Dick Bohun and Peter Bohun v. Minister of National Revenue, [1972] CTC 2325, 72 DTC 1268

J O Weldon:—The three appeals of Dick Bohun and Peter Bohun with respect to their 1965 taxation years initiated by Notices of Appeal both dated November 25, 1970 and of Reynolds Construction Ltd (“Reynolds” — year end March 31) with respect to its 1966 and 1967 taxation years initiated by separate Notices of Appeal both dated August 31, 1970 were heard together, pursuant to an order of the Board made on the application of the Minister the basis for which will hereinafter be made clear, at Saskatoon, Saskatchewan on October 13, 1971 under the Tax Appeal Board as it was then constituted. The parties were represented by counsel as follows: D F Woloshyn, Esq for the appellants Dick Bohun and Peter Bohun; J L Robertson, Esq, QC for Reynolds, and S A Hynes, Esq for the Minister.

All three of the above-mentioned appeals involve the matter of capital cost allowance in one form or another, ie allowance or recapture of allowance depending on the relevant circumstances, in connection with certain gravel crushing and loading equipment and certain truck units used therewith (those assets fall within Class 10 and Class 22) and arose out of. assessments made by the Minister having regard to an agreement (of sale) dated July 13, 1965 made between Peter Bohun and Dick Bohun carrying on business under the trade name and style of Bohun Bros at Hafford, Saskatchewan as vendors, and Reynolds of Saskatoon, Saskatchewan as purchaser. Clause 2 of that agreement reads as follows:

For the purposes of this Agreement the said purchase price shall be made up as follows:

Equipment as described in Schedule “A”
(This item covers the Class 10 and
Class 22	assets referred to above)	$30,000.00
Contracts and related business		30,000.00
		$60,000.00

In the final analysis, the issue to be decided herein is, first — should the above agreement be taken at its face value, the vendors (Dick Bohun and Peter Bohun) be accordingly assessed equally in their respective 1965 taxation years with the amount of capital cost allowance claimed by them in previous taxation years which must now be brought back into their respective incomes “or recaptured” under subsection 20(1) of the Income Tax Act, RSC 1952, c 148 as amended, on the sale of their said Class 10 and Class 22 assets on the basis of the above-mentioned purchase price of $30,000 specifically designated therefor in the said agreement, and the purchaser (Reynolds) be accordingly permitted, if it so wishes, to claim capital cost allowance under paragraph 11(1)(a) of the Act on the said Class 10 and Class 22 assets purchased by it from Peter Bohun and Dick Bohun at a cost price in the precise amount, of course; of the above-mentioned sale price of $30,000 in its 1966 taxation year and on the amount of the undepreciated capital cost thereof in subsequent taxation years, or secondly — should the Minister disregard the above-quoted breakdown of the total purchase price of $60,000 set out in the said agreement and, allegedly under paragraph 20(6)(g) of the Act, permit the purchaser (Reynolds) to use the said full amount of the total purchase price of $60,000 as its cost price of the said Class 10 and Class 22 assets referred to above as actually claimed by it in its 1966 and 1967 returns or, as a possible refinement, permit the purchaser (Reynolds) to use some lesser amount than the said total purchase price of $60,000 specified in the said agreement but greater than the $30,000 figure specified therein as its cost price of the said Class 10 and Class 22 assets.

During the sittings of the Board at Saskatoon at which the appeals of the three taxpayers mentioned earlier herein were scheduled to be heard, Mr Hynes made a motion on behalf of the Minister, notice of which had been duly given to the said taxpayers several days prior to the sittings, for an order of the Board directing that the above appeals be heard together and that the evidence adduced by the Minister. and by each of the appellants be applicable to all three appeals. Mr. Woloshyn, counsel for both Dick Bohun and Peter Bohun, consented to the making of the above-mentioned order prior to the commencement of the sittings. However, Mr Robertson, counsel for Reynolds, objected most strenuously to the making of the said order. After giving him full and ample opportunity to state his objections, the Board granted the order in the form requested by the Minister basing its decision on the precedent cited by Mr Hynes which was set by the Exchequer Court in the case of Klondike Helicopters Limited v MNR, heard together with the case of MNR v Connelly-Dawson Airways Limited, [1965] CTC 427; 65 DTC 5253. Mr Hynes also referred. the Board to subsection 91(4) of the Act which reads as follows:

91. (4) The Chairman may, subject to the rules and this Division, determine the procedure to be followed on an appeal.

It should be observed that, in getting at the root of this matter, it was obviously advisable and undoubtedly just and proper to deal in one comprehensive appeal with the rights and obligations under the Act of Dick Bohun and Peter Bohun, the vendors under said agreement dated July 13, 1965, at the same time and along with those of Reynolds, the purchaser under the said agreement, because the aforesaid rights and obligations of the vendors and purchaser are, as indicated in paragraph 20(6)(g) of the Act, directly related to one another. Incidentally, since Dick Bohun and Peter Bohun appear in this matter as equal partners and have equal and similar obligations under the Act with respect to their former business Bohun Bros, they have, accordingly, been joined together in one style of cause.

For the purpose of providing some background for this matter and also to make it more readily understandable, it would seem to be worthwhile to mention a few of the milestones leading up to the nearing thereof. In the 1966 return of Reynolds dated July 13, 1966 (ie one year exactly after the making of the key agreement herein dated July 13, 1965) covering the fiscal period from March 31, 1965 to March 31, 1966 during which period the said agreement with Peter Bohun and Dick Bohun was duly executed and fully performed, Reynolds appears to have deliberately and intentionally disregarded the breakdown of the total purchase price of $60,000 quoted earlier contained in the said agreement and to have claimed as a deduction from its 1966 income depreciation or capital cost allowance of $17,246.18 (of which $10,555.60 was allowed) using as its cost price of the Class 10 and Class 22 equipment in question the full purchase price of $60,- 000 stated in the said agreement of which $30,000 was specifically designated to cover equipment and the remaining $30,000 to cover “contracts and related business”. The amount claimed by Reynolds in its 1967 return as a deduction from its income for that year covering depreciation or capital cost allowance with respect to the said equipment amounted to the sum of $23,304.67 (of which $16,294.22 was allowed). Directing his attention first to Reynolds, the Minister reassessed its 1966 and 1967 taxation years by Notices of Reassessment both dated January 23, 1969 in which he refused, in effect, to accept the figure of $60,000 used by Reynolds as outlined above using instead thereof the figure of $30,000 specifically designated in agreement dated July 13, 1965 to cover Reynolds’ original capital cost of the Class 10 and Class 22 equipment in question herein, which said assessments were confirmed by Notification dated June 5, 1970. Over 10 months later, the Minister reassessed Dick Bohun’s 1965 taxation year by Notice of Reassessment dated December 2, 1969 by which he added the sum of $14,778.25 to his 1965 income covering recapture of capital cost allowance, which said assessment was confirmed by Notification dated September 23, 1970. Still later the Minister reassessed Peter Bohun’s 1965 taxation year by Notice of Reassessment dated January 15, 1970 (he was then living in Kelowna, BC) and again on November 4, 1970 by which he added the sum of $14,778.25 to his 1965 income covering recapture of capital cost allowance on sale of Class 10 and Class 22 assets.

In the appeal of Dick Bohun, the Minister’s Reply to his Notice of Appeal (which is the same in substance to the Reply delivered in the appeal of Peter Bohun) tells substantially the same story as the Minister’s Reply in the appeal of Reynolds. According to the last-mentioned Reply, the Minister (respondent) states inter alia that:

2. He admits that the Appellant has claimed capital cost allowance on the equipment referred to in the agreement on the basis that the depreciable property acquired under the agreement had a capital cost to the Appellant of $60,000.00, and that the Respondent has assessed the Appellant for its 1966 taxation year on the basis that the same equipment had a capital cost to the Appellant of only $30,000.00.

3. He admits that he has re-assessed Peter and Dick Bohun with respect to the same transaction on the basis that the proceeds of disposition of the same depreciable property in their hands was $60,000.00, but otherwise he does not admit any other allegations of fact contained in the Notice of Appeal.

5. By the agreement of July 13, 1965, a total consideration of $60,000.00 payable by the Appellant was allocated equally between the depreciable property and the contracts referred to above.

6. In filing its income tax returns for the relevant years, the Appellant valued the depreciable property for the purpose of obtaining capital cost allowance thereon at $60,000.00, whereas the Bohuns reported the sum of $30,000.00 as being the proceeds of disposition of the same depreciable property in their hands.

7. In re-assessing the Appellant for its 1966 taxation year, he assumed, inter alia:

(a) that with respect to the depreciable property described in Schedule “A” of the agreement of July 13, 1965, an amount of $30,000.00 can reasonably be regarded as being the consideration for the disposition of that property by the Bohuns and as the proceeds of disposition of that property in their hands;

(b) that pursuant to the provisions of Section. 20(6)(g) of the Income Tax Act, the Apppellant is deemed to have acquired the depreciable property described in Schedule “A” of the agreement of July 13, 1965, at a capital cost to it of $30,000.00.

9. It is not his intention, in re-assessing all parties to the transaction, to recover Capital cost allowance twice. The Minister has adopted the procedure of re-assessing all parties to the transaction for two reasons: first, to ensure that all the parties who are interested in the determination of the value of the equipment and whose interests will be affected by the decision arrived at, have an opportunity to appear before the Board when the determination is made, and second, to ensure that the onus of establishing the value of the depreciable property is placed on the parties to the contracts, where it belongs, and not with the Respondent.

And according to the Reply in the Dick Bohun appeal, the Minister (respondent) states inter alia that:

2. Notwithstanding the agreement of July 13th, 1965, between the Appellant, his brother, and Reynolds, the latter company, in computing capital cost allowance for the relevant fiscal period on the equipment sold to it, has claimed that its capital cost of the equipment was $60,000.00 and not $30,000.00.

3. The Respondent re-assessed Reynolds on the basis that its capital cost of the equipment purchased from the Bohuns was $30,000.00, and that company has taken an appeal from that assessment to the Tax Appeal Board.

4. The application of the provisions of Section 20(6)(g) of the Income Tax Act requires that the decision of the Tax Appeal Board or of any subsequent court of appeal, in relation to the capital cost of the above depreciable property to Reynolds, would affect the Appellant in that the proceeds of disposition of the same depreciable property to him would be equal to the capital cost to Reynolds as determined by the Board.

5. He has re-assessed the Appellant and his brother on the basis that the proceeds of disposition of the depreciable property to them in their 1965 taxation year were $60,000.00 for the following reasons:

(a) the Appellant and his brother would be directly affected by any decision of the Tax Appeal Board or any court of appeal on the question of the capital cost to Reynolds of the depreciable property covered in the agreement of July 13, 1965;

(b) the Appellant and his brother on their own account would have no Status and would be unable to appear or be added as a party to the above appeal;

(c) in order to assure that, if the Tax Appeal Board or a court of appeal considers that the capital cost to Reynolds of the depreciable property was something other than $30,000.00, that the Respondent would be able to treat all parties to the transaction equally and would be unaffected by the provisions of Section 46(4) of the Income Tax Act.

7. In re-assessing the Appellant and his brother on the basis that proceeds of the disposition of the depreciable property referred to in the agreement of July 13th, 1965, were $60,000.00, and at the same time assessing Reynolds on the basis that the capital cost to it of the same equipment was $30,000.00, he is not attempting to recover tax twice, but is merely ensuring that all the parties to the agreement of July 13th, 1965, will be able to appear and be represented at any adjudication of the value of the depreciable property, which adjudication would, because of the provisions of Section 20(6)(g), affect both the vendors- and the purchasers of the property.

8. The logical determination of the issue in this appeal requires that this appeal be heard with the appeal of Reynolds, which deals with. the same subject matter, and that this appeal and the appeal of Reynolds should be disposed of on the basis that the value of the depreciable property referred to in the agreement of July 13th, 1965, as determined by this Board, applies to all parties to the agreement.

On the basis of the evidence of the seven witnesses who testified at the hearing of the appeals of the three taxpayers involved herein, three for Dick Bohun and Peter Bohun including themselves, and four for Reynolds including R D Reynolds, its president (incidentally, the subscribed capital of Reynolds totals the nominal sum of $10 made up of 3 common shares $3 and 7 common non-voting shares $7), and the material filed with the Board, I have come to the conclusion without the slightest hesitation that the appeals of the three appellants mentioned above with respect to the taxation years now under scrutiny should be disposed of on the basis of the breakdown of the purchase price of $60,000 contained in said agreement dated July 13, 1965, which is as follows:

The following is a summary of my reasons for the conclusion outlined above:

1. Since the above agreement dated July 13, 1965 is, obviously, not a sham or subterfuge, it should be regarded, in accordance with the decision of the Exchequer Court in the Klondike Helicopters case (Supra), as establishing the relative values of the property sold, ie as supporting the above-mentioned breakdown of the purchase price in the said agreement. Reference should also be had to Kerim Brothers Limited v MNR, [1967] Tax ABC 438; 67 DTC 326, which follows the Klondike Helicopters case.

2. The said agreement was drawn by the purchaser’s (Reynolds’) own solicitors, a large Saskatoon law firm, which apparently had the carriage of the matter because one of the law partners of that firm witnessed the execution of the said agreement by the vendors Peter Bohun and Dick Bohun.

3. The evidence before me in this matter makes it clear beyond all peradventure of a doubt: that the breakdown of the purchase price in the said agreement was, unquestionably, intended by the vendors (Dick Bohun and Peter Bohun) and similarly accepted by the purchaser (Reynolds) as an important and essential term of the said agreement and one that went to the very root thereof; that Dick Bohun and Peter Bohun flatly refused to have anything to do with a previous draft of the said agreement because it did not contain the aforesaid breakdown of the purchase price; that the said agreement was then specifically amended to comply with the demands of Dick Bohun and Peter Bohun and was then executed; that the vendors (Dick Bohun and Peter Bohun) and the purchaser (Reynolds) under the said agreement were fully and completely aware at all relevant times of the tax implications flowing from the breakdown of the purchase price in the said agreement, and that the said breakdown in the purchase price governed, first, the amount of recapture of capital cost allowance which would be added in due course to the taxable incomes of the vendors (Dick Bohun and Peter Bohun) in their respective 1965 taxation years, and secondly, the amount of depreciation or capital cost allowance which the purchaser (Reynolds) would be entitled to claim as a deduction from its income in its 1966 and subsequent taxation years.

4. The law of contract imposes an obligation on each of the contracting parties to a legally enforceable contract — here it was the agreement between the Bohun Brothers and Reynolds — to keep faith with one another and there is no reason whatsoever, in my view, why that agreement should not be interpreted and enforced precisely in accordance with its terms. It struck me as complete nonsense for Rey- nolds to take the position in this appeal that, since it had received such bountiful. good value so far as the equipment covered by the said agreement was concerned and, since the “contracts and related business” also covered by the said agreement were not up to its expectations, the full purchase price thereunder of $60,000 should thereby be redesignated to cover the said equipment (which was priced at $30,000 in said agreement) to the exclusion of the “contracts and related business” which were also priced at $30,000 in said agreement. It can be stated with a considerable degree of confidence that the law of contract does not permit such unilateral amendment of a binding contract. In precipitating the present confrontation with the Minister — which is precisely what the three appeals herein add up to — Reynolds has committed a serious breach of its agreement (contract) dated July 13, 1965 with Peter Bohun and Dick Bohun which has most unfortunately involved them in unnecessary expenses in sticking up for their rights under the said agreement.

5. After listening at great length to the mass of evidence adduced in this matter, I came firmly to the conclusion that the evidence given by both Dick Bohun and Peter Bohun was consistent and rang true to me and that it should, speaking generally, be preferred to the evidence given by Reynolds’ four witnesses. In that regard, it should be observed that most of that evidence dealing with the valuation of the equipment herein, ie the Class 10 and Class 22 assets, was largely irrelevant from my standpoint because this matter plainly turns on the following points: that agreement dated July 13, 1965 is not a sham or subterfuge and, accordingly, should be interpreted and enforced in accordance with its terms, in particular the clause therein dealing with the breakdown of the purchase price; that paragraph 20(6)(g) of the Act does not support Reynolds’ position herein, and that the dispute in this matter is basically between the Bohun brothers and. Reynolds with the Minister merely holding a watching brief.

6. On the basis of the evidence of Dick Bohun and Peter Bohun which is acceptable to me, it is quite clear that the “contracts and related business” covered by the said agreement which they had arranged and built up over a period of time with certain municipalities were of substance and would have been more valuable to Reynolds if that company had carried on the said contracts with the same zeal and energy previously devoted to them by the Bohun brothers.

7. So far as paragraph 20(6)(g) of the Act is concerned on which Reynolds placed great reliance, that provision has, in my view, no particular application to the appeals now before the Board other than to make it clear that the person to whom the depreciable property in question was disposed of (ie the purchaser herein) shall be deemed to have acquired that property at a capital cost to him (it) equal to the proceeds of disposition of such depreciable property (ie the purchase price) received by the vendors herein for such depreciable property. Paragraph 20(6)(g) is a rule — quoting from page 20-610 of the Canada Tax Service — “designed to cover the situation where a lump sum consideration is received in respect of the disposition of depreciable property of a prescribed class and for other assets such as depreciable property of some other class, or for goodwill or land . . . . The law provides that a reasonable allocation of these factors must be made in order that an appropriate amount may be arrived at to represent the proceeds for the disposition of the depreciable property as distinct from the other factors involved”. It is my opinion that paragraph 20(6)(g) is not in the Act for the purpose of authorizing the Minister to change the breakdown of a purchase price in an agreement unless such an agreement is a sham or subterfuge. Obviously, the Minister would have had no reason for invoking paragraph 20(6)(g) of the Act in the present matter because the purchase price of the depreciable property in question has been clearly set out in a carefully-drawn agreement made by the parties thereto at arm’s length.

Before completing these reasons, ! should like to take this opportunity of offering my sincere congratulations to Mr Hynes, counsel for the Minister, for the effective, ingenious, sound and tenacious manner in which he brought the appeals of the three appellants herein together in one comprehensive proceeding. The course of procedure and the form of the pleadings worked out by Mr Hynes in this matter are not only based on good ordinary common sense but are also based on sound legal precedent and should be a helpful guide to the Minister when similar situations arise in the future.

In the result, as stated earlier, the appeals of the three appellants herein with respect to the taxation years now under scrutiny should be disposed of on the basis of the breakdown of the purchase price of $60,000. contained in said agreement. Accordingly, first, the appeals of Dick Bohun and Peter Bohun in connection with their respective 1965 taxation years should be allowed and the relevant assessments referred back to the Minister for reassessment on the basis stated above, and secondly, the appeal of Reynolds with respect to its 1966 and 1967 taxation years should be dismissed and the relevant assessments confirmed.

Appeals of D and P Bohun allowed.

Appeal of Reynolds dismissed.