Date: 20001110
Docket : 2000-17-IT-I
BETWEEN:
FRANÇOIS MARTEL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor Judgment
Tardif, J.T.C.C.
[1] This is an appeal from an assessment for the 1996 taxation year made as a result of information provided by the appellant. It is appropriate to reproduce paragraph 3 of the Reply to the Notice of Appeal (the "Reply"),which reads as follows:
[TRANSLATION]
On March 29, 1998, the Minister received from the appellant an amended return of income for the 1996 taxation year. The appellant reported for the aforementioned land and building proceeds of disposition of $54,000, an adjusted cost base of $100,000 and a capital loss of $46,000. As the net capital loss computed by the appellant was $34,500, he claimed a carry-back of a portion—$22,500—of his net loss from 1996 to the 1994 taxation year.
[2] In making the reassessment for 1996, the Minister of National Revenue (the "Minister") made the following assumptions of fact stated in the Reply:
[TRANSLATION]
(a) During the 1994 taxation year, the appellant was employed by and the sole shareholder of "Mécanique Auto M.F. de St-Apollinaire Inc." (hereinafter the "corporation") located at 83 rue Principale, Saint-Apollinaire, Quebec.
(b) On October 4, 1996, Mécanique Auto M.F. de St-Apollinaire Inc., located at 83 rue Principale, Saint-Apollinaire, Quebec, sold Érick Noël the following assets:
· the corporation's clientele and goodwill for $1;
· all merchandise on the premises for $8,900.72;
· all its movables, accessories and equipment for $11,000;
· all rights and privileges relating to the identification of the business;
(c) On October 4, 1996, the appellant sold to Erick Noël for $54,000 a lot including a building whose street address was 83 rue Principale, Saint-Apollinaire, Quebec.
(d) With his return of income for the 1994 taxation year, the appellant filed an election in the prescribed form under subsection 110.6(19) of the Income Tax Act (hereinafter the "Act") for a deemed capital gain in respect of certain property.
(e) In the prescribed form referred to in the preceding paragraph, the appellant stated that:
· the election under subsection 110.6(19) was in respect of two assets only: "land and garage building";
· the appellant did not include goodwill in his election made under subsection 110.6(19);
· on February 22, 1994, the fair market value elected by the appellant was $100,000 for the two properties, $50,000 for the land and $50,000 for the building;
· the adjusted cost base of the land and building was $70,000;
· the proceeds of disposition of the land and building were $100,000;
· the taxable capital gain in respect of the land and building was $22,500 (¾ of the capital gain of $30,000).
(f) In his return of income for the 1994 taxation year, the appellant claimed the deduction under subsection 110.6(3) of the Act, that is, an amount of $22,500 in respect of the deemed capital gain of $30,000.
(g) In his valuation, the Minister determined that the fair market value of the land and building was $55,500 on February 22, 1994.
(h) It follows that on his prescribed form the appellant designated a fair market value that exceeded 11/10 of the actual fair market value of the land and building on February 22, 1994.
(i) Under subsection 110.6(28) of the Act, the election made under subsection 110.6(19) of the Act cannot be revoked or amended where the amount designated in the election exceeds 11/10 of the actual fair market value of the property on February 22, 1994.
(j) Consequently, the Minister:
· determined a capital gain upon disposition of the assets in question of $37,450 (see calculation in schedule);
· calculated an additional taxable gain of $28,088 which he included in the appellant's income for the 1996 taxation year (see calculation in schedule).
[3] The issue is whether the Minister correctly determined the fair market value of the immovable held by the appellant to be $55,500 on February 22, 1994, as stated in the Reply as follows:
[TRANSLATION]
(a) the fair market value of the property held by the appellant on February 22, 1994 was correctly established by the Minister at $55,500;
(b) a taxable capital gain of $28,088 for the taxation year in issue was correctly computed by the Minister;
(c) the election made as at February 22, 1994 included the appellant's land, the building and the goodwill of the business.
[4] The burden of proof was on the appellant and both he and his agent, who was his accountant, testified in support of the appeal. A number of documents were produced. The testimony and documentary evidence sought to demonstrate that the goodwill valued at $30,000 formed an integral part of the immovable.
[5] To begin with, the appellant stated that the value of the goodwill had been based on one year's salary. Then, the appellant's agent tried to show that this amount was a component of the value of the immovable in the same way as the land and the building constructed thereon.
[6] In his testimony, the appellant's agent explained at length that, by virtue of the geographical location and the surroundings of the building operated as a mechanical repair shop, the goodwill was an essential component, an element that could not be dissociated from the immovable's value.
[7] In cross-examination of the respondent's expert Yvon Bergeron, the appellant's agent returned to the attack in an attempt to discredit the quality of the work done, not with respect to the content of the appraisal but essentially on the basis that the valuation had not taken into account or assessed the value of the goodwill.
[8] The evidence adduced by the appellant concerned only the question as to whether the goodwill should or should not be part of the value of the immovable.
[9] The appellant's case was prepared by his agent, who took charge of the various planning aspects and guided the appellant in the election he had to make. Was this election the most appropriate, the most advantageous one? For one thing, it is not up to the Court to answer this question. For another, the appellant ratified through his signature the work performed by his agent and, as a result, must assume full responsibility for it.
[10] The correctness of the valuation prepared by a recognized expert was not the subject of any valid challenge or grievance, although the appellant's agent argued that it should have assigned a value to the goodwill.
[11] I do not doubt that the goodwill had an actual value which had to be taken into account when the business was sold. That value had to be included in the overall value of the business. The goodwill definitely was not a part of, and could not be included in or blended into, the immovable's value, as the appellant's agent contended.
[12] An immovable can be valued through a number of approaches, including in particular the replacement cost method, the economic value method, and lastly, the most appropriate approach, namely the fairest and truest comparable sale. Each method must allow for a number of adjustments for items such as depreciation, the condition of the building, the year it was built, market conditions, location, etc.
[13] The notion of goodwill may be based on location, but that is an objective reality which has nothing at all to do with the talents, competence, energy, enthusiasm and personality of whoever is exploiting the immovable.
[14] The goodwill at issue in the instant case is strictly and solely an element whose quality and value derived not from the immovable but from what the appellant did with it through his work, his competence and his interest in serving his clientele well.
[15] In this case, the goodwill was closely linked to the person of the appellant, who, over the years, was able to develop a large clientele which benefited the business, thus increasing its value, just as the inventory did, but definitely not enhancing the material value of the immovable.
[16] Although this is a notion or a subtle point which the appellant clearly did not understand, he must take responsibility for that. The appellant's agent, who described himself as an accountant, argued that the consideration of $1 for the goodwill shown in the notarized agreement dated October 4, 1996, meant nothing. He also asserted that the goodwill constituted a fundamental component of the valuation of the immovable.
[17] The Court found that the appellant's agent had a very special and original conception of the meaning of goodwill and, more particularly, of the manner in which it is to be allocated in the context of an overall appraisal of a business which owns an immovable. The appellant's agent stubbornly contended that the goodwill had to be included in the value of the immovable, not of the business. Such a claim is all the harder to understand since the agent himself contended that the value of the goodwill, built up over the years, was the result of the appellant's efforts and work and of the quality of the services provided by him to the clientele which he had developed.
[18] The only evidence adduced was to the effect that the value of the goodwill, the amount of which was determined arbitrarily, had to be included in the value of the immovable from which the capital gain was realized. This evidence was moreover predictable since the Notice of Appeal expressly stated that this was the sole basis of the appeal. It is appropriate to reproduce that Notice here:
[TRANSLATION]
St-Apollinaire, December 17, 1999
. . .
Dear Sir,
I hereby wish to institute an appeal before the Tax Court of Canada from the Minister's decision of December 6, 1999, sent from the Québec tax centre, concerning the 1996 taxation year. The grounds for the appeal are the following:
- The valuation of the immovable as at February 22, 1994 took into account the goodwill and that goodwill could not be dissociated from the immovable.
I wish to appeal under the informal procedure.
François Martel
19 chemin Lambert
St-Apollinaire, Quebec
G0S 2E0
Representation: I hereby appoint Georges Bégin, C.M.A. to represent me.
155 route du Pont
St-Nicolas, Quebec
G7A 2T3
. . .
[19] The Court must render judgment on the evidence adduced. The appellant did not see fit to file any evidence apart from the contention that the goodwill must be included in the valuation of the immovable in issue. The claims of the appellant and his agent are not admissible and thus may not be taken into account.
[20] The appeal is accordingly dismissed.
Signed at Ottawa, Canada, this 10th day of November 2000.
"Alain Tardif"
J.T.C.C.
Translation certified true on this 28th day of December 2001.
[OFFICIAL ENGLISH TRANSLATION]
Erich Klein, Revisor
[OFFICIAL ENGLISH TRANSLATION]
2000-17(IT)I
BETWEEN :
FRANÇOIS MARTEL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on September 19, 2000, at Québec, Quebec, by
the Honourable Judge Alain Tardif
Appearances
Agent for the Appellant: Georges Bégin
Counsel for the Respondent: Pascale O'Bomsawin
JUDGMENT
The appeal from the assessment made under the Income Tax Act for the 1996 taxation year is dismissed in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 10th day of November 2000.
|
"Alain Tardif" |
J.T.C.C.
Translation certified true
on this 28th day of December 2001.
Erich Klein, Revisor