Kennedy v. MNR, 72 DTC 6357, [1972] CTC 429 (FCTD), aff'd 73 DTC 5359 (FCA)

Cattanach, J:—These are appeals by James F Kennedy from his assessments to income tax by the Minister of National Revenue for his 1965 and 1966 taxation years. At all material times the appellant was the sole beneficial owner of all the shares in and president of a company incorporated under the name of J F Kennedy Ford Sales Limited, which, as the corporate name indicates, was a dealer in the automobile products of Ford Motor of Canada Limited (hereinafter referred to as Ford).

In assessing the appellant as he did the Minister had added to the appellant’s income in the taxation years under review the amounts of $85,370.63 in the 1965 taxation year and $42,439.91 in the 1966 taxation year as benefits received by the appellant from J F Kennedy Ford Sales Limited to which I shall subsequently refer to as “Kennedy Ford Sales”, “Kennedy Ford” or “the company” when it is convenient to do so.

The appellant had been an executive of Ford for many years. He first joined Ford in 1940 and was with that Company until 1962. He served in many executive capacities concerned with sales. He was at various times the assistant manager in Winnipeg, Manitoba, the assistant manager for Ontario, the manager for Quebec and the Ottawa Valley and lastly at the head office in Oakville, Ontario where he was the director of vehicle marketing. There he had progressed from the third to the second position in the sales hierarchy. His job was to improve Ford’s representatives and he was in charge of marketing, marketing programmes with jurisdiction over franchised dealers and market areas. As a consequence he was familiar with the automobile business across the country.

After years of advising, directing and exhorting franchised dealers in sales techniques, it is not surprising that he should be willing to put his experience to advantage on his own behalf. Therefore in 1962 he left Ford to establish a Ford dealership of his own. At that time J F Kennedy Ford Sales Limited was incorporated. The appellant selected Oakville, Ontario as a desirable location for the business because it was Ford’s head office, it was close to Metropolitan Toronto and there was a vacancy there. For these and other reasons he foresaw a bright future for a dealership there.

The company’s first premises on Navy Street in Oakville were leased from the Texaco Oil Company together with a gasoline outlet for a term of seven years expiring in 1969. The business prospered and after three years, in 1965, it had outgrown the premises on Navy Street. These premises were not the best either in location or size but were adequate for the modest beginning of the business. It was to be expected that the business would be successful because of the appellant’s experience, his close connection with the executives of Ford and his salesmanship abilities. I might add that it is not surprising that because of his experience in a large corporation that he would apply the principles he learned there to his own affairs. He would not embark on a new venture or expansion without first securing the expert and professional advice which he considered the best and base his decisions on that advice.

The appellant began his search for new premises. He needed a site with 3 acres. The Texaco site was not a good service station outlet. The appellant was anxious to abandon his lease and Texaco was also willing to abandon that site. Under a city by-law the oil companies were limited in the number of service stations they could operate in the city. Therefore Texaco was willing to release the company from its lease, which had time to run, if the appellant, on finding a more suitable site acceptable both to himself and Texaco, would sell a portion thereof to Texaco. This was agreed upon.

The appellant found a site. It was a large property at 173 Lakeshore Road West, about one-half mile west of the Navy Street site and at the western extremity but within the core of the business area of Oakville. The property was owned by the Chase Medicine Company, a manufacturer of patent medicines but had not been occupied for a considerable period of time. The Chase Medicine Company had been acquired by the National Drug Company in whom title to the property vested.

Apparently the National Drug Company had granted an option on the property to a land developer who let the option lapse. The appellant testified that the owner of the land, no doubt because of its prior experience, would not sell to a person other than an incorporated company and it was for this reason that the sale was negotiated by and title originally taken in the name of the Company. I do not place any reliance on this because I am certain that what the vendor had in mind was a sale to a responsible person with financial means and not necessarily a corporate entity many of which do not have those qualifications.

The property was roughly rectangular in shape with a frontage of 343 feet on Lakeshore Road west and a depth of 480 feet. There was access from three streets. There was an old brick building on the western part of the property. It was built in 1930, it had not been occupied for about five years and it was leased to several tenants for warehousing purposes.

The Company did not have the requisite financing to purchase the property. The financing was arranged by the appellant, before an offer was made, through Industrial Acceptance Corporation, with whom the appellant had business relations when he was an executive of Ford.

After a financing commitment was made, an offer of purchase was made on January 5, 1965 and accepted. On January 29, 1965 Kennedy Ford Sales, the appellant’s company, purchased the property for $223,188.

On May 19, 1965, by virtue of the prior arrangement with Texaco, the north east corner of the land, about 150 feet square was sold to Texaco for $64,000. There was no negotiation of the price. That was what the appellant asked and that is what Texaco paid. The appellant felt that he got a good price.

On consultation with an architect the appellant decided that it was more economic on a short-term basis to renovate and remodel the existing building rather than to demolish and replace it. The perimeter walls were sound.

Plans and specifications were prepared and tenders invited. The appellant wanted to convert the building for no more than $100,000. The lowest tender received was for $170,000. Accordingly certain economies were affected. It was estimated that the conversion of the building would cost approximately $153,000. In fact it cost closer to $185,000.

The purchase of the property and the renovation of the building was financed, in actuality, on the personal credit of the appellant. Without him, financing would not be forthcoming even though it is true that the advances were secured by mortgages on the property owned, at that time, by the Company. These mortgages were guaranteed by the appellant personally. There were first and second mortgages in the amounts of $180,000 and $131,000 for a total of $311,000.

It was the intention of the appellant from the outset that the Company would sell the property to the appellant at the price paid for it by the Company plus $100,000, being a portion of the improvements that the appellant would bear, but that renovations contracted for would be completed at the expense of the Company.

The purchase price from the National Drug Company to Kennedy Ford Sales had been $223,513 after adjustments. A portion of the site had been sold to Texaco on May 19, 1965 for $63,675 so that the purchase price to the appellant was as follows:

Purchase price of the property paid by the Company — $223,513.00

Less price on sale to Texaco —	63,675.00
	$159,838.00
Add portion of renovation cost to be borne by
appellant —	100,000.00
	$259,838.00 subject
	to adjustments.

This prearrangement and the completion thereof was evidenced by an offer to purchase made by the appellant to the Company dated July 28, 1965 and by the deed from the Company to the appellant (Exhibit A-9).

The appellant paid the Company $259,513 for the property payable by $1,513 in cash and by the assumption of the first and second mortgages on the property totalling $311,000. Because there was a difference between the purchase price of $259,513 and the mortgage commitment of $311,000, the Company gave the appellant a promissory note in the amount of $53,000 which was paid subsequent to 1966.

It was also agreed between the appellant and the Company that upon the sale of the property to the appellant, the appellant would lease the premises back to the Company at a monthly rental of $1,935 for a five-year term with renewal privileges. This was done after the sale to the appellant so that the appellant and the Company then stood in a landlord and tenant relationship. These arrangements were made upon the advice of the appellant’s accountant who computed the rent as a 9% return on the appellant’s investment.

The appellant testified that there is a great deal of risk in an automobile dealership. A franchise agreement may be cancelled by the manufacturer on 30 day’s notice and the manufacturer, based upon its market studies, may require a dealer to relocate. He further testified that the type of renovations made the building suitable for use as an automobile dealership only and that in the event of relocation an adequate rental return could not be expected from the use of the building for purposes other than an automobile dealership. Therefore the appellant was prepared to assume that risk by personally purchasing the property rather than endanger the dealership.

I would point out that all negotiations between the appellant and the Company were not arm’s length transactions so that throughout the intentions of the Company and those of the appellant are coincident.

The sale of the property was completed prior to December 31, 1965. There were in existence building contracts in the amount of $165,792.56 which under the agreement between the appellant and the Company were paid for by the Company. In addition to this amount the Company expended $11,915.07 in architect’s fees and $7,662.99 was spent to convert a small store on the property into a used car office.

Therefore the Company expended $185,370.62 on improvements to the building in 1965. The accuracy of this figure is not in dispute between the parties. Therefore by deducting $100,000 which the appellant had agreed to pay for renovations to the building from the total amount of $185,370.62 expended by the Company thereon in 1965, the difference is $85,370.62 which is the amount which the Minister added to the appellant’s income for his 1965 taxation year as a benefit received by him from the Company.

During the 1966 taxation year the Company spent a further sum of $42,439.91 in building a body shop as an addition to the existing building. Again the accuracy of this figure is not in dispute between the parties.

The Minister added the amount of $42,439.91 to the appellant’s income for the taxation year 1966 as a benefit received by him from the Company.

The basic position taken by the Minister is, as I understand it, that the fair market value of the property when it was transferred to the appellant by the Company was not less than $344,883.62, that is $85,370.62 more than the amount of $259,513, that the appellant paid the Company for the property. Put another way, the Minister is saying that the amounts expended by the Company on renovations increased the fair market value of the property by the like amount.

The identical position is taken by the Minister in respect to the expenditure by the Company of the amount of $42,439.91 in the appellant’s 1966 taxation year.

It is the contention of the Minister that the Company in agreeing to complete the existing building contracts for the renovation of the building and in agreeing to sell the lands and premises at a price of $85,370.62 below the fair market value to the appellant, the sole beneficial. and controlling shareholder in 1965, thereby conferred upon him a benefit qua shareholder, which is properly included in the appellant’s income in that year by virtue of subsections 8(1) and 137(2) of the Income Tax Act and similarly so with respect to the sum of $42,439.71 expended by the Company on the premises during the 1966 taxation year.

Subsection 8(1) reads as follows:

8. (1) Where in a taxation year,

(a) a payment has been made by a corporation to a shareholder otherwise than pursuant to a bona fide business transaction,

(b) funds or property of a corporation have been appropriated in any manner whatsoever to, or for the benefit of, a shareholder, or

(c) a benefit or advantage has been conferred on a shareholder by a corporation,

otherwise than

(i) on the reduction of capital, the redemption of shares or the winding- up, discontinuance or reorganization of its business,

(ii) by payment of a stock dividend, or

(ii) by conferring on all holders of common shares in the capital of the corporation a right to buy additional common shares therein,

the amount or value thereof shall be included in computing the income of the shareholder for the year.

Subsection 137(2) reads as follows:

137. (2) Where the result of one or more sales, exchanges, declarations of trust, or other transactions of any kind whatsoever is that a person confers a benefit on a taxpayer, that person shall be deemed to have made a payment to the taxpayer equal to the amount of the benefit conferred notwithstanding the form or legal effect of the transactions or that one or more other persons were also parties thereto; and, whether or not there was an intention to avoid or evade taxes under this Act, the payment shall, depending upon the circumstances, be

(a) included in computing the taxpayer’s income for the purpose of Part I,

(b) deemed to be a payment to a non-resident person to which Part III applies, or

(c) deemed to be a disposition by way of gift to which Part IV applies.

In answer to the contentions of the Minister the appellant’s position is, as I understand it, that

(1) the arrangements outlined did not confer a benefit on the appellant in his 1965 and 1966 taxation years but rather that any such benefit would not mature until the expiration of the lease and that in any event they were tenant’s improvements;

(2) no benefit was conferred upon the appellant because the fair market value of the property was not increased by the improvements thereto and that the fair market value does not exceed the purchase price of $259,513 paid by the appellant to the Company and

(3) even if it should be found that a benefit was conferred upon the appellant in 1965 and 1966 then such benefit is taxable only to the extent of the Company’s undistributed income in accordance with subsection 81(1) of the Income Tax Act, and since it constitutes a dividend that dividend is subject to a dividend tax credit of 20% under section 38 of the Act.

Subsection 81(1) provides:

81. (1) Where funds or property of a corporation have, at a time when the corporation had undistributed income on hand, been distributed or otherwise appropriated in any manner whatsoever to or for the benefit of one or more of its shareholders on the winding-up, discontinuance or reorganization of its business, a dividend shall be deemed to have been received at that time by each shareholder equal to the lesser of

(a) the amount or value of the funds or property so distributed or appropriated to him, or

(b) his portion of the undistributed income then on hand.

Adverting to the third proposition advanced on behalf of the appel- lant, the crux of the matter is whether there has been a “reorganization of its business” by Kennedy Ford Sales within the meaning of section 81 by the transactions in the present case.

Kennedy Ford Sales was engaged in the sale of automobiles, that was its business, from an inadequate site to accommodate that business. It bought larger premises from which to do so. It was not argued, nor do I think it could be successfully argued, that this was a reorganization of its business. It was merely a change in the location of its business. to better facilities. It represented a growth rather than a reorganization of its business. The Company expended moneys on the renovation and improvement of the better site it had acquired. This, too, was done to accommodate the growth of the business. In the course of this expenditure on renovation of the site and building thereon, the Company sold the premises. The purchaser of the property was the Company’s controlling shareholder and the sale price did not include the full cost of the expenditures incurred by the Company. The purchaser then leased the premises back to the Company which continued in its business from that site. The change was that the Company was no longer the owner of the premises from which it conducted its business but rather it was the tenant of those premises.

The question is whether the Company by conducting its business from rented premises rather than from premises that it owned amounts to a reorganization of its business.

In Hooper v Western Counties & South Wales Telephone Co (1893), 68 LT 78, Chitty, J considered what constituted the “reconstruction” of a company as used in a statute he was called upon to interpret. He concluded that the word “reorganization” could have no wider meaning than the word “reconstruction”. He thought the words to be alternative expressions.

In Rex v Santiago Mines Ltd, [1947] 1 DLR 642, it was unanimously agreed by the Court of Appeal that the words “reorganization” and “reconstruction” were synonymous.

Smith, JA said at page 648:

I agree, too, that the word “reorganization”, when applied to Company affairs, has substantially the same meaning as “reconstruction”, the word mostly used in the English authorities.

In the Hooper case (supra) Chitty, J described the usual mode of reconstruction as winding-up, the formation of a new company, the shareholders of the first company to be its shareholders, to take over the old undertaking, the old shareholders receiving shares in the new company. In the Hooper case there was a sale by the old company to a new company (the members remaining the same) and the old company ceased to exist. This is illustrative of what is normally done in a reorganization.

However this does not mean that every circumstance outlined by Mr Justice Chitty must be present to constitute a reorganization.

If an undertaking of some definite kind is being carried on but it is concluded that this undertaking should not be wound up but should be continued in an altered form in such manner that substantially the same persons will continue to carry on the undertaking, that is what I understand to be a reorganization. It is that the same business is carried on by the same persons but in a different form.

In In re South African Supply & Cold Storage Co, [1904] 2 Ch 268, Buckley, J said that the word “reconstruction” did not have a definite legal meaning but that it is a commercial term and even as a commercial term it bears no exact definite meaning. He therefore continued that in each case one has to decide whether the transaction is such that, in the meaning of commercial men, it is one comprehended in the term “reconstruction”. In the end what must be looked at is the fact and substance of the transaction.

In subsection 81(1) the word “reorganization” is used in association with the words “winding-up” and “discontinuance”. Both of those words contain an element of finality. The company is ended. It is therefore logical to assume that the word “reorganization” presupposes the conclusion of the conduct of the business in one form and its continuance in a different form.

In The Shorter Oxford Dictionary, 3rd ed, at page 1704, the word “reorganization” is defined as “a fresh organization” and the verb “reorganize” is defined as “to organize anew”.

In the circumstances of the present case there has been no “fresh” organization. The same company continued the same business in the same manner and in the same form. The only difference was that by reason of the sale of its premises the Company operated the same business from the same premises which were rented by it rather than being owned by it.

This was merely the sale by the Company of a capital asset which did not result in the end of the business of the Company. It might have bought other premises from which to carry on its business but it chose to continue its business from the rented premises it had owned formerly. Obviously this would not affect the conduct of its business per se but only the manner in which the Company held the premises from which it conducted its business.

In my view this is not a “reorganization” of the business in a commercial sense nor in the sense of the word as contemplated in subsection 81(1).

This being so it follows that the appellant’s contention in this respect must fail. Because of the conclusion I have reached it becomes unnecessary to consider if any benefit which may have been conferred upon the appellant was a dividend to the extent of the undistributed income on hand by the Company and as a dividend would entitle the appellant to a dividend tax credit under section 38 of the Act.

It was the contention of the appellant that he received no benefit from the improvements, first because the improvements were tenant improvements designed to facilitate the conduct of the tenant’s business from those premises and so did not enhance the value of the premises to the landlord. Secondly and for substantially the same reason the appellant contended that the fair market value of the premises was not increased by the nature of the improvements and lastly, if there was a benefit conferred on the appellant it was not received by him in the 1965 or 1966 taxation years.

It is clear from the very nature of the renovations and improvements that they were fixtures and as such became part of the realty. It was contemplated from the outset that these improvements and additions, with the exception of two items which are not included in the amounts in dispute, would not be removed on the expiration of the lease. Further the improvements were of a permanent character, integrated with the existing buildings and could not be removed with any economic advantage to the tenant even if their removal had been contemplated which it was not.

This is in accordance with the evidence adduced despite a provision in the lease that the tenant may remove the fixtures if no damage is done to the realty or if damage is done by removal it shall be paid for by the tenant.

The appellant did contribute $100,000 towards the cost of those renovations. The evidence was that the appellant was restricted by his finances to that amount. He considered that he could not and he was not prepared to commit himself to an amount greater than $259,000, which includes $100,000 for renovations. The cost of the improvements in 1965 exceeded the amount of $100,000 paid by the appellant by approximately $85,000 which the Minister seeks to add to the appellant’s income in that year. The Company paid that additional amount.

As I understand the appellant’s position, it was that only $100,000 of the amount expended on the property could be regarded as ultimately enhancing the value of the appellant’s interest as landlord and that the balance of $85,370.62 was expended by the Company for its own benefit as tenant.

I fail to follow the logic of this segregation. The total expenditure of $185,370.62 was to render the site a suitable one from which to carry on an automobile dealership. Therefore all the improvements would be tenant’s improvements in that sense. However the appellant did expend $100,000 towards those improvements and he did receive compensation therefor by way of an increased rental, coincident with a 9% return on his investment. Therefore he received a benefit from his expenditure by way of increased rental. The appellant became the owner of all improvements when effected even though he did not pay for them in full. Upon the expiration of the Company’s lease the advantage of the improvements paid for by the Company would enure to the appellant in that he could exact a greater rental from another tenant engaged in the automobile business. In that sense they are a potential benefit to him. Therefore the whole of the improvements are within the same category.

The question which arises is whether improvements effected by a tenant for its own convenience but which vest in the landlord as owner are a benefit to the landlord. Provided those improvements can be utilized by the landlord, I fail to follow how they cannot be other than a benefit to the landlord and this is more abundantly clear when the fair market value of the property is increased thereby. It is simply that the landlord owns a more valuable property.

In the circumstances of this case there is no question that the additions to and renovations of the property vested in the appellant as owner from the moment they were effected.

The ancillary question which arises is when the benefit was received by the appellant.

The Minister, in assessing the appellant as he did, obviously did so on the basis that the appellant became the owner of the improvements to the property when they were completed, that cost $85,370.62 in 1965 and $42,439.71 in 1966 and that the appellant immediately benefited thereby.

It shoud be borne in mind that the appellant had granted a lease to the Company for an unexpired term of 4 /2 years (Exhibit A-12). The lease expired on December 31, 1969. There was a renewal privilege to the tenant for a further period of one year on the identical terms and for further periods of one year upon notice until the lease expires or is terminated.

It is the contention on behalf of the appellant that taxation must be predicated upon the actual receipt of the benefit and that the appellant’s entitlement to receive the benefit on a future date, that is upon the termination of the lease, does not justify immediate taxation. It is inherent in this contention that the benefit did not accrue when the improvements were effected.

In King v Earl Cadogan, [1915] 3 KB 485 (CA) there was an agreement between the lessee of licensed premises and the landlord whereby the lessee expended the sum of £5,000 in rebuilding the premises and had surrendered an unexpired lease of the premises. The lessor then granted the lessee another lease of the premises for a 90-year term at an increased rental. The question arose whether the lessee was entitled to recover a statutory debt described in the Finance Act as being so much of the increased licence duty as is proportionate to the increased rent or premium payable in respect of the premises being let as licensed premises.

Before Mr Justice Bray in the King’s Bench Division ([1915] 1 KB 821) it was contended that the £5,000 expended by the lessee was a premium received by the landlord. Bray, J held it was not and in this conclusion he was confirmed by the Court of Appeal.

He said at page 828:

. . . The effect of giving that meaning would be that the landlord would have to pay exactly the same proportionate part of his rent, whether he has received £5,000 into his pocket or only has whatever benefit there may be to him when the tenant has expended £5,000 upon the property which he, the tenant, is to retain for ninety years. The value to the landlord of this covenant is only a minute proportion of £5,000. He gets the benefit, undoubtedly, of an increased security during the lease, and at the end of the ninety years he will get a property which may be increased in value. The two things are absolutely different. In one case the landlord would at once get £5,000 into his pocket; in the other it would probably be an exaggeration to say he would get £100.

Mr Justice Bray was called upon to interpret a section of a statute which is for a different purpose and in far different language from subsection 8(1) of the Income Tax Act which I am obliged to interpret. He was obliged to determine if the £5,000 expended by a tenant was in the nature of an increased rent or premium to the tenant. In concluding that it was not he posed himself the question as to what advantage there was to the landlord. He said that the share of the increased licence duty the landlord would pay would be the same if he got the £5,000 forthwith in cash as he would if, as in the circumstances of the case, the benefit he got was that the tenant expended £5,000 upon the property which the tenant would retain for 90 years. At the end of the lease the landlord would get a property increased in value, but that the value of that increase at that time was problematical. For that reason he held that it was not a premium.

However different considerations are applicable under subsection 8(1) of the Income Tax Act. The questions which I must answer are first, was a benefit conferred upon the appellant, second, when was that benefit conferred and lastly what was the value of that benefit when conferred.

There is no doubt that the appellant herein as landlord had a benefit conferred on him.

The comments of Bray, J confirm my conclusion that the appellant received a benefit but because of the context in which they were made they are not helpful to me in determining when the benefit was conferred or the value of the benefit at that time.

I have found guidance in St-Germain v MNR, [1969] CTC 194; 69 DTC 5086. The material facts in this case are that the appellant was the sole beneficial owner of all the shares in a company. By an oral lease a building owned by the appellant personally was leased to the company on a monthly tenancy. The company expended $71,000 in making improvements and additions to the building. In assessing the appellant to income tax in his 1959, 1960 and 1961 taxation years the Minister added to the appellant’s income the amounts expended by the company in each such year, a total for the three years of $71,000, and in doing so he relied on paragraph 8(1)(c) as the expenditure being a benefit or advantage conferred by the company on the appellant as a shareholder.

Mr Justice Abbott, speaking for the majority of the Court, said at page 197 [5088]:

At the hearing before us, counsel for respondent was informed that, if the improvements and additions to the property belonged to the appellant as owner, from the time they were effected, the Court was satisfied that Section 8(1) does apply and that we did not need to hear him on that point.

While Mr Justice Pigeon dissented on another point the Court was unanimous in the above quotation.

It is clear from the quotation that the Supreme Court has characterized this type of transaction as one within subsection 8(1).

There is no distinction in the facts in the present appeals and those in the St-Germain case (supra) other than that in the St-Germain case the lease was on a monthly basis rather than for a term of five years with renewal privileges as in the present case. In both cases the property was sold to an outsider after the improvements had been made. In neither case was actual cash paid to the shareholder in the years in which the shareholder’s income was increased by the Minister by the amount of the benefit conferred. In both cases the improvements made were of a permanent character integrated into the buildings and could not be economically removed by the tenant nor was it contemplated that they would be removed.

The reasoning of the Supreme Court concerned itself with the ownership of the improvements. In the result it was that the ownership of the improvements vested in the landlord forthwith upon their completion and that a benefit was conferred at that time. The matter of the length of the term of the lease or free possession of the improvements were not considerations in the decision.

That being so it follows that the length of the term of the lease is not a material consideration in the present appeals.

For the foregoing reasons I conclude that a benefit was conferred upon the appellant by the Company of which he was a shareholder within the meaning of paragraph 8(1)(c) of the Act and that that benefit was so conferred upon the appellant in 1965 and 1966, the years in which the improvements were made at the expense of the Company.

Therefore the sole remaining question is the value of those improvements.

The formula adopted by the Minister to arrive at the value of the benefit conferred upon the appellant was the difference between the purchase price of the property without the renovation and additions and the fair market value after the improvements had been effected.

Counsel for the appellant accepted that formula but he disputed the Minister’s conclusion as to what the fair market value was.

Evidence of expert witnesses was adduced with respect to the fair market value of the property as at December 31, 1965 and as is usually the case there was a wide divergence between those opinions.

Mr Simmons, who was called on behalf of the appellant, expressed the opinion that the property had a market value of $260,000. In short he concluded that the improvements did not contribute to the overall market value.

On the other hand, Mr Mather, who was called on behalf of the Minister, expressed the opinion that the market value of the property as at December 31, 1965 was $350,000.

The Minister in assessing the appellant accepted the fair market value of the lands and premises after the buildings had been completed and prior to the sale by the Company to the appellant as $344,883.

The difference between the opinions of Mr Simmons and Mr Mather as to the respective market value of $260,000 and $350,000 in my opinion may be attributed fundamentally to their disagreement as to what constituted the highest and best use of the property.

In this connection Mr Mather said in his report:

The highest and best use of a property is the use which will provide the greatest net return to the investment in the land. In the case of the subject property, which is consistent with other commercial uses along this section of Lakeshore Road West and has a land area much larger than the usual commercial enterprise, it is our opinion that it was at the date of appraisal developed to its highest and best use as an automobile dealership.

On this subject Mr Simmons reported:

In considering the highest and best use of the subject property, which would produce the greatest net revenue over the longest period of time, the following factors were considered.

As of the effective date of this report, December 31, 1965, the property was zoned C-3 for commercial purposes, which permits the use of an automobile dealership, together with several other commercial industrial oriented uses. However, it should be pointed out that since the original acquisition in January 1965, there have been several major new developments in the Trafalgar Road — Q.E. Highway area, which are indicative of the recent trend away from the original core area. The significance of this northerly shift is that the location of several major commercial outlets in the northerly end has left the downtown area considerably less desirable from a retail standpoint. Principally due to congested traffic and lack of adequate parking facilities. With continued development in the northerly areas it is reasonable to assume that eventually the subject property will no longer lend i-self to commercial/industrial uses. Sometime, in the not too distant future its highest & best use is likely to change to a high density apartment development use. However until that time it is the appraisers opinion that its current use as a commercial/industrial use represents its highest and best use.

It is apparent that Mr Simmons, while recognizing that the highest and best use of the property was its current use as the site of an automobile dealership, contemplated that such use would change in the near future to that of high density apartment development use. This factor obviously influenced his appraisal and his conclusion that the improvements added nothing to the market value of the property. That conclusion must be based on the premise that there was no market for the property to other automobile dealers to whom the improvements would be suitable.

An event subsequent has a material bearing on this subject.

Contrary to the policy of other major automobile manufacturers, Ford did not own the premises from which its franchised dealers conducted their businesses. The dealers were responsible for providing their own premises.

Sometime about 1968, which is after the taxation years here in question, Ford changed that policy and in certain circumstances would acquire ownership of the premises of its franchised dealers. Because of his close association with Ford the appellant learned of this change in policy by Ford and he forthwith began the negotiation of the sale of the property owned by him in Oakville to Ford.

He obtained an appraisal by Mr Mason who was a principal in the Company which employed Mr Simmons. Mr Mason’s appraisal was made as of December 19, 1968. Mr Simmons was aware of that appraisal because he assisted Mr Mason in preparing the “spade” work but the responsibility for the conclusions therein was Mr Mason’s and not that of Mr Simmons. Mr Mason predicated his appraisal on the highest and best use of the property being a continuation of its use as an automobile dealership and he rejected its use as an apartment site for which the value was probably higher in his opinion. He concluded the fair market value of the property to be $543,400 as at December 10, 1968. Between 1965 and 1968 Kennedy Ford had expended $54,000 on further improvements of which $42,439.17 was spent in 1966 and is the subject of dispute in the assessment of the appellant in that year.

Because Ford was contemplating the purchase of the appellant’s property it naturally obtained an appraisal. The appellant because of his prior association with Ford knew that a material consideration was the volume of sale of new cars. With this knowledge in mine the appellant, as president of Kennedy Ford, embarked upon an aggressive sales campaign and substantially increased the number of new Cars sold.

The appraisal on behalf of Ford was done by Mr Gleadow. He considered the highest use of the property to be that of an automobile dealership. He concluded that the value of the property as at August 9, 1968 was $565,00.

In the negotiations between Ford and the appellant both parties freely exchanged the appraisals in their possession.

The property was sold by the appellant to Ford pursuant to ar option to purchase for a total price of $543,400 which coincides with the estimate of market value given to the appellant by Mr Mason.

Upon completion of the sale to Ford the property was leased back to Kennedy Ford at rental of $4,200 a month which is an increase over the monthly rental of $1,935 paid by the Company to the appellant. It was understood that the property would be leased back to the Company prior to the sale to Ford by the appellant.

In my view the highest and best use of the appellant’s property is that of the conduct of the business of an automobile dealership for which purpose the improvements to the property were specifically designed. Any appraisal of the property must take into account the value of the buildings and improvements on the land representing that highest and best use.

In Lake Erie & Northern R Co v Brantford Golf and Country Club (1917), 32 DLR 219, Duff, J in discussing the phrase “‘the value to the owner’’ after saying that it did not imply that “compensation is to be given for value resting on motives and considerations that cannot be measured by any economic standard, continued at page 229 to say:

It does not follow, of course, that the owner whose land is compulsorily taken is entitled only to compensation measured by the scale of the selling price of the land in the open market. He is entitled to that in any event, but in his hands the land may be capable of being used for the purpose of some profitable business which he is carrying on or desires to carry on upon it and in such circumstances it may well be that the selling price of the land in the open market would be no adequate compensation to him for the loss of the opportunity to carry on that business there. . . .

The principle is that in determining market value the value in the open market is taken to which is added the value of those features which are of special suitability to the highest and best use.

In my view Mr Simmons in appraising the property did so on the basis of it being vacant land without regard to the improvements which made the property particularly suitable for its special use. He must have done so on the premise that there was no market for the property as an automobile dealership. That was, in my opinion, an erroneous premise. While it is true that the market for property suitable for an automobile dealer is restricted to purchasers in that category, nevertheless that market exists as is demonstrated by the subsequent event in the present case that the property in fact was sold for use as an automobile dealership. In Mr Simmons’ opinion the highest and best use of the property in the near future was for high density apartment development. By the same token the market would be restricted likewise to land developers.

Accordingly I do not accept Mr Simmons’ appraisal of the property at $260,000 which attributes no value whatsoever to the improvements made. In my view it is too low.

The mechanics of the sale by Kennedy Ford to the appellant was that the purchase price was $259,513 in payment of which the appellant paid $1,513 in cash and assumed two mortgages in the total amount of $311,000 for a total of $312,513. Because the obligations assumed by the appellant exceeded the agreed purchase price of $259,513 by $53,000 Kennedy Ford gave the appellant its promissory note in the amount of the difference of $53,000. The note was payable in monthly instalments over a period ending December 31, 1985, with the entire amount falling due on termination of the lease between them. The net result was that the purchase price remained at what the appellant agreed to pay the Company and was not increased to the extent of the additional commitment he assumed because that increase was Satisfied by the promissory note.

The purchase price of the property paid by Kennedy Ford was $223,000. The Company spent the undisputed amount of $185,370 on improvements in 1965. Those two figures total $408,370. By deducting $64,000, being the sale price to Texaco of a portion of the land, there results an amount of $344,370. Added to this is an indeterminate amount approximating $24,000 to reclaim a water course on the property which would bring that amount to $368,370.

That figure, if taken as the fair market value, would attribute to the value of the improvements the cost thereof.

Mr Mather’s estimate of the fair market value of $350,000 closely approximates the figure of $368,370 which includes the improvements at their cost.

Four years subsequent to December 31, 1965 the property was sold to Ford in July 1969 for $543,400. In the interval an additional $54,000 was expended on improvements. A deduction of that amount from the sale price would leave the amount of $489,400. It must be borne in mind that the property may have appreciated in value over those four years. Mr Simmons indicated that appreciation would be 10%. This would result in an unappreciated amount of approximately $440,000 in 1965 which is substantially in excess of the amount of $344,883 which the Minister assumed to be the fair market value in assessing the appellant as he did in the appellant’s 1965 taxation year.

In my opinion the appellant has failed to discharge the onus that was his to demolish the assumption of the Minister that the fair market value of the property was not less than $344,883 upon the basis of which assumption taxation rested.

It follows that the difference of $85,370.62 between the price paid by the appellant to Kennedy Ford in the amount of $259,513 and the fair market value of the property of $344,883.62 after the improvements were effected in 1965 represents an amount for which the appellant gave no value. That difference coincides with the cost of the improvements made by and paid for by the Company. Thus that difference is a benefit or advantage conferred upon the appellant by the Company within the meaning of paragraph 8(1 )(c) of the Act and is, therefore, subject to tax and accordingly the assessment for 1965 must stand.

In the 1966 taxation year the Company expended a further $42,439.91 in making improvements to the hereditament owned by the appellant for which the appellant did not pay.

In St-Germain v MNR (supra) it was held that the improvements belonged to the owner of the property from the time they were effected. The assumption of the Minister in assessing. the appellant for the 1966 taxation year was that the benefit conferred upon the appellant is the cost of those improvements, that is, $42,439.71, in that year.

Again, in my opinion, the appellant has not discharged the onus upon him to demolish the assumption on which the assessment was based.

The result will be that since the appellant has not shown any error in the assessments to which he objects, they must stand and the appeals are dismissed with costs.