Benjamin Attis v. Minister of National Revenue, [1984] CTC 3013, 85 DTC 37

Kempo, TCJ:—

Part I — Issue

This appeal is in respect of the 1977, 1978, 1979 and 1980 taxation years, however, the real question in issue is that of a capital gains reassessment for 1977, the blance of the years under appeal being in relation to reserves permitted under the Income Tax Act.

This situation arose out of a plan of estate freeze whereby in 1977 the appellant sold eight rental properties all located in Moncton, New Brunswick to his four children.

According to the evidence the consideration received therefor by the appellant was a promissory note from the four children in the sum of $435,000 repayable in five annual instalments of $87,000 each with zero interest. Apparently the property was duly transferred with a mortgage back to the appellant in an identical sum and with identical terms as with that of the promissory note.

The appellant asserts that in this non-arm’s length transaction the proceeds of disposition for capital gains purposes should be the amount of the fair market value of the property being sold at the time as this was what the parties had intended in the estate-freeze scheme. It was further asserted that notwithstanding the fact that the face value of the promissory note was greater than the fair market value of the properties (the excess being viewed as a premium or bonus) its adjusted cost base would be no greater than the fair market value of the underlying property given in exchange.

In reassessing the appellant the respondent assumed, inter alia, that “the proceeds of disposition from the sale were $435,000“ essentially for the reason that that amount was the sale price in respect of the disposition.

Part II — Decision

The appeal is dismissed, the appellant not having shown the respondent’s assumptions to be erroneous.

Part III — Reasons

The only evidence in the appellant’s case was given by one of his children, Lewis Attis, the appellant himself having died on August 6, 1982. Mr Attis testified that in 1977 his father had wished to have his estate matters cleared up by an estate freeze, that eight rental properties would therefore be sold to his four children for fair market value, if not a bit higher in price, and that an annuity was to have been purchased to offset the taxable capital gains.

As to the requirement of making any payments for the properties purchased, Mr Attis testified that it really didn’t matter if the indebtedness was paid off or not as all of the children knew that the transaction was an estate freeze and that the receivables under the mortgage/promissory note would be bequeathed to them under their father’s will (which is what did happen). Other than some $40,000 from the proceds of the subsequent resale of one of the properties, nothing had been paid to the appellant, nor demanded by him, nor was it intended that any demand would have been made by him.

The only formal documentary evidence as to the estate freeze was that of the promissory note and mortgage. A master sale-agreement was not produced.

As to the face value of the promissory note being $435,000, the pertinent evidence of Mr Attis was that at the time of the purchase he felt the property was worth about $350,000 to $360,000 and that the extra money was some type of premium or bonus because of the five-year repayment term with zero per cent interest. More particularly he said that the note could have been for any amount as there had not been any intention of paying anything above the value of the property and further that, because interest was not being paid, the excess would have been just a premium or bonus “for having that agreement”.

An independent appraisal had been obtained by the appellant in 1981 from a Mr Darby indicating a total value of $355,100 for all of the properties as of the date of the sale, March 25, 1977 and which report had been made available to the respondent. As Mr Darby was not called, his report did not go to evidence.

Evidence was given by Mr Kierstead, a field auditor with Revenue Canada who had prepared the working papers attached as Annex “C“ and “D“ to the Minister’s reply to notice of appeal. His evidence was that he had used the Darby appraisal report as a guideline in his preparation of Annex “D“, which was to allocate and prorate the $435,000 overall proceeds of disposition among the various properties as well as to their respective depreciable and nondepreciable parts. It was Mr Kierstead’s information that Schedule 2 of the appellant’s 1977 Return had been premised on a value allocation of 85 per cent to the buildings and 15 per cent to land. With the Darby appraisal he prepared Annex “D“ to reflect a more accurate allocation.

Annex “C” was Mr Kierstead’s analysis of information taken from working papers in the possession of a chartered accountant (who was not the accountant who had prepared the appellant’s 1977 Return) and which, the respondent submits, circumstantially corroborates the sale price, or proceeds of disposition, as being the amount of $435,000 because of its consistency with what was reported in Schedule 2 of the appellant’s 1977 Tax Return. As all of the subject depreciable property had been acquired by the appellant prior to Valuation Day, a calculation was required to have been made to arrive at the deemed proceeds of disposition pursuant to subsection 20(1) of the Income Tax Application Rules.

The respondent makes no admission as to the fair market value of the properties as at the date of sale nor as to any value in respect of the adjusted cost base of the promissory note. His position is that by subparagraph 54(h)(i) of the Act proceeds of disposition includes the sale price, that in the case at bar the sale price, or the price at which the property had been sold, was $435,000 and that the fair market value of the property is of no relevance.

What is clear is that a sale price had been agreed upon in order to implement the sale transaction and that the appellant is seeking to convince the Court that in these close family circumstances their intent as to the consideration not exceeding fair market value should establish, and thereby govern, the calculation of the real gain to be taxed rather than that of $435,000 as evidenced by the promissory note.

It is regrettable that the evidence on behalf of the appellant was as scanty as it was and notably in respect of the failure to produce the sale agreement itself. Additionally there is nothing in the evidence to diminish or rebut the strong inference that Schedule 2 of the appellant’s 1977 Return had in fact been prepared on the basis that the appellant had employed the sum of $435,000 as proceeds of disposition of the properties as was argued by counsel for the respondent.

Accordingly the evidence has not convinced me that the price of the sale was other than that shown on the promissory note, that the value of same to the appellant was other than its face value or that its value was less than the capital cost of the property sold (vide, Avril Holdings Ltd v MNR, [1970] CTC 572; 70 DTC 6366 at 575, 576 [6368, 6369] (SCC)). It is equally obvious that the appellant had accepted the $435,000 promissory note at face value (vide, Staffordshire House Ltd v MNR, [1967] Tax ABC 532; 67 DTC 379 at 536 [381] in full satisfaction of the purchase price.

While there is authority in support of the appellant’s plea that the determination of the real proceeds of disposition (that is, the gain) should be looked at realistically (vide, Fradet and Demers v The Queen, [1983] CTC 424; 83 DTC 5445 at 428 [5448] the evidence submitted in support thereof falls short of permitting any relief from the respondent’s assumptions on reassessment. Therefore the appeal fails in respect of the appellant’s 1977 to 1980 taxation years inclusive.

Appeal dismissed.