T-1526-76
Godfrey G. S. Moulds (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Marceau J.—Ottawa, February 11
and March 2, 1977.
Income tax — Calculation of income — Plaintiff claiming
deductions of capital cost allowance on depreciable property
for 1970 and 1971 and of "terminal loss" allowance for 1972
— Plaintiff had previously withdrawn objection to 1964 reas
sessment relating to same property — Whether estopped from
denying validity of 1964 reassessment — Whether 1964 reas
sessment reasonable within the meaning of s. 20(6)(g) of the
Act — Whether arm's length transaction in 1964 Income
Tax Act, R.S.C. 1952, c. 148, ss. 17(2), 20(1)(a), 20(5)(c),
20(6)(g) — Income Tax Regulations 1100(2) and Schedule B,
Class 3.
The plaintiff claims that he is entitled to deduct capital cost
allowances on depreciable property in 1970 and 1971 and a
terminal loss allowance in 1972 when the property was disposed
of. In 1964 the plaintiff had sold land holding two buildings to
a developer, the selling price being stated to be for the land
only, and claimed a capital cost allowance for the buildings
thereon. This claim was rejected by the Minister of National
Revenue and the plaintiff agreed to withdraw his objection to
the reassessment without, however, abandoning his claim that
no value should be attached to the buildings from the proceeds
of the sale. In calculating his deductions for 1970, 1971 and
1972, the plaintiff computed the undepreciated capital cost of
his depreciable property as if no portion of the proceeds of the
1964 sale was referable to the buildings on the land at that
time. The Minister again disallowed these deductions, claiming
that, as a result of accepting the 1964 reassessment, the
plaintiff was estopped from denying its validity, that in any
event the plaintiff had failed to establish that it was unreason
able to assume that part of the price agreed on for the sale of
the property in question was consideration for the buildings
thereon and that the 1964 transaction was not at arm's length.
Held, the appeal is allowed. The plaintiff is not estopped
from denying the validity of the 1964 reassessment since he
expressly maintained his objection to value being attached to
the buildings from the proceeds of sale when he agreed to
accept the 1964 reassessment. The Minister has not shown that
it was reasonable to assume that part of the price for the sale of
the property in question was consideration for the buildings
thereon. In view of the fact that the buildings had no value to
any of the parties involved in the 1964 transaction, the question
whether or not the negotiations were at arm's length has no
bearing on the issue.
Emco Ltd. v. M.N.R. [1969] 1 Ex.C.R. 241, applied.
INCOME tax appeal.
COUNSEL:
David C. Nathanson for plaintiff.
Neil W. Nichols and Alison Scott Butler for
defendant.
SOLICITORS:
McDonald & Hayden, Toronto, for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
MARCEAU J.: The plaintiff appeals from the
decision of the Tax Review Board dated March 17,
1976, which confirmed the assessment made by
the Minister of National Revenue (hereinafter
"the Minister") of his income tax for the years
1970, 1971 and 1972.
The question at issue is whether the plaintiff, in
computing his taxable income for the said taxation
years, may be allowed certain deductions for capi
tal cost allowance on depreciable property of Class
3 of Schedule B of the Income Tax Regulations.
By notices of reassessment dated August 23, 1974,
the Minister disallowed the deduction claimed by
the plaintiff of capital cost allowance in the
amounts of $499.54 and $482.12 for the years
1970 and 1971; and by another notice of reassess
ment dated August 28, 1975, the Minister disal
lowed the deduction of a "terminal loss allowance"
in the amount of $18,521 which the plaintiff had
claimed for the year 1972 when he disposed of all
his Class 3 depreciable assets.
The facts giving rise to the issue
The plaintiff is a physician, in practice since
1947, residing in the City of Ottawa. In 1961 he
acquired, for a price of $66,000, a certain piece of
real property on McLeod Street, in downtown
Ottawa, consisting of land and two red brick
veneer five-apartment buildings standing thereon.
Until 1964, he maintained the property and leased
the apartments to various tenants. The plaintiff
had long conceived the idea of constructing with
co-practitioners a medical building which could
accommodate other doctors or dentists as well as
himself. It is his contention that he had that in
mind in 1961 when he purchased the property. It
was, in his view, ideal for such a project. In
pursuance of that idea, he contacted other doctors
and dentists. A group was formed and a. plan was
agreed upon. On the 14th of April 1964, an agree
ment for the sale of the property was entered into
between the plaintiff as vendor and the plaintiff
with two other doctors—acting in trust for a cor
poration to be incorporated—as purchasers (Tab 6
of the book of documents tendered by the parties
at the opening of the trial). The selling price,
stated to be for land value only, as the buildings
were to be demolished, was $70,500. The arrange
ment was completed on August 20, 1964, by the
plaintiff conveying the property to a newly incor
porated corporation, Foxspar Realty Limited, in
which he himself held 20% of the voting and 4 1 / 2 %
of the preferential non-voting shares. The build
ings, which had in the meantime been vacated,
were shortly thereafter demolished. The construc
tion of the medical building was completed three
years later.
In 1966, the Minister of National Revenue,
after conducting an audit of the plaintiff's affairs,
including an examination of the capital cost allow
ance schedule reported by him, allocated an
amount of $46,625.33 (out of the total sale price)
to the buildings which previously stood on the
land. The plaintiff, who had claimed an allowance
for his 1964 taxation year based on the contention
that he had been paid nothing for the buildings,
was reassessed accordingly. He disputed the
assessment. As a result of discussions between
himself, his accountant and two department offi
cials, the amount allocated to the buildings was
reduced to $44,625.33 subject to the plaintiff's
withdrawal of his notice of objection. His letter to
that effect, dated November 18, 1966, read as
follows:
Dear Sirs:
On condition that the amount of proceeds from disposition of
a property at 334-336 McLeod Street, which I sold in 1964, be
adjusted in your records to read as $44,625.33 instead of
$46,625.33 as shown on the Capital Cost Allowance Schedule
which was attached to Notice of Re-Assessment Number
1240221-1 issued on April 17, 1966 by the Department of
National Revenue, I am prepared to withdraw my Notice of
Objection dated July 14, 1966, relative to the above-noted
Re-Assessment.
I wish to point out that the withdrawal of my Notice of
Objection does not mean that I concur with the Minister's view,
in this case, that substantially the same amount should be
credited on the sale of the Class 3 Asset as was set up at the
time of acquisition. I still fail to see why any value should be
attached to the building from proceeds of sale, when the
purchaser is only buying land and had the building demolished
immediately after purchase. However, I am anxious to finalize
the matter and as stated above am prepared to accept the
figure of $44,625.33 as being the proceeds of disposition
attributable to 334-336 McLeod Street.
I trust the above information will enable you to complete my
file relative to the year 1964.
Yours very truly,
G. G. S. Moulds.
The issue, however, emerged again some years
later, in 1972, when the plaintiff disposed of all his
remaining Class 3 assets. In his income tax return
for that year, he claimed a terminal loss allowance
under paragraph 20(1)(a) of the Income Tax Act
and subsection 1100(2) of the Regulations, com
puting the undepreciated capital cost of his prop
erty of the said class as if no portion of the
proceeds of disposition of the McLeod property
was referable to the buildings standing on the
land at the time of its sale back in 1964. The
capital cost allowance claimed by him for the two
previous years had also been calculated on the
same basis. The Minister, of course, disallowed
again the deductions and issued the notices of
reassessment which are in question in this action.
The plea of estoppel
Counsel for the defendant urges, as his main
contention, that the plaintiff cannot now dispute or
change the allocation of the proceeds of the 1964
sale after having agreed to it in 1966. Under the
theory of estoppel, he says, the plaintiff is now
barred from raising again the specific issue which
was directly put into question by the reassessment
made in 1966 for the 1964 year. It is well settled in
law, he submits, that where a person makes a
representation to another who acts on it to his
detriment, he is estopped from denying later the
representation he made; and the rule, which is one
of common sense, is particularly vital in matters
such as the one at bar. Indeed, argues counsel, the
position of the Minister would be most prejudiced
if a taxpayer were allowed to withdraw or resile
from a representation of facts he made long
before. In his view, the difficulties that may arise,
years later, in trying to ascertain the true facts and
the administrative problems involved are such that
when an assessment is based on a specific fact and
no appeal is taken to contest it, the whole matter
must then be considered closed: the Revenue
Department should not be faced with the possibili
ty of a new challenge to the same fact in the
taxpayer's computation of his income for subse
quent years.
I simply cannot agree with those contentions. In
my view, the doctrine of estoppel, as I understand
it, does not apply here. When the plaintiff agreed,
in 1966, to withdraw his notice of objection, he did
not, as I see it, make any representation as to the
factual situation. In his original return, he had
taken the position that the buildings had, on the
sale of the property, no value and he adhered to
that position in his letter of withdrawal of Novem-
ber 18 when he wrote: "I still fail to see why any
value should be attached to the building from
proceeds of sale". For reasons of his own, he chose
to settle or compromise his tax liability for that
year rather than then pursue the matter further
through the Courts. But that can certainly not be
construed as the representation of a fact which it
"would be unconscionable to permit him to deny",
that being the very basis of the theory of the
so-called "estoppel in pais" (Phipson, on Evidence,
11th ed. page 927). Moreover, it can hardly be
said that the decision of the plaintiff to withdraw
his notice of objection led the Minister "to act to
his detriment". The amount allocated to the build
ings was reduced by some $2,000 but it remains
that if the objection had not been withdrawn and
had been upheld, the plaintiff would have paid less
taxes between 1964 and 1970 as he would have
been entitled to claim greater amounts of capital
cost allowance.
Some administrative problems might be involved
but it is clear to me that they cannot be invoked to
preclude a taxpayer from exercising his rights. As
for the difficulties of proof raised, they are bound
to prove an obstacle to the plaintiffs case and not
to the Minister's. It is always for the taxpayer to
rebut the facts assumed by the Minister in an
assessment, and in a case such as this, the onus
may be particularly hard to meet because the
taxpayer will have at the same time to convince
the Court that his earlier conduct is not to be
interpreted as a clear admission of the Minister's
assumptions.
Many of the cases cited by counsel on this issue
of estoppel are not helpful as they relate to estop-
pel by record (res judicata) or by deed, whereas
we are dealing here with a plea of estoppel by
conduct or representation. But one that is very
much in point is the well-known case of Emco Ltd.
v. M.N.R. ([1969] 1 Ex.C.R. 241) where such a
plea was rejected even though the facts therein
could, much more convincingly than here, lead to
the conclusion that a "representation" had been
made.
The plaintiff, in my view, was not barred in
1972 from correcting the amount of his pool of
Class 3 assets, and, by so doing, raising again the
1966 issue which he had at that time chosen not to
fight.
The basic issue
The plea of estoppel having failed, the question
which must be examined is whether or not the
plaintiff has established, on the evidence and the
law, that no portion of his proceeds of sale of his
McLeod property in 1964 should be treated as
proceeds of disposition of some of his Class 3
assets, namely the buildings standing thereon. And
the criterion to be applied in dealing with the
matter is that of reasonableness since paragraph
20(6)(g) of the former Income Tax Act under the
authority of which the allocation was made, pro
vided as follows:
20. (6) For the purpose of this section and regulations made
under paragraph (a) of subsection (1) of section 11, the follow
ing rules apply:
(g) where an amount can reasonably be regarded as being in
part the consideration for disposition of depreciable property
of a taxpayer of a prescribed class and as being in part
consideration for something else, the part of the amount that
can reasonably be regarded as being the consideration for
such disposition shall be deemed to be the proceeds of
disposition of depreciable property of that class irrespective
of the form or legal effect of the contract or agreement; and
the person to whom the depreciable property was disposed of
shall be deemed to have acquired the property at a capital
cost to him equal to the same part of that amount;
Is it "reasonable" to consider, in the circumstances
which prevailed at the time of the sale in 1964,
that any part of the price agreed upon was con
sideration for the buildings?
It is first to be noted that the defendant did not
adduce any useful evidence to substantiate the
Minister's assumption. The only witness called on
her behalf was the officer who handled the objec
tion in 1974, and who had had nothing to do with
the matter previously. It should also be noted that
no appraisal was made by the Department in 1966
when the original reassessment was issued. The
amount of $46,625.33 then allocated to the build
ings was simply the value attributed to them by
the plaintiff for the calculation of his capital cost
allowance in the years prior to 1964. We are
therefore left with: 1- the documents produced, 2-
the testimony of the plaintiff and 3- the expert
opinion of a professional real estate appraiser who,
relying on an appraisal he had done in 1961 of a
property adjacent to the plaintiff's, expressed his
views that the buildings standing, in 1964, on the
latter property, did not add any value to the fair
market value of the land, since the highest and
best use of the site was for redevelopment as an
office building site.
Now, is that evidence sufficient to rebut the
Minister's assumption reinforced, so to speak, by
the plaintiff's withdrawal of his objection in 1966?
After some hesitation I come to the conclusion it
is.
It seems clear to me that when he suggested a
price to the group of practitioners formed for the
purpose of realizing the medical building project
he had conceived, the plaintiff could not and did
not ask for more than the value the land had to the
group. And that value was the fair market value of
the property, at its highest and best use, redevelop
ment as an office or medical building.
It is true we are concerned here with the value
to the vendor, and the mere fact that the purchas
ers were interested in land only is not conclusive
that the buildings standing thereon had no value to
the vendor. But, such value, to be considered, must
be a demonstrable, real, economic value—as was
obviously the case in the two decisions cited by
counsel for the defendant, M.N.R. v. MaHoney's
Studio Limited (75 DTC 5377) and Baziuk v. The
Queen (77 DTC 5001). Here on the contrary,
according to the evidence adduced, the value of the
land alone to a developer far exceeded the capital
amount necessary to produce the rental revenues
that could be derived from the buildings. The
plaintiff asserted that the leasing of the buildings
prior to sale was, in his mind, primarily of a
transitional nature; his statement to that effect is
not to my mind contradicted by the fact that he
carried insurance against fire and stipulated in the
deed of sale itself, for some other normal precau
tionary measures with regard to them. In my view,
in the negotiations leading to the agreement of
1964 and the fixing of the purchase price, the
plaintiff was never able to obtain any additional
advantage or value by reason of the presence of the
buildings. All value had to relate exclusively to the
land. The earlier mentioned stipulation in the
agreement to the effect that the price was for land
only may have been inserted at the request of the
plaintiff and for tax purposes (as stressed by coun-
sel for the defendant) but it was, in my opinion,
the mere truth.
The Tax Review Board upheld the Minister's
assessment on the basis that the sale by the plain
tiff to Foxspar Realty Limited was a non-arm's
length transaction; that the provisions of subsec
tion 17(2) and paragraphs 20(6)(g) and 20(5)(c)
of the former Income Tax Act were applicable. I
do not agree with the view that the transaction was
negotiated on a non-arm's length basis. Although
the plaintiff was a member of the group of practi
tioners who had agreed to go ahead with the
construction of the Center and became a minority
shareholder in the company formed to realize the
project, it does not follow that his dealings with
the other doctors were not conducted at arm's
length; nor does it follow that he was induced to
give away something and by so doing sacrificed his
own economic interests. Be that as it may, in view
of the fact that, in my opinion, the buildings had
no value to any of the parties to the 1964 agree
ment, the question whether or not negotiations
were held at arm's length can have no bearing on
the issue.
I am satisfied, on the evidence relating to the
bargaining between the parties, the meeting of
minds on both sides in the transaction—to repeat
the words used by the then Associate Chief Justice
of this Court in the Emco case referred to above—
that the price arrived at was exclusively attribut
able to the value of the land and nothing to the
buildings. I therefore conclude that no amount of
the selling price in 1964 can reasonably be regard
ed as proceeds of disposition of the buildings.
The appeal will therefore be allowed with costs
and the reassessments will be referred back for
further reassessments not inconsistent with these
reasons.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.