Minister of National Revenue v. Joichi G. Kato, Rupert M. Clare, Ian D. Dickens, Estate of James Gibson, Charles Lefebvre,, [1969] CTC 492, 69 DTC 5308

CATTANACH, J.:—These are appeals from a decision of the Tax Appeal Board, [1968] Tax A.B.C. 700, whereby the appeals of the eleven respondents named in the above styles of cause with respect to their respective assessments to income tax for their 1964 taxation years were allowed.

The assessments in question resulted from the same transaction in which all eleven respondents participated and realized a profit which the Minister added to their respective incomes as profit from a business or an adventure in the nature of trade within the meaning of Sections 3 and 4 of Section 139(1) (e) of the Income Tax Act,* [1] R.S.C. 1952, c. 148.

By agreement four witnesses were called by counsel for the respondents whose evidence was common to and forms part of the evidence in all eleven appeals. Evidence was then given in respect of his individual appeal by each respondent except the respondent Angus G. MacDonald, who did not give evidence by reason of circumstances peculiar to his appeal and that of his wife, Lois MacDonald, upon which I shall comment later.

The facts which gave rise to this litigation are as follows:

One Lloyd Moss, of the City of Edmonton, a real estate salesman, was requested by a client, Bruce MacLean, who was living in British Columbia, to obtain for him a parcel of land bordering upon the Bow River in the immediate vicinity of the City of Calgary. Moss located such a parcel of land consisting of approximately three-quarters of a section or 396.5 acres. At the hearing of the appeals, Moss testified that his client wanted the land for development purposes but what type of development the client had in mind was not disclosed either to Mr. Moss or by any other evidence.

On March 19, 1957 Moss entered into an option agreement in his own name with the owner of the land so located, Cirele “ J” Ranches Limited. The total price fixed by the option agreement was $117,000 payable $15,000 in 90 days, $15,000 in a further 90 days and $20,000 in each year beginning June 21, 1958 with interest at 5%. It was a term of the option agreement that, after $40,000 had been paid, the option agreement could be turned into an agreement for sale.

The land was subject to a caveat dated December 8, 1950 in favour of Standard Gravel and Surfacing of Canada Limited warning of its right under an agreement with the owner to work gravel deposits.

The existence of this caveat apparently deterred Mr. Moss’s client from accepting the deal with the result that Moss was left with an option and no prospect of collecting his commission of $6,000 unless he could dispose of the option to other parties.

With this object in view Mr. Moss called upon Douglas KR. Matheson, a barrister and solicitor practising in the City of Edmonton. He extolled the vast potentialities of the land. Particularly he pointed out the extensive gravel deposits in the land which he described as ‘‘a veritable gold mine’’ in view of the construction going on in the City of Calgary and the consequent demand for gravel. He also pointed out that there was a great quantity of high quality black topsoil for which there was also great demand because of housing developments in Calgary. He also mentioned that there was a source of revenue from crop rental from the present owner who also grazed cattle on the land.

Mr. Matheson was impressed but not so impressed that he did not realize Mr. Moss was a promoter and salesman and he therefore undertook his own investigation of the property. Mr. Matheson was a friend and classmate of the solicitor for Standard Gravel and Surfacing Canada Limited, P. M. Mahoney, who provided him with gravel profiles which confirmed the vast gravel deposits. It was also explained that Standard Gravel and Surfacing Canada Limited did not intend to exploit the very favourable lease that it held because its then construction work was remote from that source of supply and other sources were more readily available. The likelihood of its working the gravel deposits in accordance with the minimum requirements of the terms of the lease thereby keeping the lease in effect, was remote and the lease would expire shortly. In addition, Mr. Matheson foresaw possibilities of further revenue from the sale of topsoil, for which he confirmed that there was a constant demand, and from a crop sharing and grazing arrangement with the owner of the land. He became convinced that the land would produce a substantial revenue particularly from the apparently inexhaustible supply of gravel and that that revenue would increase in the future. He was also convinced that in the meantime the income from the sale of topsoil, share crop rental and grazing rights would yield further income and carry the land. He knew that the land was situated in a farming and grazing district seven miles from the centre of the City of Calgary and that there was no likelihood of development for residential purposes because of lack of access and service facilities. Further he knew from his personal inspection of the land that on adjacent land there was an explosive plant owned and operated by Canadian Industries Limited which was subject to the provisions of the Explosives Act and regulations thereunder for the safety of the public in the immediate area. He also knew that there was an oil refinery in close proximity to the land. He was convinced that the statement of Mr. Moss that there was no prospect of a quick sale of the land, but rather that the huge deposits of gravel would provide a substantial income over the years, had substance in fact.

Prior to discussing the matter with Mr. Matheson, Mr. Moss had raised monies to pay the initial payment of $15,000 under the option agreement thereby extending the option by 90 days. This he did by applying thereto his commission of $6,000 from the owner of the land and $9,000 which was put up by E. Gaudet, another real estate salesman.

However upon the expiry of the 90-day period a further payment of $15,000 would be due to keep the option in effect. This amount Mr. Moss did not have. His purpose was to interest a number of persons each of whom would contribute a modest amount and who, together, would constitute a syndicate. This was the object of his visit to Mr. Matheson.

As intimated above Mr. Matheson became enthusiastic about the prospects inherent in the land and he and two other members of his firm, Ian D. Dickens and Angus MacDonald contributed $3,000, the equivalent of one unit in the syndicate later formed. Because there was an annual payment of $20,000 to be met and their law firm was in its struggling formative stages, one-third of the unit subscribed by the firm was sold to Grant H. Smith so as to reduce the payments to an amount that the firm could comfortably meet, with the results that Douglas Matheson, Ian Dickens and Angus MacDonald each became the owner of 2/9 of a unit and Grant H. Smith became the owner of 3/9 of a unit.

Mr. Matheson also spoke to Dr. Joichi G. Kato, his personal physician who occupied the adjoining office. Dr. Kato after giving the matter serious consideration and relying on the advice and description of the land given him by Mr. Matheson was like- wise impressed with the potentialities of the land and agreed to subscribe for one unit in the syndicate to be formed.

In turn Dr. Kato broached the subject to several of his fellow doctors at the hospital. Mr. Moss also brought up his persuasive powers to bear on Dr. Rupert M. Clare to whom Dr. Kato had spoken.

In the result Dr. Clare, Dr. Lefebvre, Dr. Sereda, Dr. War- shawski and Dr. Allard, through Crosstown Investment Ltd. each subscribed for one unit of the syndicate to be formed.

In the meantime Lloyd Moss, who was in need of money, transferred one unit to James Gibson.

On April 22, 1957 Lloyd Moss assigned his interest in the option agreement to Ian D. Dickens as trustee for an association of persons to be known as Cowtown Syndicate.

A syndicate agreement was drafted and executed in 1957 and the following persons agreed to become members and subscribed the following amounts:

One of the stated purpose of the Syndicate was ‘*. . . to develop and subdivide the said lands and premises and to effect the sale or sales thereof at a profit. ’ ’

On June 30, 1958 Ian G. Dickens, as trustee for Cowtown Syndicate, agreed to purchase the land from Circle “J” Ranches Limited for the option price of $117,000, in addition to Moss’s commission of $6,000.

Prior to the execution of the Syndicate agreement HK. Gaudet had become disenchanted with the transaction and was in need of the money which he had advanced as an accommodation to Moss. Moss felt an obligation to his friend Gaudet and managed to extricate him by disposing of his units, I believe at a slight profit.

Subsequent to the execution of the Syndicate agreement Lloyd Moss sought to change his occupation by taking social welfare classes which required all his available funds and resources. He, too, disposed of his syndicate units

From 1960 to 1961 the Syndicate paid no returns to the members, but there was sufficient income to prevent carrying the agreement for sale become an undue burden.

On July 31, 1960 the lease to Standard Gravel and Surfacing Canada Limited expired. It was replaced by a lease the terms of which were much more favourable to the Syndicate. The first gravel lease covered the entire area of the land. The contractor had agreed to pay 100 per cubic yard for every cubic yard of gravel removed but was not required to remove any minimum amount within any specified time. If during the term of the agreement the contractor had removed 250,000 cubic yards of sand and gravel then the contractor could renew the agreement for a further term of 5 years from July 31, 1960. This was not done.

The former agreement was replaced by an agreement dated September 30, 1960 for a term ending March 30, 1971. The contractor agreed to pay 100 cubic yard for gravel removed and to account therefor monthly. The contractor agreed to pay a minimum of $12,500 annually and a minimum of $20,000 over the term of the lease and the rights to exploit the gravel resources only covered approximately 70 acres of the total area of 390 acres.

Standard Gravel and Surfacing of Canada Limited built access roads and a bridge over the Bow River to give direct access to the southern portion of the City of Calgary.

On November 17, 1960 the members of the Syndicate were incorporated under the name of Cowtown Holdings Limited pursuant to the laws of the Province of Alberta despite paragraph 12 of the Syndicate agreement which provided that ‘‘The syndicate shall not be incorporated”. Obviously all members waived that provision. The purpose of incorporation, on the advice of the Syndicate’s solicitors and accountant, because with the new gravel agreement the land was now producing good revenue from its use, was that it became preferrable for income tax liability to be shareholders in a corporation rather than members of a syndicate as well as those benefits which are incidental to incorporation such as limited liability and the like. Further the Com- pany was a private one with a restriction on the transfer of shares. Some members of the Syndicate had been dilatory in meeting their annual assessments and the corporate form would permit the Company making the payments which could be more readily adjusted without the agreement for sale falling into default.

On January 4, 1961 the land was transferred by Ian G. Dickens, as trustee for the Syndicate to Cowtown Holdings Limited at a purchase price fixed at $133,369.69. No gain accrued to the members of the Syndicate by reason of this transaction.

The members of the Syndicate who became and remained shareholders in the Company were as follows:

Of the foregoing shareholders only Bruce McLean and Standard Holdings Ltd. are not respondents in these appeals and Angus MacDonald, who is not a shareholder, is a respondent.

On December 31, 1958 Gaudet had transferred one-half of one unit in the Syndicate to Moss.

In the memorandum of Association of Cowtown Holdings Ltd. the objects are set forth as follows :

8. The objects for which the company is established are:

To acquire by purchase, lease, exchange, concession or otherwise city lots, farm lands, mining or fruit lands, town sites, grazing and timber lands, and any description of real estate and real property, or any interest and rights therein legal or equitable or otherwise howsoever; to take, build upon, hold, own, maintain, work, develop, sell, lease, exchange, improve or otherwise deal in and dispose of such lots, lands, sites, real estate and real property or any interest therein, to deal with any portion of the lands and property so acquired, subdividing the same into building lots, and generally laying the same out

into lots, street and building sites for residential purposes or otherwise, and with power to construct streets thereon, neces- sary sewerage and drainage system, to build upon same for residential purposes or otherwise, to supply buildings so erected with electric light, heat, gas, water or other requisites.

To act as brokers and general agents for employment, and also for the sale and purchase of real estate and all interests therein, and for reward to procure real estate investments for any person; to act as selling agents for the owners of any real estate, subdivision, building sites, town sites or lands of any kind, or any interest therein and to take over and acquire from any person or corporation any agency exclusive or otherwise for the sale of any such lands, sites or interest therein, and to accept an assignment of and perform any contracts made by any such person with any other person or corporation for the sale of any such lands, sites or interests therein as agents or otherwise, and generally to act as real estate, house and rental agents, and as incidental thereto to carry on the business of fire insurance agents.

To buy, sell, exchange, lease or otherwise deal in, real estate and immovable property, and to negotiate for the purchase,

sale, exchange or lease of real estate and immovable property, and generally to carry on the business of real estate agents in all its branches.

To carry on any other trade or business which may seem to the company capable of being conveniently carried on in connection

with the above or calculated directly or indirectly to enhance the value of or render profitable any of the company’s property or rights.

Angus MacDonald had transferred his interest to his wife Lois MacDonald.

On November 30, 1960 Matheson transferred to Grant Smith 2/9 of one unit and Ian D. Dickens transferred to Grant Smith 2/9 of one unit and Lois MacDonald transferred to Grant Smith 2/9 of one unit.

On December 31, 1961 Moss transferred his 27 shares in the Company to Standard Holdings Limited.

On December 31, 1962 Crosstown Investments Ltd. transferred its 18 shares in the Company to Standard Holdings Ltd.

The transfers of units in the Syndicate and shares in the Company results in the shareholders in the Company being as I have listed them above.

Shortly before May 19, 1964, the date upon which an annual meeting of Cowtown Holdings Limited had been called, the Company was offered $625,000 for its land by a representative of Knowlton Realty Ltd., real estate brokers in Edmonton, on behalf of an undisclosed principal. An immediate decision on the offer was requested. Mr. Matheson, to whom the approach was made, wished to bring this unsolicited offer which he described as being a “bolt from the blue’’ to the attention of all the shareholders convened in the annual meeting and for that purpose requested and was granted an extension of time.

At the annual meeting the offer for the land from Knowlton Realty Ltd. excited great discussion among the shareholders.

Shortly before the annual meeting Drs. Warshawski and Lefebvre visited Calgary and had the opportunity to visit the land. Dr. Warshawski, whom I believe to have been raised on a farm, became extremely enthusiastic about the prospect of increasing the sale of topsoil and thereby further increasing the revenue from the land. In fact he and Dr. Lefebvre contemplated buying the shares of the other shareholders if they could raise the money to do so.

Drs. Kato and Clare, accompanied by Mr. Matheson had visited the land earlier and all three were confirmed in their conviction that the land afforded a substantial source of revenue for many future years.

Dr. Sereda was the prime motivator of the acceptance of the offer for the land for cogent reasons. First he thought the offer a very good one and that such an offer might not be repeated. Further he felt that the Company was not exploiting its business undertaking and possibilities to the full. The accounting for sales of topsoil was left to the owner of Circle ‘ ‘ J ’ ’ Ranches Ltd. and difficulties were experienced in obtaining satisfactory accounts and credits. It was only after the threat of a suit for an accounting that a satisfactory settlement was obtained. The Alberta Department of Highways had stockpiled a large amount of gravel excavated from the pits on the land and no satisfactory lease arrangement had been made in this respect. This was eventually done and constituted a further modest income to the Company. It was known that the owner of Circle “ J ’ ’ was growing crops on the land and grazing cattle thereon without any lease arrangements thereby denying the Company its legitimate income. He also felt that there was a conflict of interest in Standard Holdings Ltd. being a shareholder in the Company while its parent or related company held a gravel lease on part of the land and that the Company had to rely on the monthly returns of Standard Gravel for the accuracy of the Company’s compensation. Furthermore he felt that the gravel deposits not covered by Standard Gravel lease agreement were not being exploited at all. The shareholders were all resident in Edmonton, with the exception of Bruce McLean and Standard Holdings Ltd., practising their professions or business callings there and were unable to devote sufficient time to the affairs of the Company. These difficulties are those normally associated with absentee ownership.

On the other hand, Mr. Matheson testified that the property was returning a satisfactory income to the Company with a minimum of effort by its officers and shareholders and that it would be uneconomic to employ a resident manager who would not be more effective in achieving better results than those obtained by relying on the integrity of the owner of Circle J ’ and Standard Gravel.

Because of the wide divergence of opinion expressed by the shareholders as to the rejection or acceptance of the offer for the land by Knowlton Realty Ltd. the chairman, Dr. Clare, put the question to a ballot vote which was in favour of the rejection of the offer. Knowlton Realty Ltd. was advised forthwith of this rejection of their offer by the shareholders.

Mr. Thompson, the auditor of the Company testified that in 1961 there was a net return to the Company of $7,825, in 1962 a net return of $15,140, in 1963 a net return of $14,790 and to May 26, 1964 a net return of $4,525.

Dr. Sereda, despite the vote contrary to his view, was convinced that acceptance of the offer to buy the land was the correct decision in the circumstances.

The next day, May 20, 1964, he indicated to some of the other shareholders that he was desirous of selling his interest in the Company and telephoned the representative of Knowlton Realty Ltd. to ascertain if its principal would be interested in acquiring his shares. The answer was that the principal was not interested in acquiring the shares of an individual shareholder but would be interested in acquiring all of the outstanding shares and that the price for all such shares would be less than the price of $625,000 offered for the land.

Dr. Sereda telephoned some of the shareholders and wrote to every Shareholder arranging a meeting of the shareholders in their individual capacities on May 22, 1964. A lengthly discussion took place. Dr. Sereda in evidence described the tactics he used to achieve the end he desired. The majority were opposed to the sale of their shares. However by bringing to bear all his persuasive ability on those shareholders he considered to be waivering, he succeeded in obtaining a majority agreeing with his view that it was desirable to sell their shares. At last he succeeded in isolating the opposition to Dr. Warshawski, Ian Dickens and Douglas Matheson. Mr. Matheson succumbed on the assumption that the purchaser might purchase a controlling number of shares and the dissenters would be left holding a minority interest in a company controlled by a stranger rather than a harmonious group of friends well known to each other. Dickens, while opposed to the sale of his shares and after speaking to that effect, agreed to sell because of the small interest he held. Dr. Warshawski, whom I believe to have been the strongest opponent of selling out, was placed in the invidious position of being the last holdout and, if he persisted, he would stultify the wishes of all of the other shareholders. Therefore he too agreed to sell his shares.

Dr. Sereda and P. M. Mahoney, the solicitor for Standard Holdings Ltd. were appointed trustees for the shareholders and advised Knowlton Realty Ltd. that the shareholders were unanimously agreed to sell all their issued and outstanding 216 shares in the Company for $2,850 per share and the payment of shareholders’ loans to the Company aggregating $104,863.24. This amount of $104,863.24 represents the amounts advanced by the members of the Syndicate to meet payments under the option agreement and later by them as shareholders to meet payments under the agreement for sale which replaced the option agreement.

This offer was refused by Knowlton Realty Ltd. on behalf of its undisclosed principal but a counter offer was made being $2,000 per share and payment of $104,863.24 in shareholders’ loans.

Another meeting of individual shareholders was convened by Dr. Sereda at which this counter offer was accepted by all shareholders and the deal was closed accordingly.

To summarize the transaction and chain of events, farm land was purchased in 1957 from Circle ‘‘J’’ Ranches Ltd. for $123,000 by the members of Cowtown Syndicate and was then transferred from the Syndicate to Cowtown Holdings Ltd., a company formed by the members of the Syndicate at no advance in the purchase price. The full purchase price was paid in part by the members of the Syndicate and in part by the Company with money borrowed from its shareholders. The shares were sold to an undisclosed purchaser for $2,000 per share and $104,863.24 being the amount of the shareholders’ loans to the Company. The shares were sold for a total sum of $536,863.24. When the original purchase price of $123,000 is deducted from that amount the resultant gain was $413,863.24. The amount of this gain was distributed to the shareholders in proportion to their shareholdings. Each of the respondents was assessed by the Minister on the profit so derived.

In assessing the respondents as he did, the Minister did so on the assumptions that:

(1) the Cowtown Syndicate acquired the land with a view to trading, dealing or otherwise turning it to account for profit ;

(2) the transfer of the land from Cowtown Syndicate to Cowtown Holdings Ltd., and the subsequent sale of shares in Cowtown Holdings, Ltd., was merely an alternative method adopted by the respondents for trading in or dealing with the land; and

(3) any profit realized by the respondents on the sale of their shares in Cowtown Holdings Ltd. was income from a business within the meaning of Sections 3, 4 and 139(1) (e) of the Income Tax Act.

Obviously the basic premise underlying the Minister’s assumptions and consequent assessments was that the property was not acquired for revenue producing purposes but was acquired for the purpose of trading in the land at a profit so as to constitute a venture in the nature of trade.

Following upon that premise it was argued by counsel for the Minister that the transfer of the land from the Syndicate to the Company and the sale of shares in the Company was merely an alternative method adopted by the respondents to trade in the land.

For authority for this argument counsel for the Minister relied upon the decision of Cameron, J. in Ronald K. Fraser v. M.N.R., [1963] Ex. C.R. 334 at 345; [1963] C.T.C. 130 at 140, where he said:

Counsel for the appellant stressed the fact that the profits made by the appellant were not made by the sale of the land but by the sale of shares received on the transfer of the land to the two companies. That profit, it is said, is a capital profit. That profit, it is said, is a capital profit. I cannot agree with that submission. In my view, the appellant and Grisenthwaite, instead of selling the land as they might have done, adopted another method, namely, to cause two companies to be incorporated, sell the land for shares in these companies, and then sell the shares so received. That was the particular alternative method they chose to adopt in their real estate transactions.

The decision of Cameron, J. was unanimously confirmed on appeal by the Supreme Court of Canada, [1964] S.C.R. 657: [1964] C.T.C. 372. Judson, J. speaking for the Court said at page 661 [p. 376] :

Some point was made of the fact that the appellant did not in one case sell a store and in the other case vacant land but shares in two companies. I agree with Cameron, J. that this was merely an alternative method that they chose to adopt in putting through their real estate transactions. The fact that they incorporated companies to hold the real estate makes no difference. Associated London Properties, Ltd. v. Henriksen (H.M. Inspector of Taxes) (1944), 26 T.C. 46.

However, for the principles so expounded in the Ronald K. Fraser case (supra) to apply it must have been found (1) that the land was acquired for the purpose of turning it to account by sale at a profit, and (2) that the respondents in forming the Syndicate, transferring the land from the Syndicate to the Company, had in mind the continuing thought that the ultimate disposition of the land would be by means of the sale of shares in the Company. (See the comments of Gibson, J. on the principles of the Fraser case (supra) in G. S. Shipp et al. v. M.N.R., [1967] C.T.C. 330 at 336.)

It therefore seems to me that the first critical question to be determined is whether the gain here realized by the respondents was a mere enhancement of a capital asset acquired for revenue producing purposes or was it a gain made in an operation in the nature of a business in carrying out a scheme of profit making by acquiring the land speculatively for the sale thereof at a profit.

Counsel for the Minister, in support of his contention that the transaction here in question constituted a venture in the nature of trade, emphasized the intention expressed in paragraph 2 of the Syndicate agreement and in the objects for which the Company was incorporated as outlined in its memorandum of Association, both of which are quoted above.

In Balstone Farms Ltd. v. M.N.R., [1967] Ex. C.R. 217 ; [1966] C.T.C. 738, I commented on the significance of the object clauses of a company in this context. I repeat those comments which appear at page 228 [p. 749] :

However one is not entitled to infer from the circumstances that a company has been incorporated for trading purposes that a particular transaction in which it engages necessarily constitutes a part of the company’s trading operations. The fact that a particular transaction falls within the objects contemplated by the Letters Patent is merely a prima facie indication that a profit so derived is a profit derived from the business of the company; see Anderson Logging Co. v. The King, [1925] S.C.R. 45; [1926] A.C. 140; [1917-27] C.T.C. 210.

The question to be determined is what did the company do and whether what it did was a business.

Mr. Dickens, who was the draftsman of the Syndicate agreement and application for incorporation frankly acknowledges his inexperience in these matters and testified that he had sought to express the objects in as broad and all inclusive terms as possible, which I think he failed to do.

There was no attempt by the Syndicate or the Company to subdivide or sell the land. All that was done was to derive income that could be obtained from the land.

Each and every respondent testified that in contributing to the purchase of the land, it was their respective intentions to acquire revenue therefrom by the sale of sand and gravel, topsoil, and crop and grazing rentals and this, despite the fact that they were signatories to the Syndicate agreement and became shareholders in the Company. One of the medical respondents drew an apt analogy. He said that when a patient’s ailment had been diagnosed and an operation decided upon, the techniques of the operation was left to the skill of the surgeon and that this was what was done with the preparation of the legal documents here. It is significant to note that no profit was realized upon the transfer of the land from the Syndicate to the Company and that the Company did not sell the land pursuant to its objects, but that its shares were sold by the holders thereof. The Company, under different share ownership, continued in possession of the land.

The prospect of the subdivision of the land into lots for sale was remote and most unlikely because of the distance from the City of Calgary, the lack of services and the proximity of the explosives plant.

Several of the respondents, including Mr. Matheson, Dr. Clare, Dr. Kato, Dr. Lefebvre and Dr. Warshawski, made physical inspections of the land and were confirmed in their views formed upon the advice previously given to them that substantial revenue might be expected from the exploitation of the land’s resources. The other respondents who did not visit the land, relied on the opinions expressed to them by the other respondents and participants who had.

While it is true that, during the currency of the Syndicate agreement particularly and while the respondents were shareholders of the Company, the returns from the land did not actually put money in the pockets of the respondents, nevertheless, those returns did save the respondents’ pockets in that the payments under the agreement for sale were reduced accordingly and in one year there was a reduction in the shareholders’ loan account.

I am satisfied that each and every respondent, when contributing to the purchase of land, did so with the intention of realizing income therefrom by exploitation of the land’s natural resources to the exclusion of a profit from the sale of the land. In this respect I accept the testimony of the respondents each of whom testified to that effect.

Furthermore, I am confirmed in this conclusion by the facts that all of the respondents, with the exception of James Gibson, who was a retired merchant but engaged himself as a part time real estate salesman, and Lois MacDonald who is a housewife, are members of the legal and medical professions actively engaged therein to the exclusion of other occupations and that none of the respondents had a history of engaging in real estate speculation. No efforts were made to sell the land or advertise it for sale. The substantial offer received for the purchase of the land was unsolicited and completely unexpected. There was divergence of the opinion among the shareholders as to whether that offer should be accepted. In the first instance the majority of the shareholders of the Company rejected the offer because they foresaw better prospects in the continuing return from the land by reason of the lucrative sand and gravel agreement. It was certain that their money would be doubled or better over the currency of that agreement.

On the other hand, Dr. Sereda, and those minority shareholders who shared his view, was concerned about the failure to efficiently manage the land to the utmost advantage and about the other difficulties which follow from absentee ownership. He considered that the offer receiver was a good one, that it would not likely be repeated and he was convinced that no reasonable owner should refuse it. The views of Dr. Sereda eventually prevailed in the circumstances as above outlined.

I am certain that the evidence adduced and the arguments advanced before the Tax Appeal Board were, in substance, the same as the evidence adduced before me and the arguments presented to me. I agree with the learned member of the Tax Appeal Board that the normal ‘‘badges of trade’’ are not present in the circumstances of the present appeals. While I have expressed my reasons in my own words, I am in agreement with the conclusion reached by the learned member of the Tax Appeal Board and I am in substantial agreement with the reasons by which he reached that conclusion.

Accordingly I do not accept the basic premise advanced by counsel for the Minister that the land was acquired with a view to trading therein.

As I mentioned at the outset, the appeal against the assessment of Angus MacDonald is on a somewhat different footing than those of the other respondents. Mr. MacDonald was a member of the legal firm which included Mr. Matheson and Mr. Dickens and as such he became a member of the Syndicate. The respondent, Lois MacDonald, is his wife who came into funds in her own right which she wished to invest. On the her husband’s advice she purchased from him his interest in the Syn- dicate. In preparing his income tax return he claimed a deduction as a married person whose spouse had no income. Therefore if the amount which Lois MacDonald gained should be found to be taxable income, then her husband’s claim for a deduction should be disallowed and he should be re-assessed accordingly. The success or failure of the appeal against the respondent, Angus MacDonald therefore follows the success or failure of the assessment against his wife, the respondent Lois MacDonald.

As I understand the submissions of counsel for the respondents they were fourfold.

(1) The transfer of the land by the Syndicate to the Company was not a transfer of land by the members of the Syndicate of an interest in land but a transfer of their Syndicate units and this follows from the law of property and the equitable doctrine of conversion that what was held and transferred by the members of the Syndicate was not an interest in land but a Syndicate interest.

(2) The subsequent sale of shares in the Company by the respondents was not a sale of the land and that the law of taxation precludes ignoring the legal structure.

(3) The transaction in question, shorn of the legal implications of his first two submissions was, on the facts, a clear case of an enhanced value realized upon the sale of a capital asset.

(4) Finally that the tax consequences here sought to be imposed were not within the contemplation of the Income Tax Act, it being tantamount to a tax on distribution of assets when in fact the assets remained with the Company.

In view of the conclusion I have reached it is unnecessary for me to comment upon the first, second and fourth submissions of counsel for the respondents.

The appeals are dismissed with costs to the respondents. CITY PARKING PROPERTIES AND DEVELOPMENT LIMITED, Appellant,

and

MINISTER OF NATIONAL REVENUE, Respondent.

Exchequer Court of Canada (Kerr, J.), August 22, 1969, on appeal from an assessment of the Minister of National Revenue.

Income tax—Federal—Income Tax Act, R.S.C. 1952, c. 148—Section 20(6)(g)—Capital cost allowance—Apportionment of purchase price of land and building as between land and building.

In 1962 the appellant purchased a large parcel of improved real estate in downtown Toronto for $1,850,000 and apportioned $952,733 thereof to the building for capital cost allowance purposes. The property was on the fringe of the prime area for office buildings and was and remained partly vacant. Six years later it was demolished and the site used for a parking lot. In the Minister’s view the amount of the price reasonably attributable to the building for the purpose of Section 20(6) (g) was only $420,387. An appraiser called as a witness for the appellant placed a value of $690,000 on the building and an appraiser called by the Minister placed values of $200,000 and $392,000 on it, using two different approaches in his calculations.

HELD:

The balance of probability was that the portion of the purchase price that should be attributed to the building for the purposes of Section 20(6) (g) was approximately, and not less than, $510,000, which value could be supported both on income yield calculations and by the municipal assessment ratio. Appeal allowed and the assessment referred back to the Minister for re-assessment accordingly.

W. D. Goodman, Q.C., and Franklyn Cappell, for the Appellant.

N. A. Chalmers, Q.C., and David G. Algie, for the Respondent.

KERR, J.:—This is an appeal from an assessment of income tax for the appellant’s 1965 taxation year. The question for determination is what part of the cost of certain property in Toronto, consisting of land and an office building, purchased by the appellant, can reasonably be regarded as being the ‘ consideration ’ ’ for ‘ disposition” of the building for the purposes of Section 20(6)

(g) of the Income Tax Act.

In April 1962 the appellant purchased the property from The Toronto Stock Exchange Building Company Limited at a price of $1,850,000. Incidental legal fees of $5,322.60 brought the total cost up to $1,855,322.60.

In its tax returns for 1962, 1963, 1964 and 1965 the appellant allocated $952,733.71 (out of the total cost of $1,855,322.60) to the building as the amount reasonably attributable thereto, and claimed capital cost allowances accordingly.

In the Reply to the Notice of Appeal the respondent said that in re-assessing for the appellant’s 1965 taxation year he acted upon the following assumptions, inter alia :

— that the part of the said amount of $1,850,000 that could reasonably be regarded as being the consideration for the disposition of the building was an amount not exceeding $419,647. Para. 5(c) ;

— that as an incident of the purchase of the property the appellant incurred legal fees of $5,322.60, of which the respondent attributed $731.77 to the cost of acquiring the building, with the result that the appellant was deemed to have acquired the building at a total capital cost to it of $420,387.77*. [1] Para. 6.

Section 20(6) (g) of the Act reads as follows:

20. (6) For the purpose of this section and regulations made under paragraph (a) of subsection (1) of section 11, the following 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;

At the date of its purchase the property consisted of a main block of land containing about 56,000 sq. feet, being the entire city block bounded by King, Court, Toronto and Church streets; and an adjacent smaller parcel of land, about 2773 sq. feet in area, at the northwest corner of Court and Church streets, used as a parking lot. The building concerned was on part of the main block of land. It was an 8-storey office building which for many years up until 1958 was the Head Office of Imperial Oil Limited. The remainder of the main block was used as a parking lot. The building was torn down early in 1968 and ever since then the entire land area has been used as a parking lot.

The property and its neighbourhood was described by Robert A. Davis and James E. Farr, who were called as expert witnesses. They are competent and experienced real estate appraisers. Their descriptions do not differ materially and I shall repeat, verbatim, portions of the description given in F'arr’s appraisal Report, for convenience and because it has more detail than there is in the affidavit of Davis.

DESCRIPTION OF LANDS

(1) SITE OF 92 KING STREET EAST

OR NO. 56 CHURCH STREET

This site formed part of a larger ownership unit which is more particularly described below under item (2).

The lot size which was assessed to the building for municipal taxation purposes was as follows:

(a) King Street East	55 ft. by 155 ft. 6 ins. or 8,553 sq. ft.
(b) Court Street	82 ft. by 75 ft. 7 ins. or 6,197 sq. ft.
Total Court Street
Frontage	137 ft.	Total Area	14,750 sq. ft.

These dimensions coincide more or less with the actual building frontage on King Street East and Church Street but include an L-shaped laneway running southerly from the Court Street for 57 ft. 8% ins. and then easterly to the subject building. The assessed lot has been adopted as the appropriate curtilage for the building.

(2) TOTAL AREA OWNED AT THE LOCATION

PARCEL 1—358 feet 8^ ins. frontage on the north side of King Street East, 155 feet seven inches on the west side of Church Street, 358 feet 7 inches on the south side of Court Street and 156 feet 6% ins. on the east side of Toronto Street. The computed area is 56,162 square feet.

PARCEL 2—27 feet 8% inches frontage on the west side of Church Sreet, by a flankage on the north side of Court Street of 100 feet, and a computed area of 2,773 square feet.

Total Area of ownership—58,935 sq. ft.

IMPROVEMENTS

Erected on the site of No. 92 King Street East, was a steel framed, masonry clad, eight-storey plus basement office building with a tar felt and gravel roof. Heat was supplied by oil fired steam boilers located in the basement. There were three manual passenger elevators and two runs of steel stairs; one on either side of the elevator wells. There were two main entrances; one from Church Street and the other from King Street.

The main lobby had a terrazzo floor, commercial marble walls and decorated plaster ceilings. A section of the northerly part of the building was used for bank purposes. The Second to the Seventh Floors were laid out according to a typical floor plan, with partitions chiefly of masonry, but some others of frame and glass with some flex board. All floors were served by the three passenger elevators and stairs. Lobbies had terrazzo floors with marble wainscotting, corridor and office floors were covered with linoleum, and walls and ceilings were plastered and painted. Some offices had been treated with acoustic ceilings. Windows on street frontages had bronze covered wood sash, others were steel sash with wired glass. Washrooms for both sexes were located on various floors.

The eighth floor was originally equipped as executive offices with special plumbing. Various offices were wood panelled; a former board room was located on this floor.

Floor areas were computed as follows:

	Gross Floor	Full Floor	Net Rentable
	Area	Rentable Area	Floor Area
	sq. ft.	sq. ft.	sq. ft.
Ground	12,265	7,330	7,330
Second	12,023	6,975	5,500
Third	11,783	9,670	8,193
Fourth	11,783	9,670	8,193
Fifth	11,783	9,670	8,193
Sixth	11,783	9,670	8,193
Seventh	11,783	9,670	8,193
Eighth	11,783	9,670	8,193
Total above grade	94,986	72,325	61,988
Basement	12,265	7,140	7,140
Total	107,251	79,465	69,128
	NEIGHBOURHOOD

The subject property is located in the easterly part of downtown Toronto. The area is commercial in character and the permitted uses under the prevailing land use controls are for this use.

The ownership, with the exception of a small land parcel at the northeast corner of Church and Court Street, comprises the city block bounded on the south by King Street East, on the east by Church Street, on the north by Court Street and on the west by Toronto Street. King Street is an important east-west traffic artery and the heart of the financial district, at King and Bay Streets, lies three city blocks to the west. Church Street is a main north-south traffic artery. The King Street Station of the Yonge Street Subway lies two blocks to the west, at the junction of King and Yonge Streets, and there is a streetcar service on King Street. One block to the north of King Street and parallel to it lies Adelaide Street, an important one-way traffic artery leading to the Don Valley Parkway.

The lands to the east of the property, fronting the east side of Church Street, comprise the site of St. James’ Cathedral complex. The west side of Church Street, immediately to the north of that part of the ownership, which comprises a vacant land parcel at the northwest corner of Court and Church Streets, is occupied by No. 66 Church Street, which is a four-storey older brick commercial structure. To the west of the aforementioned vacant parcel, at the corner of Church and Court Streets, lies a parking lot fronting the north side of Court Street. To the west of this lot, at the northeast corner of Court and Toronto Street, is No. 15 Toronto Street (The Hiram Walker-Gooderham Worts Building), which is a modern eleven-storey office building completed in late 1961. North of No. 15 Toronto Street lies the premises of the Consumers’ Gas Co. which are of some age and flank the south side of Adelaide Street. The north frontage of Adelaide Street East, opposite the north end of Toronto Street, forms the site of the new Dominion Government office complex, known as the Mackenzie Building.

On the west side of Toronto Street, at the southwest corner of Adelaide Street, is No. 36 Toronto Street, which is the older ten- storey office building of the Excelsior Life Insurance Company. South of this structure, on the west side of Toronto Street and opposite the Hiram Walker Building, lay the Shaw & Begg Building, which was an older five-storey office structure. This building was purchased in February 1962 by the Excelsior Life Insurance Company and was wrecked and is now the site of No. 20 Toronto Street, a modern fourteen-storey office building known as the New Excelsior Life Building; this was completed in 1965. South of No. 20 Toronto Street is the historic original two-storey post office structure (restored as the headquarters of the Argus Corporation), and south of that, at the northwest corner of King and Toronto Streets, is an older five-storey structure housing the Letros Tavern. West of this structure and fronting the north side of King Street East lies the new offices of International Business Machines, and west of this at the northeast corner of King and Victoria Streets is the modern Fidelity Insurance Company building.

The three to five storey buildings at the northwest corner of King and Victoria Streets housed the National Trust Company but this Corporation agreed to lease space in 1961 in a projected new building at No. 21 King Street East, on the opposite side of the street from their former premises. This modern twenty-one storey office structure has a rentable area of about 300,000 sq. ft. and stands at the southwest corner of King and Melinda Streets. The former National Trust property has been sold and is now the site of a new high rise office building. The southeast corner of this junction is occupied by the King Edward Sheraton Hotel which extends easterly along the south side of King Street East to its intersection with Leader Lane.

The southeast corner of Leader Lane is given over to a car park and east of this are three older three-storey masonry commercial structures with ground floor retail and service stores. To the east of this is a somewhat similar four-storey brick building. East of this, at No. 91 King Street East, is the four-storey masonry constructed Albany Club, and then a five-storey brick commercial structure being No. 95 King Street East. The next property to the east is located at the southwest corner of the junction of King and Church Streets and consists of a car parking lot.

The southeast corner of Church and King Streets is the site of an old four-storey brick building which is leased by Darrigo Brothers Fruit Company from the City of Toronto. East of this property are three older three-storey brick structures each given over to retail or showroom premises on the ground floor.

The ground floor area of the building was estimated at 12,130 and 12,265 sq. feet by Davis and Farr, respectively.

The appellant is a company incorporated under the laws of the Province of Ontario. Evidence in respect of the purchase and use of the subject property was given by W. Bernard Herman, president of the company. For the past 30 years he had also been chief executive officer of an affiliated company, City Parking Limited, which operates and manages some 150 parking facilities in various places in Canada, and he is and has been primarily responsible for acquiring properties for the several affiliated companies, having made numerous purchases each year. The purchase of this property was negotiated under his direction and approved by him. There were communications and negotiations between City Parking Limited and Wood, Fleming & Company Limited, who were real estate brokers and agents for the owner, The Toronto Stock Exchange Building Company Limited, commencing in September 1961, pertaining to the property, its use, revenues, expenses, taxes, etc., which culminated in an Agreement of Purchase and Sale, dated February 1, 1962, taken in the name of City Parking Limited, and a subsequent Deed, Exhibit B, to the appellant, dated April 2, 1962, for a consideration of $1,850,000, of which $500,000 was paid in cash and the remaining $1,350,000 was secured by a mortgage, Exhibit C, of the property to the vendor.

At the date of the sale there were leases and lease commitments of various parts of the property, as shown in Appendix “B” to the Agreement of Purchase and Sale, including a lease of portions of the building to the Municipality of Metropolitan Toronto, at approximately $7,000 per month, expiring on September 30, 1965, with an option to renew for an additional year if the lessor did not require the premises for its own use, and a lease to the Royal Bank of Canada, at $1,640 per month, expiring on September 30, 1965. The western part of the main block of land was leased to the Parking Authority of Toronto on a rental basis of 50% of the gross revenues, with a minimum guarantee of $80,000 for 12 months, the lessor paying the realty taxes. Figures were given showing that the gross revenues from the parking lot were $110,986.42 in 1960 and $85,153.79 for the period January to September, inclusive, in 1961, and, consequently, the guaranteed $80,000 was payable in each of those years.

When the property was purchased the building was not fully rented, 2 full floors and portions of other floors were vacant, and, except for the 2 years 1966 and 1967 during which the building was rented to Eaton Centre Limited, it was not found possible to rent it completely. The Eaton lease was for 1966 and was renewed for 1967, on what was described as a ‘‘net, net’’ basis, with the lessee paying all operating expenses and realty taxes and $120,000 per year rent.

An operating statement, Exhibit 17, shows revenues, expenses and net profit (without provision for mortgage and interest expense and depreciation) of the appellant for the years 1962 to 1967, inclusive, in respect of the office building and the parking lots. The following figures are extracted therefrom :

In re the building:

That same exhibit similarly shows revenues, expenses and net profit (or loss) for those years of Empire Parking Limited, an affiliated company which operated the large parking lot in 1962 and 1963, and of Empire Parking Limited and City Parking Canada Limited, another affiliate, which operated the lot in 1964 and 1965-1967, respectively. The following figures are extracted:

A steel and reinforced concrete parking deck having 100 car spaces was erected in 1963 at a cost of $200,000, and parking revenues increased thereafter. Herman said that to make the deck economical it would have to be kept for 12 to 15 years.

The building was demolished immediately after the Eaton tenancy ended. Herman said that up until the decision to demolish was taken the company was seeking a major tenant for a 10-year lease and was negotiating with several prospective tenants, one of which was Ryerson Institute, but the situation then was that the large new Toronto-Dominion and Richmond- Adelaide Centres were attracting tenants, other office space in the downtown business district was being thrown on the market, and a major tenant for the building could not be found. The choices open to the appellant were to rent the building piecemeal, remodel it or demolish it. The company chose to demolish it and make use of the entire land as a parking lot.

The possibility of demolishing the building has been considered at earlier times, for in a memorandum, Exhibit E, dated December 21, 1961, to Herman from John Walker, who at that time was comptroller of the appellant company, demolition of the building after 4 years to give 80 additional parking spaces was set forth as an option, but Herman said that it was rejected; and in the mortgage that was entered into at the time of the purchase of the property the appellant, as mortgagor, was given the right, on making an additional payment of $100,000 on account of the principal sum, to demolish the building without being deemed to have thereby committed waste. Herman said that the actual demolition early in 1968 was not pursuant to any plan or intention when the property was purchased in 1962.

Exhibit 18 is a schedule of municipal assessments and realty taxes, which shows, inter alia, that in each of the years 1962 to 1967, inclusive, the land at 92 King Street East was assessed at $177,900, the office building at $378,000, and the main parking lot (not including the deck erected in 1963) at $494,000, except for an increase to $519,250 in 1966 and 1967 ; and that in those years the realty taxes progressively increased to $54,404 from approximately $36,400* [2] on the building and its land, and to $56,371 from about $33,630 [3] on the main parking lot. Davis said that the ratio of assessment to market value of commercial properties was 40 to 50 per cent.

Herman made a valuation of the building, for the purpose of allocating capital cost in the financial statements and tax returns of the company, by a method which, as I understand his evidence, may be generally described as follows, using approximate figures. Taking the guaranteed rent figure of $80,000 per year which the Parking Authority of Toronto was paying for the main parking lot when the appellant bought the property, and deducting therefrom realty taxes estimated at $30,000, he calculated that the parking lot would yield a net annual return of $50,000¢. [4] He then capitalized that net sum on a 7% basis and arrived at the amount of $700,000 as the value of the parking lot. Deducting that sum from the $1,850,000 purchase price of the property, there would be left $1,150,000 for the building and the land upon which it was situated or which was used therewith§. [5] To arrive at the value of the building itself, he allowed $200,000 for its land (based on 20,000 sq. feet at $10 per foot) and deducting that sum from $1,150,000 he attributed $950,000 to the building. He felt that the building could be fully rented at $2.50 to $2.75 per sq. foot and in time even edged up to $3.00 to $3.25, to give a gross revenue of $210,000 to $240,000 per year, against which there would be a total of operating expenses and realty taxes of $100,000, and a net yield, before payment of interest on borrowed money, of $120,000. This yield would be the equivalent of close to 10% on $1,150,000, and he thought it would tend to confirm that amount as the value of the building and its land. To recapitulate, he allocated the purchase price of $1,850,000 as follows: parking lot land $700,000; office building $950,000; land serving the office building $200,000.

Herman said that in the period when acquisition of the property was being considered he had several opinions respecting it and in evaluating it for the appellant he had regard for the property as a whole and its variegated use, and in his opinion at the time of purchase the use to which it was being put as an office building and parking lot was its highest and best use at that time. He was called to testify as an officer of the appellant company who had pertinent knowledge and experience and who had been responsible for advising the company and evaluating the property at the time of purchase and allocating the cost in connection with its financial statements and tax returns. He was not called as an expert witness within the context of Rule 164B of the Exchequer Court Rules. His evidence pertaining to the value of the property and its several parts and to its potential and highest and best use was objected to by counsel for the respondent on the grounds that the witness was not competent to give evidence of that nature and that there was a lack of compliance with Rule 164B ; but, in my view, having regard to Herman’s position with the appellant and affiliated companies and to the part he played in the acquisition of the property and in the allocation of its cost for the company’s purposes, I regard his evidence as relevant, useful and receivable and I have considered it in determining the appeal.

Mr. Davis, the appraiser who was called as witness by the appellant, made a valuation of the land as of the purchase date on the assumption that it was then vacant and unimproved, and he concluded that the value of the building was the difference between the purchase price and his estimate of the value of the land. He also concluded that the legal uses that would yield the highest value, as of the purchase date, would be the continued use of the building as an office building and the use of most of the land for parking purposes, until such time as a higher and better use would become apparent.

In order to estimate the value of the land as if vacant he divided it into 7 parcels, giving as a reason that land sales in the neighbourhood were of areas more or less equivalent in size to such parcels and there had been no comparable sales of a whole block prior to this sale. A sketch of the divisions made by him, which also indicates his valuations per square foot, was attached as Schedule “B” to his affidavit and I reproduce it next.

Davis used 20 sales for comparative purposes, as set forth in his affidavit, and concluded that the purchase price of $1,850,000 should be allocated $1,160,000 to the land and $690,000 to the building.

Mr. Farr, the appraiser who was called as a witness by the respondent, placed a market valuation of $1,648,843, rounded to $1,650,000 ($28 per sq. foot), on all of the land, as if vacant at the time of purchase ; and $200,000 ($1,850,000 minus $1,650,000) on the building, as its market value, i. e., the amount by which its presence increases the value or selling price of the land portion of the whole property in the market place.

In making his valuation he divided the land into 6 parcels, which are shown, with their valuations, as Item 2 in Appendix “C” to his Report, which is reproduced next.

Add: 25% corner influence $ 24,091. $ 208,531. ($27.33 sf)

on 40'
Total main block	56,162 sf	$1,461,135.		($26.00 sf)
Add: 10% allowance for
plottage owing to		$ 146,113.
large assembled site		—
Total value for main block		$1,607,248.		($28.61 sf)
(6) 27'8%" x 100’ = 2,773 sf
at $1,500. ff or $15.00 sf		$	41,595.
Total land area	58,935 sf
and value		$1,648,843.		($28.00 sf)
	Rounded — - $1,650,000.

Farr also approached the problem by considering specifically the building site (1.e. the portion of the land occupied by the building or committed to it) and disregarding the remainder of the land, and by that method arrived at a valuation of $336,000 for the building site, averaging $22.75 per sq. foot, as shown in Item 1 in Appendix “ C ’ ’ to his Report, as follows:

Appendix “C”

BOSLEY ASSOCIATES

LAND VALUES

1. SITE VALUE — NO. 92 KING STREET EAST

AS AT APRIL 2nd, 1962

Breakdown for valuation purposes:

(a) 55’ X 80° — 4,400 sq. ft. at $2,182. fr. ft.

or $27.27 sq. ft.		$120,000.
Add: 25% corner influence on 40’		$ 21,820. $141,820.
(b) 75'7" X 100'	7,556 sq. ft. at $1,820. fr. ft.
or $18.20 sq. ft.		$137,420.
Add: 25% corner influence on 40'		$ 18,200. $155,620.
(c) 37' X 75'7"	2,794 sq. ft. at $1,045. fr. ft.
or $13.84 sq. ft.		$ 38,680.
Total	14,750 sq. ft.	$336,120.

Rounded (say) — $366,000. (Av. $22.75 sq. ft.)

Farr also made a calculation of projected estimated gross revenues and expenses and net revenue of the building, Appendix “D” to his Report*, [6] which shows potential gross rental revenue of $183,837 per year, and a net revenue of $65,563, before depreciation and debt service ; he deducted $23,520 as income imputable to the site, calculated at 7% of the site valuation of $336,000; he thereby obtained a figure of $42,048 as income attributable to the building; and by giving a life of 20 years to the building and capitalizing that income at 9.82% he arrived at a value of $391,840 for the building, and, adding $336,000 for the site, a rounded figure of $728,000 for the building and its site.

Farr also made another estimate of the site value of the whole property, assuming that the building existed and prevented the whole of the land from being available for development, as shown in Item 3 of his Appendix ‘‘C’’, as follows :

3. SITE VALUE OF WHOLE OWNERSHIP ASSUMING PRESENCE OF NO. 92 KING STREET EAST

BUILDING AND THAT THE WHOLE AREA WAS NOT

AVAILABLE FOR DEVELOPMENT
Value of land in ownership as in Item
No. 2 of this Appendix	$1,648,843. ($28 s.f.)
Deduct an allowance to reflect the non
availability of the whole block for de
velopment as a unit with a consequent
diminution in land value — 10%	$ 164,884.
Site value of whole ownership (58,935 s.f.)
with part committed to the structure	$1,483,959. ($25 s.f.)
Deduct value of building site as in Item
No. 1 of this Appendix	$ 336,000. ($22.75 s.f.)
Value of actual vacant land (44,185 s.f.)
reflecting the presence of the No. 92
King Street structure	$1,147,959. ($26 s.f.)
*For details, see said Appendix “D”.

Farr’s estimates of the value of the building therefore varied, depending on the methods and assumptions, being a minimum of $200,000 on the basis of the whole of the property; and a maximum of $392,000 on the basis of the building site only and the building, as a developed unit.

In reaching the estimate of $1,648,843 for the land, Farr used a figure of $1,461,135 ($26 per sq. ft.) for the main block of land and added 10% to it for plotting or assemblage of the whole block; and a figure of $41,595 for the small parking lot, at $15 per sq. ft. He said that by 1962 there was a trend towards construction of large buildings which required assemblage of correspondingly large sites.

His opinion was that the highest and best use of the property, pending a comprehensive re-development, was the use to which it was being put in 1962.

He provided a list of 29 land sales and 2 office building sales that assisted him in making his valuations.

Reproduced next is a map of the area, which is part of Appendix ‘‘A’’ to Farr’s Report. It gives a good indication of the subject property and its neighbourhood, and it shows, in circled numerals, the land sales listed by Farr.

I have endeavoured to match Farr’s sales with the sales listed by Davis and it appears to me that the following sales* [7] are included in both lists.

Davis also regarded as particularly comparable his Sale No. 2, not on Farr’s list, which was a lease given in October 1960 for 9,417 sq. ft. of land at the N.E. corner of Church and Lombard streets, for a parking lot, to which he gave a. value of $7.58 per sq. ft.; and on his Sale No. 15, not on Farr’s list, in July 1963, of 4,632 sq. ft. of land on the S. side of King Street, on which there is a 4-storey building, at a price of $130,000, about $28 per sq. ft, without deducting anything for the value of the building. He thought the land value would be considerably less than $28 per sq. ft.

Farr’s sales, not listed by Davis, included Sale No. 25, in December 1967, of 5,136 sq. ft. of land on Colborne Street, at a price of $80,000, about $15.5 per sq. ft; and Sale No. 24, in December 1958, of 1,707 sq. ft. of land on Colborne Street, at a price of $20,000, about $11.7 per sq. ft.

I am satisfied that the purchase price of $1,850,000, which was negotiated at arm’s length, was a fair and reasonable price and equivalent to the market value of the whole property, the land and the building, at the date of its purchase. The reasonableness of the purchase price is not in issue. What the Court is here primarily concerned with is the reasonableness, or otherwise, of the amount regarded by the respondent as the consideration for disposition of the building, within the context of Section 20(6)

(g) of the Act.

I accept Herman’s evidence that the building was acquired for the purpose of producing income, notwithstanding that it was demolished about 6 years later and that its demolition was one of the options considered (and rejected) when its purchase was under consideration. I am satisfied that in the negotiations and sale the purchase price was attributable in the minds of the parties partly to the land and partly, and substantially, to the building.

For convenience, I will re-capitulate here the several amounts put forward as attributable to the building, and I will comment on them.

Davis placed a market valuation of $690,000 on the building.

Farr gave valuations of $200,000 on an overall market value approach and $392,000 on an investment value approach.

The appellant allocated $952,733 of the cost of acquisition as the amount reasonably attributable to the building for income tax purposes.

The respondent regarded $419,647 as the portion of the purchase price of $1,850,000 that can reasonably be regarded as being the consideration for the disposition of the building. Legal fees of $731.77 were added, to bring the aggregate attributable to the acquisition of the building by the appellant to $420,387.

In respect of the amount put forward by the appellant, I have regard for Herman’s extensive and practical experience in the market as a buyer of real estate and the fact that the appellant invested and committed a large sum to the purchase of the property. The appellant also has a more real financial interest, as compared with the interest of the appraisers. However, Herman has an interest also in endeavouring to allocate a maximum amount to the building for income tax purposes. In making his apportionment he took the actual current net revenue from the parking lot, and assumed no increase in that revenue, to arrive at the parking lot valuation; and, after attributing a certain amount to all the land and the remainder of the purchase price to the building, he used an estimate of prospective revenues from the building, and assumed an increase in those revenues, in support of his valuation of the building. It seems to me that he over-estimated the prospective revenues from the building, for the net revenue from the building in the year of purchase was $27,096 for the 9 months April-December; $41,590 in 1963; $42,618 in 1964; $41,282 in 1965 ; and only in the years 1966 and 1967, when Eatons had a lease in circumstances peculiar to Eatons, did the net revenue from the building reach the $120,000 mark which Herman used in making his apportionment. The opening of the Toronto-Dominion Centre no doubt militated against full occupancy of the building at the increased rents contemplated by Herman, but even before that Centre came into being the building was not fully rented and the rents were about $2.50 per sq. ft. He also applied a value of $10 per sq. ft. to the building site*, [8] which, in my view is on the low side and not supported by the evidence as a whole.

The valuation made by Davis was based largely on what he considered to be comparable sales, coupled with the municipal assessments on the land and building. He did not apply a revenue approach. He said that his Sales Nos. 2, 3, 8, 9 and 15 offered the most direct evidence of value. It seems to me that his Sale No. 2 is hardly comparable with any part of the subject land. His Sales Nos. 3 and 9 on Toronto Street, near the N.W. corner of the building, are listed by Farr also. The land in No. 9 on the

W. side of Toronto Street has a higher value per sq. ft. than the land in No. 3 on the E. side. His sale No. 15, on the N. side of King Street, opposite the subject land, has a building on it and no apportionment is made for the building, which may have a little or a considerable value. His Sale No. 8, on the N. side of King Street, at Church Street, is opposite the eastern portion of the subject property, and his Sale No. 18 is on the same side of King Street opposite the western portion of the property. The more westerly parcel shows a higher sq. ft. value than the easterly parcel. Farr’s Sale No. 15 is between those parcels, as is also a parcel of land which Herman said was repeatedly offered to and refused by him at about $12 per sq. ft.

As already stated, Farr used different approaches to arrive at his valuations of the building, $200,000 on an overall market value approach, $392,000 on an investment value approach. In 1963, the first full year of ownership by the appellant, the net profit from the building was $41,590 (Exhibit 17). In the light of that profit it seems to me that Farr’s valuation of $200,000 is unduly low. His valuation of the land itself at $1,650,000 is hardly supported by the income actually derived from it when used as a parking lot. Factors in his investment approach include the value he gave to the building site and his projected estimate of net revenue from the building. If either of those amounts was different, the estimate of the value of the building would be correspondingly different.

All of the sales listed by Davis and Farr are in respect of parcels considerably smaller than the subject property. They do not show a supply of or a demand for blocks of land or property comparable to the subject property, in its vicinity. It does not appear to me that any of those sales is so directly comparable to the subject property as to provide a reliable yardstick for measuring the value of the land or building in question. They do, however, warrant a generalization that land values are higher west of Toronto Street than east thereof, that the most valuable street frontage of the subject land is on Toronto Street, and that the land value of the most easterly portion of the property, i.e., the building site fronting on Church Street, opposite the Cathedral. is less than the land value of the portion west thereof, on a sq. foot basis.

I am reluctant to adopt any single approach to the determination of the apportionment of the purchase price, as between the land and the building, or, to be more exact, to the determination of the amount that can reasonably be regarded as being the consideration for the disposition of the building. There is no mathematical formula or yardstick or method known to me, the use of which will inevitably lead to an accurate valuation or apportionment in the present case. The appraisers, Davis and Farr, differed substantially in their valuations as between themselves. Their valuations necessarily involved a large measure of personal judgment, and their opinions — and the opinion of Herman — as to the value of the land and the building, are to be weighed in the context of the information and suppositions on which they were based and the reasoning applied by them.

Having regard to the evidence as to sales, the location, size and nature of the property, the uses to which it was being put at the time of purchase and its potential at that time for use in the future, the actual and reasonably prospective earnings from the several parts, and the municipal assessments, and applying my own judgment thereto, I think the balance of probability is that the portion of the purchase price that should be attributed to the building for the purposes of Section 20(6) (g) of the Act is $510,000 or approximately that amount, but not less.

My apportionment of $510,000 for the building may be tested in at least two ways, (a) on an income basis, (b) on a municipal assessment ratio basis. These approaches are not infallible and they do not provide governing tests, but I think that they can be considered to be useful in looking to see whether $510,000 for the building is reasonable or manifestly or probably out of line.

First, the income approach*. [9] Taking Farr’s figure of the net rentable area of the building, 69,128 square feet, and assuming rent at $2.75 per sq. ft. (which was, I think reasonably foreseeable when the property was purchased), and deducting Farr’s 5% for vacancy and bad debts, we get gross rental of $180,597. Deducting from that amount Farr’s 5% of the gross rental for management, $9,029, and his estimate of $100,350 for operating expenses, we get a net revenue of $71,218 (as compared with Farr’s $65,563) for the building and its land. I took 14,750 sq. ft. as the area of the building sitet. [10] In my opinion a fair valuation of the building site would be about $16 per sq. ft. or $236,000 in all. Applying 7%, which was used by both Farr and Herman in capitalizing land revenues, to that $256,000, there would be income attributable to the site of $16,520, leaving $54,698 as the building income. Applying to that amount the percentage of 9.32 used by Farr gives a value of $509,785 to the building.

The assessment ratio approach. Municipal assessment is not a determining or decisive factor and, in many situations, is not a reliable guide in appraising the value of property, but it is relevant and may provide some assistance in the present case. In 1962 the municipal assessments, as shown in Exhibit 18, were $177,900 for the building site, $378,000 for the building, $494,000 for the main parking lot, and $9,800 for the small parking lot, a total of $1,059,700. The building amount is about 35.6% of the total. Applying that ratio to $1,850,000 gives $519,663 for the building.

The appeal is, therefore, allowed with costs, and the assessment is referred back to the respondent for re-assessment on the basis that, for the purpose of Section 20(6) (g) of the Act, the portion of the $1,850,000 purchase price of the property that can reasonably be regarded as being the consideration for disposition of the building is $510,000.