5.15 The whole property was sold ($185,000) for less than the market value of the land ($200,000). Therefore, under normal professional appraised principles and practices, no value should be attributed toward the building.

5.16 The only witness for the deemed appellant was Mr B Hopper, president of Matador Converters Co Limited. In his opinion the building at De I’Esplanade Avenue has the same use since the date of purchase in 1973 as it had before with the actual appellant. He said his company would not have bought the land if there had not been a building on it.

5.17 Since the purchase of the property in 1973, Mr Hopper said that no repairs but maintenance repairs were made on the building. The building being in concrete block, it should last for a very very long time. The deemed appellant had no problems coming from the City of Montreal (and from the insurance company). The municipal valuation only for 9450 De I’Esplanade Avenue was $155,500 for 1972 and 1973; the land—$70,450; the building—$85,080.

The Board does not maintain the objection of the counsel for the actual appellant concerning the filing of the municipal valuation. The witness for the respondent says in his report (Exhibit R-2) that the municipal valuation for the whole property in 1973 was $463,500: land —$153,950 and building—$309,550.

5.18 The witness for the respondent, Mr Claude Bois, is a member of the Appraisers Institute of Quebec since December 1976. He has been working for the Department of Revenue for five years in the section real estate valuation. He had worked before in the same field for three years for the City of Montreal. In 1977, he made the valuation of the property at De I’Esplanade Avenue. This was done to check the valuation made before 1977 and on which the assessment concerned in the case at bar is based.

5.19 Counsel for the actual appellant made an objection concerning that valuation of Mr Bois because

a) it was made after 1973, the year of the sale;

b) it was made after the date of the assessment and consequently it was not possible for Mr Bois to stay independent.

The Board does not consider those arguments as very serious. Concerning argument a), it is a common and a necessary practice today to valuate a property after the year involved. All the properties concerned by capital gain are valuated on December 31, 1971 but the valuation is made many years after. Probably in 1985 valuation will be made to find the fair market value of property as it was on December 31, 1971.

Concerning argument b), Mr Bois is a professional and as such, he can work independently unless an evidence is offered to the contrary. No evidence was given to that effect.

5.20 The valuation report of Mr Bois was filed as Exhibit R-2.

The valuation of the land based on the comparison method uncovered 16 sales of vacant land. Twelve were utilized and adjusted. The arithmetic average is 3.78 square feet and the median average is 4.00 square feet. As the area is 51,065 square feet, the gross amount is 205,000 square feet (51,065 x 4.00 204,260).

5.21 The valuation of the whole property (land and building) was based

5.22 The cost method is explained as follows at page 29 of the respondent valuator’s report (Exhibit R-2):

Le coût de remplacement a été fait en employant le système paramétrique. Ce système est basé sur une étude des coûts publiés par la province (de Québec).

5.23 The comparison method is explained at page 30 and following of Exhibit R-2:

La parité est une technique qui vise essentiellement à produire le prix de vente le plus probable d’un immeuble en le comparant à d’autres du même type.

Eight sales are studied:

CONCLUSION

Après une étude approfondie des données du marché, la valeur marchande selon les différents critères employés se répartit comme suit:

Valeur marchande déterminée par le taux au pied carré de la bêtisse:

$512,000

Valeur marchande déterminée par ratio prix/évaluation municipale:

$505,000

Evaluation municipale

Terrain	$153,950
Bâtisse	$309,550
Total	$463,500
463,500 x 1.09 (moyenne arithmétique)	$505,215

arrondi $505,000

That figure is obtained by the following:

La valeur marchande selon le marché se situe donc à environ:

.» $500,000

5.24 The revenue method is explained at page 52 of Exhibit R-2:

La méthode du revenu consiste à capitaliser le revenu net annuel normalise d'un immeuble au taux découlant du marche pour en indiquer la valeur marchande. En fait, en se basant sur le principe d’anticipation, nous recherchons le prix que paierait un investisseur compte tenu du revenu et du taux de rendement qu'il anticipe de recevoir du capital investi.

In fact, sixteen leases were studied. The revenues of the first floor are computed at $1.45 a square foot and the second floor at $1.25 a square foot. The gross revenue is $72,410:

Moins: Provisions pour vacances et mauvaises créances 3% $ 2,170

Revenu brut effectif annuel

$ 70,240

Dépenses
Taxes: 22%
Assurances: 2%
Entretien et réparations: 10%
Gestion: 5%
Electricité: 1%
Total: 40%	$ 28,100
Revenu net avant amortissement	$ 42,140
Taux global: 8.0%
Valeur capitalisée	$526,750
Arrondi	$527,000

5.25 The amount of $500,000 (comparison method) is accepted by Mr Bois as the figure which seems to indicate the best value. At page 58 (Exhibit R-2):

La valeur pour fins d’imposition exige que la valeur globale soit répartie entre le terrain et la bâtisse.

Cette répartition est établie comme Suit:

Terrain:	$200,000
Bâtisse:	$300,000
Total:	$500,000

5.26 Following the assessment issued on December 23, 1975, refusing to the actual appellant the terminal loss of $129,079.88 (see paragraph 5.08 of the Facts) and reducing it to $5,079.88, the actual appellant filed a notice of objection on March 18, 1976.

5.27 On January 7, 1977, the respondent maintained the assessment and the undepreciated value of the building at $124,000.

5.28 A Notice of Appeal was filed before the Tax Review Board on March 31, 1977.

6. Law—Jurisprudence Comments

6.1 Law

The main sections of the new Act which apply in the present case are section 3, subsection 20(1 )(a) and section 68. Subsections 1100(1) and 1100(2) of the Income Tax Regulations also apply. Section 68 was studied and interpretation of all the other sections are not in dispute.

6.2 Jurisprudence

The following judgments were cited by the different parties:

1. Crown Trust Company v The Queen, [1977] CTC 320; 77 DTC 5173;

2. Moulds v The Queen, [1977] CTC 126; 77 DTC 5094;

3. The Queen v Marksim Storage Ltd et al, [1976] CTC 665; 76 DTC 6401 ;

4. Emco Ltd v MNR, [1968] CTC 457; 68 DTC 5310;

5. Klondike Helicopters Ltd et al v MNR, [1965] CTC 427; 65 DTC 5253;

6. D Bohun et al v MNR, [1972] CTC 2325; 72 DTC 1268;

7. Herb Payne Transport Ltd v MNR, [1963] CTC 116: 63 DTC 1075;

8. The Queen v Waldorf Hotel (1958) Ltd et al, [1975] CTC 162; 75 DTC 5109;

9. Kerim Brothers Ltd v MNR, [1967] Tax ABC 438; 67 DTC 326;

10. MNR v Clement’s Drug Store (Brandon) Ltd, [1968] CTC 53; 68 DTC 5053;

11. MNR v Steen Realty Ltd, [1964] CTC 133; 64 DTC 5081;

12. Canadian Propane Gas & Oil Limited v MNR, [1972] CTC 566: 73 DTC 5019;

13. Diggon-Hibben Ltd v The King, 1949 SCR 712; 8 Tax ABC 264; 53 DTC 187;

14. MNR v Malloney’s Studio Ltd, [1975] CTC 542; 75 DTC 5377;

15. Gateway Lodge Ltd v MNR, [1967] CTC 199; 67 DTC 5138;

16. The Queen v W Baziuk, [1976] CTC 787; 77 DTC 5001;

17. Baine, Johnston & Co Ltd v MTR, [1968] Tax ABC 1100; 68 DTC 801;

18. The Turbull Real Estate Company v The King (1903), 33 SCR 677:

19. Number Six Hundred v MNR, 21 Tax ABC 289; 59 DTC 123:

20. G. Werle v MNR, 40 Tax ABC 337; 66 DTC 210;

21. Mora Building Corp v MNR, [1967] Tax ABC 365; 67 DTC 275;

22. Samuel-Jay Investments Ltd v MNR, [1968] Tax ABC 552; 68 DTC 430;

23. F B Conci v MNR, [1968] Tax ABC 273; 68 DTC 260;

24. K V Bigmore v MNR, [1969] Tax ABC 944; 69 DTC 659;

25. City Parking Properties and Development Limited v MNR, [1969] CTC 508; 69 DTC 5332;

26. R A Stanley v MNR, [1969] CTC 430; 69 DTC 5287;

27. E B Pim v MNR, 17 Tax ABC 396; 57 DTC 409;

28. E J Marsh v MNR, 32 Tax ABC 429; 63 DTC 650;

29. Solray Investments Ltd v MNR, 35 Tax ABC 46; 64 DTC 184;

30. Hubert Munday v MNR, [1971] CTC 585; 71 DTC 5321 ;

31. Conway Estate v MNR, [1965] CTC 283; 65 DTC 5169;

32. Wallace R Brunelle, Peter Brunelle v MNR, [1977] CTC 2506; 77 DTC 326.

6.3 Comments

6.3.1 Two facts are admitted by the actual appellant and the respondent:

a) the value of the land: $200,000;

b) the whole property (land and building) was sold for $185,000.

The deemed appellant did not give special evidence concerning the value of the land but only the municipal value of part of the property: $70,450 (paragraph 5.17 of the Facts).

6.3.2 The first point to resolve is whether the principle offered by the valuator of the actual appellant applies in the present case. At page 3 of his report, Mr Hughes says “therefore, under normal professional appraisal principles and practices, no value should be attributed toward the buildings’’.

The Board has not found the statement of that principle either in the documents submitted in evidence by the parties or in any books concerning valuation the Board had on hand. During another case, however, the undersigned heard an appraiser stating the same prinicple. It seems it is a basic principle. Even in the present case, not only did the respondent’s appraiser not deny this principle but he confirmed it. He affirmed that if the whole property is valued at $418,000, that amount would be divided as follows: land—$200,000; building— $218,000. Also. if the whole property were valued at $475,000, that amount would be divided as follows: land—$200,000; building— $275,000. In. fact that is the principle he applies to determine the value of the building at page 58 of his report. After evaluating the whole property at $500,000, he only subtracts the value of the land— $200,000—to have $300,000 for the building. The Board believes that it is a logical principle to consider the land as the main asset if it is compared with the building on it. There possibly exists an exception to this general rule but no evidence was advanced in the case at bar to show that the involved transaction was an exception.

6.3.3 Since the principle is accepted and applicable to the case at bar, let us try to see the consequences of it.

It seems clear that the amount paid must be applied to the land. That amount which is the price for the whole transaction is the price decided between two parties who were at arm’s length. Consequently, at first sight, the price of $185,000 must be accepted as a normal price.

It is important to remember that the sale of I’Esplanade property was part of a large transaction of $987,747.85 according to which numerous assets were sold (paragraph 5.03 of the Facts). From two contracts (Exhibit A-1 and Exhibit A-2) it appears that the price of $185,000 was the price paid for the involved property (paragraphs 5.02 and 5.06 of the Facts). No evidence was submitted by the actual appellant concerning the discussions between the vendor and the purchaser about the price attributed to each asset described in paragraph 5.03 of the Facts. Indeed, counsel for the respondent objected to that evidence on the basis that the contracts A-1 and A-2 spoke for themselves. The Board maintained the objection. In any event Mr Sachs, in his testimony, affirmed that for the I’Esplanade property the Only consideration was $185,000 (paragraph 5.09 of the Facts). Maybe, in the present case, the vendor was more interested to sell than the purchaser to buy, and as the latter bought all the assets, he had a better price. However, this does not change the fact that the price which was paid was $185,000.

On the basis of the evidence adduced, the Board cannot discuss the price and must accept the amount of $185,000 as the right price.

Moreover, since the right price of the transaction is $185,000 and this price must be applied only to the land, from this basis, the actual appellant has reversed the burden of proof.

6.3.4 In the course of the hearing, the parties contracted a settlement to the effect that if the fair market value of the I’Esplanade property was more than $185,000, the value of the building and the value of the land would serve to apportion the amount of $185,000.

Is the I’Esplanade property worth more than $185,000? Is the Board bound by the settlement?

6.3.5 Is the I’Esplanade property worth more than $185,000?

—Let us see the evidence:

The actual appellant’s valuator evaluates it at $200,000, less $15,000 to demolish the building (paragraphs 5.12 and 5.14 of the Facts).

—The deemed appellant’s witness gave general affirmation on the value of the building but no precise figures. The municipal valuation is in fact only an indication (paragraphs 5.16 and 5.17 of the Facts). In the Board’s opinion, the deemed appellant has not reversed the burden of proof. It is probably because he knew that the evidence of the respondent would favor his own contention.

—The respondent’s valuator concludes that the value was $500,000 for the whole property. The valuation is based on three methods (paragraphs 5.21 to 5.25 of the Facts). In fact, this valuation is the only evidence before the Board concerning the value of the whole property and the Board is bound by it unless the valuation appears senseless by itself. Despite certain criticisms made by the witnesses of the actual appellant without presenting another corresponding valuation, the Board, after studying the respondent valuator’s report and the documents referred to and after receiving the explanations of Mr Bois, accepts his conclusion. The fair market value of the whole property is $500,000 divided as follows: land—$200,000; building—$300,000.

6.3.6 Is the Board bound by the settlement of the three parties described in paragraph 6.3.4?

If it is, the computation is simple:

The Board not only wonders whether it is bound but whether it can accept that settlement. The Board is bound firstly by the law. Paragraph 20(1 )(a) says that depreciation allowance is taken on the capital cost:

(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.

The capital cost is the actual. price paid by the purchaser for the property subject to depreciation or sometimes (in the case of property acquired by way of gift, bequest or inheritance) on a value which is deemed to be the fair market value (paragraph 69(1 )(c)).

Is it possible to decide by settlement that the depreciation be taken on something other than capital cost, than purchase price? The Board does not see how it can legally approve such a settlement. If the parties wish to contract such settlement, it must be done and applied out of court, but they cannot ask the Board to confirm ‘by judgment an illegal settlement.

In the present case, what is the price paid by the deemed appellant? Nothing if the appraisal principle, by which the price is first applied to the value of the land, is accepted.

Can section 68 authorize such settlement? It is not the opinion of the Board because it would not be “reasonable” according to the meaning of the word used in the section. That section. must be used when the amount paid is equal to or near the market value of the whole property (or at least more than the market value of the land) and, in the opinion of the Minister, the amounts attributed to the land and to the building are not reasonable. Then the Minister can fix the amounts which objectively are reasonable and those amounts are deemed to be “the proceeds of disposition” of the land and the building.

6.3.7 In his argument, counsel for the actual appellant affirmed that in the present case “we are concerned with the value of the vendor”. As cited in the jurisprudence of Moulds v The Queen, Diggon-Hibben Ltd v The King (cases no 2 and 13 cited above), counsels for the other parties said the cited cases do not apply and cited-other cases.

In the present case it is the Board’s opinion that the price first applies to the property which is concerned ie the land with the normal legal consequences for the vendor and the purchaser. The vendor was paid for the land only; the purchaser legally did not pay for the building. The vendor legally has the right to deduct the terminal loss. The purchaser cannot deduct capital cost allowance.

6.3.8 Another aspect of the problem must be pointed out and studied.

If the purchaser has paid nothing for the building, is it possible to say that he has acquired it by way of gift? If yes, paragraph 69(1)(c) can be applied:

69.(1) Except as expressly otherwise provided in this Act,

(c) where a taxpayer has acquired property by way of gift, bequest or inheritance, he shall be deemed to have acquired the property at its fair market value at the time he so acquired it.

On one hand the purchaser could take the capital cost allowance on $300,000 according to the evidence given and, the vendor on the other hand, would be subject to recapture up to the capital cost he paid for the building and subject to capital gain for the balance.

Could it be a gift in the present case?

There is nothing in the contract which indicates it. Even if the price were lower than the fair market value, it cannot bé automatically concluded that the balance is a gift. Certain circumstances given in paragraph 5.09 of the Facts may explain why the vendor accepted a lower price but it is not what is called a gift in its ordinary meaning, which is the one in law.

6.3.9 Concerning the application to the present case of the appraisal principle cited above (which can be summarized as follows: land first asset to be paid) the Board wonders, in final analysis, whether this principle could be used only for the evaluation. Consequently the Board would not be bound by this principle for the interpretation and application of the Income Tax Act.

Why the appraisal principles would not be on the same basis as the accounting and business principles toward the Income Tax Act? In many cases (Ushers’ Wiltshire Brewery Limited v Bruce, [1915] AC 433; The Royal Trust Co v MNR, [1957] CTC 32; 57 DTC 1055, it was held that accounting and commercial principles, methods and practices must be used as basis for interpretation of the Income Tax Act unless the contrary is especially provided by law.

It seems very difficult not to take the same position toward appraisal principles and consequently not to arrive at the conclusion of a total terminal loss for the vendor and no depreciation for the purchaser.

On another point of view it is very difficult to forget or to ignore the testimony of the purchaser who said that he would not have bought the land without a building on it. So, in the purchaser’s opinion, he also paid for the building.

In fact, he thought he had paid for the building. In law he paid only for the land. The Board must apply the law.

The intention of the purchaser in a transaction of this nature cannot be considered. The problem is not whether the transaction is one of a capital nature or business nature but to which property the price paid must be applied. The answer based on the appraisal principle quoted above is the price which must be applied to the land with the normal legal consequences to the purchaser and the vendor.

6.3.10 Something else must be pointed out which was touched above but not with the same approach.

Since the price is fixed by two parties for the whole property (land and building);

Since the two parties are at arm’s length;

Since the price is considered to be the right price and consequently the market price for the involved transaction (even if it is not the best transaction to serve as comparison to fix the fair market value of another transaction):

Maybe mutatis mutandis, the principle that the courts are inclined to accept for deduction concerning expenses or losses should be applied: the commercial and practical aspects of the transaction must be considered rather than the legal aspect (Hallstroms Pty Ltd v FIC, 8 ATD 190; BP Australia Ltd v Commissioner of Taxation, [1966] AC 224; Her Majesty the Queen v F H Jones Tobacco Sales Company Limited, [1973] CTC 784; 73 DTC 5577; The Estate of W C Cochrane v MNR, [1976] CTC 2215; 76 DTC 1154).

It might be better to construe the whole transaction on that business basis. In fact, it is what the Board tries to do by applying the appraisal principle which is a commercial aspect of the transaction, and which forms the basis of the legal interpretation by the Board. Maybe there is another commercial aspect in the transaction which is more important than the one cited above and which the Board does not see. If one arrives at a contrary conclusion with the same premise, how is it possible to rebutt the aforesaid appraisal principle? (see paragraph 6.3.9). And how to ignore the fact that the depreciation must be taken on capital cost as provided in paragraph 20(1 )(a)? (see paragraph 6.3.6).

The Board must maintain the conclusion it logically reached.

6.3.11 One could argue that the principle ex aeguo et bono (equity) must be applied so that the aforesaid apportion could be made (see paragraph 6.3.6 at the beginning). It is the Board’s opinion that in the present case equitas sequitur legem. Indeed the Board’s conclusion meets the equity for the two appellants. The vendor who sold the property in fact for a price lower than the fair market value ($185,000 in lieu of $500,000) has the advantage of the complete terminal loss. The purchaser who acquired the whole property for a very good price (according to the evidence he acquired the building for nothing) should not be too surprised if the law does not give him the advantage of the depreciation.

6.3.12 It seems this case is the first of its kind to be heard by a tribunal. Unless I am mistaken, the Board has no record of jurisprudence in a case of this nature.

Since the Tax Review Board is the first step in the judicial process, the Board thinks that firstly it must seek to follow the recognized principles and methods involved in the taxation field and in related sciences as accounting and commerce. Secondly, it must seek to apply the same kind of reasoning for new principles and methods coming from other related fields (as valuation) to taxation.

7. Conclusion

The appeal of the actual appellant is allowed and the matter referred back to the respondent for reassessment in accordance with the above reasons for judgment.

The appeal of the deemed appellant is disallowed in accordance with the above reasons for judgment.

Appeal allowed in part.