A.G. Canada v. Matador Inc., [1980] CTC 51, 80 DTC 6018 (FCA)

Pratte, J:—This is a section 28 application to review and set aside a decision of the Tax Review Board dated November 1978, determining a question set forth in an application made by the Minister of National Revenue pursuant to section 174 of the Income Tax Act.

By deed of sale dated January 12,1973, Matador Inc sold to Matador Converters Co Ltd a property, land and building, located at 9450 and 9470 de I’Esplanade Avenue in Montreal. That sale was made for a price of $185,000 which the parties did not apportion between land and building.

In December 1975, the Minister issued a notice of reassessment in respect of Matador Inc’s 1973 taxation year based on the assumption that, of the amount received from Matador Converters Co Ltd, an amount of $124,000 represented the price of the building and the balance the price of the land. Matador Inc appealed from that assessment to the Tax Review Board. It was its contention that the whole of the price of $185,000 had been paid for the land and that, consequently, it had received nothing for the disposition of the building. That appeal was pending when the Minister made an application to the Board under section 174 of the Income Tax Act.* [1] By that application, the Minister indicated that the questions in respect of which he requested a determination were:

1. What were the proceeds of disposition to Matador Inc of the depreciable property sold to Matador Converters Co Ltd?

2. What was the capital cost to Matador Converters Co Ltd of the same depreciable property?

The Minister concluded his application by praying the Board to render an order joining Matador Converters Co Ltd to the appeal of Matador Inc.

On October 31, 1977, Mr St-Onge, QC, a member of the Board, made an order joining Matador Inc to Matador Converters Co Ltd. That order was interpreted by all parties concerned as joining Matador Converters Co Ltd to the appeal already lodged by Matador Inc.

The appeal of Matador Inc was heard by the Board in January 1978. Judgment was delivered on October 23,1978, in which Matador Inc is referred to

and a copy of the application shall be served by the Minister on each of the taxpayers named in the application and on any other persons who, in the opinion of the Tax Review Board or the Federal Court—Trial Division, as the case may be, are likely to be affected by the determination of the question.

(3) Where Board or Court may determine question. Where the Tax Review Board or the Federal Court—Trial Division is satisfied that a determination of the question set forth in an application under this section will affect assessments in respect of two or more taxpayers who have been served with a copy of the application and who are named in an order of the Board or the Court, as the case may be, pursuant to this subsection, it may

(a) if none of the taxpayers so named has appealed from such an assessment, proceed to determine the question in such manner as it considers appropriate, or

(b) if one or more of the taxpayers so named has or have appealed, make such order joining a party or parties to that or those appeals as it considers appropriate.

(4) Determination final and conclusive. Where a question set forth in an application under this section is determined by the Tax Review Board or the Federal Court—Trial Division, the determination thereof is subject to any appeal therefrom in accordance with the Federal Court Act, final and conclusive for the purposes of any assessments of tax payable by the taxpayers named by it pursuant to subsection (3).

(5) Time during consideration of question not counted. The time between the day on which an application under this section is served on a taxpayer pursuant to subsection (2), and

(a) in the case of a taxpayer named in an order of the Tax Review Board or the Federal Court—Trial Division, as the case may be, pursuant to subsection (3), the day on which the question is finally determined pursuant to paragraph (3)(a) or on which an order is made under paragraph (3)(b), or

(b) in the case of any other taxpayer, the day on which he is served with notice that he has not been named in an order of the Board or the Court, as the case may be, pursuant to subsection (3),

shall not be counted in the computation of

(c) the 4-year period referred to in subsection 152(4),

(d) the time for service of a notice of objection to an assessment under section 165, or

(e) the time within which an appeal may be instituted under section 169 or subsection 172(2),

for the purpose of making an assessment of the tax payable by the taxpayer, serving a notice of objection thereto or instituting an appeal therefrom, as the case may be. as the “actual appellant’’ and Matador Converters Co Ltd as the “deemed appellant’’. That judgment read as follows:

It is ordered and adjudged that the appeal of the actual appellant pursuant to the Income Tax Act, in respect of the 1973 taxation year be and the same is hereby allowed and the matter referred back to the respondent for reassessment in accordance with the attached Reasons for Judgment.

It is furthermore ordered and adjudged that the appeal of the deemed appellant pursuant to the Income Tax Act, in respect of the 1973 taxation year be and the same is hereby dismissed in accordance with the attached Reasons for Judgment.

In his reasons for judgment, the presiding member of the Board, Mr Tremblay, first expressed the following view on the effect of the order joining Matador Converters Co Ltd the appeal of Matador Inc:

. . . 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 .. .* [2]

With regard to the questions mentioned in the application for determination, Mr Tremblay, in his reasons, found in effect that the whole price of $185,000 had been paid for the land and, consequently, that

(a) Matador Inc had received nothing for the sale of its building to Matador Converters Co Ltd, and that

(b) Matador Converters Co Ltd had incurred no capital cost in respect of the acquisition of that building.

Following that decision, the applicant filed a notice of an application under section 28 of the Federal Court Act:

. . . for an Order setting aside a decision of the Tax Review Board dated November 2, 1978, determining a question set forth in an application made by the Minister of National Revenue pursuant to section 174 of the Income Tax Act, whereby the Board decided that as a result of the sale of a property located at 9450 and 9470 de I’Esplanade Avenue, City of Montreal, on January 12,1973, the proceed of disposition to the vendor, Matador Inc, as well as the capital cost to the purchaser, Matador Converters Co Ltd, of the depreciable property, was nil.

The first submission of the respondent in opposition to that section 28 application is that it is directed against a non-existent decision. There is, it is said, “no decision of the . . . Board . . . determining a question set forth in an application . . . pursuant to section 174 . . The respondent’s position on this point is explained in the following terms in its factum:

3. Section 174(1) of the Income Tax Act authorizes the Minister, inter alia, in an appropriate case, which this apparently was, to apply to the Board for determination of a question that is common to assessments of two taxpayers. Section 174(3) authorizes the Board, where such an application has been made, to do one of two things depending on the circumstances. The Board may “determine” the question “if” none of the taxpayers has appealed (Section 174(3)(a)). However, if a taxpayer has appealed, all that the Board can do by virtue of Section 174 is to make an order joining the other taxpayer to that appeal (Section 174(3)(b)).

This is a case where one of the taxpayers had appealed and the Board, therefore, had no authority, by virtue of Section 174, to “determine” the question.

4. Because one of the taxpayers (the Respondent) had appealed and the other had not, what the Board was authorized by Section 174 to do, and all that it was authorized by that Section to do, was to join Matador Converters as a party to the Respondent’s appeal. The reason is obvious. What was desired was that both taxpayers would be bound by whatever conclusion was reached. Once the second taxpayer is made a party to the first taxpayer’s appeal, he is entitled to take part to the extent that he is concerned, the principles of res judicata apply to the extent that he is concerned and he is entitled to appeal to the extent that he is concerned.

5. Consequently, in this case, as was obviously appreciated by Mr Tremblay, the Board had no authority under Section 174 to “determine” the questions set forth in the Minister’s Section 174 application. All that the Board could do, and all that it purported to do, insofar as the Respondent was concerned, was to give Judgment under Section 171 disposing of the Respondent’s appeal.

6. For the above reasons, it is contended that there is no decision of the Board that is attacked by the Section 28 application. It is submitted, therefore, that the Section 28 application should be dismissed.

That contention is, in my view, based on a wrong interpretation of section 174. That section provides that, in certain circumstances, the Minister may apply for the determination of a question. Such an application, in my opinion, leads to a determination, which is a decision reviewable under section 28, in the case provided for in paragraph 174(3)(b) as well as in the case provided for in paragraph 174(3)(a). When an order has been made pursuant to paragraph 174(3)(b) joining a party to an appeal, the effect of that order is not merely to add a new party to the appeal but also to transform the nature of the determination that will have to be made in the course of deciding that appeal. Once an order of that kind has been made, the tribunal must, in addition to disposing of the appeal, make a determination in respect of the question raised by the Minister. In other words, the tribunal must then make two decisions: one on the appeal, the other on the question to be determined. If the making of an order under paragraph 174(3)(b) did not have that effect, the determination of the question by the tribunal seized of the appeal would not, in itself, constitute a decision but would merely be a step in the reasoning leading to the decision of the appeal. That would mean that, in such a case, the determination of the question put forward by the Minister could neither be reviewed under section 28 (since it would not be a decision) nor be the object of an appeal (since there is no appeal from the reasons for judgment but only from the judgment itself). I cannot accept such a result.

I am therefore of the view that the Board had the duty, in this case, to make a determination in respect of the two questions put by the Minister. I am also of the view that the Board in effect made a determination in respect of those two questions. It is true that, by reason of Mr Tremblay’s erroneous view of the effect of an order made under paragraph 174(3)(b), the Board did not make a formal determination in respect of those two questions. However, it is clear, when both the judgment and the reasons are read, that the Board answered those questions. Section 174 does not specify any particular form in which a determination must be made and, in my view, it does not matter that it be made in a judgment or in reasons for judgment provided that it be clear, as it is in this case, that it is made with the intention of binding all persons concerned.

I now turn to the merits of the case.

The reasons why Mr Tremblay answered as he did the two questions in respect of which the Minister sought a determination is that he felt bound in applying section 68 of the Act* [3] by a principle of appraisal according to which, when built land is sold at less than its market value, the price paid must first be applied to the land. As it was common ground that the price of $185,000 paid for the property of Matador Inc was less than the market value of the bare land, the Board felt constrained by this principle, which it regarded as a rule of law, to conclude that the whole of the price of $185,000 had to be applied to the land. It is clear, in my view, that the Board erred in law in so deciding. In allocating the price of $185,000 between land and building, the Board was governed by section 68. It had to make that allocation reasonably, having regard to all circumstances. It could not, without error, make that allocation by applying blindly a principle that was never intended to govern the allocation to be made under section 68.

Counsel for the respondent tried to justify the Board’s decision by saying that it was founded on the finding that the market value of the whole property (land and building) did not exceed the fair market value of the bare land. This is in my view a wrong interpretation of the decision. The Board, far from finding that the presence of the building on the land sold by Matador Inc did not increase the fair market value of the property, seems to have held, not only that the fair market value of the land was $200,000 but also that the fair market value of the whole property was $500,000.

In the circumstances disclosed by the record, it is clear that the allocation of the price of $185,000 between land and building should have been made on the basis

(a) of the Board’s finding that the fair market value of the land (without the building) was $200,000, and

(b) of the Board’s view as to the amount by which the fair market value of the land was increased by reason of the presence of the building, [4] t

For these reasons, I would grant the application, set aside the determination of the Board in respect of the two questions set forth in the Minister’s application and refer the matter back for determination on the basis that the allocation of the price of $185,000 between land and building must be made in the light of the Board’s finding concerning the market value of the land and of the land with the building.