The Chairman:—This is the appeal of Dr Harold T Robbins from an assessment in respect of the 1973 taxation year.
Issues
There are two issues to be determined in this appeal dealing with the allocation of value between land and buildings on the disposition of the property. The first issue is whether the Minister can allocate a value for the building different from that agreed to by the parties in an arm’s length transaction. The second issue is whether the value allocated to the building by the Minister, in the circumstances, is reasonable and in accordance with subsection 68(1) of the Income Tax Act, SC 1970-71-72, c 63 as amended.
Assessment
The appellant sold an apartment building in 1973 for $847,000. The pertinent agreement of sale allocated a value of $7,000 for equipment, $540,000 for building and improvements and $300,000 for the land.
The undepreciated capital cost of the building on July 31, 1972, was $533,454.11. In filing his tax returns the appellant placed a net value of disposition on the undepreciated capital cost of the building of $529,012 and claimed a terminal loss of $4,442.11.
By letter dated October 27, 1977, the respondent revised his Original position, amending thereby paragraphs 1(c), 3, 4(h) 4(i), 6 and 7 of his reply to notice of appeal. Said letter reads as follows:
October 27, 1977.
Dear Sir:
RE: Dr Harold T Robbins v MNR
Our File: TO 63205-1
The respondent the Minister of National Revenue has reviewed his position in the above appeal. His revised position is as follows:
1. the part of the sale price of $847,000 for the land, buildings and equipment at 130 Bellamy Road, Scarborough that can reasonably be regarded as consideration for the disposition of the building is $608,000 and not $620,000 as referred to in paragraphs 1(c), 4(h), 4(i) and 6 of the reply to notice of appeal;
2. aS a result of paragraph 1 above, the net proceeds of disposition of the Said building to the appellant are the amount of $595,626 and not $607,383.92 as referred to in paragraphs 1(c) and 4(i) of the reply to notice of appeal and the cost of disposition of the property attributable to the said building is the amount of $12,374 and not $12,616.02 as referred to in paragraphs 1(c) and 4(i) of the reply to notice of appeal; and
3. the amount that is properly included in computing the appellant’s income for the taxation year 1973 on account of the recapture of capital cost allowance in respect of the said building is $62,172 and not the amount of $73,929.85 referred to in paragraphs 3, 4(i) and 7 of the reply to notice of appeal.
Since the Minister will be taking this position at the hearing of the appeal I would ask that you file this letter with the pleadings. I have sent a copy of this letter to the taxpayer’s solicitor, George Campbell Miller.
The Minister’s position, therefore, is that the net proceeds on the disposition of the building is in excess of its undepreciated capital cost by $62,172 which was included in computing the appellant’s 1973 income.
Summary of Facts
The appellant, a dentist, being in poor health, decided to move to Florida. Other than his personal residence on Old Colony Road and his dental practice, the appellant was the sole owner of a 69-suite apartment building on Bellamy Road which was purchased in 1968 for $915,000 and operated under the name of Halmar Holdings Limited. Late in 1969 the subject apartment building was put up for sale on an open listing at $1,050,000. On April 15, 1970 a written offer for $925,000 was made io the appellant who made a counter-offer of $975,000 and the prospective buyer then raised the original offer to $950,000. Negotiations were unsuccessful and the sale did not take place. The appellant’s residence was sold in August of 1971 and he purchased a condominium in Florida. (Exhibit A-1.)
By March of 1972 the appellant had received no further offers on the apartment building and he contacted a Mrs Rotenberg, a real estate agent, who advised the appellant that the apartment building market was poor and that apartment buildings were then being purchased by syndicates at very low prices. Mrs. Rotenberg subsequently made an offer of between $850,000-$860,000 which was not accepted because of the conditions contained in the offer. The appellant wished to have a non-conditional offer and wanted to keep the prepaid rent so as to have as much cash as possible for his move te Florida.
It is alleged that the appellant’s solicitor and accountant advised him of the importance to him of placing the value of the building as low as possible and to allot as high a value to the land as possible. A copy of the Canada Tax Journal was alleged to have been given to the appellant at that time. (Exhibit A-3.)
The appellant did not have the subject land evaluated by a professional appraiser, but allegedly consulted a developer who informed him that in 1969 the cost of land was in excess of $4,000 per unit. He also made some inquiries from a real estate agent as to the value of comparable lands and Exhibit A-4 purports to be a survey of asking prices prepared by Metropolitan Trust.
In further discussion with Mrs Rotenberg, the appellant alleges that he insisted that the value of the land should be fixed at $4,500 per unit plus $700 required for rezoning, because of its proximity to a GO Station and the high occupancy rate in the area.
Mrs Rotenberg presented an offer to purchase (Exhibit A-2) which had omitted in it such conditions as number of parking spaces, forfeiture of prepaid rent and the breakdown of land and building values. The appellant added to the agreement those conditions. which he felt were necessary including an allocation of value of $7,000 for equipment, $540,000 for the building and $300,000 for the land. The amendments were accepted by the purchaser and the transaction closed at a sale price of $847,000 for land, equipment and building on August 1, 1972, the first day of the 1973 fiscal year of Halmar Holdings Limited. carried on by the appellant relative to the apartment building.
Evaluation
The respondent’s evaluation of the building is based principally on an evaluation given by Mr Gervase W Eldred, a real estate appraiser with the Department of National Revenue, who was qualified as an expert witness at the hearing. In his appraisal report and analysis study (Exhibit R-3) Mr Eldred concluded that in 1972 the value of the land was $232,000. and $608,000 for the building.
Although two cost approaches were calculated by Mr Eldred in his report, which gave a higher value to the building than $608,000 the appraiser discarded these two methods of evaluation and relied on the residual basis method of evaluation, which comprises a study of comparable land sales in order to arrive at a value of the land and subtracting that figure from the sale price of the land and building in order to arrive at a value for the building.
Mr Eldred accepted the fair market value of the land and building as being the sale price of $847,000 and that the transaction was at arm’s length. .,
In order to arrive at a value of the subject land, Mr Eldred chose 7 out of 14 vacant land sales in Scarborough which he considered to be comparable to the subject land, taking into account the time of sale, location, size of the property, financial arrangements and the proximity to transportation facilities.
Counsel for the appellant suggests, among other things, that there were no truly comparable sales available to Mr Eldred on which to base his evaluation of the subject land; that no consideration was given to the proximity of the property to the GO Station, a big factor with respect to the value of the land; that Mr Eldred did not take land sale 2 into account in his report, which is the best comparable and whose price per unit unzoned was $3,560 and that sales 1, 3, 4, 5, 6 and 7 were properties miles away from the subject property and not valid comparables.
In dealing with the seven comparable sales, Mr Eldred stated as follows at page 8 of his report:
Several apparent arm’s length sales of similar land in the Borough of Scarborough were investigated. The prices paid in each case were considered, and suitable adjustments on these prices were made for time of sale, location of comparables, size of parcel, financing, proximity of facilities, Shape and potential, and any other pertinent factors.
It is common to break down such sales into a usefully comparable unit of comparison, such as price per square foot or per acre.
On page 16 Mr Eldred recognizes these differences in the several land sales studied and states:
Sale #2 most closely resembles the subject in size, location and time, but it is subject to a lower zoning nature.
Sale #3 closely resembles the subject in size and zoning, but is located farther east and was a sale to Ontario Housing Corporation, which is Suspect as not truly reflecting the open market situation.
sales 1 and 4 are smaller lots, sales 5, 6 and 7 being larger lots very close to Highway 401 and Sheppard Avenue facilities.
It is my opinion that sale #2 alone cannot be relied upon solely to represent market value for the subject location and, in view of the range of values indicated by the other comparables after suitable adjustments, a rate of $190,000 per acre or $3,300 per unit is applicable to the subject.
$190,000 X 1.159 acres — $220,210 $ 3,300 « 69 units . ■= $227,700 I consider that the value indicated by the per unit rate is most applicable in the subject case. In an unique situation such as this, where a ‘theoretical’ land/ building value is required, consideration must be given to the costs of permits etc. being a necessary prerequisite to development.
All the purchasers of the comparable lands were aware of the levies payable prior to development, and based their purchase prices accordingly. However, in the case of the subject, the land was already developed at the appraisal date, thus effectively had the benefit of all necessary permits. In considering the value to land, therefore, it is reasonable to assume that a willing and knowledgeable purchaser would have been prepared to pay more for land having the benefit of permits—the subject land—than he would for ‘raw’ land requiring the payment of levies, necessary fees and costs involved, consequent time, delays etc.
Finding of Facts
From the report and from the evidence given by Mr Eldred, it seems to me that all the factors which could affect the value of the comparable sales studies were taken into account and adjusted accordingly in arriving at a value of the subject land in 1972 and there is no evidence that this was not in fact done.
Counsel for the appellant in cross-examining Mr Eldred suggested that the possible future expenditure of $50,000 for heating equipment and the construction of sidewalks around the building would affect the value of the building. Mr Eldred answered that latent defects that might exist in a building has little or no bearing on the evaluation of the building arrived at on a residual basis.
Notwithstanding counsel for the appellant’s thorough examination of Mr Eldred, he did not, in my opinion, prove any meaningful discrepancies in the procedure followed by Mr Eldred in his appraisal report. On the other hand, the appellant’s testimony as to how he arrived at the value of the land also using the land residual basis by informally discussing the matter with a neighbour developer, or with Mr Darke of Metropolitan Trust Company, is most incomplete and the documents included in Exhibit A-4 are far from being clear or conclusive that the Minister’s evaluation for the building is not a reasonable allocation which the appellant must clearly establish if the Minister’s evaluation is to be set aside. In my opinion, the appellant’s evidence has failed to establish that the Minister’s allocation of $608,000 for the building is unreasonable.
The second point to determine is whether the Minister can properly allocate a value to the building which he considers to be reasonable when the values of land and building have been specifically allocated in the agreement of purchase and sale.
Land
There is no dispute that the subject transaction was at arm’s length and the evidence supports the position that the price paid for the property was its fair market value at the time of sale. The real estate market for apartment buildings was down. Properties were being bought by syndicates at low prices and the subject property had in fact been listed for sale for a relatively long period of time before being purchased by a syndicate.
In my view the determination of the second issue is simply whether the allocation of the value of the land and building allegedly agreed to in the sale contract was the result of bona fide negotiations in which each party attempted through hard bargaining to settle on a value for the building which was advantageous to him or whether the value was fixed unilaterally by the appellant without any serious opposition from the purchasers.
On the basis of the evidence, I can accept that the appellant was anxious to sell; that he wanted a sale free of conditions, and that he negotiated to obtain the highest price possible for his property.
However, it is not clear from the evidence that hard bargaining with respect to the allocation of value of the building did in fact take place between the appellant and the purchasers. Whereas the appellant was most anxious to sell, the purchasers, because of the poor state of the market, sought the lowest possible price. In April of 1972 an offer of some $850,000 was made through the agent, Mrs Rotenberg, but was refused by the appellant because of the conditions specified therein. Subsequent negotiations with Mrs Rotenberg dealt principally with the appellant’s request that the offer be without conditions; that in order to obtain the most cash possible he would have to retain the prepaid rent.
A meeting was held with the purchasers and the appellant at the property early in April 1972. The appellant, in direct examination, alleges that, on the advice of his solicitor and accountant, he asked through Mrs Rotenberg, that a new offer be made without conditions, with an allocation of $4,500 per unit for the building and a correction in the number of parking spaces involved. These conditions were allegedly accepted by the purchasers.
On May 2, 1972, the purchasers made an offer of $847,000 (Exhibit A-2). However, none of the stipulations about which the appellant claims to have been adamant were included in the new offer. The offer was subsequently amended to include the appellant’s stipulations.
There appears to be some inconsistence in the appellant’s testimony with reference even to discussions with the purchasers about the allocation of values and there is no aceptable evidence of any real hard bargaining with the prospective buyers. During cross-examination the appellant stated:
A We had already had an offer—again, to recall, it was approximately the same as this offer here but retaining the prepaid rents. I think it was a little in excess of what this was but with all the conditions attached. What I was bargaining for at that point in time was to get a clean offer. I wanted _ a Clean offer. I was willing to entertain an offer that was clean with roughly
the same price.
Q 1 take it, then, that you did not discuss the allocation of the price if you did not discuss the price, is that fair?
A Yes, it is probably fair at this point in time to say that, yes.
Further in dealing with the allocation of the value of the building, the appellant stated:
Q And you also said that you did not discuss that question with the potential buyers when you met with them at the building the second time somewhat later in April?
A I can’t recall if I did discuss it with them. I think I discussed all kinds of things with them then because my main concern, at that time, was getting a Clean offer. This is what I was concerned about. And I was also discussing if the price was going to be low I had to have a clean offer from instructions from Mr Miller and Mr Laywine. I think I would discuss that: I can’t remember specifically if I discussed that. I am sure that would be one of the many varied topics of discussion. I think I would have discussed it.
The above statement of the appellant is, in my view, in serious contrast with what the appellant stated in examination-in-chief:
With this information I had another meeting with Mrs Rotenberg and her investors at the building on Bellamy and discussed with them and adamantly
(sic) told them that if the offer was going to be as low as they indicated that I would have to remove the conditions, I would have to have a clean offer, I would have to put an allocation which I felt was a fair and just price for land approximately somewhere between $4,500 or $5,200 considering this other land would be $4,500 per unit plus $700 required to rezone. And they were quite adamant in the fact that if they maintained the building, kept the building, retained the building, and were not able to sell it, they would have to have a building value, as I was already forewarned by my accountant and my lawyer, as high as possible in order for them to depreciate it.
The appellant alleges to have discussed the allocation for land and building with Mrs Rotenberg, by telephone, on several occasions:
Q Did you have any discussions with Mrs Rotenberg or the buyers personally between that meeting at the building and when you received the offer on 2nd May?
A Yes. I didn't have any meeting with the buyers but I had many discussions with Mrs Rotenberg because the buyers personally they didn't want to have the conditions removed. They were still concerned that the conditions were going to be removed. Also I told them or told Mrs Rotenberg that it was necessary that we have a further. discussion with allocation because as pointed out to me by Mr Miller and Mr Laywine that we have this in the offer, that this should be in the offer. This had to be determined.
However, the offer that was made on May 2, 1972, subsequent to the alleged telephone conversations did not contain any of the appellant’s stipulations and he explains their absence as follows:
Q The offer which was presented has been marked as Exhibit A-2, I believe. If you reached an agreement why was the offer silent on the question of allocation?
A The reason was because she neglected—it was silent on several things. there was an apportionment of the chattels, it was silent with respect to the change, if you will note, with respect to the allocation of the prepaid rents. And it was also—
Q I think you described a total of three or four changes which were made to this offer. My question is, if you made it very clear to Mrs Rotenberg that it was necessary that there be an allocation of price and if you reached an agreement about allocation, why was that not put in this offer?
A This agreement, to the best of my knowledge, it was agreed upon. The only thing that Mrs Rotenberg did—essentially this is the same offer that came in 1970 and she neglected to put this in, she neglected as per agreed. Essentially the same offer as the 1907 offer.
Considering all the circumstances of this appeal, it is most difficult to conclude that the allocation of value for the building was the result of hard bargaining between the appellant and the purchasers.
Section 68 of the Act 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.
As I understand it, though expressed in different terms in the various decisions cited by both counsel, the key to the interpretation and the application of section 68 is that the allocation of value of various assets, in a contract, to be accepted by the taxing authorities and binding by the parties must be, as suggested by counsel for the appellant, the result of a mutual decision between the vendor and purchaser. However, in order to determine whether the: allocation is in fact based on a mutual decision, the Courts have introduced the concept of “the genuinely negotiated apportionment which results from bargaining between the parties to the agreement”. The. onus of establishing that the allocation was arrived at by mutual consent after genuine bargaining rests on the appellant. If he fails to satisfy that onus, the allocation stipulated in the agreement is not decisive and the reasonableness of the allocation for tax purposes must be determined on other grounds ‘‘irrespective of the form or legal effect of the contract or agreement”.
There can be no doubt that the Minister is empowered by section 68 to assess the taxpayer on the basis of a value for the building which he considers to be reasonable and which can differ from that stipulated in the agreement.
In the circumstances, for the appellant to be successful in his appeal, he must have established:
a) that the apportionment of values stipulated in the contract resulted from genuine hard bargaining between the parties and is decisive; or
b) failing that, he must have established that the apportionment of values made by the Minister was not reasonable and should be set aside.
On the basis of the evidence before me, I have come to the conclusion that the appellant did not satisfy the burden of proof in either respect.
For the above reasons, the appeal is dismissed.
Appeal dismissed.