Date: 20010831
Docket: 1999-1851-IT-G
BETWEEN:
CLIFFORD JAMES SAVAGE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND
Docket: 1999-1852-IT-G
BETWEEN:
DARYL SAVAGE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor Judgment
(Delivered orally from the bench in Prince Albert, Saskatchewan, on August 31, 2001)
Bowman, A.C.J.
[1] I shall render judgment today in the cases of Clifford James Savage and Daryl Savage v. Her Majesty The Queen. These appeals, which are from income tax assessments for the 1992, 1993, 1994 and 1997 of Clifford James Savage and for the 1992, 1993, 1994, 1996 and 1997 taxation years of Daryl Savage were heard together on common evidence. A large number of issues are raised. I shall begin by dealing with the issues that have been disposed of by the parties on consent.
[2] The appellants are father and son carrying on business in Saskatchewan as farmers. The issues are, broadly speaking, these:
(a) the extent of business use of certain motor vehicles;
(b) the entitlement of the appellants to CCA on certain farm equipment; and
(c) the entitlement of the appellants to input tax credits on the purchase of farm equipment.
[3] The parties have consented to a disposition of some of the issues raised in the notices of appeal and replies as follows: the appeals will be allowed on the following basis:
(a) It is agreed Daryl Savage will be entitled to claim 70% of the cost of the use of two half ton trucks referred to in paragraph 7i)b) of the reply to the notice of appeal, as opposed to 60%, as allowed on assessment.
Clifford James Savage concedes the Crown's position with respect to the business use of the Oldsmobile Delta 88 referred to in paragraph 6i)b) of the reply.
(b) The respondent concedes that there should be deleted from Daryl Savage's income the amounts of $29,000 and $5,959 referred to in paragraphs 16 and 17 of the reply to the notice of appeal as shareholder benefits under subsection 15(1) of the Income Tax Act.
(c) The respondent concedes with respect to both Daryl and Clifford James Savage the capital cost of a John Deere 4560 tractor, S.N. 1570, referred to in paragraph 11 of the reply to the notice of appeal in the appeals of Daryl Savage and paragraph 10 in the appeals of Clifford James Savage, was $105,000, rather than $85,686 assumed on assessing, and that the consideration for that tractor included the transfer of a John Deere 4555 tractor, S.N. P002427, with the fair market value of $82,500 rather than $52,686.
(d) The parties agree that the John Deere 4560 tractor, S.N. 1570, was acquired and available for use on December the 11th, 1992, and that the two combines, Ford New Holland TX36, S.N. 8607025 and TX36, S.N. 8610055 were acquired and available for use in 1993, and the Versatile 976 tractor, S.N. 485260 was acquired and available for use on June 26th, 1993.
(e) The parties agree that all of the properties in issue were acquired pursuant to binding agreements entered into at a time which entitled them to claim an input tax credit in respect thereof.
[4] I turn now to the remaining issues in respect to which there is no agreement; namely, the capital cost to the appellants of two combines and one tractor for the purposes of tax credits.
[5] Broadly, the problem is this: when these pieces of farm equipment were acquired, there would be as part of the price a trade-in of a similar piece of equipment acquired by the appellants in an earlier year. The value of this trade-in would be negotiated between the parties who were at arm's length.
[6] In filing their income tax returns, the appellants treated the contract price, that is to say, the list price, as the cost of the equipment for the purposes of the input tax credit and for the purposes of claiming CCA and the negotiated trade-in value of the used equipment as forming part of the consideration.
[7] Subsection 13(33) of the Income Tax Act reads as follows.
For greater certainty, where a person acquires a depreciable property for consideration that can reasonably be considered to include a transfer of property, the portion of the cost to the person of the depreciable property attributable to the transfer shall not exceed the fair market value of the transferred property.
[8] This was enacted evidently following the decision of this court in Zeiben v. Minister of National Revenue, [1991] 2 C.T.C. 2008. Whether that provision was really necessary is a matter upon which I do not consider it necessary to comment.
[9] The Minister took the position that the fair market value was less than that negotiated by the parties, and the difference in the result was as follows. I am going to read from the reply to the notice of appeal of Daryl Savage, but the same figures apply of course to Clifford James Savage. I am reading from subparagraph 3b), c) and d) of the reply of Daryl Savage's notice of appeal.
b) Ford New Holland Combine TX36, S.N. 8607025
i) in 1992, the Appellant and his father filed their 1992 tax returns on the basis that they had acquired a TR96 Combine TX36, S.N. 8607025 at a cost of $190,000.00 and claimed ITC and CCA accordingly;
ii) the Appellant and his father had calculated their cost of $190,000.00 based on:
Cash payment (1993) $2,500.00
Cash payment (1992) $13,000.00
Trade-in value of TX36, S.N. 8607055 $174,500.00
Total $190,000.00
iii) the Minister reassessed by deleting the tax effects of the transaction from 1992 and adding them, instead, to 1993;
iv) the Minister reassessed on the basis of the cost to the Appellant and his father on the TR36, S.N. 8607025 was $149,681.00 calculated a follows:
Value of the TX36,
S.N. 8607055 net of ITC $134,181.00
Cash paid $15,500.00
Total $149,681.00
and adjusted CCA and ITC accordingly;
v) the Appellant's percentage of ownership of the Ford New Holland TR36, S.N. 8607025 was 36.84%;
c) Ford New Holland combine TX36, S.N. 8610052
i) the Appellant and his father filed their 1993 tax returns on the basis that they acquired a Ford New Holland Combine TX36, S.N. 8610052 at a cost of $193,200.00 calculated as follows:
Cash $12,000.00
Value of trade - TX36, S.N. 8607025 $180,700.00
Total $192,700.00
The reason for the $500 difference between $193,200 and $192,700 was not explained to the Minister.
[I note parenthetically it was not explained to me either.]
ii) The Minister reassessed the Appellant by calculating the cost of the Ford New Holland combine TX36, S.N. 8610052 as follows:
Value of trade S.N. 8607025 $149,681.00
Cash $12,000.00
< ITC claimed > < $14,968.00 >
[Those are with, I don't know what you call those marks, but I take it they indicate a negative amount.]
$146,713.00
and adjusted CCA and ITC accordingly;
iii) the Appellant's percentage of ownership of the Ford New Holland Combine TX36, S.N. 8610052 was 40.48%;
d) Versatile 976 Tractor, S.N. 485260
i) the Appellant and his father filed their 1993 returns on the basis that they had acquired a Versatile 976 Tractor, S.N. 485260 at a cost of $150,000.00 calculated as follows:
Value of the Versatile 946 Tractor,
S.N. D475781 $125,000.00
Cash paid $25,000.00
Total $150,000.00
ii) the Minister reassessed on the basis that the cost of the Versatile 976 tractor, S.N. 485260 was $112,977.00 calculated as follows:
Value of the Versatile 946, S.N. D475781 $87,977.00
Cash $25,000.00
$112,977.00
and adjusted the CCA and ITC accordingly;
iii) the Appellant's percentage of ownership interest in the Versatile 976 Tractor, S.N. 485260 was 30%.
[10] The difference of course lies in the fair market value of the equipment that was traded in as part of the purchase price. The respondent called no witnesses, but relied solely upon the figures set out in the Western Canada Trade Guide which contains guidelines for the valuation of used equipment.
[11] The appellants called Mr. Cook, the president of Farm World Equipment Ltd., the world's largest Ford New Holland dealer. He has had 35 years experience in trading in farm equipment. He testified that he had sold Mr. Savage the equipment in question and had also sold him the year before the equipment that was traded in. He and Mr. Clifford Savage both described the negotiations; they were tough and arm's length.
[12] In Western Securities Limited v. The Queen, 97 DTC 977, I set out what I believed to be the characteristics of a hypothetical informed vendor and purchaser for the purposes of determining fair market value as follows at page 978:
Essentially, the determination of fair market value involves the conjuring up of a hypothetical seller and a hypothetical buyer, operating in an unrestricted market. Neither of these persons must be under any compulsion to make a deal, but we must assume that they both want to do so and we must also assume that they do in fact do so. They must both be of equal financial strength. They are honest, but cagey, knowledgeable, tough, experienced, smart and hard-nosed, with their eye on the commercial main chance, their feet firmly planted on the bedrock of economic reality and their cards close to their vests. An encounter between these hypothetical titans of the negotiating table would, I should think, be a combat of truly Homeric proportions. The only thing they lack is the hindsight that subsequent valuators have but in general may not use except perhaps as a test of the reasonableness of the assumptions as to future use. All I have to do is decide what deal they would strike. Unfortunately, encounters between two such equally matched hypothetical negotiators seldom occur in the real world.
[13] I never thought I would meet such people, but I was wrong. These two tough old birds are the archetypes of a knowledgeable vendor and purchaser, and I mean that in a complimentary sense. I am prepared to accept the figures negotiated by the parties with respect to the trade-in value because it comes as close as is possible to the price that two knowledgeable persons would negotiate.
[14] I do this for several reasons. The price in the Western Canada Trade Guide is unreliable, according to Mr. Cook. In 1993 and 1994, the publishers of that guide had little experience with respect to the Ford New Holland TX36 combines. Even today with eight years experience, the guide assigns values to eight-year-old combines with 1,740 hours use that are not significantly lower than the price assigned by the CCRA to one-year-old combines with less than 200 hours of use.
[15] Mr. Cook testified that the used equipment that the Savages traded in was in mint condition. Mr. Cook testified that the prices he negotiated were based upon what he thought he could sell the equipment for. Sometimes he was wrong; sometimes he got more when he sold; sometimes he got less. If the equipment stayed in inventory for a year, the price decreased or he would sell it for less to stop interest from accruing.
[16] In my view the appellants have made out a strong prima facie case that the negotiated price is the best indication of fair market value, and that the guide relied upon by the respondent is unreliable as a means of determining fair market value.
[17] As Madam Justice L'Heureux-Dubé said in Hickman Motors Ltd. v. Canada, [1997] 2 S.C.R. 336, at paragraphs 92 to 95:
92 The Minister, in making assessments, proceeds on assumptions (Bayridge Estates Ltd. v. M.N.R., 59 D.T.C. 1098 (Ex. Ct.), at p. 1101) and the initial onus is on the taxpayer to "demolish" the Minister's assumptions in the assessment (Johnston v. Minister of National Revenue, [1948] S.C.R. 486) ... The initial burden is only to "demolish" the exact assumptions made by the Minister, but no more. ...
93 The initial onus of "demolishing" the Minister's exact assumptions is met where the appellant makes out at least a prima facie case. ... The law is settled that unchallenged and uncontradicted evidence "demolishes" the Minister's assumptions. ...
94 Where the Minister's assumptions have been "demolished" by the appellant, "the onus ... shifts to the Minister to rebut the prima facie case" made out by the appellant and to prove the assumptions. ...
95 Where the burden has shifted to the Minister, and the Minister adduces no evidence whatsoever, the taxpayer is entitled to succeed. ...
[18] I will not cite anything more of that case. That prima facie case has been amply made out, and we have nothing to rebut it.
[19] Two final points should be emphasized. There is no suggestion that the negotiated trade-in values or the selling price of the equipment were inflated or manipulated. They were negotiated honestly and in good faith between arm's length persons. I was favourably impressed by all three witnesses called by the appellants. These were honest, credible people.
[20] Finally I should comment on the so-called "washout price". This is basically a figure arrived at by Farm World Equipment Ltd. after all of the trades related to a particular transaction have been completed, and we have nothing left but cash.
[21] For example, a farmer wishes to buy Equipment A. He pays some cash and trades in Equipment B. The dealer sells Equipment B for part cash and part trade-in of Equipment C. He sells Equipment C for cash and a trade-in of Equipment D, and so on, until only cash is paid and we have run out of trade-ins.
[22] The "washout" is an aggregate of the cash components in all of the transactions. I do not regard the washout price as a reliable means of determining the fair market value of a piece of equipment that is traded in. For one thing, it may take years for the series of trades to be completed before the figures can be ascertained. It is subject to altogether too many variables to allow it to be used as a satisfactory method of determining value.
[23] Numerous parties are involved in the series of transactions and the determination of fair market value at a point in time that is made dependent upon events and economic conditions that may not occur until years later.
[24] The appeals are allowed and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment:
(a) to give effect to the agreement between the parties referred to at the beginning of these reasons;
(b) to determine capital cost allowance and investment tax credits to which the appellants are entitled in respect of the Ford New Holland combine TX36, S.N. 8607025, Ford New Holland Combine TX36, S.N. 8610055, and the Versatile 976 Tractor, S.N. 485260 on the basis that the trade-in value of the used machinery which the appellants traded in on the purchase of that equipment is the value negotiated by them with Farm World Equipment Ltd.; that is to say, $174,500, $180,700 and $125,000 respectively, so that the cost to them of the two combines and the tractor is $190,000, $192,000 and $150,000 respectively.
Signed at Ottawa, Canada, this 7th day of November 2001.
"D.G.H. Bowman"
A.C.J.
COURT FILE NOS.: 1999-1851(IT)G, 1999-1852(IT)G
STYLE OF CAUSE: Between Clifford James Savage and
Her Majesty The Queen AND
Between Daryl Savage and
Her Majesty The Queen
PLACE OF HEARING: Prince Albert, Saskatchewan
DATE OF HEARING: August 30, 2001
REASONS FOR JUDGMENT BY: The Honourable D.G.H. Bowman
Associate Chief Judge
DATE OF ORAL JUDGMENT: August 31, 2001
APPEARANCES:
Counsel for the Appellants: Grant Carson, Esq.
Counsel for the Respondent: Karen Janke
COUNSEL OF RECORD:
For the Appellants:
Name: Grant Carson, Esq.
Firm: Carson & Co.
Melfort, Saskatchewan
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada