A-760-80
George Golden (Appellant)
v.
The Queen (Respondent)
Court of Appeal, Thurlow C.J., Heald J. and
Verchere D.J.—Vancouver, February 7 and 9,
1983.
Income tax — Income calculation — Sale of property —
Apportionment of purchase price between land and depreciable
property — S. 68 not applicable as everything disposed of
"property" — Presuming s. 68 applicable, determination
thereunder to be approached from point of view of both vendor
and purchaser and taking all relevant circumstances into
consideration — Appeal allowed — Income Tax Act, S.C.
1970-71-72, c. 63, s. 13(1),(7), 68, 248(1) — Income Tax Act,
R.S.C. 1952, c. 148, s. 20(6)(g) (as am. by S.C. 1953-54, c. 57,
s. 5).
In a 1973 agreement by which a syndicate of which the
appellant was a member sold a property to real estate opera
tors, the purchase price was apportioned between the land and
the depreciable property. The Minister of National Revenue,
relying on section 68 of the Income Tax Act, reassessed the
appellant and his partners, modifying the apportionment. The
Trial Judge, relying on expert testimony and section 68, arrived
at a different apportionment and ordered a reassessment of the
appellant's 1973 income tax. The Court of Appeal, ex proprio
motu, raised a question as to the applicability of section 68.
Held, the appeal should be allowed.
Per Thurlow C.J.: It is not strictly necessary to decide
whether section 68 is applicable. The determination to be made
for the purposes of section 68 must be approached from the
points of view of both the purchaser and the vendor (not only
that of vendor, as held by the Trial Judge). The inquiry is not
one as to reasonable value but as to proceeds of disposition.
Because of the fiscal implications involved, the apportionment
was an important part of the agreement. That apportionment
should stand.
Per Heald J. (Verchere D.J. concurring): Since section 68
applies only when there is disposition of property and of
something else other than property and since everything dis
posed of in this case was "property" within the meaning of the
definition of that term as set out in subsection 248(1), section
68 does not apply in the present case. In any case, a section 68
determination must be approached from the points of view of
both the vendor and the purchaser and taking all relevant
circumstances into consideration.
CASES JUDICIALLY CONSIDERED
APPLIED:
Her Majesty the Queen v. Malloney's Studio Limited,
[1979] 2 S.C.R. 326; [1979] CTC 206; Herb Payne
Transport Ltd. v. Minister of National Revenue (1963),
63 DTC 1075 (Ex. Ct.); Minister of National Revenue v.
Steen Realty Limited (1964), 64 DTC 5081 (Ex. Ct.);
Emco Limited v. Minister of National Revenue
(1968), 68 DTC 5310 (Ex. Ct.); Moulds v. The Queen,
[1977] 2 F.C. 487; 77 DTC 5094 (T.D.); The Queen v.
Moulds, [1978] 2 F.C. 528 (C.A.); Klondike Helicopters
Limited v. Minister of National Revenue (1965), 65
DTC 5253 (Ex. Ct.).
OVERRULED:
Munday v. Minister of National Revenue (1971), 71
DTC 5321 (Ex. Ct.).
DISTINGUISHED:
Attorney General of Canada v. Matador Inc. et al.,
[1980] 2 F.C. 703; 80 DTC 6018 (C.A.).
COUNSEL:
G. T. W. Bowden for appellant.
W. Hohmann, Q.C. for respondent.
SOLICITORS:
Birnie, Sturrock & Bowden, Vancouver, for
appellant.
Deputy Attorney General of Canada for
respondent.
The following are the reasons for judgment
rendered in English by
THURLOW C.J.: The relevant facts are set out in
the reasons for judgment prepared by Mr. Justice
Heald and I need not repeat them. I am in general
agreement with his reasoning and conclusions.
There are, however, some further comments that I
wish to make.
In a footnote to the judgment of the Court in
Attorney General of Canada v. Matador Inc. et al.
[[1980] 2 F.C. 703, at page 709]; 80 DTC 6018
[C.A.], the view is expressed that in a situation
where what is disposed of consists of land and
buildings section 68 [Income Tax Act, S.C. 1970-
71-72, c. 63] applies to authorize an apportion
ment of the consideration between land and build
ings on the basis which the section sets out.
In that case the property had been sold for an
amount that was less than the value of the land
alone and also less than the value of the buildings
alone and the contract had not purported to appor-
tion the amount between land and buildings. As
subsection 13 (1) required the amount for which
the buildings were sold to be brought into the
computation of income that amount had to be
ascertained whether section 68 applied or not. The
parties appear to have dealt with the matter as if
section 68 applied and it does not appear from the
report that the applicability of the section in the
particular situation was seriously argued.
In the circumstances I doubt that the view
expressed in the footnote was necessary to the
decision. Were the matter unaffected by the view
so expressed I would be prepared to agree with
Mr. Justice Heald's analysis and conclusion that in
the present situation section 68 does not apply.
However, as the parties in this case as well regard
ed section 68 as applicable until the matter was
raised by the Court and as it is not strictly neces
sary to determine the point I prefer to rest my
opinion on the other ground set out in the judg
ment of Mr. Justice Heald.
The learned Trial Judge [[1980] CTC 488; 80
DTC 6378] having, in my opinion, erred in
approaching the determination to be made for the
purposes of section 68 from the point of view of
the vendor and not that of the purchaser it is, I
think, open to the Court to reach its own determi
nation of the amount that can reasonably be
regarded as the proceeds of disposition of the
depreciable property included in the subject
matter of the sale. For this purpose the respective
values of land alone and depreciable assets alone
are no doubt relevant and may be taken into
account in reaching a conclusion but it is to be
remembered that the inquiry is not one as to
reasonable value but as to proceeds of disposition.
It is open to an owner to dispose of his property as
he sees fit and for that purpose it is open to him,
when he sees it to be to his advantage, to realize on
the full potential of an asset of one kind even if as
a result the greatest potential of a related asset
cannot be realized in the transaction.
In the first offer an allocation of the price
offered between land, building and equipment was
proposed by the purchaser. The offer was rejected
for several reasons including dissatisfaction with
the proposed allocation. The vendors knew that the
land was underdeveloped and believed that the
purchaser's interest was in the land. They wanted
to realize the full potential price for it. The learned
Trial Judge found that $5,100,000 was not an
unreasonable price for the purchaser to pay for the
land alone. It was also, in my view, not an unrea
sonable amount for the vendors, for their own
reasons, to insist on receiving for the land. It is
also not unreasonable to think that the vendors
would not have sold for $5,850,000 without the
term providing for the allocation of that amount
between land and other assets included in the
transaction. It must I think be assumed that they
knew that there would be recapture of capital cost
allowances which had been claimed on the build
ings and that they would have to include the
recaptured amount in the computation of their
incomes and pay tax on it. Without an agreement
allocating the purchase price or with an agreement
allocating a higher amount to the depreciated
assets the offer would not have been as attractive
or as beneficial to them. From their point of view
the consideration for the buildings and equipment
and the amount they can reasonably be regarded
as having received for them was the $750,000
provided by the agreement.
The allocation has a reciprocal effect. Its conse
quence from the point of view of the purchaser is
that the cost of depreciable assets is less and the
amount of capital cost allowance he can claim on
the buildings and equipment is accordingly less
whether he keeps or demolishes them. The amount
he can reasonably be regarded as having paid for
them is thus the $750,000 provided for in the
agreement, a result which as I view it is confirmed
by the learned Trial Judge's finding that the pur
chaser paid $5,100,000 for the land alone.
Given that the agreement was reached between
parties who were dealing at arm's length and that
it is not a sham or subterfuge, it appears to me
that, notwithstanding the evidence of respective
values on which the learned Trial Judge relied, the
amount that can reasonably be regarded as the
proceeds of disposition of the depreciable assets
included in the transaction, irrespective of the
form or legal effect of the contract, operating as it
does only to govern the rights of the parties inter
se, was the $750,000 for which the vendors agreed
to sell and the purchaser agreed to purchase them.
I would dispose of the matter as proposed by
Mr. Justice Heald.
* * *
The following are the reasons for judgment
rendered in English by
HEALD J.: This is an appeal from a judgment of
the Trial Division whereby the appellant's 1973
income tax assessment was referred back to the
Minister of National Revenue for further reassess
ment on the basis that the consideration for the
disposition of the land alone, by the Bel Air Syndi
cate on March 14, 1973, was $2,320,000. In the
Trial Division this action was heard on common
evidence with the cases of McGuckin v. The Queen
[not reported, T-500-79, judgment dated October
31, 1980], Golden v. The Queen [not reported,
T-503-79, judgment dated October 31, 1980] and
Leemar Holdings Ltd. v. The Queen [not reported,
T-505-79, judgment dated October 31, 1980]. The
reasons for judgment of the Trial Division in this
action were made to apply to the other three
actions referred to supra and the judgments in
each case were identical, that is, the income tax
assessment in respect of each of the above men
tioned taxpayers was referred back to the Minister
of National Revenue for reassessment on the same
basis as in this case.
At the commencement of the hearing of this
appeal, counsel for both parties agreed that the
principles involved in all four appeals were identi
cal and that the Court's decision in this appeal
would apply equally to the appeals of John
McGuckin (A-759-80), Leemar Holdings Ltd.
(A-758-80) and Eleanor Golden (A-757-80). The
facts relevant and applicable to all four appeals
follow.
This appellant along with the three other appel
lants referred to herein were the sole partners in
Bel Air Syndicate. On March 14, 1973, this Syndi-
cate, in an arm's length transaction, sold the Bel
Air Apartments in Edmonton to knowledgeable
real estate operators' for $5,850,000 which was
allocated pursuant to the agreement between the
parties as follows: to land—$5,100,000, and to
"equipment, buildings, roads, sidewalks, etc."—
$750,000. It should be noted that on March 7,
1973, Skalbania made an unsolicited offer for the
same Bel Air Apartments without prior negotia
tion or consultation, of $5,600,000 subject to the
following valuation breakdown: land—$2,600,000;
buildings—$2,400,000; and "trucks, equipment,
roads, etc."—$600,000. The vendors rejected that
offer. Negotiations then followed and as a result,
the above described sale of March 14, 1973, took
place with the resultant increase in the purchase
price from $5,600,000 to $5,850,000, and with the
changed allocation of that purchase price as
detailed supra. The Minister of National Revenue,
in reassessing this appellant and his syndicate part
ners, relied on the provisions of section 68 of the
Income Tax Act (S.C. 1970-71-72, c. 63). That
section reads as follows:
68. Where an amount can reasonably be regarded as being in
part the consideration for the disposition of any property of a
taxpayer 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 proceeds of disposition of that property irrespective of the
form or legal effect of the contract or agreement; and the
person to whom the property was disposed of shall be deemed
to have acquired the property at the same part of that amount.
The Trial Judge accepted the opinion of an
expert appraiser called at the trial by the respond
ent, who concluded that, as of March 14, 1973, a
reasonable allocation of the total value to land
alone would have been $2,320,000 rather than the
sum of $5,100,000 allocated to the land alone by
the agreement entered into by the parties. On this
basis, and relying on the provisions of section 68
supra, he ordered reassessments of the 1973 tax
returns of this appellant and his three syndicate
partners on the basis quoted earlier herein. These
reassessments resulted in a substantial recapture of
depreciation by the vendors.
' The purchasers were a syndicate consisting of N.M. Skal-
bania Ltd. and others. The Trial Judge referred to the purchas
ers collectively as "Skalbania".
When the appeal came on for hearing, the
Court, ex proprio motu, raised a question as to the
applicability of the provisions of section 68 of the
Income Tax Act, supra, to the situation in this
case. It seems evident, and counsel for both parties
agreed, that the action in the Trial Division pro
ceeded on the basis that section 68 did apply to
this case and the three other related cases and that
the question of the applicability of that section was
not raised in the Trial Division proceedings. Like
wise, the matter was not advanced as a ground of
appeal in the appeal to this Court, nor was it
alluded to in any way in the appellant's memoran
dum of fact and law. In these circumstances, the
Court heard counsel for both parties on the
grounds of appeal which had been relied on in the
appellant's memorandum, thereafter adjourning to
enable both counsel to prepare argument in respect
of the applicability of section 68 to these appeals.
Two days later, the Court heard argument on
this aspect of the appeal. In addressing the issue of
the applicability of section 68 to the circumstances
of these cases, I think it instructive to consider the
legislative history of that section. Section 68 was
first enacted as a part of the 1972 Income Tax
Act.
At that time, paragraph 20(6)(g) 2 of the pre-
1972 Act [R.S.C. 1952, c. 148, as am. by S.C.
1953-54, c. 57, s. 5], which was somewhat similar
2 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; and
ly worded, was repealed. It is important to note
that that paragraph was one of the many provi
sions of section 20 of the Act which dealt with the
recapture and inclusion into income of excess capi
tal cost allowance on disposition of an asset in
respect of which capital cost allowances had been
claimed. It dealt with nothing else. Provisions simi
lar to others with which it was associated are now
found in a similar context in subsection 13(7).
The present section 68, however, is not found
among the provisions for recapture of capital cost
allowances. It appears in a different subsection
entitled "Rules Relating to Computation of
Income" between a provision limiting deductions
to what is reasonable in the circumstances and
provisions relating to situations where consider
ations on acquisition or disposition are inadequate.
In interpreting and applying section 68, it must be
borne in mind that the 1972 Act for the first time
introduced and imposed a tax on capital gains.
That, as it seems to me, is the reason section 68 is
found in a group of general rules and is the area in
which it can be expected to apply according to its
terms and without straining the meaning of any of
them.
When the wording of paragraph 20(6)(g) is
compared with the wording of section 68, it will be
seen that whereas the application of paragraph
20(6)(g) was restricted to the disposition of depre-
ciable property, section 68 applies to the disposi
tion of any property. In my view paragraph
20(6)(g) applied in circumstances where an
amount received by a taxpayer could reasonably
be regarded as being in part the consideration for
disposition of depreciable property and as being in
part consideration for something else other than
depreciable property. Likewise, and applying the
same criteria, it seems to me that section 68 can
only apply in circumstances where an amount
received by a taxpayer can reasonably be regarded
as being in part the consideration for the disposi
tion of any property and as being in part consider
ation for something else other than any property.
Subsection 248 (1) of the Act (as it was at all
relevant times) defines "property" as follows:
248. (1) In this Act ...
"property" means property of any kind whatsoever whether
real or personal or corporeal or incorporeal and, without
restricting the generality of the foregoing, includes
(a) a right of any kind whatever, a share or a chose in action,
and
(b) unless a contrary intention is evident, money;
In the case at bar, the property disposed of was
land together with the buildings, equipment, roads
and sidewalks, etc., situated thereon. Because of
the very wide definition of property set out in
subsection 248 (1) supra, it seems clear that every
thing disposed of in subject sale is included in that
definition. Thus the appellant taxpayer and his
associates disposed only of "property" as that term
is defined in the Income Tax Act. They did not
dispose of anything which could be described as
"something else" as that term is used in section 68.
As stated supra, I think the "something else"
referred to in section 68 means something else
other than "property". Since section 68 applies
only where an amount is received partly as con
sideration for the disposition of property and
partly as consideration for something else, it fol
lows that it does not apply in the circumstances of
the instant case. The situation was different under
the pre-1972 section, paragraph 20(6)(g). Under
that section, the requirement for applicability was
that the consideration be in part the consideration
for disposition of depreciable property and in part
the consideration for something else. On these
facts it seems evident that the provisions of para
graph 20(6)(g), had that section applied to the
taxation year 1973, would apply here since subject
consideration is partly for depreciable property
(buildings, equipment, etc.) and partly for some
thing else other than non-depreciable property,
namely land.
I find support for my opinion that section 68
cannot apply in the facts of this case in the reasons
of Estey J. in the case of Her Majesty the Queen v.
Malloney's Studio Limited.' At page 332
[Supreme Court Reports], the learned Justice said:
The rule therefore applies to the situation where the taxpayer
has disposed of two types of property, first depreciable property
and secondly, something else. When this factual situation
occurs, the rule then permits the allocation of that part of the
3 [[1979] 2 S.C.R. 326]; [1979] CTC 206, at p. 210.
consideration received in the total transaction to depreciable
assets as "can reasonably be regarded as being in part the
consideration for disposition of depreciable property of a tax
payer". The rule does not permit the Minister to characterize a
transaction as one which could reasonably be regarded as being
in part the sale of depreciable property and in part the sale of
something else. The rule operates only as a second stage, the
first stage being the agreement or valid determination that the
sale involves both a sale of depreciable property and a sale of
something else.
That case was dealing with the pre-1972 section,
paragraph 20(6)(g). However, I think the same
reasoning would apply to section 68. 4 In my view,
before there is any right to apportion the selling
price on a reasonable basis, the initial condition
precedent to the application of section 68 must be
met. Put another way, the "reasonable apportion
ment" rule of section 68 only applies in cases
where there is (a) property as defined by the Act,
and (b) something else other than property.
The result of my conclusion that section 68 does
not apply is that there is no statutory basis for
fixing an amount to be brought into the computa
tion of the appellant's income under subsection
13 (1) of the Act as the proceeds of disposition of
the depreciable property and the amount that must
be brought into the computation is the amount for
which the depreciable property was sold under the
terms of the contract. The reassessment must
therefore be set aside. Such a conclusion is suffi
cient to dispose of the appeal in favour of the
appellant. However, I have reached the further
conclusion that the Trial Judge erred further in
deciding that the determination under section 68 is
to be approached from the point of view of the
vendor only. The Trial Judge was relying on the
Exchequer Court decision of Dumoulin J., in the
case of Munday v. Minister of National Revenue.'
That decision appears to me to be inconsistent
with a number of other decisions of the Exchequer
Court, the Trial Division of the Federal Court and
the Federal Court of Appeal. In the case of Herb
Payne Transport Ltd. v. Minister of National
Revenue, 6 Noel J. (as he then was), in a determi-
4 For a similar view see Editorial Notes, [1979] CTC at pp.
3808-3810.
5 (1971), 71 DTC 5321 [Ex. Ct.], at p. 5325.
6 (1963), 63 DTC 1075 [Ex. Ct.] at p. 1079.
nation under paragraph 20(6)(g), enunciated the
following principles:
Because of the reciprocal effect on purchaser and vendor of
any such finding here I am prepared to accept, as suggested by
counsel for the respondent, that the matter should be con
sidered from the viewpoint of the purchaser as well as from the
viewpoint of the vendor.
There is also no question that if the purchaser and vendor
acting at arm's length, reach a mutual decision as to apportion
ment of price against various assets which appear to be reason
able under the circumstances, they should be accepted by the
taxation authority as accurate and they should be binding on
both parties.
In another case before the Exchequer Court
involving a determination under paragraph'
20(6)(g), Ritchie D.J., in making the determina-'
tion, considered the situation from the point of
view of both the vendor and the purchaser.' In
1968, Mr. Justice Noel was called upon to again
make a determination under paragraph 20(6)(g)
in the case of Emco Limited v. Minister of Na
tional Revenue. 8 Here also, in making the neces
sary determination, the learned Justice considered
the evidence as to the bargaining between the
parties and the evidence as to the meeting of minds
on both sides in the relevant transactions. Then, in
1977, in the Trial Division of the Federal Court,
Marceau J., in the case of Moulds v. The Queen, 9
in making a determination under paragraph
20(6)(g) followed the Emco decision of Mr. Jus
tice Noel and had regard to the bargaining be
tween the parties and the meeting of minds on
both sides in the transaction. The Federal Court of
Appeal [[1978] 2 F.C. 528] dismissed the appeal
from the judgment of Marceau J. without specifi
cally commenting upon the basis used by Marceau
J. for making the determination under paragraph
20(6)(g).
A further decision of the Exchequer Court rele
vant to this issue is the decision of Thurlow J. (as
he then was) in the case of Klondike Helicopters
Limited v. Minister of National Revenue. 10 That
was also a paragraph 20(6)(g) determination. At
page 5254 of the report, Thurlow J. said:
7 Minister of National Revenue v. Steen Realty Limited
(1964), 64 DTC 5081 [Ex. Ct.].
8 (1968), 68 DTC 5310 [Ex. Ct.].
9 [[1977] 2 F.C. 487]; 77 DTC 5094 [T.D.] at p. 5099.
10 (1965), 65 DTC 5253 [Ex. Ct.].
The making of a contract or agreement in the form in which it
exists is, however, one of the circumstances to be taken into
account in the overall enquiry and if the contract purports to
determine what amount is being paid for the depreciable
property and is not a mere sham or subterfuge its weight may
well be decisive.
I find this series of cases to be persuasive when
reaching a conclusion on the proper test to be
utilized in making the determination required
either under section 68 or its predecessor section,
paragraph 20(6)(g). It is my opinion that the
correct approach to a section 68 determination
would be, as suggested by the above authorities, to
consider the matter from the viewpoint of both the
vendor and the purchaser and to consider all of the
relevant circumstances surrounding the transac
tion. Where, as in this case, as found by the Trial
Judge, the transaction is at arm's length and is not
a mere sham or subterfuge, the apportionment
made by the parties in the applicable agreement is
certainly an important circumstance and one
which is entitled to considerable weight. Further
more, in this case, the Trial Judge made a specific
finding of fact (A.B., p. 159) that the figure of
$5,100,000 which the parties apportioned to land
in the agreement was not an unreasonable price for
the purchaser to pay for the land alone in March
1973. Accordingly, based on that specific finding
and on the other circumstances appearing from the
evidence and addressing the question from the
point of view of both the appellant and its purchas
er, I am of the opinion that the amount that can
reasonably be regarded as having been paid and
received for the land apart from the buildings, etc.,
was $5,100,000 and for the buildings, equipment,
roads, sidewalk, etc., was $750,000.
For these reasons I would allow the appeal, set
aside the decision of the Trial Division and refer
the appellant's 1973 income tax assessment back
to the Minister of National Revenue for further
reassessment on the basis that the consideration
for the disposition of the depreciable assets by the
Bel Air Syndicate on March 14, 1973, was
$750,000.
The appellant is entitled to his costs both here
and in the Trial Division.
VERCHERE D.J.: I concur.
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.