A-173-77
The Queen (Appellant) (Defendant)
v.
Godfrey G. S. Moulds (Respondent) (Plaintiff)
Court of Appeal, Pratte, Ryan and Le Dain JJ.—
Ottawa, December 19, 1977 and January 30,
1978.
Income tax — Income calculation — Deductions —
Respondent claiming deductions of capital cost allowance on
depreciable property for 1970 and 1971, and of "terminal
loss" allowance for 1972 — Respondent had previously with
drawn objection to 1964 reassessment relating to same prop
erty — Whether or not Trial Judge correct in holding no part
of sale price attributable to those buildings — Whether or not
appellant's estoppel argument valid — Whether or not
respondent can repudiate election for determining capital cost
of two buildings and adopt fair market approach for deter
mining their proceeds of disposition — Income Tax Act,
R.S.C. 1952, c. 148, ss. 20(5)(e)(i),(ii), 20(6)(g).
In 1964, respondent sold a developer land on which two
buildings were located, the selling price expressly being for the
land only, and yet claimed a capital cost allowance for the
buildings. The Minister rejected this claim and plaintiff agreed
to withdraw his objection to the reassessment without abandon
ing his claim that no value should attach to the buildings from
the proceeds of the sale. The issue, which arises from respond
ent's claim to a capital cost allowance in 1970 and 1971 and a
terminal loss in 1972 in respect of Class 3 depreciable property,
is whether the Trial Judge was right in holding that no portion
of the sale price could be attributed to the disposition of the two
buildings. Appellant continues to argue that estoppel lies
against respondent, and further argues that respondent cannot
repudiate his election for determining capital cost of the two
buildings and adopt the fair market value approach for deter
mining the proceeds of disposition for the same buildings.
Held, the appeal is dismissed. The argument based on estop-
pel was rightly dismissed by the Trial Judge. The resolution of
the issue is not dependent on respondent's method of calculat
ing the capital cost to him of the two buildings. Even if the
property's fair market value did not change between 1961 and
1964, it does not follow that the buildings had the same value
for the respondent at the time of sale as at the time of purchase.
On acquisition, the buildings clearly had a certain value: pro
ducing revenue to maintain the property until a purchaser-
builder could be found for the medical building project. When
that purchaser was found, however, the situation changed, for
when respondent decided to sell, the buildings lost their useful
ness, and value, to him. The principle, argued by appellant, that
"a person may not approbate and reprobate" has no application
in this case because respondent never had the right to elect
between two inconsistent courses of action. The only choice was
to claim or not to claim a capital cost allowance. Once a
decision had been made to claim it, it had to be calculated in
the manner prescribed by statute.
INCOME tax appeal.
COUNSEL:
G. W. Ainslie, Q.C., and A. Scott-Butler for
appellant (defendant).
D. C. Nathanson for respondent (plaintiff).
SOLICITORS:
Deputy Attorney General of Canada for
appellant (defendant).
McDonald & Hayden, Toronto, for respond
ent (plaintiff).
The following are the reasons for judgment
rendered in English by
PRATTE J.: This is an appeal from a judgment
of the Trial Division [[1977] 2 F.C. 487] allowing
the respondent's appeal from a decision of the Tax
Review Board confirming the reassessments made
by the Minister of National Revenue of the
respondent's income for the years 1970, 1971 and
1972.
The question to be determined relates to the
calculation of the capital cost allowance to which
the respondent was entitled for those years in
respect of his depreciable property falling within
Class 3 of Schedule B of the Income Tax
Regulations. °
Under Regulation 1100(1) (a) the capital cost
allowance to which a taxpayer is entitled in respect
of property of a given class is determined by
reference to the "undepreciated capital cost" to
the taxpayer "as of the end of the taxation year ...
of property of the class". The definition of the
expression "undepreciated capital cost" is found in
section 20(5)(e) of the Act; it reads in part as
follows:
° According to Schedule B, Class 3 comprises:
Property not included in any other class that is
(a) a building...
20. (5) ...
(e) "undepreciated capital cost" to a taxpayer of depreciable
property of a prescribed class as of any time means the
capital cost to the taxpayer of depreciable property of that
class acquired before that time minus the aggregate of
(i) the total depreciation allowed to the taxpayer for
property of that class before that time,
(ii) for each disposition before that time of property of the
taxpayer of that class, ...
(A) the proceeds of disposition thereof,
In order to compute the capital cost allowance
to which a taxpayer may be entitled in respect of
property of a prescribed class, it is therefore neces
sary to calculate the undepreciated capital cost to
the taxpayer of that property. That calculation
requires, first, that the capital cost of the property
be established and, second, that there be deducted
from that cost the amounts mentioned in subpara-
graphs (i) and (ii) of section 20(5)(e). In certain
instances, the determination of the quantum of the
"proceeds of disposition" of a depreciable asset
may, as in the present case, raise difficulties. Sec
tion 20(6)(g) was enacted in contemplation of such
a situation. It reads as follows:
20.(6)...
(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;
The facts which gave rise to these proceedings
can now be briefly stated.
The respondent is a doctor who is established in
Ottawa. In 1961, he purchased for $66,000 a piece
of land, on which two small apartment buildings
were erected, because he considered that property
to be a suitable site for the construction of a
medical office building. He kept the property until
1964; during that time he rented the apartments
and thus earned a modest income which was
nevertheless sufficient to pay for the taxes and
other expenses that the respondent had to incur as
long as he held the property. In 1964, the property
was sold to Foxspar Realty Limited, a company
that had been incorporated at the instigation of the
respondent and other members of the medical
profession in order to carry out the respondent's
project of erecting a medical building. The sale
price, specified in the deed to be for the land only
since the buildings were to be demolished, was
$70,500. Shortly after the sale, the two apartment
houses were pulled down and the construction of
the medical building began.
The respondent continued until some time in
1972 to own other buildings which were property
of Class 3 of Schedule B. From 1961 to 1972,
therefore, in computing the capital cost allowance
to which he was entitled in respect of his Class 3
property, the respondent had, each year, to deter
mine the capital cost of that property and, in
particular, of the apartment buildings he had
acquired in 1961. In all those years, the respondent
valued that capital cost at $46,625.33; that valua
tion is not in issue in these proceedings. From
1964, the respondent also had to determine what
were the proceeds of disposition of the two apart
ment buildings that he had sold in 1964 with the
land on which they were erected for a consider
ation of $70,500. It is that determination, which
had to be made in the light of section 20(6)(g),
which eventually gave rise to these proceedings.
When the respondent made his income tax
return for the year 1964, he calculated the capital
cost allowance to which he was entitled for that
year on the basis that the whole price of $70,500
was to be regarded as having been paid for the
land and that he had received nothing for the
disposition of the buildings. The Minister of Na
tional Revenue took a different view and assessed
the respondent on the basis that out of the price of
$70,500, a sum of $46,625.33 was to be regarded
as the proceeds of disposition of the buildings. The
respondent contested that assessment and filed a
notice of objection. After negotiations, it was
agreed the respondent would withdraw his notice
of objection and that the Minister would reduce to
$44,625.33 the part of the price of $70,500 allocat
ed to the buildings. On November 18, 1966, the
respondent wrote to the Department of National
Revenue confirming that arrangement. That letter
read as follows:
On condition that the amount of proceeds from disposition of
a property at 334-336 McLeod Street, which I sold in 1964, be
adjusted in your records to read as $44,625.33 instead of
$46,625.33 as shown on the Capital Cost Allowance Schedule
which was attached to Notice of Re-Assessment Number
1240221-1 issued on April 17, 1966 by the Department of
National Revenue, I am prepared to withdraw my Notice of
Objection dated July 14, 1966, relative to the above-noted
Re-Assessment.
I wish to point out that the withdrawal of my Notice of
Objection does not mean that I concur with the Minister's view,
in this case, that substantially the same amount should be
credited on the sale of the Class 3 Asset as was set up at the
time of acquisition. I still fail to see why any value should be
attached to the building from proceeds of sale, when the
purchaser is only buying land and had the building demolished
immediately after purchase. However, I am anxious to finalize
the matter and as stated above am prepared to accept the
figure of $44,625.33 as being the proceeds of disposition
attributable to 334-336 McLeod Street.
I trust the above information will enable you to complete my
file relative to the year 1964.
On the same day, the respondent's accountant
wrote a letter to the Department in which he
expressed the wish of the respondent to take
advantage of the additional capital cost allowance
to which he was entitled as a consequence of the
agreement of the Department to reduce from
$46,625.33 to $44,625.33 the amount considered
to be the proceeds of disposition of the two apart
ment buildings here in question. That letter read in
part as follows:
It is our client's wish that, when your records are being
adjusted to incorporate the above change, the additional Capi
tal Cost Allowance available to our client as a result thereof be
used in 1964 and subsequent years.
Following this arrangement, the capital cost
allowance to which the respondent was entitled for
the years 1964 to 1969 was calculated on the
assumption that the two buildings acquired in
1961 had been disposed of in 1964 for a price of
$44,625.33. However, when the respondent made
his income tax returns for the years 1970, 1971
and 1972 he adopted a different position. For each
one of those years he claimed a capital cost allow
ance in respect of his property of Class 3 on the
basis that the whole sum of $70,500 that he had
received in 1964 was to be considered as having
been the price for the sale of the land and that no
part of that price was to be attributed to the two
apartment buildings. The Minister disallowed that
claim and assessed the respondent, for each one of
those years, on the basis that the two apartment
buildings had been disposed of for a price of
$44,625.33. Those are the assessments which were
set aside by the judgment of the Trial Division
against which this appeal is brought.
In the Trial Division, the appellant had
advanced two contentions:
(a) that the respondent was estopped, by reasons of the
representation he had made to the Minister in 1964 when he
had agreed to withdraw his notice of objection, from alleging
and establishing that the whole of the price of $70,500.00
was to be regarded as the consideration for the disposition of
the land, and
(b) that the circumstances surrounding the sale indicated
that the sale price of $70,500.00 could reasonably be regard
ed as being in part the consideration for disposition of the
two apartment buildings and that the amount of $44,625.33
was the amount that could reasonably be regarded as being
the consideration for the disposition of those buildings.
The Trial Judge rejected both these contentions.
The Trial Judge disposed of the argument
founded on estoppel by saying that it had not been
proven that the respondent had made any
representation of fact to the Minister and that, in
any event, the evidence did not show that, as a
result of those alleged representations, the Minis
ter had acted to his detriment.
With respect to the appellant's second conten
tion, the Trial Judge first made reference to the
uncontradicted evidence showing that, at the time
of the sale, the buildings did not add any value to
the fair market value of the land since the highest
and best use of the property was for redevelopment
as an office building. The learned Judge then
expressed his findings [at pages 494-495] as
follows:
It seems clear to me that when he suggested a price to the
group of practitioners formed for the purpose of realizing the
medical building project he had conceived, the plaintiff could
not and did not ask for more than the value the land had to the
group. And that value was the fair market value of the prop
erty, at its highest and best use, redevelopment as an office or
medical building.
It is true we are concerned here with the value to the vendor,
and the mere fact that the purchasers were interested in land
only is not conclusive that the buildings standing thereon had
no value to the vendor. But, such value, to be considered, must
be a demonstrable, real, economic value—as was obviously the
case in the two decisions cited by counsel for the defendant,
M.N.R. v. Malloney's Studio Limited (75 DTC 5377) and
Baziuk y. The Queen (77 DTC 5001). Here on the contrary,
according to the evidence adduced, the value of the land alone
to a developer far exceeded the capital amount necessary to
produce the rental revenues that could be derived from the
buildings. The plaintiff asserted that the leasing of the build
ings prior to sale was, in his mind, primarily of a transitional
nature; his statement to that effect is not to my mind con
tradicted by the fact that he carried insurance against fire and
stipulated in the deed of sale itself, for some other normal
precautionary measures with regard to them. In my view, in the
negotiations leading to the agreement of 1964 and the fixing of
the purchase price, the plaintiff was never able to obtain any
additional advantage or value by reason of the presence of the
buildings. All value had to relate exclusively to the land. The
earlier mentioned stipulation in the agreement to the effect that
the price was for land only may have been inserted at the
request of the plaintiff and for tax purposes (as stressed by
counsel for the defendant) but it was, in my opinion, the mere
truth.
I am satisfied, on the evidence relating to the bargaining
between the parties, the meeting of minds on both sides in the
transaction—to repeat the words used by the then Associate
Chief Justice of this Court in the Emco case referred to
above—that the price arrived at was exclusively attributable to
the value of the land and nothing to the buildings. I therefore
conclude that no amount of the selling price in 1964 can
reasonably be regarded as proceeds of disposition of the
buildings.
In support of the appeal, counsel for the appel
lant also invoked two arguments. First, he reiterat
ed his argument based on estoppel and, second, he
presented a new argument which had not been
advanced in the Court below.
With reference to the first argument based on
estoppel, I merely wish to say that it was, in my
view, rightly rejected by the Trial Judge and I
could not add anything useful to the reasons he
gave for reaching that conclusion.
The appellant's second argument is not easy to
formulate. I will, nevertheless, try to state it as I
understood it. Counsel first acknowledged that, as
found by the Trial Judge, the existence of the two
apartment houses did not increase the fair market
value of the land at the time of the sale; he also
recognized that, if one had regard for the fair
market value of the property, one could, as the
Trial Judge, reach the conclusion that the whole
price of $70,500 had been paid for the land.
However, counsel stressed the fact, established at
the trial, that even in 1961, when the respondent
had purchased the property, the two buildings did
not add anything to the fair market value of the
land. In spite of that fact, the respondent had
valued the capital cost to him of the two small
apartment buildings at $44,625.33. It is clear,
therefore, according to counsel, that the respond
ent had not, in making this valuation, adopted the
"fair market value approach"; he had chosen to
adopt another method of valuation. Counsel for
the appellant concluded that the respondent,
having made that election for the purpose of deter
mining the capital cost of the two buildings here in
question, could not repudiate it and adopt the fair
market value approach for the purpose of deter
mining the proceeds of disposition of those same
buildings. In support of that contention, counsel
invoked "the principle that a person may not
approbate and reprobate" (see Halsbury's Laws of
England, 4th Ed., Vol. XVI, vbo Estoppel, par.
1507).
This contention appears to me to be untenable.
The sole issue to be determined in these pro
ceedings relates to the allocation of the price of
$70,500 received by the respondent in 1964. In
view of the way in which the appellant pleaded to
the respondent's action, the determination of the
capital cost to the respondent of the two buildings
here in question was not an issue before the Trial
Judge and is not an issue in this appeal. The only
question is whether the Trial Judge was right in
deciding that no portion of the sale price of
$70,500 could reasonably be attributed to the dis
position of the two small apartment houses. More
over, the answer to be given to that question does
not depend, in my view, on the way in which the
respondent calculated the capital cost to him of
those two buildings. Even if the fair market value
of the property did not change between 1961 and
1964, it does not follow that the buildings had the
same value for the respondent in 1964, at the time
of the sale, as in 1961, at the time of his purchase.
When the respondent acquired the property in
1961, the buildings had clearly a certain value for
him since they produced an income that could
enable him to keep the property until he found a
purchaser willing to embark on the construction of
a medical office building. Once that purchaser had
been found, however, the situation was changed:
having decided to part with the property, the
buildings which enabled him to keep that property
lost their usefulness and their value.
The principle invoked by counsel for the appel
lant that "a person may not approbate and repro
bate" has no application in this case because the
respondent never had the right to elect between
t)vo inconsistent courses of action. His only choice
was to claim or not claim a capital cost allowance;
once he had decided to claim it, he had to calcu
late its amount in the manner prescribed by the
statute.
For these reasons, I would dismiss this appeal
with costs.
* * *
RYAN J.: I concur.
* *
LE DAIN J.: I agree.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.