Godfrey G S Moulds v. Minister of National Revenue, [1976] CTC 2104

The Chairman:—This is the appeal of Godfrey G S Moulds from income tax assessments in respect of the 1970, 1971 and 1972, taxation years.

By notices of reassessment dated August 23, 1974 the Minister of National Revenue disallowed deductions for capital cost allowance in the amount of $499.54 for 1970 and $482.12 for 1971 on depreciable property of Class 3 of Schedule B of the Income Tax Regulations.

By a notice of assessment of the same date the Minister disallowed the deduction of an amount of $18,521 claimed by the appellant as a terminal loss in 1972 when he disposed of all of his Class 3 depreciable assets. By notice of reassessment dated August 28, 1975 certain adjustments were made to other items but the terminal loss was still disallowed.

In 1956 the appellant, a medical docior whose offices were in the City of Ottawa, conceived the idea of constructing a medical building which would accommodate other practitioners as well as himself. In 1961 a suitable site was found at 334-336 McLeod Street which consisted of land on which stood a 5-apartment building with garages at the rear, and the appellant purchased the property in April of that year for a price of $66,000 (Exhibit A-2). The appellant maintained the property and leased the apartments until August 1964 (Exhibit A-3).

The appellant in the meanwhile negotiated with a group of doctors for the financing of the medical building and, on April 14, 1964, the appellant sold the property to a group of doctors, consisting of himself, Dr lan Jeffrey and Dr Edward J Fox, in trust for a company to be incorporated (Exhibit A-4). Subsequently, a company called Foxspar Realty Ltd was incorporated in which the appellant was a substantial shareholder. The selling price of the property to the trust was $70,500, which was slightly more than the appellant had paid for the property in 1961, and the appellant contended that this selling price was for the land only, because the building was to be demolished so that the proposed medical building could be proceeded with.

In 1966 the Minister of National Revenue, in assessing the appellant, fixed an amount of $46,625.33 as the portion of the total sale price to be ailocated to the building. By notice of objection the appellant contested the allocation and, after negotiation, the Minister reduced the capital cost of the building to $44,625.33, to which figure the appellant agreed and withdrew his notice of objection (Exhibit R-2).

In 1972 the appellant disposed of all his Class 3 assets and the question of the amount allocated as the selling price of the building in 1964. was again in issue. The appellant has appealed the assessment in which the Minister disallowed the terminal loss in the amount of $18,521 claimed by the appellant for the 1972 taxation year. The appellant contends that the Minister’s assessment is wrong, because the McLeod Street property had been disposed of in 1964 at a price which did not contain any amount at all in respect of the building standing on the property, as the purchasers had no use for it.

On November 18, 1966 the appellant had written a letter to the District Taxation Office (Exhibit A-1) in which he stated that, although he accepted the figure of $44,625.33 as being the portion of the proceeds of disposition attributable to the McLeod Street building, he did not understand why any value should be attached to the building since it was to be demolished immediately after the purchase.

Counsel for the respondent claims that the allocation of $44,625.33 for the building was reasonable, as the property was producing rental income at the time of sale; and that it is now too late for the appellant to claim that no value should have been allocated to the building.

In my view, the important matter in contention is not so much that the appellant cannot now claim that the building had no value at the time of sale. What is more pertinent is, that the sale by the appellant of the McLeod Street building to Foxspar Realty Ltd, a company in which the appellant was a significant shareholder, was a non-arm’s length transaction, and the provisions of subsection 17(2) of the former Income Tax Act, RSC 1952, c 148, and subsection 69(2) of the new Income Tax Act, SC 1970-71-72, c 63, are applicable, as well as paragraphs 20(6)(g) and 20(5)(c) of the former Income Tax Act. Subsection 17(2) reads:

17. (2) Where a taxpayer carrying on business in Canada has sold anything to a person with whom he was not dealing at arm’s length at a price less than the fair market value, the fair market value thereof shall, for the purpose of computing the taxpayer’s income from the business, be deemed to have been received or to be receivable therefor.

Considering that the property was purchased in 1961 at a cost of $66,000, the 5-apartment building on the property was leased up to the time of its sale, and the building had at that time a market value of $44,625.33, it seems to me that the portion of the selling price deemed attributable to the building by the Minister pursuant to subsection 17(2) of the old Act, having been fixed at that market value of $44,625.33, is reasonable, and indeed was agreed to by the appellant in 1966.

Although the purchasers may have been interested in the land only, and were, for their purposes, buying the land only, it does not necessarily follow that what the vendor was selling consisted only of the land. The appellant had purchased both land and building in 1961, he had obtained revenue from the building until its sale, and could have continued doing so had he chosen not to sell. In the circumstances, I find it very difficult indeed to consider that the building had no value whatsoever to the vendor (the appellant) at the time he sold the property to the trustees for Foxspar.

The cases cited by the appellant deal with transactions at arm’s length and, contrary to the appellant’s contention, I feel that the sale of the property by the appellant to Foxspar was not at arm’s length. In the light of subsection 17(2), the Minister properly applied paragraph 20(6)(g) in allocating a fair market value for the building. Since the appellant did not prove to the satisfaction of the Board that the amount of $44,625.33 was not the proper market value for the building at the time of the sale, I can only conclude that the Minister was correct in considering the amount of $44,625.33 to have been the proceeds of disposition of the McLeod Street building and that, in using that amount as the basis for calculating capital cost allowance on that building, he did not err in arriving at the undepreciated capital cost of the appellant’s depreciable Class 3 assets at the time of their disposal. I therefore also conclude that there was no terminal loss to the appellant in 1972.

For these reasons the appeal is dismissed.

Appeal dismissed.