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Docket: 2001-1102(IT)G |
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BETWEEN: |
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GIUSEPPE COLUBRIALE, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
____________________________________________________________________
[OFFICIAL ENGLISH TRANSLATION]
Appeal heard on April 21, 2004, at Montreal, Quebec.
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Before: The Honourable Justice François Angers |
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Appearances: |
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Counsel for the Appellant: |
Louis-Frédérick Côté |
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Counsel for the Respondent: |
Mounes Ayadi |
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JUDGMENT
The appeal for the 1996 taxation year is allowed, and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the market value of the building is $1,000,000, the benefit conferred on the appellant is $500,000, and the necessary adjustments will need to be made in terms of calculating losses.
The respondent will be entitled to its costs.
Signed at Ottawa, Canada, this 24th day of September 2004.
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"François Angers" |
Angers J.
Translation certified true
on this 20th day of January 2005.
Colette Dupuis-Beaulne, Translator
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Citation: 2004TCC578 |
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Date: 20040924 |
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Docket: 2001-1102(IT)G |
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BETWEEN: |
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GIUSEPPE COLUBRIALE, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Angers J.
[1] The appellant is appealing an assessment made by the Minister of National Revenue ("the Minister") for the 1996 taxation year. Following a transaction consisting of the sale of a property by the appellant to a corporation in which he holds the majority of the shares, an amount of $523,775 was added to the appellant's income, and this amount is considered by the Minister to be a benefit conferred on a shareholder according to subsection 15(1) of the Income Tax Act ("the Act"). At the beginning of the hearing, the Minister agreed to reduce the amount to $500,000 so that it would be consistent with the amount identified in his expert's appraisal. For his assessment, the Minister also denied the appellant the deduction of a final loss of $124,619 resulting from the adjustment the Minister had made to the fair market value of the property.
[2] The corporation in question was established in 1986 and carries out its business under the name J.C. Fibers Inc. ("J.C. Fibers"). It operates a business for recovering and recycling paper, which it collects mainly from office towers as well as other places in the Montreal area. The paper is sorted and packed into bales to be sent to local or foreign plants. The J.C. Fibers facilities are found on the Chemin de la Grande-Ligne in Chambly on the property that is in dispute.
[3] The property in question is 11,500 m2 of land; although it is located in an agricultural zoning area, it was put to industrial use under vested rights. The building where J.C. Fibers is operated is 3,915 m2 in size, and it was built in 1990 after a fire destroyed the first building. Prior to the purchase of the property on February 2, 1996, J.C. Fibers was leasing the land and the building as a tenant of the appellant and his wife. Indeed, there had been a tenancy agreement (lease) between them as of November 1, 1989; it was a 10-year lease with a basic lease rate of $12,500 per month. At the time the property was transferred to J.C. Fibers, the lease was $15,000 per month.
[4] The first building was destroyed by fire in 1989. After consulting his family and his partner, the appellant had decided to rebuild on the same location. The condition of the land and its proximity to the highway influenced that decision. After the construction and despite the fact that J.C. Fibers was only a tenant, J.C. Fibers assumed the costs of installing a weighing device and unloading docks, as well as the costs of creating parking around the building.
[5] The appellant is also a shareholder of some other companies whose activities are similar to J.C. Fiber's activities. However, those other companies own the land and buildings where they carry out their activities. For that reason and owing to the fact that 1995 had been a good year, the appellant decided that it was worth transferring the property at issue to J.C. Fibers. Furthermore, his accountant had told him that doing so would make it easier to sell the company if someone ever became interested in purchasing it. In fact, one potential purchaser had spoken to the appellant in 1995, but nothing serious came of it. Some other potential purchasers also showed an interest in 1999 and 2002, but nothing resulted from this. The sale to J.C. Fibers would resolve the issue of whether the appellant and J.C. Fibers had to assume the expenses for improving the building. During the above-mentioned discussions, moving J.C. Fibers had never been mentioned.
[6] The transfer of the title of ownership from the appellant to J.C. Fibers took place, as indicated above, on February 2, 1996. Just prior to the transfer, the appellant's wife had transferred her share in the property to him in order to reduce the taxes applicable to the transfer of title. The consideration was established with the assistance of the chartered accountant of the appellant and J.C. Fibers, Mr. Tony Spemsieri. Without taking into consideration the expenses already paid by J.C. Fibers, the purchase price was established at $1,500,000, an amount which, according to the accountant, represented the fair market value of the property.
[7] The appellant and his accountant determined this fair market value after considering the appraisal report completed in December 1995. That report had been prepared to establish an insurable value for the building. The replacement value for the building had been established at $1,392,610. They also took into consideration the actual cost of rebuilding after the fire, which amounted to $1,574,788. Those two values did not include the land, which was assessed at $174,450. The transaction took place based on that information. The proceeds of the sale were used to pay back the mortgage loan of approximately $800,000, and the balance was invested. For tax purposes, the proceeds of the sale were distributed equally between the appellant and his wife.
[8] J.C. Fibers still operates its business at the same location. In 1998 and 1999, other renovations were made, namely the installing of offices in the building and the addition of a garage for truck repairs and a place for oil changes. On May 21, 1998, further to an agreement with J.C. Fibers and the municipality of Chambly, the value of the property for purposes of the three-year appraisal for 1996, 1997, and 1998 was established at $971,500, that is, $24,600 for the land and $946,900 for the building.
[9] Establishing the property's fair market value is thus crucial to resolving this issue. Each party produced an expert in real estate appraisal, and without going into the details of those reports, it is possible for me to conclude that the fair market value of the property was $1,000,000. The appraisal the appellant had made was not the result of an exercise to establish the fair market value of the property in question. In the cross-examination, the appellant's expert acknowledged that a value of $1,000,000 was appropriate. His report was used instead to establish a suitability value, since the value of the property had been determined based on its occupant. In such a case, the value generally exceeds the market value and includes, in addition to that, a specific value the property has for the owner/user. In the instant case, it is a matter of establishing a market value based on the concept of a special purchaser, hence the argument of counsel for the appellant.
[10] Benoît Egan is a chartered appraiser. His report establishes a suitability value of $1,500,000 for the property purchased by J.C. Fibers, and in his report, Mr. Egan concludes that that appraisal satisfies the special purchaser criteria. In order to arrive at that conclusion, Mr. Egan took into consideration, among other things, all of the value indicators, including the municipal assessment, the cost recorded in the appellant's books, the appraisal report for insurance purposes, and the report of the respondent's expert. In his summary, we find two groups of values, the first varying between $1,500,000 and $1,600,000 and representing the value for a special purchaser, and the second varying between one and $1,100,000 and representing the market value for a typical purchaser.
[11] Within the context of a special purchaser, Mr. Egan analyzed various options that may have been available to J.C. Fibers. He reviewed the costs of building in a similar environment, supposing that the agricultural zoning would not have hindered the business's activities and taking it as an established fact that that option would have required the installation of an underground tank and a fire protection system. That option represented costs of $1,430,000. He also reviewed the costs of building in the Chambly industrial park. That park provides utilities, which would save money in terms of the fire protection system. However, the cost of the land is higher, as are the taxes. That option represented costs of $1,250,000. Then, if the new building were placed in an industrial park in an urban setting, the cost would reach $1,650,000.
[12] Mr. Egan added a cost for moving the business, which he appraised at $600,000, to the cost corresponding to each of these options. Therefore, the three options represent a cost that exceeds or comes very close to $2,000,000, which led him to conclude that J.C. Fibers had saved money by purchasing the property for $1,500,000. He concludes his report by saying that that comparative analysis shows that J.C. Fibers received cash benefits by purchasing the property at issue at the price it paid and that that situation is not surprising, even though the market value for another user would have been approximately $1,000,000. Therefore, he qualifies J.C. Fibers as a special purchaser, which justifies the fact that it paid a price that corresponds to a suitability value and eliminates any cash benefit the appellant may have been considered to have received.
[13] In the cross-examination, Mr. Egan acknowledged that he had not established the fair market value of the building because he had focussed on determining a suitability value. He also admitted that his opinion is based on the options that J.C. Fibers could have considered because, in actual fact, those options had not been considered before deciding to purchase the property. Some of the information had been questioned during the cross-examination, particularly the expenses Mr. Egan assigns to moving and the costs associated with the interruption of operations during the move. Mr. Egan acknowledged that he is not an expert in this field, and he said that he relied on the information he had been given. Finally, the lease price used to make certain calculations was also questioned.
[14] The respondent had Mr. Gaston Laberge testify. Mr. Laberge estimates that the market value of the property as of February 2, 1996, was $1,000,000. In order to obtain that final estimate, he used three recognized appraisal methods: cost, parity, and income. These methods gave values of $1,000,000, $1,009,000, and $990,000 respectively. He also analyzed and commented on Mr. Egan's report. According to Mr. Laberge, contrary to what Mr. Egan claims, depreciation cannot be ignored when establishing a suitability value. A number of other issues were raised, particularly in relation to vested rights in terms of zoning, comparable sales, depreciation, the water tank, the lease price, the facilities paid for by J.C. Fibers, and the appraisal of the business. All in all, on the strength of the two experts' opinions, I am convinced that the market value of the property was $1,000,000 as of February 2, 1996, the date it was purchased.
[15] Is it then possible, given the circumstances of this case, to add a premium to this market value to justify the fact that J.C. Fibers paid a price greater than the market value in the context of a genuine commercial transaction between non-arm's length parties? Counsel for the appellant maintains that it was fully to J.C. Fibers' advantage to pay the purchase price of $1,500,000, since then it did not have to consider moving expenses or incur losses in revenue owing to the interruption such a move would cause. J.C. Fibers would have also incurred the loss of the facilities it had built on the appellant's property, such as parking, the unloading docks, and the device for weighing its trucks. J.C. Fibers had acquired zoning rights, and those rights would have facilitated its possible sale. Construction costs and costs to move the building are, according to counsel for the appellant, factors that justify paying a price greater than the market value. He also argues that, in order for there to be a benefit within the meaning of subsection 15(1) of the Act, J.C. Fibers must have had an intent to confer the benefit on the appellant. In this case, the purchase represented a business decision, and its only purpose was to facilitate the possible sale of the business.
[16] Counsel for the respondent asked whether the instant case involves a genuine commercial transaction. According to the facts, there was nothing that forced J.C. Fibers to purchase the property from the appellant on February 2, 1996. No purchase offers had been made that could force the conclusion of this type of transaction. Furthermore, he maintains that, if this type of transaction had taken place between third parties, they would certainly have consulted two experts to determine the market value of the property. The concept of a suitability value applies when a seller is obliged to sell his property, particularly in the case of an expropriation. This is a concept that is in favour of the owner/user, not the purchaser. In the case at hand, on February 2, 1996, J.C. Fibers had no obligation to purchase the property at issue.
[17] This Court dealt at length with the concept of market value in relation to the concept of the purchaser having a special interest, and it acknowledged that it is possible, in certain circumstances, for a purchaser to have a special interest in acquiring property for a price higher than what others would be prepared to pay. In Morneau v. Canada, [1998] T.C.J. No. 680 (Q.L.), Dussault J. set out a number of doctrine and case law passages dealing with this issue, in particular, the comments made by Joyal J. in Dominion Metal & Refining Works Ltd. v. The Queen, 86 DTC 6311 (F.C.T.D.). Moreover, in Morneau, Dussault J. concluded in the existence of a special purchaser and spoke of how to deal with the issue of persons not at arm's length:
43 Since in our law the concept of market value presupposes an open and unrestricted market, it is also wrong to say that the value which property would have for a potential purchaser desiring to use it for different purposes can be disregarded on the ground that he is the only one who wants to use it for those purposes, there is no competition in the market for this use and the value is thus purely subjective. To do so would be to disregard one aspect of the situation, with the result that the appraisal exercise would become highly theoretical, disconnected from the specific circumstances of the case under consideration and so very questionable.
44 Several other decisions mentioned or analysed by Joyal J. in Dominion Metal & Refining Works Ltd., supra, establish that two relevant factors in determining the value of property are the possibility of using the property in accordance with its special features and its use contemplated by a special purchaser. Two such decisions are those of the House of Lords in Vyricherla Narayana Gajapatiraju v. The Revenue Divisional Officer, Vizagapatam, [1939] A.C. 302, and the Supreme Court of Canada in Fraser v. The Queen, [1963] S.C.R. 455. Joyal J. also mentioned Laycock v. The Queen, 78 D.T.C. 6349 (F.C.T.D.), and 931 Holdings Limited v. M.N.R., 85 D.T.C. 388 (T.C.C.), and he analysed the Tax Review Board's decision in Lakehouse Enterprises Ltd. et al. v. M.N.R., 83 D.T.C. 388. The least that can be said on reviewing these decisions is that it is impossible to disregard the special interest which a potential purchaser may have in acquiring property for a value higher than what others would be prepared to pay, in view of the special circumstances in which it finds itself and the use it intends to make of the property, to the extent that such an interest can be demonstrated at a given date.
[...]
47 While the determination of fair market value presupposes a transaction between people who are dealing with each other at arm's length, I agree with the view that this question must be answered by looking at the particular circumstances of a given case, and not by reference to the presumption stated in s. 251(1)(a) of the Act that related persons are deemed not to deal with each other at arm's length.
[18] In Morneau, Dussault J. reminds us of what is required to apply subsection 15(1) of the Act. I will set out his comments on this issue, which are found in paragraphs 31 and 32 of his reasons:
31 It should be noted that under s. 15(1) the Court must first determine whether a benefit was conferred on a shareholder in that capacity. Such a finding can only be made by looking at all the particular circumstances surrounding a given transaction. If a benefit was so conferred, its value must then be determined. It is primarily at this stage that the application of certain accepted principles of appraisal becomes truly relevant. The fact that a transaction between a company and a shareholder does not at first sight appear to have been made at the fair market value does not necessarily mean that a benefit was conferred by the company on its shareholder qua shareholder. Having said that, I hasten to add that although a transaction such as a sale of property which at first sight appears to have been made for an amount below or above the fair market value may of course be an indication in this regard, it must still be established that in the circumstances this transaction was not a genuine commercial transaction between the parties.
32 In the recent Federal Court of Appeal judgment in Canada v. Fingold, [1998] 1 F.C. 406, Strayer J.A. referred on this point to the classic comments of Cattanach J. in Minister of National Revenue v. Pillsbury Holdings Ltd., [1965] 1 Ex. C.R. 676 (Ex. Ct.), at p. 684, on the real meaning to be given to the equivalent provision of the Act as applicable prior to 1972, namely s. 8(1)(c). These comments read as follows, at p. 413 of Fingold:
. . . in my view, there can be no conferring of a benefit or advantage within the meaning of paragraph (c) where a corporation enters into a bona fide transaction with a shareholder. For example, Parliament could never have intended to tax the benefit or advantage that accrues to a customer of a corporation, merely because the particular customer happens to be a shareholder of the corporation, if that benefit or advantage is the benefit or advantage accruing to the shareholder in his capacity as a customer of the corporation. It could not be intended that the Court go behind a bona fide business transaction between a corporation and a customer who happens to be a shareholder and try to evaluate the benefit or advantage accruing from the transaction to the customer.
On the other hand, there are transactions between closely held corporations and their shareholders that are devices or arrangements for conferring benefits or advantages on shareholders qua shareholders and paragraph (c) clearly applies to such transactions . . . It is a question of fact whether a transaction that purports, on its face, to be an ordinary business transaction is such a device or arrangement.
[19] The facts and circumstances inMorneau enabled Dussault J. to conclude that the price negotiated for the purchase of Mr. Morneau's residence was completely normal and reasonable, and it represented the fair market value. To come to this conclusion, Dussault J. took into consideration the fact that Mr. Morneau's children had taken over management of the company, and that the interests of the company and Mr. Morneau were separate and opposing. It must be remembered that, in that case, Mr. Morneau's company had a real need for office space, and the residence in question was located at the entrance to the lot owned by the company, which adjoined the residence on three sides. Prior to making the purchase, the company had obtained estimates of the costs of new construction. It had reviewed all of the possibilities, and the location of the residence was a unique advantage for the company, given its facilities. Mr. Morneau had not been interested in selling at a price that corresponded to the market price, since it would have cost him twice as much to settle elsewhere.
[20] In the instant case, according to the testimonies of the appellant and his accountant, the transaction of February 2, 1996, had been motivated by the desire to facilitate a possible sale of the business, in that it would be more worthwhile to purchase it if the business owned the property where it carried out its activities, as was the case with the appellant's two other businesses. Furthermore, the company had spent money to improve its operations on a piece of land it had leased, and according to the appellant, 1995 had been a good year financially, which had enabled J.C. Fibers to purchase the property at issue.
[21] Yet the evidence did not show that serious negotiations had taken place for the sale of J.C. Fibers, or that the fact that J.C. Fibers was not the owner of the land and the building could have been an obstacle to the sale of the business. The expenses incurred for the unloading docks, the parking, and the weighing device were leasehold improvements that are normal in that type of situation, and the evidence did not reveal that this was a major inconvenience requiring the purchase of the appellant's property on February 2, 1996.
[22] In fact, on the date of the transaction, the two parties were bound by a lease that ended on December 31, 1999, nearly 3 years and 11 months later. The business had no obligation to purchase the property, and the appellant had no obligation to sell the property. J.C. Fibers and the appellant complied with the conditions of the lease, and neither party seems to have been caught in a situation that may have compelled them to negotiate the purchase of the appellant's property.
[23] In the instant case, the evidence does not show that actual negotiations took place between the parties. To establish the selling price, the appellant and his accountant first used an appraisal made for insurance purposes, which established a replacement cost for the building, and then used the total cost of the new construction, which the appellant paid after the fire. These two factors are undoubtedly important to the seller, but they are far from important to the purchaser. This case does not show the reasoning and analysis a purchaser would demonstrate if faced with this kind of scenario. As a matter of fact, this case has none of the factors the appellant's expert carefully analyzed and applied to establish a fair market value for a special purchaser.
[24] Contrary to Morneau, in the instant case we do not find an actual need to purchase the property at a particular time, namely February 2, 1996. The facts in this case do not reveal that there was an urgency to conclude this transaction before the end of the lease. Even though J.C. Fibers had taken into consideration all of the possibilities listed in its expert's report to justify adding a premium to the market value, it should have also taken into consideration the seller's expected vulnerability in that type of situation. That is, in fact, the very essence of the negotiations that must take place between persons at arm's length. In Morneau, Dussault J. summarized the determination of a fair market value as follows in paragraph 46:
When the interests of a seller can be reconciled with those of a buyer, albeit a special one, after a mutual compromise consistent with each side's bargaining power, a price which has been negotiated and finally accepted may be regarded as representing a value which could be obtained on the market.
[25] The facts in this case do not show that these types of negotiations took place; however, this does not mean that the selling price of the appellant's property would not still have surpassed the fair market value established by the respondent's expert, but only genuine negotiations could have enabled us to know this. The facts in this case lead me to the conclusion that the fair market value of the property was $1,000,000, and there are no points here that can justify adding a premium to this value.
[26] The appellant's counsel maintained that, for the application of subsection 15(1) of the Act, there must be an intent to confer a benefit on the shareholder. He bases his argument primarily on Chopp v.Canada, [1995] T.C.J. No. 12 (Q.L.), confirmed by the Federal Court of Appeal in [1997] F.C.J. No. 1551 (Q.L.), which upheld the decision of Morgan J. of our Court, who stated the following in paragraphs 15 and 19:
I cannot accept the Respondent's argument so broadly stated that a bookkeeping error which benefits a shareholder to the disadvantage of his corporation is a benefit within subsection 15(1) even if the error was not intended and was not known to the shareholder. In my opinion, if the value of a benefit is to be included in computing a shareholder's income under subsection 15(1), the benefit must be conferred with the knowledge or consent of the shareholder; or alternatively, in circumstances where it is reasonable to conclude that the shareholder ought to have known that the benefit was conferred. I am supported in this view by the decisions of this Court in Simons v. M.N.R., 85 DTC 105 and Robinson v. M.N.R., 93 DTC 254.
[...]
I would not go as far as Judge Rowe in stating that the words used in subsection 15(1) refer to some form of action with a strong component of intent. I think a benefit may be conferred within the meaning of subsection 15(1) without any intent or actual knowledge on the part of the shareholder or the corporation if the circumstances are such that the shareholder or corporation ought to have known that a benefit was conferred and did nothing to reverse the benefit if it was not intended. I am thinking of relative amounts. If there is a genuine bookkeeping error with respect to a particular amount, and that amount is truly significant relative to a corporation's revenue or its expenses or a balance in the shareholder loan account, a court may conclude that the error should have been caught by some person among the corporate employees or shareholders or outside auditors. Shareholders should not be encouraged to see how close they can sail to the wind under subsection 15(1) and then plead relief on the basis of no proven intent or knowledge.
[27] There were then a number of different decisions referring to subsection 15(1) of the Act that were rendered by our Court. I need only cite Smith v. Canada, [1996] T.C.J. No. 838 (Q.L.), Hehr v. Canada, [1997] T.C.J. No. 997 (Q.L.), Cano v. Canada, [1996] T.C.J. No. 1745 (Q.L.), Duchesneau v. Canada, [1997] T.C.J. No. 1152 (Q.L.), Cribb-McKeown v. Canada, [1998] T.C.J. No. 263 (Q.L.), and Long v. Canada, [1997] T.C.J. No. 722 (Q.L.).
[28] In paragraph 12 of Long, Bowman J. stated his support for the Robinson, Simons, and Chopp decisions and added that "each case under subsection 15(1), however, as stated in Pillsbury, turns on its own facts." Under that case law, the application of subsection 15(1) of the Act does not require an intent to confer a benefit on the shareholder. It is enough that the shareholder knew or should have known, given the facts in the case, that he was receiving a benefit further to the transaction at issue.
[29] In light of my conclusion that the transaction between the appellant and J.C. Fibers was not a genuine commercial transaction and that the sale was made for an amount greater than the fair market value, I am able to conclude that, in this case, a benefit was conferred by J.C. Fibers on the appellant. The appellant and his accountant made no effort to determine the property's fair market value prior to the transfer. No appraisers were consulted to assist the parties in setting a purchase price. The appellant and his accountant attempted to establish a construction cost based on the actual amount of the expenses and the appraisal of the replacement cost for insurance purposes rather than determining the property's market value. In those circumstances, the appellant knew or should have known that a benefit could be conferred on him.
[30] The appeal is allowed in order to reflect the fact that the market value of the building is $1,000,000, the benefit conferred on the appellant is $500,000, and the necessary adjustments will need to be made in terms of calculating losses.
[31] The respondent will be entitled to its costs.
Signed at Ottawa, Canada, this 24th day of September 2004.
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"François Angers" |
Angers J.
Translation certified true
on this 20th day of January 2005.
Colette Dupuis-Beaulne, Translator
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CITATION: |
2004TCC578 |
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COURT DOCKET NO.: |
2001-1102(IT)G |
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STYLE OF CAUSE: |
Giuseppe Colubriale and Her Majesty the Queen |
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PLACE OF HEARING: |
Montreal, Quebec |
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DATE OF HEARING: |
April 21, 2004 |
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REASONS FOR JUDGMENT BY: |
The Honourable Justice François Angers |
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DATE OF JUDGMENT: |
September 24, 2004 |
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APPEARANCES: |
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For the Appellant: |
Louis-Frédérick Côté |
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For the Respondent: |
Mounes Ayadi |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
Louis-Frédérick Côté |
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Firm: |
Mendelsohn, avocats Montreal, Quebec |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |